Innovation That Matters: Cities, Digitalization, and the Future Economy

Peter Komives | July 29, 2016
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As new digital platforms disrupt long-standing business models, enhance social connectedness, and change the way people live and work, are cities poised to thrive in the future economy? Just as businesses must use (or become) digital platforms to keep abreast of rapid economic change, observers such as Robin Chase and Lisa Gansky suggest that the best way for cities to think of themselves going forward is as a platform. Which U.S. cities are best positioned to leverage digital and network technologies, attract new talent, and engage their citizens and stakeholders in an on-going effort to find solutions to new challenges is the subject of the recently released Innovation That Matters study produced by 1776 and the U.S. Chamber of Commerce Foundation.

Michael Hendrix, the Foundation’s research director, guided the 2016 study of eight U.S. cities: Austin, Boston, Chicago, Detroit, New Orleans, New York, San Francisco, and Washington, D.C. The research team visited each of these cities and examined startups in the education, energy, healthcare, and government services sectors by meeting founders and other key ecosystem actors. Then, to measure the development of each city’s startup ecosystem, the team surveyed diverse groups of local stakeholders and created a set of indicators. After compiling the data, they produced an analysis which serves as a useful framework for understanding urban ecosystems.

The report demonstrates to city government and business leaders what they need to do to help their communities thrive in a digital economy. For those in the trenches building startups and public sector leaders eager to support entrepreneur-support initiatives, Innovation That Matters outlines an overall theory of the future economy and offers actionable recommendations.

“Our research consisted of examining three elements,” Hendrix explained, “surveys, interviews, and open source proprietary data.”

“In a world increasingly centered on data-centric decision-making,” he added, “one of the most critical challenges to measuring progress toward developing cities that foster entrepreneurship and innovation is finding the right metrics.” Measuring the impact of community building initiatives, local leaders told the team, is the top priority.

Simple metrics – land, labor, capital – are not sufficient. Metrics that capture the openness and density of social networks, social capital, and the key attributes of the city’s culture are needed, as these factors matter a great deal to fostering thriving startup ecosystems. Based on feedback the research team received and their review of the literature, Innovation That Matters incorporates six metrics that are crucial indicators of ecosystem success:

  • Talent
  • Capital
  • Industry Specialization
  • Density
  • Connectivity
  • Culture


Talent: Do cities have workforces they need?

To measure this, the research team tracked educational attainment and – using LinkedIn and U.S. Census Cluster Maps – the different skills present in each city. But because a skilled workforce can become stagnant, the team also tracked healthy dynamism by including broader population flux to capture whether talent is mixing and remixing data.


Capital: Are cities mobilizing adequate financial resources?

The team included traditional input measures such as the amount of dollars invested in startups and deal flow, and then went further to capture outputs – deal size and IPOs – and outcomes. To determine whether startups are growing and maturing, they examined proprietary data from Mattermark.

Hendrix related how startup community leaders in all the cities they visited during past two years (except, interestingly enough, New York City) told the team that they suffered from a lack of investment capital – even Silicon Valley.

“But, as we talked with them, an interesting pattern emerged: each felt that they had some sort of unlocked potential in their traditional wealth base.” For example, in Atlanta the team heard from startup community leaders how so much local capital is invested in real estate. “They said, ‘we are looking for avenues to educate and connect and build trust with this community in an effort to tap into some of this wealth.’” To gain an approximation of what share of the capital base is being invested in startups, the research team included measures of venture capital investments compared to overall GDP, which reveals an estimate of the unlocked capital potential across cities.


Industry Specialization: As tech evolves from general IT to specialized sectors, are cities ready to take advantage of the shift?

Many knowledgeable observers see four sectors as bellwethers of the future economy: education, energy, healthcare, and urban infrastructure. Each is large and complex, involves many public and private sector actors, and holds high levels of productive potential for digital technologies to unlock. To measure how focused cities’ economies are on these sectors, the team reviewed Michael Porter’s dataset of industry clusters and examined industry-specific employment, which indicates the industries that cities are already specialized in. They then compared this to Mattermark data on startup specialization.


Density: Is a city’s startup community concentrated enough to form a cohesive identity?

“Because people and proximity are powerful drivers of productivity and innovation, and because social networks and social capital are easier to build within dense agglomerations of people and firms, which in turn provides the framework and setting for knowledge to build up over time,” Hendrix explained, “we developed indicators that measure the overall number of startups compared to the population to capture next generation industry-specific density variations for setting a baseline against which to observe future trends.”


Connectivity: Are cities’ key actors well integrated within the startup community?

“Open dense social networks of people and firms run through every aspect of innovation – it is how people find jobs, spread new ideas, and produce complex goods and services,” said Hendrix. Although there are many ways to measure connectivity – such as through LinkedIn, meetup and event attendance, board membership overlaps, who is investing in whom, etc. – the most straightforward approached turned out to be asking startup leaders how connected they are to people and institutions in emerging sectors.


Culture: Does a city have the right mindset and quality of life to attract entrepreneurs?

“A city can have talent, capital, and research capacity in place yet still not generate sustained startup activity because social capital and cultural values are lacking,” said Hendrix. In a world of ever faster change, the ability to process and respond to new idea and emerging global trends is critical. Therefore, the research team broke down cultural metrics into three categories: (1) openness to new ideas – that is community interest in experimenting with new approaches and new ways of doing business; (2) the presence of trust and empathy within the community – trust being the glue of large social networks and empathy allowing entrepreneurs to produce goods and services their customers want; and (3) quality of life – is the general experience of living in a particular city an asset or a detriment for entrepreneurs?

This is just the beginning of developing robust measures of the degree to which social networks and social capital strengthen city startup ecosystems. For city leaders who are seeking to position their urban centers to take full advantage of the opportunity to shape the future digital economy, it is critical to be able to identify the right elements, measure progress, and evaluate impact. Innovation That Matters makes a substantial contribution to this on-going effort.

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Peter Komives
Peter focuses on building the Global Entrepreneurship Network's capacity to impact entrepreneurship ecosystems around the world. For the Global... About the Author