Mariana Mazzucato [ 28 OCT 2013 | Innovation Economics | 14:05 ] Have you ever asked yourselves why it is that companies, the really cool companies, the innovative ones, the creative, new economy-type companies — Apple, Google, Facebook — are coming out of one particular country, the United States of America? Usually when I say this, someone says, “Spotify! That’s Europe.” But, yeah. It has not had the impact that these other companies have had.
Now what I do is I’m an economist, and I actually study the relationship between innovation and economic growth at the level of the company, the industry and the nation, and I work with policymakers worldwide, especially in the European Commission, but recently also in interesting places like China, and I can tell you that that question is on the tip of all of their tongues: Where are the European Googles?
What is the secret behind the Silicon Valley growth model, which they understand is different from this old economy growth model?
And what is interesting is that often, even if we’re in the 21st century, we kind of come down in the end to these ideas of market versus state. It’s talked about in these modern ways, but the idea is that somehow, behind places like Silicon Valley, the secret have been different types of market-making mechanisms, the private initiative, whether this be about a dynamic venture capital sector that’s actually able to provide that high-risk finance to these innovative companies, the gazelles as we often call them, which traditional banks are scared of, or different types of really successful commercialization policies which actually allow these companies to bring these great inventions, their products, to the market and actually get over this really scary Death Valley period in which many companies instead fail.
But what really interests me, especially nowadays and because of what’s happening politically around the world, is the language that’s used, the narrative, the discourse, the images, the actual words. So we often are presented with the kind of words like that the private sector is also much more innovative because it’s able to think out of the box. They are more dynamic. Think of Steve Jobs’ really inspirational speech to the 2005 graduating class at Stanford, where he said to be innovative, you’ve got to stay hungry, stay foolish.
So these guys are kind of the hungry and foolish and colorful guys, right? And in places like Europe, it might be more equitable, we might even be a bit better dressed and eat better than the U.S., but the problem is this damn public sector. It’s a bit too big, and it hasn’t actually allowed these things like dynamic venture capital and commercialization to actually be able to really be as fruitful as it could. And even really respectable newspapers, some that I’m actually subscribed to, the words they use are, you know, the state as this Leviathan.
This monster with big tentacles. They’re very explicit in these editorials. They say, “You know, the state, it’s necessary to fix these little market failures when you have public goods or different types of negative externalities like pollution, but you know what, what is the next big revolution going to be after the Internet? We all hope it might be something green, or all of this nanotech stuff, and in order for that stuff to happen,” they say — this was a special issue on the next industrial revolution — they say, “the state, just stick to the basics, right? Fund the infrastructure. Fund the schools. Even fund the basic research, because this is popularly recognized, in fact, as a big public good which private companies don’t want to invest in, do that, but you know what? Leave the rest to the revolutionaries.” Those colorful, out-of-the-box kind of thinkers.
They’re often called garage tinkerers, because some of them actually did some things in garages, even though that’s partly a myth.
And so what I want to do with you in, oh God, only 10 minutes, is to really think again this juxtaposition, because it actually has massive, massive implications beyond innovation policy , which just happens to be the area that I often talk with with policymakers. It has huge implications, even with this whole notion that we have on where, when and why we should actually be cutting back on public spending and different types of public services which, of course, as we know, are increasingly being outsourced because of this juxtaposition.
I mean, the reason that we need to maybe have free schools or charter schools is in order to make them more innovative without being emburdened by this heavy hand of the state curriculum, or something. So these kind of words are constantly, these juxtapositions come up everywhere, not just with innovation policy.
And so to think again, there’s no reason that you should believe me, so just think of some of the smartest revolutionary things that you have in your pockets and do not turn it on, but you might want to take it out, your iPhone. Ask who actually funded the really cool, revolutionary thinking-out-of-the-box things in the iPhone. What actually makes your phone a smartphone, basically, instead of a stupid phone?
So the Internet, which you can surf the web anywhere you are in the world; GPS, where you can actually know where you are anywhere in the world; the touchscreen display, which makes it also a really easy-to-use phone for anybody. These are the very smart, revolutionary bits about the iPhone, and they’re all government-funded.
And the point is that the Internet was funded by DARPA, U.S. Department of Defense.
GPS was funded by the military’s Navstar program.
Even Siri was actually funded by DARPA.
The touchscreen display was funded by two public grants by the CIA and the NSF to two public university researchers at the University of Delaware.
Now, you might be thinking, “Well, she’s just said the word ‘defense’ and ‘military’ an awful lot,” but what’s really interesting is that this is actually true in sector after sector and department after department.
So the pharmaceutical industry, which I am personally very interested in because I’ve actually had the fortune to study it in quite some depth , is wonderful to be asking this question about the revolutionary versus non-revolutionary bits, because each and every medicine can actually be divided up on whether it really is revolutionary or incremental. So the new molecular entities with priority rating are the revolutionary new drugs, whereas the slight variations of existing drugs — Viagra, different color, different dosage — are the less revolutionary ones. And it turns out that a full 75 percent of the new molecular entities with priority rating are actually funded in boring, Kafkian public sector labs .
This doesn’t mean that Big Pharma is not spending on innovation. They do. They spend on the marketing part. They spend on the D part of R&D. They spend an awful lot on buying back their stock, which is quite problematic. In fact, companies like Pfizer and Amgen recently have spent more money in buying back their shares to boost their stock price than on R&D , but that’s a whole different TED Talk which one day I’d be fascinated to tell you about.
Now, what’s interesting in all of this is the state, in all these examples, was doing so much more than just fixing market failures. It was actually shaping and creating markets. It was funding not only the basic research, which again is a typical public good, but even the applied research . It was even, God forbid, being a venture capitalist.
So these SBIR and SDTR programs, which give small companies early-stage finance have not only been extremely important compared to private venture capital, but also have become increasingly important. Why? Because, as many of us know, V.C. is actually quite short-term. They want their returns in three to five years . Innovation takes a much longer time than that, 15 to 20 years .
And so this whole notion — I mean, this is the point, right?
Who’s actually funding the hard stuff? Of course, it’s not just the state. The private sector does a lot. But the narrative that we’ve always been told is the state is important for the basics, but not really providing that sort of high-risk, revolutionary thinking out of the box. In all these sectors, from funding the Internet to doing the spending, but also the envisioning, the strategic vision, for these investments, it was actually coming within the state.
The nanotechnology sector is actually fascinating to study this, because the word itself, nanotechnology, came from within government.
And so there’s huge implications of this. First of all, of course I’m not someone, this old-fashioned person, market versus state. What we all know in dynamic capitalism is that what we actually need are public-private partnerships . But the point is, by constantly depicting the state part as necessary but actually — pffff — a bit boring and often a bit dangerous kind of Leviathan, I think we’ve actually really stunted the possibility to build these public-private partnerships in a really dynamic way.
Even the words that we often use to justify the “P” part, the public part — well, they’re both P’s — with public-private partnerships is in terms of de-risking.
What the public sector did in all these examples I just gave you, and there’s many more, which myself and other colleagues have been looking at, is doing much more than de-risking. It’s kind of been taking on that risk. Bring it on . It’s actually been the one thinking out of the box. But also, I’m sure you all have had experience with local, regional, national governments, and you’re kind of like, “You know what, that Kafkian bureaucrat, I’ve met him.”
That whole juxtaposition thing, it’s kind of there. Well, there’s a self-fulfilling prophecy.
By talking about the state as kind of irrelevant, boring, it’s sometimes that we actually create those organizations in that way. So what we have to actually do is build these entrepreneurial state organizations. DARPA, that funded the Internet and Siri, actually thought really hard about this, how to welcome failure , because you will fail. You will fail when you innovative. One out of 10 experiments has any success . And the V.C. guys know this, and they’re able to actually fund the other losses from that one success.
And this brings me, actually, probably, to the biggest implication, and this has huge implications beyond innovation.
If the state is more than just a market fixer, if it actually is a market shaper, and in doing that has had to take on this massive risk, what happened to the reward ?
We all know, if you’ve ever taken a finance course, the first thing you’re taught is sort of the risk-reward relationship, and so some people are foolish enough or probably smart enough if they have time to wait, to actually invest in stocks, because they’re higher risk which over time will make a greater reward than bonds , that whole risk-reward thing. Well, where’s the reward for the state of having taken on these massive risks and actually been foolish enough to have done the Internet?
The Internet was crazy.
It really was. I mean, the probability of failure was massive. You had to be completely nuts to do it, and luckily, they were. Now, we don’t even get to this question about rewards unless you actually depict the state as this risk-taker. And the problem is that economists often think, well, there is a reward back to the state. It’s tax. You know, the companies will pay tax, the jobs they create will create growth so people who get those jobs and their incomes rise will come back to the state through the tax mechanism.
Well, unfortunately, that’s not true.
Okay, it’s not true because many of the jobs that are created go abroad. Globalization, and that’s fine. We shouldn’t be nationalistic. Let the jobs go where they have to go, perhaps. I mean, one can take a position on that. But also these companies that have actually had this massive benefit from the state — Apple’s a great example. They even got the first — well, not the first, but 500,000 dollars actually went to Apple, the company, through this SBIC program, which predated the SBIR program, as well as, as I said before, all the technologies behind the iPhone.
And yet we know they legally, as many other companies, pay very little tax back.
So what we really need to actually rethink is should there perhaps be a return-generating mechanism that’s much more direct than tax. Why not?
It could happen perhaps through equity.
This, by the way, in the countries that are actually thinking about this strategically, countries like Finland in Scandinavia, but also in China and Brazil, they’re retaining equity in these investments. Sitra funded Nokia, kept equity, made a lot of money, it’s a public funding agency in Finland, which then funded the next round of Nokias.
The Brazilian Development Bank, which is providing huge amounts of funds today to clean technology, they just announced a 56 billion program for the future on this, is retaining equity in these investments.
So to put it provocatively, had the U.S. government thought about this, and maybe just brought back just something called an innovation fund, you can bet that, you know, if even just .05 percent of the profits from what the Internet produced had come back to that innovation fund, there would be so much more money to spend today on green technology.
Instead, many of the state budgets which in theory are trying to do that are being constrained. But perhaps even more important, we heard before about the one percent, the 99 percent. If the state is thought about in this more strategic way, as one of the lead players in the value creation mechanism, because that’s what we’re talking about, right?
Who are the different players in creating value in the economy, and is the state’s role, has it been sort of dismissed as being a backseat player? If we can actually have a broader theory of value creation and allow us to actually admit what the state has been doing and reap something back, it might just be that in the next round, and I hope that we all hope that the next big revolution will in fact be green, that that period of growth will not only be smart, innovation-led, not only green, but also more inclusive , so that the public schools in places like Silicon Valley can actually also benefit from that growth, because they have not.