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Is this the way to the future? (Photo credit: bennylin0724)

The World Economic Forum meeting in Vienna this week will be grappling with the challenging problem of European innovation. The evidence is suggesting that rather than leading the world, Europe is worryingly backsliding. Worse, of course, is the public rhetoric is not backed up by actual real-world action by governments, who persist in the old ways. This has produced the current complex mix of disincentives for risk-takers with governments fearful of the disruptive impact of innovation on European preferences (ranging from employment to lifestyle), coupled with frequently ineffective and unreformed public sector organisations. This has been admirably addressed, too, in the WEF report on the future of government.

Rather than FAST government (flatter, agile, streamlined, tech-enabled) as the WEF calls for, we find hierarchical and bureaucratic, slow and sluggish, complex and unreformed, tech-naive government — these are hardly attributes needed if the public sector is to play a role in public/private partnerships to drive forward innovation. Our innovation culture instead gets:

  • social costs that burden small and medium businesses with a disproportionate share of social costs, which kill off risk takers because they can’t even afford the first day of business; this includes unreasonable start-up capital requirements (1€ should be enough), pointless company start up procedures, wrong-head bankruptcy laws, and inflexible employment laws;
  • unreformed central governments, which absorb productive capacity , require very high levels of tax funding to support, and which generate administrative and regulatory red-tape to little end other than to control;
  • public ownership of intellectual property as the default position for publicly funded research, coupled with the poor commercialisation record of state-owned research infrastructure, leading to hoarding of innovations within bureaucracies, and not accessible to risk-takers;
  • weak academic performance amongst the universities, with little competitive forces within academe to encourage researchers to move outside the university to become entrepreneurs, or to work with investors to generate new ventures, as it frequently jeopardises public sector employment contracts as in many countries academics are civil servants (that is itself is undesirable) — there are very few world-class European universities, based on recent global rankings.

I have some experience here, and while governments value stability in their civil services, what they often get instead is classic ‘rent-seeking’ behaviour, whereby civil servants seek to monopolise whole areas of the economy, ranging from failing to control regulatory creep, to governments having all sorts of pre-emptions rights over private arrangements. This latter point is particularly concerning when it comes to pre-emption rights over intellectual property created with public funds — as the Commission has noted, Europe badly needs its equivalent of the US’s Bayh-Dole Act.

I put my money in a few areas, not just because I know a little about them, but because they have the benefit of driving wider benefits — they act like breeders for other innovations, as well as magnets for innovations developed in other areas:

  • health technologies, including life sciences, devices, new materials, nano-tech, imaging, remote monitoring;
  • information technologies, including the internet (many governments are fearful of the disruptive influence of the internet);
  • new media as the convergence of technological delivery systems (potentially disruptive and problematic when the state is an owner of media).

There are no thousand kilo gorillas in Europe because Europe’s governments have become authoritarians that fear disruptive innovation that may challenge deeply held beliefs and challenge the European model. This is the type of pride that goes before a fall.  So, action is needed in at least four areas:

  • liberating the investment climate to encourage a higher tolerance of risk and acceptance that higher risks should lead to higher rewards, which has implications for taxation, capital gains/losses and bankruptcy;
  • liberating labour markets, to incentivise business to create experimental forms of employment, whereby firms in acknowledged startup situations can have greater flexibility retaining and rewarding staff without being confronted with first euro social costs and minimum wage regimes;
  • understanding the tremendously heavy burden unreformed government and excessively zealous taxation has on entrepreneurs and the need to liberate the entrepreneurial system from official structures as much as possible; this also means that government needs to understand what it can and should do (and of course what it shouldn’t do);
  • placing publicly funded intellectual property on the open market — I would suggest even creating an auction market for publicly funded IP.

The European Innovation Road is not a paved autobahn; it is full of holes, and in some places just goes over a cliff, but it has the potential to be a superhighway if we get the fundamentals right.

Uncertainty can never be removed from the innovation process. We shouldn’t act as though it can.

Want to know more?

Just searching on the internet will produce an avalanche of information. Regretfully, much academic research is still published in journals that are not open access which means accessing them requires either a subscription or the payment of a fee, despite the vast majority of this work having been publicly funded. These articles are not listed. However, authors of papers who would like to have their papers listed here, and provide a pdf for download are encouraged to provide a paper for listing here.

Also consider:

Martin Fransman, The New ICT Ecosystem: implications for Europe (Kokoro, 2007) presents a thoughful policy framework.

Anything by Annalee Saxenian, but her The New Argonauts: regional advantage in a global economy (Harvard 2006) is worth reading in the context of European regional development.

Josh Lerner, Boulevard of Broken Dreams: why public efforts to boost entrepreneurialism have venture capital have failed, and what to do about it (Princeton, 2009) offers a research-based critique of the role of government and why for every dollar/euro/pound government puts into commercialisation of research, the private sector takes one out.

The new report from NESTA, Atlantic Drift [here] is worth reading for its US/UK investment comparisons with important insights for other countries.  It is authored by Josh Lerner, Yannis Pierrakis, Liam Collins and Albert Bravo Biosca.

Lawton Burns, The Business of Healthcare Innovation (Cambridge, 2005), explains important innovation drivers in healthcare, which offers some thoughts on how Europe can succeed here, despite widespread government control of healthcare systems. It is worth noting that virtually all EU countries and their regions have prioritised biotechnology/healthcare/life sciences in at least their top 5 areas.

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Daily we read of the debts that governments have run up, whether Greece, Hungary, UK or elsewhere. How has this come to pass will require all of us to reflect on what we expect from government and indeed what is government for. Folks such as Robert Nozick argued for the minimal state, all the way over to the bankrupted ideology of the collectivist state. In between lies reality.

Therefore, in the spirit of redefining the purpose and function of the modern state, I am asking this question:

what are the Grand Challenges for modern government?

In effect, what is the purpose of government? What is on the list will reflect the current priorities, but also an effort to anticipate the consequences of current actions by public bodies — if governments stop doing some things, what will happen down the road.

Here is some to get us going. I think we need 10 at the most as they must in the be both grand and challenges; my list may in the end be neither, but let’s see.

Boundary value problem for an arbitrary shape

Like any good challenge, one needs to know what is in the problem, what is outside the problem and line that demarcates the two

  1. A challenge is to ensure that governments are subjected to the same rules and regulations as everyone else.  Someone said, it would be a shame to waste a good crisis, so many governments find themselves in a crisis, and in many cases they are part of the problem, not part of the solution. Governments have some role to pay in aligning efforts to solve the crisis, but they are not exempt from the solutions.
  2. A challenge is to design a simple tax system. We don’t need governments to create complex, full of exceptions tax systems. We have complex tax systems that have becomes ends in themselves, inscrutable and reflecting overly bureaucratic approaches. Rebooting our logic of taxation is a non-trivial challenge. The problem though is that governments use financial instruments as carrots and sticks to alter behaviour, whether of individuals or corporations. We need to rethink our use of financial instruments as tools of policy and that these financial instruments must deliver social outcomes, not just be used to fund government programmes.
  3. A challenge is to better control adventuresome, rent-seeking behaviour of civil servants.  Too often, hyperactive civil servants follow a logic of state intervention because in the end it may be easier to do and please political masters, than to do the harder, consultative and more developmental approach which will produce the best outcomes, but with the least amount of government. The problem is that civil servants are rent-seeking, and are rewarded for expansionist activities. We see this with regulators who either do their jobs badly (regulators are after all monopoly suppliers of regulation, so if they do a bad job, we the regulated have little choice), or seek to expand the scope of their mandates, like a gas (there is always some reason to expand a mandate, when there is no one to say no). To be fair, the private sector also has adventuresome corporate executives who need to prove themselves through adventuresome corporate mergers and acquisitions — fortunately they don’t always get their way, such as the shareholder response to the plans of the relatively new CEO at Prudential (on the job only 5 months and he thought this made sense). The challenge here is a general problem, but acute in government.
  4. A challenge is for governments need to know how to recognise market failure, and having identified this, decide what they should do it anything. Is there market failure in funding medical research, is there market failure in higher education? Understanding this will help define the boundaries of the government role, and importantly define the boundary conditions that tell us that different logic and problem solving is needed. At the root, we need to  first decide what the role of government should really be. Integral to this is determining a proportional response — in other words, there is identifying the need for intervention, and there is separately deciding what to do, how much to do, and importantly when to stop.
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