26 March 2014
Forum 2013: The Enterprising State

Enterprising state at OECD Week 2013

The final session at OECD Forum 2013, on the "enterprising state", made many interesting points, but failed to address some of the finer nuances.

The final session at OECD Forum 2013, on the "enterprising state", made many interesting points, but failed to address some of the finer nuances.

A major success story of the enterprising state was the creation of the Internet, as highlighted by Dirk Pilat, OECD's deputy director for science, technology and industry. This really got started in 1969 at the US government agency, ARPANET. This led to the invention of the World Wide Web at CERN (European Organization for Nuclear Research) in 1989 by British scientist Tim Berners-Lee. And then to the invention of the first web browser.

All this would not have easily happened without the state. It has of course been picked up and further developed by business. But Google was only created in 1998, many years down the track.

There have of course been many costly ventures by government, such as efforts to develop biofuels to tackle climate change. Another costly area is that of state-owned enterprises, which receive preferential treatment and reduce competition in markets.

Overall, the enterprising state can play an important role in basic research, and in financing big initiatives that the private sector cannot. But the market should be left to judge what is successful, and state initiatives should be subject to evaluation, transparency and accountability.

Public/private partnerships in education, infrastructure and government services have played an important role in Estonia according to Nele Leosk from the e-Governance Academy. Small countries can surprise with their innovations, Skype coming from developers in Estonia, Denmark and Sweden. And local governments are important in the innovation arena, commented INSEAD's Bruno Lanvin.

The state should focus on early stage, cutting edge research, argued Robert Hormats, US Under Secretary of State. But the commercialization of research should be undertaken by the private sector. In this regard, the US has great strengths in its venture capital market, and the willingness of entrepreneurs to take risks.

Hormats, a former Vice Chairman of Goldman Sachs, insisted that regulation stifles innovation. For example, the breaking up of American telecommunication giant ATT opened up that sector to competition and innovation. He stressed the importance of protection of intellectual property, of education for exploiting the benefits of technology, and of business working in partnership with universities and government.

A culture of risk-taking, and experimentation, and tolerance of failure are critical. Thomas Edison failed 70 times in trying to invent the electric light bulb. The Model T Ford was the result of all the models from A to S not succeeding. Experimentation and failure are great learning processes. Lanvin argued that in the US, even the public sector has a greater risk-taking culture.

But the global financial crisis was born of excessive innovation, and insufficient regulation, retorted Giuseppe Scognamiglio from Italy's UniCredit. And the subsequent failure to agree on global financial regulation leaves us too exposed to future financial crises. Lanvin argued in favor of convergence of regulatory principles, but allowing each country to adopt its own specific regulations, based its own situation.

The panel seemed to agree that the US has a much stronger innovative culture than Europe and emerging economies. What are the key ingredients?

While a strong banking system is important for the economy, it is not so for entrepreneurship and innovation, argued Hormats. Venture capital and angel investors are key for early stage innovation, and Europe is much weaker in this area. Hormats noted that some American entrepreneurs use their credit cards to get started. As Pilat said, the 3Fs are important for financing innovation -- family, friends and fools!

Is the present weak global economy a constraint on innovation?

No, argued Hormats. People tend to be more innovative in difficult times. Necessity is the mother of invention, because the human mind is highly inventive. But as Leosk countered, it is also human nature to resist change -- it took years for Internet usage to spread in Estonia.

New products can also create their own demand. No-one demanded an iPod, iPhone or an iPad until Steve Jobs created them. Television was invented during the great depression. And if you surveyed consumers before the invention of the automobile, they would have demanded more horses.

While it is true that innovations generate lots of profits for the innovators, they can also create much profits for the product users, as evidenced by the case of Microsoft software.

Multi-disciplinarity and cross-fertilization are important for innovation, as evidenced by the case of biotechnology, argued Hormats. Pilat added in a similar vein that many national policies suffer from being led by a single ministry and not taking a whole of government approach. And as the case of the Internet shows, a long-time approach is essential.

The enterprising state should also endeavor to be innovative itself, argued Leosk. In Estonia and Iceland, the economic crisis led to a crisis in governance, thereby spurring innovation in government such as through crowd-sourcing, e-governance and open-government.

Finally at the end of the session, the panelists addressed the role of the enterprising state in emerging economies like the BRICS. These economies have of course enjoyed outstanding performance in recent decades, and more recently through the crisis period. But the key issue for them is how to rise to the next level of economic development, argued Hormats. They have struck an invisible wall. They need to be open to new information, and new ideas, and to be free to innovate. They lack well-developed innovation ecosystems, and strong IPR. Moreover, a nationalistic approach will not work as research and innovation are now open and international.

While there is much good sense in Hormats' reaction, there are many critical issues he did not satisfactorily address. Japan, Korea and Taiwan all developed very rapidly using a "developmental state" model, with a very strong and activist state. China is now practicing its own "state capitalism" approach with great success. And in Singapore, the state has also played a very important role.

It's difficult to reject out of hand these Asian cases, as Hormats and many others seem to do (bytheway, there was curiously no Asian representative on the panel). Asia's economic development has been much faster than that of other countries, including the US.

And even today, state-led development in Asia is resulting in better high school education results than in the US and most OECD countries. According to the OECD PISA study, high-school students from five Asian locations (Shanghai, Korea, Hong Kong, Singapore and Japan) are in the world's top ten, and the US is languishing much further down the list. Massive investments are being made in R&D in Asia. And a longer term and more consistent policy approach is certainly evident in China where presidents are in place for a decade.

Also today, the US government is failing to provide the most basic service to its citizens, that of security. America suffers from an extraordinary high rates of violence and murder. A so-called "gun culture" means that Americans are free to own guns, but not able to live in a country which is free of violence. And the American government often provides weak support to its citizens exposed to natural disasters.

These fundamental insecurities are surely adversely affecting the US economy as well as its society. For example, growing numbers of skilled migrants and international students are choosing Australia, Canada or New Zealand rather than America.

In other studies, the OECD has started to puncture the triumphalistic myth of "innovative America". True, the US innovation system has many strengths, including world class research universities and firms that thrive in innovation-intensive sectors.

However, fissures have begun to appear, notably in the areas of human capital development, the patent system and manufacturing activity, while public investments in R&D and research universities are at risk of being curtailed by budget cuts. Revitalizing the dynamism of innovation should receive heightened attention by US policymakers.

In short, 90 minutes was not long enough to tackle all the nuances related to the "enterprising state".


John West
Executive Director
Asian Century Institute
Tags: asia, role of state, innovation, entrepreneurship, developmental state, state capitalism

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