State support for science has been the key driver of private-sector innovation, but the resulting profits do not trickle back into public budgets, according to a recent book by a professor of science and technology policy at the University of Sussex, United Kingdom.
The Entrepreneurial State: Debunking Public vs Private Sector Myths by Mariana Mazzucato challenges the view that states' role in innovation is simply to help facilitate a creative and dynamic private sector.
Instead, she argues that national innovation-led growth has depended on the state's involvement in shaping markets and making initial high-risk investments in new technologies ahead of the private sector. And she believes there are lessons for developing nations.
Using the US example of Silicon Valley, Mazzucato says that venture capitalists' innovating and risk-taking role has often been mythologised, and that the success of companies such as Apple, Google and Intel has instead depended heavily on initial state-funded research and investment.
For instance, Mazzucato describes how technologies in the iPhone, including wireless networks and touchscreen displays, were products of state-funded research for which Apple pays minimal tax.
"Entrepreneurship is not just about setting up a company," she tells SciDev.Net. "It's actually about the willingness and ability to take on real risk and high uncertainty. If you look sector by sector, whether it's biotech, pharmaceuticals, nanotech or cleantech, the state has actually absorbed most of that high risk and uncertainty."
According to Mazzucato, the state should be able to get some of the returns from research successes, both to cover costs of initial funding and to fund future research.
As returns through the tax system are limited, she proposes more direct return mechanisms such as retaining a 'golden share' (offering majority ownership of intellectual property rights), and holding equity.
"There's something wrong in the way the rewards [fail to] come back to the state," she tells SciDev.Net. "The risks are socialised, but the profits are privatised. Innovation is a collective social process, so the rewards should be as well."
The problem also extends to the pharmaceutical industry, according to Mazzucato, where most innovative new drugs can be traced back to publicly funded research.
She says that companies often justify high drug prices as being necessary to recoup high research and development (R&D) costs, but evidence shows that their own research has been falling.
"These ecosystems of innovation are getting increasingly parasitic, in the sense that the state is doing more and more, and the companies are doing less and less," she says.
The book's conclusions may also be relevant for developing countries seeking innovation-led growth, suggests Mazzucato.
"These countries are looking at the developed world and trying to learn from examples such as Silicon Valley," she says. "But the problem is that the lessons learned are often the wrong ones."
Attempts by several Latin American countries to attract capital through low taxes and exchange rates are the wrong strategy, according to Mazzucato.
She says that it is better for governments to think about the agencies and expertise they need to direct spending in the right areas to facilitate innovation.
"Some countries, such as Brazil and China, have been using their state investment banks to do much more than just build infrastructure. And, increasingly, you have developing or emerging countries that are trying to play the innovation game using these public finance tools," she adds.
Brazil's state investment bank employs economists with expertise in innovation and invests in new areas such as clean technology, biotechnology and nanotechnology, which have generated large profits, according to Mazzucato.
These profits are put back into the economy, she says. "So the state not only facilitates innovation, but also reaps some of the rewards to reinvest into things such as education and health."
Patarapong Intarakumnerd, a lecturer in innovation policy at the National Graduate Institute for Policy Studies in Tokyo, Japan, agrees the book has merits for developing countries.
"Public research institutes play important roles as knowledge brokers and facilitators," he tells SciDev.Net. "They can work alongside private firms to upgrade technological and innovative capabilities, and take risks and strategic choices to foster the development of new industries."