Mariana Mazzucato, Reginald M. Phillips Professor in the Economics of Innovation in the Science and Technology Policy Research centre (SPRU), at the University of Sussex, gave this public lecture as part of the STEPS Centre Summer School on 12 May 2014. FInd out more: http://steps-centre.org/2014/blog/summerschool2014/

1. The (Green) Entrepreneurial
State
Risks, Rewards, and Directionality in Innovation
Mariana Mazzucato
R.M. Phillips Professor in Economics of Innovation
Science Policy Research Unit (SPRU), University of Sussex
www.marianamazzucato.com
@MazzucatoM

2. Framework matters: de-risking?
High risk innovation? Who takes risks, who
takes rewards?
Green evidence
Directionality and Organizations
Inequality…

3. 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

4. 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

5. 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?

6. VS.

8. “..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

9. The Entrepreneurial (risk taking) State

10. 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?

11. MARKET
Radical
Leverage baseEvolutionary
Discontinuity
Increasing
risk
NewExisting
NewExisting
TECHNOLOGY
market and technology risk

12. Valleys of death and Darwinian seas
1. research 2. concept/
invention
3. early stage
technology
development
(ESTD)
4. Product
development
5. production/
marketing
Angel investors,
corporations,
technology labs,
SBIR
NSF, NIH,
DARPA
Corporate
research
Corporate venture
funds, equity,
commercial debt
VC, public
venture
capital, NIH,
labs, ARPA-E
Source frequently funds this technological stage
Source occasionally funds this technological stage
Patent Invention: functional prototype Business Validation Innovation new firm or program Viable business
source: Auerswald/Branscomb , 2003

13. bumpy investment landscape

14. Number of Early Stage and Seed Funding Awards,
SBIR and Venture Capital
(source: Block and Keller, 2012)

15. What makes the iPhone so ‘smart’?
source: Mazzucato (2013), p. 109, Fig. 13

16. 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

17. 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

18. 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)

19. Green?

20. source: Ghosh and Nanda, 2011
technology risk in clean tech
(VC will ride the wave, who will kick/push?)

21. source: Frankfurt School-UNEP Centre/BNEF (2013)
Who is funding the green revolution?

22. Who is funding the green revolution?
source: Climate Policy Initiative (2013), The Flows of Climate Finance 2013
(http://www.climatefinancelandscape.org/flows-diagram/)

23. source: Bloomberg New Energy Finance

25. BNDES (Brazil) disbursements for innovation

26. China Development Bank
CDB 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)

27. 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?

28. 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

29. source: Bank of England, Haldane 2011
Financialization not good for Innovation!

30. 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
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…

31. 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.
Source:http://www.youtube.com/watch?
v=x54bVuduggU

32. 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!

33. 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

34. Inequality

36. 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?

37. time
Cumulative innovation curve

39. “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

40. Organizations

41. “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

42. 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?

45. Who is funding the green revolution?
New work with Caetano Penna
State Investment Banks & Mission Oriented Policies
BNDES and the Brazilian Pharma Risk Landscape
Picking winners: the real story