Box 3.1. Innovation drain
The transition region’s most successful innovative entrepreneurs and small firms often move to London, Berlin, Silicon Valley, Boston, New York and other innovation hubs at the earliest available opportunity in order to take advantage of the resources available there. The investors, mentors, advisers and clients located in these places help them to develop products faster and more efficiently (thanks to the benefits of agglomeration and clustering), while at the same time increasing the value of their businesses.20 The legacy of socialism means that entrepreneurship does not have a long tradition in the transition region, so marketing and business development still lag behind advanced economies.
Since a country’s development prospects are partly dependent on its capacity for innovation – which, in turn, depends on human capital – such “innovation drain” may be damaging. Indeed, research suggests that the emigration of highly skilled individuals weakens local knowledge networks.21
However, a highly skilled diaspora can contribute to economic development through a variety of channels (such as remittances, trade, foreign direct investment and knowledge transfers), helping innovators back home to access knowledge accumulated abroad.22 Most successful start-ups from the transition region are now developing their businesses in the United States or the United Kingdom, but have development centres somewhere in eastern Europe.23
The net effect ultimately depends on the country’s economic development, the degree of transparency within government and public administration, the business environment, and employers’ business practices in terms of recruitment and selection.24 It also depends on how good the country is at establishing links with its citizens abroad.25 One option here would be to put expats in contact with one another through social media and networking events and help them to return home if they so wish.
There are numerous examples of companies from the transition region that have moved abroad at an early stage.
Toshl Inc., the creator of a personal financial assistant app, was established in Slovenia in 2012, but moved its headquarters to Silicon Valley after joining the 500 Startups accelerator programme later that year. Another example is Double Recall, which helps publishers to increase the profitability and efficiency of paywalls by monetising social media, search and email traffic using simple advertisements that connect and engage with users. The company was established in Slovenia in 2010, but then graduated from Y Combinator (an American seed accelerator) in 2011 and now has its headquarters in New York.
Likewise, Croatian-Slovenian start-up Bellabeat (previously BabyWatch), the creator of pregnancy tracking system Bellabeat, participated at Startupbootcamp Berlin and raised funds via angel investors and an Indiegogo campaign in 2013. It graduated from the Y Combinator accelerator in March 2014 and relaunched its product in the US market after successfully completing the seed round. Its headquarters are in Silicon Valley.
Croatian start-up Repsly, a field management software company that was founded in 2010, moved its headquarters to Boston in 2014 after securing funding from Launchpad Venture Group, First Beverage Group and K5 Ventures.
GrabCAD, a company established in 2009 that has created a collaborative product development tool that helps engineering teams to manage, view and share CAD files in the cloud, moved its headquarters from Tallinn to Boston in 2011 in order to benefit from the start-up scene there.
Codility, which produces software used for testing candidates for developer positions and was founded in London by a group of Poles in 2009 after winning the Seedcamp competition, is an example of movement in the opposite direction. Most of the team is now based in Warsaw, where they have an R&D centre, although they still have an office in London.
RealtimeBoard, which has developed a cloud-based whiteboard that facilitates collaboration, was founded in Perm, in Russia, in 2011, but it now has its headquarters in Las Vegas. Similarly, Jelastic, a cloud computing service that provides networks, servers and storage solutions to software development clients, enterprise businesses, original equipment manufacturers and web hosting providers, was founded in Zhitomir, in Ukraine, in 2010. It received funding from several Russian venture funds, but moved its headquarters to Silicon Valley in 2012.
It is interesting to note that several of these start-ups were given an initial (financial) push by seed financing or boot camp accelerator programmes in Berlin or London, but nevertheless moved across the Atlantic to the United States. The pull of the US innovation hubs and the large US market remains too strong for Europe to compete with, particularly as there are still many barriers to the free movement of online services and entertainment across national borders in the EU.