TCI Network
28 August 2014

This article was published in the TCI Newsletter August 2014. The launch of the new TCI website with the redesigned Newsletter has also given us the opportunity  to improve the focus of its contents. One of the main pillars of our network is sharing cutting edge knowledge about clusters and competitiveness worldwide. In this sense, our President will write each month a topical issue in the spirit of a blog post instead of a welcome note. You are invited to let us know your thoughts on the issue and exchange points of view simply by e-mail or through all our social media channels.

At least in some segments of the economic development profession Mariana Mazzucato’s “The Entrepreneurial State” created quite a stir. Finally someone pointed out how critical public investments were for innovation, even for the iPhone as one of ‘the’ symbols of private sector-inventiveness. No wonder that many working in public agencies on innovation and economic development felt redeemed and recognized as an innovative force, not a bureaucratic road block. And the data does indeed leave little doubt that publicly-funded investments into the innovation system are very important and that in some sectors, for example life sciences, there has been a remarkable shift of basic research activity from firms to public universities and research organizations. It is also not a surprise that when companies get a chance to socialize risks and privatize returns many will do so.

 

Still, there is plenty of evidence that makes me skeptical about Mazzucato’s analysis and policy advice, especially her views on ‘socializing’ the economic gains that companies derive when launching products and services that have benefited from the publicly-funded innovation system. On a conceptual level, Mazzacuto fails to acknowledge the crucial role that entrepreneurs (in small and large companies) play when translating a new technology or idea into a product or service. The iphone didn’t emerge just because government funded a range of critical research projects; it took Apple and its leadership team to translate the research results into a product package, value chain, and business model that creates compelling value for consumers. They took risks; many such ventures fail, despite leveraging the results of publicly financed innovation. And they created something new; having the individual pieces is not enough to create value. Without them there would be no iphone. On the empirical level, let’s not forget that in the leading innovator countries business R&D expenditure is more than twice as large as public R&D expenditures (in the EU average the ratio is 1.7 : 1). Having the government play a strong role in R&D seems to be good for innovation. But having the government play a stronger role than business, or making R&D unattractive for business, seems detrimental for the innovative performance of an economy.

 

This suggests to me that the debate of whether government or businesses are more important for innovation (and thus more worthy of our money as tax payers or consumers) is fundamentally flawed. Framing the policy debate as a choice between state and market or social and private benefits is at best misleading. Where government has pushed innovation just by investing in science but not mobilizing the entrepreneurial power of firms, it has often failed. Where government has done nothing, firms have often not explored opportunities that would have required more long-term and risky investments, including those that would have benefited other firms as well. We need a framework that captures the complementary and different roles of government and business.

 

The ‘complementary’ part is easier, and reflects the daily practice of what many in the TCI community do: it is about government and companies working together with an ambition to create more innovation, competitiveness, and healthy economies. This is not a zero-sum game where the key question is whether it is government or private enterprises that are more active; it is about the sum of both.

 

The ‘different’ part, however, is difficult: What should government do, and where should companies be in charge? The old debate about public goods and more provides good background but there is a clear sense that it has to be translated into the context of a modern, knowledge-driven society. Maryann Feldman (with some co-authors) has recently made an interesting contribution to this debate, suggesting that government should focus on creating capacities that companies or the market process do not provide themselves – progress on this path is what she then calls ‘economic development’. In the work on cluster efforts as a specific tool of economic development one often hears that government may support joint action in clusters, but that the decision about what activities to engage in should be firmly in the hands of companies. In practice, however, these principles are often hard to follow: the availability of government programs trying to encourage cluster organizations to engage in specific activities that public officials have selected as important drives many action agendas, while it is hard to engage companies in defining a clear action agenda for joint activities. In the smart specialization strategies currently produced by regions all across Europe to tap in the EU’s structural funds there is much talk about encouraging the ‘entrepreneurial discovery process’. But too often it is government that defines and tries to explore the market opportunity, not companies. And the track record of the ‘entrepreneurial state’ in this regard is quite discouraging.

 

Where does this leave us? First, we need to recognize the important complementary roles of government and companies in driving innovation, competitiveness, and sustainable prosperity. The often ideological debate – especially in the US and Maria Mazzucato’s UK – posing one against the other is not very helpful to address the real questions about what policy should and can do. Second, we need to understand much better what different capabilities and incentives government, joint public-private platforms, and individual companies have in contributing to more prosperous societies. This is a complex process where well-intended policy changes sometimes have had unintended consequences – for example when the Bayh-Dole act in the US not only made tech transfer between universities and firms much easier but also led to a shift from within-firm R&D to largely publicly-financed research in universities.

 

The TCI community is in my way a great place to move this discussion forward in a practical way. We connect many committed officials from government agencies that aim to support innovation and competitiveness with dynamic people working in and for companies in cluster organizations that are close to the market. Let us draw on this resource and see how we can find and publicize those cases where government and companies have been able to find their respective roles in creating value for both society and firms.

Christian Ketels, TCI President

 

Links to material mentioned in this piece:

http://marianamazzucato.com/projects/the-entrepreneurial-state/

http://maryannfeldman.web.unc.edu/defining-economic-developmentx/

See for another critique of Mazzucato’s ideas:  http://www.nesta.org.uk/blog/problem-entrepreneurial-state (thank you, Håkan Gergils!)