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.

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.

• 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?

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.