As with the microelectronics program, government incentives don’t have to line the road all the way to commercial success. At some point, companies will be ready to sell products, and market demand can take over. The US Department of Defense was the only customer for integrated circuits in 1962, but by the end of the decade consumers were buying transistor radios and pocket calculators in droves.
Likewise, state-sponsored demand should not take the form of subsidies to specific technologies or companies; the government has no business gambling taxpayer money on particular ventures. Assuming that risk is the job of venture capitalists and others in finance, not public officials. There is little risk in offering a contract for a job well done, but there is no payout if the problem remains unsolved.
Those payouts are modest compared to the research and development efforts they stimulate. A program offering rewards of US$1 billion to US$5 billion in contracts or deployment commitments can generate many times that value in private-sector research and development. Innovators and their investors are willing to bet big on these opportunities, because they know that the eventual reward in revenue from a global customer base will far exceed the initial investment. That makes state-sponsored demand a very efficient mechanism for generating innovation.
Because of the multiplier effect, small governments and states, and even large cities, can successfully sponsor the kind of demand that fosters a world-class innovation epicenter. Certain Scandinavian countries, Chinese provinces, and the city-state of Singapore, for example, are ideally positioned to try this approach.
Some years ago, I calculated how many units of product need to be sold to launch a technology. The number is actually quite modest: If you can move between 100,000 and one million units of a disruptive product, you can establish the technology standards for that category and in time become the global leader of a new industry. Government sponsorship ensures that a certain number of people will adopt your product. At the start, it need not be that many.
The economic planners and policymakers who are chasing Silicon Valley’s taillights are learning that they cannot always replicate the entrepreneurial culture and finance mechanisms that flourish there now. They have forgotten how it all started: guaranteed demand, which stimulates the most ambitious kind of innovation.
The lesson is a simple one: Do not try to build another Silicon Valley. Instead, build a “Demand Mountain,” and the innovators will come.
Edward Jung, former chief architect at Microsoft, is chief technology officer at Intellectual Ventures.
Copyright: Project Syndicate