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  • Have you ever asked yourselves why it is that

  • companies, the really cool companies,

  • the innovative ones, the creative,

  • new economy-type companies --

  • Apple, Google, Facebook --

  • are coming out of one particular country,

  • the United States of America?

  • Usually when I say this, someone says, "Spotify!

  • That's Europe." But, yeah.

  • It has not had the impact that these other companies have had.

  • Now what I do is I'm an economist,

  • and I actually study the relationship

  • between innovation and economic growth

  • at the level of the company, the industry and the nation,

  • and I work with policymakers worldwide,

  • especially in the European Commission,

  • but recently also in interesting places like China,

  • and I can tell you that that question

  • is on the tip of all of their tongues:

  • Where are the European Googles?

  • What is the secret behind the Silicon Valley growth model,

  • which they understand is different

  • from this old economy growth model?

  • And what is interesting is that often,

  • even if we're in the 21st century,

  • we kind of come down in the end to these ideas

  • of market versus state.

  • It's talked about in these modern ways,

  • but the idea is that somehow, behind places like Silicon Valley,

  • the secret have been different types of market-making mechanisms,

  • the private initiative, whether this be about

  • a dynamic venture capital sector

  • that's actually able to provide that high-risk finance

  • to these innovative companies,

  • the gazelles as we often call them,

  • which traditional banks are scared of,

  • or different types of really successful

  • commercialization policies which actually allow these companies

  • to bring these great inventions, their products,

  • to the market and actually get over this

  • really scary Death Valley period

  • in which many companies instead fail.

  • But what really interests me, especially nowadays

  • and because of what's happening politically around the world,

  • is the language that's used, the narrative,

  • the discourse, the images, the actual words.

  • So we often are presented

  • with the kind of words like that the private sector

  • is also much more innovative because it's able to

  • think out of the box.

  • They are more dynamic.

  • Think of Steve Jobs' really inspirational speech

  • to the 2005 graduating class at Stanford,

  • where he said to be innovative,

  • you've got to stay hungry, stay foolish.

  • Right? So these guys are kind of the hungry

  • and foolish and colorful guys, right?

  • And in places like Europe,

  • it might be more equitable,

  • we might even be a bit better dressed

  • and eat better than the U.S.,

  • but the problem is this damn public sector.

  • It's a bit too big, and it hasn't actually allowed

  • these things like dynamic venture capital

  • and commercialization to actually be able to really

  • be as fruitful as it could.

  • And even really respectable newspapers,

  • some that I'm actually subscribed to,

  • the words they use are, you know,

  • the state as this Leviathan. Right?

  • This monster with big tentacles.

  • They're very explicit in these editorials.

  • They say, "You know, the state, it's necessary

  • to fix these little market failures

  • when you have public goods

  • or different types of negative externalities like pollution,

  • but you know what, what is the next big revolution

  • going to be after the Internet?

  • We all hope it might be something green,

  • or all of this nanotech stuff, and in order for that stuff to happen," they say --

  • this was a special issue on the next industrial revolution --

  • they say, "the state, just stick to the basics, right?

  • Fund the infrastructure. Fund the schools.

  • Even fund the basic research, because this is

  • popularly recognized, in fact, as a big public good

  • which private companies don't want to invest in,

  • do that, but you know what?

  • Leave the rest to the revolutionaries."

  • Those colorful, out-of-the-box kind of thinkers.

  • They're often called garage tinkerers,

  • because some of them actually did some things in garages,

  • even though that's partly a myth.

  • And so what I want to do with you in, oh God,

  • only 10 minutes,

  • is to really think again this juxtaposition,

  • because it actually has massive, massive implications

  • beyond innovation policy,

  • which just happens to be the area

  • that I often talk with with policymakers.

  • It has huge implications, even with this whole notion

  • that we have on where, when and why

  • we should actually be cutting back on public spending

  • and different types of public services which,

  • of course, as we know, are increasingly being

  • outsourced because of this juxtaposition.

  • Right? I mean, the reason that we need to maybe have free schools or charter schools

  • is in order to make them more innovative without being emburdened

  • by this heavy hand of the state curriculum, or something.

  • So these kind of words are constantly,

  • these juxtapositions come up everywhere,

  • not just with innovation policy.

  • And so to think again,

  • there's no reason that you should believe me,

  • so just think of some of the smartest

  • revolutionary things that you have in your pockets

  • and do not turn it on, but you might want to take it out, your iPhone.

  • Ask who actually funded the really cool,

  • revolutionary thinking-out-of-the-box

  • things in the iPhone.

  • What actually makes your phone

  • a smartphone, basically, instead of a stupid phone?

  • So the Internet, which you can surf the web

  • anywhere you are in the world;

  • GPS, where you can actually know where you are

  • anywhere in the world;

  • the touchscreen display, which makes it also

  • a really easy-to-use phone for anybody.

  • These are the very smart, revolutionary bits about the iPhone,

  • and they're all government-funded.

  • And the point is that the Internet

  • was funded by DARPA, U.S. Department of Defense.

  • GPS was funded by the military's Navstar program.

  • Even Siri was actually funded by DARPA.

  • The touchscreen display was funded

  • by two public grants by the CIA and the NSF

  • to two public university researchers at the University of Delaware.

  • Now, you might be thinking, "Well, she's just said

  • the word 'defense' and 'military' an awful lot,"

  • but what's really interesting is that this is actually true

  • in sector after sector and department after department.

  • So the pharmaceutical industry, which I am personally

  • very interested in because I've actually had the fortune

  • to study it in quite some depth,

  • is wonderful to be asking this question

  • about the revolutionary versus non-revolutionary bits,

  • because each and every medicine can actually be

  • divided up on whether it really is revolutionary or incremental.

  • So the new molecular entities with priority rating

  • are the revolutionary new drugs,

  • whereas the slight variations of existing drugs --

  • Viagra, different color, different dosage --

  • are the less revolutionary ones.

  • And it turns out that a full 75 percent

  • of the new molecular entities with priority rating

  • are actually funded in boring, Kafka-ian public sector labs.

  • This doesn't mean that Big Pharma is not spending on innovation.

  • They do. They spend on the marketing part.

  • They spend on the D part of R&D.

  • They spend an awful lot on buying back their stock,

  • which is quite problematic.

  • In fact, companies like Pfizer and Amgen recently

  • have spent more money in buying back their shares

  • to boost their stock price than on R&D,

  • but that's a whole different TED Talk which one day

  • I'd be fascinated to tell you about.

  • Now, what's interesting in all of this

  • is the state, in all these examples,

  • was doing so much more than just fixing market failures.

  • It was actually shaping and creating markets.

  • It was funding not only the basic research,

  • which again is a typical public good,

  • but even the applied research.

  • It was even, God forbid, being a venture capitalist.

  • So these SBIR and STTR programs,

  • which give small companies early-stage finance

  • have not only been extremely important

  • compared to private venture capital,

  • but also have become increasingly important.

  • Why? Because, as many of us know,

  • V.C. is actually quite short-term.

  • They want their returns in three to five years.

  • Innovation takes a much longer time than that,

  • 15 to 20 years.

  • And so this whole notion -- I mean, this is the point, right?

  • Who's actually funding the hard stuff?

  • Of course, it's not just the state.

  • The private sector does a lot.

  • But the narrative that we've always been told

  • is the state is important for the basics,

  • but not really providing that sort of high-risk,

  • revolutionary thinking out of the box.

  • In all these sectors, from funding the Internet

  • to doing the spending, but also the envisioning,

  • the strategic vision, for these investments,

  • it was actually coming within the state.

  • The nanotechnology sector is actually fascinating

  • to study this, because the word itself, nanotechnology,

  • came from within government.

  • And so there's huge implications of this.

  • First of all, of course I'm not someone,

  • this old-fashioned person, market versus state.

  • What we all know in dynamic capitalism

  • is that what we actually need are public-private partnerships.

  • But the point is, by constantly depicting

  • the state part as necessary

  • but actually -- pffff -- a bit boring

  • and often a bit dangerous kind of Leviathan,

  • I think we've actually really stunted the possibility

  • to build these public-private partnerships

  • in a really dynamic way.

  • Even the words that we often use to justify the "P" part,

  • the public part -- well, they're both P's --

  • with public-private partnerships

  • is in terms of de-risking.

  • What the public sector did in all these examples

  • I just gave you, and there's many more,

  • which myself and other colleagues have been looking at,

  • is doing much more than de-risking.

  • It's kind of been taking on that risk. Bring it on.

  • It's actually been the one thinking out of the box.

  • But also, I'm sure you all have had experience

  • with local, regional, national governments,

  • and you're kind of like, "You know what, that Kafka-ian bureaucrat, I've met him."

  • That whole juxtaposition thing, it's kind of there.

  • Well, there's a self-fulfilling prophecy.

  • By talking about the state as kind of irrelevant,

  • boring, it's sometimes

  • that we actually create those organizations in that way.

  • So what we have to actually do is build

  • these entrepreneurial state organizations.

  • DARPA, that funded the Internet and Siri,

  • actually thought really hard about this,

  • how to welcome failure, because you will fail.

  • You will fail when you innovative.

  • One out of 10 experiments has any success.

  • And the V.C. guys know this,

  • and they're able to actually fund the other losses

  • from that one success.

  • And this brings me, actually, probably,

  • to the biggest implication,

  • and this has huge implications beyond innovation.

  • If the state is more than just a market fixer,

  • if it actually is a market shaper,

  • and in doing that has had to take on this massive risk,

  • what happened to the reward?

  • We all know, if you've ever taken a finance course,

  • the first thing you're taught is sort of the risk-reward relationship,

  • and so some people are foolish enough

  • or probably smart enough if they have time to wait,

  • to actually invest in stocks, because they're higher risk