One of the recent jewels in publications on Innovation, R&D and patenting is prof. Mariana Mazzucato’s book “The Entrepreneurial State debunking private vs. public sector myths”. It was mentioned one of the Financial Times’ 2013 books of the year, and on Forbes’ list of 13 recommended readings for creative leaders to close out 2013. Rightfully so.
According to Mazzucato there are 4 myths that need to be debunked.
Myth 1: Innovation is about R&D
In order to reach growth for a company spending more on R&D is not always the panacea. Conditions strongly differ between sectors. She found that in the pharmaceutical industry only those firms that patent five years in a row (“persistent patenters”), which engage in alliances, achieve growth from their R&D spending. Other academic research indicates that only the fastest- growing firms reap benefits from their R&D spending
Myth 2: Small is beautiful
Mazzucato calls the abundance of funds available for SME’s a hype, mainly caused by the confusion between size and growth. The most robust evidence emphasizes not the role of small firms in the economy but to a larger extent the “young high-growth firms”. While many high growth firms are small, many small firms are not high growth. Major government policies are aimed at tax breaks and benefits to SMEs with the aim to make the economy more innovative and productive. Research found that there is no systematic relationship between firm size and growth. Productivity: small firms are often less productive that large firms. Some economies that have favored small firms, such as India, have in fact performed worse.
Myth 3: Venture Capital is Risk Loving
Venture capital, private equity capital, is focused on early stage, high potential growth particularly in knowledge-based sectors where capital intensity and technological complexities are high. However time after time it has been public rather than privately funded venture capital that has taken the most risks. Government funding has played a leading role not only in the early stage research but also in the commercial viability stage.
Venture capital funds have a big bias towards investing in projects where the commercial viability is within 3-5 years period. This is sometimes possible, Mazzucato points to Google, however mostly it is not. Mazzucato points to the great number of biotech companies that have been funded at very early stage that produce nothing, yet have been sold on the public market for monetary gain for the venture capitalists. She writes: “The increased focus on patenting and venture capital is not the right way to understand how risky and long-term innovations occur.
Myth 4: We Live in a Knowledge Economy –Just Look at all the Patents
“The rise in patents does not reflect a rise in innovation but a change in the patent laws and a rise in the strategic reasons why patent are being used”, writes Mazzucato. The obsession within the IP community with patent numbers and the suggestion that those numbers tell you about which country or which company is “most innovative” seems to rise to unprecedented highs when (even) the EPO mentions (Annual Report 2013) that the Swiss are among the most innovative people taken the number of patents per capita (mainly caused by the number of major pharmaceutical companies based in Switzerland).
The exponential rise in patents and the increasing lack of relationship this rise has had with actual “innovation” (e.g. new products and processes) has occurred to various reasons.
The Bayh-Dole Act which allowed publicly funded research to be patented rather than remain in the public domain encouraged the emergence of the biotechnology industry as most of the new biotech companies were new spinoffs from university labs receiving heavy state funding. Directing too much attention to patents, rather than to specific type of patents, such as those that are highly cited, risks wasting a lot of money as prof. Mazzucato argue using the patent box case. In October 2010 the UK Minister of Finance announces a “patent box” policy beginning 2013 which will reduce the rate of corporate tax on the income derived from patents to 10% (which fitted in the government’s belief that investment and innovation can be easily nudged through tax policy. Netherlands followed with a similar policy. Mazzucato argues that R&D tax credits are enough to address the market failure issue around R&D and that the patent box policy is poorly targeted at research as the policy targets the income that’s results from patented technology not the research or the innovation itself.
Myth 5: Europe’s Problem is all about Commercialization
Mazzucato refers to Europe’s main disadvantage in innovation in comparison to the US is its lack of capability of “commercialization” which stems from problems with the “transfer” of knowledge. “In fact, EU problems don’t come from poor flow of knowledge from research but from the EU firms’ smaller stock of knowledge. This is due to the great differences in public and private spending on R&D.
In IPEG’s home country, The Netherlands, the situation is rather alarming as published data from the Rathenau Institute (‘Investeringen in Wetenschap en Innovatie 2012-2018’) of March 2014 show. The direct expenditures for R&D by the Dutch government will fall the coming years from 0,78 percent of BBP to 0,65 percent. There should be a rise to 1 percent but the opposite happens, a deplorable 0,65 percent! Our abundance in natural gas reserves (12 billion euros) is now used to lower the state’s budget shortage. The Germans however don’t have natural gas invest a lot more in research than the Dutch. Netherlands will, in 2014, join the innovation followers together with Cyprus, Estland and Slovenia, rather than the innovation leaders like Germany.
Myth 6: Business Investment Requires “Less Tax and Red Tape”
I will leave it here at that. More in Mariana’s Mazzucato’s excellent book, For anyone interested in Innovation, R&D and the relation with Intellectual property a must read.
(Anthem Frontiers of Global Political Economy, Anthem Press, 2013