The conventional view of what the state should do to foster innovation is simple: it just needs to get out of the way. At best, governments merely facilitate the economic dynamism of the private sector; at worst, their lumbering, heavy-handed, and bureaucratic institutions actively inhibit it. The fast-moving, risk-loving, and pioneering private sector, by contrast, is what really drives the type of innovation that creates economic growth. According to this view, the secret behind Silicon Valley lies in its entrepreneurs and venture capitalists. The state can intervene in the economy—but only to fix market failures or level the playing field. It can regulate the private sector in order to account for the external costs companies may impose on the public, such as pollution, and it can invest in public goods, such as basic scientific research or the development of drugs with little market potential. It should not, however, directly attempt to create and shape markets. A 2012 Economist article on the future of manufacturing encapsulated this common conception. “Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage,” the article stated. “As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.”
That view is as wrong as it is widespread. In fact, in countries that owe their growth to innovation, the state has historically served not as a meddler in the private sector but as a key partner of it—and often a more daring one, willing to take the risks that businesses won’t. Across the entire innovation chain, from basic research to commercialization, governments have stepped up with needed investment that the private sector has been too scared to provide. This spending has proved transformative, creating entirely new markets and sectors, including the Internet, nanotechnology, biotechnology, and clean energy.
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