Entrepreneurial or innovation-friendly state?

The best mission for innovation policy might well be investments in basic education and research, Tuomas Takalo and Otto Toivanen argue.

Legoilla päällystetty iPhone. Kuva: Anssi Koskinen (rajattu, CC BY-NC 2.0) Photo: Anssi Koskinen (cropped, CC BY-NC 2.0)

British innovation researcher Mariana Mazzucato’s book The Entrepreneurial State: Debunking Public vs. Private Sector Myth has provoked debate about the state’s role in innovation policy in Finland, too (see, for example, the report by Antti Alaja and the blog post by Heikki Pursiainen; both in Finnish). There is widespread consensus in economics that innovation activities promote wellbeing and economic growth. It is also generally accepted that active measures are needed from the public authorities to strengthen innovation activities. However, Mazzucato’s proposal of the state as the driver of innovation activities goes way beyond the view of mainstream economics about the state’s role in innovation activities. For example, in his book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneursip and Venture Capital Have Failed – and What to Do About It?, the American economist Josh Lerner comes to conclusions about the state’s role that are very different from those drawn by Mazzucato.

As we wrote in our recent Economic Policy Council background report, "The Economics of Finnish innovation policy", we are also of the opinion that Mazzucato demands too strong a role for the state. It is typical of innovation activities that their results are not well predictable. It is not reasonable to expect that public officials or politicians would be able to tell all that well which innovation projects are worth investing in. Even Mazzucato’s book contains examples where state investments resulted in positive, but unpredictable innovations elsewhere in the economy. The current technological transition increases this kind of uncertainty. In an environment like this, it is more worthwhile for the state to invest in the growth of human capital rather than in precisely defined missions.

Public officials and politicians are also lacking incentives to effectively execute narrowly defined innovation missions. For this reason, even well-meaning plans may be watered down by poor execution. Furthermore, we cannot always be certain of the state's good intentions; precisely targeted investments in particular are prone to be influenced by the interest groups that benefit from them.

Mazzucato’s book is a reminder of the fact that the state has a significant role to play in innovation activities. Furthermore, it is not a matter of indifference how the state acts in this role. As it is, makers of innovation policy should resist the temptation to engage in high-profile, precisely targeted actions. Instead, they should concentrate in building a beneficial infrastructure for innovation activities. The best mission for the innovation policy of public authorities might well be investments in basic education and research, in regard of which the public sector’s incentives to make investments are particularly weak, but which provide the capabilities for pursuing investment activities in different, changing environments.

Tuomas Takalo is Senior Research Adviser (Bank of Finland) and Visiting Scholar (VATT Institute for Economic Research).
Otto Toivanen is Professor (Aalto University School of Business and KU Leuven).