Economics - Innovation - Inclusive Growth - Public Purpose

PATIENT FINANCE & PUBLIC BANKS

Research on Patient Finance & Public Banks

Countries around the world are seeking smart, innovation-led growth. In her book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Mazzucato shows how innovation requires not any type of finance but patient, long-term, committed finance. This has taken different forms in different countries, including public R&D agencies such as the USA’s Defense Advanced Research Projects Agency (DARPA), Finland’s SITRA, ISRAEL’s Yozma public venture capital fund, or through state investment banks such as Brazil’s BNDES or Germany’s KfW (see below).

Mazzucato’s work on patient finance studies the way in which these diverse types of finance have been distributed between different types of public institutions, in different sectors and in different countries. Related to this objective, Mazzucato’s research is examining the role of short-termism in industry, including the increasing financialization of companies, and the challenges this produces for public-private partnerships.

See the Entrepreneurial State webpage for a discussion of how this topic is approached in Mazzucato’s 2013 book, and below for recent developments of this work, in the areas of (1) public banks and (2) green finance, with related journal articles and working papers.

State Investment Banks

Mazzucato’s research with Dr. Caetano Penna is examining the role of State Investment Banks. The traditional functions of state investment banks were in infrastructure investment and counter-cyclical lending during recessions when private banks restrained credit. But over time, many have become more active as key players in the innovation system. They have provided, for example, public venture finance for innovative firms, and strategic finance for modern societal challenges with technological ‘missions’. Examples of ‘mission-oriented’ investments include the EIB’s €14.7 billion commitment to sustainable city projects in Europe; the efforts of KfW to support Germany’s Energiewende policies through the greening and modernisation of German industries and infrastructures; China Development Bank’s investments in renewable energies; and the technology fund put in place by Brazil’s BNDES to channel resources toward selected technologies (eg. FUNTEC). The examples of KfW and BNDES are examined in a recent working paper. See below for other related working papers.

Green Financing

In 2013, state investment banks were the largest funders of the deployment and diffusion phase of renewable energy, outpacing investment from the private sector. Mazzucato is working with Dr. Gregor Semieniuk to look at the role of different types of public and private financial actors, investing in renewable energy. Here too state investment banks are prominent: the four most active banks were the China Development Bank, the German KfW, the European Investment Bank and the Brazilian development bank BNDES. But if state investment banks are to play this role it requires new policy tools to monitor and assess the degree to which public investments are pushing the market frontier, and in what direction. Analysing, theorising and constructively criticising what is being done, using a market shaping policy framework in combination with a market fixing one, presents a new agenda for pubic policy in economics, which this research theme is developing. Mazzucato and Semieniuk recently organised a workshop exploring the actors financing renewable energy.

MISSION-ORIENTED
INNOVATION POLICY

This work on patient finance is related to Professor Mazzucato’s work with international policy makers exploring mission-oriented innovation policy and its role in directing investment and innovation towards smart, inclusive and sustainable growth. Her research is developing a new framework that understands the role of the state as shaping and creating markets, not only fixing them. It asks challenging questions about the ways in which public sector investments are currently envisioned, justified and measured, and considers how to build the type of public sector institutions that can welcome the fundamental uncertainty—and hence risk-taking—inherent in the innovation process. Central to this is how we can socialize both risks and rewards to develop more symbiotic and mutualistic public-private partnerships. Read more about the origins of the project here.

Key Questions

  • How have the roles of public banks evolved over time, and how do they differ between countries?
  • Do public banks crowd in private banks?
  • Which parts of the innovation chain do public banks have a greater role? Does it make sense for them to be present across the entire chain? Are there certain areas that they should not enter?
  • What sort of funding structures do public banks have (e.g. where does their money come from) and does this matter?
  • What evaluation metrics are most appropriate for both justifying and assessing the investments made by public banks?
  • What is the acceptable number of failures that public banks can afford to bear?
  • How can portfolio investing take into account the different risk levels that technological and societal challenges encompass?
  • What are the different mechanisms by which public banks can earn some of the upside returns in order to cover downslide losses and the next round of investments. How much equity should be retained, and how does this differ between banks?

The European Investment Bank

Related Journal Articles

Beyond market failures: the market creating and shaping roles of state investment banks

Beyond market failures: the market creating and shaping roles of state investment banks

Mazzucato M., Penna C. (2016) “Beyond market failures: the market creating and shaping roles of state investment banks”, Journal of Economic Policy Reform, Volume 19, 2016 – Issue 4

The paper develops a typological framework of the roles of state investment banks (SIBs) in the economy. The typology identifies four different roles: countercyclical; developmental; venture capitalist; and challenge-led. The paper conceptually elaborates the typology by first providing a historical overview of SIBs, and then discussing how the mainstream “market failure theory” justifies them. It then advances a different conceptualization based on insights from heterodox economics, showing that all roles of SIBs are more about market creating/shaping rather than market-failure fixing. The paper concludes with a proposal of a new agenda for research on SIBs based on our typological framework.

Financing innovation: creative destruction vs. destructive creation

Financing innovation: creative destruction vs. destructive creation

Mazzucato, M. (2013), in special issue of Industrial and Corporate Change, M. Mazzucato (ed.), 22:4

Although the 2007 financial crisis, and the ensuing world-wide recession, has caused policy makers to want to ‘re-stabilize’ the financial sector as well as ‘rebalance’ economies away from finance toward the ‘real’ economy, this article claims that to bring finance back to serve the real economy, it is fundamental to (a) also de-financialize companies in the real economy, and (b) think clearly how to structure finance so that it can provide the long-term committed patient capital required by innovation. Without this, the risk is that current policy produces a healthy financial sector (bailed out, ring-fenced, and re-structured) in a deeply sick economy, which continues to reward value extraction over value creation activities.

The risk-reward nexus in the innovation-inequality relationship: Who takes the risks? Who gets the rewards?

The risk-reward nexus in the innovation-inequality relationship: Who takes the risks? Who gets the rewards?

Lazonick, W. and Mazzucato, M. (2013), in special issue of Industrial and Corporate Change, M. Mazzucato (ed.), 22:4.

We present a framework, called the Risk-Reward Nexus, to study the relationship between innovation and inequality. We ask the following question: What types of economic actors (workers, taxpayers, shareholders) make contributions of effort and money to the innovation process for the sake of future, inherently uncertain, returns? Are these the same types of economic actors who are able to appropriate returns from the innovation process if and when they appear? That is, who takes the risks and who gets the rewards? We argue that it is the collective, cumulative, and uncertain characteristics of the innovation process that make this disconnect between risks and rewards possible. We conclude by sketching out key policy implications of the Risk-Reward Nexus approach.

Related Working Papers

Beyond Market Failures. The Market Creating And Shaping Roles Of State Investment Banks

Beyond Market Failures. The Market Creating And Shaping Roles Of State Investment Banks

SPRU Working Paper Series 2014 (21)
“Recent decades witnessed a trend whereby private markets retreated from financing the real economy, whilst simultaneously the real economy itself became increasingly financialized. This trend resulted in public finance becoming more important for capital investments. Within this context, the paper focuses on the roles played by a particular source of public finance: state investment banks (SIBs). It develops a conceptual typology of the different roles that SIBs play in the economy which together show the market creation/shaping process of SIBs, rather than their mere ‘market fixing’ roles. The paper discusses four types of investments, both theoretically and empirically: countercyclical; developmental; venture capitalist role; and challenge-led. To develop the typology, we first discuss how standard market failure theory (MFT) justifies the roles of SIBs, the diagnostics and evaluation toolbox associated with it, and resulting criticisms centred on notions of ‘government failures’. We then show the limitations of this approach based on insights from Keynes, Schumpeter, Minsky and Polanyi, and other authors from the evolutionary economics tradition, which help us move towards a framework for public investments that is more about market creating/shaping rather than market fixing. As frameworks lead to evaluation tools, we use this new lens to both analyse the increasingly targeted investments that SIBs are making, and to provide a new light on the usual criticisms that are made about such directed activity (e.g. crowding out and picking winners).”

Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis

Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis

Mazzucato, M., Wray, R., Levy Economics Institute, Working Paper No. 837
“This paper discusses the role that finance plays in promoting the capital development of the economy, with particular emphasis on the current situation of the United States and the United Kingdom. We define both “finance” and “capital development” very broadly. We begin with the observation that the financial system evolved over the postwar period, from one in which closely regulated and chartered commercial banks were dominant to one in which financial markets dominate the system. Over this period, the financial system grew rapidly relative to the nonfinancial sector, rising from about 10 percent of value added and a 10 percent share of corporate profits to 20 percent of value added and 40 percent of corporate profits in the United States. To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition—to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge—the rate of growth of capacity has slowed.The past quarter century witnessed the greatest explosion of financial innovation the world had ever seen. Financial fragility grew until the economy collapsed into the global financial crisis. At the same time, we saw that much (or even most) of the financial innovation was directed outside the sphere of production—to complex financial instruments related to securitized mortgages, to commodities futures, and to a range of other financial derivatives. Unlike J. A. Schumpeter, Hyman Minsky did not see the banker merely as the ephor of capitalism, but as its key source of instability. Furthermore, due to “financialisation of the real economy,” the picture is not simply one of runaway finance and an investment-starved real economy, but one where the real economy itself has retreated from funding investment opportunities and is instead either hoarding cash or using corporate profits for speculative investments such as share buybacks. As we will argue, financialization is rooted in predation; in Matt Taibbi’s famous phrase, Wall Street behaves like a giant, blood-sucking “vampire squid.” In this paper we will investigate financial reforms as well as other government policy that is necessary to promote the capital development of the economy, paying particular attention to increasing funding of the innovation process. For that reason, we will look not only to Minsky’s ideas on the financial system, but also to Schumpeter’s views on financing innovation.”

The Rise of Mission-Oriented State Investment Banks: the case of Brazil’s BNDES and Germany’s KfW

The Rise of Mission-Oriented State Investment Banks: the case of Brazil’s BNDES and Germany’s KfW

Mazzucato, M., Penna, C., SPRU Working Paper Series SWPS 2015-26

“This paper focuses on the rise of state investment banks (SIBs) as lead funders of mission-oriented innovation in various countries’ agendas regarding smart (innovation-led) growth, and not just fixers of ‘market failures’. The market failure justification for public finance fails to capture the active mission-oriented role that such banks are playing in shaping and creating markets, rather than just fixing them. In tackling innovation priorities and shaping new markets, these banks are developing new financial tools that also help to reform the financial system from within, addressing issues of short-termism and financialisation. This paper documents and analyses the roles of such banks, building on the Neo-Schumpeterian work on mission-oriented policies (that is, policies that aim to address societal issues or challenges). The paper presents a rich analytical description of mission-oriented investments in two of the leading SIBs: Brazil’s BNDES and Germany’s KfW. We discuss the directionality of the investments, the various tools used, and the lessons to be learned for evaluating these tools outside of a market failure framework.”

Financing Renewable Energy: Who is Financing What and Why it Matters

Financing Renewable Energy: Who is Financing What and Why it Matters

Mazzucato, M.,Semieniuk, G., SPRU Working Paper Series SWPS 2016-12
“Accelerating innovation in renewable energy (RE) requires not just more finance, but finance servicing the entire innovation landscape. Given that finance is not ‘neutral’, more information is required on the quality of finance that meets technology and innovation stage-specific financing needs for the commercialization of RE technologies. We inves- tigate the relationship between different financial actors with investment in different RE technologies. We construct a new deal-level dataset of global RE asset finance from 2004 to 2014 based on Bloomberg New Energy Finance data, that distinguishes 10 investor types (e.g. private banks, public banks, utilities) and 11 RE technologies into which they invest. We also construct a heuristic investment risk measure that varies with technology, time and country of investment. We find that particular investor types have preferences for par- ticular risk levels, and hence particular types of RE. Some investor types invested into far riskier portfolios than others, and financing of individual high-risk technologies depended on investment by specific investor types. After the 2008 financial crisis, state-owned or controlled companies and banks emerged as the high-risk taking locomotives of RE asset finance. We use these preliminary results to formulate new questions for future RE policy, and encourage further research.”

Related Media Articles

Related Talks

Bank of England Open Forum, 11 November 2015 – Panel on ‘How financial innovation and technology can support the economy’.

NIB Financing the Future seminar, 2 November 2016 – Keynote on ‘Innovation Policy as Market Shaping and Creating’ , with Finnish Prime Minister Juha Sipilä.

Related Policy Impact

Nordic Investment Bank

Nordic Investment Bank

Copenhagen, Denmark – Keynote on ‘Innovation Policy as Market Shaping and Creating’ at the NIB Financing the Future seminar, with Finnish Prime Minister Juha Sipilä. more

European Investment Bank

European Investment Bank

Mazzucato was invited to present & discuss her work on ‘The Entrepreneurial State and the role of public investment banks’ more

Mission-Oriented Finance For Innovation

Professor Mazzucato organised a major conference in July 2014 on Mission Oriented Finance for Innovation (MOFI), opened in the UK Parliament by the Rt Hon Vince Cable, then UK Secretary of State for Business, Innovation & Skills. It brought together policymakers, leaders of mission-oriented public organisations and academics from around the world to consider the framework through which public sector investments are envisioned, justified, and measured and how to build the type of public sector institutions that can welcome the fundamental uncertainty—and hence risk-taking—inherent in the innovation process. A subsequent pamphlet, Mission-Oriented Finance for Innovation: New ideas for investment-led growth, published in collaboration with Policy Network and co-edited by Mazzucato and Caetano Penna, collected contributions from Vince Cable, Andy Haldane, Adair Turner, leaders of mission-oriented public agencies from around the world and economists. It was launched at a second event in the House of Commons – a podcast is available here. Read more about Mazzucato’s work on Mission-Oriented Finance for Innovation here.