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Digital economy • Entrepreneurs

Creating a climate for digital entrepreneurs

Desirée van Welsum and Jonathan Murray - 23 July 2015

It is ever more important that policymakers focus on establishing effective policies that maximise entrepreneurial opportunity

The recent arrival of utility-based cloud computing is shifting the focus of the challenge facing digital entrepreneurs from technical barriers to the business environment. This shift reinforces the growing importance of implementing effective policies that foster the best climate for digital service incubation, growth and successful development. Given the critical platform for economic activity that cloud has become it is ever more important that policymakers focus on establishing effective policies that maximise entrepreneurial opportunity. This includes creating an appropriately skilled labour force, ensuring access to investment capital, reducing barriers to creating and growing new businesses and finally ensuring the widest access to cloud-based services for consumers through broadband infrastructure and open trade policies.

Over the last eight years cloud computing has reduced barriers to entry and increased opportunities for digital entrepreneurs. Cloud computing delivers computing services − data storage, computation and networking – to users at the time, to the location, and in the quantity they wish to consume, with costs based only on the resources used. In essence, this transforms the provision of computing resources from a capital investment in fixed infrastructure into a dynamic utility.[i] The “utility” nature of the new cloud computing model means that investment capital that would previously have been needed to build-out dedicated computing infrastructure can now be saved or spent on developing better products or services. The use of cloud computing as the foundation for startups has become so ubiquitous that venture capital firms now routinely refuse to allow investment funds to be spent on fixed computing infrastructure.

The “on-demand” aspect of cloud computing means that the computing costs of delivering a new digital service will be directly proportional to usage of the service by consumers. This enables entrepreneurs to more effectively manage costs and capital utilisation. Cloud computing is inherently “elastic” so costs are only incurred when there is demand. The previous generation of digital entrepreneurs whose services were built on fixed private computing infrastructure fought a constant battle to match the scale of infrastructure investment with user demand. Underinvestment might lead to service quality and availability issues while over-investment often led to inefficient capital utilisation detracting from other critical investments in the business.

Acquiring the specialised expertise − and capital − required to design and implement computing infrastructure which can operate reliably at global scale has been challenging historically. But this capability is now available by default when services are built on top of cloud computing infrastructure. The “global by default” nature of cloud computing based services provides a significant advantage to digital entrepreneurs who wish to scale their services internationally in a short space of time.

In short, the advantages of cloud computing enable digital entrepreneurs to more effectively utilise capital, manage costs, and scale reliably and responsively to growing user demand even when that demand comes from all over the world.

Barriers to digital entrepreneurship

The main barriers to digital entrepreneurship appear to include: skills, infrastructure, and various aspects of the business environment.[ii] Access to affordable, reliable, and high-speed broadband infrastructure remains a problem in many parts of the world, including in parts of Europe, and in particular in rural and remote areas. It is important to foster continued efforts to provide high class affordable infrastructures, including as a locational determinant for businesses. It is also important to create a dynamic digital business environment and address concerns around digital entrepreneurship conditions in order to incentivise the creation of online services and applications. While this is also true for entrepreneurship more generally, it is even more important in the fast changing and fast moving digital world, and for digital entrepreneurs in start-ups, smaller companies, and newer companies, in highly innovative − and therefore inherently riskier – sectors.

Energising the business environment requires addressing issues related to the level of competition, entry and exit barriers, business creation, access to finance, bankruptcy regulation and legislation, data and privacy and security regulation, market fragmentation − especially for online and/or ICT-enabled services − and a perceived policy bias towards larger firms.[iii] Inefficiency in all of these areas creates friction and costly regulatory uncertainty for (digital) entrepreneurs.

A focus on skills

Skills issues are tremendously important for digital entrepreneurship, from the ability to recruit talent, including across borders, to having the skills to identify new technology-enabled business opportunities and bringing them to fruition, either as a new venture, or by transforming existing ones.

Having the ability to communicate or “pitch” the business case for technology-enabled opportunities, either to the bank or other investors, or to senior management in the case of transforming activities in existing organisations, is crucial. This is an example of what is referred to as the need for “dual skills”, or “e-leadership skills”[iv]: people who combine an entrepreneurial mind-set and business skills and acumen with technical skills, at various levels of management and enterprise activity.

Business leaders need to possess a degree of technological awareness and understanding that allows them to identify new technologies that will transform and shape their business model; that will allow them to do new things, or do things differently, and to develop new products and services, ways of delivering them, and ways to communicate with their supplier, customers and employees. At the same time, technically trained people need business skills to identify new opportunities, but also the communication skills to convey them. Technical skills that are crucial in this environment include those of data scientists and engineers, specific big-data related skills and packages (such as Hadoop), data visualisation skills, service designers, user experience designers, and process engineering.[v]

As more countries transform into knowledge-based economies, and as the cloud and big data continue to gain importance, having access to these skills will become ever more important. Many countries are putting their hopes for economic development and innovation on investments in Information and Communication Technologies (ICTs). However, the impacts of ICTs depend on the use that is being made of them, which is in turn driven by factors such as skills, and whether or not the business environment enables people and businesses to take advantage of the opportunities offered by ICT.  This is increasingly important in today’s knowledge economies, in which “the creation, acquisition, dissemination, and utilisation of knowledge” are key to economic performance.[vi]

In a fully enabled knowledge economy, different factors need to come together and mutually support each other to be able to maximise the opportunities for innovation, growth and competitiveness, and in particular: the physical ICT infrastructure, the soft infrastructure (the skills needed to exploit the physical infrastructure), the business environment (factors such as the cost and ease of starting a business, and product and labour market regulations), and the innovation environment (e.g. university and firm collaboration, ability to bring new ideas to market, treatment of R&D, IP protection).[vii]

What governments can do to help

A good dose of regulatory humility will be needed in the fast moving digital space. Indeed, figuring out how to regulate activities and players that could be as yet unknown − created by fast moving and evolving technologies and the emergence of new applications − requires a fine balancing act.[viii] Similarly, it will be important to find a balance between regulating for the protection of privacy and enhancing security on the user side, without restricting the opportunity for entrepreneurs to innovate and consumers to receive the benefits of this data-based innovation.  Striving for consistency and harmonisation of the rules governing digital entrepreneurship, while also limiting regulatory change and uncertainty going forward, will also be critical. Several areas are key:

Ensuring the supply of appropriate skills

Simplify and speed-up procedures for cross-border recruitment of talent and reduce costs (e.g. related to immigration rules and formalities); promote more interaction between the private sector and educational and training organisations to ensure the skills supply better matches the skills needs in practice.

Fostering a competitive environment

Reducing barriers to entry, and exit, where necessary is important in fostering a competitive environment and should help the diffusion of technology and reduce the power of incumbents.

Recognising the self-interest of incumbents

Well-established businesses will often use policy influence to defend their market position against new disruptive technology based entrants. Policymakers need to be alert to these tactics and to ensure that policy intervention is not used as an unfair barrier to new competitive business models.

Clarifying the rules for use of data

“Big data” regulation and rules of ‘ethical’ conduct around the collection, storage and use of data are needed. But until the implications and ramifications of the big data era are better understood it will be important not to over-regulate, which could stifle innovation. At the same time, it is important to create trust in the online environment. Finding a balance between regulating for trust, and avoiding creating too much regulatory uncertainty and/or tie-downs will be an important and challenging task for policymakers.

Promoting open standards and open data

A new generation of evolved open standards will be required to unlock the full potential of the “Internet-of-Things”. Policymakers should also “prime-the-pump” for the creation of new digital services by ensuring open access to public data (e.g. weather, traffic, geography, public records, archives) to allow the creation of new and relevant localised digital content, services and applications.

Recognising the “sharing economy”

Ensure rapid adaptation of regulatory regimes to enable “sharing economy” based business models and services this includes implementation of sensible IP protection and enforcement, adapted to the digital age.

Easing the business life cycle

Simplify and harmonise regulation around starting and closing a business online − including bankruptcy laws − and around doing digital business, including across borders.

Creating the best climate for incubation and success

Promote entrepreneurship and technology awareness and skills in schools, at all levels, promoting technology skills, and especially combinations of technical and soft skills (e.g. communication, management, creative fields), and providing information and a one-stop-shop to start a business online.

Ensuring access to finance

Promote access to finance for start-ups and scale-ups, and strive for a culture where it is ok to try-fail-and try again, which is very important as many successful − digital − enterprises have come about following many failed attempts.

Facilitating market integration and demand aggregation

Integrate markets for digital and online services by reducing fragmentation and other barriers, and help through the aggregation of demand where necessary to allow an increase in overall demand for ICT goods and services.  And this include enabling digital entrepreneurs to obtain cloud services from any provider, anywhere in the world and to be able to move data across borders.

Creating the conditions for digital growth

Digital technologies offer tremendous growth opportunities but require entrepreneurs to have the ability to fully unlock their economic potential as the basis of new businesses or an enabler of the transformation of already established firms. Cloud computing dramatically reduces technical and investment barriers to bringing new digital products and services to market. But with these barriers being reduced much greater emphasis must be placed on creating the right conditions in the business environment – including skills, business cycle regulations, infrastructure and access to capital − that allow digital entrepreneurs to be successful. Access to the technology – even at scale − is no longer the limiting factor for digital entrepreneurial success and with that the role of policymakers in creating the right conditions for growth of new digital products and services becomes ever more critical.

Desirée van Welsum is senior ICT policy consultant, The World Bank and associate partner at Innovia Ventures

Jonathan Murray is co-founding partner of Innovia Ventures

This essay formed a contribution to the recent Policy Network and ITIF pamphlet Sharing in the Success of the Digital Economy

[i] Kushida, K., J. Murray, and J. Zysman, “Diffusing the Cloud: Cloud Computing and Implications for Public Policy”, Journal of Industry, Competition and Trade, 2011, at SSRN: http://ssrn.com/abstract=1861114

[ii] See Clayton, T., and D. van Welsum, “Closing the Digital Entrepreneurship Gap in Europe: Enabling Businesses to Spur Growth”, The Conference Board, Executive Action Report 425, 2014, The Conference Board, New York.

[iii] ibid

[iv] van Welsum, D., and B. Lanvin (2012), e-Leadership Skills – Vision Report, Prepared for the European Commission, DG Enterprise and Industry, October 2012, which can be downloaded from the “e-Skills for Competitiveness and Innovation: Vision, Roadmap and Foresight Scenarios” project website: http://eskills-vision.eu/results-downloads/, or from the direct link: http://eskills-vision.eu/fileadmin/eSkillsVision/documents/Vision%20report.pdf

[v] See van Welsum, D., “The Digital Jobs of the Future”, Chapter 1 of The e-Skills Manifesto 2014 (http://eskills-week.ec.europa.eu/c/document_library/get_file?uuid=5bbbe47d-8d34-43d1-b602-f37d651047a8&groupId=2293353 ), and also available at: http://innoviaventures.com/the-digital-jobs-of-the-future/

[vi] Kumar, K., and D. van Welsum, “Knowledge-Based Economies and Basing Economies on Knowledge – Skills a Missing Link in GCC Countries,” Research Report RR-188-GCC, The RAND Corporation, 2013, Santa Monica, CA

[vii] Similarly, see for example, the World Bank’s Knowledge Assessment Methodology (KAM) framework which identifies four pillars to innovation processes (Chen, D. H. C., and C. J. Dahlman, “The Knowledge Economy, the KAM Methodology and World Bank Operations,” Working Paper, The World Bank, Washington D.C., 19 October 2005.): Economic Incentive and Institutional Regime (policies and institutions for the protection of intellectual property, the rule of law, the ease of starting a business, etc.), Education (human capital), Innovation (universities, firms, and research institutes), and ICT (physical capital).

[viii] There is also a risk of regulatory “overshooting”, for example in response to the NSA and Snowden revelations, and some data security breaches widely covered in the media. These have raised awareness and brought much attention to the issue of data collection, use and storage, privacy and security. In response, politicians, policymakers and regulators feel the need to respond “firmly” to satisfy their stakeholders. This also means that regulation in this area is currently (even more than usual) subject to change, creating additional uncertainty for companies. One example of a likely “overreaction” were the calls for a “European NSA-proof Internet” (European Internet services that are walled off from the US). As recent as February 2014, Chancellor Merkel was still calling for such an initiative and was inviting France for talks on the idea.  However, it is unlikely such “extreme” ideas could come to fruition, not least because it is very likely they would not be successful in practice, for example because of technical difficulties of implementing such a “solution”, or with American entities establishing themselves within Europe. There was also some talk of a “Schengen area for data”. The idea was to create a “European cloud”, and an area within which data traffic within Europe would be restricted to European channels. While this is unlikely to be successful because of how the internet is structured and operates, and also because traffic within such an area is only a fraction of all the online European activities, it would also create new burdens and costs for companies if they have to try to comply with such new restrictive rules.

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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