European Digital City Index measures fertility of cities across Europe for innovative digital firms

Whether ranking universities across the world, tallying sports teams’ performance or determining the world’s most miserable economies, indexes have become the format of the day for laying out data and comparing discrete entities. Nesta’s 2016 European Digital City Index (EDCi), is a composite indicator which measures the ‘fertility’ or ‘receptiveness’ of cities across Europe for young digital firms. London, Stockholm, Paris, Amsterdam and Helsinki round out the top five spots. Meanwhile, Berlin, Barcelona, Copenhagen, Dublin and Vienna comprising the top ten. This ranking hints at what is a significant divide between North-West and South-East Europe. This is particularly visible when it comes to different cultural attitudes towards entrepreneurship, the availability of capital, and mentoring or managerial assistance.

The starting and scaling of new ventures is of such importance to our economic well-being that it must be front and centre of policymakers’ agendas. But we must also remember that entrepreneurs are also affected by their local environment. The latter can influence decision making and affect the framework by which startups thrive or die. Our index is a guide to navigating the European startup landscape.

Composite view

After consultation with entrepreneurs and other stakeholders within European start-up ecosystems, we chose ten indicators. When aggregated, these give a measure of a city’s attractiveness for disruptive small and growing businesses. These indicators include access to funding, business environment and the prevalent entrepreneurial culture in a city.

Composite indicators can be great at simply representing a big picture or complex system. They typically combine a number of indicators into a single measure based on an underlying, multidimensional model. Done well, composite indicators may be helpful in setting a policy agenda. They can also be used for benchmarking or monitoring policy performance. However, they necessarily remain a simplification; when poorly constructed or misinterpreted, they can easily mislead.

To ensure rigour, therefore, we collaborated with the Composite Indicator Research Group (COIN) of the European Commission’s Joint Research Centre. Our full methodology and data set are published online. We have also provided a tool making it possible for users to see the effect of reweighting different components of the Index.

Attractiveness beacons

So what did we find? Out of 60 European cities, London came out on top for both start-ups and scale-ups for a second consecutive year. London was found to attract Europe’s best start-up investment and finishing consistently in the top-five ranking in other themes such as entrepreneurial culture–helped by having the most ‘unicorns’ or billion-valuation companies–,significant local market size, access to skilled labour–readily available talent from the many universities that call the city home–and non-digital infrastructure–airports and rail connections.

London did not do as well in the digital infrastructure theme, since internet access, in particular, is both relatively slow and expensive; something that the UK government has promised to fix. The high costs of both commercial real estate, along with salaries of software developers, are other pain points for startups.

Nipping at London’s heels is Stockholm. The birthplace of VoIP communications tool Skype and music streaming software Spotify, Stockholm is less than half a percentage point behind London on our Index in terms of scale-up attractiveness. The city performs well across most themes but is hampered – slightly – by its relatively small local market size.

A patchwork of support

London and Stockholm top the rankings because they do consistently well when aggregated across all ten themes. But when we dig deeper into the data, a much more nuanced picture emerges, showing distributed areas of excellence across Europe. For example, on the Digital Infrastructure theme, Eastern European cities such as Bucharest, Vilnius, Bratislava and Riga are head and shoulders above the competition due to their ultra high-speed and low-cost fibre internet services. This is because these states built their digital infrastructure from scratch post-Soviet occupation. Therefore, internet service providers (ISPs) could ‘leapfrog’ older technologies, such as copper, and install fibre infrastructure from the start.

Similarly, we see a number of German cities like Karlsruhe, Munich, Berlin and Stuttgart ranking highly in the Knowledge Spillovers category as the German government spends significantly more than its European counterparts on R&D per capita, as well as on establishing top technical research institutions.

A final illustrative example is in the Mentoring and Managerial Assistance theme – which is especially important for scale-ups – where Dublin and Cambridge score highly because they host numerous networking events and are home to Business Angels and accelerator programmes.

Entrepreneurial hubs

But, one might ask: so what? What is the value in such a ranking, besides bolstering local pride? City pride can certainly be helpful, and part of the intention of the EDCi is to harness that spirit, directing it towards the cause of start-ups. A related aim is to attract attention to the hugely important role that local conditions can play in encouraging the entrepreneurship and scaling-up of businesses that Europe desperately needs.

We have also provided interesting examples of initiatives and supportive policies adopted by cities – such as Valencia’s Urban Laboratory for Innovation, Antwerp’s City of Things initiative and the Barcelona Open Challenge – to provide inspiration to those cities who want to improve their position in the Index.

Whilst every index has its limitations, we hope that the EDCi is a robust tool which makes a positive contribution towards entrepreneurship in Europe. To do so, the index contributes to raising awareness of the strengths and weaknesses of different ecosystems and highlighting ways in which they may be improved.

Chris Haley and Siddharth Bannerjee

Chris is Head of Startup and New Technology Research at the UK innovation foundation Nesta, in London, UK.

Siddharth is Researcher at Nesta, London, UK.