Erasmus Innovation Study – Hightech in Eindhoven sets the benchmark for Innovation

The Inscope research institute at Erasmus University Rotterdam has announced the findings of the annual Erasmus Competition and Innovation Monitor. Dutch companies are becoming more and more innovative. But amongst the good news came a very clear warning. Henk Volberda (pictured) is Professor of Strategic Management and Business Policy at Rotterdam School of Management and leads the research. He is very concerned that average investments in technological innovation in some other sectors have hit an all-time low. So we asked Henk Volberda to elaborate on why we need action now and the role that startups play in innovation.

Why monitoring innovation is important

We’ve been running the Erasmus Competition & Innovation monitor on an annual basis since 2006. We do it because we believe innovation is important for the economy of a smart society such as The Netherlands. If you don’t measure it, you can’t steer it when it goes wrong. I’m also involved with the global competitive ranking of the World Economic Forum and saw a need to do a comparison in the Netherlands on an enterprise level. It also provides useful data for the business research that we’re doing at the Rotterdam School of Management. We’re looking for the conditions needed to bring about success for companies large and small.

We’ve developed a scientifically accepted scale of disrupted innovation. To supplement the panel research amongst the companies, we also do site visits to interview managers in selected companies. We have access to archive data so we can examine what percentage of revenue comes from new and improved products and data. And although this particular study was a national study, it including both Dutch and foreign enterprises operating in the Netherlands. We also conduct a similar survey in partnership with universities in Italy, France, the UK and Belgium as well in Saudi Arabia and Australia. There is not a lot of data on the firm level anywhere.

When some companies and countries talk about “innovation” they assume that’s simply a measure of investments put into R & D. Our data shows it isn’t.

Sorting out different types of Innovation

So how does Dutch innovation compare with its European neighbours? Can it really compete with the likes of Germany or is its strength in focusing on specific areas of expertise (e.g. photonics or medical robotics?)

We are measuring different factors, not just technological innovation. Here’s the fact that most CTO’s don’t know. Only 25% of Innovation success depends on the investments in ICT and related technologies. But 75% comes from other factors such as management innovation, leadership style, methods of organizing, investment in human capital and co-creation with partners.

The High Tech Campus Eindhoven was singled out in the report. Why was that?

We found that the High Tech Campus Eindhoven is outperforming the others in all the innovation types. There are very high scores on radical innovation, incremental innovation, but also social innovation.

Many innovation studies are based on a calibrated scale which measures investment in research and development. But I call this invention rather than innovation.

Well before an innovation can become a marketable invention, a company needs to find people willing to invest in that technology. Many corporate managers are only focused on the short-term, delaying innovative research so they can reach their key performance indicators. Or perhaps it doesn’t fit the existing organizational structure. Or employees are not willing to co-operate.

Degree of Disruptive Innovation by Sector

Spotting Genuine Innovation

The real innovative companies are ones that encourage intrapreneurial clusters within the organization and invest in human capital embracing ideas from all levels within the organization. There needs to be transformational leadership.

When measuring innovation, we study per industry but we also look at performance per region. In the Eindhoven area, corporates, startups, government, knowledge institutes, and supply chains have built trusted relationships with each other in a very pragmatic, open way.

Each company knows they don’t have the funds, time or capacity to achieve success fast enough on their own. Strategic alliances are the way of cutting development costs and accelerating time to market.

The Eindhoven region outperforms the rest of the country in disruptive innovation, but also in the other categories we measure. I remember in earlier studies, Eindhoven was already leading in investments in R & D, although high-tech is capital intensive by nature and demands it. But we’re seeing evidence in our survey that they are leading with other types of innovation – co-create with partners, giving room for ideas for employees, getting rid of hierarchical pyramids. Managers in the Eindhoven area focus not only on performance but also on innovation.

Brainport Eindhoven has learned to collaborate

Where do startups fit into the picture?

We focus on firms, large and small. Incidences of disruptive innovation are much higher in startups than in large enterprises. Age and size of a company tends to have a negative effect on innovation. Some larger corporates now see the need to speed up their innovation to maintain an edge in global markets. They do this by partnering with startups and adopting lean methodologies, often in a way that benefits both – corporates have to be more than an exit strategy for startups. If they get it right, then they innovate faster with startups than if they try to do it themselves inside their own structured R & D labs.

High tech is one of the so-called 9 Top Sectors that is doing well. But the same cannot be said of other sectors. We see logistics and energy both have relative poor scores when it comes to innovation. It’s important that more innovation happens in energy. We have Dutch national targets for CO2 reduction that need to be met by 2020 as well as a larger share needed from renewable sources. I feel that because the energy sector is dominated by large incumbents, we need more disruptive input from startups and smaller enterprises to give this sector the innovation boost it clearly needs.

Every industry seems to have its own clock speed. High-tech is clearly running a lot faster than the huge capital intensive sectors like logistics and energy.

Innovation across the Netherlands

Creative Industry Challenges

The creative industry is also a separate chapter in itself. It is very innovative in coming up with fresh ideas. But following through and scaling up is rare. The sector is dominated by the self-employed, operating on their own or in very small groups. They hate routine, and in their never ending quest for something new, they are not good at exploiting what they build. That means they find it difficult to collaborate with others on longer term projects, scoring low on our scale of social innovation. There are exceptions, of course when these top sectors overlap and interact. Architects like Daan Rosengaarde are doing a number of excellent world-class projects with high-tech companies. But he’s adjusted his tempo to match the clock speed of the high-tech industry. And he understands that the big opportunities for the Netherlands lie in the intersection between these top sectors rather than inside the individual verticals.

Far Shoring & Near Shoring

In absolute terms companies operating in the Netherlands appear to be spending the same on research and development, but an increasing proportion of this is done in Asia. Originally this was related to cost reduction, but increasingly the reason given by CEO’s is that they want to be close to the market – and the availability of qualified talents. India for instance has an abundance of level-5 qualified software engineers. They are far-shoring their research.

There is a gradual return to the Netherlands of some types of manufacturing. And here you see innovation in 3D-printing and smart robotics for production. Operating in, for example, Eastern Europe leads to language and cultural challenges – only 20% of Dutch companies that move production abroad turn out to be successful. And they are the companies that have some prior experience of operating in those markets. Times are changing as salaries are re-adjusted in what we used to call “low-wage” countries. So in many cases the benefits of near-shoring production are going away.

The Dutch government has started to restructure its innovation policy to make it easier for foreign companies to establish in the Netherlands. There are fiscal incentives when they invest in R&D and collaborate with Dutch firms and institutions. Companies pay less income tax and national insurance contributions and self-employed individuals can make use of a fixed deduction.

More Ecosystems Needed like Eindhoven

I believe we need to do more to build attractive ecosystems across the StartupDelta. That means tax incentives, but also access to qualified talent, supply chains as well as attractive and affordable facilities. The Netherlands is a great test market for many industries, being compact, connected, tech-savvy and relatively affluent. If it works here, it will work in much larger markets. Foreign venture capital and angel investors are increasingly finding that establishing a company here as a portal into other European markets makes more and more sense. As serial entrepreneurs start their second and third companies here and share their knowledge and experience, I think we will see more second and third-round investments in start-ups.

High Tech Plaza is the latest innovation centre to help scale-ups

Remember that best VC’s are excellent judges of the innovation capacity of startups.

I’m frequently in various parts of the United States. I must say if I bring up the subject of co-creation and ask if they know any examples, High Tech Campus Eindhoven is mentioned repeatedly by US academics, like the person credited with coining the term open innovation, Professor Henry Chesbrough of Berkeley, California.

I think it also has to do with changing attitudes in both the public and private sectors – the Brabant Development Agency (BOM) is doing more investment in startups, Philips has put innovation at the centre of its revised mission, and the current Mayor of Eindhoven has led the outreach abroad to explain that his region encourages collaboration in high-tech.

So I conclude that the success of Eindhoven has got out in many foreign circles. Now we need more places in the Netherlands to reach the benchmark achieved by the High Tech Campus. Because there are other important sectors where we have expertise. You can see that areas like the Port of Rotterdam now understand that this collaborative approach is the way forward. But they are still several years behind in their development of a local trusted ecosystem and active implementation of the triple helix partnerships.

In some sectors, R & D trends are worrying

Let me finish by sharing an important concern. It doesn’t apply to high-tech. But is does apply to other top sectors

I notice that there is a general trend in the Netherlands to reduce the budgets of R & D, something that has been showing up as a downward trend since 2009. It used to be on average 6.6% of sales turnover. It’s now dropped to an average of 2.4%. This is puzzling, bearing in mind all the talk about the importance of innovation. It is true that the efficiency of R & D is increasing, unnecessary management levels have gone, and innovation with trusted partners has meant less duplication of effort. But I believe we need to put more investment back into R & D back to levels of at least 5 – 6%. If not, we will face some serious challenges in 5 to 10 years when foreign competitors who are investing much more now will start to reap the benefits. Any startup will tell you that you cannot schedule innovation – you need time to discover it!

The report (in Dutch) can be downloaded here.

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