A Bumpy Risk Landscape &
Myths that Blind Innovation Policy
Finance, Business Models and Sustainable Prosperity
Ford Foundation, NY, Dec. 6 2012
RM Phillips Professor in Science and Technology Policy, SPRU
University of Sussex www.marianamazzucato.com
1. (context) Industrial Policy is back but beware
of the finance vs ‘real economy’ myth.
1. Rethinking the State: ‘fixing’ market failures,
‘creating conditions’ vs visionary courageous
making things happen along a bumpy risk
1. Policy mistakes from not getting this.
2. Risks and rewards. Moving beyond ecosystem hype to a division of innovative
labour, and getting something back along
the way. Risks and rewards….
Rebalancing the economy and industrial policy
is also about re-aligning indicators of economic
performance with innovation.
Financial intermediation and aggregate gross value added compared
Financial liberalisation has allowed
finance to outpace growth in the nonfinancial economy, by around 1.5
percentage points per year
Between 1948 and 1978, intermediation
accounted on average for around 1.5%
of whole economy profits. By 2008, that
ratio had risen tenfold to about 15%
Source: Bank of England, 2011 (discussed in Mazzucato 2012 http://www.policy-network.net/publications/4201/RebalancingWhat- )
Total loans to different sectors of the economy as % of GDP
Bank lending to financial sector, via
wholesale markets not matched by
deposits...went to hedge funds, private
equity and subprime mortgages, and
derivatives built on these, since returns
were higher than lending to industry or
Bad banks vs. Good Industry ?
UK ‘key’ sectors, Dutch ‘top’ sectors, etc
Industrial Policy is back…
• Life Sciences
Knowledge-intensive traded services
• Professional / business services
• The information economy
• Further and Higher Education
…unfortunately industry is just as messed up as the banks!
rebalancing indicators of performance
a) credit scores penalise innovative firms
Source: Tamagni et al. FINNOV WP 4 (data for Italian manufacturing, 2003, http://www.finnov-fp7.eu/publications/finnov-discussionpapers/the-dynamics-of-financial-fragility-and-default-probability )
b) repurchases, dividends, net income, R&D 1980-2006
(293 corporations in the S&P500 in October 2007 in operation in 1980)
Fortune 500 comp spent $3
trillion in last decade on
buying back their own
and its bad for innovation
Source: W. Lazonick, FINNOV WP 5
stock repurchases in Green tech
American Energy Innovation Council (AEIC) have
together spent $237 billion on stock repurchases
c) venture capital model inappropriate for science
based sectors, including greentech
From 1976 VC was applied to biotechnology. VC wants return
in 3-5 yrs. Yet it takes at least a decade and $1 billion to
develop and commercialize a biopharma drug with high risks
Not surprising that in biopharma there is a prevalence of
(productless IPOs, Lazonick and Tulum 2011).
Danger: speculation permits financial interests to gain even
when no product is produced. Pisano (2008): VC bad
financing model for science based sectors.
State: fixing market failures vs making things
happen that wouldn’t otherwise.
The important thing for Government is not to do things
which individuals are doing already, and to do them a
little better or a little worse; but to do those things
which at present are not done at all.
John Maynard Keynes, The End of Laissez Faire, 1926
What is the State’s role in the economy?
1. Keynesian output failure
2. Market failure
3. System failure
4. Something more interesting through vision,
scale, willingness to fail…(and not just ‘derisking’)
system failure policies
e.g. Innovation Union
Strengthening the knowledge base & reducing fragmentation
Education and skills
European Research Area
EU financing instruments
Getting good ideas to market
• Access to finance
• Single innovation market
• Openness and creative potential
Social and territorial cohesion
European Innovation Partnerships
Source: Innovation Union
Flagship Initiative presentation, Oct, 2010
failure failure failure…
If there are so many failures….why don’t we change the
medicine (model of what is wrong) rather than
constantly just picking up the pieces, and wasting so
many precious bandages?
Governments have always been lousy at picking winners, and they are likely
to become more so, as legions of entrepreneurs and tinkerers swap designs
online, turn them into products at home and market them globally from a
garage. As the revolution rages, governments should stick to the basics:
better schools for a skilled workforce, clear rules and a level playing field for
enterprises of all kinds. Leave the rest to the revolutionaries.
The Third Industrial Revolution, The Economist, April 21, 2012
Who are the revolutionaries?
Private sector = fast, innovative, dynamic, entrepreneurial...
Public sector = slow, bureaucratic, inertial...or even worse:
‘enemies of enterprise’ (David Cameron, 2011)
Animal Spirits …?
Businessmen have a different set of delusions from politicians, and need,
therefore, different handling. They are, however, much milder than
politicians, at the same time allured and terrified by the glare of publicity,
easily persuaded to be ‘patriots’, perplexed, bemused, indeed terrified, yet
only too anxious to take a cheerful view, vain perhaps but very unsure of
themselves, pathetically responsive to a kind word. You could do anything
you liked with them, if you would treat them (even the big ones), not as
wolves or tigers, but as domestic animals by nature, even though they have
been badly brought up and not trained as you would wish. It is a mistake to
think that they are more immoral than politicians. If you work them into the
surly, obstinate, terrified mood, of which domestic animals, wrongly handled,
are so capable, the nation’s burdens will not get carried to market; and in the
end public opinion will veer their way. Perhaps you will rejoin that I have got
quite a wrong idea of what all the back-chat amounts to. Nevertheless I
record accurately how it strikes observers here.
John M. Keynes’s private letter to Franklin D. Roosevelt, February 1, 1938
The Entrepreneurial State
• Government doesn’t only ‘fix’
markets but does what private
sector not willing to do.
• Catalyst, and lead investor,
sparking the initial reaction in a
network. Creator not facilitator
of knowledge economy.
Engaging with very high risk,
uncertainty, radical change.
bumpy investment landscape
Number of Early Stage and Seed Funding Awards, SBIR and Venture Capital
market and technology risk
…State has funded the most uncertainty
• In immature phase of sectoral development
• In seed stage of firm development (e.g. Google, Apple,
• In early stage of product development
(e.g. Block buster drugs)
• Radical innovations behind the gadgets: (e.g. where would
iPhone be without state funded internet, GPS, touchscreen
display, communication technology, SIRI,etc)
In each case it was not just basic research, but also envisioning
the opportunity space, engaging in the most risky and
uncertain early research, and sometimes overseeing the
NME vs. ‘me too’ in pharma (1993-94)
Radical innovation funded almost entirely by
public sector labs (Angell, 2004)
Variations of existing drugs
technology risk in green tech
(GIB will nudge, VC will ride the wave, who will kick/push?)
Figure source: Ghosh and Nanda, 2011
most green radical areas are cross-sectoral
• construction materials for structurally-integrated energy
production (eg: PV wall/roof tiles);
• synergies between electricity transition and modal shift in
transport (eg: new battery infrastructures);
cross-sectoral leadership in new long-distance
distributed energy grids (eg: DC, superconductors etc);
(more controversially) state leadership out of an
innovation system disproportionally committed to
(thanks to Andy Stirling, SPRU)
a ‘functional’ or ‘parasitic’ green eco-system?
2010: US American Energy Innovation Council (AEIC) asked for 3x
spending on clean technology to $16 billion annually, with an
additional $1 billion given to the Advanced Research Projects Agency
for Energy (ARPA-E)
Yet AEIC have together spent $237 billion on stock repurchases
The major directors of the AEIC hail from companies with collective
2011 net incomes of $37 billion and R&D expenditures of
approximately $16 billion. That they believe their own companies
enormous resources are inadequate to foster greater clean
technology innovation is indicative of the state's true role as the first
driver of innovation. (Mazzucato, 2013 forthcoming)
Development Bank Green Financing, 2007-2011
European Investment Bank
Brazilian Development Bank
KfW Bankengruppe (excluding KfW IPEX Bank)
PR China Development Bank
World Bank Group
Asian Development Bank
European Bank for Reconstruction and Development
Agence Francaise de Developpement
Nordic Investment Bank
Indian Renewable Energy Development Agency
Inter-American Development Bank
Overseas Private Investment Corp.
African Development Bank
US Federal Financing Bank
Sources: Adapted from Global Wind Energy Council. “Annual market update 2011.” Mar 2012.
Need patient long term finance to fund green revolution
“The main factor that distinguishes development banks from
private sector lending institutions is the ability of development
banks to take more risk associated with political, economic and
locational aspects. Further, since they are not required to pay
dividends to private stakeholders, the development banks take
higher risks than commercial banks to meet various national or
international ‘public good’ objectives. Additionally, long-term
finance from the private sector for more than a ten year maturity
period is not available.” (Global Wind Energy Council, 2012)
Big mistakes from not getting this.
Mistake 1: wrong actors in wrong places/times
Where are the European Googles? Usual answers given:
-We don’t have enough venture capital
-We have terrible ‘death valley’ problem
-We don’t have enough small firms and ‘firm entry’
In fact, VC has been part of the Silicon Valley PROBLEM
Finance problem: just as much about Demand as it is about
Supply (many firms happy with status quo)
Too much firm entry not too little (most die, or remain
insignificant players). Help strong existing firms to grow.
These often need patient long term committed finance not
Mistake 2: obsession with some actors, eg SMEs
•Less than 10% of all new firms produce 50% and 75% of all new jobs by
new firms. Yet SMEs get £8 billion in direct/indirect support in the UK, more
than the police force! (Hughes, 2008)
•Evidence: Storey (1994): 4% of new firms born in any given year accounted
for 50% of all the jobs created by the surviving firms within that cohort after
ten years. Kirchhoff (1994): 10% of fastest-growing firms contributed to three
quarters of new jobs during an eight-year observation period within a cohort
of firms started in the US in 1978. Birch et al. (1997): ‘gazelles’ accounted
for more than 70% of the employment growth in the U.S. between 1992 and
1996, while representing only about three per cent of the firm population.
NESTA (2009): 6% of UK businesses with the highest growth rates
generated half of the new jobs created by existing businesses between 2002
•Need more nuanced approach to uncover the job-generation power of highgrowth innovative firms (but don’t fetishize these either!).
Mistake 3: obsession with commercialisation and
knowledge transfer…..but are we ‘pushing on a string’?
1. EU problems don’t come from poor flow of knowledge from
research but from EU firms’ smaller stock of knowledge.
US govt: 2.6% of GDP on R&D. Germany 2.5%. UK 1.3%.
2. If the US is better at innovation, this isn’t because
university-industry links are better—they aren’t—or US
universities produce more spinouts—they don’t. It simply
reflects more research being done in more institutions,
which generates better technical skills in the workforce
3. And more mission oriented research (Mowery,2010; 2012).
4. US funding is split between research in universities and
early-stage technology development in firms. Getting EU
universities to do both runs the risk of generating
technologies unfit for the market.
Mistake 4: governmental ‘nudge’ units everywhere
The green revolution (redirecting all sectors) requires a major
push (kick in the ….) not a nudge.
e.g Green Investment Bank in the UK assumes that the
problem is just one of co-financing. When actually it is entire
areas that are being ignored due to fear of future returns in
bumpy risk landscape.
Renewed emphasis on 1980s style
• ‘enterprise zone’ initiatives
• tax cuts
• cutting red tape
Mistake 5: EU ignores competition, and patient finance
Chinese 5 year plan: 1.5 trillion dollars in 7 new emerging
areas, including new engines, new materials, new generation
IT, environmentally friendly technologies…
Brazilian State Investment Bank: BNDES, bond for ‘death
valley’, and 20% return on equity.
Eurozone mess: austerity wrong diagnosis wrong remedy.
Germany=‘surplus’ country due to much higher R&D
investments, green focus, and institutional variety that allows
‘patient finance’ (KfW), science-industry links (Fraunhofer).
Structural reforms don’t work without investment. Witness
Telecom Italia vs. French Telecom.
Recapitalise EIB and more synergy between EIB and ECB.
Blind QE waste of money. Use QE to direct investments
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Summary: what is missing in Europe is
Scale (e.g. SBRI/TSB=peanuts compared to SBIR/DARPA)
Eco-system that admits business is part of the problem.
Better division of innovative labour.
Public labs (should we have a ‘green’ CERN, an
‘immigration’ CERN). Equivalents of NIH?
Challenges that are more like ‘missions’ (problem based and
inter-disciplinary, but also with products as outputs).
Vision, coherence, imagination (and solidarity) which drives
business (animal spirits) investment
Willingness to ‘fail’ in public institutions (DARPA like)
Too many firms not enough innovative firms.
Copy-cat financialised US model
US is pretty messed up too….
Romney, don’t kill ARPA-E!
Risks and rewards: moving beyond eco-system
hype (old wine in new bottles) to a division of
innovative labour, and getting something back.
taking the risk ignoring the returns
A new pharmaceutical that brings in more than $1 billion per
year in revenue is a drug marketed by Genzyme. It is a drug for
a rare disease that was initially developed by scientists at the
National Institutes of Health. The firm set the price for a year’s
dosage at upward of $350,000. While legislation gives the
government the right to sell such government-developed drugs
at ‘reasonable’ prices, policymakers have not exercised this
The result is an extreme instance where the costs of
developing this drug were socialized, while the profits were
privatized. Moreover, some of the taxpayers who financed the
development of the drug cannot obtain it for their family
members because they cannot afford it. (Vallas et al. 2011).
Nokia vs. Google
When SITRA, the Finnish government’s public innovation
fund, provided the early stage funding for Nokia, it later
reaped a significant return on this investment – a fact
accepted by the Finnish business community and politicians.
The reason why the US government has not reaped a return
from its early stage investments in companies like Google
(which benefitted from a state-funded grant for its early
algorithm) and other such success stories including Apple,
Intel and Compaq (which received public SBIR funding) is
due to the lack of understanding in the USA, and many other
economies, of state-led growth-inducing investments, which
allow conservative forces to portray the state as only a
menace in the economy.
Creative thinking on tools to claim back return
IPR ‘golden share’ (Burlamaqui, 2011)
Income contingent loans
Public VC (reinvested back), e.g. SITRA
National Investment Bank (e.g. Brazil’s BNDES
21% return on equity!)
BNDES: (Public) investment in
innovation and infrastrucuture
Dec 31, 2010 Dec 31, 2010 Jun 30, 2010* Dec 31, 2010 Dec 31, 2009
IDB = Inter-American Development Bank
IBRD = The International Bank for Reconstruction and Development (World Bank)
(*) Unlike other institutions, 12-month fiscal year ends June 30th
CAF = Corporación Andina de Fomento
CDB = China Development Bank
Capitalization = Shareholders’ Equity / Total Assets
ROA = Return On average Assets
ROE = Return On average Equity
Need a framework to understand problem:
‘the risk-reward nexus’
Uncertain (Knight, 1921)
Collective (Systems of Innovation)
Cumulative (dynamic returns and path-dependency)
Lazonick and Mazzucato (2012), Risks and rewards in the
innovation-inequality relationship, forthcoming Industrial and
Innovation is collective, uncertain and cumulative
Some agents—VC and large shareholders—
enter late, but reap integral under curve…(Lazonick and Mazzucato, 2012)
• When, across the collective actors, the distribution of
financial rewards from the innovation process reflects the
distribution of contributions to the innovation process,
innovation tends to reduce inequality.
• When, however, some actors are able to reap shares of
financial rewards from the innovation process that are
disproportionate to their contributions to the process,
innovation increases inequality.
• The latter outcome occurs when certain actors are able
to position themselves at the point where the innovative
enterprise generates financial returns; that is, close to
the final product market or, in some cases, close to a
financial market such as the stock market