Abstract
Economic theory justifies policy when there are concrete market failures. The article shows how in the case of innovation, successful policies that have led to radical innovations have been more about market shaping and creating through direct and pervasive public financing, rather than market fixing. The paper reviews and discusses evidence for this in three key areas: (i) the presence of finance from public sources across the entire innovation chain; (ii) the concept of ‘mission-oriented’ policies that have created new technological and industrial landscapes; and (iii) the entrepreneurial and lead investor role of public actors, willing and able to take on extreme risks, independent of the business cycle. We further illustrate these three characteristics for the case of clean technology, and discuss how a market-creating and -shaping perspective may be useful for understanding the financing of transformative innovation needed for confronting contemporary societal challenges.
Highlights
Schumpeter’s focus on innovation and inter-firm competition made him place finance at the centre of his analysis
We have looked at 3 key features of this process: (1) investing along the entire innovation chain, in classic public good areas; (2) the mission oriented nature of the agencies involved, and (3) their lead risk taking role, independent of the business cycle
We have argued that looking at these three features of the system help to see the limits of the traditional market failure framework
Summary
Schumpeter’s focus on innovation and inter-firm competition made him place finance at the centre of his analysis. The type of finance that is provided depends heavily on its source, whether it is the private or the public sector and the multitude of different types of public and private finance In this respect, recent literature has highlighted how private finance has increasingly retreated from financing productive activities (Turner, 2015) and the real economy itself has become increasingly financialised, with spending on areas such as share buybacks exceeding spending on long-run investments like human capital formation and R&D (Lazonick, 2013). To answer this question we can learn from the lessons of previous technological revolutions (e.g. IT, biotech, nanotech), where different forms of public funds had been essential in providing the high-risk and early funding (Block and Keller, 2011; Mazzucato, 2013a) Most often, such investments had a ‘mission-oriented’ nature, actively creating new industrial landscapes that served a need (man on moon, or agricultural needs) that did not exist before (Mowery, 2010; Foray et al 2012).
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