The Next Silicon Valley

The importance of governments in stimulating successful innovation

Almost everywhere you look today, people talk about innovation and entrepreneurship. It’s true that in a world where governments are focused on minimizing public expenditure, that economic growth depends on more innovation and more entrepreneurs. And for over 20 years, Silicon Valley in California has been held up as role model of a successful innovation ecosystem.

But how did Silicon Valley become what it has? Well, there’s no doubt that US government innovation programs like SBIR (Small Business Innovation Research) have contributed to its growth. By providing grants to small businesses, the program increases private-sector commercialization of innovations derived from federal research and development funding. It enables small businesses to explore their technological potential and provides the incentive to profit from its commercialization. This in turn ensures high-tech innovation is stimulated and the US gains entrepreneurial spirit as it meets its specific research and development needs.

As Mariana Mazzucato, a professor in the in the Economics of Innovation at the Science Policy Research Unit (SPRU) of the University of Sussex, argues in her book, the government acted as a strategic investor in Silicon Valley through a decentralized network of public institutions: the Defense Advanced Research Projects Agency (DARPA), NASA, the SBIR program, and the National Science Foundation. She says the tech revolution in the US was indeed indeed financed initially by patient public finance provided by this network of strategic and mission-oriented agencies, which have given more early stage high risk finance to companies than the entire venture capital sector.

She also highlights how public money has provided early stage funding to successful tech companies in other countries. In Israel for example, where the public venture-capital fund Yozma provided early-stage funding to some of the country’s most dynamic companies; in Finland, Sitra, the public innovation fund, supplied early financing for Nokia. In China, the state-owned development bank offered billions of dollars in loans to some of the country’s most innovative companies, including Huawei and Yingli Solar.

She says that such public investments are critical in creating and shaping new markets. In an article published last year, she commented, “Indeed, government investment played a central role in developing nearly all of the technologies that make the iPhone a smart phone: the Internet, GPS, touchscreens, and the advances in voice recognition underlying Siri. Similarly, in many countries, it is the public sector that is leading the way in making green technology possible.”

A paper published in the Socio-Economic Review also makes the case for the role of government innovation programs in stimulating growth and opportunities for small companies. The paper demonstrates the critical importance of government innovation programs, arguing that a single small, relatively unknown program—the Small Business Innovation Research (SBIR) program—played a critical role in catalyzing this broader economic transformation in the US. The research draws on programmatic data, employment trends and data on SBIR’s intersection with venture capital and federal procurement, and shows how SBIR catalyzed a series of cross-cutting institutional mechanisms that supported the growth of small, innovative technology firms.

The importance of programs like SBIR is relevant even today. For example, personal genetics company 23andMe announced this month it received a $250k SBIR grant toward developing an analysis pipeline as an alternative to the traditional genome-wide association study (GWAS) for identifying genetic variants associated with disease. Funded by the National Institutes of Health (NIH), this work could help alleviate some of the existing disparities in genetic research between people of European ancestry and people of African, Latino and Asian ancestry.

A key aspect of this program is that it is not kept hidden on some government web site which nobody visits. The US Small Business Administration (SBA) is also undertaking a 20-state road tour led by the SBA’s SBIR and Small Business Technology Transfer (STTR) programs with participation from 11 other federal agencies, with a view to publicizing the $2.5 billion in early stage funding available to small businesses in the STEM fields.

John Williams, SBA director of innovation and technology, commented, “American innovation is not restricted by geographic or cultural boundaries, and we are committed to supporting America’s entrepreneurs wherever they are.  This tour reflects our commitment to ensuring that these innovators are aware of these resources that can help them turn a big idea into another great American success story.”

The key message from all of this is that successful innovation, and creating successful entrepreneurs doesn’t just happen. Innovation also needs to be seeded, and commercialization of those ideas needs to be supported. The Silicon Valley and US example shows that governments play an important role in providing what is today being labelled as patient capital for seeding and growing new ideas into successful businesses.

Photo credit: US Small Business Administration (SBA)

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