The Great Innovation Mirage: Big Talk, Small Ideas

Faced with secular stagnation, more governments in advanced economies are hoping to spur innovation. But the thinking on how they should approach this task is surprisingly thin.

(This article was originally published in Institutional Investor in Nov 2015.)

With startup financing booming and corporations all over the world, no matter how old, lumbering or unimaginative, rushing to sprinkle themselves with some of Silicon Valley’s stardust via the creation of dynamic-seeming entrepreneurship labs and accelerators, “innovation theater,” to borrow a favored phrase of Anand Sanwal, is at an all-time high. National governments are getting in on the act, too, tiny armies of freshly minted Schumpeterians emerging from the woodwork in Ottawa and London and Canberra and Pretoria to trumpet the hosannas of their new religion — the religion of innovation. Canadian prime minister Justin Trudeau has made a renewed commitment to innovation a core part of his government’s agenda, while across the Pacific, his counterpart in Australia, Malcolm Turnbull, is beating the creative economy drum more ferociously than any politician on the planet. “The Australia of the future has to be a nation that is agile, that is innovative, that is creative,” Turnbull announced after his elevation to the prime ministership two months ago. Creative destruction, guys: it’s the future!

Countries such as Chile, Israel and Korea have long aspired to something similar: to turn themselves into cradles for nurturing and developing wildly creative and genuinely transformational businesses and technologies. To differing extents these countries have succeeded; Tel Aviv and Santiago have particularly active startup scenes. But for other nations with less established tech scenes and governments eager to get in on the innovation gold rush, things are more complex. And while the rhetoric of many of these governments may be bold, in practice the policy recipes being put forward are timid.

Doubtless innovation is a fine thing to aspire to, especially in an era of secular stagnation when the search for new growth levers is becoming more pressing. But what does it mean for a government to support innovation, in a way that goes beyond support for traditional small business? How do cultures of agile, confident, creative entrepreneurship — these frequently invoked, wonderful-sounding things — emerge and thrive? For many governments out there making big noises about innovation, the answer appears to be: be more like America. Silicon Valley, home to success stories as diverse as Palantir, Apple and Twitter, is rightly the object of much admiration.

Policymakers outside the U.S. look at the Valley and feel an urge, perhaps natural, to imitation. Cut red tape, pump money into R&D, create conditions favorable for the development of venture capital and startups, and voila: innovation will happen, bringing productivity gains and growth in its wake. But Silicon Valley’s success is built, of course, on strengths no other nation can match: the size of the U.S. economy and consumer base, the existence of complex and sophisticated financing and risk allocation structures (angel investing, traditional venture capital, private equity) to assist new private companies across the product development life cycle, the world’s best universities, deep and liquid capital markets. These aren’t the types of things other countries can simply create by force of legislation.

If you don’t have Silicon Valley to help you innovate, what next? Despite all the ambitious rhetoric, the thinking on what middle-sized, open economies such as Canada and Australia can actually do to turn themselves into hives of right-brain business ingenuity is surprisingly thin. Earlier this month Richard Florida, the celebrated University of Toronto urban studies academic, said: “We know where innovation comes from. It does not just come from great entrepreneurs or even great companies. It comes from cities, which bring talented and ambitious people, which have the openness and diversity, which spur new ideas, and which are the arenas where ideas come to mate. A successful innovation strategy must be an urban innovation strategy.” The central claim may be debatable — Silicon Valley’s relaxed sprawl doesn’t exactly scream density and urbanism — but it’s an interesting idea. What’s more interesting, though, is that there are so few other new ideas out there exploring the origins of innovation in small, non-U.S. economies. Many governments aspire to foster innovative businesses, but exhibit little flare for innovation themselves in their thinking about how to attack that task. Innovation is their new god, but they worship it with old prayers.

The real problem with much of the reasoning — to the extent it’s even apparent — behind innovation policy in economies outside the U.S. today is that it’s built on a slightly nebulous idea that the state needs to get out of the way and, essentially, let the idiosyncratic geniuses of private enterprise do their thing. This is an economic policy variation of great man theory, in which the state’s role is limited to setting the conditions for entrepreneurship at the margins (tax concessions, light regulatory processes, the creation of special economic zones, and so on), rather than driving its direction. Australia’s Turnbull has flagged the release of a comprehensive national innovation strategy in early December but already the language he and his ministers are choosing to foreshadow its contents tells us much: The emphasis is almost entirely on a minimal state whose best task is to withdraw from the sphere of productive economic activity. The government needs to “remove obstacles” to innovation, Turnbull has argued; innovation, in this sense, is something other people do.

In her influential 2013 book, The Entrepreneurial State, economist Mariana Mazzucato explodes the myth that innovation in the U.S. has been exclusively a creature of Silicon Valley and the private sector. The U.S. government is and has long been a primary motor of innovation, and many of the Valley’s most vaunted creations, including Google and the iPhone, emerged via government research grants or earlier product innovations sponsored, in part, by the state. Mazzucato argues that the U.S.’s stunning postwar successes in innovation have been achieved, in large part, as a result of the state’s active role in guiding the strategy and direction of technological change; the government, via bodies such as the Defense Advanced Research Projects Agency and the Small Business Innovation Research program, has made Silicon Valley what it is today. This has been more than a simple question of mechanically handing out subsidies or spraying R&D dollars in the hope that innovation will follow; the state has set out a proactive development agenda and actively commissioned the generational, market-creating technologies that require innovation (semiconductors, the internet, space exploration). This has required the government both to develop a high tolerance for failure and to think carefully about what the future might look like — the very essence of entrepreneurialism.

The boldness of the U.S. government’s thinking has been greatly facilitated, of course, by the size of the balance sheet at its disposal. No government has the resources to match Washington, but Mazzucato’s contention — a twist on the old Ricardian idea of comparative advantage — is that smaller economies can use their unique, existing strengths to help guide the specific focus of government-led innovation initiatives. These are ideas few appear to be paying attention to. More should. If policymakers across the developed world are going to succeed in making their countries more innovative, creative, confident and dynamic, they may need to throw off the habits of decades and accept that innovation will require more, not less, of a role for the state.