Public funds are instrumental in the prosperity of private enterprises

EVERY NOW AND AGAIN somebody writes a book that breaks out of the narrow field of innovation policy for which it was intended and gains a wider audience, and in the case of The Entrepreneurial State, that is exactly what has happened.

No high level conference on innovation these days is complete without a keynote presentation from its author, Professor Mariana Mazzucato, an economist from the University of Sussex.

Dr Mazzucato’s book was based on an earlier free report published by Demos and based on her work at the Open University (http://bit.ly/1oRJRux) and it provides a fresh perspective on quite how innovation is really created – and the surprising fact is that a huge amount of it is actually created by public funding by governments.

She debunks the notion that the hugely innovative companies in Silicon Valley such as Apple and Google are entirely the result of private sector risk taking. In fact all sorts of key technologies that underpin these companies – the internet, the world wide web, GPS positioning, touchscreen technology and so on – were all developed in government labs or by research funded by the state. Even the algorithm that underpins Google’s search technology was the result of a grant from the US National Science Foundation.

And it’s not just consumer electronic technology that get such support. The pharmaceutical industry benefits enormously from the US$30bn budget of the US National Institute of Health which generates most of the revolutionary new drugs they then bring to market.

And over the years UK-funded researchers have developed the jet engine, liquid crystal displays, MRI scanners, programmable computers, DNA technology, and carbon fibre among many others.

It certainly puts into perspective the tax-avoiding antics of such companies where Apple, Google and so on have arranged their business affairs to ensure that they pay almost no tax on their corporate profits. It does seems somewhat bizarre that they are so unwilling to contribute to the funding that has, and continues to, lead to the innovation they then exploit so successfully.

But maybe we shouldn't be so surprised – they see their role as maximising the return to their shareholders. Instead we should probably blame governments for letting these loopholes persist.

Mazzucato does mention the ‘tax-avoidance' factor, but the main theme of her book is that she believes that governments should demand more when their technologies are exploited – via licensing or equity stakes in their exploitation.

I must say I am less convinced. Governments are not good at 'picking winners' and the dead hand of a nationalised interest is unlikely to add much to the success of an entrepreneurial operation.

If we look at the long history of state funded innovation – particularly in the USA where it has regularly led to the creation of world leading businesses – even when they manage to avoid much of their corporation tax they can't escape employment, property and sales taxes, so there are plenty of ways in which governments still get a return on successful businesses.

And, of course, we all gain enormously from the ubiquitous availability of internet search, GPS navigation systems, or the fact that most of us now have at our fingertips accurate, up-to-date timetables, maps, booking services, online banking and more.

Now, if only we could get these companies to also pay their tax, most would be satisfied.