The Entrepreneurial StateRethinking Risks and Rewards in Innovation

Mariana Mazzucato

R.M. Phillips Professor in Economics of InnovationScience Policy Research Unit (SPRU)

University of Sussex, UKwww.marianamazzucato.com

@MazzucatoM

 

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

John Maynard Keynes, The General Theory of Employment Interest and Money, Ch. 24, p. 383

a)Set ‘level’ playing field then get out of the way

b)Solve market ‘failures’

c)Something more interesting?

 

What is the State’s role in the economy?

“..Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds… Leave the rest to the revolutionaries.”

The Third Industrial Revolution, The Economist, April 21, 2012

VS.

Business R&D spending across Europe

The Entrepreneurial (risk taking) State

Market failure policies don’t explain the advent of key General Purpose Technologies

• ‘mass production’ system• aviation technologies• space technologies• IT• internet • nuclear power• nanotechnology

MARKET

Radical

Leverage baseEvolutionary

Discontinuity

Increas

ing ris

k

NewExisting

New

Exi

stin

g

TEC

HN

OLO

GY

market and technology risk

Valleys of death and Darwinian seas

1. research 2. concept/invention

3. early stage technologydevelopment(ESTD)

4. Product development

5. production/ marketing

Angel investors, corporations, technology labs,SBIR

NSF, NIH, DARPACorporateresearch

Corporate venture funds, equity, commercial debt

VC, public venture capital, NIH, labs, ARPA-E

Source frequently funds this technological stageSource occasionally funds this technological stage

Patent Invention: functional prototype Business Validation Innovation new firm or program Viable business

source: Auerswald/Branscomb , 2003

bumpy investment landscape

Number of Early Stage and Seed Funding Awards, SBIR and Venture Capital

(source: Block and Keller, 2012)

What makes the iPhone so ‘smart’?

source: Mazzucato (2013), p. 109, Fig. 13

Microchips powering the iPhone owe their emergence to the U.S. military and space programs, which made up almost the entire early market for the breakthrough technology. In the 1960s, the government bought enough of the initially costly chips to drive down their price 50x in a few short years, enabling numerous new applications.

The early foundation of cellular communication lies in radiotelephony capabilities advanced throughout the 20th century with support from the U.S. military.

The technologies underpinning the Internet, which gives the “smart phone” its smarts, were developed and funded by the Defense Department’s Advanced Research Projects Agency in the 1960s and 70s.

GPS was created/deployed in 1980s/90s by the military’s NAVSTAR satellite program and still today maintained via public funds

The multi-touch display that makes using an iPhone so intuitive has the government’s fingerprints all over it. The revolutionary interface was first developed by a brilliant pair of University of Delaware researchers supported by NSF and CIA grants

SIRI, iPhone 5’s personal assistant, developed initially in DARPA.

Source: Mazzucato (2013) and The Breakthrough Institute: Where Good Technologies Come From? , 2011

Total NIH spending, 1936-2011 in 2011 dollars=$792 billion

NIH budget for 2012=$30.9 billion

source: http://officeofbudget.od.nih.gov/approp_hist.html

National Institutes of Health budgets 1936-2011

Variations of existing drugs

Priority NMEs

Standard NMEs

67%

Radical innovation funded almost entirely by NIH funding (75% of P NMEs)

19%

14%

new vs. ‘me too’ in pharma (1993-94)

source: Angell (2004)

PIIGS!!

Source: OECD 2012 http://www.oecd.org/sti/sti-outlook-2012-financing-business-rd.pdf

source: Ghosh and Nanda, 2011

technology risk in clean tech(VC will ride the wave, who will kick/push?)

Where are energy’s Xerox Parcs & Bell Labs?

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

0100200300400500600700800900

Renewable energy R&D investments in the U.S.in million 2002 dollars

Public sectorPrivate sector

2002

US$

mill

ion

source: Nemet and Kammen (2007), “U.S. energy research and development: Declining investment, increasing need, and the feasibility of expansion”, Energy Policy, 35 (1), 746-755

2004 2005 2006 2007 2008 2009 2010 2011 20120

100000000002000000000030000000000400000000005000000000060000000000

Renewable energy investments

Development bank (data available for 2007-2012 only)Venture capital, private equity and stock marketsGovernment R&DCorporate R&D

source: Frankfurt School-UNEP Centre/BNEF (2013)

Who is funding the green revolution?

BNDES (Brazil) disbursements for innovation

China Development BankCDB key in China’s 2020 goal of producing 20% energy from renewables. 5 year plan includes $1.7 trillion dollars in 5 new (green) sectors. CDB founded CDB Capital, a ‘public equity’ fund with $US 5.76 bn to finance innovative start-ups from the energy and telecom sectors. Yingli Green Energy received $1.7 bn from 2008 through 2012 with a $5.3 bn line of credit opened for it. Since 2010, CDB has made available $47.3 bn in credit lines for Chinese wind and solar energy companies and other $30.6 bn for clean energy transmission, distribution and efficiency investments. In 2010, the list of Chinese alternative energy technology companies receiving CDB lines of credits included LDK Solar ($9.1 bn); Sinovel Wind ($6.5 bn); Suntech Power ($7.6 bn); and Trina Solar ($4.6 bn), which “allowed Chinese companies to further ramp up production and drive down costs” of renewable energy technologies  (source: Sanderson and Forsythe, 2013)

 

anti–competitive?

source: Bank of England, Haldane 2011

Financialization not good for Innovation!

0.00

0.20

0.40

0.60

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1.20

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2.40

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ratio

TD/NI RP/NI (TD+RP)/NI RP/R&D

Repurchases, dividends, net income, R&D 1980-2006(293 corporations in the S&P500 in October 2007 in operation in 1980)

FINNOV WP 5 (Bordeaux)

Fortune 500 companies have spent $3 trillion on buybacks over the last decade…

A key element to get an energy breakthrough is more basic research. And that requires the

government to take the lead. Only when that research is pointing towards a product then we can

expect the private sector to kick in.

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2010: US American Energy Innovation Council (AEIC) asked for 3x spending on clean technology to $16 billion annually, with an additional $1 billion given to the Advanced Research Projects Agency for Energy (ARPA-E)

Yet 7 companies that form AEIC have together spent $237 billion on stock repurchases between 2001-2010.

Yet…

THE GREAT TRANSFORMATION

From CROWDING-IN to TRANSFORMING-IN

From PICKING WINNERS to WIN SOME LOSE SOME

From SUPPLY OF FINANCE to QUALITY OF FINANCE

SYMBIOTIC vs PARASITIC ECO-SYSTEMS

From DE-RISKING to SHARING RISKS AND REWARDS

Are taxes enough?

•IPR golden share •Income contingent loans •Retain some equity (e.g. SITRA with Nokia)•% payback into an ‘innovation fund’

Lessons from Solyndra and Tesla: win some lose some.How to cover the losses and have enough for next round?

And where will the money come from?