59The Entrepreneurial State: An Ownership Competence Perspective

and political economy literatures, most recently from the perspective of agency and incomplete contracting theories (De Bettignies & Ross, 2009; Laffont & Tirole, 1991; Schmidt, 1996a, b). Also relevant is the poor performance of government-led innovation programs (Krueger, 1990; Kwerel, 1977; Le Grand, 1991; Levy & Peart, 2015; Winston, 2000). Projects such as Minitel (in France), Solyndra (in the U.S.) and Universal Credit (in the U.K.) are three salient cases out of thousands of examples (Datta-Chaudhuri, 1990; Helm, 2010; Keech & Munger, 2015).

While most research has highlighted incentive and property-rights problems of government ownership and control of resources and projects, here we also focus on a different issue: Even the best-intentioned and most strongly motivated directors and managers of state-run programs tend to lack the ability to play an ownership role. Ownership itself is an economic, as well as legal, function that can be exercised with greater or lesser ability (Foss et al., 2021). Ownership involves taking ultimate responsibility, or exercising residual decision-making authority, over resources deployed in productive uses. The ownership function is distinct from management, leadership, and similar functions. Those can be exercised on behalf of others, while ownership per se—the right to make decisions about the use of resources under conditions not specified by prior agreement (Hart, 1995)—cannot be delegated to non-owners. Competence arguments for value creation are different from incentive arguments because even owners with strong incentives to increase value may lack the competence to do so. From an ownership competence perspective, the benefit of markets and market competition are not only that private ownership mitigates agency and moral hazard problems, but also that the market process tends to place ownership titles (the right to exercise ownership) in the hands of individuals and groups with higher levels of ownership ability (those using privately owned resources to create value) (Pelikan, 1993). This process is hampered, or entirely absent, in parts of the economy dominated by public ownership or with a strong state role in the management of privately owned assets. The idea that government actors often lack ownership ability appears in popular discussions of the failures of “state capitalism” (e.g., The Economist, 2014), but is almost entirely absent from the academic literature (Musacchio & Lazzarini, 2014). For instance, state-owned banks in China and India display much lower valuations than their private peers, not to talk about the fall of state-owned telecommunications operators like China Mobile (The Economist, 2014). One of the main reasons is that private owners were “invited” by the state to play a subordinate role in the management of those companies, with the state holding a golden share or other forms of control mechanisms, which results in misallocation of capital, bad debt, and sometimes liquidation. While these problems certainly have an incentive dimension, they also have a competence dimension: the owners hand-picked by the state are unlikely to be those best positioned to innovate and create value. More generally, we suggest that ownership competence differs systematically between public and private actors, particularly around innovation, and that this difference has important implications for innovation policy.

60S. Murtinu et al.

Our reasoning about the competence of government owners builds on Pelikan’s (1989, 1993) notion of “economic competence,” developed in the context of comparative economic systems, and Foss et al.’s (2021) concept of “ownership competence,” developed in the context of strategic management. Pelikan (1993) defines competence as the ability of owners to assign managers to firms and tasks and points out that different institutional rules (e.g., private capital markets versus statecontrolled resource allocation) can be understood as alternative mechanisms for matching owners to competence. Foss et al. (2021) dimensionalize ownership competence into decisions concerning which resources to own (matching competence), how to create value by owning these resources (governance competence), and when to own them (timing competence). These decisions take place in situations with significant levels of (“Knightian”) uncertainty. Under uncertainty, decisionmakers typically lack, or cannot agree upon, meaningful probabilities they can assign to future events. Instead, while they may rely on formal routines or procedures such as scenario-planning, mental experiments, and the like, decision-making under uncertainty ultimately involves intuitive, subjective judgments about the future (Foss & Klein, 2012). As we argue below, this kind of decision-making is particularly difficult for public actors who, as stewards of resources owned by the public (Klein et al., 2010), cannot exercise the ultimate responsibility that comes with ownership. We use these ideas and augment them with public choice arguments to better understand the effects of government (in)competence in markets and businesses.

We begin with a brief review of Mazzucato’s arguments for the entrepreneurial state. We next show that, unlike competitive capital markets, democratic processes for assigning public actors to act like owners of public resources do not select for ownership competence. We show how a political party’s true competence may be very different from that perceived by the median voter (Murtinu et al., 2021). Thus, by manipulating voters’ rational inattention (Sims, 2003, 2010), incompetent politicians are often in place, and their incompetence leads to the implementation of (too) expansionary policies, which materialize via a massive presence of politics in firms and in markets. Next, we show how government ownership is conducive to an inefficient market for corporate control for two main reasons. One is that the pursuit of political goals leads to horizontal agency costs, that is, conflicts between principals (private owners and government owners) who have different interests, preferences, and objectives. For instance, government owners may push for the appointment of controllable managers who are not the most economically competent but who are politically aligned with the government agenda. Another reason is that government owners are less capable than private owners of selecting competent managers because of a lack of high-powered incentives, more red tape, inefficient compensation schemes, less talent, and a lack of independence in decision-making.

61The Entrepreneurial State: An Ownership Competence Perspective

The Myth of the Entrepreneurial State

In the last 40 years, free markets have brought millions of people (especially in developing and underdeveloped countries) out of absolute poverty. Openness of trade and financial markets gave emerging economies (e.g., China between the mid-1990s and the first decade of the twenty-first century) the possibility to attract foreign capital. Foreign direct investment helped to bring about a technology catchup toward advanced economies. Free-market policies allowed production inputs like capital and human resources to move freely, with money being invested in the most productive investments and capable people choosing the country where the synergy between their individual competences and a country’s resources is maximized. Despite such demonstrated successes of free-market policies, many economists increasingly call for a return to older, more interventionist models with massive government involvement in the economy. Economic disruptions such as the 2008 financial crisis and the recent Covid-19 pandemic, despite their different causes and dynamics, are described as instances of market failure that call for preventive or corrective activity by government. Inequality, the rise of tech-based superstar firms, and what some see as a global ecological crisis are also used to motivate increased government intervention. More government control over research and development