A big question from the past 20 years is: where are the European Googles? Why are all the funky, creative, dynamic, innovative companies like Apple, Amazon, Google and Facebook coming out of the US and not Europe? The answer you will often hear is: Europe has lots of culture, good food and fashion, but there is too much state and not enough market. As a result, it is not entrepreneurial enough.
This view, fed to us on a daily basis by some media outlets and politicians, ignores the fact that all the revolutionary technologies that make the iPhone so smart were actually funded by government. Not through narrow market-fixing policies, but through mission-oriented policies that catalysed the creation of entirely new technologies and sectors.
Wherever you are, you can surf the web with your iPhone, because the internet was funded by DARPA, part of the Department of Defence in the US. GPS on your phone can tell you where you are anywhere in the world, and that was funded by the government’s Navistar Satellite Program. And Siri, iPhone 5’s voice-activated personal assistant, and the user-friendly iPhone touch screen display were both also funded by government.
Of course you need people like Steve Jobs to turn these visions and ideas into actual products, but it is wrong to think that these geniuses came out of nowhere. Such entrepreneurs, as well as the venture capital funds that finance them, have often surfed massive waves created by public money. Not admitting this fact is putting future waves at risk.
The current emphasis on so-called ecosystems of innovation – the public-private partnerships – is problematic. We must build ecosystems, but we need to ask what kind of ecosystems: symbiotic or parasitic? A parasitic ecosystem is one where we socialize only the risk, not the rewards. A symbiotic and mutualistic ecosystem is one where both the risks and the rewards are shared.
Government is taking an increasing role in the knowledge economy, so taxpayers should share in the rewards. Economists believe that this return will come back via taxes. But many of the companies in question pay very little in tax compared to their incomes – incomes that are heavily dependent on such strategic state funding. There is also no guarantee that the jobs these companies create will be in the country that funded the technologies. If the tax system is not working, where will future funding come from?
We can either print the money, raise taxes or think concretely about how to create more symbiotic ecosystems, where government doesn’t just de-risk the private sector, but also shares in the risks and rewards. This could be through income-contingent loans, some equity or shares in the company, or retention of a golden share of the intellectual property rights, for example. Equity is of course used in successful emerging economies like Brazil and China, where, alongside the private sector, state investment banks are one of the leading public infrastructure players funding innovation. In 2011, the Brazilian Development Bank made a 21% return on equity. The treasury took some of that return, and reinvested it into health, education and the economy. So the taxpayers who actually funded innovation saw some returns.
If the state in the US that funded the internet had been able to earn back even 1% of the profits, there could be so much more spending on things like climate change mitigation, for example. Instead, many of the same agencies which funded the whole Silicon Valley miracle – such as the National Science Foundation, National Institutes of Health and DARPA – are today under extreme pressure to cut their budgets, and this is putting the innovation machine at risk.
People sometimes say that governments can’t pick winners; they don’t have the expertise. Well, my work has shown that there has been loads of picking (every technology behind the iPhone was picked). That is not the question. The question should be how to frame innovation policy around new challenges of the future, and to enable government agencies to think big about those challenges. More mission-oriented governments find it easier to attract top expertise. If instead we keep telling government to either step aside, or to merely facilitate innovation in the private sector, who would want to go work there? It would be much more exciting to work somewhere like Google or Goldman Sachs.
Obama’s post-crisis stimulus spending has been directed towards environmental sustainability. As a result, he has attracted a Nobel Prize-winning physicist to direct the US Department of Energy and founded ARPA–E, which is trying to do for renewables what DARPA did for the internet. Even shale gas extraction was initially funded by the government, showing how government spending can create revolutionary changes. Now, we need a more democratic debate on where that spending should be directed.
Other countries with active public sector investment in innovation include Finland, Denmark, Germany and Israel. After the Cold War, some of the top Russian scientists went to Israel. Another country might not have known how to absorb that kind of knowledge, but Israel has a symbiotic ecosystem, where public venture capital retains equity, and the government earns back from investments in innovation. The same is true in Germany, where the public and private sector work closely together at the publicly funded Fraunhofer institutes – without the myth of the slow bureaucratic state.
But to build this type of environment, it is important to make sure government gets something back. Take the example of Silicon Valley. Although it has received huge amounts of government investment, its public school system has been deteriorating, and is worse now than it was in the 1970s. This is dysfunctional. It is arguably the most innovative part of the US economy, and has received huge amounts of basic research, applied research and seed financing from government, but the taxpayers who funded it have seen no returns. The challenge, then, is how to make growth smart, innovation-led, but also inclusive and sustainable.
My recommendation for business and government is to think together about the future – think about how to co-invest in different areas and recognize each other’s roles.
All too often, we hear about the state as Leviathan, almost like a big monster getting in the way of innovation. My mission is to make this debate less ideological and for us to really think about the relationship between the state and the market. It’s time to admit that the state already acts entrepreneurially to drive innovation, and is now overdue a more social return on its high-risk investments.
Read our report, Fostering Innovation-Driven Entrepreneurship in Europe.
Author: Mariana Mazzucato, R. M. Phillips Professor in Science and Technology Policy, University of Sussex, United Kingdom