{Innovation} Debunking Public vs. Private Sector Myths

innovation

Common sense in Economics claims that the role of the State is to overcome market failures and protect competition. According to this, public intervention is not justified unless private agents are unable to produce a satisfactory outcome for all. The drive for initiative and dynamism would belong to the private sector, whereas the State unduly protects special interests, produces absurd and penalizing regulations for entrepreneurship by wasting resources that could be better used by private firms.

These arguments emerge regularly in discussions on innovation and disruption. The “Knowledge Economy” has produced a Schumpeterian Hero. The Entrepreneur has become the central pivot of economic development by taking risks to create new products and jobs that require Venture Capital and a light regulatory framework. This entrepreneurial culture has fostered the development and the myth of the Silicon Valley.

In a recent study (1), Mariana Mazzucato, Professor of Economics of Innovation at the University of Sussex, shows how this myth of the Silicon Valley propagates a distorted view of the respective roles of the public sector and private firms in the innovation process. Because the genuine Entrepreneur taking risks and exploring unknown territories in the Internet, Nanotechnologies or Biotechnologies has always been the public sector.

There are no radical innovation in which the State has not played a leading role, not only as funder of the basic research, but also as an innovator. Venture capital is assumed to be the essential ingredient of innovation in the myth of the Silicon Valley. But VC always intervenes after previous public investments and when technological risks have significantly decreased whereas profit opportunities have increased accordingly.

Private firms regularly benefit from what the public research has previously discovered. A striking example is the Apple iPhone. Actions and funding from the State can actually be found in all patents that make this smartphone “smart”.

Between 1993 and 2004, 75% of new molecular entities approved in the US were issued from public research.

Would the Silicon Valley be this innovation Lab without the needs in telecommunications and transistors of the US Navy in San Francisco? What history, data and figures teach us has nothing to do with myth of young entrepreneurs starting from scratch in their garage. The Dark Matter created by the public sector was accessible and ready to be transformed into a viable business model.

The reality is that Innovation raises from ecosystems where public sector and private companies are co-operators and co-creators.

Industrial and innovation policies drawing the consequences of this observation should give public intervention a central place, nor as a proof of market failures or a guardian of free competition, but as creator of innovative and disruptive technologies.

 (1) “The Entrepreneurial State. Debunking Public vs. Private Sector Myths “, Anthem Press, London

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