The new geography of innovation



Overview

The past five years have ushered in a major shift in our conception of place and innovation. We’re now seeing the mainstream uncoupling of work and location, amidst a technology revolution that is inherently global. The next wave of innovation will be increasingly decentralised, with major implications for how and where founders and technological progressives work.

Given this, what capabilities are needed to support this new ecosystem? And which jurisdictions are best placed to meet the needs of start-ups and innovators?


CREATING INNOVATION ECOSYSTEMS

Innovation ecosystems have long been at the heart of technological progress, centred around a standard operating system in place. Universities and corporates act as anchor institutions, alongside government, start-up accelerators, VCs and private investors, and media institutions. Together they form a loosely connected network, with shared sets of knowledge, technologies or specialist skills.

This is a familiar story. It would be recognisable to Alfred Marshall who, back in the 1890s, described the "concentration of specialized industries in particular localities" in the early descriptions of agglomeration. Indeed, the success of the Bay Area, Seattle and Cambridge / Boston as economic powerhouses is testament to the effectiveness of this model in the late 20th century.

Yet there are now new models of agglomeration. Many of the core functions of successful ecosystems are being displaced and transformed through technology. Communities of tech progressives are gathering online, rather than at physical accelerators. Tech progressives are building their own digital distribution networks for products and ideas. University degrees are being displaced by skill-based micro-credentials, accessible from any location. Progressive jurisdictions – be they nation states or cities - are increasingly focused on attracting innovators through the right mix of visa access, legal frameworks, openness to new regulatory approaches, and clarity of direction.

THENNOW
UniversitiesTask-based education / micro-credentials accessed remotely
GovernmentStates / cities set standards and the basic infrastructure on which others innovate
CorporationsMajority continue to be global in nature, with ‘corporate venture capital’ arms operating internationally
Entrepreneurs, accelerators, VCs and private investorsCommunity of innovators that gather online initially, and later meet physically. Networks based partially on time-zone – rather than physical location
MediaBuild a niche community on Twitter, branch out to multiple platforms (newsletter, mainstream media commentary), monetise audience / direct participation

VENTURE STATES

Given the increasingly mobile generation of founders and start-ups, what factors should governments and global jurisdictions focus on in attracting innovators? And which jurisdictions have the right hybrid of factors to support technological progressives? We’ll focus our attention on crypto, given the significant role the state can play in stimulating or dampening its growth, and dictating the development of the market.



GOVERNMENT AS A BAZAAR, NOT A CATHEDRAL

In 1999 Eric Raymond introduced the idea of a bazaar to describe open source software, in contrast to traditional models of software development (the cathedral). As Tim O’Reilly posited, the analogy can equally be applied to governments / jurisdictions.

Under this model, jurisdictions are responsible for establishing the bazaar: a place where the community can exchange goods and services. By contrast, the cathedral is far less open, with a limited number of entities able to shape the development of economic paths.

But, as O’Reilly argues, “not all bazaars are created equal. Some are sorry affairs, with not much more choice than the vending machine, while others are vibrant marketplaces in which many merchants compete to provide the same goods and services, bringing an abundance of choice as well as lower prices.”

The role for jurisdictions is therefore to create bazaars for tech progressives: one which embraces openness in visa systems and encourages new models of innovation, while being clear in its mission and priorities. This means setting an agenda that will enable tech progressives – and the new innovation ecosystems they create – to align around this mission.

"HOW CAN I HELP?"

The new models of innovation that are powering the progressive tech workforce require a new conception of the role of political / public leaders. The traditional model of regulation and interventionism on one side of the spectrum and non-regulatory freedom at the other, with the majority of industries falling in between, is no longer appropriate. Jurisdictions that want to successfully market themselves as locations for tech progressives will need to remove the mindset of state-as-incumbent.

Instead, they will need to follow the blueprint of leaders like Francis Suarez in Miami: articulate a clear direction, engage your early customers, and rapidly prototype your product – in this instance, crypto-friendly regulation - from there.

As a result of Suarez’s intervention, Miami has built an unparalleled reputation as a city open to progressive crypto governance and sits alongside Wyoming as the leading crypto destination in the US.

REGULATORY CLARITY AND WILLINGNESS TO INNOVATE

The openness of jurisdictions to test the use case of new technologies is also critical. The world’s major financial centres have sought to up their game in recent years with the introduction of sandboxes as regulatory experiments. They generally seek to bring new products to market, build capacity and understanding within regulatory institutions, and identify where regulatory requirements are unclear or missing. For example, the Bank of Lithuania’s LBChain dedicated to cryptoassets and DLT, and Malta’s focus on virtual financial assets and virtual tokens through sandboxes both demonstrate a willingness to create legal structures that support crypto. Even Hawaii – which has historically been restrictive to crypto – has exempted sandbox participants from rules that require crypto companies to hold cash reserves equivalent to their digital currency holdings. Highly regulated economies with strong enforced frameworks for operating in the financial sector are also managing to pull ahead, with both Singapore and Switzerland cementing their place as important cryptocurrency hubs in Europe and Asia.

Thematic sandboxes are just one example of ensuring that the ‘bazaar’ provides a sufficient basis for the ecosystem to thrive. The overarching question is whether governments have a responsive infrastructure and sufficient capability to underpin new applications of crypto – and indeed broader innovations – beyond the traditional model.

Jurisdictions as talent investors

Just as in past decades companies competed for the best talent, across borders, jurisdictions will now compete for talent. The increase in incentives for skilled workers represents a new focus on human capital in building economies. In 2009 Portugal’s introduction of a flat 20% tax rate for ‘high value’ residents was part of a new move to draw talent to the country. In the US the introduction of a Remote Worker Grant in Vermont - worth $10,000 for those willing to move and work remotely for an out-of-state employer – has been matched by cities including Savannah, Topeka and Tulsa, and countries around the globe have developed a range of ‘golden visas’ with a range of residency and investment requirements.

Right now, this agenda is focused on helping traditional jurisdictions develop the basic standards and capabilities to capture location-agnostic innovation. Yet the disaggregation of personal location and business location will require jurisdictions to go further.

Estonia’s e-residency programme offers entrepreneurs access to the EU market, without the need for a physical base or residency in the country. Similar e-residency programmes are currently being rolled out in Lithuania and Portugal. Alongside borderless capital, these kinds of models represent a major change to the geography of innovation. Beyond this, few jurisdictions have yet created models to streamline the complexity tech progressives will face as location-types become increasingly splintered.


GEOGRAPHIES FOR TECHNOLOGICAL PROGRESSIVES

The world’s big economies have already introduced a risk-based approach to crypto. China has already closed in on regulating crypto, banning banks and payment firms from providing services related to cryptocurrency transactions. With the recent confirmation of Gary Gensler as the new Chair of the SEC, the US looks poised to intervene in crypto markets at the federal level, with interventions along the way from other regulators including the Commodity Futures Trading Commission (CFTC) and the Federal Reserve Board. Speculation remains rife about a blanket crypto ban in India, despite hopes the country would embrace blockchain-based technologies. Yet, as the examples throughout this note demonstrate, a number of smaller nations and – pending federal regulation - US states are well-placed to step into this space. The table below is a summary of the most promising locations for tech progressives in the medium-term.

Defined mission / political direction Regulatory clarity and willingness to innovate Talent investor (including visa access)
EstoniaYYY
MaltaNYY
MiamiYYN
SwedenYYN
SingaporeYYN
SwitzerlandYYN
WyomingYYN

Conclusion

As the importance of physical location wanes and decentralised and disintermediated technologies grow, jurisdictions have an opportunity to build new hubs of economic activity. In the short term, the sharpest examples will bring together a defined political mission, with the levers of government used to support those developing new use cases for blockchain and building crypto businesses. They will have a degree of regulatory clarity, with approaches to experimentation baked into their operating model. Finally, they’ll have the mindset of a talent investor, addressing common hurdles around visa access and entry costs.

Looking further out, the ecosystems that emerge will need to work with local jurisdictions to unpick the complexities of disaggregating citizenship, personal location, professional location, tax jurisdiction, capital type / location and, eventually, participation in democratic engagement beyond their primary physical location. This may involve location ‘slates’ with jurisdictions informally aligning to support tech progressives who operate out of multiple jurisdictions. This is far from the starting model of creating place-based anchor institutions around which tech progressives gather, but is the next set of questions for progressive nations, states and cities to address, to support location-independent innovation.