Policymakers must accept that we have to pay to develop a smart economy
THE WORST thing about the smart economy is the meaningless jargon. Policy documents littered with phrases like “the RD intensive enterprise sector of the knowledge economy” is enough to put anyone off.
Despite the gibberish, there is consensus that a thriving population of stock option-wielding engineers is a good thing. Start-ups are the engine of any economy. In the US, nearly all net job creation since 1980 has occurred in firms less than five years old. If you want to create jobs, invest in new companies, not old ones. Unfortunately, there is no consensus on what we should do to incubate the little darlings.
It’s not just that entrepreneurs and economists disagree on what’s needed. Even different government departments fall out over what they should do. Just one issue is the principle of direct government investment.
In November 2008, the Taoiseach proposed an “Innovation Fund” of up to €500 million that would ramp up government direct investment in start-up companies. That was the last we heard of the policy.
Apparently, the Department of Finance shelved the plan. In fairness, since we ran out of money, Finance is legitimately focused on ideas that save money, not spend it.
Belt-tightening aside, there is no surer way to make an economist splutter into his cornflakes than to suggest that public money should be invested in private companies. Where is the public good of market failure? If a high-tech idea can’t get a venture capitalist to back it, why should the Government get involved? What expertise does the Government have in selecting which ideas will take over the world, and which will flop?
Even the commercialisation of research by universities is controversial. Stanford, in whose computer science department firms such as Google were born, earns relatively little from companies it helps fund on its campus. Over 40 years, Stanford’s return on its spin-out companies would cover 9 per cent of its operating costs for just one year.
Based on this evidence, governments should confine themselves to funding education to create a healthy population of science graduates and implement tax policies that encourage private venture capital investment. Then we should leave the market to do what it does best – pick winners and absorb the losses of losers.
The only snag is that if that policy had been applied by governments across the world, there’d be no such thing as computers, not to mention the internet.
The big leaps of the technological age were funded not by private money, but public. Silicon Valley in California is the world’s leading centre for technology due to a unique combination of factors. These include a great university in Stanford, intensive venture capitalism, a pleasant climate, and even the mind-expanding drugs used by academics in the 1960s. But none of the innovation would have happened without guaranteed US department of defense funding.
The army paid for the silicon in Silicon Valley. From the 1900s right up to the present day, billions of dollars have been systematically pumped into research projects and campus companies by the US military. In 2008, of $51 billion spent on research in the top 20 universities across America, $31 billion came from the federal government. The government’s goal is to get the technology developed so it can buy it later on. A balance sheet return, investment by investment, is not the point.
Just one fund that companies can apply to is Darpa – the Defense Advanced Research Projects Agency – which has a quoted budget of $3.2 billion (€2.6 billion). It proudly claims that “our nation’s global technological leadership is a result of the enormous contribution Defense innovation has made”.
The other country most frequently referenced as a model for its innovation policy is Israel. Clearly, what we’re missing is not entrepreneurial spirit, but a military-industrial complex.
What the US and Israeli governments recognise is that before venture capitalists will invest, research ideas and start-up companies need early stage funding to get them to a point where they can prove their products’ commercial viability. So a university such as Stanford does not measure its success purely on the percentage return per investment.
Instead, it implements a one size fits-all licensing template for as many companies as possible on its campus. It recognises that though there are losses in research failures and modest returns on the winners, the success stories earn the university prestige, ratings and huge donations from subsequently wealthy graduates. As for the failures, which the number-crunchers say is money down the toilet, they are a prerequisite of success. Spreading money widely, even if thinly, is the trick to finding a winner.
The US and Israeli experience shows that government investment and university enthusiasm for commercialising research creates a critical mass of innovation, which then attracts venture capital and thus creates a virtuous cycle.
If we’re going to pay anything more than lip service to this smart economy stuff, the policymakers must accept that we have to pay for it. A thriving venture capital industry is not going to magically materialise in Dublin and start funding innovative ideas by ambitious academics.
In 2008, Enterprise Ireland invested €22 million across 73 high-potential start-up companies. It’s a tiny amount, and while the Taoiseach’s €500 million is too big an ask in today’s climate, we shouldn’t let the dismal scientists dismiss the policy out of hand.