Joseph Schumpeter suggested that growth comes from innovation (creative destruction) rather than just capital investment. This innovation is "fundamental", rather than a twist on an existing formulae. Here an innovation is not a scientific breakthrough, but the full innovation process ie customer adoption. This therefore suggests that the goods or services concerned are indeed needed.
The difficulty governments have is how to support innovation or new markets. If they do not other economies will become better in those markets and competitive advantage is lost. Full intervention can be messy, administratively poor, and picking winners eludes even the best of us.
In the UK you can see 3 clear examples at the moment.
Messy - Firstly there is a call from the government for the economy to reduce carbon emissions. The regulator Ofgem was reviewing its procedures as prices have risen in the very confusing retail gas market. This suggests that there is ineffective regulation of the energy industry, especially as the same industry is asking for "subsidy" to invest in low carbon technology. What the government would like is lower prices and sensible research and development.
Administration - Secondly the Government introduced the Climate Change Act in 2007 and became law in 2008. This gave the government powers to intervene in the energy industry and bring on lower carbon technologies and introduce them into the market. Whilst FiT's were introduced last year to introduce regional production of electricity the RHI (Renewable Heat Incentive), is to be introduced in June 2011. This is 4 years of discussions and at the moment the market has not got a clue how much or what the government will support. The announcements were expected in July, then "Autumn", then during the spending review, and now "by the end of the year". If you take into account the research prior to the act you can see that it stretches several parliaments.
Picking Winners - Thirdly for new technologies the government used to support "innovative ideas" in the DTI. Then we had the Regional Development Agencies who "supported" R+D, but did so in a far more competitive way, which meant fewer companies being supported - which inevitably meant less winners. The Technology strategy board now asks for bids for particular technologies that have been identified and the RDA's have been shut down. We seem to have moved towards the governments deciding "what" should be invented and by whom from an original model of encouraging innovation.
At the moment there is a clear gap between the funds available in the market through debt or equity finance. With the demise of "Quango's" franchises like Business Link may not exist in the future, and whilst this may save funds it does not give industry or entrepreneurs clear pathways to move forward.
If you came up with an innovation to save carbon emissions - you might think that you had struck gold. However confidence in investment is low, and unless you match a competition that the Technology Strategy Board have at the moment (and get chosen), your chances of succeeding are lower. There is "support" in word form from the government. They would like growth and to be competitive as an economy. Their first act has been to "reduce" the size of the public sector, but these things take time......
