Innovation and reform key to ending financial crisis, says Sussex economist

Innovation and reform key to ending financial crisis, says Sussex economist

Government needs to implement radical, strategic financial reform that favours innovation and the technology economy – or face economic instability with major social consequences.

That’s the message in a new report released by Finance, Innovation and Growth (FINNOV – www.finnov-fp7.eu ), a three-year collaborative research project funded by the European Commission and led by University of Sussex economist Professor Mariana Mazzucato.

FINNOV explored the link between the financial sector and the real economy, analysing to what extent financial activities promote or impede industrial growth and innovation.

The research recommends immediate financial reform to re-boot the economy, with the State driving growth in innovative technologies and businesses that can deliver new and lasting benefit.

Key recommendations include:

• Strategic investments by the State in early stage innovation;
• Successful State investments in innovation (for example in green technologies) should deliver tangible returns to the public purse, not just debt;
• Blanket support for small and medium-size enterprise (SMEs) is misguided and would be better targeted to producing not more firms but better, high-growth firms that create more jobs and better products;
• Share buy-backs (a manipulation of the market, which boost companies’ share prices and executives’ options and other ‘performance pay’ at the expense of R&D), should be subject to stronger governance control or banned outright;
• Indicators of performance, used by financial markets, should be rebalanced to reflect companies’ investments in innovation, research and development and productivity;
• Tax rules that currently penalise innovative companies should be changed to shift the balance of rewards towards innovators who create lasting value, and away from those extracting short-term value and speculative capital gains.
• Public financing of innovation should be reformed (to function as venture capital) so that the public benefits from successful publicly-funded innovation.

Professor Mazzucato, who is Professor in Science and Technology at the University of Sussex and is an expert on the economics of growth and innovation, says: “The economic crisis has exposed deep flaws in conventional economic thinking on which financial policies and regulations have been based.

“The changing links between risks and rewards have contributed to an increasing ‘financialisation’ of the economy, and this has allowed parts of the financial services sector to extract value at the expense of industrial growth. This practice is undermining investment in productive activity and has already destabilised the economy. Innovation requires ‘patient capital’, with greater distribution of rewards to contributors to the innovation process, aligned to the money, time and energy they risk making it a success.”

The FINNOV recommendations were presented to MPs at a conference at the House of Commons (1 February 2012).

David Willetts, Secretary of State for Universities and Science, said: “How the financial system supports investment is a key question for policy makers at the present time and a key concern of BIS. We welcome the contribution FINNOV is making to the discussion and debate.”

Chi Onwurah, Shadow Minster for Innovation and Science, said: “ The relationship between innovation, finance and public policy is one of the key questions of our time. Governments who get that relationship right can use it to build a sustainable economy. Governments who get it wrong will pay a high price.”