Designing Innovation Ecosystems Part 3: Labour Market Liquidity

Welcome to the third in our five-part series on designing innovation ecosystems. Our series covers five key dimensions to building a successful growth environment:

1. Failure tolerance
2. Risk capital
3. Labour market liquidity
4. Innovation policy
5. Ecosystem strategy

So, let’s talk about the importance of a liquid labour market to building innovation.

Failure tolerance, which we covered in the first part of our discussion, is closely related to this issue of a liquid labour market. If it’s okay to try something and not have it work out, you can have people who are willing to take a job at a startup instead of a large established company. If it doesn’t work out, so what? It was a valuable experience that’s useful in future work.

The East Coast of the US, even today, is still not as liquid on its labour function as the West Coast. But New York and Boston are definitely better than they were. I remember, when I was starting my career in the mid-1990s, that if you changed a job after three years you were considered an unemployable “job hopper.” It was almost impossible to persuade the best computer programmers to leave their high-cash Wall Street job in order to work for low current pay (albeit with equity) at a startup.

I don’t hear this hesitation as often, but it still rears its head from time to time. And I argue the Bay Area is perhaps over-liquid; employees switching every six to 12 months in certain hot fields as they quest for that next “unicorn” company – it makes for an unstable workforce. We need a balance, somewhere between “lifetime employment” and “one foot out the door as soon as you walk in the door”. Overall, however, the US has a reasonably liquid labour market that fosters the ability of new enterprises to attract talent.

Now, let’s turn our attention to Europe. A few years ago, I was asked to contribute to a study for the European Commission around regional innovation. Could Southern Europe grow its way out of its post-crisis troubles? We identified labour market liquidity as a critical input to the evolution of regional innovation and future enterprises. Our observation was that there was low liquidity in the European labour markets and this inhibited growth.

Back to our old friend, failure tolerance. If your grandchildren still carry the shame of your business not working out, that’s going to inhibit you from starting that business in the first place. We heard echoes of this attitude in our discussions around many European countries. The main objective of a university education, in some European countries, is to get “the job” – lifetime employment with a secure pension. Not exactly risk-taking behaviour.

Asian countries have a similar issue, although, with the successes of such large-scale enterprises such as Alibaba, Tencent, CreditEase and others, we are beginning to see a shift in mindset. One working hypothesis I have is that a helpful input occurs when there is a media culture that glorifies entrepreneurs (the US even has a TV show, Silicon Valley, that’s very successful; Bill Gates and Steve Jobs have been on the covers of many magazines and featured in many TV news segments, treated like rock stars at conferences, etc. – more recently Jeff Bezos, or Jack Dorsey, or Chris Larsen, or Evan Spiegel, or… you get the idea). We are starting to see this culture of entrepreneurial heroes rising in Asian countries.

So, how do you teach someone that failure is acceptable, if they have been raised expecting to get 90% or 100% all the time, and that anything less is shameful; how do you convince them that it’s okay to go out and try to sell a product that 9 out of 10 prospects won’t buy? When you start a new company and begin selling your enterprise software product, almost everyone is going to turn you down until you have five to 10 reference accounts and case studies. How do you convince someone who’s taught that effort equals success, that in this case, you can do everything right and still not win? And if you lose that job, because the company goes out of business, how do you convince people to try again?

A healthy approach to non-competition agreements (basically making them unenforceable) is a minor but important factor in creating labour market liquidity. In my discussions with students around the world, and people considering going into startups, I hear much more inhibition driven by the fear of leaving the perceived security of the large organisation with the “permanent job,” than I do about the worry of having to sign some form of non-competition agreement.

The solution lies within instilling a willingness to try and fail, and try again. Education is part of the story; ongoing culture change (perhaps mediated by media and social media) can help create a culture of risk-taking that can truly stimulate an innovative approach.

In the next instalment, we’ll talk about framing these ingredients from the first three parts through government action: the best practices of innovation policy.

The opinions reflected in this column are my own. My current portfolio is disclosed at VisionaryFuture.com. Chris Larsen is an investor in a company I run.

The views expressed in this column are those of David Shrier, and may not reflect those of Saïd Business School, University of Oxford, its faculty, or GetSmarter.