Economics - Innovation - Inclusive Growth - Public Purpose


Research on a Green Direction

Professor Mazzucato’s work on mission-oriented innovation policy begins with the fact that innovation has both a rate and a direction. The direction can be chosen passively by the market’s invisible hand, which is often sub-optimal. Or it can be chosen deliberately by policy-makers acting in bold ways to shape new futures, solving public problems and creating new markets. It was direction setting policies that sparked major breakthroughs around the Internet, biotechnology, nanotechnology and today is paving the way towards a potential green revolution. In Mazzucato’s work with Carlota Perez, Innovation as Growth Policy, the authors argue for green to become a new direction for the entire economy, affecting production, distribution and consumption--similarly to how suburbanization provided a direction for mass production.

As was the case with the IT revolution, battling climate change requires transformation across the entire innovation chain: on the supply side through investments in innovation, and on the demand side through procurement policies as well as policies that affect consumption and investment patterns. Both are critical, with demand side policies important for diffusion and deployment, so that new technologies increase productivity across the economy.

In her book, The Entrepreneurial State: debunking public vs. private sector myths, and recent work on the Green Entrepreneurial State, Mazzucato has looked at the roles of public and private actors engaged in the green tech sector, finding similar patterns to those in biotech and ICT: a network of decentralized public actors supplying the long-term patient finance required for high-risk innovation to get off the ground. From US Department of Energy agency ARPA-E to Germany’s development bank KfW, public finance has been and is leading the way. Her work has attracted the attention of international policy-makers, private investors and philanthropists, including Bill Gates who has echoed Mazzucato’s call that the state must lead the way in a green energy revolution.

Mazzucato is currently working with Dr Gregor Semieniuk, a Research Fellow at SPRU, on how different sources of finance influence the pace and direction of renewable energy innovation. They are using different data sources – particularly the Bloomberg New Energy Finance (BNEF) database – to document which types of finance are doing what in the climate finance landscape. Their work examines who the key funders of renewable energy are world wide, and how the portfolio decisions they make influence the direction of green innovation (see Emerging Findings below).

A recent high-level workshop organized by Mazzucato and Semieniuk at Bloomberg New Energy Finance brought key actors in the sector together with academics to consider emerging findings. The workshop papers and presentations can be found here.


Professor Mazzucato’s research on a green direction is related to her work with international policy makers, exploring how mission-oriented innovation policy and investment can direct innovation towards useful areas, and stimulate investment in the business sector, contributing to economic growth that is smarter, more inclusive and steered towards tackling societal and environmental challenges. 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 so that economic growth is not only ‘smart’ but also ‘inclusive’. Read more about the origins of the project here.

Key Questions

  • How do different types of finance differ in their risk-averseness and time horizons?
  • How do these differences influence the type of renewable energy technologies invested in, setting the ‘direction’ of innovation?
  • How different are the returns earned by financial actors investing in different types of renewables?
  • How can policies affect the performance of investments that are more long-term and willing to bear the risk - across the entire innovation chain - that technological revolutions require?

A Green Revolution

Emerging Findings: Who is financing what and why it matters

Since the financial crisis in 2008, publicly owned or publicly controlled investments have assumed an increasing role in renewable energy finance while private investments have languished (see Figure 1). The graph on the left shows private investment is now below levels between 2006-8. Note that the public investments shown exclude China – if investments by China’s big state-controlled enterprises were included public investments would almost equal the level of private investments.

Finance is not neutral when it comes to innovation – the type of finance deployed influences not only the amount of finance but also the ‘direction’ of innovation because different types of investors have varying objectives and risk tolerances. Figure2 shows that public investments, although smaller in total USD, have been more focused on high risk investment; almost half of the public funds were in invested in such high risk projects in 2014, as opposed to a quarter of private investments. While public sources of finance invest across the whole risk landscape, they are particularly active in high-risk areas including offshore—not onshore—wind, and new photovoltaic technologies rather than well-established crystalline silicon photovoltaics. Public investments are exposed to greater risk; private investors are the ones playing it safe. It is public sources of finance that are driving renewable energy innovation across a wider portfolio and towards newer technologies, while private sources tend to be more risk-averse reinforcing investment in existing technologies.

Figure 1: Time series of annual private and public investment into renewable energy asset finance. Investments into Chinese assets are excluded.

Figure 2: Time series of annual private and public share of investments allocated to financing high risk renewable energy assets.

Their research also shows how different types of actors—including commercial banks and state banks, institutional investors, government agencies, utilities and technology companies—focus their investments on particular technologies within renewable energy. Among the most high-risk technologies, Figure 2 shows that utilities are more active in financing offshore wind (panel a) while technology companies are concentrating on financing solar power (CSP, panel b). Among the least mature technologies—marine energy from waves and tides and advanced fuels from biomass such as algae—a single actor type (state-owned or controlled utilities) has provided the only single boost so far of total asset finance in marine (panel c) while energy and technology companies have invested heavily in advanced fuels. The absence of private financial organisations from almost all of these investments is notable. On the other hand, state banks are the actors that most spread their investments across a wide portfolio of different high-risk technologies, thus both keeping options open for a range of different technologies to supply more power, and hedging their investments.

Figure 3: Stacked time series of top three investors’ volume of asset finance for 4 high risk technologies as well as of the total of all other investors.

Finally, Mazzucato and Semieniuk are also looking at the companies who are actually manufacturing renewable energy technologies. Early results indicate that profits in renewables are still below those in fossil fuels, suggesting that companies investing in this sector are making investment decisions based on future profit expectations, rather than current returns.

This research raises questions about how actors judge risk and how this guides their investment decisions. It suggests that an effective ‘mission-oriented’ policy will have to leverage the different actors’ risk appetites, thus ensuring sufficient flows of finance towards all phases of the innovation landscape – from highly uncertain R&D down to the diffusion of already mature technologies. Read their working paper.

Interviews on Green Innovation

Related Policy Briefs

Related Journal Articles

Related Book Chapters

The Green Entrepreneurial State

The Green Entrepreneurial State

Mazzucato, M. (2014), “The Green Entrepreneurial State,” in The Politics Of Green Transformations. M. Leach, P. Newell and I. Scoones (eds.) STEPS Earthscan Series, Routledge, ISBN: 9781138792906.  Working paper.

Innovation as Growth Policy

Innovation as Growth Policy

Mazzucato, M. and Perez, C. (2014), “Innovation as Growth Policy,” in The Triple Challenge:  Europe in a New Age. J. Fagerberg, S. Laestadius, and B. Martin (eds.) Oxford University Press: Oxford.  Working paper.

Related Working Papers

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.”

Research Workshop

Financing Renewable Energy Workshop

Financing Renewable Energy Workshop

London, United Kingdom – Mazzucato organised a workshop at Bloomberg New Energy Finance on the different types of financial actors driving the emergence of renewable energy across the globe. Event Website

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