The Entrepreneurial (Risk-Taking) State

The Entrepreneurial (risk taking) State

Mariana MazzucatoR.M. Phillips Professor in Economics of Innovation

Science Policy Research Unit (SPRU)University of Sussex, UK

www.marianamazzucato.com @MazzucatoM

Big battles require big (policy) thinking “Smart” innovation-led growth(battle vs. ‘secular stagnation’, consumer debt-driven growth)

“Inclusive” growth (battle vs. increasing inequality)

“Sustainable” growth (battle vs. climate change)

“Rebalancing” away from speculative finance (battle vs. short-termism, speculation, ‘financialization’)

“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.” John M. Keynes, The End of Laissez Faire, 1926 (p. 44)

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” The General Theory of Employment Interest and Money, 1936 (p. 383)

Biggest battle: what should the State do?

a)Set ‘level’ playing field then get out of the way

b)Solve market ‘failures’

c)Something more interesting?

What is the State’s role in the economy?

VS.

Market shaping not (only) fixing

Market failure view: correcting ‘inefficiencies’ to bring markets back to default ‘efficient’ position

A different view: Shaping and creating markets actively

Market failure policies don’t explain the advent of key General Purpose Technologies

• ‘mass production’ system• aviation technologies• space technologies• IT• internet • nuclear power• nanotechnology

MARKET

Radical

Leverage baseEvolutionary

Discontinuity

Increasin

g risk

NewExisting

New

Exi

stin

g

TE

CH

NO

LOG

Y

market and technology risk

Mission oriented investments along entire innovation chain

1. research 2. concept/invention

3. early stage technologyDevelopment

4. Product development

5. production/ marketing

Angel investors, corporations, technology labs,SBIR

NSF, NIH, DARPACorporateresearch

Corporate venture funds, equity, commercial debt

VC, public venture capital, NIH, labs, ARPA-E

Source frequently funds this technological stageSource occasionally funds this technological stage

Patent Invention: functional prototype Business Validation Innovation new firm or program Viable business

source: Auerswald/Branscomb , 2003

Private and Public (SBIR) Venture Capital

(source: Block and Keller, 2012)

What makes the iPhone so ‘smart’?

source: Mazzucato (2013), p. 109, Fig. 13

Total NIH spending, 1936-2011 in 2011 dollars=$792 billion

NIH budget for 2012=$30.9 billion

source: http://officeofbudget.od.nih.gov/approp_hist.html

National Institutes of Health budgets 1936-2011

Variations of existing drugs

Priority NMEs

Standard NMEs

67%

Radical innovation funded almost entirely by NIH funding (75% of P NMEs)

19%

14%

new vs. ‘me too’ in pharma (1993-94)

source: Angell (2004)

Source: OECD 2012 http://www.oecd.org/sti/sti-outlook-2012-financing-business-rd.pdf

PIIGS!!

Business R&D spending across Europe

Who is funding the ‘next big’ green thing?

source: Ghosh and Nanda, 2011

technology risk in clean tech(venture capital will ride the wave, who will kick/push?)

source: Frankfurt School-UNEP Centre/BNEF (2013)

Who is funding the green revolution?

China Development BankChina’s 2020 goal of producing 20% energy from renewables.5 year plan includes $1.7 trillion dollars in 5 new (green) sectors. CDB founded CDB Capital, a ‘public equity’ fund with $US 5.76 bn to finance innovative start-ups from the energy and telecom sectors. Yingli Green Energy received $1.7 bn from 2008 through 2012 with a $5.3 bn line of credit opened for it. LDK Solar ($9.1 bn); Sinovel Wind ($6.5 bn); Suntech Power ($7.6 bn); and Trina Solar ($4.6 bn),

Patient committed finance has “allowed Chinese companies to further ramp up production and drive down costs” of renewable energy technologies  

(source: Sanderson and Forsythe, 2013)

Where are energy’s Xerox Parcs & Bell Labs?

source: Nemet and Kammen (2007), “U.S. energy research and development: Declining investment, increasing need, and the feasibility of expansion”, Energy Policy, 35 (1), 746-755

Innovation ‘eco-systems’: parasitic vs. symbiotic

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

ratio

TD/NI RP/NI (TD+RP)/NI RP/R&D

Repurchases, dividends, net income, R&D 1980-2006(293 corporations in the S&P500 in October 2007 in operation in 1980)

FINNOV WP 5 (Bordeaux)

Fortune 500 companies have spent $3 trillion on buybacks over the last decade…

A key element to get an energy breakthrough is more basic research. And that requires the

government to take the lead. Only when that research is pointing towards a product then we

can expect the private sector to kick in.

Sou

rce

: ht

tp:/

/ww

w.y

outu

be.c

om/w

atch

?v=

x54b

Vud

ugg

U

2010: US American Energy Innovation Council (AEIC) asked for 3x spending on clean technology to $16 billion annually, with an additional $1 billion given to the Advanced Research Projects Agency for Energy (ARPA-E)

Yet 7 companies that form AEIC have together spent $237 billion on stock repurchases between 2001-2010.

Yet…

from de-risking to sharing risks and rewards

A new pharmaceutical that brings in more than $1 billion per year in revenue is a drug marketed by Genzyme. It is a drug for a rare disease that was initially developed by scientists at the National Institutes of Health. The firm set the price for a year’s dosage at upward of $350,000. While legislation gives the government the right to sell such government-developed drugs at ‘reasonable’ prices, policymakers have not exercised this right. The result is an extreme instance where the costs of developing this drug were socialized, while the profits were privatized. Moreover, some of the taxpayers who financed the development of the drug cannot obtain it for their family members because they cannot afford it.

(Vallas, Kleinman and Biscotti, 2009, p. 24)

(source: Piketty, 2013)

“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

And….why did capital gains fall in 1976?

Warren Buffet

time

Cumulative innovation curve

Solyndra and Tesla: win some lose some.

How to cover losses and have enough for next round?• Tax• IPR golden share • Income contingent loans • Retain some equity (e.g. SITRA with Nokia)• % payback into an ‘innovation fund’ • State investment banks • Sovereign wealth funds?

And where will the money come from?

Background research

The Entrepreneurial State: debunking private vs. public sector myths (2013) Anthem Press: London, UK.

Apple's Changing Business Model: What Should the World's Richest Company Do with All Those Profits? (2013), Accounting Forum. 37: 249-267, with Bill Lazonick

The risk-reward nexus in the innovation-inequality relationship: Who takes the risks? Who gets the rewards? (2013), Industrial and Corporate Change, 22:4:1093-1128, with Bill Lazonick

Smart and inclusive growth: rethinking the State’s role and the risk–reward relationship, (2013) in Innovation studies: evolution and future challenges. J. Fagerberg et al (eds.) Oxford University Press.

Accounting for productive investment and value creation (2014), Industrial and Corporate Change, with Alan Shipman.