The Funding of Important Emerging and Evolving Technologies by the Public and Private Sectors

Abstract

We examine the sources of the finance that has enabled technological evolution, distinguishing between sources in the private, or for-profit, sector (FPS) and sources in the public or not-for-profit sector (NPS). We investigate the roles that agents in each sector have played, both directly and indirectly, in financing the creation and evolution of twelve major technologies that were innovated between the late 19th and early 21st centuries, many of which have been labelled GPTs. To document this, we describe the development of our selected technologies in some considerable detail. Although much of this is already well known, what has not been done, to the best of our knowledge, is to emphasise for all these developments the extent to which agents in the NPS and FPS provided the supporting finance. Studies of the physical location of R&D, inventions and innovations typically give heavy weight to the FPS and much less to the NPS. However, when we study the sources of the finance that enabled these technological developments, this greatly increases the relative weight attached do the NPS compared with that of the FPS.

We distinguish four trajectories in the evolution of any new technology: the invention trajectory covers the scientific and technological developments that precede the emergence of an identifiable technology; the efficiency trajectory is the time path of the cost of producing a unit of the service provided by the technology; the applications trajectory is comprised of the technological products, processes, and forms of organization that depend on it; the diffusion trajectory is the spread of the technology to uses in other places and other times, both nationally and internationally. For each of these trajectories in each of our 12 technologies we indicate which developments were financed mainly by the NPS, mainly by the FPS, or by some combination of both.

We divide our technologies into five main groups (groups that were discerned after completing our case studies rather than being imposed a priori): Group 1, little NPS support except for the applications trajectory, the internal combustion engine; Group 2, NPS support mainly for the invention trajectory, refrigeration; Group 3, NPS support mainly for the efficiency and applications and diffusion trajectories, railways, automobiles, aircraft and agriculture; Group 4, NPS support mainly for the invention and efficiency trajectories, the iron steam ship; Group 5, NPS Support for all trajectories, electricity, computers, the Internet, and lasers.

After reporting on each of our 12 technologies, we suggest lessons that are drawn from them and are appropriate to industrial policy. For example, when there is much uncertainty about the technology early on, as it is so often and was with refrigeration, certain practical components of it need to be demonstrated by agents in the NPS before those in the FPS can foresee profitable investments in the technology. In such cases NPS support is needed early in the invention trajectory.

After completing our case studies, we draw several lessons that seem appropriate to most or all of them. Two examples follow. First, the more does a technology depend on science, the larger the place for NPS support for the relevant trajectories. Second, major technologies have significant co-evolutionary complementarities amongst themselves. As a result, NPS support in the development trajectories of any one technology has significant positive and often difficult-to-foresee, impacts, on the development trajectories of other technologies, including some that were not directly supported by NPS themselves. NPS investments can also help to create positive feedbacks through these indirect impacts by creating further complementarities that subsequently operate on the originally supported technology. Thus, calculations of the “return to NPS support” for a particular technology typically underestimate that return, unless they take account of the impact on the entire interconnected, complementary system.

The work concludes that dismissing industrial policy with statements such as ‘governments cannot pick winners’ relies on an empty slogan to avoid detailed consideration of the actual complicated, multifaceted relationships between the private and public sectors in encouraging the inventions and innovations that are the root of economic growth.