The Entrepreneurial State and the Innovation Economy

Transcript of speech delivered at the at the Barbados Hilton for the Small Business Association of Barbados

September 27, 2014

Distinguished guests, ladies and gentlemen.

To be part of your celebration of small businesses, of hardworking citizens, of those who have chosen to own their future, gives me a greater sense of honor, satisfaction, and national pride than I can easily describe. I salute you and your important work.

[The opening section of this speech relates more to developing states than developed ones. It argues that we need a respectful state, one in which rules and practice are designed as if citizens matter and that their time is valuable. It calls for a task force to modernize rules and practices with this in mind. It also touches on the way the state inadvertently criminalizes entrepreneurism through high costs of incorporation and low thresholds for value-added tax (VAT) and other regulations. While this is relevant to a number of emerging economies, some of the examples used and issues may not be easily understood everywhere, and as this is also not the central topic of my speech I have placed this section at the end.]

Ladies and gentlemen, I want to talk to you about the entrepreneurial state.

When people start talking about the need to be more entrepreneurial, I have to resist the instinct to sigh. Like all clichés, repetition and overuse is fast rendering this exhortation meaningless, and too often a substitute for original thought.

The cult of all things entrepreneurial is so entrenched in today's popular culture that there is a need to point out that we shouldn't want everyone to be entrepreneurial in everything they do—as some exhort. There is an important role for entrepreneurship—it is the focus of my remarks to you tonight—but not all activities should be entrepreneurial. I do not want the motor vehicle inspector to be an entrepreneur, or the food safety inspector, or the person marking my son's exams. I do not want entrepreneurial thoughts to get in the way of my doctor doing her job, the auditor to the National Insurance Board doing his, or a judge at the supreme court. Some things are done by professions for a reason. I do not want a brave new world where the doctrine of entrepreneurship is taught at schools to the detriment of balance and healthy skepticism. Our economy, our economic and social activities, and our people, need a diversity of behaviors. 

Let me also begin by recognizing that some confuse entrepreneurship with small business. They are not one and the same thing.

Small businesses do not easily start, survive, and succeed without entrepreneurship. But some do—maybe by filling a specific gap. Some may even prosper by doing the exact job that others do—only better. Spotting the opportunity to do that is entrepreneurial, but it reflects the power of competition more than that of entrepreneurism. By entrepreneurship and the entrepreneurial state I am talking about something beyond the relentless pressing down on costs that comes with competition, something that grows our economy by changing the way we live and organize our lives for the better. And so entrepreneurs can also be found in large companies or become large companies. Many are not in companies or businesses at all—though most are not in their apocryphal garage either. Some are in research labs, writing scripts in a movie studio, behind a desk in a government ministry, or in volunteer organizations. Small businesses and entrepreneurship are strongly associated, but they are not one and the same.

How we can create a balanced but more entrepreneurial nation?

At presentations by the wealthiest entrepreneurs or their biographers, people like the late Steve Jobs, Carlos Slim—currently the richest man in the world—Lakshmi Mittal and Larry Ellison who are snapping at his heels, they talk about the rare skills needed to be a successful entrepreneur. The story is not that they happened to be in the right place at the right time—perhaps when the computer age was born, or during a state privatization bonanza, or born with a silver spoon in their mouths, or that they were insiders connected to the people who awarded the first contracts. We are told that they were visionaries made gritty by humble or trying circumstance. The story is one of the brave entrepreneurs struggling against monolithic big business and conventional thinking—David against Goliath. They looked skywards and dug deep. They believed in themselves and were steadfastly focused on their goals. If they were a little socially awkward at shareholder meetings, it was because they had to be prepared to be loners, impervious to the doubters.

The prevailing thinking is that what the rest of us have to do is to set these people free. To identify them early, perhaps in kindergarten, encourage more to follow their true path and nurture their talents when they leave school. Government, it is said, must create an enabling environment, one where the courts do not punish failure too severely and where the government should facilitate business through low taxes and low regulatory burdens. These are the critical ingredients needed to create an entrepreneurial nation, or so we are repeatedly told. The broad philosophy is that if we want a more dynamic economy, filled with entrepreneurs, we need to allow economic energy to bubble up from below and not be crushed from above by the heavy hand of the state.

The small problem with this story is that research shows it is a myth. Steve Jobs designed attractive new commercial products. I own too many of them. He became one of the richest people in the world by creating entirely new industries with the iPod and iPad. Yet, according to Mariana Mazzucato of Sussex University,1 all the research that made the iPod, iPhone, and iPad possible and commercially viable, was carried out by government-funded scientists. There was the internet of course and the location services built off the Global Positioning System—both coming out of the military—but also the shrinking of memory chips and batteries, the click wheel and touch-screen technology. Swiped technology was swiped—though neither illegally or from Samsung.

In new gene-related medical research we often think of fevered competition between the labs of rival pharmaceutical companies. This is how it is documented in the pages of the financial press. Yet, Marcia Angell's research unearths the fact that 75 percent of the major breakthroughs in drugs and medical treatment over the past two decades have come from America's publicly funded National Institutes for Health.2 Elsewhere Professor Mazzucato documents how researchers have found that of the one hundred top inventions annually listed by R&D Magazine in the 2000s, just 27 came from projects that did not benefit from government funding.

The cold reality is that innovation is highly uncertain, and businesses and venture capitalists are risk averse. The vast majority of technological advances do not bubble up on their own; they are given a helping hand by the state.3 They are simply too risky to attract internal investment or bank finance. In the United States this happens behind the veil of a $550 billion defense budget, five times bigger than China's, and big enough to quietly cloak failures as well as successes. The US Defense Advanced Research Projects Agency, established in the panic after the Russians launched the first satellite in 1958, not only helped to establish the internet but numerous other digital technologies then and now.

If I were to piece together the real mechanism of entrepreneurism uncovered by this new research, much of it led by Professor Mazzucato, it is that for the most part, the entrepreneur that dare not speak its name is the state. Innovation begins with the state setting a goal. In the United States this goal was defense oriented, and if you are paranoid enough almost anything can be considered a matter of national security. This included ensuring the United States was the first to build the atomic bomb and that later it could wage wars abroad without risking public opinion back home because of American casualties. Drones are not a private sector invention. Defense also included the goal of beating the Russians to the moon, making sure America was not dependent on Japanese microchips and backing Google, Facebook, and Yahoo as they provided more national security data than the Central Intelligence Agency. While American entrepreneurs tend to be immigrants and internationalists, the US defense department is a fierce economic nationalist.

The national security element means that in the US model of the entrepreneurial state, open procurement and trade rules that others must follow do not apply. A state agency, often within the defense department, pulls together a consortium of leading researchers based at universities or in the private sector. Professor Mazzucato shows that some approaches are better than others—especially those where the agency is decentralized and expert driven.

This consortium doesn't then spend an inordinate amount of time writing business plans and trying to fund itself. It has a budget to get beyond proof of principle. The budget is not overflowing, but it is enough to experiment, and most importantly it dispenses with the inhibitions inherent in financial risk. That is why it works. I apologize for the lack of romance, but pathbreaking research is not carried out by hungry, sleep-deprived researchers, beavering away in an old garage with smells of unknown provenance. The further draw for private sector involvement is that the private partners get to own the intellectual property to commercialize to their hearts' content. Evidence suggests that the manufacturing and distribution of state-funded innovation plays to the private-sector's strength and the state's. Both are lost without each other.

That is all well and good. But how could you transfer that model to a cash-strapped state that rightly spends more on sewage than defense?

Let us begin with the state having a goal. National goals do not need to be defense oriented. The great scientist, Albert Einstein, once said that imagination is more important than knowledge. Our future, the course of our innovation and technology, is not driven by random discoveries. It is defined by our imagination.

Perhaps the giant entrepreneur of the 20th century was not Steve Jobs but Gene Roddenberry. In the early 1960s, Gene Roddenberry invented Star Trek. This NBC TV series may have been on a two-dimensional screen with airbrushed models and the first televised interracial kiss, but Gene Roddenberry's imagination operated on multiple dimensions.

He imagined a utopian future where there were no material needs—so no money. People were engaged in discovery for the sake of expanding their understanding; it is called science fiction for a reason. To make this utopia work, he imagined technologies that had never been dreamed of in his day. But having dreamed them, put them on the screen, he captured the imagination of a generation of would-be scientists. They grew up, went out, and invented them. In 1966, Roddenberry's small wireless communicators were ahead of, and smaller than, mobile phones by 15 years. His tablet computers with touch screens came 20 years before we held the iPad. Google developed the universal translator but only 30 years after Roddenberry had imagined it. Forty years after Captain Kirk first reasoned with the Enterprise's computer, Apple launched Siri. I used to think Gene Roddenberry's replicators were pie-in-the-sky until 3D printing machines were developed that could print pies, chairs, and more—fifty years after the first Star Trek episode.

In short we need to own our future by imagining it. I imagine it is one in which our people live longer, healthier, more fulfilling lives. To arrive at that future, we need to set three or four goals, perhaps in the fields of health, environment, and learning. Let the state then award prizes for those who can come up with practical solutions to achieving these specific goals. The prizes would be open to all citizens and local companies and chosen by an independent panel of experts based solely on the quality of the idea—not the size of the firm behind it or its current ability to develop the idea. That will be what the prize money is for. The winner of one of these prizes—and there could be more than one winner if the judges wanted to try some alternative approaches—would be awarded sufficient funds to take the idea to the development stage and launch, thereby eliminating the financial risks that impede research and development in the private sector. This model would have even better results than one that for political purposes is confined to defense related projects.

Let me give you one practical example inspired by the Nokia heath screening prize and our health challenges. An expert panel could set an award for half a million dollars to the person or group who can develop an app and a single, small, mobile, wireless device that could speed the detection of cancer through the use of an electronic nose, collect the diagnostic markers for asthma and diabetes through a single exhale, or assess potential life-altering conditions by scanning the inner eye and pulse. All of this information could be logged in real-time on the cloud, and users can give access to this information and automatic alerts to any medical practitioner they want to. The science is already there. With the financial risks addressed, a local team could put this together.
Barbados may be a small island, but the government spends almost $1,500 per person or $400 million on health annually. Like many countries, a large chunk of that is on the 40,000 diagnosed with diabetes and the growing numbers of others with other chronic, noncommunicable diseases. Most of this money is spent on those with poorly monitored, late-diagnosed, or uncontrolled conditions. The savings to the health budget from greater use of monitoring devices would more than pay for the prize even if it were not sponsored like Nokia's. The wider commercial benefits of creating poles of innovation, collaboration, and high-tech development would be many times the prize money.
And such an initiative can also be oriented to promote responsible citizens playing and paying their part in society. It will push our university from where it is to where it should be—at the center of innovation and with potentially new revenue sources. Because the state will award the winner with the financial security to develop the product, the intellectual property would be owned by the state, which could license it and award it free of charge to companies that for the past five years had been paying the majority of their taxes locally. The app would be freely available to members of the National Insurance Scheme and commercially to others. Perhaps even more importantly, it will spur new collaborations between sectors of society that do not currently interact.
With three or four national goals and a couple of prizes for each goal, this entire project could grip the imagination of the entire country. It could excite our children, students, and adults with a national purpose and transform the level of innovation in the country—all for less than the cost of another new roundabout. The health prizes would cost less than half of 1 percent of health expenditures—providing room for a failure that does not break the bank. But, if it succeeds, it could revolutionize that budget.

Ladies and gentlemen, we need to grab the future by the scruff of its neck and pull it in the direction we want it to go. The state has a central, visible role to play in that. It can use its convening power to help decide on the course our society should take and the goals that get us there. It can help lead us there by using independently awarded funding that not only enables this future but actually makes it a reality. We cannot drift and wish that someone else's future will fortuitously collide with ours. Good luck.

Professor Avinash Persaud, September 27, 2014.

[Introductory Remarks made on the Respectful State]

Before I turn to the entrepreneurial state and I would like to make a few opening remarks about the respectful state.

How many times have you had to take half a day off work to line up for something that could be done online? How many times have you been stuck in traffic behind an accident, waiting for the police to show up, as we have not yet invented mobile phones with cameras, or as if no one has anywhere to go and are just out for a drive; or, how many times have you been behind a bus or car or truck where the driver has just stopped dead in the middle of a road with no indication of why, rather than moving to one side and letting others pass? We live in a society where the rules and conventions appear designed as if other citizens do not matter, as if their time is cheap. Yet for small business, time is expensive.

Creating a taskforce to change rules and practices as if citizens matter would not raise  government costs or cut revenues, but it would show respect, lower costs, and spur business, large and small.

A significant amount of the entrepreneurial activity in Barbados is criminalized. Many of our favorite food vendors are parked without permission, unincorporated, and unregulated. Because of that they cannot move over from the unofficial sector to the official sector. No bank can extend a loan to them. They are trapped in a twilight zone unable to establish themselves and grow, though sometimes able to complete with legitimate businesses. We need to create a new regulatory regime—call it a Start-up-in-a-Box for nano-enterprises that for small regular micro-payments registers these companies and allows them to provide only basic reporting until they grow.  Once registered, they have access to bookable vending spots in attractive places for low rents. Please let us not let our fair isle start to look like some of those other places where street urchins weave between cars at busy intersections to sell cheap goods of unknown provenance. Let us better respect ourselves.

Notes

1. Marian Mazzucato, 2013, The Entrepreneurial State, Debunking Public vs. Private Myths in Risks and Innovation, Anthem Press.

2. See Marcia Angell, 2014, The Truth About the Drug Companies: How They Deceive Us and What To Do About It, , Random House.

3. For a broader discussion of the role of the state in other fields see Stephany Griffith-Jones, Jose Antonio Ocampo, and Joseph Stiglitz, eds., 2010, Time for a Visible Hand: Lessons from the 2008 World Financial Crisis, Oxford University Press.