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Innovation

The start-up bubble: How abundant money is actually not helping

Victor Mulas's picture



A start-up office in New York.
Photo Credit: © Victor Mulas


We are in the grip of start-up hype. Today, every large city in the world aspires to become a start-up hub. New York City became a start-up role model; Berlin and London were the “go to” start-up hubs in Europe two or three years ago; Nairobi is the start-up darling in Africa; and Dubai promoted itself as start-up destination.

Start-ups are seen as the new solution for job creation in the emerging economy of the so-called “fourth industrial revolution.” Indeed, they can help produce the jobs of the future — those new employment opportunities that are created in brand-new industries or technology categories. For instance, this has already happened in New York City, where the connection with local industries has resulted in new jobs, new industries, and greater competitiveness for traditional sectors. And it is has not been only about jobs. Solutions for critical development challenges, such as online payments and access to energy in off-grid areas, have emerged from Nairobi and India’s ingenious start-up scenes.

As I visit these cities, however, I wonder if the actual — and potential — impact of these emerging start-up ecosystems is being exaggerated and if we are all collectively witnessing an overflow of attention and resources that cannot translate into “magic” solutions to unemployment and other global challenges.

Indeed, many of the ecosystems I visited and studied seem to be overinflated. Not many start-ups become sustainable businesses, and the few successful examples are cited over and over again. Start-ups are disconnected from local industries and there is little absorption of start-up innovation by the economy.

In some cases, the result is a massive, large-scale training program where a new generation of aspiring entrepreneurs can learn technical and management skills (this is a good outcome). On fewer occasions, the ecosystem becomes sustainable, producing successful new businesses that reinvest in new talent and connect with the local industry base (this is a better outcome).

But these seem to be a handful of cases, and it’s not easy to get there. I suspect this is the result of a lack of maturity of the infrastructure supporting the ecosystem, as well as the poor understanding of what we need to translate the energy of new entrepreneurs and innovators into productivity and business success.

How start-ups can turbocharge global productivity growth

Ganesh Rasagam's picture



Attendees at Republica Berlin 2016, an annual conference on digital culture for entrepreneurs from around the world.
Photo Credit: © Victor Mulas/The World Bank


We have witnessed in recent years the emergence of technology start-up ecosystems across the world. New technology trends are reducing the costs as well as the barriers of access to markets and resources for developing technology start-ups. If in the 1990s an entrepreneur needed $2 million and months of work to develop a minimum viable prototype, today she would need less than $50,000 and six weeks of work.

Entrepreneurs are also surging in emerging economies. India hosts major start-up ecosystems in New Delhi and Bangalore, with their start-ups having raised $1.5 billion in funding in 2016, respectively. São Paulo ranks among the top 20 start-up ecosystems with more than 1,500 active start-ups, closely followed in the region by Santiago and Buenos Aires. Warsaw hosts around 700 active start-ups, and Nairobi is the home of leading African start-ups, such as Ushahidi, M-Pesa or Brck.

Tech start-up ecosystems present new opportunities for emerging economies. Local entrepreneurs develop new business solutions that address domestic demands. For instance, in Kenya, M-Kopa is addressing the demand for energy in off-grid locations, a major issue in the country's rural areas. Unicorns, those start-ups that raise more than $1 billion, are no longer a U.S./Europe-only phenomenon. Indian, Chinese and Indonesian start-ups, such as Lu.com, Flipkart or Go-Jek, have reached this valuation, and African Internet Group from Nigeria is poised to be the first African unicorn.

Start-up ecosystems also create new jobs. Data from New York City's ecosystem on employment generated in the tech start-up ecosystem shows that most of the jobs generated by tech start-ups are not in start-ups themselves, but in local traditional industries that either are influenced or disrupted by start-ups. Think about a bank or a retail company that has to react to a mobile app providing finance or retail business and that needs to hire new talent to develop a competing app. More than 40 percent of these new jobs do not require a college degree. These are jobs like building a website, a basic database, a web or mobile app.

The data revolution continues with the latest World Bank Innovation challenge

Marianne Fay's picture

On September 22, 2016, we launched the World Bank Big Data Innovation Challenge – a global call for big data solutions for climate resilience and sustainable development.

As the world grows more connected--through mobile phones, social media, internet, satellites, ground sensors and machines—governments and economies need better ways to harness these data flows for insights toward targeted policies and actions that boost climate resilience, especially amongst the most vulnerable. To make this data more useful for development, we need more data innovations and innovative public-private arrangements for data collaboration.

The World Bank Big Data Innovation Challenge invites innovators across the world to reimagine climate resilience through big data solutions that address the nexus areas of food security and nutrition, and forests and watersheds – high priority areas of the World Bank’s Climate and Forest Action Plans and the UN Sustainable Development Goals.

Big data innovation – moving from ideas to implementation

Trevor Monroe's picture

If you want to do something fast, do something that has already been done. If you want to hardwire a data innovation into World Bank Operations, be prepared to involve others in a process of learning by doing.  – Holly Krambeck, Senior Transport Specialist, WBG



As the world grows more connected, data flows from a multitude of sources. Mobile networks, social media, satellites, grounds sensors, and machine-to-machine transactions are being used along with traditional data--like household surveys--to improve insights and actions toward global goals.
 
At the World Bank, a cadre of pioneering economists and sector specialists are putting big data in action. Big data sources are being harnessed to lead innovations like:

  • satellites to track rural electrification, to monitor crop yields and to predict poverty;
  • taxi GPS data to monitor traffic flows and congestion
  • mobile phone data for insights into human mobility and behavior, as well as infrastructure and socio-economic conditions 

How can countries take advantage of the fourth industrial revolution?

Victor Mulas's picture

The economy is in a restructuring process. Technology-led transformations are no longer limited to technology-related sectors and are beginning to affect structural sectors, including manufacturing, retailing, transportation and construction. Disruptions of business models are surging from a fragmented network of entrepreneurs and innovators. Cognitive skills are increasingly being replaced by technology-led productivity, affecting labor supply in both developing and developed countries. In turn, creativity and social skills are becoming more important and more valuable than ever before. This process has been called the Fourth Industrial Revolution.

Countries that are less prepared to adapt to these structural changes will suffer in their competitiveness. As much as 80 percent of the productivity gap between developed and emerging economies can be explained by the lag in transitioning to technology-led changes from previous economic restructuring processes (for example, the 18th-  and 20th-century industrial revolutions). Automation is reducing the cost of traditional labor-intense industries (reducing costs relative to labor by 40 percent to 50 percent since 1990), shifting the cost structures that benefited emerging economies. Trade is shifting increasingly to digital goods and services. Knowledge-intensive flows of trade are already growing about 30 percent faster than capital-  and labor-intensive trade flows. Jobs are also being affected, with routine cognitive functions being affected the most, while providers of intellectual and physical capital benefitting disproportionately. 



There are also opportunities stemming from this widespread diffusion of technology and transformational changes. Entrepreneurship and innovation is becoming affordable and de-localized. The innovation model of large capital-intense laboratories (e.g., Bell Labs) is not the most effective one anymore. Instead, open innovation (the process whereby large firms co-create innovation with entrepreneurs and other actors, instead of having an internal process) and innovation emerging from startups are increasing. Tech startup ecosystems have emerged in cities worldwide, in both emerging and developed economies, disrupting traditional business and creating new industries. This results in local innovation and business models that can be appropriated by the domestic economies. These ecosystems also generate new sources of jobs emerging from the structural changes produced by technology.

How high-growth firms can reshape the economy

Denis Medvedev's picture

Productivity. Growth. Jobs. These are the outcomes that are at the top of many of our clients’ agendas, and they form a core part of most of our private sector development projects. But where do they come from? Who creates them?

Evidence from high-income countries suggests that the answer might be found in a group of small, young and fast-growing firms that contributes disproportionately to these outcomes at the national level. In the United States, about 50 percent of new firms will have gone out of business before the age of five (Haltiwanger et al, 2013). Among those that do survive, just 12 percent experience output growth in excess of 25 percent, but they account for 50 percent of overall increase in output. Similarly, only 17 percent of surviving firms (less than 10 percent of all that entered) experience employment growth above 25 percent – but they create close 60 percent of new jobs in the U.S. economy (Haltiwanger et al, 2016). There is undoubtedly something special about these few high-growth firms (HGFs).

One key reason that HGFs are able to perform so well is their high productivity. Firms in the 90th percentile of the U.S. productivity distribution create almost twice as much output with the same inputs as firms in the 10th percentile (Syverson, 2004). In developing countries, the gap between firms at the top and bottom ends of the productivity distribution is even larger – up to five times! (Hsieh and Klenow, 2009)



Beyond their own high productivity, HGFs raise national efficiency in several important ways. Their “pull factor” facilitates the convergence of less productive firms to the national frontier (Bartelsman et al, 2008). And when markets for production inputs are competitive, HGFs are able to lift overall efficiency by pulling resources from less productive firms. This is what accounts for their disproportionate contribution to productivity, jobs, and output growth (Haltiwanger et al, 2016).

How can cities reduce water-energy nexus pressures?

Robert C. Brears's picture
Credit: Water & Sanitation Program 

Cities over the past century have become the driving force of the global economy. Accounting for over half the world’s population and generating around 80% of global GDP, cities provide numerous opportunities for development and growth. Cities however bring about risks and challenges to people and the environment. By 2050, demand for water is projected to increase by 55% mainly due to increased demand from urban populations. At the same time demand for energy in providing water and wastewater treatment services will increase.

#ItsPossible to End Poverty

Christine Montgomery's picture

Ending poverty is within our reach. The percentage of people living in extreme poverty has more than halved since 1990, thanks to the sustained efforts of countless individuals, organizations and nations. 

Show us how #ItsPossible.

SDGs Made with Code: Giving women and girls the power to change the world

Mariana Dahan's picture
Increasingly more aspects in our lives are powered by technology, yet women aren’t represented in the roles that create this technology. In many places there are barriers to simply using technology, let alone, creating it. Women in India and Egypt are six times more likely than women in Uganda to say that internet use is not considered appropriate for them, and that their friends or family may disapprove. Learning to create with technology opens up opportunities for women to express themselves, have the ideas heard and contribute to shaping our future. Even though there’s so much more we need to do, we’re inspired to see the movement around the world to break down these barriers and start contributing their voices to the field of technology.

We recently met Mariana Costa from Laboratoria – a nonprofit that empowers young women by providing them access to the digital sector. In the next three years Laboratoria will train more than 10,000 young women as coders. This tech social enterprise located in Peru, Mexico and Chile, helps young women - who have not previously had access to quality education – enroll in an immersive five-month training program at Laboratoria’s Code Academy, where students achieve an intermediate level on the most common web development languages and tools. Their technical development is complemented with a personal development program that helps them build the soft skills needed to perform well at work. Successful graduates also receive mentoring and job placement and are usually able to pay-back the cost of the course during their first two years of employment. Most of the time, these young girls are the only breadwinners in their households.

Is the declining pace of innovation lowering productivity & growth?

Vinaya Swaroop's picture

If you have been listening lately to Robert ‘Bob’ Gordon, an economics professor at Northwestern University, he will tell you that the days of great inventions are over. This in turn, has led to a significant slowdown in total factor productivity – a measure that economists use to measure innovation and technical progress. Falling productivity is one of the main reasons for growth shortfall in advanced economies like the United States.

Eager to know more about this seemingly worrisome and pessimistic thesis, which has attracted a lot of attention among economists and the media, we invited Gordon to give a talk at the World Bank.


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