Building an Innovation Ecosystem

Op-ed by Raffi Balian, Regional Environmental, Science & Technology, and Health Attaché for Central and Eastern Europe, U.S. Department of State

Published in Hungarian in Figyelő economic weekly magazine
Thursday, October 30, 2014

As the regional attaché for environmental, science, technology, innovation, and health issues for the United States in Central and Eastern Europe, I am often asked how countries and communities can create their own Silicon Valley.  Developing a viable research and innovation ecosystem can prove to be critical in determining which countries and regions succeed and which are left behind in the increasingly global marketplace of ideas, goods, and services.

While it would be reassuring to think that Silicon Valley was developed through a well-thought-out plan executed to perfection, the reality is much closer to a serendipitous confluence of people, institutions, and circumstances that would be hard to replicate today even in the United States.  However, six critical components play an important role in building and maintaining a sustainable innovation ecosystem.  These components were necessary to help make Silicon Valley possible.  What are these six critical components?

1. Research and Development Funding:  Investments in research and development by the Federal Government in the United States have helped the private sector develop its own ability to make similar investments.  Historically, the Federal Government had been the main source of R&D funding.  However, over the course of the previous twenty years that funding equation has gradually reversed.  Today, the Federal Government provides one third, while private sector firms account for two thirds of the R&D budget.  The Government support totals around $150 billion dollars for both military and civilian R&D and is appropriated across 20 different government agencies.  On the other hand, the U.S. private sector today spends around $330 billion dollars for R&D.  For these companies, this amount is an investment in new and better goods and services to keep them competitive in the marketplace.  The total U.S. spending of $480 billion dollars represents close to 40% of the over $1.2 trillion U.S. Dollars spent globally on research and development. The United States spends close to 3% of its GDP on R&D.  The average in the European Union is around 1.9% of GDP and in Hungary the figure is well below 1%.

2. Enabling Policy Environment:  The rule of law is the most critical element of building a policy and regulatory environment that enables innovation to thrive.  Entrepreneurs rely on political stability and consistent, transparent, and accountable government structures in order to better plan for the long-term and to minimize the level of risk.  Innovators seek protection under anti-trust and intellectual property rights laws, well-defined bankruptcy rules and regulations, and a regulatory framework that does not make starting and running a business overly cumbersome, including having access to capital.

3. Financing:  In addition to the funding used to invest in research and development, innovators rely on access to sufficient and diversified sources of capital.  In the United States, these sources are from both the public and private sectors and include government agencies that provide loans at competitive rates to small and medium sized enterprises and angel investors and venture capitalists who make high-risk investments often with a low probability of success.  In addition, individuals can borrow from a commercial bank or raise money through their own means, such as a home equity loan, or by crowd sourcing from family and friends.  These types of financing options are essential to allow an innovator to move from the initial phase of an idea to development and commercialization.

4. Higher Education System:  A dynamic and vibrant higher education system is a fundamental component of the innovation ecosystem.  This system should teach and develop critical thinking skills so that existing methods can be questioned and new and better approaches can be developed.  Universities should be integrated into other parts of society, particularly with industry and the private sector, and should welcome the best students from all over the world.  In the United States, 30-35% of the graduate students on average in our universities are international.  According to the Innovation Union Scorecard 2013, the most innovative countries in the European Union have Higher Education systems that play a key role in promoting public-private cooperation in research between industry and science.

5. Clusters of Innovation:  There are a number of examples in the United States of companies, universities, and affiliated institutions coming together in a geographic region to help build a supply-chain approach to innovation.  These clusters bring together a geographic concentration of competing and cooperating companies, suppliers, service providers, universities, and associated institutions.  The intention is that the supply chain, or rather, I would call it an innovation support chain, makes the link between science and industry and business easier to implement.  Examples of these clusters of innovation are Silicon Valley with Stanford and University of California, Berkeley near-by; Research Triangle Park in North Carolina with Duke University; and Boston for biotechnology with MIT and others.

6. Learning from Failure:  A fundamental aspect of the innovation ecosystem in the United States is the culture of risk taking and learning from failure.  This culture emphasizes a decentralized and bottom up approach that incentivizes individuals at all levels of society to innovate.  More than any of the other components, this is the most American of the characteristics of the innovation infrastructure.  I was surprised to learn recently that only 1 out of 10 investments in Silicon Valley is a success.  Imagine for a moment if 9 out of 10 of your investments fail; how do you think you would respond?

The United States and Hungary share a number of important characteristics.  We both have a strong tradition of science and value deductive reasoning.  We have worked together to promote Euro-Atlantic integration by building bridges of understanding and cooperation on many levels, including scientific research.  Through various mechanisms, the United States in the previous twenty-four years has invested over $1 billion dollars in Central and Eastern Europe to promote democratic and free market transitions and to assist in Euro-Atlantic integration.  Today, we are proud to call the countries of the Visegrad Four our friends and allies.

Many countries around the world are working to promote innovation.  Some will succeed and some will not.  There is great potential in Hungary for success; whether or not that potential is met is still to be determined.