What does it mean to live in an innovative city? You might be surprised to learn that it’s not all about flying cars and free internet access but the development of a wholesale environment in which businesses can thrive and grow. This innovation spurs on entrepreneurship and job creation, helping lift people out of poverty and foster development. It’s an attractive proposition.

If that sounds ideal, consider exactly which world cities made the 2021 FINOM Innovation in Business Index ranking. Leading the pack was San Francisco, which scored best in terms of company research and development (R&D) spending and an enabling tech ecosystem (not surprising if you consider the city is home to the world’s innovation hub, Silicon Valley). Beijing and New York came in second and third, followed by London and Boston. Paris, the only European city in the Top Ten list, was eighth. And, squeaking in at 99th place – sandwiched between Turin in Italy and Quebec City in Canada – was Cape Town, South Africa’s innovation capital.

What makes this list interesting from a methodology perspective is how fintech company, FINOM, set about determining what makes for an innovative city and which sectors are worth tracking to measure the type of activity taking place. Seven innovation areas were scored:

  • Company R&D spending by headquarters.
  • The presence of governmental R&D organisations.
  • Industrial activity in the city.
  • The number of internationally recognised universities.
  • Maturity and diversity of the business ecosystem.
  • The number of companies founded in the city after 2010, which have received funding at some point since 2015.
  • Venture capital funding raised by companies founded in the city since 2010.

Furthermore, business activity in industries such as biotechnology, artificial intelligence and machine learning, fintech and green innovation were considered, as was the range of industries with a presence in each city’s business ecosystem.

While this methodology provides a handy guide for tracking innovation at city level, it also offers a glimpse into some of the ingredients that countries like South Africa should be baking into their entrepreneurial ecosystem mix to encourage and support start-ups.

Sizing up Indonesia, Israel and Estonia

Homing in on the 2020-2021 Global Entrepreneurship Monitor (GEM) Global Report, and specifically the 44-country GEM National Entrepreneurship Context Index (NECI), it is clear that some countries have already succeeded in creating an environment conducive to entrepreneurship.

The NECI provides a snapshot of a country’s entrepreneurship environment and how conducive it is based on an assessment of 12 conditions, including policies and priorities, government programmes, entrepreneurial education levels, societal support and professional and commercial infrastructure access. In 2020, the top performers were Indonesia, the Netherlands, Taiwan, India and the United Arab Emirates.

Driving the Indonesian ecosystem is a dynamic internet economy with an average yearly growth rate of 49% since 2015, according to internet company, Catcha Group’s CEO, Patrick Grove. Yet, despite this boom and the venture capital funds that have followed, Indonesia is still regarded as a ‘complex jurisdiction’ in which to do business.

The Global Business Complexity Index 2021, released by TMF Group, ranks Indonesia among the most complex markets globally for corporate compliance, highlighting issues such as rules and regulations, accounting and tax, and labour considerations. In 2020, Indonesia placed worse in the TMF report, but in just a year, the country had improved five places, coming in behind Brazil, France, Mexico, Colombia and Turkey. The reason? A sweeping set of reforms aimed at making the area more attractive to foreign direct investment.

While Indonesia is clearly still working out the kinks in its entrepreneurial ecosystem, a little further down the GEM NECI list – in 11th position – is Israel. A controversial figure in global politics, Israel is still a great example of how to embed entrepreneurial support across the national ecosystem over time, says GIBS Associate Professor Dr. Jonathan Marks.

Marks, who teaches, researches and consults in the field of high-growth entrepreneurship, family business, corporate innovation and entrepreneurship and entrepreneurial finance, says, “I’ve made a fairly close study of the Israeli ecosystem because there’s activity going on there that I think are exemplars for the rest of the world. So irrespective of what one’s politics of the Middle East might be, it’s just impossible to ignore what goes on in this tiny little country.”

In an interview with The Times of Israel in November 2021, Aharon Aharon, a former CEO of the Israel Innovation Authority, said, “Israel accounts for some 8% of global unicorns [start-ups valued at more than US$1 billion], but for just 0.1% of the global population. So, we are punching some 100 times our weight in the world.”

Without any natural resources and mineral wealth to speak of, Israel’s entrepreneurial approach was really cemented in the late 1980s and early 1990s following an influx of almost a million Russian Jews into the country, explains Marks. “These people were scientists and mathematicians and computer scientists; they were unbelievably well educated. The government noticed that these people were literally washing cars and working in restaurants, so they started building a system to bring them into the economy, and that led to what is the start-up nation today.”

Another country on Marks’ radar is Estonia, the hometown of video chat service, Skype. “A tiny country coming out of the former east bloc, Estonia is getting past its history, which was brutal and painful,” says Marks. The country has effectively digitised its entire administration, enabling entrepreneurs to run businesses completely online. In the first 10 months of 2021, Estonian tech start-ups raised more than US$1 billion in funding, with ride-sharing app, Bolt, grabbing the lion’s share, according to ZDNet journalist, Kalev Aasmae.

To highlight that valuable link between innovation and entrepreneurship, Estonia’s capital, Tallinn, ranks 77th on the FINOM best cities for the future of business list. Tel Aviv, in Israel, is 45th.

The enablers for this remarkable success, achieved just 30 years after Estonia gained independence from the Soviet Union, were outlined in a 2020 Startup Estonia white paper which singles out the following:

  • High-quality local talent and a highly ranked education system.
  • Low levels of bureaucracy.
  • Fully digital business infrastructure, from company formation to banking and digital contracts.
  • A flat tax system, which allows companies to reinvest profits tax-free (except for distributed dividends).
  • High levels of public sector innovation.
  • A national ‘can do’ mindset and openness to experimentation.
  • A tight-knit start-up community with hands-on mentoring and support.

This low-interference, high-enablement model has seen Estonia produce four unicorns in the past 15 years: Skype; financial trading software company, Playtech; low-cost money transfer solution, TransferWise (recently renamed Wise), and Bolt.

 Lessons in ecosystem creation

So, where is South Africa dropping the ball? And why, despite pouring resources into training and funding, does the situation remain unchanged?

“I think that you can blame it on a few things,” says Marks. “Apartheid left a legacy of social, cultural and institutional gaps that don’t bring enough people into the economy. But also, I think the history of South Africa prepares people for the world of work rather than the world of entrepreneurship. So when you take that legacy, plus the legacy of apartheid that excluded so many people from the economy, it’s unsurprising that we have so little entrepreneurial activity.”

Notably, the level of entrepreneurship Marks is referring to are the sort of high-end, tech-based, unicorn-building endeavours targeted by the likes of Israel, Indonesia and Estonia. Not needs-based, survivalist entrepreneurship, but risk-taking, innovative start-ups that embrace change and thrive on agility.

To build an ecosystem that supports this level of entrepreneurship, Marks believes government must step out of arenas like entrepreneurship development and focus instead on creating policies and institutional structures “that support and encourage entrepreneurship”. Then the state must “allow people to get on with it, recognising that it’s slightly Darwinian: some are going to live, and some are going to die”.

Of course, businesses and educators should still be teaching business skills – particularly at school level – since this positions entrepreneurship as a viable, alternative career path, believes Marks. Still, it must be recognised that not everyone is cut out to be an entrepreneur and pushing people down this path will not help solve South Africa’s unemployment problem. Instead, Marks favours dropping barriers to make it easier for would-be entrepreneurs and business owners to access decision-makers – be they in government, the private sector, or potential investors. It’s about creating an environment where ideas are the real capital rather than funding. After all, says Marks, “If you talk to investors, they say what they’re looking for is investable ideas – there’s just not enough of those. A great idea will usually attract funding.”

Finally, the country needs to clear out regulatory and rule-based barriers, such as South Africa’s laws against the export of information technology, believes Marks. “Right now [in terms of the Currency and Exchanges Act] you have to get Reserve Bank approval before you can export South Africa-owned intellectual property, which means that many start-up tech entrepreneurs and businesses take their IP out of the country early on and relocate to a neighbouring country like Mauritius, or they get on a plane and go to America and do their business there. Why do they do this? Because investors won’t put money into a high-tech business in South Africa because they are worried about what happens when they sell. That’s a problem.”

When you drill down into these sorts of barriers, the finer details of how to build a robust entrepreneurial ecosystem take on a different hue, highlighting the need for government to take a step back.

According to Miranda Hosking, executive director of the GIBS Entrepreneurship Development Academy, “Ideally, government should facilitate entrepreneurship through creating enabling and flexible policies, leaving the sector to self-generate and regulate as it grows within the context of what is happening on the ground. It is not an area government should own or hold undue influence over.”

As Estonia and Israel show, it takes a groundswell of coordinated effort to build a society of high-end, game-changing entrepreneurs. It takes bold decision-making, up-to-date thinking and the courage to relinquish control and let the unicorns come out to play.

South Africa’s recipe is not working

It is widely held, by bodies such as the World Bank, that boosting entrepreneurship across South Africa would create jobs and help to reduce unemployment, help foster a more inclusive economy, and produce greater macroeconomic stability. However, after years of being ranked among the world’s laggards by the likes of the Global Entrepreneurship Monitor (GEM), it is clear that something is not gelling in South Africa’s entrepreneurship ecosystem.

Miranda Hosking, executive director of the GIBS Entrepreneurship Development Academy (EDA), believes that “for entrepreneurship to thrive, it is essential that a robust support framework is created and maintained. A healthy entrepreneurial ecosystem comprises interconnected key stakeholders – education, corporations, financiers, government, support services – operating within an enabling regulatory environment and a culture that is supportive of entrepreneurial activity.”

Recognising the role that business has to play in this development, the EDA has positioned itself as a partner that helps corporates play an active role in the development of smaller enterprises. By helping companies align their procurement practices to support small businesses and adopt a pro-small business mindset, the broader business environment can become a much friendlier place for entrepreneurs and smaller businesses. The EDA’s approach “hinges on the assertion that it makes good business sense to invest in suppliers, young business owners and emerging industries, both from a national growth and employment perspective and as a way of building effective supply chains,” explains Hosking.

While acknowledging that progress is being made, Hosking recognised in an interview on The Money Show in 2020 that the South African ecosystem remains very fragmented and “collaboration is a swear word. We don’t collaborate, and we don’t learn from each other.” Moving away from a tendency to punish people when a business venture fails is one mindset shift that must take place, she said, alongside establishing support structures to help entrepreneurs over the first hurdles of starting a business. “Most small businesses fail – 70% to 80% fail in the first year. It’s a miracle if you make it to the third year. So how do we make sure that we help them make it to the third year and beyond?” she asked.

While the EDA provides support, networking opportunities and education that help young businesses to grow and thrive, what is ultimately needed is a cohesive national entrepreneurship ecosystem that aligns the enablers highlighted by GEM, from policy and regulatory alignment to ease of entry, education, social and cultural support, personal motivation, access to capital as well as commercial and professional infrastructure.

But is there more to the mix than just these points? Marks believes there is.

“We harp on about the same stuff, and even the GEM report has become a bit hackneyed now, with the same narrative of more funding, better education, different policy,” says Marks. “We’re just wasting money on that stuff. Let’s just put that money into helping real entrepreneurs launch their businesses.”

Want an entrepreneurship boom?

  • Ensure policies are enabling and the government gets out of the way.
  • Build a high-quality education system that fosters local talent.
  • Cut bureaucracy.
  • Build a fully digital business infrastructure.
  • Roll out a flat tax system, allowing companies to reinvest tax-free profits.
  • Innovate at all levels.
  • Be open to experimentation.
  • Focus on ideas, and the funding will come.
  • Offer hands-on mentoring and support.

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