In the show Shark Tank, an entrepreneur gives a presentation in hopes of receiving funding for a new venture or product. The investors (sharks) decide if the innovations are worthy of their investment, with an average approval rate of 56%. The Oklahoma Department of Commerce has decided to give this method a shot. While they are not filming a TV show, they are investing in companies claiming they can produce something innovative that will propagate growth and employment.
At 78% approval, the odds of getting funding through the program are significantly better than Shark Tank. The state’s program provided $7.74 million in funding to those programs chosen and claims to have created 680 jobs (about $11,000 per job). The companies applying must have a payroll of $625,000 and at least $50,000 designated for capital investment. While requiring this higher level of payroll does favor companies that are less likely to fail, reducing the risk of the investment, it does distort the innovation process to favor bigger companies at the cost of smaller companies.
In order to qualify, the project must be innovative, a project that shortens or strengthens the supply chain, or a project that targets new markets. This begs the question, what is an innovative project and how would they know that before they received funding? Paul Krugman famously said, “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” Clearly, Krugman was wrong in hindsight, but at the time, he believed it to be true. How could someone so accomplished (a Nobel Prize winner in economics) be so wrong? Entrepreneurs must take risks and there is nothing certain about a new invention. Observers with imperfect knowledge like Krugman or Oklahoma’s Department of Commerce are not good at predicting such things. The same can be applied to targeting new markets and supply chain innovation; they all can be clearly seen after the fact but are often impossible to spot before.
If the government assumes some of the risk and a project receives funding, what do they get? The company will get payroll tax rebates. Reducing the tax burden will allow the company to spend more on innovation that will help their company. The lessening of a tax burden will be helpful to the companies that receive it, but if the innovation is truly beneficial, they should be able to assume the risk of creating the innovation without government help.
The risk for innovation should be captured by the entrepreneur rather than subsidized by government. For example, what happens if the innovation does not align with the market a few months down the road? The company would be stuck creating something that is not helpful to economic growth and taxpayers end up paying for it. The lag between creation and completion of the innovation could be so great that it becomes obsolete before it is finished. If someone were creating a better typewriter in the early 1990s, it would be completely unnecessary by the time it entered production. These types of changes in the economy happen often and change the demand for products. If the company were allowed to pivot from the innovation into something productive, the market would be better off. This market correction would force the company to be efficient and would not waste government funds.
The Innovation Expansion Program is a miscalculation of how to foster growth in the economy and is ineffective at accomplishing this goal. In Shark Tank, the sharks use their own money to invest in hopes of a reward. The risk they take on should equal the expected reward for them to invest; this is noticeably lacking from the state government’s expansion program. The outlay of funds from the government has hopes of rewards, but since government does not demand it, the risk falls on the public. The best way to foster innovation and entrepreneurial activity is through economic freedom. Government policy should embellish freedom through limited government intervention and lower taxes. It should not favor those ideas some nameless bureaucratic committee deems worthy of investment such as bakery glitter, a bathtub manufacturer, or a martial arts store. The intervention of government interrupts and deviates the economic calculation that must happen for productive economic growth. The entrepreneurial process must be fluid and flexible, something the inflexibility of government funded innovation does not allow.
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.