janabeil01: How Much Should Government Intervene In The Innovation Process?

By Francis Moran and Leo Valiquette

This is the 15th article in a continuing series that examines the state of the ecosystem necessary to successfully bring technology to market. Based on dozens of interviews with entrepreneurs, venture capitalists, angel investors, business leaders, academics, tech-transfer experts and policy makers, this series looks at what is working and what can be improved in the go-to-market ecosystem in the United States, Canada and Britain. We invite your feedback.

How much should government intervene in the process of innovation and commercialization? In a truly entrepreneurial culture that has healthy risk tolerance, one could argue that the government doesn’t need to play any substantial role at all. Entrepreneurs worthy of that title just get out there and do what they must to succeed.

In his book, The Way Ahead: Meeting Canada’s Productivity Challenge, Tom Brzustowski, RBC professor for the commercialization of innovation at the University of Ottawa’s Telfer School of Management, wrote, “I believe that it is only the private sector that creates wealth.” The public sector, on the other hand, is a consumer of wealth in order to bankroll the two fundamental roles it plays.

First, it provides the “supportive and normative framework for wealth creation by the private sector” through laws, regulations, treaties, incentives and so forth. Second, it is a “concentrator of resources assembled through the tax system” to pay for things like education, healthcare and infrastructure.

Now the big question is, how any government can best create that “supportive and normative framework” without simply creating a welfare state, or choking entrepreneurial endeavour with too much bureaucratic intervention?

That startup nation

In an earlier post, we looked at the entrepreneurial chutzpah that has helped to define Israel as a startup powerhouse. This time, let’s take a closer look at what role government has played in that country’s tech sector, as explained by authors Dan Senor and Saul Singer in their book, Startup Nation: The story of Israel’s economic miracle.

Israel – a country of 7.1 million, only 60 years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources – has produced more startup companies than large, peaceful and stable nations like Japan, China, India, Korea, Canada, and the U.K. On a per capita basis, it has attracted in recent years more than twice as much venture capital investment as the U.S. and 30 times more than Europe.

Where and how has government played a role in this? Senor and Singer distill it down to three key points:

1) Israel is a country founded on strong immigration and assimilation policies that create a highly motivated, diversified pool of talent. In fact, immigrants from 70 different countries call the tiny nation home.

“Immigrants are natural risk takers since they were willing to uproot themselves and start over,” said Senor in an interview with Freakanomics.com, adding that, “politicians there actually compete with each other with campaign promises to bring in more immigrants, not fewer.”

2) Israel spends more as a percentage of its GDP on R&D than any other country in the world, about twice the OECD average at five per cent. More importantly, it knows how to apply public policy to drive the “D” side of that equation and make the investment work for startups by seeing where there are opportunities to lever Israel’s expertise in growth areas such as water management, agricultural science and alternative energy.

3) Israel actively cultivates a culture of entrepreneurship and leadership in the military that provides a degree of life experience unlike any other.

“Certain units have become technology boot camps, where 18- to 22-year-olds get thrown projects and missions that would make the heads spin of their counterparts in universities or the private sector anywhere else in the world,” said Senor. “The Israelis come out of the military not just with hands-on exposure to next-gen technology, but with training in teamwork, mission orientation, leadership, and a desire to continue serving their country ... teenagers are not only given the responsibility to make life-saving decisions, typically with little data, but to question authority regularly in doing so.”

In summary, Israeli government does a lot to create an environment which feeds that entrepreneurial chutzpah and also looks at where public policy can be applied to create more resources and opportunity. Beyond that, however, it stays out of the way.

But what happens when government, with the best of intentions, gets a little too involved, particularly on the investment side?

‘Regulatory Capture’

In its May 2010 report, “Government Involvement in the VC Industry, International Comparisons,” the Canadian Venture Capital Association (CVCA) reviewed the results of government involvement in the VC industry in eight countries. It found that such programs often fail to boost VC and entrepreneurship for two key reasons.

First, such programs are often poorly designed. They cannot properly adapt to the characteristics of the economic environment or how markets work and often underestimate risk. The result is conflicting and counterproductive sets of objectives and constraints and lack of proper skills to implement programs.

Second, such efforts often suffer from “regulatory capture,” which occurs when a regulatory agency created to act in the public interest instead acts in favour of the commercial or special interests that dominate the industry or sector it is charged with regulating. In other words, government money ends up lining someone’s pockets with little to show for it and taxpayers are left holding the bag.

In short, throwing money at innovation and entrepreneurship in the hope it will yield dividends is a crapshoot at best, with the odds that much worse if it the gatekeepers of the cash are government bureaucrats who themselves do not have credible experience in the private sector bringing technology to market.

In Seattle

We wanted to finish off with some thoughts on the role of government from entrepreneur-turned-VC Mark Suster. Or, rather, his lack of emphasis on government in his post last week about Seattle’s tech scene, A Few Key People Really Can Make a Huge Difference.

“The ingredients are all here,” he wrote. “Seattle should be the envy of any non-Silicon Valley tech community in the country. Great lifestyle, great cost of living, motivated people and only the crap weather on the negative side. They have their successes; yet somehow all of the neurons don’t yet seem to be firing as powerfully as they need to be.”

Suster went on to describe his key ingredients for building a healthy technology sector, including the leadership of elder statesmen, a strong local angel community with capital that is reinvested, “patron companies” (which we have described before as “champions”), and of course, “marketing muscle.”

While government figures in his recipe (those angel investors, for example, would certainly appreciate favourable tax treatment), it merited little mention.

After all, with a nod to Iain Klugman of Communitech, government doesn’t start companies, or build them, either. Individuals do.

Coming up: more thoughts on government’s role in the ecosystem.

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