Comments for How entrepreneurial should the state be?

To some extent I believe that the state should massively invest in R&D on a “pro bono” basis. I will first explain my view and then turn to one limit of this policy.

Risk is a huge barrier against innovation. A lot of potential entrepreneur just don’t dare to invest in their ideas. This is particularly important if activities including very high fixed costs are concerned. We isolate here a second source of inefficiency, the lack of money.
A potential solution to this problem could be massive investments from the government in order to launch their own researches with their own structure. My argument is based on the fact that innovation is often cumulative. If the government takes the majority of the risk by starting researches from scrap, there is a greater incentive for other entrepreneurs to build afterward on these researches, with a significant reduction of their own risk. An intervention of the public sector could in my opinion foster innovation.
This view goes against the one proposed in the article “The third industrial revolution” (The Economist) stating that the government should leave innovation to the revolutionaries. But the article only takes into account the example of people innovating from their garage. What about activities involving high investments?

Secondly, we must address the problem of IP protection. As the goal of the government is only to foster innovation, I would say that the protection offered to them should be as limited as possible. Indeed this protection should only enable the authority to recover its initial investment (minimal reduction of social welfare) so that the innovation falls rapidly in the public domain and can thus be exploited by other (the final goal of this policy). The cumulative feature of innovation calls for a patent protection on a short period.

Finally, the limit highlighted by Ms Mazzucato seems relevant. States just don’t manage their money in the same way as entrepreneur. To avoid this problem the authority should perhaps try to hire for the leading of their R&D programme people with an entrepreneurship state of mind but that don’t want to invest their own money for a reason or another. The aim would be on the one hand to set these programmes as independent as possible of the short-term political views and on the other hand to better manage risk.

For me two things stand out from the above article. One how the author defines public goods and second the way Ms Mazzucato advocates the state deserving a higher return on its investment
In my opinion, it is unquestionable that the state should be actively taking part in the development of new technologies and breakthroughs for goods that benefit the whole state and its residents. But when it comes to innovations that are revolutionary in their own sense but do not promise any benefit for the larger section of society, the state should take a backseat and leave the private players to take the risks and reap the benefits. For eg. an innovation like the iPhone does not deserve state funding but an innovation like a new communication technology should be actively pursued and supported by the state.
Secondly, talking about the returns on investment for the state, I believe the state is nothing but the people and the biggest return the people can get out of their investments is the benefits that the whole society stands to enjoy as a result of the new innovation. In case of public goods, the state should not think of direct monetary returns but indirect returns which will result from the increased standard of living of its people.

My point of view is that the equilibrium is the thin between a lot of interventionism of the government and a totally free market. A country where there is only uneducated people who can not exist because of the competition between countries. We must find in which sector we get a comparative advantage for promoting exchanges with the rest of the world. But for all this computation we need educated people, so we need the government to invest in schooling. e.g. In my country (DRCongo) education is not the priority of the government and thus, the development of a country depends on the education level of the future generation but here professors are underpaid and their motivation to teach students in a good way is nearly inexistent. This is not a kind of “deserve” system. Corruption is also a negative externality that we need to fight against. In this system investors are demotived because the money you can invest in R&D is split between bribes and real investment.

The state is also there to guarantee and protect the right of ownership. But in some others countries where there is free market, with a majority of educated people the state intervention is not very needed. The market foundations must be then very well established to support the prosperity.

Change the mind to help the country growth. And to conclude, the equilibrium depends on the kind of country, the mind of his population and the kind of sector.
(P.S. : sorry for my English)

Innovation is nowadays a critical issue for firms. There is no future without it, even more in the field of technology. Therefore, it is important for governments to support its industries and economy. However I don’t totally agree with Ms Mazzucato who encourages more than financial participation. In my opinion, states can’t take this risk today. This would mean playing with the money of the people.

Choose budget destination takes already enough time while there are other more important subjects they should manage like education, unemployment or environment. For this reason, I think states should be big brothers for start-ups and support them, but not spend time to lead them by being proactive and taking risks. Financial support for strong and safe beginning companies would create jobs and improve competition.
In my point of view the biggest problem is not really how much the state should invest in innovation (time or money). The critical point is the time and the knowledge of states and politicians.

Innovation takes time and we usually see that politicians in charge don’t have enough of it because of their mandate. When they are elected, they take time to establish the budget and to get use to their new position. At the end of term, they also take time to prepare the next elections. In the meanwhile they have to manage with bigger crisis than ever before. That doesn’t let them a lot of time to really think about innovation. Moreover, the next authority in charge can totally disagree with the previous decisions and decide to cut off financial helps, which would kill the concerned start-up. As such, GMO cultivation is a long-term innovation that takes much more time than one mandate. This is probably why this innovation is not still a reality.

The knowledge of politicians is also a problem. Because of the democracy, any person can be in charge of investment in innovations. Therefore, they can be easily manipulated to invest on a project or other. Thus, the state could invest on a too risky project, which can also have bad consequences on a long-term basis. A good example is cigarettes. During years, governments enhanced tobacco’s industry but nowadays they back off and argue the bad effect on health.

With all, I think that the role of governments must not be leading innovations but empowering start-ups to invest in innovation’s research with, among others, tax reductions. One question remains: How effectively choose which start-up to empower?

I think that the government should not invest entrepreneurs or intervene the market. Because I have some reasons.
First, I think the role of government is keeping the balance between “freedom” and “regulation”. You know, if the government made a commitment to one side of them, the society would become corrupt. So, the government keep it using the law and policy. It is true that the innovation makes countries richer as Ms Mazzucato said. But it is just conclusion that companies in a country make efforts and find some innovation, not the government. If the government invested entrepreneurs or intervened the market, the governments would break the balance by yourself, I think. So, the governments just make the environment for entrepreneurs to begin or make his plan or business using its policy. For example, the government makes some chance where entrepreneurs can find their partner, companies.
Second, I wonder whether the government use money to entrepreneur or to the market without waste if the government invest entrepreneur or intervene the market. If the government use money for its purpose, it should make some inspections. So, if the government invest entrepreneur or intervene the market, it needs some inspections, and the inspections should be strict ones. This is because the governments’ money is composed mainly of taxes, so the governments have the big responsibility for its people and for the taxes. The governments have to use the money to make their life better. So, if the government invest entrepreneur or intervene the market, the reason for it should be making the people’s life better. But when doing so, it is difficult to decide that the governments support who and how. And the risk is very big if the invest is failed. It is true that we need some risks to make successes. But I think many people in a country cannot accept such failure and such risk that are responsible for specific groups. The government should use the money as they accept.
For these reasons, I think the government should not invest entrepreneurs or intervene the market. The governments should just make some environment for making innovation.

The opinions of The Economist and Mrs. Mazzucato are quite opposite to each other. We could consider that the middle between the two positions would be more relevant but I don’t agree. My view is that each of these opinions helps to apprehend different contexts that need thus different approaches. Indeed, the world is composed with very different countries which economies work very diversely and wich investors have different culture.

To illustrate that point, I will use a sentence of Mrs. Mazzucato who says that the states should receive more direct return on their investments. Consider two countries. The first one has a high taxation rate and the second has a low one. In the first country, when the state gives a subsidy for an innovation to a firm, he will receive an indirect return on investment much higher than the second one via the taxes on the profit generated by the investment. It seems obvious that the second state deserve a higher direct return on their investments than the first state. What’s important is not to know who‘s is right, but to ask ourselves which vision fits better to a particular context.

The Economist and Ms Mazzucato also are opposed on the role the state should play: the economist says he has to do the minimum (education and so on) but Ms Mazzucato thinks that his role must be more important because it could redistribute more fairly. Here I think Ms Mazzucato is too much extreme. The Public Economics shows us that the governments are not perfect and that they don’t always consider the social welfare. But as Ms Mazzucato, the European countries that made less public investments are those who suffer more from the crisis so it means that the role of the state in investment should be more important that The Economist says.

If I agree that the state should play a role in the innovation, it is important to ask how the state should play a role. Is it better to subsidy, regulate with IP protection, and so on. We spoke before about the subsidization but what about the IP protection. Here too the opinions are very different among the economists. One opinion is J. Stiglitz who is against the IP protection. He thinks that it reduces the total surplus generated by the innovation and that we don’t really need it to promote innovation ( Stiglitz, J. (2008). Economic foundations of intellectual property rights, Duke Law Journal 57(6), 1693-1724.). In their book, Lévêque and Ménière expose a different argumentation. They show the market imperfections in the intellectual goods market(s) to prove that it needs a public intervention (Lévêque, F. and Ménière, Y. (2004). The Economics of Patents and Copyrights. Berkley Electronic Press.).

According to the European Union R&D and Innovation are the sectors where countries and companies have to invest if we (Europe) want to stay competitive and try to keep our current level of life. So it is true that we need innovation and that countries like Belgium must invest and stimulate companies in this way.

Thus, my opinion is that a state should be able to provide money to companies asking for it if they have a concrete innovating project. I don’t want to be linked to any side but I think state should not interfere with the economy but should help it if needed. From my point of view, in some cases, if the state wants to be interventionist it should be fully done. Providing money is good for companies but why couldn’t the state receive shares or any retribution in compensation if the project works?

Maybe receiving shares is too interventionist but retribution would be quite fair. As it is not the role of the state to interfere with the economy I think it’s normal that when it provides money it gets a return, even small, other than being happy to see a flourishing company. There is no free money in the business world and a state should not be conned so easily.

I think a state should act as a company which mission would be to insure the welfare of its people. This company should be independant and should not have contacts with other companies if it’s not about business or mission related.

So should the state take risk and invest in high-tech innovation? Yes if it gets any kind of retribution and if the other company asked for funds. A State should be like the last solution for a company in need of funds. So there i partially agree with Ms Mazzucato.

But the real problem for me is not to know what are the limits which a state can intervene in but the fact that those limits should be the same for each country in the world. And as Europe wants to be the good guy many companies within it suffer unfair competition.

In my point of view if a state wants to be a succesful entrepreneur , it must follow the ideas of Ms Mazzucato more than the ideas of The economist .

We live in a society where all the companies are in a constant competition between themselves and if they want to be profitable here , they have to innovate.

Like Ms mazzucato said the state has to play a role in the innovation of the industry but not only with subsidies.
It’s true that subsidies are a big plus for all the investments a firm may have and could be enough for the well-being of the firm like it was the case with apple, but i want to go further than Ms mazzucato and add that a state can do more for innovation if it really wants to!
the patent(already used ) is a good example, if you protect your technology from the others it can be possible to make a huge return on investment.
The government can also prevent bankruptcy by reducing taxes in the early years of a firm which are the riskier.

Indeed , we know that a lot of promising companies can’t afford the taxes on their beginning, if the state can increase the number of companies in the country he will encourage the competion between them and the price war will be more effective.
Thus,if a company doesn’t want to reduce it’s prices and survive,it has to innovate (patent , new technology)

in conclusion i approve the point of view of Ms mazzucato but i just want to go further saying that state can intervene in the market but subsidies are not the only way of doing that.
The important thing to reach is increasing the number of firms in the market so that the competion will increase together with innovation !

The main point of the problem is the way the governement can generate knowledge and how induce firms to innovate. Governement has a role to play, the debate is in which ways and in which measure it can do it.

I agree partially with Mrs Muzzacato’s point and much more with the one of The Economist.

In fact, the Schumpeterian theory and the neo-schumpeterian theory lead to the vision that the State must be osbessed by competition. In the first theory, that is the threat of newcomers that encourage innovation by the incombents, and that a monopolist makes enough profit to invest in innovation, in the second theory, that is intense competition between firms that encourage innovation. Innovation become so a way to break away.

I’d like to illustrate the previous point with European “building” (considering European Institutions as the governement).The creation of a common market increased the competition between the firms within the european borders. I’m sure this measure boosted the incentive to innovate in Europe in the first years of the european “building” but maybe not enough to compete with others, like US, in the long term. In fact, the OECD observed that the product market competition is less intense in Europe than in the US.

That’s why the idea of Mrs. Muzzacato could have sense. In the european case, a way to generate knowledge is to invest in firms and innovative projects. European institutions invest a certain % of the european GDP (1.9%- for the EU-15 countries) in R&D. The institutions hope to increase this % to 3% for 2020. I’m not so sure that these investments are as efficient as the regulation/drawing of the market because Europe is less and less productive and competitive over the years than other countries as US or Japan. I agree that a reward could benefit for all (health, education) and will make that investment a fair investment. But a what prize? As we know, knowledge is a risky asset, that involve commercial and technological uncertainty. Are taxpayers ready to trust the governement to invest a part of their money in a assets with uncertain returns, and mostly after the banking sector crisis?

I think the governement should directly invest in health and education rather to risk money when there are other ways to encourage innovation, as above, by creating a certain market sructure (here competition) that lead firms to fight for innovation. I ‘d like to remind too that a european patent is in prep. I will maybe be a way to increase innovation in Europe, and a solution to fill the gap between Europe and its competitors.

The point of view of the Economist and the one of Ms. Mazzucato seem to be too much extreme and I believe that we can find the best way to stimulate the creation of information and knowledge between these two different positions. In my opinion, before deciding in which measure the state should intervene on the economy to boost innovation, we should evaluate better the impact of public investments in R&D on private ones.

Even if the point of Ms. Mazzucato is very interesting, I partially agree with her analysis.
Ms. Mazzucato is right to say that some states had a central role in the development of many important innovations in technology, and the Apple’s case-study is of course a good example of that.

Moreover, I agree with Ms. Mazzucato when she say that the state should do more than simply fix market failures, but I’m not convinced by her conclusion that governments should capture a more high return on investment in innovation. The state should create incentives to innovate using different kinds of instruments and policies, but if it goes to far in financing R&D there could be a crowding out effect on private investments in research and development.

However, because public investments in R&D are also likely to stimulate private investments, I think that the state should invest in R&D in a measure that maximize the incentive of private enterprises to innovate. So, in addition of a good and efficient set of IP rights, governments should invest carefully in R&D taking into account the effect that this investments will have on the private sector.

In conclusion, I believe that the real issue isn’t whether or not the state should intervene but in which measure it should do it, and I believe that we can give an answer to this question only if we understand in which way public investments in innovation affect the private ones.

The state will always play a crucial role on promoting innovation, thus the debate is whether this promotion should be done indirectly by, for example, managing incentives, regulating and providing stability, or by intervening directly as a player pumping tax-payers money into specific ventures. The only right side of this debate is: it depends!

In fact, one may expect that private entrepreneurs and managers will devote their time to promote efficiency and innovation, as their income is dependent on that. On the contrary, when it comes to politicians and bureaucrats, their current and future income is much dependent on their political connections than on maximizing efficiency of the organization there are leading.
However, as stressed in this post, innovation can be seen as having the typical characteristics of a public good, so without public intervention one may expect its under provision bellow what would be socially desirable. Here is where the government kicks in, assuming the technological and commercial risk, as well as covering the huge initial and fixed costs.

As a final result one has the following dilemma. If a private investment is successful, the society must maintain incentives to innovate, rewarding the risk-taking and innovative attitude with monopoly rents. Since this creates a dead weight loss to society, if the successful investment was public, then setting a lower price would increase wellbeing. In the other hand, if a private investment fails, that is shareholders’ own money, while if it is public, then tax-payers’ money is lost. Letting someone take risks with others’ money is not a good incentive for prudent investments.

I believe that the correct answer to this question is country specific, because it will depend on the culture and working of institutions. As an example, Hofstede (1980) indicated that weak Uncertainty Avoidance (high-risk tolerance) societies tend to take risks easier, are relatively tolerant of behaviours and opinions different from their own, and are enamoured of technology, traits which encourage entrepreneurship and innovation. Moreover, Hofstede (1984) also shows that societies which score high on individualism and low on the power dimension have a greater tendency to innovate. Thus, one might argue that in this kind of societies, the government should be less interventionist, as the private sector is able to do the job, while maybe in the opposite kind of societies, government’s direct intervention is most needed to promote innovation.

I will finish this comment with two examples of both sides of the question.
As a pro for government intervention, in East Asia, governments invest directly in firms, as long as the latter prove to be competitive worldwide. This common practice gave birth to the term “state capitalism”, where public-funded firms are managed as private ones, proving to be highly competitive in the world market. The so called East Asian miracle, despite strongly associated with the Washington Consensus type of policies, functioned in a highly state interventionist atmosphere, which provided sustained rapid growth and dramatic declines in poverty.
As a con, I will give a current event from my country. Portugal Ventures is a public institution working supposedly as venture capitalist firm, funding risky entrepreneurs with promising projects. In the last 20th September it bought a completely indebted and highly unprofitable racecourse in Algarve, showing that there is no need for positive NPVs when some friends need to be bailed out with taxpayers’ money.

Hofstede, Geert (1980), Culture’s Consequences. London: Sage;

Hofstede G. (1984) Culture’s consequences: international differences in work-related values. Newbury Park, CA: Sage Publications.

State capitalist: http://www.economist.com/node/21543160

Portugal Venture news (in Portuguese): http://autosport.pt/portugal-ventures-comprou-autodromo-de-portimao=f114774