The Myth of The Meddling State – what does it mean for investors?
This article was published by Mariana Mazzucato – which we give full credit to. Here is our excerpt of her truly wise words.
Risk-takers reap the rewards. But is this the case? It is known that from Silicon Valley to Singapore, innovation relies on state funding and investing. The private sector should give something back.
European policymakers ask themselves: “where are the European Googles?” – the innovators, the risk-takers?
Many times the answer that comes up is that the US business and economic model is much more entrepreneurial than in other parts of the world. Another fact is that the US economy has more venture capitalists that invest in innovators at the “garage business” stages, driving endless innovation in many sectors of the economy.
It is also arguable that Americans have a more entrepreneurial spirit and are tolerant of failures, which drives them to occasional big successes. Much like the internet – a result of an endless experimentation process.
The consensus is that the US model is successful because it is market-driven. While in Europe the heavy hand of the state has made investing in innovations slower and less efficient.
Economists understand that the market sometimes fails. But, in most cases, the state is still the driving force behind economic flow and investing.
But what if the whole narrative about the sluggish and bureaucratic (meddling) state is wrong?
What if the innovation and changes in capitalism came because of the “meddling” state?
Let’s take Silicon Valley for example…
This is not a story of how the state got out of the way of innovators and investors so they could innovate. Actually, most of the fundamental advances in technology came from the funding of the state. From the very first and basic research to commercialization were funded by the state. Businesses only got on the bandwagon once the returns were clear. The government-funded all the innovative technologies behind the iPhone: GPS, the internet, touchscreen display, and even voice-activated Siri.
The investments the government made, were not just the basics. The state-funded basic and applied research. It went as far as providing early-stage risk finance for companies that were considered too risky for private investments. Apple received an investment of $500,000 from the Small Business Investment Corporation – a financing arm of the state. Intel and Compaq are also among the companies that received early-stage financing from public capital through the Small Business Innovation Research Program.
While many believe that these innovations and investments are related to the military, they are everywhere, including the US Department of Health and the Department of Energy. It turns out that about ¾ of the most innovative drugs weren’t funded by Big Pharma or Venture Capital, but by the National Institutes of Health. The NIH invested over $600bn in the biotech-pharma knowledge base.
Most of the Venture Capital entered the biotech industry in the late 1980s and early 1990s, while the heavy investments occurred much earlier in the 1950s, 60s, and 70s. The private investments entered after the government funded the most high-risk and capital-intensive parts of the industry. Most venture capitalists want to see returns within 3-5 years, which has done a bit of damage to the industry. Today, most of companies are without products and produce little for the economy beyond returns of private equity in the exit stage.
Clean technology is another sector that is seeing the same pattern. In countries like China, US, Singapore, Germany, Finland, and Denmark, the government funds the most capital intensive stages of development and innovation. Venture capital and businesses wait for returns to become more certain.
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