62S. Murtinu et al.

innovation. Mazzucato (2011) calls for government, not decentralized market players such as startups and unicorns, large firms, or venture capital funds, to be the driving force in the development of innovations and technological progress. According to Mazzucato, only the state can play this role because it (properly) socializes the risk of long-term technological investment. The state can invest in whatever technologies it likes because it has access to the taxpayer’s bottomless purse. By contrast, private investors operating in competitive markets risk their own money and entrepreneurs are accountable to their financiers, who can withhold future support in the event of poor performance.

In Mazzucato’s account, when innovative entrepreneurial firms contribute to societal improvement by means of new products, new organizational processes, and other innovations (Audretsch, 2009), the state deserves credit for providing— at least indirectly, via initial high-risk investments—entrepreneurial firms with the necessary resources and assets to challenge incumbents. Moreover, the state needs to regulate these profit-seeking big players who, in this interpretation, “do little more than free-ride on government-funded research and development activities” (Mingardi, 2015). It is certainly true that innovation requires long-term, high-risk investments, many of which fail to deliver the intended benefits. Conventional market-failure arguments, as inspired by Walrasian assumptions, suggest that, because private actors often cannot capture the spillover benefits from basic scientific research, they will not invest enough in fundamental breakthroughs (Nelson, 1959; Arrow, 1962); this is the usual justification for public funding of basic science. Mazzucato goes much further, however, insisting that government should guide and direct applied research and development, with state funders displacing private angel investors and venture capitalists in providing resources to innovative companies and projects. There are several problems with this argument, however. First, Mazzucato conflates invention with innovation (Karlson et al., 2021); while the former (an engineering concept) can be performed by a variety of actors, the latter (an economic concept) only makes sense with respect to subjective entrepreneurial judgments and beliefs—about future consumer preferences, market conditions, the value of alternative uses of resources, and so on (Foss et al., 2007; Foss & Klein, 2012)—and the activity of entrepreneurs in combining and recombining resources and assets with the final aim to maximize consumer experience and value (Bylund & Packard, 2021). Moreover, analysis of alternative means for promoting innovation should be comparative; while Mazzucato focuses on alleged market failures arising from information and incentive problems, she does not address the potential policy failures that also arise from public funding and execution of research and development projects which are also plagued with information and incentive problems— which are likely substantial given the lack of evidence for the success of industrial policies for innovation (Karlson et al., 2021).

63The Entrepreneurial State: An Ownership Competence Perspective

Policy Ineffectiveness

Evidence on social welfare programs such as transfers, government consumption, and public investment is mixed (Brückner & Tuladhar, 2014; Hansson & Henrekson, 1994). Consider universal basic income: In developing countries, Banerjee et al. (2019) show that while several cash transfer programs had positive impacts, targeted measures to reduce extreme poverty were unsuccessful. In the case of Sweden, Bergh (2016) argues that state-sponsored cash transfers for sickness, family allowance, and unemployment reduced relative poverty and income inequality, although Ahmed (1986) shows that government spending in the United Kingdom crowds out private spending and produces negative wealth effects (see also Yuan & Li, 2000). Moving to taxation, income taxation has negligible or negative effects on investment in human capital (Trostel, 1993). Corporate income taxes negatively affect entry into entrepreneurship (Djankov et al., 2010; Gentry & Hubbard, 2000; Keuschnigg & Nielsen, 2003, 2004) and the efficiency of global value chains (Foss et al., 2019), while capital gain taxes are negatively correlated with both entrepreneurial entry and the supply of venture capital (VC) financing (Gompers & Lerner, 1998), although the exact mechanisms are complex and vary with firm characteristics (Henrekson & Sanandaji, 2016). At a more macroeconomic level, Afonso and Furceri (2010) show that both government revenue (indirect taxes) and spending (social contributions, public consumption, subsidies, public investment) are detrimental to the growth of OECD and E.U. countries. The bottom line is that, in general, investment of public money in unproductive projects leads to higher deficits and debt without a positive impact on aggregate productivity. This translates into a stagnant productivity in the long run, a reduced sustainability of debt (that is, a country needs to pay higher interest rates to refinance its debt, with then fewer resources to be spent on public goods), and to less cash to be used in the case of negative shocks like the recent Covid-19 pandemic.

The microeconomic evidence on government attempts to help innovative entrepreneurial firms is also mixed. Bianchi et al. (2019), Colombo et al. (2011), and Grilli and Murtinu (2012, 2018) find a positive, partial equilibrium effect of direct innovation subsidies. Many other studies reach opposite conclusions. Wallsten (2000) shows that government-funded commercial R&D in the form of Small Business Innovation Research (SBIR) grants fully crowds out privately financed R&D spending. Other studies found small effects of R&D subsidies net of the crowding-out effect (see Zúñiga-Vicente et al., 2014). Paff (2005) shows that R&D tax credits in California targeting biopharmaceutical and software firms did not stimulate contract research with universities and nonprofit research centers. Cappelen et al. (2012) show that the Norwegian tax credit scheme SkatteFUNN does not contribute to new products for the market or enhanced patenting activity. As in the case of R&D subsidies, other studies find more positive effects of tax credits (e.g., Agrawal et al., 2020; Czarnitzki et al., 2011). Interestingly, Kong (2020) shows that being headquartered in states characterized by increases in government spending