Only Sovereigns can solve certain riddles

Stimulus, Legislation and Fiscal policy.

Governments play many roles in their attempt to stimulate innovation and growth processes. Thus far, however, they have not produced the desired results. While fears that innovation is slowing are exaggerated, there is a need to rethink current practices.

Assets under the management of Sovereign Wealth Funds (SWFs), for example, continue to expand globally as emerging markets and developing countries join in the search for ways to benefits from new sources of revenues and grow their economy. A large number of SWFs are focused on fiscal stabilization (Brazil, Peru, Mexico, Nigeria,) and the maintenance and growth of value, including SWFs set up to manage government pension funds (Chile, California/USA, Sweden). These goals, while important, tend to orient the Sovereigns towards investment abroad. Most advisory services reinforce this focus.

Although Sovereigns are becoming key actors in global investment, they are missing opportunities to play a larger role in economic growth and development at home. Applying funds to the venture asset class abroad makes little sense when, in absolute terms, the returns are not meaningful, and strategically they miss the point.

Making choices about the use and risks to which Sovereign funds would be put requires a longer term horizon and a wider perspective on local needs and options than is generally the case. From this perspective, SWFs could become a bridge to innovation and stimulate the transition to new energy technologies (Norway, New Zealand). For developing countries and emerging markets, there is a strategic gap that needs to be filled.

Governments have also made use of public funds to support startups at home, often through research funding. Requests for Proposals, grants and calls have been used to identify potential technology winners of the future. Calls are reverse engineered to proposals that meet the criteria, but will not (efficiently) lead to the underlying objectives. A strategy for moving research to market, preserving the value of natural reserves in a low carbon environment, or directing system integration across industries is rarely a part of such projects.

Making innovation happen, is not just about picking winners but about knowing how to pick. Can this be improved? Reshaping research funding to resemble more closely the strategy for sovereigns noted above could make a major difference.