The Entrepreneurial State: Rethinking Risks and Rewards in Innovation

The Entrepreneurial State: Rethinking Risks and Rewards in Innovation is a talk that was given at the ARPA-E* Energy Innovation Summit 2014 by Dr. Mariana Mazzucato – an economist and a RM Phillips Chair in Science and Technology at the University of Sussex. Named by the New Republic as one of the three most important thinkers about innovation, her research focuses on the relationship between financial markets, innovation and economic growth at the company, industry and national level. An intriguing, thought-provoking and grounds-shaking talk, no wonder Forbes described her work as “heretical” to everything that Forbes stood for for the last 96 years!

Dr. Mazzucato opens up the keynote by asking: What do economists have to stay about organizations like ARPA-E (public sector, yet dynamic and innovative, creative)? The answer was that they had very little to say about such a public sector organization. Describing ARPA-E as decentralized yet active in innovation and very visible, Dr. Mazzucato continues, “… these organizations are very important and if we don’t understand them they really risk disappearing”. The standard framework has been that the role of the state in the economy is to: A)Set ‘level’ playing field then get out of the way and B)Solve market ‘failure’. Throughout the talk, Muzzocato gives evidence that there is more to the role of the state than that and proposes ways that this role can be further strengthened.

Partnerships

Muzzocato debates a quote by the Economist where the government is asked to get out of the way and “leave the rest to the revolutionaries”. She argues that most revolutionary creations actually come from the public sector working with the private sector. Not to diminish the role of the private sector but it is the role of the public sector about which we do not talk enough. This will lead to problems when we want to set partnerships that are symbiotic as opposed to the current ecosystem that she describes as “parasitic”. In IT revolution there were private sector companies like Xerox parc and Bell labs and other innovative companies working with public sector. Why a smart phone is smart not stupid? Because you can surf the Internet, use GPS to identify location, use touch screen, Siri for voice activated personal assistance. Many of these were project funded by government agencies.

A word about State and Entrepreneurship

Throughout her talk, Muzzocato uses the word ‘state’. So, what does ‘state’ mean? Muzzocato gave the definition as the de-centralized networked state through agencies like ARPA-E, DARPA, NIH.. etc. and other public sector organizations that have been very active in the US innovation economy. She goes on to explain that the reason she calls it the entrepreneurial state is because if you look at the meaning of the word entrepreneurship, it is not just setting up a company “but willingness and commitment to take on real uncertainty and real risk”. Muzzocato gave examples of projects that had high risk and required high funding that were supported by the public sector from the initial research to the commercialization of the product like Tesla and Solyndra.

What you need to be innovative is….

Private finance has become increasingly short-termist. Innovation takes 15-20 years whereas VC industry wants returns in 3-5 years. All the attention is on the exit. Patient long term committed finance is what is needed to be innovative. Another important thing is that you have to reinvest your shares in areas like R&D and human capital. The two sectors where companies do most buybacks are energy and pharmaceutical because they say there are no opportunities for investment. Even Apple is starting to do Share buyback – Steve Jobs would be turning in his grave!

Where does wealth come from in the first place?

When we have big technological innovations, some agents have been able to extract more than they have put in. This leads to inequality and lack middle class jobs, among other things. Growth requires inclusive innovative funding. For that, Muzzocato proposes some ways to encourage this inclusive innovative funding like IPR Golden Share, retaining some equity to fund the losses or to fund the next round or even have a percentage payback into an “innovation fund”. This will allow inclusive growth in jobs, talent and even the public school system!

Don’t just socialize the risks, socialize also the rewards!

 

*ARPA-E, or Advanced Research Projects Agency-Energy is a United States government agency tasked with promoting and funding research and development of advanced energy technologies. It is modeled after the Defense Advanced Research Projects Agency (DARPA). – Source Wikipedia

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