The entrepreneurial state?

000000000349In Slate, Marianna Mazzucato argues that it is a myth that entrepreneurs drive innovation. I’ll chalk that up to the Slate sub-editorial title writers because what the article is really saying is the ‘independent’ entrepreneurs do not drive innovation. Instead, in many classic situations the hand of the government was there and it is difficult and probably semantic to say who really drove innovation. It was probably combining the two.

Fair enough but then Mazzucato moves away from looking at evidence to call for changes that would increase the rate of innovation. And that is when she arrives at this:

It is time for the state to get something back for its investments. How? First, this requires an admission that the state does more than just fix market failures—the usual way economists justify state spending. The state has shaped and created markets and, in doing so, taken on great risks. Second, we must ask where the reward is for such risk-taking and admit that it is no longer coming from the tax systems. Third, we must think creatively about how that reward can come back.

There are many ways for this to happen. The repayment of some loans for students depends on income, so why not do this for companies? When Google’s future owners received a grant from the NSF, the contract should have said: If and when the beneficiaries of the grant make $X billion, a contribution will be made back to the NSF.

Other ways include giving the state bank or agency that invested a stake in the company. A good example is Finland, where the government-backed innovation fund SITRA retained equity when it invested in Nokia. There is also the possibility of keeping a share of the intellectual property rights, which are almost totally given away in the current system.

Recognizing the state as a lead risk-taker, and enabling it to reap a reward, will not only make the innovation system stronger, it will also spread the profits of growth more fairly. This will ensure that education, health, and transportation can benefit from state investments in innovation, instead of just the small number of people who see themselves as wealth creators, while relying increasingly on the courageous, entrepreneurial state.

Now as I understand it, her argument is that what the state needs is to appropriate more of the returns from innovation it funds on its books. However, this is at the same time, that she argued that state success in funding and seeding innovation was precisely because it didn’t have to worry about getting the returns from innovation on its books. In other words, the problem with state-funded innovation is apparently it is not sufficiently like private funded innovation in its return calculus.

Again, for all I know that could be correct but if I were to guess the thing that makes the system work well now is precisely the diversity of goals between the state and private sector coming together to produce innovation rather than that being the problem.

5 Replies to “The entrepreneurial state?”

  1. I don’t find any real conflict in Mazzucato’s argument.

    State investments in innovation, iike those in other types of research, can be of great value in part because they are not primarily concerned with monetary returns. But it does not follow from this fact that any returns that -do- arise should therefore be captured by someone else.

    The entrepreneurial capitalist story is that entrepreneurs are entitled to large returns because they are the “makers” or “job creators” who take the large risks. But if in fact they are -not- taking the large risks, then it is hardly reasonable to think that they are entitled to outsize returns.

    My reading of Mazzucato’s argument is not that “state-funded innovation is […] not sufficiently like private funded innovation in its return calculus”, but that too often actually existing -private- innovation is not sufficiently like the claimed model for privately funded innovation: so-called “private” investors try to capture returns based on risks taken by the state.

  2. I would like to suggest that we are discussing different stages in a process. In the US, the State funds early stage basic research to promote discovery (think NIH, NSF etc.). All major State funding agencies also fund more applied research with commercial potential, for example, SBIR, STTR funding. The point of these funds is to specifically promote the commercialization of discoveries funded through early research. The intent is to encourage the formation of businesses that will then take the discovery (technology, medication, treatment, etc.) to the market. This is where the entrepreneur often comes in, it is rare to see the entrepreneur engaged in the early stage, basic research that drives scientific discovery – the entrepreneur’s role is to build a business, at the end of the process, that will bring a product to market.

    There are mechanisms that allow institutions to recapture some of the value realized by the entrepreneur and business – the Bayh-Dole act allows universities to negotiate license and royalty payments with the entrepreneur. These funds do not go back to the State, but are often used by universities to support their own basic and applied research efforts. University IP policies vary, but if a researcher discovers a technology with commercial potential while working on a State funded grant, the Bayh-Dole act would apply and the potential to capture future revenues from the entrepreneur is real. We also have tax policies at the state and federal level which allow governments to capture a portion of revenues, and these are clearly agents of the state.

    Different players have different roles in the process. The State encourages basic and applied research for many reasons, Universities play a pivotal role in conducting and translating this research. The Entrepreneur comes in towards the end to convert the “not-yet-commercial” work of the researcher into a commercial product and business. In terms of risk, it seems that the State and the Entrepreneur face more risk than the University. The State is risking tax payer funds when it funds grant programs, the Entrepreneur is typically risking a mix of personal and private investment funds – but not typically State funds at this point (these were expended by the University). There are some exceptions, but this is generally how the research-application-company process works.

    It is certainly important to recognize the role of the State in this process, but I am not sure I see the state as the “lead risk taker”. There is a mechanism through Bayh-Dole to capture some of the value generated by the business, and this goes to the University – could we consider the University as the State proxy?

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