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Debunking The Narrative Of Silicon Valley's Innovation Might

This article is more than 10 years old.

This is going to sound completely heretical to everything Forbes has stood for over 96 years (and The Economist for a few decades longer than that) but here goes: The real innovation engine in the global economy is not the entrepreneurial class blazing capitalist trails through the thicket of government red tape and taxation. No. The real engine of innovation is government.

That’s crazy, you say. One Mark Zuckerberg or Steve Jobs is worth ten suits in D.C. or Brussels. If we left investment and risk capital to the state, all we’d get are bad bets such as Solyndra, Fisker Automotive and the Concorde.

Wrong, says economist Mariana Mazzucato, a professor of economics at the University of Sussex. In her new book The Entrepreneurial State (adapted into a rousing TED talk delivered this week in Edinburgh), Mazzucato argues that long-term, patient government funding is an absolute prerequisite for breakthrough innovation. There is something seriously wrong, she says, with a system that asks taxpayers to take all the risk while the private sector takes all the rewards (shades of what happened in the financial crisis and ensuing bailout). “By constantly painting the government as a big bad leviathan we're stunting the growth and opportunities before us,” she writes. “If we're funding all the risks where are the rewards for the state?”

Her case study for myth-debunking is the iPhone, that icon of American corporate innovation. Each of its core technologies--capacitive sensors, solid-state memory, the click wheel, GPS, internet, cellular communications, Siri, microchips, touchscreen—came from research efforts and funding support of the U.S. government and military. Did the public see an iPhone dividend? Not really. The “stay foolish, stay hungry” geniuses ran away with the gains, says Mazzucato, and now the company is under fire for not paying enough taxes or creating enough high-wage jobs in the U.S. Apple’s five-year R&D spending as a percentage of sales has hovered around 2% to 3%, while companies such as Nokia and Samsung Electronics spend 9% and 8%, respectively. Steve Jobs’ real genius was not in developing new technology but integrating technologies invented somewhere else, often backed by tax dollars.

Mazzucato calls the pharmaceutical industry onto the carpet. The National Institutes of Health funds 75% of all revolutionary new drugs, while Big Pharma spends most of its time and money developing me-too drugs and buying back their shares. She also debunks the myth of the swashbuckling venture capitalist. In her view they’re free riders, waiting for the government to underwrite the most expensive and risky projects and then, once the uncertainty is gone, they swoop in and skim all the profits. She blames short-term VC thinking, not government incompetence, for the Solyndra debacle. The VCs pulled their funding and tanked the government's loan guarantees just as the company was preparing a plan to deal with the dramatic price declines of solar panels made in China.

As it stands, says Mazzucato, the anti-government narrators are winning. The U.S. and Europe are slashing budgets for basic and applied science and research while developing nations such as China and Brazil are spending more than $1 trillion for the same. This puts the U.S. and Europe at risk of falling behind in key growth sectors such as renewable energy, nanotech and space exploration.

So, rather than bash and slash federal research funding and outsource it to the private sector, Mazzucato argues we need to restore funds to programs such as DARPA (the Defense Department’s Advanced Research Projects Agency) and its Department of Energy equivalent ARPA-e. We need reforms that create royalty streams to the public for successful bets, more transparency and measurement of state-operated investment vehicles and more income-contingent loans (like some student loans) and opportunities for direct equity in companies backed by the state. This is fairly common practice in Finland, where the state agency SITRA retained equity from its investment in Nokia and made a bunch of money to reinvest in more companies. In 2012 the German state investment bank KfW reported $3 billion in profit. Brazil’s state development bank BNDES has been actively investing in clean tech and biotech and in 2010 made a 21% return on equity.

Critics would say that one shouldn’t create direct returns to the state because it is already getting its money back in taxes. But that argument, says Mazzucato, ignores the fact that tax avoidance and evasion are common and only getting worse. Recent research in the U.K. suggests that the country’s tax gap, or income not collected, is 120 billion GBP, roughly the same size as its national deficit.

As she said in her talk, “if the U.S. government had asked for 0.5% from the Internet there would be so much money available…the next period of growth could be smart and green and inclusive, so that the public schools in Silicon Valley can actually benefit from the tech boom, because they haven’t.”

Even if you disagree with Mazzucato’s argument, you should read her book. It will challenge your thinking.