Picking winners empirically works when the government invests in a direction for innovation – it doesn’t put all investment into one single project. It acts like a venture capitalist and disperses risk over many projects

And yet the idea that government cannot pick winners is historically inaccurate.48 In fact, during periods of technological shifts, government can play a critical role in co-ordinating industrial efforts and setting standards that create markets. But they must make the decision to pick a strategy – and tilt the playing field in that direction. We saw this in the 1990s, when the government of South Korea recognized the enormous potential of high-definition (HD) technology. At the time, the electronics industry was undergoing a shift from analogue to digital products, and South Korea was still a mass-producer of analogue TVs. To build the necessary capabilities to shift to HD products, the South Korean government set up a committee dedicated to co-developing HD TV – comprised of three ministries and more than a dozen private firms, universities and government research institutes – which resulted in the creation of a ‘grand research consortium’. The consortium, which was led by the Video Industrial R&D Association of Korea, included the Korea Electronics Institute, the Korea Institute of Industrial Technology, Samsung, LG, Hyundai, Daewoo Electronics and other private-sector firms. With $100 million in combined funding from the government and the private sector, it focused on the technology transfer and absorption from the USA and Japan. The government co-ordinated the work of leading companies to develop standards for digital TV emerging from the USA while also encouraging competition between the companies.49 Meanwhile, Korean companies established research teams and centres in the USA that were close to universities and other research institutes.50 In October 1993, after the consortium presented the first prototype for digital TV broadcasting and receiving, the Korean government moved to support the second phase of the project – the industrialization and commercialization of a new prototype. Two years later, the consortium started the development and miniaturization of ASIC chips, and many companies competed to scoop the contract for the final commercial product – which was ultimately launched by Samsung in 1998.51

Not all strategies of this type succeed, of course; that is part and parcel of trial and error. But sometimes picking winners is confused with state support for troubled industries, for example when the UK government attempted to help the domestic car industry by forming British Leyland in 1968 and shipbuilding by creating Upper Clyde Shipbuilders that same year. Neither company was successful. But picking winners in the sense of backing what are deemed to be the innovations, sectors and businesses of the future is quite different from trying to keep ailing industries and companies alive. And in the narrow sense of selecting a winning business, governments, just like venture capitalists, will win some and lose some. The same year that the US government made the $535 million guaranteed loan to Solyndra, it also made a similar loan of $465 million to Tesla – now a global leader in the electric revolution that is transforming the automotive industry. China is the world’s biggest producer of pencils because it set out to develop a competitive industry, not because it started with comparative advantages in technology or the supply of graphite. Chinese state-owned firms invested in technology and labour, and the government provided cheap finance, tariff protection of domestic producers, lax forest management policies to keep wood cheap, and generous export subsidies.52

If a government is to act as an investor of first resort and steer an economy towards meeting goals such as a digital revolution or the green transition, of course it will need to make bets and pick winners. But it should pick a direction, and within that direction take a wide portfolio approach. In other words, not pick one technology, or a random sector (usually one of those that lobbies hardest), or even a type of firm (SMEs) – but a direction that can foster and catalyse new collaborations across multiple sectors and have as a key spillover the growth of firms that engage with it. In that sense it is not about picking winners, but picking the willing.

Without the government making bets, we would not have the internet or Tesla. However, the manner in which government does so is important. If it puts all of its eggs in one basket, then there is a danger that it picks wrong and loses everything. But if it acts more like a venture capitalist and structures its investments as a portfolio, then this risk is reduced. Indeed, it was because Obama was interested in steering the economy along a green transition that the DoE provided guaranteed loans to Tesla, Solyndra and other green companies. The fact that one of these failed is only normal; as any venture capitalist will confirm, many failures are required before a success arrives. The real problem is the practice of socializing risks and privatizing rewards, which we return to in Chapter 6.53 The government bailed out the failed company (Solyndra) but got none of the upside for the successful company (Tesla). Moreover, US citizens knew about the government’s role in the failure of Solyndra – which was widely described in the media – but not about its role in the success of Tesla, which was marketed as a private-sector success. This only reinforced the narrative that government should not try to pick winners.