Who should drive ‘blue sky’ research?

Satwik Mishra | Updated on August 25, 2019

As it involves study of the unknowns, the state should take the lead. The likes of Google and Apple gained from US govt’s efforts

An entrepreneur is a risk taker. A rational self-interested entity that invests where there exists a favourable cost-benefit ratio. This investment benefits society, by optimum utilisation of resources. An entrepreneur would rationally want to minimise cost of production, earn profit and create a product valued by society.

However, this cycle is also an entrepreneur’s limitation when it comes to a niche sector — blue sky research and development. This implies research into today’s unknowns, into fields that aren’t immediately beneficial or commercially profitable. Today, that would imply dark energy, genomics, quantum computing, neural intelligence, and geo-engineering.

These are areas in which the risk of investment is far too high and the profit isn’t immediately calculable. However the “products” of investment in this sector are essential and valuable.

Stephen Hawking said: “I think the next [21st] century will be the century of complexity.”

To deal with this complexity we need to invest time and resources in the unknowns of today. Due to its profit-seeking timelines, the private sector isn’t typically willing to take risks in long-term projects. To make returns for its stakeholders, it must invest in what is valued in the short term.

Venture capitalists have a timeline of five to seven years, to seek returns (Ghosh and Nanda 2010) . If investors don’t get the returns they expect, they would park their funds elsewhere. Blue sky research as a sector doesn’t have short-term timelines within which it can guarantee some form of return, tangible or not.

So then who will be the blue sky entrepreneur? An uncommon candidate is — the state. This seems counter-intuitive, given that the dominant narrative today is of the state being only a facilitator of entrepreneurs. However, this narrative undermines the risk-taking capabilities of the state. It also doesn’t hold true historically. Especially, when it comes to blue sky research.

This conception of the state has been brought out by the economist Mariana Mazzucato. She argues that most of modern commercialised scientific products were built on groundwork done by the entrepreneurial state. .

She enumerates a fascinating list of US’ successful commercial technology firms and products that were built on the vision of the the state.

The US government’s Small Business Innovation Research (SBIR) provided seed capital to Compaq and Intel for its initial entrepreneurial vision in this sector.

The algorithm that led to Google’s success was funded by the US’s National Science Foundation Grant.

Research in driverless cars was first spurred by Grand Challenges funded by Defence Advance Research Projects Agency (DARPA).

Apple’s iPod and iPhone have been built on GPS, Internet, liquid crystal display, micro hard-drive and touch-screen technologies, most of which are off-springs of the state’s investment in blue sky research.

Mazzucato doesn’t ridicule the private sector. She simply points out that the nature of private sector is such that, for blue sky research a more viable alternative has been the state. The private sector is structurally more inclined towards investment in applied research. Applied research leads to commercialisation of basic research.

The Indian scene

India’s R&D expenditure has been abysmally low. Given the lack of R&D investment in India, it is no surprise that only 0.23 per cent college educated graduates pursue research whereas in the US and China it is 1 per cent.

In the last two years though, there have been hints of the state recognising its entrepreneurial role in blue sky research. The Prime Minister’s Science Technology and Innovation Advisory Council has taken up missions such as biodiversity conservation, bioscience for human health, quantum technology.

Another related intervention has been the National Mission on Cyber Physical Systems.

Though these missions are laudable, there exists a challenge which may make them unsustainable. The state doesn’t have the financial or human resources for sustaining this kind of research into the unknowns. It is difficult to argue with a state to invest in dark energy, when millions live without access to basic necessities.

Mazzucato has shown a way to surmount this challenge as well.

A sustainable approach

Get over the self-fulfilling prophecy of the minimalist state. If we continue to set the narrative that the state must recede, we will most definitely create a resource and talent starved state. Instead, the state must actively develop capabilities and processes to invest on larger scales.

Equally important, is to have the capability to attract talented human resources. Hence, the lateral recruitment under way in India is a step in the right direction.

The state must become a stakeholder when blue sky research is commercialised. It must incorporate contracts with ensured remuneration, when the fruits of its investments and risk-taking in blue sky research is commercialised.

This remuneration raising can then create a “virtuous cycle” of efficient role allocation between the state and the private sector. A role allocation which benefits society in the short and long term.

The benefits of this structural reform has been shown by Mazzucato by constructing a thought experiment. She cites the course of two companies, Solyndra, a solar panel start-up, and Tesla .

Both had taken significant loans from government programmes in its early days. Solyndra couldn’t capture markets and failed, Tesla of course has been extremely successful. When Solyndra failed, the taxpayers took the brunt. However with Tesla, the profits have been privatised.

In the thought experiment, Mazzucato argues to consider, if the government had some stake in Tesla, it probably would have covered some of its losses in Solyndra. It would also be a reward for its risk appetite. This stake could hypothetically be a certain percentage of equity which must mandatorily be sold when the company reaches a threshold value of the initial investment by the state.

A framework like this could set up the virtuous cycle where the entrepreneurial state has funds for blue sky research and the private sector has a plethora of basic research which it can commercialise.

An Indian example of the entrepreneurial state can be Lithium ion batteries developed by ISRO’s Vikram Sarabhai Space Centre (VSSC) which is now being commercially utilised by the private sector. This commercialisation is with appropriate remuneration value to ISRO, which would most likely use this remuneration for further research and development.

Another example can be the cryogenic engines technology developed by ISRO. It is already generating revenue for the state with every launch.

Being an entrepreneur is about risk calculation. It is about minimising chances of failure. It’s about being rewarded for the entrepreneurial spirit which creates valued products for society. Taking inspiration from Mazzucato’s fascinating research, it is time to push for an Indian blue sky entrepreneur — to invest, for making our future more certain.

The writer is pursuing post graduation in public policy from Takshashila Institution, Bengaluru

Published on August 25, 2019

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