Mariana Mazzucato is professor at Sussex University, where she researches the links between innovation, economic growth and financial markets. “Guided, mission oriented, state investments have been the catalyst for some of the most important and radical innovations”.
State initiated innovation
The funding of the internet by the Defense Advanced Research Projects Agency can be seen as the prime example. Similar is the role public funds play in the biotech and nanotech revolutions. “In these cases it has been the state’s courageous vision, ‘patient’ capital, and willingness to support innovation from concept to commercialization has allowed some of the most important innovations to occur”.
It is not just about ‘basic’ research, applied research has catalyzed innovation in for example National Institutes of Health labs. Public venture capital and equity investments from public agencies have helped some of the most innovative firms worldwide. For instance the Finnish Innovation Fund Sitra’s that funded of Nokia in Finland, or the Small Business Investment Company’s funding of Apple Computers in the US.
Targeted proactive investments
“Investment and innovation would stop in ‘death valley’, when the private finance, interested in quick returns, shies away. Lessons from these experiences are important. They force the post-crisis recovery debate to go beyond the role of the state in simply stimulating demand, or the fear of ‘picking winners’ in industrial policy. Instead it is a case for targeted, proactive, entrepreneurial state investments, able to rake risks, creating a highly networked system of actors harnessing the best of the private sector for the national good over a medium or long-term horizon”.
But equally, it requires more explicit thinking about how to makes sure the state can earn a return beyond taxes for its risk-taking. Otherwise, in innovation like in finance we end up with socialization of risk and privatization of rewards, which are the signs of dysfunctional capitalism.
Mazzacuto's four lessons for the EU to catalyze innovation:
1 The EU needs venture capital, but has to realize that it does not work in all sectors, sometimes it takes too long to reap a return. In Pharma and Biotech, for example, returns can only be delivered after 10 to 17 years
2 Stop the obsession with Small and Medium-sized Enterprises, major innovations do not happen there.
3 Stop the obsession with ‘knowledge transfer’: “it is like pushing a string”. Invest on R&D, it is not a surprise that Portugal, Italy, Ireland, Greece and Spain are the European countries in trouble right now. In the 90’s they had by far the lowest R&D investments in Europe.
4 The abovementioned “socialized risk, privatized reward”-system has to change.