The Entrepreneurial State

Here in Wales there is a stale unchallenged economic consensus among those who govern Wales that has failed to produce sustainable economic growth, investment and jobs over the years, but could a new report from the Demos Think Tank published in July entitled ’The Entrepreneurial State’ shake not only our Government Ministers and Opposition Parties out of the public sector good, private sector bad attitude that is so often in display in any Welsh economic debate, but wider Welsh society as well.

The report by Mariana Mazzucato, currently Professor in the Economics of Innovation at the Open University, states ‘The prevailing opinion on public spending is that the state must be cut back to make room for entrepreneurship and innovation, to prevent the public sector ‘crowding out’ the private sector. This draws on the belief that the private sector is dynamic, innovative and competitive, in contrast to the sluggish and bureaucratic public sector.

The Entrepreneurial State challenges this minimalist view of economic policy. It finds that successful economies result from government doing more than just creating the right conditions for growth. Instead, government has a key role to play in developing new technologies whose potential is not yet understood by the business community. State-funded organisations can be nimble and innovative, transforming economies forever — the algorithm behind Google was funded by a public sector National Science Foundation grant.

This pamphlet forces the debate to go beyond the role of the state in stimulating demand, or crudely ‘picking winners’ in industrial policy. Instead, it argues for a proactive, entrepreneurial state: a state that is able to take risks and harness the best of the private sector. It imagines the state as a catalyst, sparking the initial reaction that will cause innovation to spread.'

A summary of the main recommendations she makes is below, some are UK specific but most apply to Wales and are worth debating at the very least.

• Reduce government spending on direct transfers to small firms, such as small business rates relief and inheritance tax relief. This is a cost saving.

• If the Small Business Research Initiative (SBRI) is enhanced, as the government has indicated, it must be done in a way that focuses on how to get SMEs to spend money on new technologies. To do so, it will need to increase the size of the project financing that it administers (too diluted currently), and concentrate on firms that prove they will spend on innovation. This is cost neutral.

• Abandon initiatives to establish a UK patent box (a preferential tax regime for profits arising from patents), which would not increase innovation and according to the Institute for Fiscal Studies would in time lead to greater taxpayer costs. This is a cost saving.

• Review R&D tax credits with a view to ensuring that firms are held accountable for actually spending the money on innovation, and failing that, shift away from blanket R&D tax credits to free up resources towards direct commissioning of the technological advance in question. This is a potential cost saving.

• Enterprise zones, that give regulatory or taxation advantages to firms in a certain area, are a distraction as they do not cause innovation to happen that would not have taken place elsewhere. Best to use the money in other ways. This is a cost saving.

• When successful, a part of the return from investments made with significant public support should be returned to government. This is a potential cost saving.

Use these freed-up resources to engage in a massive expansion of the Technology Strategy Board, structured in line with the model of the US DARPA to directly enable innovation (research, development and commercialisation) through a bottom-up government-directed network of agencies, in line with recommendations of the Confederation of British Industry (CBI) in 2006/9 it also requires more transparency about funding decisions and clearer auditing of performance so that failing performance areas are cut off. This would increase expenditure.

• Adopt a more proactive interventionist approach to green technology innovation, drawing on the UK’s specific strengths. This would increase expenditure.

• The time any private equity investment must be held before the gains from sale can be exempt from capital gains tax, should be raised in the UK to at least five years (currently only two, previously ten in 2002). This would help prevent the ‘take the money and run’ in green tech, which has characterised investments in biotechnology companies, most of which
remain ‘product-less’. This is a cost saving.

• Short-termism is especially problematic in contexts in which radical technological change is needed and the reason why venture capital and other forms of private equity are not playing a leading role in green technology. Given the lack of private investments, the UK government should step up and increase its ‘green’ budget. The Green Investment Bank is not enough. This would increase expenditure.

So do we have a First Minister, a Business Minister and Opposition politicians brave enough to take some of these ideas on board, challenge the failing economic consensus here in Wales and try and build a new consensus to give us all a brighter future?

The full report is HERE
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