This week an opinion piece circulated via email from a nonprofit policy institute that claims to “stand on principle, not politics”. The writer used the example of Suntech, a solar company that has received business incentives here in Arizona as a prime example of why we should not use government funds to support or invest in specific companies or industries.
The piece ended with the conclusion that Arizona House Speaker Andy Tobin’s bill, H.B. 2646, that would establish a fund in which the state “invests” directly in chosen companies was a bad idea. The writer’s argument against the bill was based on business relocation incentives Arizona provided to Suntech not a direct investment as a fund woud do, yet since that company failed or as the New York Time’s Keith Bradsher proclaimed: “…was the Icarus of the solar power industry. And, on Wednesday, it fell to earth” the writer cautioned us all to “hold on to our wallets.”
OK, That Makes Sense… Or Does It?
The writer’s premise was pretty simple. Since Arizona invested incentives in a specific company in an emerging technology sector and that company failed, future state investments in specific emerging technology companies should be discouraged. Government should not pick winners and losers. Instead, simplify government, create a more business friendly environment, and treat everyone equally so that there is a level playing field and let free market investment forces come into play.
That sounds really good.
However, there are two problems with that argument.
The first is that savvy investors hold diversified protfolios and do not base or judge an investment portfolio based on a single investment. Sound portfolios are made up of a cross section of investments with the understanding that some may succeed and others may not. That is the whole reason we diversify. Second, when you put certain industries side-by-side and look at their risk profiles, the field is not level to start with. Some emerging technologies would never see the light of day simply due to the perception that other less risky investments are a safer bet for investors.
The safest bets rarely yield the greatest rewards.
Many emerging technologies, or yet to be discovered future innovations, will not progress purely on free market investment. Railroads, telecommunications, semiconductors, the internet, and different forms of energy have all benefited from government investments and subsidies in their early years and some still do today. The basic tenant of that public sector investment is that the future innovation or product meets an unmet need and supports the greater good making it worth forward looking public investment to help move the technology along to the point where the risk profile is acceptable to private sector investors.
Without government investments in basic research, we would not be the nation to first step foot on the moon, the U.S. would not have become a world leader in semiconductor technology, nor would we have mapped the human genome. Without further subsidies and support, high risk bets like this rarely move from concept to real world applications.
Innovation does not just happen. It follows a path from discovery to development to delivery.
State and federal investments combined with philanthropic support of the discovery phase build and maintain research infrastructure and support new discovery through specific programs. This work occurs in public institutions like our universities as well as in nonprofit and for- profit businesses of all sizes.
The development phase is where traditionally private investment enters the process. But development itself can have many phases and risk levels. Some of the industries that have the greatest potential to satisfy unmet needs, like biotechnology and alternative energy, have equally high risk profiles in the early development stages where angels and VC’s fear to tread. They also, over time can have the greatest payoffs in both societal benefit and economic benefit to the country or state that supports them once they reach the delivery stage and begin to scale. Great examples of successes include Ventana Medical Systems, Inc., a member of the Roche group that was born here and grew here (today the facility in Oro Valley is home to thousands of high tech employees) and up-and-coming med tech companies like Ulthera in Mesa.
Developing an investment fund, using public dollars or state funded investment incentives, is not the same thing as offering relocation incentives to an outside company to get them to locate here. Properly managed investment funds have a criteria to evaluate both risk and reward and, by definition, diversify their investments to buffer the aggregate risk. The goal of an investment fund is to build companies that can scale and create jobs. And when they do, they yield a much higher return on investment than when we “hold onto our wallets” which gets about the same ROI as putting the money under your mattress.
Investors are called to pick winners and losers every day and if the state of Arizona is committed to truly invest in our future, that is what we must do.