While globalization has opened up markets everywhere, it has also thrown the inherent tension between government economic activism and entrepreneurial freedom into sharp relief. We now take up crucial questions about the proper role of government on the one hand, and the place, indeed the very future, of entrepreneurship on the other. In our global economy entrepreneurs are frequently competing with companies supported and directed, and often controlled, by the governments of the countries where they do business. It is hardly an even match: such policies inevitably engender hidden or overt preferences for buying local products.
Clearly, state-controlled economies pose a serious challenge to the basic concept of entrepreneurship and the ability of foreign corporations to operate freely within those economies. By raising barriers to international sales opportunities, they clearly increase the inherent risks of launching new entrepreneurial businesses. Under such conditions, it is fair to ask whether the individualistic and “random” entrepreneurial process, gated by so many unpredictable circumstances, can be counted upon in the future as a significant economic driver. Must governments everywhere become much more involved in supporting ambitious entrepreneurs focused on creating new markets? This is a pressing issue for countries like the US, which have a tradition of free markets and limited government support of their industries. We opened this book on the entrepreneur in the global economy by outlining how governments involve themselves in building local economies.
The succeeding chapters tracked the fortunes of twelve entrepreneurs, from David Sarnoff of RCA in the first half of the twentieth century to Lynn Liu of Aicent at the opening of the twenty-first, as they strove to build competitive companies in an increasingly globalized economy. In this chapter we will ask whether and how governments and entrepreneurs can coexist and cooperate, and explore the ramifications of that question. This covers such topics as, to what extent will governments take on the roles of venture capitalist and entrepreneur, choosing the technologies and building the industries of the future? In what areas is government participation most likely to be healthy and productive? How can entrepreneurs and corporations responding to market conditions make better decisions? The hazards of targeting industries To set the stage, we will review two diametrically opposed views of economic development, as described initially in our opening chapters. They represent the most extreme positions in the argument over industrial policy in the developed world: pure free markets versus heavy state involvement. There is plenty of public support for an untrammeled entrepreneurial approach. Free-market advocates insist that the US government (and by extension governments in other free-market countries) should stay out of the markets and let entrepreneurs chart their own course. According to these proponents, “The country needs to unleash entrepreneurs, who will only be held back by tax-funded make-work projects.”
Others question the efficacy of this approach. They believe that the idea that “entrepreneurs are the foundation of the [US] economy” is a myth,3 and that the US and other free-market countries might be better off with a targeted industrial policy to ensure the growth (and protection) of domestic industries, particularly new ones based on domestic innovations. A better way to frame the argument is to ask the following question. Is it realistic to believe that government planning, supported by taxpayer money, can force-feed industrial innovations into the commercial marketplace? Can it totally replace the more chaotic but much more flexible and dynamic entrepreneurial process? As an approach to answering this question, it is worth keeping in mind the observations of Nassim Taleb in his book The Black Swan,4 in which he summarizes the views of Nobel Laureate economist Friedrich August Hayek, a famous proponent of the free market For Hayek, a true forecast is done organically by a system, not by fiat. One single institution, say, the central planner, cannot aggregate knowledge; many important pieces of information will be missing. But society as a whole will be able to integrate into its functioning these multiple pieces of information. Society as a whole thinks outside the box. Hayek attacked socialism and managed economies.
Owing to the growth of scientific knowledge, we overestimate our ability to understand subtle changes that constitute the world, and what weight needs to be imparted to each such change. On a theoretical level, then, there are limits to what can be done with “top-down” economic planning. Hayek suggests that any attempt to dictate a national approach to a dynamic market will be unsuccessful in the long run. Instead, the most productive strategy for fostering economic growth is likely to be the creation of national policies that focus government on what it does best, leaving private capital and entrepreneurs to areas where they function more efficiently. We will clarify the dividing line between these two spheres by looking at some examples of government actions and their outcomes.
Government as entrepreneur
On the face of it, it seems like a good idea to have the national government fund the creation of industries around promising technologies in the hope of expanding the economy and building exportable products. Proponents of this approach envision using subsidies and other incentives to accelerate the growth of the chosen industries.
This would be done in partnership with private industry if possibleÂ€– and without it if private funding is not available. This may sound familiar because it is an old idea. We encountered it in our discussion of Colbert, who targeted growth industries for seventeenth-century France. China runs a modern version of the strategy. Although this approach can achieve quick success, it usually runs into trouble later on. The availability of “easy” state money spawns enterprises with uncompetitive cost structures. They become too far removed from the discipline of the competitive marketplace to achieve profitability. Bereft of entrepreneurial management, companies built on this model risk becoming permanent wards of the state. This actually happened in Colbert’s France. There is a bigger problem with this approach: it too often fails, especially when newer technology is introduced. We can understand why when we contrast industrial development with infrastructure and defense, two functions crucial to economic growth and stability that governments can carry out quite effectively.
Infrastructure (roads, airports, and water and power utilities) is convenient for the citizenryÂ€– and absolutely necessary for industrial development. Likewise, defense programs uphold national securityÂ€ – and also spur the growth of industry by underwriting R&D programs. Even the most radical proponents of limiting the power of
government would agree that both of these activities are the rightful province of the state. Governments are the only entities with the resources to plan and finance such sweeping programs. They are also dealing with known quantities: it is relatively easy to project infrastructure requirements and forecast future defense needs.
Deciding which new innovative industries to subsidize, on the other hand, is a far less certain undertaking than determining when and where people will need roads and sewers. It is nearly impossible to predict future market trends and competitive threats with any great degree of accuracy. As a result governments are notoriously poor at picking winning new commercial industries for long-range development. Such attempts have often generated disappointing results.
Long-term planning, longer odds
There is another reason why governments have such a poor track record in planning technology industries: the nature of their Â�decision-making process. They are not the only entities affected by this shortcoming. It is common in large corporations as well.
As can well be imagined, thousands of planning meetings take place every day in large organizations around the world, with committees deciding economic and technological matters large and small. Whether these meetings occur in the government bureaucracies of planned economies or in the boardrooms of large corporations, one thing is certain. Lone visionaries, even if present, have little chance to influence the ultimate decision. In addition, most of the people in the room will be far removed from the actual technologies under discussion.
Targeting growth industries: Government teams with the private sector
When state initiatives to develop new industries fail, it is the taxpayer who foots the bill. Where the government has recruited private capital and entrepreneurs to join such initiatives, however, the economic effects are amplified. Entrepreneurs and their investors are left stranded along with the taxpayers, potentially affecting the availability of funding for other, more promising innovations. Three US government “clean energy” programs illustrate how this can happen. Clean energy is currently one of the most popular areas for investment, so it was easy to persuade private investors and companies to participate. All the programs were targeted at reducing fossil fuel consumption and controlling greenhouse gas emissions, though in very different ways. Two programs addressed the electrical utility industry, while the third subsidized sales of hybrid electric automobiles. Of the two programs targeting electric utilities, the first
sought to replace non-renewable fossil fuels (oil and coal) in power plants with biomass (wood and other organic materials). Biomass was touted as a “clean” and renewable energy source. The other program aimed to build a so-called “smart grid” to improve the efficiency of the electrical power distribution network. With a more efficient grid, the electric industry could meet the demand for power with less fuel. Both programs had the worthwhile goal of reducing the amount of CO2 spewed into the atmosphere by generating plants.
Industrial planning vs. technology funding
Up to now we have looked at the difficulties of industrial planning. We have also reviewed the dismal record of planners and prognosticators in accurately predicting which technologies would prove successful in the marketplace. Fortunately, there are positive aspects to the planning process. These include government policies that recognize how important entrepreneurship is to economic development. As observed before, entrepreneurs do not generate new businesses in a vacuum. They need access to intellectual property developed by others on which to base product offerings. They have to identify and exploit promising new markets, develop funding sources, and attract talented employees. And contrary to myth, they rely heavily on the infrastructure, resources, and business environment established by government. Even in free-market countries like the US, the government has more involvement in the development of new industries than most people realize.
We saw how David Sarnoff took advantage of cooperation between the US government and private companies in the 1920s to create the broadcast industry as we know it. Without the original government initiative to establish RCA, he would not have had the opportunity. Of the entrepreneurial innovators we cover in this book, Sarnoff is the earliest by some sixty years. But he took full advantage of government policies and funding, and US entrepreneurs have followed his path right up to the present. To prove the point, consider a prominent example from our own era: the digital industries pioneered in the US after World WarÂ€II. Everyone talks about the famous entrepreneurs who created iconic companies such as Apple and Microsoft, but few mention that these and many other enterprises had their genesis in technologies developed under government-sponsored R&D funding. Many of the companies we discuss in this book replicate the pattern.
The technology that underlies RMI, RDA, and SanDisk can be traced to government-funded initiatives if you go far enough into the past. In the case of Ness Technologies, the roots of some of the technologies it commercialized can be traced to work sponsored by the governments of Israel and other countries. This research was conducted under government funding in
universities, national laboratories, and private industry, and originally may have been targeted at applications in the defense and space programs. But somehow the resulting technologies, developed in unrelated settings for different purposes, found their way to the world market. The results were spectacular: the creation of new electronics, computer, and telecommunications industries that have literally transformed the way people live, work, and communicate.