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Innovation: re-thinking the role of the state

Mariana Mazzucato’s new book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, has created some buzz: her Ted Talk has been widely shared, and the book is being discussed by the Economist, the Financial Times, and in the Globe & Mail by the Broadbent Institute’s own Andrew Jackson.

The book goes a long way towards debunking myths about private sector innovation. There is a persistent view that private entrepreneurs are the lions of the economy, fearlessly setting new directions and taking risks. Mazzucato argues that the private sector is important, but should really be viewed as a pussycat, with the state more aptly described as the lion that takes risks and drives innovation. 

To reinforce her argument, Mazzucato provides detailed histories of some of our most important innovations. She finds that throughout modern history, government has been integrally involved in directing the economy, undertaking basic research, and nurturing new technologies into the market when the private sector found it too risky to touch them. Only after governments have subsumed much of the risk do private entrepreneurs do their bit, though they often take all the credit and make off with most of the money. The most entertaining example of this practice is her review of the state's integral role in the development of the information technologies that Apple later packaged into the iPod, iPad, and iPhone.

Mazzucato worries that the current relationship between public and private entrepreneurship is a parasitic one, whereby the private sector captures the benefits of public sector work, and the public sector becomes captured by private interests. This makes it difficult for the state to play its socially valuable role of kicking off new rounds of innovation. She calls for a symbiotic innovation relationship where private entrepreneurs can continue to play their important role in commercializing innovative technologies. The place of the state, she argues, must also be recognized and given its due. Thus Mazzucato advocates for mechanisms to ensure the state receives a share of the financial awards from the innovations it helps create.

Most of the examples in the book come from the U.S. with China, Japan, Denmark, and Germany sprinkled in. Though she does not focus on Canada, the book certainly has relevance for the Canadian context.

State involvement has been integral to the historical and contemporary development of Canada’s resource sectors. The bitumen sands were developed due to the work of government departments and Crown corporations such as the Federal Department of Mines, the Alberta Research Council, and the Alberta Oil Sands Technology and Research Authority. Government involvement tends to go hand-in-hand with resource sectors, given the importance of land-use and transportation networks, and high-fixed costs of development. However, resource interests can also easily “capture” government. When they stop innovating or face global fluctuations, resource industries tend to seek direct government protection, or indirect protection by lobbying political leaders to allow them to externalize social and environmental costs (eg the exploitation of temporary foreign workers and carbon emissions).

Of course, Canada has succeeded in non-resource sectors and produced a few technology superstars in its time, such as Bombardier, Nortel, and Blackberry. However, since the latest resource boom and the global recession, Canadian manufacturing and high-tech industries have started to decline. The Globe and Mail’s Eric Reguly lays blame for this situation on “the sellout culture, nice-guy directors with a propensity to protect the wrong executives at the wrong times and Canada’s classic lack of corporate self-confidence.” Further, he adds, “the upshot is a country that turned into a one-trick pony – oil sands – with a few decent, protected banks and insurers at its side.”

Reguly’s lamenting of the state of Canadian entrepreneurship is nothing new.  In 1957, economic historian W.T. Easterbrook explored the long history of Canadian vis-à-vis American entrepreneurship. He explained that the resource sectors that dominated Canada’s early development were characterized by heavy fixed costs and unpredictable fluctuations in income. In this context, Canadian business leaders directed much of their entrepreneurial energies towards building relationships with government to protect their industries, rather than making the calculated risks involved in selling new products to new markets. In Canada, Easterbrook saw a “pattern of persistence” in old industries closely linked to government, which he compared to the U.S. “pattern of transformation”. 

So if Mazzucato is correct in describing the American entrepreneur as a pussycat, the Canadian entrepreneur might be the kitten that always hides under the table (or an unprocessed wood-pile). Further, the Canadian state is more easily captured than entrepreneurial.

Canadian social democrats have often highlighted the perennial problem of Canada’s truncated form of entrepreneurship and innovation. In Canada’s particular context, left economic thinkers surmised that the role of the state is not only to foster equality, but to also help set the direction of the economy since domestic entrepreneurs were proving inadequate to the task.

Today, there is a special need for the Canadian government to play a more activist role. First, because the private sector is having difficulties finding the new technologies that will direct the next stages of economic progress. Corporations are holding onto hordes of money instead of undertaking new investments (the "dead money" problem), and heavily indebted consumers precariously support economic growth. The second reason we need a more activist government is because, as Mazzucato argues, the state has always been involved in leading important structural shifts in the economy. Such a structural shift is required to introduce the green technologies needed to dramatically reduce carbon emissions.

A Canadian version of an “entrepreneurial state” must also recognize the particularities of the Canadian federation. Many of Mazzucato’s U.S. examples demonstrate how industrial policy is hidden within American defense initiatives, a characteristic peculiar to that country. During the last major discussion of industrial policy in Canada (before the 1985 MacDonald Commission), most thinkers were working under the assumption that a strong centralized government was required, which didn’t fit within the decentralized and regionally diverse nature of Canada.

Since this time, thinkers such as the University of Toronto’s David Wolfe, have talked about shifting toward a more bottom-up development paradigm based on identifying local knowledge assets and supporting them by determining what each level of government can do best in close consultation with communities (multi-level governance). This networked governance model more closely fits with new technologies (eg information technology and green energy) and the nature of the Canadian federation.

This means that building an entrepreneurial state not only requires busting some myths, it must also ensure effective public administration.  Some examples of policy orientations required for an entrepreneurial state could include:

  1. Promoting national laboratories and publicly-funded scientific research, without political interference.
  2. Creating a confident public service with a strong sense of vision and mission. To avoid capture by vested interests, civil servants should possess expert competencies in the industries with which they work.
  3. Ensuring close collaboration between federal, municipal, and provincial governments to coordinate bottom-up regional development strategies.
  4. Eliminating wasteful incentives such as corporate tax cuts and indirect R&D incentives, and ensuring the government is able to collect an adequate return from the innovations that are helped along by government activities and direct incentives.
  5. Integrating all aspects of public policy to complement the mission of transitioning towards a sustainable economy, including promoting green entrepreneurial activities, and guiding the economy through targets and regulations.

Unfortunately, the current federal government is moving in the other direction, on all these fronts. The Conservatives remain entrenched in a resource export growth strategy that directs the state’s energies towards protecting established interests, and they are steadfastly undermining the capacity of government to proactively shape economic directions. 

Today more than ever Canada needs an ‘entrepreneurial state.’ It requires governments that are confident in playing a role in shaping and creating markets and new avenues for innovation, in order to forge a symbiotic relationship with private entrepreneurs instead of leaving our governments open to be captured by vested interests that will hold back the type of dynamic, green economy we need to build.

Brendan Haley is a Broadbent Fellow and PhD Candidate at Carleton University’s Department of Public Policy and Administration.

Photo: singne. Used under a Creative Commons BY 2.0 licence.