Embed Size (px)
Citation preview
A Bumpy Risk Landscape & Myths that Blind Innovation Policy
Finance, Business Models and Sustainable ProsperityFord Foundation, NY, Dec. 6 2012
Mariana Mazzucato RM Phillips Professor in Science and Technology Policy, SPRU
University of Sussex www.marianamazzucato.com
©Mariana Mazzucato
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 landscape.
1. Policy mistakes from not getting this.
2. Risks and rewards. Moving beyond eco-system 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.
first point
Source: Bank of England, 2011 (discussed in Mazzucato 2012 http://www.policy-network.net/publications/4201/Rebalancing-What- )
Financial intermediation and aggregate gross value added compared
Financial liberalisation has allowed finance to outpace growth in the non-financial 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% (Haldane, 2011)
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 government.
Advanced Manufacturing• Aerospace• Automotive• Life Sciences
Knowledge-intensive traded services• Professional / business services• The information economy• Further and Higher Education
Enabling Industries• Energy• Construction
Bad banks vs. Good Industry ?UK ‘key’ sectors, Dutch ‘top’ sectors, etc
Industrial Policy is back…
…unfortunately industry is just as messed up as the banks!
•
www.finnov-fp7.eu 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-discussion-papers/the-dynamics-of-financial-fragility-and-default-probability )
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
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
rati
o
TD/NI RP/NI (TD+RP)/NI RP/R&D
b) repurchases, dividends, net income, R&D 1980-2006(293 corporations in the S&P500 in October 2007 in operation in 1980)
Source: W. Lazonick, FINNOV WP 5
Fortune 500 comp spent $3 trillion in last decade on buying back their own shares. Why?
and its bad for innovation
stock repurchases in Green tech
American Energy Innovation Council (AEIC) have together spent $237 billion on stock repurchases between 2001-2010
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 of failure.
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.
second point
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
correcting:
1. Keynesian output failure
2. Market failure
3. System failure
creating:
4. Something more interesting through vision, scale, willingness to fail…(and not just ‘de-risking’)
What is the State’s role in the economy?
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
International cooperationSource: Innovation Union Flagship Initiative presentation, Oct, 2010
system failure policies
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?
failure failure failure…
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
Private sector = fast, innovative, dynamic, entrepreneurial...
Public sector = slow, bureaucratic, inertial...or even worse:
‘enemies of enterprise’ (David Cameron, 2011)
Who are the revolutionaries? false contrast…
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
• 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.
http://www.demos.co.uk/files/Entrepreneurial_State_-_web.pdf
The Entrepreneurial State
bumpy investment landscape
Number of Early Stage and Seed Funding Awards, SBIR and Venture Capital (Block, 2012)
MARKET
Radical
Leverage baseEvolutionary
Discontinuity
Increasin
g risk
NewExisting
New
Exi
stin
g
TE
CH
NO
LOG
Y
market and technology risk
• In immature phase of sectoral development (e.g. Nanotech)
• In seed stage of firm development (e.g. Google, Apple, Compaq, Intel) • 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 commercialisation process.
…State has funded the most uncertainty
Variations of existing drugs
Priority NMEs
Standard NMEs
67%
Radical innovation funded almost entirely by public sector labs (Angell, 2004)
19%
14%
NME vs. ‘me too’ in pharma (1993-94)
Figure source: Ghosh and Nanda, 2011
technology risk in green tech(GIB will nudge, VC will ride the wave, who will kick/push?)
• 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 military/security.
(thanks to Andy Stirling, SPRU)
most green radical areas are cross-sectoral
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 between 2001-2010
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)
a ‘functional’ or ‘parasitic’ green eco-system?
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.
third point
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 not SOLUTION
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 VC!
•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 and 2008.
•Need more nuanced approach to uncover the job-generation power of high-growth innovative firms (but don’t fetishize these either!).
Mistake 2: obsession with some actors, eg SMEs
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 (Nightingale, 2009).
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 3: obsession with commercialisation and knowledge transfer…..but are we ‘pushing on a string’?
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 4: governmental ‘nudge’ units everywhere
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 productively.
Mistake 5: EU ignores competition, and patient finance
the PIIGS!!
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.
fourth point
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 $350,000. While legislation gives the government the right to sell such government-developed drugs at ‘reasonable’ prices, policymakers have not exercised this right.
The result is an extreme instance where the costs of developing this drug were socialized, while the profits were privatized. Moreover, some of the taxpayers who financed the development of the drug cannot obtain it for their family members because they cannot afford it. (Vallas et al. 2011).
taking the risk ignoring the returns
When SITRA, the Finnish government’s public innovation fund, provided the early stage funding for Nokia, it later reaped a significant return on this investment – a fact accepted by the Finnish business community and politicians.
The reason why the US government has not reaped a return from its early stage investments in companies like Google (which benefitted from a state-funded grant for its early algorithm) and other such success stories including Apple, Intel and Compaq (which received public SBIR funding) is due to the lack of understanding in the USA, and many other economies, of state-led growth-inducing investments, which allow conservative forces to portray the state as only a menace in the economy.
Nokia vs. Google
• IPR ‘golden share’ (Burlamaqui, 2011)
• Income contingent loans • Public VC (reinvested back), e.g. SITRA• Shares • National Investment Bank (e.g. Brazil’s BNDES
21% return on equity!)
Creative thinking on tools to claim back return
IDB = Inter-American Development Bank
IBRD = The International Bank for Reconstruction and Development (World Bank) (*) Unlike other institutions, 12-month fiscal year ends June 30th
CAF = Corporación Andina de FomentoCDB = China Development Bank
Capitalization = Shareholders’ Equity / Total AssetsROA = Return On average AssetsROE = Return On average Equity
US$ millon BNDES IDB IBRD CAF China DB
Dec 31, 2010 Dec 31, 2010 Jun 30, 2010* Dec 31, 2010 Dec 31, 2009
Total Assets 329,504 87,217 282,842 18,547 665,168
Shareholders' Equity 39,551 20,960 37,401 5,753 55,471
Net Income 5,950 330 (870) 166 4,673
Loan Disbursements 96,322 10,341 28,854 4,584 92,998
Total Loans 217,006 63,007 120,103 13,873 543,196
Capitalization 12.0% 24.0% 13.2% 30.8% 8.3%
ROA 2.1% 0.4% -0.3% 1.6% 0.8%
ROE 21.2% 1.6% -2.3% 3.7% 8.8%
Established 1952 1959 1945 1968 1994
BNDES: (Public) investment in innovation and infrastrucuture
Need a framework to understand problem: ‘the risk-reward nexus’
time
Innovation is collective, uncertain and cumulative Some agents—VC and large shareholders—
enter late, but reap integral under curve…(Lazonick and Mazzucato, 2012)
VC
• 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
