A German version of this blog appeared in the newspaper Handelsblatt on May 5, 2015.
Innovation in Silicon Valley is driven by public funding.
A big question for the past 20 years has been: Where are the European Googles? Why are all the funky, creative, dynamic, innovative companies like Apple, Amazon, Google and Facebook coming out of the United States and not out of Europe?
The three-part answer you will often hear is: Europe has lots of culture, good food and fashion, but it is not “entrepreneurial enough.” There are not enough “garage tinkerers.” Not enough high risk venture capital funds. This is mainly because we Europeans have too much state and not enough market.
This view, fed to us on a daily basis by the media and conservative politicians, ignores the fact that all the revolutionary technologies that make, say, the iPhone so smart were actually funded by government, the U.S. one in this case. It did not engage in narrow “market fixing” policies, but pursued “mission oriented” policies that catalyzed the creation of entirely new technologies and sectors.
As I tell in my book, Das Kapital des Staates, you can surf the web anywhere you are with your iPhone, because the internet was funded by DARPA, part of the Department of Defence in the United States. GPS on your phone can tell you where you are anywhere in the world. That was funded by the U.S. government’s Navistar Satellite Program. Siri, iPhone 5’s voice-activated personal assistant, and the user-friendly iPhone touch screen display were both also funded by the U.S. government.
Public sector funds for private sector advancement
Indeed, the Internet and even the word “nanotechnology” came from government. Of course, you need people like Steve Jobs to turn these visions and ideas into actual products, but it is wrong to think that these geniuses came out of nowhere.
Such entrepreneurs, as well as the venture capital funds that finance them, have often “surfed” massive waves of innovation that were essentially created by public money. Not admitting this fact is putting future waves at risk.
Take a recent example, Elon Musk’s Tesla S electric car benefitted from a large government-sponsored guaranteed loan ($465 million). Today Musk is the new hero of Silicon Valley. But a similar guaranteed loan, when given to the solar company Solyndra ($500 million), did not fare well. While everyone has heard of the latter and uses it to bash government’s inability to “pick winners,” few talk about the successful Tesla loan. Yet, failures are inevitable with innovation. For every Tesla there are 20 Solyndras. For every Internet, there are many Concordes.
But while private venture capitalists can use the profits from the wins to cover the losses, the same has not held for the state. This is because we have not admitted its role as lead risk taker. This has created a situation where we socialize only the risks, not the rewards.
How can the government recoup its investment?
Economists believe that this return to such state funded investments will come back via taxes. Indeed, the jobs created by high tech companies like Apple and Google can create higher incomes and thus higher tax revenue. This is great. But neither Google (whose algorithm was paid for by the tax payers) nor Apple pay much tax, compared to their own income. And indeed many such companies have been leaders in lobbying government to cut taxes—precisely through the wrong narrative of who the risk takers and innovators are.
So what to do? Besides making sure we fix tax loopholes, we must also think concretely about how to create more symbiotic ecosystems, a world where government doesn’t just de-risk the private sector, but also shares in both the risks and rewards. This might come from income-contingent loans, the government retaining some equity/shares, retention of a golden share of the intellectual property rights or other means. But it could also come from a better ‘deal’ between government and business, where public investments are negotiated in return for reinvestment of corporate profits back into innovation—instead of hoarding cash and/or share buybacks which are both at record levels across the US and much of Europe.
So what should Europe do? Limit hoarding and financialization (so private profits are reinvested); use the European Investment Bank to ‘direct’ the quantitative easing of the ECB into productive investments rather than just boosting of share prices; and think up concrete ways in which public investments can be devised in a portfolio manner so some of the upside success can fund the downside losses. Socialize risks and rewards.
In magazines such as The Economist, you sometimes hear about the state as Leviathan, almost like a big monster getting in the way of innovation. The real task ahead of all of us is to make this debate less ideological. That requires us to understand the market as an outcome of public and private interactions. Rethinking a new relationship and deal between the state and the business, which will lead to the next big wave for future surfers to benefit from.
Tags: Entrepreneurial State, Financing Innovation, Innovation Policy, Market Failure, R&D, Risks and Rewards