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4 Government Programs That Drive Innovation

2013 July 10
by Greg
Capitol

Steve Jobs was the ultimate entrepreneur.  As Walter Isaacson pointed out in his acclaimed biography, Jobs revolutionized seven industries and created the most valuable company in the world.  We revere people like him, because they help create the future.

Yet, they do not do it alone.  One fact that often gets lost is that the basic technologies that Apple products are built on (and those of all tech firms), from the chips, to the Internet, to GPS to the software protocols, were all supported or wholly developed by government programs.

As Bruce Upbin noted in a recent article in Forbes, while we like to think of daring venture capitalists and entrepreneurs taking all the risk, they are more akin to the “last mile,” building on top of technological infrastructure built by the government.  In truth, public sector programs are often crucial to innovation in the private economy.  Here are four:

1. DARPA

In 1939, Leó Szilárd sent a letter to his friend Albert Einstein about the possibility of a mysterious device that could level entire cities.  Einstein, in turn, passed it on to Franklin Roosevelt who, acutely aware that this otherwise unlikely idea had the sanction of the world’s most famous scientist, put the wheels of government in motion.

The result was the Manhattan Project, the most consequential government science program ever, which gave an enormous advantage to America and its allies.  After the war, the military looked for ways to keep scientists involved and in 1958 President Eisenhower authorized DARPA (Defense Advanced Research Projects Agency).

Since then, DARPA has been a mainstay of technological development, funding development of the Internet, GPS and even Apple’s Siri, just to name a few.  More recently, ARPA-E has been created to support similar development in energy.

2. NIH

We often fall into the trap of thinking about technology as mainly gadgets and gizmos. However, some of the most important innovations happen in the life sciences, much of it funded by the NIH (National Institutes of Health), a vast effort whose 2014 budget exceeds $31 billion.

The impact of the NIH cannot be overstated.  Researchers there discover vaccines for infectious diseases and innovative new treatments.  A Congressional study found that as many as 60% of important drugs would not have been discovered without NIH support and that economic returns range from 25% to 40%.

It also funded the Human Genome Project, a $3.6 billion undertaking that has not only revolutionized medical science, but whose economic benefits have been estimated to be nearly $800 billion as of 2011 and will likely multiply many times in the future.

3. In-Q-Tel

Government procurement is notoriously inefficient, especially with regard to military contracts, because there are multiple points of failure.  First, specifications need to go through a cumbersome bureaucratic process, then bids are solicited and assessed not only on their merits, but amidst a political and greed ridden morass.

In the case of technology, the problem is especially acute.  Much like large corporations, government bureaucrats are ill equipped to judge the value of nascent technologies and, by the time they are finished wrangling through the procurement process, the technology is often already out of date.

That’s why the CIA created In-Q-Tel, a government funded VC that invests in startup companies focused on cutting edge technology such as big data analytics and quantum computing.  Rather than fully funding research programs, they can partner with entrepreneurs like Jeff Bezos and pursue a number of approaches.

The In-Q-Tel program has become so successful that it is often seen as a stamp of approval for start-ups, so it is able to invest at attractive valuations even when a company is fully funded.

4. SBIR

Entrepreneurs are often seen as heroic, while many  observers complain that government should just get out of the way.  However, while nobody likes the regulation and red tape, the Small Business Innovation Research (SBIR) program shows that government can play an important role in helping young, innovative businesses get started.

The program has three phases.  The first is a “proof of concept” phase in which funding is generally capped at $150,000.  The second is a research phase in which grants can go up to $1 million.  In the third phase, the company is expected to either get private funding or, in some cases, can receive funding from another government program.

Qualcomm, iRobot and Symantec are just a few of the SBIR success stories.  The combination of low grants (lower in fact, than most venture capitalists are willing to get involved with) and limited duration encourages entrepreneurs to embark on projects that aren’t yet developed enough to secure financing in the private sector.

The New Hoover Dams

The quintessential government project of the 20th century was the Hoover Dam, large, impressive projects that helped build the nation’s infrastructure.  These were always popular because they showed a clear, tangible result even for those that weren’t directly affected by the investment.

However, building large physical structures will do little for US competitiveness in the 21st century (although much investment is needed for renovation and repair).  Ours is a technological age and the most important investments are the ones we won’t see, in smart grids and connectivity, new molecules and algorithms.

In an important TED talk (see below), economist Mariana Mazzucato suggests that the public sector has a crucial role to play in funding innovations deemed too risky for profit seeking companies, who are under intense pressure to show a return on investment before a project is undertaken.

She also suggests that austerity is counterproductive, lowering deficits in the short term, but sacrificing the future through a lack of investment.  She proposes that government programs should be transformed into innovation banks and that a equity stakes in funded companies should be plowed back into investments (Finland already does this).

Whether or not her proposals are workable, one thing is for sure:  The tired old caricatures of lazy, feckless government bureaucrats and heroic entrepreneurs is more of an excuse for rent seeking (by lazy, feckless corporate bureaucrats) than it is a serious basis for policy.

- Greg
 
 

4 Responses leave one →
  1. July 14, 2013

    “Steve Jobs was the ultimate entrepreneur.” Edison?

    [Reply]

    Greg Reply:

    Opinion’s can differ, but my money’s on Jobs:-)

    - Greg

    [Reply]

  2. July 22, 2013

    Great catch on NIH – which I also wrote about recently here: http://hc4.us/15aCwKI

    [Reply]

    Greg Reply:

    Great article! It’s funny how things turn out. When the human genome was originally sequenced, everybody thought the killer app was going to be gene therapies, but it turned out its pharmacogenetics.

    - Greg

    [Reply]

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