Do governments have the capacity to foster innovation? Truly, governments can and do play a critical role in encouraging innovation, by actively creating new markets, rather than just regulating them. Data from all over the world account for billions of public-sector dollars that have flowed toward downstream applied research, even providing early-stage financing for companies.
Indeed, in some of the world’s most famous innovation hubs, the state has played a key entrepreneurial role, envisioning and financing the creation of entire new fields, from information technology to biotech, nanotech, and green tech.
Practitioners and economists have largely analysed the issue of the state participation in a variety of innovations, mostly with the undeniable research contribution by the Italo American economist Mariana Mazzucato.
Innovation is a key driver of long-term growth: it can fuel productivity growth, transforming production, distribution, and consumption across entire economies. Moreover, innovation has historically been an outcome of ambition in both public and private sector, and it is increasingly involving third sector institutions.
So, how does the government contribute in fostering innovation and the advancement of the society?
For instance, the US National Institutes of Health (NIH) invested $31 billion in biomedical research. Similarly, for some of the most innovative American companies, financing from the Small Business Innovation Research (SBIR) has proved to be more important than private venture capital.
Examples outside the US include Israel, where the public venture-capital fund Yozma has provided early-stage funding to some of the country’s most dynamic companies, and Finland, where Sitra, the public innovation fund, supplied early financing for Nokia. In China, the state-owned development bank is offering billions of dollars in loans to some of the country’s most innovative companies, including Huawei and Yingli Solar.
European Community and its member states support numerous cooperative research ventures too. While the Airbus is perhaps the best-known of these, many others have been conducted under the umbrella of ESPRIT, EUREKA, and other collective public/private efforts. The European Community is also now beginning to use EC-wide standards both to stimulate innovation and to reduce risk.
Therefore, these types of public investments are critical in creating and shaping new markets. Government investments played a central role in developing most of the technologies that make the iPhone a smart phone: the Internet, GPS, touchscreens, and the advances in voice recognition underlying Siri: the internet began as a network of computers called Arpanet, funded by the US Department of Defense (DoD) in the 60s to solve the problem of satellite communication; the DoD was also behind the development of GPS during the 70s, initially to determine the location of military equipment; Siri was the outcome of a Stanford Research Institute project to develop a virtual assistant for military staff, commissioned by the Defense Advanced Research Projects Agency (DARPA); lastly, the touchscreen was the result of graduate research at the University of Delaware, funded by the National Science Foundation and the CIA.
Recognizing the importance of government investment in promoting innovation and growth implies the need to rethink the conventional wisdom about state intervention: instead of focusing on picking individual technologies or firms, public organizations should act like investors, betting on a diversified “portfolio” of choices.
Additionally, it is believed that governments can foster innovation through four basic ways: by buying it, by reducing its risk, by collaborating on it, and by using standards or regulations to encourage it.
In many instances, the government’s key role in fostering innovation is as the lead customer. The government itself acquires the required systems, products, and services, generally after following a prescribed procurement procedure that provides free competition. As very large and concentrated purchasers, governments have major opportunities to promote innovation. In many countries, military and space agency procurement has triggered major innovations.
Additionally, departments of energy and public utilities have used procurement to foster innovation in nuclear power generation, solar and renewable energy technologies, and environmental technologies.
The government can also help reduce the technical, commercial, and financial risks associated with industrial innovation. To reduce technical risk (i.e., the chance that effective solutions to problems being addressed will not be found), the government funds R&D programs and demonstration projects. Governments also fund demonstration programs that help to reduce not only technical risk but commercial and financial risks as well, while the private sector gets a much better idea of potential demand for the innovation.
Government regulations and standards serve as important barriers and incentives for innovation. For example, efforts to accelerate innovation in broadband telecommunications capabilities and intelligent network services in the United States and Europe are being driven or held back primarily by government regulatory policy on rates and investments. Patent policy and health care regulation drives pharmaceutical and medical equipment innovation in most countries.
Government agencies at all levels and in all parts of the world are broadening their roles and expanding their efforts to encourage innovation and enhance industrial competitiveness.
They are partnering more closely with whole industries and with individual businesses, providing more government resources: technical expertise from government laboratories, financial resources, targeted tax benefits for R&D and innovation, and access to government patents.
Nonetheless, like any other investor, the state will not always succeed. Actually, failure is more likely, because government agencies often invest in the areas of highest uncertainty, where private capital is reluctant to enter. This means that public organizations must be capable of taking chances and learning from trial and error.
If failure is an unavoidable part of the innovation game, and if government is crucial for innovation, society must be more tolerant of “government failure”.
The most important lesson learned from the successes and failures of past government efforts to support innovation and accelerated commercialization is that governments and businesses need to focus on win-win situations in which they can and do fully commit themselves to the success of new initiatives.
Initiatives that are further from the market – such as those driven by government laboratories looking for new missions or advanced space and defense programs looking for new commercial applications – have had patchy success despite the very high potential and generous funding.
Businesses need to take the lead in identifying areas where government procurement, collaboration, risk reduction, or standards would significantly accelerate innovation and commercialization.
Businesses also need to be more aware of the technical and financial resources that are available from government to support technology, product, business, or industry needs for accelerated innovation and commercialization. However, businesses need to enter into collaborative innovation ventures with the principal objective of making them successful, not merely exploiting available resources and programs.
In order to build support for public investment in higher-risk innovation, perhaps taxpayers should receive a more direct return, by channelling profits into a public innovation fund to finance the next wave of technologies. The current approach suffers from serious shortcomings, largely because it socializes the risks and privatizes the rewards.
This is hurting not only future innovation opportunities, but also the government’s ability to communicate its role to the public. Acknowledging the role that the state has played and should continue to play in shaping innovation enables the most pivotal question: What are the new visionary public investments needed to drive future economic growth?
Sources: M. Mazzucato, Governing Missions in the European Union – 2019; Wired; World Economic Forum; Ashok B. Boghani and Ronald S. Jonash
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