Public Sector Influence in the Private Sector – A Catalytic Relationship

I found a compelling TED talk by Mariana Mazzucato called “Government: Investor, Risk-taker, Innovator” which describes her argument regarding government’s investment and support in private sector research and innovation.  She details the misconceptions about ‘revolutionary’ firms who innovate and the persistent idea that government should simply support basic institutional structures to maintain stability and promote growth and innovation in the private sector.

Using the example of an iPhone and the pharmaceutical industry, she explains how many of the innovative features, the truly revolutionary aspects of the technology, are actually backed by government projects and funding.  From the internet, GPS, microchip and touchscreen capabilities on modern phones, to truly ‘new’ pharmaceuticals, funds from the US Department of Defense, CIA grants and other government sources are the backbone of the research and development of these innovations.

While the government is often looked at as a “leviathan” which steps in to correct markets, it has much more importance in the private sector and a critical role in innovative developments and research.  Mazzucato emphasizes the need for public sector investment, not only to mitigate the massive risk associated with innovation, but to acknowledge the need for government influence and the widespread benefits that result from market-shaping and the returns that exist but are often overlooked from public projects.

Overall, she introduces a compelling point about the preconceived notion of public sector influence on private sector, and how value is actually created.  The last few minutes of her presentation depict the conceptual importance of government involvement and the risk-return tradeoff, with some key points about how that influence provides benefits and innovation.   Around 11 minutes into the presentation, she describes these aspects and ends with a contrasting view of how our misconceptions can hurt institutions, but embracing this idea can allow for a period of sustainable, improved growth that we have yet to see.


3 comments on “Public Sector Influence in the Private Sector – A Catalytic Relationship

  1. Wow this is a really interesting post. I never really thought about the public sector as a major investor in the private sector other than to support markets. Personally, I have grown up with the view that the less of a role the public sector has in the private sector, the better. Yet, hearing what she has to say is leading me to question that view a little bit. Thinking about it a little more deeply, I keep coming back to Tesla as a company that exemplifies public investment in the private sector. In some cases, I guess public funding is truly necessary to spur innovation today.

  2. I have a very similar viewpoint Chris, but this post also raised some great points. Government funded projects sometimes go overlooked by the public and the innovations are ignored.

  3. Taking equity in firms makes Americans nervous, usually. However, several firms we rescued in the bail out, such as AIG and GM, at least (I’m not sure about other banks), we did through buying equity. These deals were also structured so that the government would often have non-voting shares to protect some of the autonomy of the private market.

    She is absolutely right that many of the key technologies of our current era of prosperity were directly and indirectly government-sponsored. We’ll read a book in a few weeks from Jeff Sachs, another economist, which includes some facts about how much we spend on research; most of it is military spending, and a distant second is biomedical. If we shifted 15% of our military funding to other areas, like clean water, the food system, behavioral research about how to build collaborative systems, think what we might learn, discover, and implement.

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