The Role of Government in Innovation

Think for a minute about all of the innovations that had to take place for you to read this sentence. There are lots – computers, semi-conductors, the internet, and the world-wide web just for starters. Where did this innovation come from? Many firms have played important roles in these breakthrough innovations. But another important player in the US at least has been the government. Nearly all of the major innovations relating to computers and the internet have been the result of government funded and often government directed research.

Which is interesting since we keep hearing about how the US is all about markets, and nothing but markets.

I thought of this because of an article that I ran across called Okinawa’s Doomed Innovation Experiment by Vivek Wadhwa. After discussing investment by the Japanese government in an effort to create an innovation cluster on Okinawa, Wadhwa says:

The Japanese have it all wrong. The original clusters failed—just as nearly all the cluster development projects all over the world fail—because the basic premise is wrong: Governments can’t mandate or manufacture innovation, no matter how much they invest. Clusters happen where like-minded entrepreneurs congregate, start risky ventures, and learn from one another other by networking. Innovation is a by-product of this synergy and experimentation. What is needed is less government control, not more.

Here’s the problem with this argument – it’s false. Many cluster development projects around the world have in fact failed. But many have also succeeded. If you make either the argument that governments should have nothing to do with innovation, or that innovation should be government directed, you are making an ideological statement, not a fact-based argument.

This is a really tricky area, because there are no consistent outcomes. Silicon Valley was formed on the development firms making first integrated circuits and then semi-conductors. Both of these industries were heavily supported by the US government. This history is well documented by Kenneth Flamm in Creating the Computer: Government, Industry and High Technology. After the integrated circuit was invented in 1959,

Close to a decade passed before the integrated circuit was cheap enough to become widely used in commercial electronics. During these crucial years the U.S. military again played a key role in funding development of technology and providing a large market for these premium-priced components. Industry sources estimate that defense customers ended up paying for nearly half of all semiconductor research and development from the late 1950s to the early 1970s. …

So the success of U.S. computer firms was built on a technology base in electronic components, that, in its infancy, benefited greatly from a healthy diet of government support. …

But even today, government retains a powerful influence at the most radical leading edge of architectural innovation in computers. Research on novel types of parallel architectures and the financial backing for the first working models of these new concepts rely heavily on federal funding. And development of the largest and most powerful computers of the day – even those with more conventional designs – continues to rely heavily on demand by government agencies.

It’s the same story for computer memory, microprocessors, and the technology underpinning the internet itself.

The government role in supporting innovation is incredibly complex. Silicon Valley and the innovation that has developed there is based on government support. So are the innovation clusters in automobiles and consumer electronics in Japan, in electronics in Taiwan, in software in Ireland, and in clean technologies in China.

But on the other hand, we have notable failures in all of those countries as well – much as in the Okinawa example.

Instead of making sweeping generalisations about how governments should stay out of innovation, it would be more useful to try to figure out the circumstances in which some government-led innovation initiatives fail, while others succeed.

Anyone that says there is only one way to do things is simply not correct. Governments play complex and unpredictable roles in supporting innovation. We know a bit about some of the things that they should and shouldn’t be doing, but this is still an active area of research, with much more to learn. But the correct answer is neither “only markets” nor “only governments”. The two have to work together – there’s no way around it.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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