From our sister publication, Global Government Venturing.
In an opening address at the Mission-Oriented Finance for Innovation conference (Mofi2014) at the House of Commons, the UK’s lower chamber of parliament, Andrew Haldane, chief economist at the Bank of England, noted that China’s economy is now about seven times the size of Italy’s, whereas in 1990 they were equal in size.
The subsequent relative change was due to China’s focus on the “one thing” economists know – “today’s investment is tomorrow’s growth”, Haldane said, in an example of what he called “patient” capital that had the potential to unlock human potential.
While there was discussion about this, including the perils of mistaking correlation for causation, Haldane’s broader point ran through the subsequent two days of discussion organised by Sussex University.
A series of speakers noted the flaws in pre-credit-crisis economic theory and practices and argued for change, even if without much hope that “vested interests in the current system” could be altered in the short term. There was a call for a more “enterprising state” able to support, through its venture investment and tax and regulatory policies, society’s innovation and businesses and claim a greater share of the rewards.
Baron Turner of Ecchinswell, a member of the UK’s Financial Policy Committee and chairman of UK regulator the Financial Services Authority until its abolition in March 2013, examined the pre-crisis rise in debt levels, from 50% of gross domestic product (GDP) in the 1950s to 170% before the crisis, and standard economic theories underpinning their actions. He asked: “Was it a good thing? Finance is a commodity not a consumer good.”
He said society’s interest in finance, therefore, was whether it was cost-effective and efficient. However, he said he no longer believed the hypothesis that markets were efficient. “The price is not always right.” And adding more liquidity through more debt, such as through securitisation or derivatives, does not make them more efficient or tradable and so better priced.
Further, the creation of more money through the shadow banking system creating derivatives and other financial instruments led to little lending to new business creation – as argued in text books – but instead went to fuel an increase in prices in real estate. For individual banks lending on individual property deals, the transaction could appear low-risk and easy, Turner continued, but was effectively reinforcing and harmful to societies. This, therefore, required “public policy intervention”, such as capital risk weights and limiting “hot” money international capital flows while boosting long-term foreign direct investment.
Germany-based angel investor Peter Jungen continued Turner’s theme, arguing it was “no surprise” there was more debt in economies as it had tax advantages over equity.
Instead, a host of academics organised by Mofi2014 chairman Mariana Mazzucato, professor in the economics of innovation at the science policy research unit of Sussex University, “rethought” the public and private risks and rewards.
Mazzucato and Randall Wray, professor in the department of economics at US-based University of Missouri Kansas City, synthesised economic thinkers John Maynard Keynes, Joseph Schumpeter and Hyman Minsky to show how societies could again finance innovation for long-run growth and full employment rather than for the benefit of intermediaries in a “financialised” economy.
William Lazonick, professor of Massachusetts University’s Centre for Industrial Competitiveness and president of the non-profit Academic-Industry Research Network, effectively warned these intermediaries encompassed more than bankers to include public shareholders that, using the “maximising shareholder value” policy prescription resulting in 90% of corporate earnings being returned to them rather than “allocated to new investment in productive capabilities or higher standards of living for corporate employees”.
In the US between 2001 and 2013, companies in the Standard & Poor’s 500 index spent $3.6 trillion on buying back their own shares, primarily to manipulate their companies’ stock prices, and another $2.4 trillion on dividends, Lazonick said.
By contrast, Lazonick pointed to search engine provider Google, which had yet to pay a dividend but was credited with investing in potentially disruptive innovations through its foundation, GoogleX’s “atoms” laboratory and corporate venturing units Google Ventures and Google Capital.
Arun Majumdar, vice-president of energy at Google, said one lesson from his analysis of the years since the industrial revolution was the need for “persistent” funding of research. He said it was “bull” to try to separate research into basic or applied, just as it was important to recognise research took time to mature and it was hard to foretell where it would lead – and even failure was important if lessons could be learned quickly.
Majumdar called for industry to share part of the costs of some research and development with governments and advocated the creation of a public-private endowment to help research through the multiple “valleys of death”.
In turn, Mazzucato argued there also needed to be a re-evaluation in the division of rewards as well as risks from investing in innovation. She said: “All of the technologies that make the iPhone smart – the internet, GPS [global positioning system], touch-screen display and Siri [voice-recognition system] – trace their funding back to public investments made in [US government] institutions like Darpa [Defense Advanced Research Projects Agency] or the CIA [Central Intelligence Agency] that are guided by different types of mission.”
But while failure is inevitable in the innovation process, “some actors”, such as venture capitalists (VCs), in the ecosystem have presented themselves as “the key risk-takers and innovators, and in doing so reaped a much greater share of the returns from innovation than the risk that was actually taken”, Mazzucato said.
She questioned whether taxes provided enough return to cover losses and asked: “Are methods of more direct rewards for taxpayers required, whether through retention of some equity, a golden share of the IPR [intellectual property rights] or the use of income contingent loans?”
This idea is questionable in certain quarters. Gordon Murray, emeritus professor of management (entrepreneurship) at UK-based Exeter University, asked rhetorically: “Is public venture capital an oxymoron … or merely moronic?”
After decades of study, he was “surprised” by just how “continuously popular” VC had been regarded by policymarkers across the world despite “ambivalent” results from its cost-benefit impact. Nonetheless, Murray later gave some hope that the “better-designed” public VC programmes, such as in the UK recently under the state-owned British Business Bank, had “a valuable and complementary role to independent market investors”.
Bernardo Gradin, founder and head of Brazil-based synthetic biology company GranBio and former CEO of the country’s largest non-state-owned oil major, Braskem, provided a case study of how such a direct investment government venturing policy might work in practice.
Having founded GranBio with $500m from his family office, Gradin said at the start of last year that Brazil’s National Bank for Economic and Social Development (BNDES) had invested $200m for a 15% stake in GranBio and provided $150m for the development of its productio
n facility. This venture equity investment had a guarantee that BNDES would receive at least $100m back within seven years.
Through the funding of a series of four roll-up acquisitions of US-based companies along with synthetic biology research and development on sugar cane as a feedstock for energy production, GranBio within three years has begun its second-generation ethanol plant, provided 610 jobs and built up 125 patents, Gradin said.
He said government was getting better at providing missions through which to stimulate entrepreneurs, provide smart demand, freedom from bureaucracy, finance to scale up ideas, letting private sector lead and building transnational symbiotic ecosystems.
Similarly, Leonardo Burlamaqui, an associate professor of economics at Rio de Janeiro State University in Brazil, argued China could be taken as the “prototype of a development entrepreneurial state” to “become an economic superpower”.
Effectively, in Haldane’s analysis, is not just about the rate of investment that is important but how the state views its role and reaps the rewards from innovation.
