What role for government in innovation?

Former EU commissioner Lord Peter Mandelson

“In my view, to argue that government is chiefly a problem for enterprise [...] is not only wrong, but it is to misunderstand fundamentally what enterprise needs in order to work. In a globalised economy based on high levels of knowledge, skill and innovation, enterprise needs an active government in many respects.

Not a big state that gets in the way of business. Nor the small state that offers nothing but the kind of retrenchment that, at its worst, would plunge [us] into a double dip recession.

But a smart state working in partnership with business that fosters growth as the answer to unemployment and debt. Not big, but activist. Today I want to set out what I think that means. [...]

This is a room full of entrepreneurs and would-be entrepreneurs, and I’m sure that your first piece of advice for government would always be “get out of my way” and I’m with you on that one hundred per cent.

The wrong decisions on tax, or planning law, or regulation can of course get in the way of business and job creation [...]

But when I was EU Trade Commissioner I was constantly struck by the fact that the problem for most countries lower down the development ladder is not entrepreneurialism or enterprise. They have it in spades. You see it on every corner, in market stalls and micro-businesses.

What they don’t have is roads. And electricity or digital infrastructure. And complex skills. And credit, which is the basis of a modern economy.

What enterprise needs in these cases is not governments that get out of the way, but governments with the resources and policies that help create and nurture an enterprise economy. This whole idea that comparative advantages don’t just emerge out of the air, set in stone forever, but that competitive capacity can be built up, is at the heart of development economics. [...]

Capacity building simply means recognising that while the market is irreplaceable as the ultimate arbiter of what is long-term viable here, or anywhere else, industrial strength can be lost – or never built – for reasons that are totally avoidable and that have nothing to do with long term viability and competitiveness.

Think about it for a moment. The high tech entrepreneur who commercialises an innovative low carbon technology has not usually thought up the whole thing from scratch and built it in her garden shed. She is building on technological education, or perhaps the skills she learnt in further education.

She’s drawing on the UK’s science base. She’ll need access to finance to support trials of pre-commercial technology, and that means investors patient enough to sit it out while she gets it right. Assuming she can get funding to trial her product, she’ll often need access to the facilities to do so.

When she gets her company off the ground, if she wants to stay in the UK, she’s going to be totally reliant on highly-educated staff with the right niche skills. Every time she sends an email or uses her website to attract customers, she’s relying on a digital infrastructure for broadband that is now as integral to modern business life as roads are. [...]

None of these things are produced solely by markets – at least not to the extent that we need. [This is] for a range of reasons, but basically because the profit incentives for individual firms are wrong. In whole, or in part, they are built on public investment and the right kind of activism from government.

So if your problem is growth – and in every sense [the] biggest problem after the recession is returning to sustained, balanced, low carbon, deficit-reducing, job creating growth – then the right kind of government is undoubtedly part of the solution.

Again, the risk of caricature means that it’s important to be clear. Our recovery will be enterprise-led. The jobs and growth will be created by private enterprise and private investment. But if and how government supports that enterprise will be critical.

If I stay with my high tech low carbon entrepreneur for a few more minutes, I can make the point.

First on skills. Both her own skills and the skills of the people she employs come from our higher and further education systems. Those systems, more even than they are now, need to be tailored to the demands of a knowledge economy. Producing people capable of managing complex systems and technologies and confident enough to innovate and lead.

Second, research. Our low carbon entrepreneur will probably draw in some way on the UK’s huge public science base. [...] Actively tapping the huge resource of our research base to drive innovation and development is now one of the key challenges [...]. Which is why in our new higher education framework, we will have a range of new incentives for businesses and universities to build long-term collaborations on research and development. [...]

We’ve committed almost three quarters of a billion pounds this year through our Strategic Investment Fund to projects […] that are all about making sure that viable technologies get a shot where they might otherwise stay on the drawing board. Many of these technologies are linked to the low carbon agenda, which makes investing in getting them across the line to commercial viability doubly important. [...]

Third, finance. Our entrepreneur probably learnt the hard way that investment capital for innovation in Britain is still far too much of a gamble. Perhaps she is lucky enough to have angel or venture capital support, maybe she managed to crowbar a loan out of a bank. But maybe not.

I am convinced that this is not a cyclical problem: it is a structural problem in Britain. But it is a structural problem that is going to be made a lot worse by cyclical risk aversion as we come out of the recession.

Through the Innovation Investment Fund and a new type of national investment organisation, we will have the capacity to create new sources of public seed capital to draw in private investment for start-ups and growing companies.

We’re also going to use the government’s role as a lead user more as an indirect way of financing innovation. In pilot programmes in the National Health System we’ve shown that when we open up procurement tenders in a way that encourages smaller firms to bid we get more innovative solutions, usually at a net saving. This is a model that I want to see rolled out much more widely across government.

We haven’t junked our commitment to long term viability in an open market. But we have recognised that the market can fail essentially viable projects or technologies, especially at the earliest stages. [...]

We’ve also resisted the temptation to micromanage. We see a critical role for public investment, but have gone out of our way to avoid turning politicians or civil servants into investment managers or technology pickers. The deployment of resources is effectively managed by independent technology experts like the Technology Strategy Board and venture capital and industry experts. [...]

Smart capital is always going to look for the best return at the lowest cost. But companies at the top of global value chains – which is where we need to be – measure best returns in far more than just cheap labour.

They need infrastructure, skills, a whole ecosystem of research, development and finance. Smart capital is increasingly going to seek out countries that know how to invest in that capacity. It will seek out countries that understand the balance between public investment and private enterprise in driving growth.

Getting that balance right will also equip our own people to prosper in a global economy. Arguing that government has no role here doesn’t sound like a statement of fact to me, it sounds like an abdication of responsibility. [...].”