King's College London

There are good reasons to be leery of close relationships between government and big business in the context of startup ecosystems. Risks include corruption, regulatory capture, and agenda-setting that can distort the use of public coffers and harm broader innovation ecosystems.

Government contracts can be directed toward businesses with political ties rather than merit-based selection, undermining the aims of supporting entrepreneurs and instead, constituting another means of allocating scarce government resources to established businesses. Regulatory capture can occur as large businesses can use their influence to shape “startup-friendly” regulations in their favor, stifling competition and limiting opportunities for smaller or more innovative firms. Agenda-setting poses an additional concern, as governments may prioritize the interests of dominant industries or specific firms over broader societal or technological advancements.

Such dynamics risk turning public policies into tools for advancing corporate agendas rather than fostering inclusive and competitive innovation environments. The chorus of worries about the perceived corruption that may ensue from big businesses’ involvement can inhibit government efforts.

As a result, government policies targeting startup-fuelled innovation can focus only on engaging entrepreneurs. Based on our research on how governments are fuelling startups in open innovation systems in East Asia, we argue that big business can be worth bringing into what we call ‘startup capitalism.’

The case against involving incumbents

First, we unpack the case for why incumbents should not be involved.

One major concern is idea theft, where conglomerates may appropriate startup innovations without proper compensation.

Another risk is the pressure for early acquisitions, where startups may be bought out before realizing their full potential and losing autonomy in the process.

This concern has been called the “kill zone,” especially when it relates to Big Tech.

These risks underscore the importance of robust legal protections and balanced partnerships.

Open innovation brings risks for large firms too. For example, Steve Jobs and the fledgling Apple leadership team visited Xerox’s Palo Alto Research Company when the much larger Xerox was considering an investment. Apple replicated the graphical user interface it saw, which would give it a huge edge in the personal computer industry.

Southeast Asia’s governments can play a critical role to stymie this by creating legal frameworks to protect both parties and promote fair collaboration.

Beyond the pursuit of a stylized version of Silicon Valley

Despite what many believe, there’s more than one model for a startup ecosystem.

While the Silicon Valley model - where disruptive startups challenge and replace incumbent companies - has dominated global thinking about entrepreneurship, a different approach may make more sense for Southeast Asia, where the startup scene is more nascent than that of the West.

Strategies used in Japan and South Korea, for instance, foster a more collaborative model of innovation.

In these two nations, governments recognize that while startups are crucial drivers of innovation, large firms play a vital role in bringing new technologies to market. Rather than pitting startups against established companies, policymakers in these countries have encouraged collaboration between the two groups.

This “David and Goliath” model of innovation - where small startups inject ideas and talent into large conglomerates - has helped both parties harness each other’s strengths to drive technological advances and economic growth. The potential gains from bringing David and Goliath together are seen to outweigh the downside of the potential risks.

While some Southeast Asian nations already do this, adopting a similar approach for the wider region could be transformative.

Silicon Valley flaws

The Silicon Valley model has long been seen as the gold standard for innovation. By and large, public policy has treated startups and large firms separately.

But as has been argued elsewhere, the collective US innovation system could benefit from policies to turbocharge the David and Goliath model instead.

The Silicon Valley approach is an outdated idea, tied closely to the unique economic conditions of the US in the latter half of the 20th century.

Now, Silicon Valley’s startups are giants, and business dynamism has declined.

The approach also doesn’t account for the diverse cultures, languages, and political regimes of places like Southeast Asia.

So the more collaborative approach of countries like Japan and South Korea, with their large, influential conglomerates and young startups, offers an alternative.

This model of open innovation has allowed large companies to stay competitive in fast-changing markets while providing startups with the resources and networks they need to scale.

In Korea, for instance, Samsung Electronics partnered with AI medical solutions firm Vuno Inc. in 2021. This helped the startup scale its customer base and enabled Samsung to add AI tech to its hardware business.

Similarly, Toyota Motors’ investment in Whill, a high-tech wheelchair startup, allowed the Japanese automaker to extend its mobility offering beyond cars. For Whill, the investment boosted its ability to scale to global markets.

Getting a boost

For startups, one of the key challenges is scaling their operations and gaining access to markets. Many young companies struggle to move from developing an innovative product or service to commercializing it on a large scale.

By working with conglomerates, startups can tap into well-established supply chains, distribution networks, and customer bases.

Large companies run accelerators, innovation labs, and corporate VC arms, too, giving startups access to resources they would struggle to secure on their own.

In Southeast Asia, where many startups face barriers to scaling - whether due to limited access to funding or regulatory hurdles - partnering with large firms could provide a competitive advantage in global markets. These big companies have established infrastructure and an extensive market reach that can help startups grow faster and sustainably.

Several startups in the region have already run with this approach. Grab, for instance, teamed up with Microsoft in 2018.

The five-year partnership enabled collaboration around big data and artificial intelligence, helping Grab enhance the delivery of its digital services and enabling Microsoft to boost the geographic reach of its innovation services.

In Indonesia, financial inclusion startup Amartha has benefited from a partnership with Telkom Indonesia to expand its business of microlending to female entrepreneurs.

But other than increasing market access, working with large companies also lets small firms tap into more industry expertise.

Managers in conglomerates have years, if not decades, of experience in navigating complex industries. For startups, particularly those run by young founders with limited industry experience, this mentorship can be invaluable.

Allies, not disruptors

Even the most successful conglomerates must stay ahead of the curve to remain competitive. Working with startups allows these companies to tap into new ideas, technologies, and ways of thinking that they might not develop internally.

This is particularly important in industries where innovation is key to survival, such as the electronics, automotive, and digital services sectors.

Large firms in Southeast Asia, particularly those in manufacturing, can provide startups with access to the production capabilities needed to bring new technologies to market at scale. Manufacturing excellence is a strength in Asia, and Southeast Asia is increasingly becoming a hub for advanced manufacturing.

Vietnam, for instance, continues to move up the supply chain of Apple products and is now entering the global AI industry, with Nvidia’s announcement that it is expanding into the country through its acquisition of VinBrain. This offers an opportunity for technology transfer from large firms to local startups in the region. To date, this transmission has been muted; policy that makes a concerted effort to link the growing presence of lead firms and startups could help harness the potential.

Political push

The success of the open innovation model in Japan and South Korea is not just a result of corporate strategy but has also been driven by proactive government policies. In both countries, the government plays an active role in facilitating collaboration between startups and large firms.

Programs like K-Startup Grand Challenge in Korea and J-Startup in Japan are designed to connect startups with large companies, providing funding, mentorship, and access to global markets.

In Southeast Asia, governments can play a similar role in fostering collaboration between startups and large firms. Governments can extend their growing suite of startup policies by establishing startup accelerators that focus on partnerships with large companies, offer tax incentives for corporate investments in startups, and provide funding for joint R&D projects.

Examples already in play include the Startup Venture Fund in the Philippines, which stood at US$143 million  in 2023, Enterprise Singapore, and Vietnam’s Project 844.

Better together

Southeast Asia’s tech scene is already on a rapid growth trajectory. Countries like Singapore, Indonesia, and Vietnam are emerging as key players in the global startup landscape and the region has accumulated a growing roster of unicorns.

However, to fully realize its potential, founders in the region need to acknowledge the flaws of the Silicon Valley model and pursue the alternative, more collaborative approach. This requires acknowledging–and addressing–the risks of ‘kill zones’ and the gamut of corruption and capture potential. Based on the performance of Japan and Korea’s open innovation settings, which now rank amongst the world’s most innovative, we argue that the risk is worth the potential reward.

In the end, open innovation works when incumbents and startups have complementary aims and skill sets. The role of policy is to encourage them to work together and to lessen the risks for both sides.

It’s not easy, but it is worthwhile, as the potential to scale and maintain a technological edge are essential to both startups and large firms.

Of course, Southeast Asia can adapt these lessons to its own unique economic and industrial context. Collaboration could be the key to ensuring that the region’s tech ecosystem continues to grow, innovate, and compete on the global stage.