Government and Innovation

When one thinks about the Age of Exploration, what comes to mind is the story of Christopher Columbus’s famous voyage financed by Queen Isabella and King Ferdinand of Spain. However, upon further inspection, one realizes that while it was this governmental financing that spawned the age of innovation, the colonization of the New World was paid for not from treasury coffers but from the pockets of shareholders in corporations such as the Dutch and British East India Companies. The age of colonial expansion can be seen to have direct parallels to a modern age of expansion, that of space exploration. What we see is that political goals, just as they did with colonial exploration, paved the path for a decades long space race between the public entities NASA and Roscosmos. However, what we see today, is the beginning of a shift in which the private sector, led by companies such as SpaceX, Blue Origin, and the United Launch Alliance, is starting to take up the mantle and carry forth humanity’s plunge into the vastness of space. We see this pattern of public sector triggering a movement and then passing the torch to private industry that brings the vision to fruition throughout modern history. The cell phone, internet, and GPS were all conceived in governmental institutions but met their success when put into the hands of the private sector to further develop and commercialize. The role of government in innovation is undoubtedly a complex one, however, it is one that can not be understated. There have been countless times when governmental bureaucracy has stifled innovation and it’s ability to push forward, but history has shown us time and time again that the balancing of government influence and industry independance can lead to strides in innovation. Economist Mariana Mazzucato suggests that the public sector has a crucial role to play in funding innovations deemed too risky for profit seeking companies, who are under intense pressure to show a return on investment before a project is undertaken. The government can help absorb this risk by providing the private sector with three key thing : motivation, capital, and protection.

When one looks at the defining technologies of the past fifty years, a disproportionate amount of them seem to come from the military and its related branches. Throughout history, we see some of humanity’s greatest inventions come during times of war, rather than peace. This is because the nation-state often provides the private sector with the motivation it needs to create new technologies whether it is directly through an appeal to an industry’s nationalism as was seen often in World War II or indirectly through incentivization. In 1939, Hungarian physicist, Leó Szilárd sent a letter to Albert Einstein about the possibility of a mysterious device being developed by Germany that could level entire cities. Einstein, in turn, passed it on to President Franklin Roosevelt who, acutely aware that this otherwise unlikely idea had the sanction of the world’s most famous scientist, put the wheels of government in motion. The result was the Manhattan Project, the most consequential government science program ever, which gave an enormous advantage to America and its allies. After the war, the military looked for ways to keep scientists involved and in 1958 President Eisenhower authorized DARPA (Defense Advanced Research Projects Agency). Since then, DARPA has been a mainstay of technological development to reach political and militaristic goals, funding development of the Internet, GPS and even Apple’s Siri, just to name a few. More recently, as the United States realized how vital energy production and management is to national security, ARPA-E has been created to support similar development in energy by financing companies that will further these national interests. Whether it is landing a man on the moon or winning a war, the government often sets the prime directive that leads innovation for a generation.

The second vital piece of the puzzle is the capital provided through public funding for the private sector. Entrepreneurs are often seen as heroic innovators, while many complain that government should just get out of the way. However, although nobody likes the regulation and red tape, many don’t realize that government can play an important role in helping young, innovative businesses get started. One such example of a government institution is the Small Business Innovation Research, which has three phases. The first is a “proof of concept” phase in which funding is generally capped at $150,000. The second is a research phase in which grants can go up to $1 million. In the third phase, the company is expected to either get private funding or, in some cases, can receive funding from another government program. Some SBIR success stories include Qualcomm, iRobot and Symantec. The combination of low grants (lower in fact, than most venture capitalists are willing to get involved with) and limited duration encourages entrepreneurs to embark on projects that aren’t yet developed enough to secure financing in the private sector. Other agencies that commonly provide capital to industry include the NIH, DARPA, In-Q-Tel, and even NASA. One of the most important types of capital vital to innovation is human capital. Government is nearly solely responsible for the nation’s education infrastructure through public schools and universities. Better educated students, especially in fields of STEM, often go on to become more productive workers and innovators within the private industry, and it is the responsibility of the public sector to provide this for the betterment of the nation.

Finally, the government is responsible for providing the legal structure which protects the business entities that operate in its bounds. Governments support innovation best by funding basic research and setting and enforcing the “rules of the game” such as laws, regulations and property rights. A robust and predictable legal environment convinces investors and companies that a country has laws and regulations in place to protect their interests — and that the government and its courts are willing to enforce those laws. Rights related to intellectual property such as patents and copyrights are particularly important because IP is both a reward for innovation (if I invent a better mousetrap I get to patent it) and an input to it (most new ideas are recombinations of existing ones). Governments therefore have to strike a delicate balance; they have to provide enough IP protection to encourage innovation, but not so much that it’s stifled. Countries with weaker institutions supporting patent protections and copyright laws tend to lag in innovation on the global competitive stage. Without such legal protection and effective legal institutions for enforcement and judicial review, innovators have no recourse but to take their business elsewhere.

Around the world, governments are broadening and deepening their support for innovation in the private sector and the economy more generally. When it comes to innovation and technology, governments may have several goals. They may want to encourage the formation or growth of entrepreneurial ventures that create new technologies capable of competing on a global stage. Creating the right climate for innovation remains a difficult task that involves balancing governmental influence and a laissez-faire “hands off” approach. But key to government’s role is providing the private sector with motivation, capital, and protection in order for it to spur innovation.