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a blog from young economists at Nova SBE

The Government Role in Innovation: Incentives and Challenges

The Noble laureate, Michael Spence, defended back this month that the “problems confronting the world economy will require action by multiple actors – not just central banks” ( https://goo.gl/cCT1sF). The monetary policy as gone as far as it can go expansively but “unfortunately, governments did not go nearly far enough in pursuing complementary fiscal and structural responses” and are too focused on easing the debt pressure. In fact, governments have high incentives to maintain the status-quo but it should be appropriate to discuss the role of the government “to spark innovation”! Web Summit arrives this year to Portugal, a forum that lumps “more than 50,000 tech CEOs, founders, startups, investors and political leaders driving change across the world” ( https://websummit.net/ ) to discuss some of the newest technologies, it would be stimulating to see all these entrepreneurs discuss the importance of non-incremental innovation and the importance of the government to foster innovation within himself and outside!

The mainstream thought is that “the state should play a little role in the economy” ( https://goo.gl/vai8bc) and have nothing to do with the market. But as stated above the market presently hasn´t been capable of creating economic growth. The privet sector has highly incentives in investing in incremental changes however when it comes to breakthrough innovation the incentives are reduced. The type of investigation that leads to breakthrough innovation doesn´t have immediate results and that´s why the state has to invest. The problem is that these investments are highly risky and for one that is successful there are another ten that don´t succeed, and for the public opinion the former have more height, that´s why governments tend to maintain the status-quo. While the private sector can compensate the loses of a bad investment with the profits of a good one, the public sector only benefit from the successful ones is normally the social welfare increase, unfortunately, people don´t perceive it very easily so it would be a good idea to increase the direct benefits from the investments, for instance, the government could demand a royalty from a certain successful investment in order to leverage the bad ones.

Many others can argue that the economy sector that needs more innovation is the public and that it is difficult to drive innovation within this sector, however a study from the Harvard Business School state that “Breakthrough innovation in government is possible”. Since the profit and competition aren´t present other conditions need to be achieved for innovation to be possible: the ability to experiment and to sunset outdated infrastructure. The private sector doesn´t have problems in experimenting because all they have to do is put the new product in the market and see if it survives, while the public activity isn´t drive by competiveness and it makes very difficult to produce data necessary to explain, for example, a new technology to the public. Furthermore, replacing the outdated infrastructure is immensely difficult because it has a huge impact at people life’s and therefore at the pools, and so the Politian’s are reluctant to promote breakthrough innovation that can achieve structural changes.

“One thing is clear: the current approach suffers from serious shortcomings, largely because it socializes the risks and privatizes the rewards”, and in a time that public policy can make a difference in allowing the economies to finally growth it is absolutely necessary to discuss how to create the right incentives to promote government innovation.

João Gonçalo Silva

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Author: studentnovasbe

Master student in Nova Sbe

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