THE COALITION MODEL, A PRIVATE-PUBLIC STRATEGIC INNOVATION POLICY MODEL FOR ENCOURAGING ENTREPRENEURSHIP AND ECONOMIC GROWTH IN THE ERA OF NEW ECONOMIC CHALLENGES.

• Published date: 22 March 2018
• Author: Alon-Beck, Anat
• Date: 22 March 2018

INTRODUCTION 270
                I. THE HISTORY OF THE UNITED STATES GOVERNMENT AS A MARKET
                 PARTICIPANT 280
                 A. The Declaration of Independence 280
                 B. The period between 1865 and 1920 281
                 C. The Rise of Large, Vertically Integrated American
                 Corporations 282
                 1. Advanced Projects Research Agency (ARPA) 283
                 2. The Small Business Innovation Research (SBIR)
                 Program 284
                 D. Startup America & Additional Federal Initiatives led by the
                 Obama Administration to Promote Innovation
                 Entrepreneurship and Growth 289
                 E. Criticism 292
                III. THE MATCHMAKER PUBLIC-PRIVATE INVESTMENT FUND
                 INITIATIVE 293
                 A. The Reasons for Government Intervention in the Current
                 Market 294
                 B. The Initiative--Governance Mechanisms 298
                 1. The "General Partner" 299
                 2. The Limited Partners 304
                II. STARTUP NATION'S YOZMA INITIATIVE 306
                 A. The "Yozma" Funds Initiative 308
                 B. The Need for Israeli Government Intervention in the Market 310
                 C. Inbal (Israeli Government Intervention that Failed) led to
                 Yozma 312
                 D. The Successful Yozma Design 314
                 E. Yozma vs. Silicon Valley 316
                V. CAN THE NEW INITIATIVE FOR THE GOVERNMENT'S
                 INTERVENTION IN THE MARKET IN THE FORM OF GOVERNMENT
                 OWNED ENTERPRISES PREVENT ABUSE? 317
                 A. The problem of Inadequate Monitoring of Public
                 Management 318
                 B. Lack of Market Discipline of Government-Owned Firms 321
                 C. Illegal Behavior and Corruption of Public Managers 322
                 D. Political Capture of Business Objectives 323
                VI. CONCLUSIONS 324
                

INTRODUCTION

Innovation driven entrepreneurial firms (1) have an important role in contributing to job creation, generating technological innovation, and stimulating the United States economy. However, there was recently a notable decline in emerging growth entrepreneurial activity in the United States. (2) According to the 2015 Global Entrepreneurship Monitor (GEM) survey, the total entrepreneurial activity (TEA) in the United States declined from fourteen percent (14%) to twelve percent (12%). (3) The survey advances the view that fewer Americans are taking steps to start new businesses. (4) There are several reasons for this phenomenon.

Finding ways to maximize opportunities for industry, academia, and government to collaborate and build sustainable relationships will help convert the current challenges in the U.S. market into opportunities. Combining the resources of these sectors will lead to innovation-driven firm formation. This Article will advance the view that markets for allocating risk capital to early-stage ventures are inefficient and that the financing of these firms present countless underlying challenges to their prospective investors and innovators. There is a financing and information gap, which is termed the "Valley of Death." (5) The Valley of Death describes the financial barriers of firms at the early stage of technology development. Such difficulties are the product of the uncertainty, high risk and information asymmetry problems, which preclude many investors from backing such firms. Additionally, policymakers, practitioners and academics alike hold strong views that investors' emphasis on stock market liquidity, which is evidenced by the growing high frequency and algorithmic trading activity and short-term holding periods, encourages a focus on short-term results. (6) The short-term focus of investors and corporate boards is currently one of the key issues in the corporate governance debate. (7)

The newly elected United States Administration must devise an innovation strategy that will lead the world in generating innovation, technology, and economic growth, as well as help the federal government harness new approaches for institutional change. The notion that the United States is on the verge of losing its place as a world leader in generating innovation, technology, and economic growth, is not a new one. (8) Economists have been warning for quite some time, even prior to the current Administration, that the United States is facing a "historic tipping point," (9) where countries around the world are "stepping on the gas" (10) to promote innovation policies, while the United States is "slacking off,"" lagging behind and even worse yet, scaling back on such important policies supporting growth efforts. (12)

The Administration can mitigate some of these problems by intervening in the market in order to encourage the creation (and survival) of high-growth firms. This Article proposes a "Coalition Model," which promotes policies for innovation strategy in the form of public-private partnership initiatives. Adopting the Coalition Model bridges some of the financial inefficiencies and information gaps associated with investment in innovation-driven enterprises, but, perhaps, more importantly, will serve as a catalyst for encouraging and stimulating the development of new firms and technologies.

The Model is built on the notion of taking a proactive approach to innovation. The Model encourages government agencies to fund research and innovation, by identifying specific technological challenges, determining the course of the research that can benefit their needs, collaborating with audiences in the public sector, research institutions and universities, and private corporations to act on these needs, and advancing commercialization efforts.

There are several potential benefits to adopting such a proactive policy. First, it might encourage future engineers, scientists and innovators to take a risk and become entrepreneurs. Second, it provides direct funding to research and development needs that might otherwise not be used. Third, it can signal that there are opportunities for private investors to invest in such ventures, and perhaps even serve as some sort of certification. Fourth, it will create a direct pathway for small firms to access government procurement. Fifth, it will encourage knowledge spillovers between professionals in government, industry, and academia. And finally, it will increase awareness in private industry and academia about the benefits of collaborating with the government.

The Model advocates for the Administration to adopt a targeted policy initiative (strategic development tool): the Matchmaker fund ("Matchmaker"). The Matchmaker fund is a private-public partnership equity investment fund, in which one of the public partners is a government agency that will invest in early-stage firms. The government agency partner will invest in such early-stage firms that will serve the commercial strategic development to be articulated by the agency. The fund will establish a channel for private firms to access government procurement and development. The fund will function as an autonomous, non-bureaucratic body, and be designed to prevent political capture. The adoption of the strategic Matchmaker fund will be formed to complement, and not to replace, the private market efforts in financing emerging growth firms.

The Model allows the government to make direct equity investments in start-up firms using government-owned venture capital funds (Matchmaker), while also encouraging various private intermediaries to participate in the financings of such projects. The initiatives are designed to ensure effectiveness and prevent political distortions based on the successful case studies of Silicon Valley and Israel.

This article calls upon the government to craft policies for institutional innovation that will encourage experimentation and reduce bureaucracy in order to radically improve the performance of the Federal government by soliciting private sector and civil society collaborations. Technological innovation is the only reliable engine that can drive change and is the fundamental source of sustained productivity and growth, according to Nobel Laureate Robert Solow. (13) However, there are many challenges associated with introducing technological change into an existing organization, especially for bureaucratic organizations such as the U.S. government. In general, it is much easier for public or private management to develop and invest in new technologies, rather than implement the new technology into operations and train their employees in how to use the new tools. (14) If the current Administration intends to successfully compete in tomorrow's market place, promote growth, as well as increase productivity and expand the economic and social value, (15) then they must charge their new policymakers with designing and instituting sweeping innovation policies that will embrace new approaches to management, technologies and operating methods. (16) This article will accordingly promote the following policy recommendations.

There is a public debate in the U.S. concerning the role of the government in relation to the market. The U.S. has a long history of conflict with regards to the national policy and political structure concerning the government's development efforts. (17) The conflict can be traced to the times of the beginning of the Republic, (18) to the difference in philosophy between founding fathers Alexander Hamilton and Thomas Jefferson. According to legal scholar Hockett, (19) Jefferson (20) suggested that governments work best when they govern the least (favoring the non-interventionist government), while Hamilton (21) advocated for a strong centralized government with powers to work for the common benefit of all (favoring the interventionist government).

Other scholars, such as Block, claim that this tension was resolved fairly (22) in the twentieth century when developmental policies were formed within the context of national defense. (23) For the purposes of this article, the result of such integration is embedded in the grants and funds that were invested by the U.S. government in countless advanced technologies, such as jet planes, computers, lasers, civilian nuclear energy, and biotechnology. (24) This article advances the view that for national defense purposes, the U.S. Government must intervene in the market in order to encourage entrepreneurship and...