2 Discussion and 2 Research Paper

227

“Reconquer the domestic market!” is a rallying cry invented by the government in its effort to reduce France’s foreign trade deficit and stimulate citizens to buy nationally-made products in preference to imports.1

While globalization has opened up markets everywhere, it has also

thrown the inherent tension between government economic activism

and entrepreneurial freedom into sharp relief. We now take up crucial

questions about the proper role of government on the one hand, and

the place, indeed the very future, of entrepreneurship on the other.

In our global economy entrepreneurs are frequently competing

with companies supported and directed, and often controlled, by the

governments of the countries where they do business. It is hardly an

even match: such policies inevitably engender hidden or overt prefer-

ences for buying local products.

Clearly, state-controlled economies pose a serious challenge

to the basic concept of entrepreneurship and the ability of foreign

corporations to operate freely within those economies. By raising

barriers to international sales opportunities, they clearly increase

the inherent risks of launching new entrepreneurial businesses.

Under such conditions, it is fair to ask whether the individualistic

and “random” entrepreneurial process, gated by so many unpredict-

able circumstances, can be counted upon in the future as a signifi-

cant economic driver. Must governments everywhere become much

more involved in supporting ambitious entrepreneurs focused on

creating new markets? This is a pressing issue for countries like the

10 Building an economy: Government planning vs. entrepreneurial innovation

1 J. Gee, “Five year target for France,” Data Processing, vol. 25, no. 9, November 1983, pp. 37–39.

C o p y r i g h t 2 0 1 2 . C a m b r i d g e U n i v e r s i t y P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS AN: 465765 ; Kressel, Henry, Lento, Thomas V..; Entrepreneurship in the Global Economy : Engine for Economic Growth Account: s8501869.main.ehost

Building a n economy228

US, which have a tradition of free markets and limited government

support of their industries.

We opened this book on the entrepreneur in the global econ-

omy by outlining how governments involve themselves in building

local economies. In Chapter 2 we looked at the importance of entre-

preneurs in creating new companies and industries. The succeeding

chapters tracked the fortunes of twelve entrepreneurs, from David

Sarnoff of RCA in the first half of the twentieth century to Lynn Liu

of Aicent at the opening of the twenty-first, as they strove to build

competitive companies in an increasingly globalized economy.

In this chapter we will ask whether and how governments and

entrepreneurs can coexist and cooperate, and explore the ramifica-

tions of that question. This covers such topics as, to what extent

will governments take on the roles of venture capitalist and entre-

preneur, choosing the technologies and building the industries of

the future? In what areas is government participation most likely to

be healthy and productive? How can entrepreneurs and corporations

responding to market conditions make better decisions?

The h azar ds of targeting industries

To set the stage, we will review two diametrically opposed views of

economic development, as described initially in our opening chap-

ters. They represent the most extreme positions in the argument

over industrial policy in the developed world: pure free markets ver-

sus heavy state involvement.

There is plenty of public support for an untrammeled entrepre-

neurial approach. Free-market advocates insist that the US govern-

ment (and by extension governments in other free-market countries)

should stay out of the markets and let entrepreneurs chart their

own course. According to these proponents, “The country needs to

unleash entrepreneurs, who will only be held back by tax-funded

make-work projects.”2

2 E. Glaeser, “Detroit’s decline and the folly of light rail,” The Wall Street Journal, March 25, 2011, p. A17.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 229

Others question the efficacy of this approach. They believe that

the idea that “entrepreneurs are the foundation of the [US] economy”

is a myth,3 and that the US and other free-market countries might

be better off with a targeted industrial policy to ensure the growth

(and protection) of domestic industries, particularly new ones based

on domestic innovations.

A better way to frame the argument is to ask the following

question. Is it realistic to believe that government planning, sup-

ported by taxpayer money, can force-feed industrial innovations into

the commercial marketplace? Can it totally replace the more chaotic

but much more flexible and dynamic entrepreneurial process?

As an approach to answering this question, it is worth keep-

ing in mind the observations of Nassim Taleb in his book The

Black Swan,4 in which he summarizes the views of Nobel Laureate

economist Friedrich August Hayek, a famous proponent of the free

market.

For Hayek, a true forecast is done organically by a system, not

by fiat. One single institution, say, the central planner, cannot

aggregate knowledge; many important pieces of information will

be missing. But society as a whole will be able to integrate into

its functioning these multiple pieces of information. Society

as a whole thinks outside the box. Hayek attacked socialism

and managed economies. Owing to the growth of scientific

knowledge, we overestimate our ability to understand subtle

changes that constitute the world, and what weight needs to be

imparted to each such change.5

On a theoretical level, then, there are limits to what can be

done with “top-down” economic planning. Hayek suggests that any

attempt to dictate a national approach to a dynamic market will be

3 R. Foroohar, “Don’t hold your breath,” Time, June 20, 2011, pp. 22–26. 4 N. S. Taleb, The Black Swan (New York: Random House, 2010), p. 180. 5 See F. A. Hayek, The road to serfdom (Chicago, IL: The University of Chicago

Press, 1994), for a statement of his positions.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy230

unsuccessful in the long run. Instead, the most productive strategy

for fostering economic growth is likely to be the creation of national

policies that focus government on what it does best, leaving private

capital and entrepreneurs to areas where they function more effi-

ciently. We will clarify the dividing line between these two spheres

by looking at some examples of government actions and their

outcomes.

Government as entrepreneur

On the face of it, it seems like a good idea to have the national gov-

ernment fund the creation of industries around promising technolo-

gies in the hope of expanding the economy and building exportable

products. Proponents of this approach envision using subsidies and

other incentives to accelerate the growth of the chosen industries.

This would be done in partnership with private industry if possible –

and without it if private funding is not available.

This may sound familiar because it is an old idea. We encoun-

tered it in our discussion of Colbert, who targeted growth industries

for seventeenth-century France. China runs a modern version of the

strategy.

Although this approach can achieve quick success, it usually

runs into trouble later on. The availability of “easy” state money

spawns enterprises with uncompetitive cost structures. They become

too far removed from the discipline of the competitive marketplace

to achieve profitability. Bereft of entrepreneurial management, com-

panies built on this model risk becoming permanent wards of the

state. This actually happened in Colbert’s France.

There is a bigger problem with this approach: it too often fails,

especially when newer technology is introduced. We can understand

why when we contrast industrial development with infrastructure

and defense, two functions crucial to economic growth and stability

that governments can carry out quite effectively.

Infrastructure (roads, airports, and water and power utilities) is

convenient for the citizenry – and absolutely necessary for industrial

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 231

development. Likewise, defense programs uphold national secur-

ity – and also spur the growth of industry by underwriting R&D

programs. Even the most radical proponents of limiting the power of

government would agree that both of these activities are the rightful

province of the state. Governments are the only entities with the

resources to plan and finance such sweeping programs. They are also

dealing with known quantities: it is relatively easy to project infra-

structure requirements and forecast future defense needs.

Deciding which new innovative industries to subsidize, on the

other hand, is a far less certain undertaking than determining when

and where people will need roads and sewers. It is nearly impossible

to predict future market trends and competitive threats with any

great degree of accuracy. As a result governments are notoriously

poor at picking winning new commercial industries for long-range

development. Such attempts have often generated disappointing

results.

Long-term planning, longer odds

There is another reason why governments have such a poor track

record in planning technology industries: the nature of their

decision-making process. They are not the only entities affected by

this shortcoming. It is common in large corporations as well.

As can well be imagined, thousands of planning meetings

take place every day in large organizations around the world, with

committees deciding economic and technological matters large and

small. Whether these meetings occur in the government bureaucra-

cies of planned economies or in the boardrooms of large corpora-

tions, one thing is certain. Lone visionaries, even if present, have

little chance to influence the ultimate decision. In addition, most of

the people in the room will be far removed from the actual technolo-

gies under discussion.

Yet funding decisions must be made, often long in advance.

And unfortunately what appears to bureaucrats or board members to

be the low-risk approach has a good chance of being the wrong path

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy232

to take. That is why so many radical innovations come from individ-

uals or small independent teams. They have the freedom to assume

risks of their own choosing and the financial freedom to fund pro-

grams that balance high risk against high rewards. They also have

the flexibility to modify their decisions quickly, without waiting for

the next budget cycle.

Planning industrial development is no task for the faint of

heart. But countries have to place their bets and take their chances

in the competitive global market. The question is how do govern-

ments in open economic systems like the US establish policies and

fund programs that lead to innovative businesses, without trapping

themselves in dead ends.

One would think that a country like China, which has had

great success with a planned economy, would have an answer. But

even China understands the difficulty of long-term industrial plan-

ning. For example, its first five-year plan of 1951 called, among other

things, for 6 million tons of cement, 5 million tons of pig iron, and

4.2 million tons of steel. These objectives were achieved because the

state paid for the construction of the plants required to produce these

products, and the technology was acquired from foreign sources.

But things have changed since then. In what is now the second

largest economy in the world, the multitude of industries and prior-

ities are too complex to be sorted out by state planners. Now China’s

five-year plans target only industries deemed to be of major stra-

tegic importance. Hence, the twelfth plan (2011 to 2015) puts great

emphasis on broader issues such as employment, energy efficiency,

increased funding of research and development, the expansion of

top-quality universities, and environmental improvements.6

In spite of the pitfalls of planning by committee, critics of

the free-market model worry that the transition from innovation to

commercialization, when paced by the capitalist profit motive, is

too slow in countries such as the US. They call for a more focused

6 “A new epic: China’s new five-year plan is at odds with itself,” The Economist, October 23, 2010, p. 88.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 233

national industrial policy helped along by government funding,

which they feel is essential to accelerate the pace.

People who advocate this approach are basing their recommen-

dations on the rapid growth of China and its perceived ability to

quickly build industries practically from scratch. In their enthusi-

asm they tend to gloss over the gap between China’s more predict-

able path of importing existing technology as opposed to the chancy

nature of developing innovations.

In defense of government planners, however, they may not be

much worse at forecasting the future of transformational technol-

ogy than the private sector. We will have occasion below to judge

the efforts of analysts and technology experts outside the govern-

ment in predicting which innovations will have a serious impact on

the economy. Nor should one assume that government investments

in technology never deliver positive results. We will also highlight

cases where government involvement has produced truly transform-

ational technology.

However, history is littered with the remains of failed state-

funded industrial initiatives.7 One such case is especially interesting

in that it concerns France, a centuries-long bastion of state planning.

Targeting growth industries: A government goes it alone

In 1983, in an effort to develop new growth industries that could

compete with foreign firms (see the quote that opens this chapter),

the government of France launched a five-year, $20 billion program

to stimulate the development of domestic information technology

companies. Its program targeted computers, semiconductor compo-

nents, and industrial software. At the time all of those fields were

dominated by the US.

The program also included funding for the expansion of

Minitel, a new videotext service pioneered in France. Minitel used a

7 Josh Lerner of the Harvard Business School discusses salient examples in Boulevard of broken dreams (Princeton, NJ: Princeton University Press, 2009).

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy234

combination of television and the telephone system to interactively

provide information to homes and businesses across the nation.

It was not surprising that France should target specific indus-

tries for investment. This approach was consistent with the coun-

try’s history of state industrial planning and financing, starting

with Colbert in the seventeenth century. What was surprising was

the program’s lack of success.

French computer companies were never able to keep pace with the rapid • international progress in the computer industry. The national champion,

Groupe Bull (named, ironically, for its Norwegian founder Fredrik

Rosing Bull), was nationalized in 1982 and re-privatized in 1994. It has

undergone many takeovers, mergers, and name changes, including joint

ventures and ownership relations with overseas companies General

Electric, Honeywell, NEC, and Motorola. Now called simply Bull, it

remains a marginal competitor in need of state support.

During the semiconductor industry’s greatest growth period, • between 1980 and 2000, France remained a minor player. Thomson

Semiconducteurs, the leading French chip company, merged with

Italy’s SGS Microelettronica to form SGS Thomson in 1987, but sold its

ownership share in 1994. Meanwhile Japan and Taiwan joined the US as

major global chip suppliers.

France developed many niche players in industrial software, but the US • raced ahead, and Germany’s SAP proved to be a world-class enterprise

software innovator.

Although Minitel was a truly innovative service and did achieve some • popularity in France, it was eventually overwhelmed by the success of

the Internet – a technology unknown in 1983. The obsolete service was

officially terminated in 2011.8

Among many explanations for these disappointing results, one

key factor, we believe, was insularity. France’s program focused on

funding domestic companies to execute the turnaround of the com-

puter industry. Its intent was to boost French industry by relying as

much as possible on French resources.

8 M. Cochester, “France Telecom will bid adieu to Minitel,” The Wall Street Journal, July 25, 2011, p.B4.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 235

Another factor was the program’s reliance on established (one

might say ossified) providers. No new entrepreneurial ventures were

in the equation. It was a state initiative, rife with the bureaucratic

malaise that such programs commonly entail. The French author-

ities ignored the example of Colbert, the finance minister who had

vigorously recruited foreign entrepreneurs to bring in new technical

talent and start new companies in seventeenth-century France.

Contrast this failed effort with what some other countries were

doing during the same period, and with the results they achieved.

Entrepreneurial activity in the US, substantially funded by venture • capital, led to an explosion of new businesses, many of which became

world leaders in their categories.

During the same period Japanese companies imported foreign technology • under license to get started. They then used domestic product

development to fuel the growth of world-class businesses such as Fujitsu,

Toshiba, and NEC.

Taiwan’s semiconductor industry began with foreign technology, with • RCA a major licensor, giving TSMC and other semiconductor companies

the foundation they needed for success.

Targeting growth industries: Government teams with the private sector

When state initiatives to develop new industries fail, it is the tax-

payer who foots the bill. Where the government has recruited pri-

vate capital and entrepreneurs to join such initiatives, however, the

economic effects are amplified. Entrepreneurs and their investors

are left stranded along with the taxpayers, potentially affecting the

availability of funding for other, more promising innovations. Three

US government “clean energy” programs illustrate how this can

happen.

Clean energy is currently one of the most popular areas for invest-

ment, so it was easy to persuade private investors and companies to

participate. All the programs were targeted at reducing fossil fuel con-

sumption and controlling greenhouse gas emissions, though in very

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy236

different ways. Two programs addressed the electrical utility industry,

while the third subsidized sales of hybrid electric automobiles.

Of the two programs targeting electric utilities, the first

sought to replace non-renewable fossil fuels (oil and coal) in power

plants with biomass (wood and other organic materials). Biomass

was touted as a “clean” and renewable energy source.

The other program aimed to build a so-called “smart grid”

to improve the efficiency of the electrical power distribution net-

work. With a more efficient grid, the electric industry could meet the

demand for power with less fuel. Both programs had the worthwhile

goal of reducing the amount of CO2 spewed into the atmosphere by

generating plants.

These initiatives were in line with other programs intended to

combat global warming and reduce energy consumption, then under

way around the world. It is estimated that global funding for such

efforts reached $200 billion in 2010, a nearly fivefold increase from

$44 billion in 2004. This figure includes private investments as well

as government funding.9

In the US, however, private funding for energy-related R&D

was on the decline. It dropped 50 percent between 1991 and 2005.10

In response, in 2009 the Department of Energy allocated an incre-

mental $5.4 billion for development of renewable energy sources.

Part of that funding went to the biomass program, created to encour-

age electric companies to use biomass in place of fossil fuels. This

was in line with an initiative supported by Congress as far back as

1978 to reduce the country’s reliance on imported oil. Private inves-

tors invested substantial funds as well, in anticipation of a major

business opportunity from a new generation of power plants that

could use renewable fuels.

The program’s success depended on widespread adoption of the

new technology. To make the desired impact on reducing fossil fuel

9 “Climate change,” The Economist, November 29, 2010, pp. 59–61. 10 D. M. Kammen and G. F. Nemet, “Reversing the incredible shrinking energy

R&D budget,” Real Numbers, 2005.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 237

consumption, electric utilities would have to generate at least 25

percent of their power with biomass fuels. Unfortunately, it is more

expensive to use biomass than fossil fuels. That means biomass-

fueled electrical generation simply isn’t profitable without charging

businesses and consumers substantially more for electricity. Without

increased prices for power, there was little incentive for utilities to

make the switch.

Private investors had assumed state regulators would make

biomass plants profitable by permitting utilities to raise their elec-

tricity rates. They did not take into account the difficulty of forcing

through a utility price increase, at least in a democracy. Electricity

rates in the US are largely set at the state level by a utility commis-

sion. Most commission members are political appointees, and revis-

ing rate structures is an inherently political process. Consumers

may consider clean energy a worthy cause in the abstract, but when

it came down to paying more for electricity, their resistance to price

increases was fierce. To complicate the matter, opponents found other

good reasons to hinder the profitable operation of biomass plants.

Most state regulators took the path of least resistance, and did

not implement mandates forcing the use of biomass fuels. To fur-

ther frustrate program proponents, operating costs for the new bio-

mass plants that actually got built turned out to be even higher than

anticipated.

Finally, with the public increasingly concerned about air pol-

lution from burning biomass fuels, state officials issued costly new

regulations to control emissions from generating plants that used

the new technology. For example, the Massachusetts Department of

Energy Resources decreed that biomass power plants had to increase

their efficiency by 60 percent to reduce their level of pollutants. This

was not practical. They also required extra filtration of emissions,

which increased the cost of building such plants.

With these and other obstacles to profitable operation in their

path, by 2010 biomass-fueled electrical generation plants were being

phased out as uneconomical. In one case Sierra Pacific Industries

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy238

of California closed down a 16-megawatt plant because environ-

mental restrictions made it difficult and costly to obtain wood from

forests.11

Our second program, the “smart grid” initiative, offers another

object lesson in the difficulties of forging a public/private partnership

to develop a new approach to business. Partly funded by the Federal

government, this program had the goal of improving the efficiency of

electrical power generation by two means: using new metering tech-

nology in homes and businesses; and improving communication and

control in the power generation distribution network.

One of its goals was to reduce demand for electricity during

peak periods, such as warm summer afternoons when air-condition-

ing use is at its highest. Utilities have to maintain “peaking cap-

acity” to meet this demand, an expensive resource that otherwise

stands idle. If they could even out demand across the day, they would

not have to maintain as much peaking capacity, reducing the overall

cost of generating electricity.

The “smart grid” initiative called for new electric meters,

called “smart meters,” as part of the solution. These devices not only

record how much power consumers use over the course of a day and

billing cycle, but show consumers how much electricity they use at

different times of the day. With “smart meters” in place, utilities

could institute a policy to charge more for electricity used during

peak periods.

Planners assumed that if consumers knew they would be

charged more for electricity during peak periods, they would shift

chores that require a lot of electricity to times when rates are lower.

For example, they might run washers and dryers at night instead of

during the day. The architects of this initiative believed that con-

sumers would welcome this scheme because it gave them some

11 J. Carlton, “(Bio)mass confusion: High costs and environmental concerns have pushed biomass power to the sidelines in the US” The Wall Street Journal, October 18, 2010, p. R5.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 239

control over the price they paid for electricity and could lead to lower

electric bills.

With this noble objective in mind, the Federal government set

aside $3.4 billion in 2009 to help fund home installation of the smart

meters. Since these new devices have built-in communication cap-

abilities, utilities can read them remotely in real time, and give con-

sumers timely access to data on their electricity use.

Given the tens of millions of homes and businesses where

meters can be installed, this represents a multi-billion dollar oppor-

tunity. Its enormous potential attracted many companies, includ-

ing startups, to offer the new smart meters and the communications

links needed to connect them to the utilities. Of course the util-

ities expected that the net cost of the meters (after Federal subsidies)

would be passed on to their customers.

It sounded like a good program for everyone concerned: utilities

would achieve more efficient power use, consumers smart enough to

time-shift their use of major appliances would get lower-cost electri-

city, and meter providers would rack up sales and profits.

However, it didn’t quite turn out that way. In a classic clash

between an obvious public good and public unwillingness to pay for

it, consumers rebelled. While smart meters have been deployed on

a small scale in some states, legal actions in California and Hawaii,

among other places, have blocked their mass deployment. Consumers

simply don’t want to pay for them, directly or indirectly.12

Eventually smart meters will very likely be deployed more

widely, as they are now in some parts of the US and other countries.

But their spread will be at nowhere near the rate anticipated by the

promoters of the government’s smart grid plan, or by investors in the

companies trying to benefit from a national program.

We come now to an example of industrial planning that is more

familiar to and more popular with the average consumer: the Federal

subsidizing of plug-in electric automobiles. We are not talking about

12 See report in Bloomberg Businessweek, September 26, 2010, pp. 44–45.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy240

funding research and development here. (The US Department of

Energy did in fact provide low-interest loans to two electric vehicle

startups, Tesla Motors and Fisker Motors, for product development,

but it is too early to assess the success of this investment.) Our topic

is the government rebate of part of the purchase price of electric cars,

which is given directly to consumers. About $5 billion has been allo-

cated by the government for this purpose, all in the spirit of reducing

oil consumption and helping to create a cleaner atmosphere.

These automobiles exhibit a very limited degree of true innov-

ation. The core enabler is a new generation of a very old product: stor-

age batteries. Advances in battery technology are making such slow

progress that one can question whether the cars they power actually

represent a new generation of products with long-term value.

Whatever the answer to that question, one thing is certain.

With the possible exception of the very expensive Tesla roadster,

which claims to travel 245 miles on a full charge, electric vehicle

driving ranges are too short to make them credible competitors to

gas-powered vehicles. Nissan’s Leaf, an all-electric car, requires four

to eight hours of charging on a 220-volt circuit to travel 100 miles

or less. Its American competition, the Chevrolet Volt, runs only

35 miles on a fully charged battery pack. A built-in gasoline-powered

generator extends the Volt’s range to 300 miles, but during that oper-

ational mode it is not a true plug-in electric. (Fisker’s Karma automo-

bile is similar in range and operation to the Volt.)

Given their limitations, electric cars are very much a niche

product. Without subsidies it is highly unlikely that they would

have been introduced to the general market.13

These Federal initiatives show what happens all too often with

government plans in a country like the US, where promulgating new

industrial standards or forcing people to buy products is not a simple

matter of a decree from Washington. Because these initiatives tried

13 M. Ramsey, “Bumpy road for electrics: Boosters see bright future for battery cars, but some say drawbacks too severe,” The Wall Street Journal, October 18, 2010, p. B1.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

The h a za r ds of ta rgeting industr ies 241

to mandate innovations without taking into account public resist-

ance to their cost or negative consequences of their implementation,

they were pre-ordained for failure.

All three programs did some things right: they were conceived

for a worthwhile purpose; they displayed a vision, however limited,

of the future; and they created new business opportunities for inno-

vators and entrepreneurs. Yet they were by no means as successful

in driving new business as the planners or the entrepreneurs who bet

on them could have hoped. The energy-related initiatives have been

a disappointment, and the success of electric cars is still in doubt.

This is all a result of factors outside the control of the Federal gov-

ernment or of entrepreneurs.

Before leaving this topic, it is worth noting that as subsi-

dized industries build constituencies, they have a way of becoming

entrenched, leading to misallocation of resources. A case in point is

the US Federal program to subsidize the production of ethanol from

corn. Started in the 1970s in the midst of the oil embargo, this pro-

gram was aimed at reducing America’s dependence on foreign oil by

providing a substitute fuel that could be produced from a major US

crop. In addition, ethanol was thought to be far less polluting than

oil. Huge private investments were made to build plants to produce

it, and its use was mandated by law.

But here is what an original proponent of this program, former

US Vice President Al Gore, had to say about it in 2010: “The benefits

of first-generation ethanol are trivial … but it’s hard once such a pro-

gram is put in place to deal with the lobbies that keep it going.” Corn

producers are strong supporters of this program, and of course the

powerful farm lobby is intent on retaining the subsidy. Yet not only

is ethanol not delivering the expected benefits, it is now believed to

contribute more greenhouse gas emissions to the atmosphere than

fossil fuels.14

14 “Al Gore’s ethanol epiphany,” The Wall Street Journal, November 27–28, 2010, p. A16.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy242

Why long-r ange technology planning is so ch ancy

So far our examination of the uncertainties of industrial planning

has focused on market misreadings by the planners, and on the

impediments to progress that a democratic society can place in the

path of government initiatives. Now we turn our attention back to

the central issue of industrial innovation: selecting new technolo-

gies that show promise as the basis of new industries.

People who undertake this task face a different set of issues

from the ones industrial planners take for granted. They are dealing

with technology in the early stages of development, when much of

its potential has yet to be revealed, and before it has been tested in

the market.

As already noted, picking winners is very hard. So hard, in

fact, that forecasts from experts in the private sector as to which

technology will succeed are not much better than those of govern-

ment planners. As proof, here is a salient example from the not-so-

distant past.

In 1995 Scientific American devoted an issue to “Key tech-

nologies for the 21st century.” In his introduction to the survey, Paul

Rennie, editor of the magazine, cautioned the reader on the hazards

of technology prophecy.

“The future is not what it used to be,” wrote the poet Paul

Valéry decades ago, and it would not be hard to share in his

disappointment today. As children, many of us were assured

that we would one day live in a world of technological marvels.

And so we do – but, by and large, not the ones foretold. Films,

television, books and World’s Fairs promised that the twilight

of the 20th century and the dawn of the 21st would be an era

of helpful robot servants, flying jet cars, moon colonies, easy

space travel, undersea cities, wrist videophones, paper clothes,

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Wh y long-r a nge technology pla nning is so ch a ncy 243

disease-free lives and, oh, yes, the 20-hour work week. What

went wrong?

…

Of course, many technologies do succeed wildly beyond

anyone’s dreams … In fact, it is tempting to think that most

great innovations are unforeseen, if not unforeseeable … The

truth is that as technologies pile on technologies at an uneven

pace, it becomes impossible to predict precisely what patterns

will emerge.15

Rennie went on to assert that technology predictions fail

for many reasons. He cited such factors as practicality (the jet-

pack looked good in theory but proved unusable in the field) and

an overly optimistic assessment of how fast a technology will

advance. But the biggest reason why forecasts are inaccurate is

that they are, in his words, “simplistic, and hence unrealistic,”

failing to take into account the challenges a technology will face

from market forces, economic conditions, public policies, timing,

fashions, and more.

For example, visions of industrial robots taking over the work-

place have been tempered by the fact that they are too costly for

many applications. Likewise, the exotic (and expensive) materials

that experts once thought would replace silicon in semiconductor

chips were relegated to niche applications as more advanced silicon

chips matched their capabilities.

Looking back at visions of the future

To really appreciate how hard it is even for experts to predict which

technologies will shape the future, it helps to look at predictions

by some of the smartest people of a prior era. In spite of his cau-

tions about the enterprise of prophecy, Rennie – give him credit for

great courage – nevertheless assembled a set of predictions around

15 P. Rennie, “The uncertainties of technological innovation,” Scientific American, September 1995, pp. 57–58.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy244

several areas of technology. So we will see how the predictions of

1995 compare to the reality of 2011.

• Information technology. Only two technologies mentioned in this area

have continued to create enormous economic value. Driven by steadily

advancing manufacturing technology, microprocessors have evolved

in complexity and value creation more or less as indicated by what

has become known as Moore’s Law. Wireless networks, the second

technology, have become an increasingly important part of computer

technology. The other five technologies singled out for future importance

have not lived up to the hype. These include artificial intelligence and

virtual reality.

• Transportation. None of the predictions have panned out. High-speed

rail systems still use steel wheels and rails, not superconducting

schemes, for support. None of the few maglev trains built up to now has

demonstrated any significant advantage in speed over a conventional

high-speed train. As for customized automobiles, they never happened.

Nor have any revolutionary commercial airliners been built. Boeing’s

787 Dreamliner, which went into service in 2011, is only an evolutionary

advance over previous airplanes. Its development took ten years and

billions of dollars in cost overruns.

• Medicine. Gene therapy has proven to be a continued investment area,

though practical results are still in the future. No artificial organs are

even close to replacing the use of transplanted real organs.

• Machines, materials, and manufacturing. Here the miss is almost total.

Self-assembling materials and high-temperature superconductors are

still not commercially significant technologies.

• Energy and environment. Solar power is beginning to make an impact

in the field of renewable energy, but hydrogen fusion, which attempts to

replicate the energy production process of stars, is as far in the future as

ever.

A list of the technologies that were not highlighted or men-

tioned in these visions of the future, but did prove successful, would

be just as revealing as the miscast predictions. For example, the

forecast of a wireless future envisioned the use of satellites for gen-

eral broadband data communications. In fact, broadband data now

reaches consumers through telephone, cable, or fiber optic lines, and

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Industr ia l pla nning vs. technology funding 245

through the cellular wireless network. But the biggest miss of all is

the fact that the Internet is not featured as an innovation with enor-

mous transformational impact.

It would be comforting to think that the Scientific American

missed so many of its predictions because it chose visionaries with

unorthodox views about the technologies of the future. But that was

not the case. The magazine selected highly respected experts to pre-

sent their views in each technical area.

As a further demonstration of how inaccurate visions of the

future tend to be, we will consider a set of predictions from another

group of respected experts, also issued in 1995. It was published as

a Technology Forecast by Price Waterhouse (now Price Waterhouse

Coopers), the well-known accounting and consulting firm.16

This thick, 650-page tome includes predictions on the likely

direction of information technology over the coming years. While

its forecasts of evolutionary changes turned out to be right on the

money, it notably missed the Internet and its related applications.

Also missing is data virtualization – a technology that has revolu-

tionized the use of computer systems in data centers.

Industrial planning vs. technology funding

Up to now we have looked at the difficulties of industrial plan-

ning. We have also reviewed the dismal record of planners and

prognosticators in accurately predicting which technologies would

prove successful in the marketplace. Fortunately, there are posi-

tive aspects to the planning process. These include government

policies that recognize how important entrepreneurship is to eco-

nomic development.

As observed before, entrepreneurs do not generate new busi-

nesses in a vacuum. They need access to intellectual property

developed by others on which to base product offerings. They have

16 Technology Center, Technology Forecast 1995 (Menlo Park, CA: Price Waterhouse World Firm Technology Center, 1995).

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy246

to identify and exploit promising new markets, develop funding

sources, and attract talented employees. And contrary to myth, they

rely heavily on the infrastructure, resources, and business environ-

ment established by government.

Even in free-market countries like the US, the government

has more involvement in the development of new industries than

most people realize. We saw how David Sarnoff took advantage of

cooperation between the US government and private companies in

the 1920s to create the broadcast industry as we know it. Without

the original government initiative to establish RCA, he would not

have had the opportunity.

Of the entrepreneurial innovators we cover in this book,

Sarnoff is the earliest by some sixty years. But he took full advan-

tage of government policies and funding, and US entrepreneurs have

followed his path right up to the present.

To prove the point, consider a prominent example from our

own era: the digital industries pioneered in the US after World War II.

Everyone talks about the famous entrepreneurs who created iconic

companies such as Apple and Microsoft, but few mention that these

and many other enterprises had their genesis in technologies devel-

oped under government-sponsored R&D funding.

Many of the companies we discuss in this book replicate the

pattern. The technology that underlies RMI, RDA, and SanDisk can

be traced to government-funded initiatives if you go far enough into

the past. In the case of Ness Technologies, the roots of some of the

technologies it commercialized can be traced to work sponsored by

the governments of Israel and other countries.

This research was conducted under government funding in

universities, national laboratories, and private industry, and ori-

ginally may have been targeted at applications in the defense and

space programs. But somehow the resulting technologies, devel-

oped in unrelated settings for different purposes, found their way

to the world market. The results were spectacular: the creation of

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Industr ia l pla nning vs. technology funding 247

new electronics, computer, and telecommunications industries

that have literally transformed the way people live, work, and

communicate.

Non-commercial planning produces results

When a controlled economy like China’s is slowly backing away

from detailed targeting of industries for development, what course

should relatively free economies like the US or the UK take? They

already do extensive planning and resource allocation in areas of

national concern such as defense and infrastructure. Should they

increase their role to include general industrial development?

It is not true that free-market governments never become

involved in industrial activity. They always get involved dur-

ing wartime, when resources are mobilized for expanded weapons

development and production, and for meeting communications,

transportation, and logistics requirements. These projects are gener-

ally successful, in large part because the customer base for defense

products is well defined, as are the applications.

But peacetime targeting of industries in commercial markets

is an entirely different matter. It involves understanding market

opportunities, competitive costs, and international trade issues.

This is not something that bureaucrats are particularly noted for,

as seen in the US government’s abortive entrée into environmen-

tal projects. Where, then, can government planners make a positive

contribution to industrial development? A look at history gives us

some answers.

Starting in the 1960s, US government funding of research and

development played a key role in developing a number of innova-

tive technologies that revolutionized whole industries. Government

planners did not directly target the building of modern US industry,

but their role was indirectly important nevertheless. Technologies

initially intended for defense and space applications ended up in the

commercial world.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy248

Once the technologies were in place, they were seized on by

private capital for commercial exploitation. Further development and

commercialization of many of these technologies was carried out by

privately funded research. The resulting products and services built

companies and industries that became the envy of the world.

Cold war R&D

Take, for example, the great entrepreneurial successes that built the

foundation for the commercial digital revolution in the US after the

1970s. They were built on core technologies developed under feder-

ally funded, defense-related initiatives aimed at increasing the mili-

tary capabilities of the US in the face of a perceived threat from the

Soviet Union. These initiatives were focused on advanced comput-

ing technology, semiconductor devices to enable those computers,

and such communications technologies as satellites, fiber optics,

and lasers.

Another good example of a government initiative with huge

(unplanned) commercial impact was the Apollo space program.

Launched under the Kennedy administration in 1961, its goal was to

land a man on the moon within a decade. Creating the manned space

capsule required rapid development of such new electronic technolo-

gies as low-power, high-performance computing devices, software,

and instrumentation.

This meant creating more and more powerful chips and other

devices. As a result, the Apollo program gave enormous impetus

to advances not only in rocket technology, life sciences, and sup-

port systems, but in microelectronics, displays, and light-emitting

diodes (LEDs). R&D contracts to develop these technologies were

let to universities, national laboratories, research institutions, and

corporations. The technological fallout from that work ultimately

infiltrated the commercial marketplace.

By any measure the government’s investment in the technol-

ogy of space flight reaped huge returns. One estimate of the benefit

of the Apollo program is that for every dollar of R&D spent, seven

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Industr ia l pla nning vs. technology funding 249

dollars came back to the government in the form of corporate and

income taxes from new jobs and economic growth.17

Building the digital domain

We cannot leave this topic without mentioning the government ini-

tiative that yielded the biggest commercial impact, the Internet.18

Now the universal global medium for communication and com-

merce, the Internet took almost thirty years from conception to

commercial reality. It was started not for a commercial purpose, but

to address a specific communications problem among researchers.

The Internet as we know it grew out of a novel network, origin-

ally conceived by computer scientists in 1964, designed to let com-

puters communicate. Its creators envisioned it as a communications

facility for research institutions. They never imagined that it would

spread outside the research community to become a major force in

the world economy.

Actual deployment of such a network became possible only

because of the independent invention in 1962 (published 1964) of

an early version of a packet-based digital communications software

protocol, which eventually became the IP (Internet Protocol). As

proof of the capricious nature of R&D, the contribution of IP to the

Internet came as a result of an unrelated Department of Defense

(DoD) research program funded at the RAND Corporation. The

rationale for this program was the need for robust military commu-

nications to minimize disruptions to the system.

DoD’s Advanced Research Projects Agency undertook the

actual management of the first network to link research laboratories.

This network, called ARPAnet (later DARPAnet), eventually became

available to the general public as the Internet. It is noteworthy that

AT&T, then the monopoly owner of the US telecommunications

17 www.thespaceplace.com/nasaspinoffs.html, accessed November 6, 2010. 18 An excellent review of the history of the Internet can be found in J. Naughton,

A brief history of the future: The origins of the Internet (London: Weidenfeld & Nicolson, 1999).

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy250

industry, refused to operate such a network for fear of creating com-

petition for its established voice and data network (so much for

visionary thinking in monopolies).

Chips and lasers

Among the other notable outcomes of R&D funded under govern-

ment defense and space programs were the standard manufacturing

process for integrated circuits and commercially feasible lasers. Both

innovations were developed at RCA, the company built by David

Sarnoff.

Today practically all chips produced worldwide are made in

the CMOS process. But it began as a DoD project at RCA in the

1970s. DoD wanted to explore the possibility of creating comput-

ing chips with lower power dissipation than the then-current tech-

nology could produce. After successful completion of the project,

CMOS technology was used to manufacture chips for avionic radar

systems, among other applications. It found its way into the com-

mercial market in the 1980s.

Our second example, the development of semiconductor lasers

at RCA Laboratories, was a program I headed. The pioneering work

on this technology was originally funded in the 1960s by DoD to

develop infrared searchlights that could illuminate a battlefield, but

would be invisible to the naked eye.

As the technology progressed in the late 1960s and early 1970s,

it became clear that it would be possible to use such lasers in fiber

optic communications and other systems. RCA announced a com-

mercial laser in 1969 that was based on technology developed largely

under DoD funding.

In two earlier books19 we have described how thousands

of entrepreneurs with access to private venture capital seized the

19 See H. Kressel and T. Lento, Competing for the future: How digital innovations are changing the world (Cambridge: Cambridge University Press, 2007); and Investing in dynamic markets: Venture capital in the digital age (Cambridge: Cambridge University Press, 2010).

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Industr ia l pla nning vs. technology funding 251

opportunity to develop pioneering commercial products around elec-

tronic technology that had been partly or fully developed under gov-

ernment funding. For example, several companies were founded to

capitalize on the semiconductor laser and its applications. As a result,

it appeared in numerous applications over the next few years.

Companion technologies also sprang up that greatly expanded

the ways in which lasers could be used. This led to their current

status as not only the key to all fiber optic communication sys-

tems, including voice and data networks, but as the enabling tech-

nology of millions of instruments, DVD players, and a host of other

devices.

Government research and commercial innovation

Do these examples of government-funded technologies seeding great

industries constitute a unique set of events, or are they representa-

tive of a highly effective approach to industrial development? Free

marketers and proponents of state control may debate that question,

but the fact remains that government-sponsored research and devel-

opment does eventually migrate into the commercial and industrial

markets.

In the US, at least, the government is still a major funder of

innovative R&D that has broad applicability outside narrow defense

applications. The 2010 US Federal R&D budget of $147 billion cov-

ers a vast scope of activities, from medical science to new sources of

energy.

Corporate funding of basic research, on the other hand, has

waned. Corporations are focused on product-oriented development

programs aimed at producing quick results in the marketplace. They

are much less invested in long-horizon projects that may or may not

produce breakthrough innovations.

One recent study by Block and Keller, published in 2008, offers

a view of the sources of industrial innovation in the US between

1970 and 2006. It confirms the increasing importance of govern-

ment funding for R&D, and the continuing abdication of the field by

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Building a n economy252

corporate entities. During this period, as documented in the study,

large firms contributed a declining fraction of the innovations, con-

sistent with the decline in corporate research laboratories, while

government-funded contributions from universities and national

laboratories increased. Block and Keller sum up the situation this

way: “If one is looking for a golden age in which the private sector

did most of the innovating on its own without federal help, one has

to go back to the era before World War II.”20

Summing up

Government policies play an important role in determining a

nation’s industrial destiny, no matter what that nation’s professed

economic philosophy might be. China achieved resounding success

in industrializing its economy through a tightly targeted form of

“top-down” industrial development.

These policies can change over time to reflect national prior-

ities. In the hopes of generating industry from its own innovations,

China is now backing away from its highly prescriptive model to

allow a greater degree of “bottom-up” initiative. It may have no

choice. In a world where innovation is a key driver of long-term

industrial success, government must promote policies that encour-

age creative entrepreneurship while avoiding, in general, targeting of

specific product initiatives.

One such policy is the funding of basic technology devel-

opment. This approach has paid off handsomely for the US in the

past, and will continue to do so in the future. But just generating

technology is not enough for economic value creation. The fruits of

R&D investments must move into the marketplace. That requires

collaborative efforts between those who innovate and companies

that can generate successful new products and services around their

innovations.

20 F. Block and M. R. Keller, “Where do innovations come from? Transformation in the US national innovation system, 1970–2006,” Information Technology & Innovation Foundation, July 2008, p. 16.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use

Summing up 253

We are back once again to entrepreneurship as an engine for

economic growth. In Chapter 2 we outlined the positive impact

that entrepreneurs can have on an economy. They create new

companies or rebuild existing ones that drive innovation into

the market, where it fails or succeeds on its own merits. If the

new company’s innovation is successful, it creates significant

and lasting value. If the company fails, it makes way for the next

company with the next big idea. Firms created by government

action, by contrast, tend to persist long after they have outlived

their usefulness.

Government can support businesses through creative indus-

trial programs like those of the Fraunhofer Institutes, also discussed

in Chapter 2. Under this arrangement the German government helps

fund collaborative development between the Institutes and small

and medium-sized companies. Normally such companies could not

afford an ongoing innovation effort. By sharing a technology devel-

opment resource, they can stay competitive. If they are startups, this

arrangement gives them the opportunity to develop products that

can compete in the global market.

Government-funded R&D programs and mechanisms for sup-

porting businesses have proven highly successful as foundations for

new companies and new industries. This only bolsters an already

solid case for the continued importance of entrepreneurs in tak-

ing innovations to market. How entrepreneurial activity should be

funded, however, is a source of significant disagreement among eco-

nomic theorists.

Some point to the level of global competition, and the grow-

ing number of countries that directly underwrite industrial devel-

opment, as reasons for developed countries to fund the creation of

new companies. They believe this is the only way they can build an

industrial base that will sustain their economies and their contin-

ued prosperity. Others maintain that this role should be assumed,

as it has been historically, by private companies and entrepreneurs

with funding from private sources.

EBSCOhost - printed on 1/26/2020 8:39 PM via UNIVERSITY OF THE CUMBERLANDS. All use subject to https://www.ebsco.com/terms-of-use