The (Green) Entrepreneurial State

Risks, Rewards, and Directionality in Innovation

Mariana MazzucatoR.M. Phillips Professor in Economics of Innovation

Science Policy Research Unit (SPRU), University of Sussex www.marianamazzucato.com

@MazzucatoM

 

Framework matters: de-risking?

High risk innovation? Who takes risks, who takes rewards?

Green evidence

Directionality and Organizations

Inequality…

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

John Maynard Keynes, The General Theory of Employment Interest and Money, Ch. 24, p. 383

Market Fixing vs. Market Shaping

Market failure view: correcting ‘inefficiencies’ to bring markets back to default ‘efficient’ position

A different view: Shaping and creating markets actively

a)Set ‘level’ playing field then get out of the way

b)Solve market ‘failures’

c)Something more interesting?

 

What is the State’s role in the economy?

VS.

“..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

The Entrepreneurial (risk taking) State

Market failure policies don’t explain the advent of key General Purpose Technologies

• mass production• aviation technologies• space technologies• IT• Internet • nuclear power• nanotechnology

• Green tech?

MARKET

Radical

Leverage baseEvolutionary

Discontinuity

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market and technology risk

Valleys of death and Darwinian seas

1. research 2. concept/invention

3. early stage technologydevelopment(ESTD)

4. Product development

5. production/ marketing

Angel investors, corporations, technology labs,SBIR

NSF, NIH, DARPACorporateresearch

Corporate venture funds, equity, commercial debt

VC, public venture capital, NIH, labs, ARPA-E

Source frequently funds this technological stageSource occasionally funds this technological stage

Patent Invention: functional prototype Business Validation Innovation new firm or program Viable business

source: Auerswald/Branscomb , 2003

bumpy investment landscape

Number of Early Stage and Seed Funding Awards, SBIR and Venture Capital

(source: Block and Keller, 2012)

What makes the iPhone so ‘smart’?

source: Mazzucato (2013), p. 109, Fig. 13

Microchips powering the iPhone owe their emergence to the U.S. military and space programs, which made up almost the entire early market for the breakthrough technology. In the 1960s, the government bought enough of the initially costly chips to drive down their price 50x in a few short years, enabling numerous new applications.

The early foundation of cellular communication lies in radiotelephony capabilities advanced throughout the 20th century with support from the U.S. military.

The technologies underpinning the Internet, which gives the “smart phone” its smarts, were developed and funded by the Defense Department’s Advanced Research Projects Agency in the 1960s and 70s.

GPS was created/deployed in 1980s/90s by the military’s NAVSTAR satellite program and still today maintained via public funds

The multi-touch display that makes using an iPhone so intuitive has the government’s fingerprints all over it. The revolutionary interface was first developed by a brilliant pair of University of Delaware researchers supported by NSF and CIA grants

SIRI, iPhone 5’s personal assistant, developed initially in DARPA.

Source: Mazzucato (2013) and The Breakthrough Institute: Where Good Technologies Come From?, 2011

Total NIH spending, 1936-2011 in 2011 dollars=$792 billion

NIH budget for 2012=$30.9 billion

source: http://officeofbudget.od.nih.gov/approp_hist.html

National Institutes of Health budgets 1936-2011

Variations of existing drugs

Priority NMEs

Standard NMEs

67%

Radical innovation funded almost entirely by NIH funding (75% of P NMEs)

19%

14%

new vs. ‘me too’ in pharma (1993-94)

source: Angell (2004)

Green?

source: Ghosh and Nanda, 2011

technology risk in clean tech(VC will ride the wave, who will kick/push?)

source: Frankfurt School-UNEP Centre/BNEF (2013)

Who is funding the green revolution?

Who is funding the green revolution?

source: Climate Policy Initiative (2013), The Flows of Climate Finance 2013(http://www.climatefinancelandscape.org/flows-diagram/)

source: Bloomberg New Energy Finance

BNDES (Brazil) disbursements for innovation

China Development BankCDB key in China’s 2020 goal of producing 20% energy from renewables. 5 year plan includes $1.7 trillion dollars in 5 new (green) sectors. CDB founded CDB Capital, a ‘public equity’ fund with $US 5.76 bn to finance innovative start-ups from the energy and telecom sectors. Yingli Green Energy received $1.7 bn from 2008 through 2012 with a $5.3 bn line of credit opened for it. Since 2010, CDB has made available $47.3 bn in credit lines for Chinese wind and solar energy companies and other $30.6 bn for clean energy transmission, distribution and efficiency investments. In 2010, the list of Chinese alternative energy technology companies receiving CDB lines of credits included LDK Solar ($9.1 bn); Sinovel Wind ($6.5 bn); Suntech Power ($7.6 bn); and Trina Solar ($4.6 bn), which “allowed Chinese companies to further ramp up production and drive down costs” of renewable energy technologies  (source: Sanderson and Forsythe, 2013)

 

Lesson for the green revolution?

Will never take off with private capital alone

Not about ‘nudging’ : need to push. Especially in high risk, capital intensive areas

Must welcome failure and experimentation: “ARPA-E …feels like Google!” (Grunwald, 2012)

Talent/expertise (in public sector) crucial

Need symbiotic public-private partnerships. Xerox Parc and Bell Labs were key partners in IT revolution -- where are the energy companies?

“

Where are energy’s Xerox Parcs & Bell Labs?

source: Nemet and Kammen (2007), “U.S. energy research and development: Declining investment, increasing need, and the feasibility of expansion”, Energy Policy, 35 (1), 746-755

source: Bank of England, Haldane 2011

Financialization not good for Innovation!

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

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ratio

TD/NI RP/NI (TD+RP)/NI RP/R&D

Repurchases, dividends, net income, R&D 1980-2006(293 corporations in the S&P500 in October 2007 in operation in 1980)

FINNOV WP 5 (Bordeaux)

Fortune 500 companies have spent $3 trillion on buybacks over the last decade…

A key element to get an energy breakthrough is more basic research. And that requires the

government to take the lead. Only when that research is pointing towards a product then we

can expect the private sector to kick in.

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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 7 companies that form AEIC have together spent $237 billion on stock repurchases between 2001-2010.

Look out Green!

THE GREAT TRANSFORMATION

From CROWDING-IN to TRANSFORMING-IN

From PICKING WINNERS to WIN SOME LOSE SOME

From SUPPLY OF FINANCE to QUALITY OF FINANCE

SYMBIOTIC vs PARASITIC ECO-SYSTEMS

From DE-RISKING to SHARING RISKS AND REWARDS

Inequality

Are taxes enough?

•IPR golden share •Income contingent loans •Retain some equity (e.g. SITRA with Nokia)•% payback into an ‘innovation fund’

Lessons from Solyndra and Tesla: win some lose some.

How to cover the losses and have enough for next round?

And where will the money come from?

time

Cumulative innovation curve

“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

And….why did capital gains fall in 1976? VC from IT!

Are renewables creating different ‘narrative’?

Warren Buffet

Organizations

“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 M. Keynes, The End of Laissez Faire, 1926

Shaping and creating markets (not just fixing)(and why its great to be at Sussex!)

GREEN as re-direction of production, distribution, consumption (IT deployment), Carlota Perez.

TRANSFORM research outside of private sector boundaries, John Abraham.

MULTIPLE pathways, Andy Stirling.

TRANSITIONS, civil society and and strategic niches, Johan Schot.

STATE CAPACITY? What happens when public intelligence is outsourced?

Who is funding the green revolution?

New work with Caetano Penna

State Investment Banks & Mission Oriented PoliciesBNDES and the Brazilian Pharma Risk LandscapePicking winners: the real story