The Entrepreneurial State

1. The Entrepreneurial State: Debunking Public vs. Private Sector Myths

The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.

Challenging conventional wisdom. The book challenges the widely held belief that the private sector is the primary driver of innovation while the state merely facilitates or fixes market failures. It argues that the state has been the key risk-taker and innovator in many groundbreaking technologies.

Historical evidence. The author provides numerous examples of how state investments have been crucial in developing technologies that later became commercially successful, such as the Internet, GPS, touch-screen displays, and many components of smartphones. These innovations were often too risky or capital-intensive for private companies to undertake alone.

Reframing the debate. By highlighting the state's entrepreneurial role, the book aims to shift the discourse on innovation policy and economic growth. It calls for a more balanced understanding of public-private partnerships and a reconsideration of how innovation is funded and rewarded in society.

2. The State as Risk-Taker and Innovator in Technological Development

The State not only 'crowds in' business investment but also 'dynamizes it in' – creating the vision, the mission and the plan.

Beyond market failures. The state's role in innovation goes beyond simply fixing market failures. It actively shapes and creates markets, taking on high-risk investments that the private sector is unwilling or unable to make.

Long-term vision. Government agencies like DARPA in the US have played crucial roles in developing technologies with long-term potential, often before there was any clear commercial application. This long-term perspective allows for the development of radical innovations that can transform entire industries.

Creating ecosystems. The state's investments help create innovation ecosystems, bringing together researchers, entrepreneurs, and investors. This collaborative approach has been key to the success of many technological revolutions, including the rise of Silicon Valley.

3. The Crucial Role of Public Funding in Groundbreaking Innovations

While innovation is not the State's main role, illustrating its potential innovative and dynamic character – its historical ability, in some countries, to play an entrepreneurial role in society – is perhaps the most effective way to defend its existence, and size, in a proactive way.

Underappreciated contributions. The book highlights how many of the most revolutionary technologies of our time, from the Internet to biotechnology and clean energy, have their roots in state-funded research and development.

Patient capital. Public funding often provides the "patient capital" needed for long-term, high-risk research that can take decades to pay off. This is particularly important in areas like pharmaceutical development or renewable energy technologies.

Enabling private sector success. Many successful private companies have built their fortunes on technologies initially developed with public funds. The book argues that this contribution is often overlooked or minimized in discussions about innovation and economic growth.

4. Misunderstood Dynamics of Innovation: Beyond R&D and Small Firms

The fact that economics was putting so much emphasis on innovation in the growth process caused policymakers, since the 1980s, to begin paying much more attention to variables like R&D and patents as a predicator of innovation and therefore of economic growth.

Challenging innovation myths. The book debunks several common myths about innovation:

• R&D spending alone does not guarantee innovation
• Small firms are not inherently more innovative than large ones
• Venture capital is often risk-averse and enters late in the innovation process

Complex innovation ecosystems. Innovation is presented as a collective, cumulative process involving multiple actors and institutions, rather than the result of individual genius or market forces alone.

Policy implications. Understanding these dynamics is crucial for designing effective innovation policies that go beyond simple R&D tax credits or support for small businesses.

5. The State's Role in Creating and Shaping Markets

Rather than analyzing the State's active role through its correction of 'market failures' (emphasized by many 'progressive' economists who rightly see many failures), it is necessary to build a theory of the State's role in shaping and creating markets.

Market shaping. The state doesn't just fix market failures; it actively creates and shapes markets, especially in emerging technologies and industries.

Mission-oriented policies. The book advocates for mission-oriented policies where the state sets ambitious goals (like putting a man on the moon or transitioning to clean energy) and mobilizes resources across sectors to achieve them.

Creating demand. Through procurement, regulations, and other policy tools, the state can create demand for new technologies, helping them reach the scale needed for commercial viability.

6. Green Revolution: State-Led Investments in Clean Technology

China's visionary and ambitious 12th 5-year plan (2011–15) aims to invest $1.5 trillion (or 5 per cent of GDP) across multiple industries: energy-saving and environmentally friendly technologies, biotechnology, new generation ITs, advanced manufacturing, new materials, alternative fuels and electric cars.

Leading the transition. The book argues that the state must play a leading role in driving the transition to a green economy, as the scale and urgency of the climate crisis require coordinated, long-term investments.

International comparisons. Examples from countries like Germany, China, and Brazil show how state-led investments and policies have been crucial in developing renewable energy industries.

Challenges and opportunities. The transition to a green economy is presented as both a challenge and an opportunity for innovation-led growth, requiring sustained public investment and policy support.

7. Socializing Risks and Privatizing Rewards: A Flawed Innovation Ecosystem

While the State needs to take risks, it should not be simply absorbing (or even 'mitigating') the risk of the private sector, but taking the kind of risks that the private sector is not willing to take, and also reaping returns from that risk taking.

Asymmetric risk-reward relationship. The book criticizes the current system where the public sector often bears the risks of innovation while the private sector reaps most of the rewards.

Tax avoidance and innovation. Many successful tech companies that have benefited from public investments engage in aggressive tax avoidance, reducing the public's return on investment.

Sustainability concerns. This imbalance threatens the sustainability of the innovation ecosystem, as it may lead to underinvestment in future innovations and exacerbate inequality.

8. Towards a Symbiotic Innovation Ecosystem: Balancing Risks and Rewards

Finding a way to realign risk taking with rewards is thus crucial not only for decreasing inequality but also for fostering more innovation.

Rethinking public-private partnerships. The book calls for a new approach to public-private partnerships that ensures a more equitable distribution of risks and rewards.

Policy proposals. Suggestions include:

• Retaining equity stakes in companies that benefit from public research
• Implementing income-contingent loans for innovation grants
• Creating public venture capital funds
• Establishing mechanisms for direct returns on successful public investments

Long-term sustainability. These measures aim to create a more sustainable and dynamic innovation ecosystem that can continue to drive economic growth and address societal challenges.

9. Rethinking the Role of the State in Fostering Innovation-Led Growth

What distinguishes the State is of course not only its mission but also the different tools and means that it has to deploy the mission.

Beyond facilitation. The book argues for a more active and strategic role for the state in fostering innovation-led growth, going beyond traditional notions of the state as a mere facilitator or market fixer.

Building state capacity. To fulfill this role effectively, governments need to build their capacity for long-term strategic thinking, risk assessment, and collaboration with the private sector.

Changing the narrative. The author calls for a change in how we talk about and perceive the state's role in innovation, moving away from negative stereotypes of government inefficiency towards a recognition of its entrepreneurial and innovative potential.

Policy implications. This new understanding of the state's role has important implications for economic policy, industrial strategy, and approaches to addressing major societal challenges like climate change and inequality.

Last updated: October 17, 2024