Entrepreneurship, Innovation and

Diversification in Times of Crisis:

Challenges and Opportunities for Newfoundland

Ben Spigel, PhD University of Edinburgh Business

School

Agenda• Who am I?

• Entrepreneurs as innovators and diversifiers

• Entrepreneurial Diversification in Aberdeen and St. John’s

• Barriers and Opportunities in St. John’s

• Conclusions and Questions

Diversification in Resource Economies

• Chief challenge of resource economies: how to avoid crisis during period of low prices or resource decline 

• Economic impacts of resource extraction tend to reduce opportunities for economic diversification (e.g. resource curse and dutch disease)

• But regions can leverage the concentration of human and financial capital that occurs during resource development

Innis’s staple trap• Innis understood Canada as a

hinterland that exports staples to core areas for processing

• Economy and political institutions developed to preserve this role

• Beaver pelts → timber → cod → grain → oil → Justin Bieber

• Creates boom-bust cycle as region is price-taker for unprocessed commodities and is unable to move up value chain

Haley 2011 p. 101

Path dependency & lock-in• Economic and social histories of a place affects

future growth trajectories

• Institutional systems develop to support and stabilize existing trajectories

• Lock-in occurs when regional economies can no longer diverge from existing paths

• Lock-in persists until disturbed by a significant economic shock (technological or economic)

Lock-in & Lock-out• Lock-in not necessarily a bad

thing: Silicon Valley is locked in to technology

• New firms can be locked-out of highly concentrated industries

• Being locked-out of an industry forces diversification, which can be useful in the long-run

A - Positive Lock-out B - Positive Lock-in

C - Negative Lock-in B - Negative Lock-out

Entrepreneurs as path-breakers

• Firms expand into similar markets (related diversification) or totally new markets (unrelated diversification)

• Firms and regions tend focus on related diversification

• Entrepreneurs key drivers of diversification and new path creation

Path dependencies in resource regions

• Platonic ideal: capital and talent attracted by resource extraction can be used to diversity region into non-staples activities

• Can diversify into new markets (move up value chain or enter new geographical markets) or diversify into new industries through product innovation

• But multiple barriers to diversification exist

100 1 2 3 4 5 6 7 8 9

10

0

1

2

3

4

5

6

7

8

9

Time

Econ

omic

valu

e

Fishing

Boat rental

Offshore servicing

Naval architecture

Rig operation

Exploration and financing

Diversification in the resource industry

• Unique industrial structure that affects firm growth trajectories

• Firms build up new capabilities by supplying local resource sector, which they can then export in the form of new products and services

• Growth through moving up supply chain or expanding into new markets / sectors Selling same

capability in new sector

Selling new capability in same sector

Selling new capability in new sector

Why diversification matters

• Detaches region’s economy and labour market from vagaries of a single market

• Key to building more resilient regional economy

• Creates more opportunities for entrepreneurs to bring existing skills and capabilities to new markets

Entrepreneurship & Diversification in St. John’s and Aberdeen

Offshore Production Levels

Tota

l Ter

ajou

les

Prod

uced

0

750,000

1,500,000

2,250,000

3,000,000

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

Aberdeen St. John's

Aberdeen as a entrepreneurial hub

• Aberdeen has very similar background as St. John’s

• Firms evolved from supplying basic services (boat rentals) to global oil and gas services

• Development of specialised white collar and blue collar workforce

• But region dependent on offshore economy as production decline

Context of study• Focus on role of entrepreneurs

in diversifying economy into new markets and industries

• Interviews with technology entrepreneurs inside and outside the oil and gas industry

• Additional interviews with investors and economic development officials

Number of Interviews

Aberdeen St. John’s

Entrepreneurs 27 20

EconDev 8 8

Investors 1 4

Total 36 32

IndustriesLife

ScienceConsumer

Tech B2B Tech Oil and Gas Maritime

St. John’s 1 5 9 2 3

Aberdeen 2 1 7 16 1

𝝌2= 14.1, p < .01

IndustriesLife

ScienceConsumer

Tech B2B Tech Oil and Gas Maritime

St. John’s 1 5 9 2 3

Aberdeen 2 1 7 16 1

𝝌2= 14.1, p < .01

Barriers to spinouts• Very few experienced

engineerings or managers leaving to start their own ventures

• Younger industry means fewer people with 20+ years of experience

• Cultural barriers to leaving stable employment

Prior Experience in the O+G Industry

St. John’s Aberdeen

Yes 2 15

No 18 12

p < .001

Barriers to spinouts• Very few experienced

engineerings or managers leaving to start their own ventures

• Younger industry means fewer people with 20+ years of experience

• Cultural barriers to leaving stable employment

“[it would be] highly unusual for someone to say well I’m going to quit my $200,000 a year job’ to start a new venture”

- Economic Development Expert

Selling to oil and gas industry

• Very difficult for SJ entrepreneurs to sell into local or global oil and gas industry

• Shifting nature of global oil value chains means operators prefer solutions from multi-national suppliers

• Importance of pre-existing knowledge and social contacts within the global oil value chain

Sells to the Oil and Gas Industry

St. John’s Aberdeen

Yes 8 21

No 12 6

p < .01

Entering new sectors• Low rates of St. John’s firms

purposefully trying to enter new geographic markets (e.g. sell products to North Sea operators)

• However, St. John’s firms more likely to be ‘born globals’

• Higher rates of selling products into new sectors in St. John’s, likely due to fewer O+G firms

Entered new geographic market

St. John’s Aberdeen

Yes 4 13

No 16 14

Entered new sector / industry

St. John’s Aberdeen

Yes 10 9

No 10 18

p < .1

p < .1

Lack of outside investmentInvestment Experience

St. John’s Aberdeen

No Need 6 16

Have Looked 8 4

Received Investment 6 7

p < .1

• Entrepreneurs need outside financing to expand into new markets and sectors

• Lack of entrepreneurial history in SJ means few skilled angel investors

• Lack of investors with knowledge of offshore industry hampers local firms

• Cultural barriers to successful investment

Lack of outside investment• Entrepreneurs need outside

financing to expand into new markets and sectors

• Lack of entrepreneurial history in SJ means few skilled angel investors

• Lack of investors with knowledge of offshore industry hampers local firms

• Cultural barriers to successful investment

“Investors here are, you know, your local brick-and-mortar investors who’ve might have made a lot of their capital through running a grocery store or construction company [but] there’s definitely a lack of understanding of high-tech”

- Technology entrepreneur

Strong but diffuse networks

“I just went out for lunch with three-fifths of the video game industry the other day – I went out with two other guys.”

- St. John’s Technology entrepreneur

• High levels of trust for networking and knowledge sharing in St. John’s

• Other communities like Aberdeen and Calgary have high levels of distrust due to competition between firms

• However, few groups or communities for entrepreneurs to learn from each other

Strong but diffuse networks

• High levels of trust for networking and knowledge sharing in St. John’s

• Other communities like Aberdeen and Calgary have high levels of distrust due to competition between firms

• However, few groups or communities for entrepreneurs to learn from each other

“I’ve tried to develop a sort of culture between companies up here. But it doesn’t take long before people become very insular…. it kind of worked for awhile but it doesn’t take long before somebody thinks it benefits someone else more than it benefits them and it kind of broke down”.

- Aberdeen Technology entrepreneur

Why is St. John’s different?

• Aberdeen began development before rise of global oil service firms — more room for moving up value chain

• Smaller production levels & rig count mean fewer opportunities

• Less time to develop global ties with global energy industry

Is St. John’s locked-In?• Signifiant evidence of cultural lock-in that

discourages entrepreneurship, spinouts and investment

• Local entrepreneurs largely locked-out of participating in local oil and gas industry

• Lack of entrepreneurial and investment infrastructure makes it hard for new entrepreneurs to quickly scale up and enter new markets

Barriers to diversification

• Lack of local market to develop tech product before going global

• Lack of investment infrastructure to finance growth

• Lack of internationalisation knowledge and global pipelines

Strengths to build on• Very strong community of

entrepreneurs who share knowledge and support

• Success stories like Rutter, PanGeo, VMT, GreyMatter, and BlueDrop

• Layoffs remove barriers to entrepreneurship amongst local and returnee senior managers

• Firms are born global by necessity

Quick wins• Entrepreneurship training and advising to

experienced O+G workers from those who have been through this before

• Formalise processes to draw on social resources and networks of Newfoundlanders working in O+G sector abroad

• Build on successes of organisations like Common Ground and support informal startup groups

Building for long-term success

• Who are the key stakeholders?

• Strong entrepreneurial ecosystems are built by entrepreneurs, not governments or universities

• Lack of investment capital is an issue, but one entrepreneurs can overcome

• Using adaptive co-management tools to create common vision for the community

Questions?

Funding from the British Academy / Leverhulm Trust Small Research Grant