Working Paper no. 331: Bureaucrats or Markets in Innovation Policy? – A critique of the entrepreneurial state

Abstract

This paper takes stock of recent suggestions that the state apparatus is a central and underappreciated actor in the generation, diffusion and exploitation of innovations enhancing growth and social welfare. We contrast such a view of “the entrepreneurial state” with theories and empirical evidence of the microeconomic processes of innovation in the modern economy which focus on well-functioning markets, free entry and competition among firms, and independent entrepreneurship as central mechanisms in the creation and dissemination of innovations. In doing so, we identify several deficiencies in the notion of an entrepreneurial state by showing that (i) there is weak empirical support in the many hundreds empirical studies and related meta analyses evaluating the effectiveness of active industrial and innovative policies, that (ii) these policies do not take account of the presence of information and incentive problems which together explain why attempts to address purported market failures often result in policy failures, and that (iii) the exclusive focus on knowledge creation through R&D and different forms of firm subsidies ignores the equally important mechanisms of knowledge dissemination and creation through commercial exploitation in markets. We discuss how a more theoretically well-founded focus on the state as investing in knowledge generation and securing the conditions of free and competitive markets will lead to a more innovative economy.