Does State-Led Innovation Work?

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Liberals are notoriously skeptical about the state’s ability to generate innovation. A new study on the potential of national innovation agencies puts these concerns into perspective – and makes the case for limited state activity.

Liberalism’s success is not simply based on its philosophical persuasiveness but on its economic power. By inextricably interlinking political with economic freedom, liberalism paves the ground for a dynamic market economy that generates wealth and innovation. In his groundbreaking “Theory of Economic Development” (1912), the Austrian economist Joseph Schumpeter was the first to identify the entrepreneur as the decisive agent of change.

“Entrepreneurs are a special type, and their behaviour a special problem,” Schumpeter wrote, emphasising that he (or she) was quite different from ordinary businessmen. “Everyone is an entrepreneur only when he actually ‘carries out new combinations’ and loses that character as soon as he has built up his business, when he settles down to running it as other people run their businesses.”

Since then, Schumpeter’s “new combinations” have become a staple of innovation textbooks, placing the entrepreneur firmly at the heart of economic dynamism. For a long time, the conflict between believers in the state and free-market liberals looked a bit like “Tom & Jerry”: the liberals were able to field the quick and daring entrepreneur while the other side had to rely on slow and risk-averse bureaucrat. As of recently, the boundaries have blurred. In her book “The Entrepreneurial State” (2013), the Italian economist Mariana Mazzucato has argued that the state could play an “active role […] in innovation-led growth.”

In particular, Mazzucato continues, “this has entailed very risky investments – speculation for Schumpeterian ‘create destruction’.” Drawing on the success of the United States’ Defense Advanced Research Projects Agency (DARPA) and other examples, Mazzucato argues in favor of the “‘collective’ character of innovation.” 

In the past decade, Mazzucato’s ideas have had a huge impact on policy debates about the role of the state in the realm of innovation policy. The notion that an entrepreneurial state should invest in “moonshot missions” that drive innovation contradicts the received liberal wisdom that entrepreneurs, not bureaucrats, lead innovation. While these ideas have been hotly debated, their impact cannot be denied. The European Union, for instance, has been eagerly collecting “mission-oriented policy studies and reports” while the German “Commission of Experts for Research and Innovation (EFI)” has placed “mission-oriented innovation strategy” at the heart of their policy recommendations.

Another key example for such state-led innovation policies is the establishment of national innovation agencies. Germany’s first shot at such an innovation agency has been the “Federal Agency for Disruptive Innovation” (SPRIND) which, in due course, is to be followed by the “German Agency for Transfer and Innovation” (DATI). While the former addresses the so-called “valley of death” (i.e. innovation projects that have huge potential but are deemed too risky for private capital), the latter will be tasked with establishing regional transfer network

At the end of September, the Friedrich Naumann Foundation for Freedom has released new study by Professor Marc Ventresca, Victor Salenius and David Lehmann (University of Oxford) that takes a close look at a specific type of state-led innovation policy: the national innovation agency. By comparing examples of such agencies from the US, the United Kingdom, Switzerland, and Israel, make a case that national innovation agencies do have a way of contributing to innovation ecosystems. The report makes twelve recommendations for national innovation agencies in order to align them with the social market economy.

These suggestions are based on an extensive literature survey, international case studies and expert insights. If innovation agencies are to be implemented, the researches argue, they should “aim at avoiding adverse outcomes (e.g. cronyism, reduced competition, wasted tax budget) while maximising the potential upside.”

Their conclusions are rather conciliatory: While the task of designing an effective and useful innovation agency is a multi-faceted challenge, the expert reflections also support the notion that this challenge is worth meeting to raise the potential of the national innovation system and meet the grand challenges of our time,” the authors write.

“National innovation agencies, in combination with other innovation policy instruments, have the potential to support the market-based innovation system at exactly some of the points where our societies are currently at a turning point and where the future trajectory of technology and innovation is uncertain.”

The liberal’s skepticism about state-led innovation has a long history. A few years before Schumpeter, the FNF’s very own Friedrich Naumann argued in 1906 that the state was a rather problematic entrepreneur: he should not be burdened any such expenses, but should focus his powers “on the most necessary tasks of regulating and supervising the emerging self-administration of the capitalist economy.” More than a hundred years later, this argument retains its power. And yet, as the new study by the FNF show, there is some room for nuance. 

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