Endorsements

In recent years, governments around the world have focused on boosting innovation. Given the importance of this activity for economic growth, their interest is understandable. But executing successfully on these initiatives can be challenging. This interesting volume makes a compelling case for prioritizing policies that “set the table”—that create a conducive environment for innovators and entrepreneurs.

Josh Lerner
Jacob H. Schiff Professor of Investment Banking
Unit Head of Entrepreneurial Management, Harward Business School

Everyone wants more and better innovations, but how? Policymakers have long searched for magic bullets – state-funded incubators and science parks, targeted subsidies and prizes, entrepreneurship training, improved patent systems, and the like – but none seems to work. As this book demonstrates, the best policies to promote innovation are those that promote economic activity more generally: private property, free and open markets, sound money, and a legal system that favors competition, not particular competitors.

PETER G. KLEIN
Caruth Professor of Entrepreneurship,
Baylor University & Norwegian School of Economics

Governments today are well aware of the importance of entrepreneurship, and they covet the growth and jobs that innovation provides. Academics are often all too willing to oblige with activist “innovation policies” like government subsidies or tariffs directed to favored sectors. As this excellent Ratio Institute study reaffirms, however, the most effective policies a government can use to spur innovation are actually the kind that curate the background conditions necessary for what Joseph Schumpeter called creative destruction. A genuinely “entrepreneurial government” is not one that picks winners but one that clears obstacles from the path of private entrepreneurship.

RICHARD LANGLOIS
Professor of Economics, University of Connecticut

On its face it seems unlikely that bureaucrats in Stockholm and Brussels and Washington are good at choosing winners. The economic history is not encouraging. But if you still hope they might be entrepreneurial, and if you are willing to consider elegant economic science marshalling novel data to explore the hope, you need to read this book. In fact, everyone concerned about innovation, entrepreneurship and growth should.

DEIRDRE MCCLOSKEY
Distinguished Professor of Economics, History, English, and
Communication at the University of Illinois at Chicago

Despite their many differences, the U.S. and Sweden have followed similar paths to successful innovation. Bureaucrats or Markets in Innovation shows that – in both countries – for-profit entrepreneurship has delivered a massive wave of valuable new ideas and products. Giving governments more power to help “spur” innovation is a solution in search of a problem.

BRYAN CAPLAN
Professor of Economics, George Mason University

Innovation is important for economic growth and vitality. But, innovative opportunities are not “out there,” just waiting to be discovered and funded by some clever government bureaucrats. Rather, they are being created, endogenously, by entrepreneurs struggling to provide desired goods and services to customers more efficiently and effectively then competitors. This book shows that governments can play a significant role in facilitating this kind of innovation, but only by creating an institutional setting that encourages entrepreneurship—by protecting intellectual property rights, by supporting education that enables entrepreneurs to develop the skills they need to be successful, and by facilitating the free flow of capital to fund entrepreneurial opportunities. If, instead, governments try to identify and then fund what they believe are likely to be innovative opportunities, they are much less likely to increase the actual level of innovativeness in the economy.

Jay Barney
Presidential Professor of Strategic Management
Lassonde Chair of Social Entrepreneurship
Editor-in-Chief, Academy of Management Review
Eccles School of Business
The University of Utah

In one of the most interesting economic articles of the past two decades, Jeremy Greenwood and Boyan Jovanovic (1999), argued that the arrival of the information technology revolution in the 1970s created the need for new firm. The technology breakthrough favors new firms for three reasons: (1) awareness and skill; (2) vintage capital; (3) vested interests. The stock market incumbents of the day in both Europe and the United States were not ready to implement the new technologies and it took new firms to bring the technology to market after the mid-1980s. Stock prices of incumbents fell immediately. New capital flowed via venture capital to the startups that built the new industries.

One of the outcomes of this revolution was the restructuring of the traditional field of industrial organization that focused primarily on large firms to startups. The creation of new fields more closely organized around technology, innovation, entrepreneurship, economic geography and organizations to explain the role of new technology and the need for new firms. While this happened in the United States (Google, Amazon, Apple, Facebook, Uber) it did not happen to the same extent in Europe. Why not?

The answer to this question can be found in part due to deficiencies in the two major conceptual frameworks emerging in the 1990s to explain the evolution of this technological revolution. The first was the National Systems of Innovation framework. The main theoretical underpinnings were that knowledge is a fundamental resource in the economy, that knowledge is produced and accumulated through an interactive and cumulative process of innovation that is embedded in a national institutional context. National systems assumed that all of this takes place in existing firms, so there is no role for new firm or entrepreneurship to bring the technology to market. The second concept framework was Porter’s Diamond that defined a system of regional clusters that propelled a country to prominence. The Porter Diamond put the emphasis on supporting institutions that may be missing in a cluster that are needed to incorporate new technologies. However, the Jovanovic insight was missing.

Clusters and National Systems of Innovation had two assumptions in common. First, they both argued that institutional embeddedness was important and second, they both relied on existing firms to implement and deploy the new technologies! Both of these approaches had a large theoretical literature, empirical research and policy recommendations. Because they both left out of their analysis the role of new firms that was Jovanovic’s great insight they were limited in their usefulness for implementing the new information technologies. Why new firms were left out of these approaches is a subject in and of itself.

However, while the approaches did not have a large following in the United States they were immensely popular in Europe, especially National Systems of Innovation. The National Systems approach was in part a Swedish discovery and helps explain both the Scandinavian disdain for startups and the European Union’s unwillingness to view innovation and entrepreneurship in the same unified approach. This theoretical misstep set Europe on a false path in the late 20th century and still haunts Europe as it falls further and further behind the United States and China in the digital age.

This important new book by Sandström, Wennberg and Karlson takes us a long way to try and bring Europe back to the realization that new firms and the financing of them is fundamental to productivity and economic growth.

References
Greenwood, J. & Jovanovic, B. (1999). The Information-Technology Revolution and the Stock Market. The American Economic Review, 89(2), 116-122.

ZOLTAN ACS
Professor of Economics and Public Policy,
George Mason University

Bureaucrats or Markets persuasively demolishes arguments for activist industrial policies. The empirical studies in this thought-provoking book remind us they didn’t work well in the past and its careful reasoning why they are not likely to do much good in the future. This is an important and timely antidote to the resurgence of “techno-fetishism” now being promoted by academics, politicians and appointed officials throughout the West.

Amar Bhide, Thomas Schmidheiny Professor of International Business, Fletcher School of Business,Tufts University

Over the last few decades, the leviathan of bureaucratic government interventions to innovation policy in Sweden and elsewhere around the world grew into a formidable impediment to real entrepreneurship and growth, and was largely unchecked by systematic research on outcomes. Bureaucrats or Markets in Innovation Policy fills a critical gap by systematically studying the actual costs and benefits of often well-intended, but post-hoc inept interventionalist government policies to promote entrepreneurship. The authors provide further evidence that Sweden’s success is attributable to capitalism and free markets for innovation, rather than socialism and welfare state polices. Policymakers and entrepreneurs can use this peer-reviewed, in-depth treatment to coalesce around building institutions that protect private property, enable free markets, and thwart cronyism. For researchers, this tome serves as a platform for further research as well as a model of an impactful, large-scale, systematic, and multi-year project, and hopefully inspiration to explore the leviathan in other government policy arenas.

Siri Terjesen, Professor, Florida Atlantic University & Norwegian School of Economics