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Innovation Policy

'Mission-oriented' strategies to invest in innovation: Competitiveness via an enterprising public sector

Christopher Colford's picture
Mariana Mazzucato on "The Entrepreneurial State"


“This is the most extraordinary collection of talent, of human knowledge, that has ever been gathered – with the possible exception of when Thomas Jefferson dined alone.” That quip sprang readily to mind this week – it was coined in 1962 by President John F. Kennedy, when he welcomed a group of Nobel laureates to the White House – at a paradigm-shifting, synapse-snapping seminar featuring Prof. Mariana Mazzucato and other leading economics scholars, who convened for a think-tank symposium on innovation policy and competitiveness strategy.

The ideal of innovative, inclusive, green and sustainable economic growth is achievable, Mazzucato explained to the Information Technology and Innovation Foundation – if policymakers and private-sector firms recognize that a dynamic economy requires a “mission-oriented” approach to driving technological innovation. An acclaimed economist at the University of Sussex – and the author of, among other works,“The Entrepreneurial State: Debunking Public vs. Private Sector Myths” – Mazzucato is inspiring an increasingly wide-ranging debate over how to create higher-quality jobs in higher-value industries by sharpening economies’ competitiveness.

An essential driver of creativity is “the innovative state,” as Mazzucato recently detailed in an essay in the journal Foreign Affairs – through disciplined, deliberate public-sector investment, not just in basic research, but in risk-taking ventures as a key stimulant to economy-wide growth. That requires a forthright embrace of the public sector’s ability – and responsibility – to “actively shape and create markets, not just fix market failures.”

With a frisson of what one panelist called “the goosebump factor” enlivening the ITIF seminar – which was moderated by another top scholar of innovation and competitiveness, ITIF’s Rob Atkinson – the think-tank crowd heard Mazzucato outline the need for public-sector agencies to be, not just an occasional partner of private-sector firms, but a persistent driver of investment in leading-edge industries.

Industrial policy is finally back on the agenda,” Mazzucato asserted at the start of her ITIF remarks. Yet her vision of a competitiveness-minded public sector promoting a modernized version of industrial policy goes far beyond the long-ago experiments in heavy-handed planning that many free-market fundamentalists – forever in thrall to Thatcherism – still enjoy deriding as doomed attempts to “pick winners and losers.” Political Washington’s stale bickering over such a frozen-in-time caricature of industrial policy has long since been eclipsed, among economics scholars and practitioners, by the imaginative approaches of Mazzucato and others to energizing “the entrepreneurial state.”

Focusing the debate on the many pro-active instruments that the public sector can assert to help channel investment into innovation, Mazzucato hurled the defeatist “picking winners and losers” accusation back at the laissez-faire fatalists: “The question is not whether we should ‘pick’ but how.”

“The ‘entrepreneurial’ state, to me, means the state being willing and able to take on risk, to take on real fundamental uncertainty,” Mazzucato recently told The Financial Times. An enterprising public sector has often proven far more venturesome than short-term-focused private-sector firms, which often shy away from higher-risk, higher-reward investments that might diminish their next quarter's profits.   

“Venture capitalists themselves often enter [the innovation process] late in the game. In biotechnology, they actually came in after the state had made some of the most radical, revolutionary investments – which, after all, will often fail,” said Mazzucato. “And this is a very important point. Innovation is uncertain. It will often fail. So you need to make sure that the government budget can also fund some of the failures, cover the losses, as well as reap the return from some of the successes to fund the next round” of investments in innovation.

In his enthusiastic review of Mazzucato’s book, economics sage Martin Wolf of the Financial Times noted that energetic public-sector investment in innovation – and the abdication by private-sector firms of their oft-bragged-about, seldom-fulfilled role as bold risk-takers – has led to a “free-rider” problem that distorts incentives.

“Government has increasingly accepted that it funds the risks, while the private sector reaps the rewards,” wrote Wolf. “What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most loss-making elements are socialised, while the profitmaking ones are largely privatised.” Neoclassical purists' continued scorn for the positive role of innovation-minded public-sector investment, Wolf reasoned, may be “the greatest threat to rising prosperity” in austerity-pinched Western economies.

Mazzucato’s analysis at ITIF reminded economy-watchers of how far the innovation-policy discussion has advanced, even as laissez-faire dogmatists belabor their weary bromides about the supposed taboo against “picking winners and losers.” Propelling a more nuanced vision of competitiveness strategy, as an improvement on earlier approaches to industrial policy, this week’s ITIF seminar advanced an enterprising agenda that Washington should weigh more often – analyzing not whether, but how, the public sector and the private sector can share the responsibility of crafting pro-growth policies and pro-jobs initiatives sans frontières. Meeting that challenge will require a paradigm-changing determination to champion an entrepreneurial public sector as a positive catalyst for creativity.

Mazzucato: "Value Creation" -- Dynamic Role for Government


 

On World Energy Day, Applauding an Energy Breakthrough: Innovation Through Successful 'Industrial Policy'

Christopher Colford's picture

At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.

The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund. 

Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.  

The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

Step by step, consider how this process delivered today's energy abundance.

There: We actually said the fateful phrase: "industrial policy."

That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."

It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.

Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.” 
 

Mitchell’s determined experimentation with the new technologies built atop the crucial government investment in R&D. His entrepreneurial zeal was even more remarkable considering the opposition of many free-market absolutists on Capitol Hill, who disdained any type of public-private partnership that tolerated an active government role. Mitchell’s team gives credit where credit is due: “DOE started it, and other people took the ball and ran with it,” according to Mitchell’s former vice president and lead geologist. “You cannot diminish DOE’s involvement.”

Indeed, the impact of lower oil and natural-gas prices has been so dramatic that some energy-policy scholars, as became clear at this week’s European Union event, understandably worry that lower energy prices may lull governments and consumers into a false sense of security. Lower energy costs may remove a price-conscious spur to continued investment in cleaner, more sustainable alternative energy sources. That concern surely poses a genuine challenge for policymakers as they craft clean-energy and anti-climate-change strategies for the long term. Avoiding any backsliding on clean-energy investment will require sustained pro-innovation initiatives, and perhaps tax-policy adjustments, that promote long-term investment in cleaner energy sources. Disincentives on the use of fossil fuels is surely crucial to climate-smart strategies, speeding the transition toward renewable sources. The recent shale-gas revolution has bought some extra time for the economy to make that transition, and, as environmental advocates insist, that time must be used wisely. 

Looking back on the process that delivered today’s shale-gas and tight-oil abundance, the lesson is clear: A well-targeted industrial policy – or, if you’d prefer to use the modernized lingo, competitiveness strategy – inspired today’s revolution in energy policy. It’s the latest proof that competitiveness strategies, with the public sector and the private sector both playing constructive roles, can contribute to positive change.

So the next time a dogmatic defender of laissez-faire passivity tries to tell you that government should always keep its hands completely off the economy – or scoffs that all forms of competitiveness strategy are merely doomed attempts at “picking winners and losers” – remind that laissez-faire fatalist about the positive economic impact of government-and-industry partnerships.

Yes, it took decades of patient public-private teamwork to trigger this energy revolution. And, yes, as environmentalists wisely warn, the new technologies must be used under strict regulation that upholds the highest degree of environmental protection. Yet, accepting all the caveats, the economy now seems ready to reap a rich reward.

Whether you embrace the term "industrial policy" or use a euphemism like "competitiveness strategy," this example of mission-focused, government-organized, private-sector-driven, technology-led progress provides dollars-and-cents evidence that activist strategies, promoting research and investment in high-priority sectors of the economy, can deliver a dramatic payoff in productivity.

 

#TakeOn Job Creation and Economic Growth

Better knowledge for better innovation policies: the new Innovation Policy Platform

Gerardo Corrochano's picture

We are surrounded by innovations – the outcome of innovative activities. Some affect us more than others. Some are more visible than others. In reading this blog post on a computer or a portable device, you can see how this innovation has made your personal and professional life more productive (although not necessarily easier).
You might not have heard, however, about other kinds of innovations – like the eco-friendly and affordable cooking stoves that reduce exposure to toxic gases for people in Mongolia, substantially increasing their health and lowering costs. All kinds of innovations improve people’s lives from Ulaanbaatar to Washington, increasing social well-being and driving economic growth.

Governments can support innovation through the effective use of public policy. Innovation has steadily climbed its way to the top of policymakers’ agendas in recent years, in developed and developing countries alike. This is illustrated by the importance given to innovation in such strategies as the European Commission’s “Europe 2020” growth strategy, China’s 12th Five-Year Plan (2011 -2015), or Colombia’s National Development Plan (2010-2014). Yet despite the growing consensus around innovation as a driver of sustainable growth, governments face considerable difficulties in identifying, designing and implementing the best-suited policy instruments and approaches to support innovation.

Defining good policies is a walk on a tightrope. Much like the barriers that constrain innovators inside an economy, policymakers face high costs of retaining and retrieving valuable information and best practices to help define their policies. To address this issue, the World Bank – in collaboration with the Organisation for Economic Cooperation and Development (OECD) – has developed a new tool destined to enhance the capacity of policy practitioners around the world to support innovation through better policies.

The Innovation Policy Platform (IPP) is a one-of-a-kind web-based interactive space that provides easy access to open data, learning resources and opportunities for collective learning on the design, implementation, monitoring and evaluation of locally appropriate innovation policies. The IPP contains a wealth of practical information on a wide array of innovation-related topics, such as financing innovation, technology transfer and commercialization, and innovative entrepreneurship. The IPP is intended to enable North-South and South-South policy learning and dialogue through a wide array of case studies, policy briefs and collaborative working tools. The IPP aims to create a dynamic community of practice. It is now available to the public and can be accessed at www.innovationpolicyplatform.org.

Innovation Policy Platform