Economics - Innovation - Inclusive Growth - Public Purpose

Journal Articles

Co-creating and directing Innovation Ecosystems? NASA’s changing approach to public-private partnerships in low-earth orbit

Co-creating and directing Innovation Ecosystems? NASA’s changing approach to public-private partnerships in low-earth orbit

Mazzucato M., Robinson, D.K.R. (2017) “Co-creating and directing Innovation Ecosystems? NASA’s changing approach to public-private partnerships in low-earth orbit”, Technological Forecasting and Social Change.

U.S. public activities in space directed via NASA are undergoing change. While NASA has historically been able to drive market creation, through its procurement policy (which is much weaker in Europe), the past decade has seen a visible shift in US space policy, away from NASA-directed developments in low-Earth orbit (LEO) towards an ecosystem with a mix of private, not-for-profit, and public actors in LEO. This has fundamentally changed NASA’s role from an orchestrating/directing role, to a more ‘facilitating’ one driven by commercialization needs. This shift in mission and approach has ramifications for the LEO ecosystem as well as NASA’s innovation policy, which has previously centred on clearly defined “mission-oriented” objectives, such as putting a man on the moon or creating the shuttle fleet. Such objectives required ‘active’ innovation policy whereby NASA both funded and ‘directed’ the innovation, within its walls and with its partners. The emerging multi-actor ecosystem approach has involved a more open-ended objective that does not have a unified nor clearly defined end-game. In this situation, NASA’s ability to shape activities in a direction in line with its mission will depend on its relationships with other members in the system. The rise of new actors in the space eco-system, and new relationships between them, presents interesting challenges for innovation policy informed by an Innovation System approach. In this paper, we critique the market failure approach of public intervention in markets and describe further work to be done in the innovation systems literature – more focus on the interactions between agents (and the type of agents) as complimentary to the dominant focus on funding programmes in innovation systems. In this paper, we present the evolving processes of NASA’s engagement in building a low-earth orbit economy to draw out case specific insights into a public agency shifting its mission to incorporate approaches to facilitate the market creation policy. The paper focuses on the way that NASA structures its new innovation policy, away from a classical supply side oriented R&D investment through NASA itself, towards a policy of orchestration and combination of instruments rather. We close the paper with a reflection on the ramifications of NASA’s approach to building a sustainable low-Earth orbit economic ecosystem. Working paper version

Public financing of innovation: new questions

Public financing of innovation: new questions

Mazzucato M., Semieniuk G. (2017) “Public financing of innovation: new questions”, Oxford Review of Economic Policy, Volume 33, Number 1, pp. 24–48.

Economic theory justifies policy when there are concrete market failures. The article shows how in the case of innovation, successful policies that have led to radical innovations have been more about market shaping and creating through direct and pervasive public financing, rather than market fixing. The paper reviews and discusses evidence for this in three key areas: (i) the presence of finance from public sources across the entire innovation chain; (ii) the concept of ‘mission-oriented’ policies that have created new technological and industrial landscapes; and (iii) the entrepreneurial and lead investor role of public actors, willing and able to take on extreme risks, independent of the business cycle. We further illustrate these three characteristics for the case of clean technology, and discuss how a market-creating and -shaping perspective may be useful for understanding the financing of transformative innovation needed for confronting contemporary societal challenges.

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.

From Market Fixing to Market-Creating: A New Framework For Innovation Policy

From Market Fixing to Market-Creating: A New Framework For Innovation Policy

Mazzucato M. (2016) “From Market Fixing to Market-Creating: A New Framework For Innovation Policy”, Special Issue of Industry and Innovation: “Innovation Policy – can it make a difference?” DOI 10.1080/13662716.1146124

Many countries are pursuing innovation-led “smart” growth, which requires long-run strategic investments and public policies that aim to create and shape markets, rather than just “fixing” markets or systems. Market creation has characterized the kind of mission-oriented investments that led to putting a man on the moon and are currently galvanizing green innovation. Mission-oriented innovation has required public agencies to not only “de-risk” the private sector, but also to lead the direct creation of new technological opportunities and market landscapes. This paper considers four key issues that arise from a market-creating framework for policy: (1) decision-making on thedirection of change; (2) the nature of (public and private) organizations that can welcome the underlying uncertainty and discovery process; (3) the evaluation of mission-oriented and market-creation policies; and (4) the ways in which both risks and rewards can be shared so that smart growth can also result in inclusive growth.

Innovation Systems: From Fixing Market Failures to Creating Markets

Innovation Systems: From Fixing Market Failures to Creating Markets

Mazzucato, M. (2015) Which Industrial Policy Does Europe Need? Volume 50, May/June 2015, Number 3 | pp. 120-155

One lesson of the Great Recession has been that countries with higher shares of industry in their GDP seemed to be less affected by the crisis. Consequently, the call for an industrial renaissance has become stronger. Industrial policy has now become a top priority in countries where it was not explicitly considered in the past. A strong EU-wide industrial policy is expected to foster growth and job creation. However, cultivating industrial development is a complex challenge. This Forum addresses the steps that need to be taken to create a new European industrial policy. What are the structural challenges that need to be addressed? What are the instruments of the EU’s industrial policy? And should the EU be engaged in picking winners, or is the market better at making such judgements?

High-Growth Firms In Changing Competitive Environments: The US Pharmaceutical Industry (1963 to 2002)

High-Growth Firms In Changing Competitive Environments: The US Pharmaceutical Industry (1963 to 2002)

Mazzucato, M. and Parris, S. (2014) “High growth firms in competitive environments: the US pharmaceutical industry (1963 to 2002)” Small Business Economics Journal, 43(1): DOI 10.1007/s11187-014-9583-3

Firms across sectors and regions are highly skewed in their ability to engage with innovation and even more skewed in their ability to translate investments in innovation into higher growth. Recent attention has been placed on the importance of ‘high-growth firms’ (HGF) for innovation policy. Our paper explores under what conditions HGF matter for translating R&D investments into economic growth and how this depends on firm-specific and industry-specific factors. We use quantile regression techniques to study the R&D–growth relationship in HGF compared to low-growth firms. Unlike previous studies, we pay particular attention to whether this relationship depends on the particular period in the industry’s life cycle. We focus on the US pharmaceutical industry from 1963 to 2002 and find that the R&D–growth relationship is sensitive to the changing competitive environment over the industry’s history, which suggests that innovation policy must focus not only on firm attributes but also competitive structures.

Accounting for productive investment and value creation

Accounting for productive investment and value creation

Mazzucato, M. and Shipman, A. (2014), Industrial and Corporate Change, 23 (1). pp. 1-27.

The increased size and influence of financial institutions and markets has widened the scope for divergence between value-creation and the value-added measured by national accounts. This paper uses a re-assessment of the concept of value, showing how its creation can be separated from income flows, to examine its potential under- or over-representation in conventional GDP. A revived (and revised) value theory offers new insight into the impact on measured income and growth of structural change (including financial sector growth and offshore outsourcing), and of recent national-accounting reforms including the capitalization of R&D spending.

Apple’s Changing Business Model: What Should the World’s Richest Company Do with All Those Profits?

Apple’s Changing Business Model: What Should the World’s Richest Company Do with All Those Profits?

Lazonick, W. Mazzucato, M. and Tulum, Ö. (2013),  in special issue of  Accounting Forum, Volume 37, Issue 4, Pages 249–267.

Apple Inc. stands out as the world’s most famous, and currently richest, company. To the general public, Apple is known for three things: its intriguing CEO Steve Jobs, who has achieved iconic status in death as in life; its amazing iOS products, especially the iPhone and the iPad, and their predecessor the iPod, which have literally placed sophisticated technology in the hands of the masses; and its stratospheric stock price, which even when in March 2013 it had dropped to 63 percent of its September 2012 peak, gave Apple the highest market capitalization of any company in the world. As a result of its phenomenal success, at the end of fiscal 2012 Apple had $121 billion in liquid assets. In April 2013 the company committed to distributing as much as $100 billion to shareholders in stock buybacks and cash dividends by the end of calendar 2015. By employing the theory of innovative enterprise to analyze how over the course of its 37-year history Apple became so profitable, we argue that there is no economic justification from a risk-reward perspective for this distribution to Apple’s shareholders. Taxpayers and workers have superior claims on these profits. In analyzing by whom value is created as a basis for considering for whom value should be extracted, we raise the implications of Apple’s changing business model for the future of innovation at this heretofore exceptional American company and even in the U.S. economy as a whole.

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.

R&D, Patents and Stock Return Volatility

R&D, Patents and Stock Return Volatility

Mazzucato, M. and Tancioni, M. (2012), “R&D, Patents and Stock Return Volatility”, Journal of Evolutionary Economics, Vol. 22 (4):811-832

Recent finance literature highlights the role of technological change in increasing firm specific (idiosyncratic) and aggregate stock return volatility, yet innovation data is not used in these analyses, leaving the direct relationship between innovation and stock return volatility untested. The paper investigates the relationship between volatility and innovation using firm level patent data. The analysis builds on the empirical work by Mazzucato (2002; 2003) where it is found that stock return volatility is highest during periods in the industry life-cycle when innovation is the most ‘radical’. In this paper we ask whether firms which invest more in innovation (more R&D and more patents) and/or which have more important innovations (patents with more citations) experience more volatility in their returns.  Given that returns should in theory be higher, on average, for higher risk stocks, we also look at the effect of innovation on the level of returns. To take into account the competition between firms within industries, firm returns and volatility are measured relative to the industry average. We focus the analysis on firms in the pharmaceutical industry between 1974 and 1999. Results suggest that there is a positive and significant relationship between volatility, R&D intensity and the various patent related measures—especially when the innovation measures are filtered to distinguish the very innovative firms from the less innovate ones.

Innovation and Firm Growth: Is R&D Worth It?

Innovation and Firm Growth: Is R&D Worth It?

Demirel, P. and Mazzucato, M. (2012), “Innovation and Firm Growth: Is R&D Worth It?”, Industry and Innovation, Volume 19, Issue 2.

The paper contributes to an emerging literature that critically questions the degree to which R&D, at the centre of national and transnational innovation policies, results in firm growth. The differences in how innovation affects firm growth is explored for small and large publicly quoted US pharmaceutical firms between 1950 and 2008. We observe that the positive impact of R&D on firm growth is highly conditional upon a combination of firm-specific characteristics such as firm size, patenting and persistence in patenting. For small firms, R&D boosts growth for only a subset of firms: namely, those that patent persistently for a minimum of five years. For large pharmaceutical firms, on the other hand, R&D may have a negative impact on growth; potentially resulting from the low R&D productivity these firms have suffered from since the mid-1990s. These results raise important issues around the R&D and firm growth relationship for small and large firms as well the role of persistence in innovation for boosting firm performance.

Industrial and Corporate Change

Industrial and Corporate Change

Mazzucato, M. and Tancioni, M. (2008). “Innovation and idiosyncratic risk: an industry – and firm – level analysis”. Industrial and Corporate Change, Volume 17, Issue 4.

Recent studies find that idiosyncratic risk (IR)—the degree to which firm-specific returns are more volatile than aggregate market returns—has increased since the 1960s and attribute this to economy-wide factors such as the role of the IT revolution. Yet no innovation data is used in these studies. To gain further insights into the relationship between technology and IR, our aricle studies whether firms and industries that are more R&D intensive are in fact characterized by higher IR due to how innovation affects the uncertainty of expected future profits. While the industry-level results prove inconclusive, a clear relationship is found between firm-level R&D intensity and firm-level volatility of returns.

Regional Studies

Regional Studies

Demirel, P. and Mazzucato, M. (2010), “The Evolution of Firm Growth Dynamics in the US Pharmaceutical Industry”, Regional Studies, Volume 44, Issue 8.

The evolution of firm growth dynamics in the US pharmaceutical industry,Regional Studies. This paper studies the dynamics of firm growth and firm size distribution in the pharmaceutical industry from 1950 to 2003. Growth dynamics are studied in the context of how the size composition of firms changes, how innovation patterns change, and how location leads to growth differentials among US firms. It is found that the growth advantage of small pharmaceutical firms increases after the 1980s as small firms become more active in patenting and their patenting activities become more ‘persistent’. Location is found to affect growth differences only for the most innovative firms (that is, for non-innovative firms, location does not matter).

Revue de L’Observatoire Francais de Conjonctures Economiques

Revue de L’Observatoire Francais de Conjonctures Economiques

Mazzucato, Mariana (2006). “Innovation and stock prices: a review of some recent work”. Revue de L’Observatoire Francais de Conjonctures Economiques, Special issue.

The paper reviews work which draws a link between the dynamics of innovation and the dynamics of stock prices. One of the key findings is the relationship  between innovation intensity (e.g. radical innovation) and the volatility of firm level stock returns. By connecting the analysis of risk and uncertainty’ often left in the finance literature to explanations related to ‘animal spirits’ and other stochastic factors’ to changes in real production conditions at the firm and industry level, the paper provides the foundation for a Schumpetarian analysis of time varying risk.

Revue d’Economie Industrielle

Revue d’Economie Industrielle

Mazzucato, M. Tancioni, M. (2005). “Indices that capture creative destruction: questions and implications”. Revue d’Economie Industrielle, Volume 110, pp. 199–218.

The paper argues that micro and macro economists interested in the dynamics of creative destruction can gain important insights by using indices that capture the effect of innovation on the relative position of firms. This is due to the uneven and ‘destructive’ effect that radical innovation has on firm rankings. One such index is the market share instability index. On the financial side, the excess volatility of stock prices and idiosyncratic risk also appear to capture the uneven dynamics of creative destruction. The paper concludes by considering the implications of these propositions for economy-wide growth during periods of radical innovation (e.g. GPTs).

Journal of Evolutionary Economics

Journal of Evolutionary Economics

Mazzucato, M. (2003), “Risk, Variety and Volatility: Innovation, Growth and Stock Prices in Old and New Industries”, Journal of Evolutionary Economics, Volume 13, Issue 5, pp. 491-512.

The paper studies the patterns of volatility in firm growth rates and stock prices during the early phase of the life-cycle of an old economy industry, the US automobile industry from 1900-1930, and a new economy industry, the US PC industry from 1974-2000. In both industries, firm growth rates are more volatile in the period in which innovation is the most radical. This is also the period in which stock prices are more volatile. The comparison sheds light on the co-evolution of industrial and financial volatility and the relationship between this co-evolution and mechanisms of Schumpetarian creative destruction. Results provide insight into the debate on whether the statistical behavior of firm growth rates is well represented by Gibrats Law.

Nonlinear Dynamics, Psychology, and Life Sciences

Nonlinear Dynamics, Psychology, and Life Sciences

Mazzucato, M. and Semmler, W. (2002), “The Determinants of Stock Price Volatility: An Industry Study”, Nonlinear Dynamics, Psychology, and Life Sciences, Volume 6, pp. 230-253.

The currently ongoing IT-revolution is a great challenge for economists. The industry displays ever arising new technologies, unstable markets shares, long term swings and short term volatility of stock prices. Yet, to study those phenomena empirically one is constrained by a lack of data. The U.S. auto industry, for which long term time series are available, has shared a similar experience since its early development. This paper studies how long term swings and short term stock price volatility in the U.S.auto industry is related to innovative efforts and switching of market shares of firms. The early period of the life-cycle of the industry was characterized by high product innovation, high market share instability, volatile stock prices and the later period by fewer firms, process innovation, more stable market shares and less stock price volatility. In this paper we focus on the “transition” period leading from the first to the second period and study the relation of innovative effort, market share fluctuations and stock price dynamics. After presenting stylized facts on the life-cycle of the industry we introduce a dynamic model that is able to replicate some of the stylized facts. The dynamic model admits heterogeneous firms and encompasses both evolutionary as well as optimizing approaches.

Metroeconomica

Metroeconomica

Geroski, P. and Mazzucato, M. (2002), “Myopic Selection and the Learning Curve”, Metroeconomica, Volume 53, Issue 2, pp.181-199.

The severity of selection mechanisms and the myopia of selection are explored through a duopoly model where one firm tries to move down a learning curve in which costs are initially higher than its rival’s but ultimately much lower. A trade-off is found between catch-up time and asymptotic market share: the more severe are selection pressures, the less likely is it that the learning technology will survive; however, if it does survive, the learning technology will in the limit be more competitive the more severe are selection pressures. We explore the dynamics of the model under unit cost and strategic pricing and find that the optimal pricing rule depends on the parameters governing firm learning and market selection.

Review of Economic Dynamics

Review of Economic Dynamics

Mazzucato, M. (2002), “The PC Industry: New Economy or Early Life-Cycle”, Review of Economic Dynamics, Volume 5, pp. 318-345.

The paper studies the co-evolution of industrial turbulence and financial volatility in the early phase of the life-cycle of an old high-tech industry and a new high-tech industry: the U.S. auto industry from 1899–1929 and the U.S. PC industry from 1974–2000. In both industries, the first three decades were characterized by industrial turbulence: radical technological change, high entry and exit rates, and rapidly falling prices. However, unlike in the auto industry, in the PC industry technological change and new entry did not lead to strong instability of market shares–at the core of the monopoly-destroying effect of Schumpeterian creative destruction–until the 1990s, when the lead of the incumbents from the pre-existing mainframe and minicomputer industries was undermined. In both industries, stock prices were the most volatile and idiosyncratic during those years in which technological change disrupted market shares the most (Autos: 1918–1928; PCs: 1990–2000).

International Journal of Industrial Organization

International Journal of Industrial Organization

Geroski, P. and Mazzucato, M. (2002), “Modelling the Dynamics of Industry Populations”, International Journal of Industrial Organization, Volume 19, pp. 1003-1022.

This paper examines four models which might be used to account for variations in the number of producers who operate in a particular market over the lifetime of that market. Two of these are standard economics textbook models, one is a non-standard model and one is a textbook model derived from the literature on organizational ecology. The four models have several observable differences and this opens up the possibility of testing any one against the others. We apply these four models to 93 years of data on the population of domestic car producers in the US car industry. The salient feature of this population is the very large rise and fall in the number of firms operating in the very early years of the industry, a phenomena which seems hard to account for using any of the three textbook models that we consider here.

Industrial and Corporate Change

Industrial and Corporate Change

Geroski, P. and Mazzucato, M. (2002), “Learning and the Sources of Corporate Growth”, Industrial and Corporate Change, Volume 11, Issue 4, pp. 623-644.

This paper explores the link between learning and corporate growth by developing different models of learning and showing that they produce observably different models of corporate growth. Using data on the growth of a number of firms in the US automobile industry during the 20th century, we compare these different models of growth in an effort to identify the major sources of learning which these firms seem to have relied on. Although there are interesting differences between growth processes before and after the Second World War, the basic conclusion that we are drawn to is that learning in this sector is largely unsystematic and opportunistic.

Advances in Complex Systems

Advances in Complex Systems

Mazzucato, M. (2000), “Firm Size, Innovation, and Market Share Instability: the Role of Negative Feedback and Idiosyncratic Events”, Advances in Complex Systems, Volume 3, pp. 417-431.

An evolutionary model is built which uses structural and random factors to account for the emergence of market share instability and industry concentration. The structural factors are studied through the relationship between firm size and innovation (dynamic returns to scale) while the random factors are studied through the effect of shocks on this feedback relationship. We find that market share instability is the highest under the negative feedback regime, when the industry specific level of technological opportunity is intermediate, and when shocks are neither very large nor very small.

Journal of Evolutionary Economics

Journal of Evolutionary Economics

Mazzucato, M. and Semmler, W. (1999), “Stock Market Volatility and Market Share Instability during the US Automobile Industry Life-Cycle”, Journal of Evolutionary Economics, Volume 9, pp. 67-96.

Market share instability, during certain stages of the industry life-cycle, has become a stylized fact in the industrial organization literature. In the finance literature, volatility in the form of excess volatility, i.e. the much larger volatility of stock prices than dividends (although stock prices should in theory trace the present value of future dividends), has given rise to controversies regarding stock price determination (Campbell and Shiller, 1988; Shiller, 1989). Recent evolutionary models, both theoretical and empirical, have tied the presence of market share instability to industry specific variables, such as specific periods in the industry life-cycle and specific “technological regimes”. The object of the paper is to explore whether there is a relationship between market share instability and stock price volatility and to what degree this relationship is connected to the concept of the industry life-cycle, and hence to industry specific factors. To do so, we explore the relationship in one particular industry, the US automobile industry. Since neither life-cycle nor finance theories attack this problem directly, we use insights from both approaches to build hypotheses which guide the data analysis. The empirical results confirm many of these hypotheses, suggesting that the degree of excess volatility is indeed partly affected by industry specific factors.

Structural Change and Economic Dynamics

Structural Change and Economic Dynamics

Mazzucato, M. (1998), “A Computational Model of Economies of Scale and Market Share Instability”, Structural Change and Economic Dynamics, Volume 9, pp. 55-83.

Replicator dynamics and computer simulation techniques are used to construct a reduced form model which explores negative and positive feedback processes between firm costs and market shares embodied in the dynamics of (dis)economies of scale. After reproducing the standard equilibrium results for decreasing returns to scale (unique equilibrium) and increasing returns to scale (multiple equilibrium) a more dynamic formulation of returns to scale is introduced where scale affects not the direction of costs but the rate of cost reduction. Here we find that negative feedback does not produce self-correcting stabilizing forces in market shares but rather instability and turbulence. Life-cycle phenomena are explored by combining positive and negative feedback in a firm’s cost function. The alternating periods of market share stability and instability which emerge from the simulations are compared to empirical regularities in market share patterns.