how many people know that the algorithm that led to Google’s success was funded by a public sector National Science Foundation grant? Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council (MRC) labs in the UK? Or that many of the most innovative young companies in the USA, including Apple, were funded not by private venture capital but by public funds, including the Small Business Innovation Research (SBIR) programme?
between 1971 and 2006, 77 out of the most important 88 innovations (rated by R&D Magazine’s annual awards) were found to have been fully dependent on US federal government support, especially, but not only, in the early phases … in the pharmaceutical industry, it is state-funded research that has been responsible for producing 75 per cent of the most innovative drugs (‘new molecular entities’ with priority rating), with private pharma preferring to focus on the less risky, hence often more profitable, ‘me too’ drugs.
The state is absolutely crucial for guaranteeing business innovation, argues Mariana Mazzucato (excerpt):
“The view of the current government – shared by its predecessor – is that the role of the state in spurring innovation is simply to provide the ‘conditions for innovation to flourish’ (BIS and HM Treasury, 2011). The UK government states that if it invests in skills and a strong science base, ensures a strong legal framework within an amenable macroeconomy, and supports entrepreneurial clusters, then the market will do the rest through the incentive of the profit motive.
In The Entrepreneurial State I present evidence that challenges this minimalist view of the state in the field of economic policy, and argue that a far more proactive role is required (Mazzucato, 2011). The case can be made that the role of the government, in the most successful economies, has gone way beyond creating the right infrastructure and setting the rules. It has been a leading agent in achieving the type of innovative breakthroughs that allow companies, and economies, to grow, not just by creating the ‘conditions’ that enable innovation. Rather the state can proactively create strategy around a new high growth area before the potential is understood by the business community (from the internet to nanotechnology), funding the most uncertain phase of the research that the private sector is too risk-averse to engage with, seeking and commissioning further developments, and often even overseeing the commercialisation process. In this sense it has played an important entrepreneurial role.
Of course there are plenty of examples of private sector entrepreneurial activity, from the role of young new companies in providing the dynamism behind new sectors (for example Google), to the important source of funding from private sources like venture capital. But this is the only story that is usually told. Silicon Valley and the emergence of the biotech industry are usually attributed to the geniuses behind the small high tech firms like Facebook or the plethora of small biotech companies in Boston or Cambridge in the UK. Europe’s ‘lag’ behind the USA is often attributed to its weak venture capital sector. Examples from these high tech sectors in the USA are often used to argue why we need less state and more market: to allow Europe to produce its own Googles.
But how many people know that the algorithm that led to Google’s success was funded by a public sector National Science Foundation grant? Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council (MRC) labs in the UK? Or that many of the most innovative young companies in the USA, including Apple, were funded not by private venture capital but by public funds, including the Small Business Innovation Research (SBIR) programme?
Lessons from these experiences are important. They force the debate to go beyond the role of the state in stimulating demand, or the role of the state in ‘picking winners’ in industrial policy, where taxpayers’ money is potentially misdirected to badly managed firms in the name of progress, distorting incentives as it goes along. Instead it is a case for a targeted, proactive, entrepreneurial state, able to take risks, creating a highly networked system of actors harnessing the best of the private sector for the national good over a medium- to long-term horizon. It is the state as catalyst, and lead investor, sparking the initial reaction in a network that will then cause knowledge to spread. It is the state as creator of the knowledge economy.
It cannot be called ‘new’ industrial policy because it is in fact what has happened, though in a ‘hidden way’ to prevent a backlash, over the last three decades in the development of the computer industry, the internet, the pharma-biotech industry, and many more including today’s nanotech industry (Block and Keller, 2011a). None of these technological revolutions would have occurred without the leading role of the state. It is about admitting that in many cases, it has in fact been the state, not the private sector, that has had the vision for strategic change, daring to think – against all odds – about the ‘impossible’, creating a new technological opportunity, making the large necessary investments, and enabling a decentralised network of actors to enable the risky research, and to allow the development and commercialisation process to occur in a dynamic way.
A key reason why the concept of market failure is problematic in understanding the role of government in the innovation process is that it ignores a fundamental fact about the history of innovation. Not only has government funded the riskiest research, whether applied or basic, but it has indeed often been the source of the most radical, path-breaking types of innovation. To this extent it has actively created markets not just fixed them.
While economists agree that innovation is an important factor leading to growth, not all innovations lead to economy-wide growth. This is only true for new products or processes that have an impact on a wide variety of sectors in the economy, as was the case with the rise of electricity and computers. These are what economists call general purpose technologies (GPTs) characterised by three core qualities:
they are pervasive in that they spread to many sectors; they get better over time and, hence, should keep lowering the costs of its users; they make it easier to invent and produce new products or processes. In fact, large scale and long-term government investment has been the engine behind almost every GPT in the last century. Vernon Ruttan analysed the development of six different technology complexes (the US ‘mass production’ system, aviation technologies, space technologies, information technology, internet technologies and nuclear power) and concluded that government investments have been important in bringing these new technologies into being, and that nuclear power would, most probably, not have been developed at all in the absence of large government investments in development (Ruttan, 2006). In each case it was not just funding innovation, and creating the right conditions for it, but also envisioning the opportunity space, engaging in the most risky and uncertain early research, and overseeing the commercialisation process. This has also been the case for the recent development of nanotechnology, which many believe is the next GPT.
At a more micro level, Fred Block and Matthew Keller find that, between 1971 and 2006, 77 out of the most important 88 innovations (rated by R&D Magazine’s annual awards) were found to have been fully dependent on US federal government support, especially, but not only, in the early phases (Block and Keller, 2011b).
In different sectors, it has often been the state that has funded the most radical innovations, with the private sector focusing on the less risky, more profitable innovations. For example, in the pharmaceutical industry, it is state-funded research that has been responsible for producing 75 per cent of the most innovative drugs (‘new molecular entities’ with priority rating), with private pharma preferring to focus on the less risky, hence often more profitable, ‘me too’ drugs, that is, slight variations of existing drugs such as Viagra with a different colour and different dosage (Angell, 2004).
These examples are fundamental for understanding the impact of publicly funded research.It is not just about funding blue sky research but creating visions around new important technologies. Ironically, the state has played this entrepreneurial role the most in the USA, which is usually described in European policy circles and in the media as one in which the economy is mainly driven by the market, with many European politicians pitching the need to learn from the market-driven Silicon Valley experiment. Silicon Valley was in fact built upon decades of state-led vision around the power of the internet, decades of investment in the riskiest research, and decades of nurturing regional innovation systems and new company start-ups – a lesson that is, ironically, being ignored by the UK and being followed by China.”