How to spend public money on innovation?

How to spend public money on innovation?

Government institutions have a considerable role to play in creating breakthrough innovations. However, as experience demonstrates, not all forms of the state's involvement in promoting innovation give rise to revolutionary technologies, and they are always paid for with taxpayers' money.

According to the latest studies on how landmark innovations that emerged in the IT, pharmaceutical and energy sectors over a period of 15 years were financed, those breakthroughs would not have been possible without substantial involvement on the part of the state. On the other hand, there are many examples where the state's involvement in supporting innovation failed to produce any visible effects. Then how can government institutions support (finance) innovative technologies effectively?

Choosing to support only selected solutions present in the economy drives up the social cost of development. Since we like a quick success, it is not surprising that politicians prefer to back technologies which are already available. In any case, refining existing solutions makes perfect sense for businesses, as it provides them with very tangible benefits by improving efficiency. However, when the state becomes involved in the process, it tends to favour specific technologies, which are also typically tied to specific manufacturers. Although the chosen technology develops at a faster pace, it does so without business and market verification, in addition to being more expensive overall. The more capital is involved, the greater the pressure to bring the project to an end, even if there are no valid business reasons to keep it going. Besides, favouring some manufacturers over others hampers the development of alternative, and perhaps more effective, technologies which address the same problems.

State-sponsored support should be technology-neutral. When encouraging innovation, the state should act as a leader whose mission is to define the objectives by identifying key challenges to the development process and mapping out a vision of a future economy in which these challenges have been beaten. This economic vision should be rooted in research and have public approval by referring to generally-accepted objectives, such as energy security. Another role of the state is to allocate money from the budget, which – through national research programmes coordinated by independent experts – are to be invested to enable the discovery of the solutions which will make the vision a reality. Through trial and error, as well as own research, businesses will use these solutions as building blocks for new technologies, which will be placed on the market to verify their validity. Some of these will have the potential to the change the world.

How to spend public money to foster innovation effectively? An example for other institutions to follow has been set by the US DARPA (The Defence Advanced Research Project Agency). Modelled on DARPA, an agency whose job is to finance innovation should have the following characteristics:

• It should be divided into relatively small departments, populated with leading scientists and engineers, with a high degree of budget autonomy in supporting promising ideas. The departments should be proactive (rather than reactive) and prepare agendas for ‘field’ researchers. The aim would be to create a scientific community – dispersed across universities, the public sector and corporations – which would concentrate on certain technological problems that need to be overcome.

• It should provide financing to university researchers as well as to start-ups, mature companies and industrial consortia. It should also do away with the division into primary research and applied research, as the two groups overlap and interact to a large extent, and encourage its personnel to reallocate funding from groups which have failed to make progress to those which show more promise.

• Since the objective is to foster useful technological progress, the agency should also assist businesses in making their products commercially viable. The extent of the support provided should go well beyond financing research.

• One of the agency's key functions should be to use its supervisory capacity to combine ideas, resources and people from various areas of study and application into a constructive whole.