IDEAS home Printed from https://ideas.repec.org/p/lev/wrkpap/wp_831.html
   My bibliography  Save this paper

Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks

Author

Listed:
  • Mariana Mazzucato
  • Caetano C.R. Penna

Abstract

Recent decades witnessed a trend whereby private markets retreated from financing the real economy, while, simultaneously, the real economy itself became increasingly financialized. This trend resulted in public finance becoming more important for investments in capital development, technical change, and innovation. Within this context, this paper focuses on the roles played by a particular source of public finance: state investment banks (SIBs). It develops a conceptual typology of the different roles that SIBs play in the economy, which together show the market creation/shaping process of SIBs rather than their mere "market fixing" roles. This paper discusses four types of investments, both theoretically and empirically: countercyclical, developmental, venture capitalist, and challenge led. To develop the typology, we first discuss how standard market failure theory justifies the roles of SIBs, the diagnostics and evaluation toolbox associated with it, and resulting criticisms centered on notions of "government failures." We then show the limitations of this approach based on insights from Keynes, Schumpeter, Minsky, and Polanyi, as well as other authors from the evolutionary economics tradition, which help us move toward a framework for public investments that is more about market creating/shaping than market fixing. As frameworks lead to evaluation tools, we use this new lens to discuss the increasingly targeted investments that SIBs are making, and to shed new light on the usual criticisms that are made about such directed activity (e.g., crowding out and picking winners). The paper ends with a proposal of directions for future research.

Suggested Citation

  • Mariana Mazzucato & Caetano C.R. Penna, 2015. "Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks," Economics Working Paper Archive wp_831, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_831
    as

    Download full text from publisher

    File URL: http://www.levyinstitute.org/pubs/wp_831.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gutierrez, Eva & Rudolph, Heinz P. & Homa, Theodore & Beneit, Enrique Blanco, 2011. "Development banks : role and mechanisms to increase their efficiency," Policy Research Working Paper Series 5729, The World Bank.
    2. Levy Yeyati, Eduardo & Micco, Alejandro & Panizza, Ugo, 2004. "Should the Government Be in the Banking Business?: The Role of State-Owned and Development Banks," IDB Publications (Working Papers) 1543, Inter-American Development Bank.
    3. Etzkowitz, Henry & Leydesdorff, Loet, 2000. "The dynamics of innovation: from National Systems and "Mode 2" to a Triple Helix of university-industry-government relations," Research Policy, Elsevier, vol. 29(2), pages 109-123, February.
    4. de Aghion, Beatriz Armendariz, 1999. "Development banking," Journal of Development Economics, Elsevier, vol. 58(1), pages 83-100, February.
    5. Dimitri Papadimitriou & L. Randall Wray, 1998. "The Economic Contributions of Hyman Minsky: varieties of capitalism and institutional reform," Review of Political Economy, Taylor & Francis Journals, vol. 10(2), pages 199-225.
    6. Krueger, Anne O, 1990. "Government Failures in Development," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 9-23, Summer.
    7. William Lazonick & Mariana Mazzucato, 2013. "The risk-reward nexus in the innovation-inequality relationship: who takes the risks? Who gets the rewards ?," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(4), pages 1093-1128, August.
    8. Ronald Dore, 2008. "Financialization of the global economy," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(6), pages 1097-1112, December.
    9. Weber, K. Matthias & Rohracher, Harald, 2012. "Legitimizing research, technology and innovation policies for transformative change," Research Policy, Elsevier, vol. 41(6), pages 1037-1047.
    10. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1351-1408.
    11. Henry Etzkowitz & Marina Ranga, 2009. "A trans-Keynesian vision of innovation for the contemporary economic crisis: ‘picking winners’ revisited," Science and Public Policy, Oxford University Press, vol. 36(10), pages 799-808, December.
    12. Kakabadse, Andrew & Kakabadse, Nada, 2002. "Trends in Outsourcing:: Contrasting USA and Europe," European Management Journal, Elsevier, vol. 20(2), pages 189-198, April.
    13. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
    14. Joseph E. Stiglitz, 1974. "Growth with Exhaustible Natural Resources: The Competitive Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(5), pages 139-152.
    15. Giovanni Dosi & Richard R. Nelson, 2000. "An Introduction to Evolutionary Theories in Economics," Chapters, in: Innovation, Organization and Economic Dynamics, chapter 11, pages 327-346, Edward Elgar Publishing.
    16. Aghion, Philippe & David, Paul A. & Foray, Dominique, 2009. "Science, technology and innovation for economic growth: Linking policy research and practice in 'STIG Systems'," Research Policy, Elsevier, vol. 38(4), pages 681-693, May.
    17. Erik S. Reinert, 1999. "The role of the state in economic growth," Journal of Economic Studies, Emerald Group Publishing, vol. 26(4/5), pages 268-326, September.
    18. Lazzarini, Sergio G. & Musacchio, Aldo & Bandeira-de-Mello, Rodrigo & Marcon, Rosilene, 2015. "What Do State-Owned Development Banks Do? Evidence from BNDES, 2002–09," World Development, Elsevier, vol. 66(C), pages 237-253.
    19. Wright, Brian D., 2012. "Grand missions of agricultural innovation," Research Policy, Elsevier, vol. 41(10), pages 1716-1728.
    20. Ms. Selma Mahfouz & Mr. Richard Hemming & Mr. Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity: A Review of the Literature," IMF Working Papers 2002/208, International Monetary Fund.
    21. de Luna-Martinez, Jose & Vicente, Carlos Leonardo, 2012. "Global survey of development banks," Policy Research Working Paper Series 5969, The World Bank.
    22. Jan Kregel, 2009. "The Global Crisis and the Implications for Developing Countries and the BRICs: Is the B Really Justified?," Economics Public Policy Brief Archive ppb_102, Levy Economics Institute.
    23. Falck, Oliver & Gollier, Christian & Wößmann, Ludger, . "Arguments for and against Policies to Promote National Champions," Chapters in Economics,, University of Munich, Department of Economics.
    24. Griffith-Jones, Stephany & Tyson, Judith, 2013. "The European Investment Bank: Lessons for Developing Countries," WIDER Working Paper Series 019, World Institute for Development Economic Research (UNU-WIDER).
    25. Paul Nightingale & Alex Coad, 2014. "Muppets and gazelles: political and methodological biases in entrepreneurship research," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 23(1), pages 113-143, February.
    26. Hyman P. Minsky & Charles J. Whalen, 1996. "Economic Insecurity and the Institutional Prerequisites for Successful Capitalism," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 19(2), pages 155-170, December.
    27. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, vol. 57(1), pages 265-301, February.
    28. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    29. Eduardo Levy Yeyati & Alejandro Micco & Ugo Panizza, 2004. "Should the Government Be in the Banking Business? The Role of State-Owned and Development Banks," Research Department Publications 4379, Inter-American Development Bank, Research Department.
    30. Micco, Alejandro & Panizza, Ugo, 2006. "Bank ownership and lending behavior," Economics Letters, Elsevier, vol. 93(2), pages 248-254, November.
    31. Rodrik, Dani, 2004. "Industrial Policy for the Twenty-First Century," CEPR Discussion Papers 4767, C.E.P.R. Discussion Papers.
    32. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(1), pages 193-194, February.
    33. David, Paul A. & Hall, Bronwyn H. & Toole, Andrew A., 2000. "Is public R&D a complement or substitute for private R&D? A review of the econometric evidence," Research Policy, Elsevier, vol. 29(4-5), pages 497-529, April.
    34. D. A. Fergusson, 1948. "The Industrial Development Bank of Canada," The Journal of Business, University of Chicago Press, vol. 21, pages 214-214.
    35. Lisboa, Marcos de Barros & Latif, Zeina Abdel, 2013. "Democracy and Growth in Brazil - revised version," Insper Working Papers wpe_311, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    36. Bronwyn H. Hall & Nathan Rosenberg (ed.), 2010. "Handbook of the Economics of Innovation," Handbook of the Economics of Innovation, Elsevier, edition 1, volume 1, number 1.
    37. Kathryn Hochstetler & Alfred P. Montero, 2013. "The Renewed Developmental State: The National Development Bank and the Brazil Model," Journal of Development Studies, Taylor & Francis Journals, vol. 49(11), pages 1484-1499, November.
    38. Abramovitz, Moses, 1986. "Catching Up, Forging Ahead, and Falling Behind," The Journal of Economic History, Cambridge University Press, vol. 46(2), pages 385-406, June.
    39. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(2), pages 541-545, April.
    40. Dodgson, Mark & Hughes, Alan & Foster, John & Metcalfe, Stan, 2011. "Systems thinking, market failure, and the development of innovation policy: The case of Australia," Research Policy, Elsevier, vol. 40(9), pages 1145-1156.
    41. Jan Kregel, 2009. "The Global Crisis and the Implications for Developing Countries and the BRICs," Brazilian Journal of Political Economy, Center of Political Economy, vol. 29(4), pages 341-356.
    42. Bleda, Mercedes & del Río, Pablo, 2013. "The market failure and the systemic failure rationales in technological innovation systems," Research Policy, Elsevier, vol. 42(5), pages 1039-1052.
    43. George, Gerard & Prabhu, Ganesh N., 2003. "Developmental financial institutions as technology policy instruments: implications for innovation and entrepreneurship in emerging economies," Research Policy, Elsevier, vol. 32(1), pages 89-108, January.
    44. Mowery, David C., 2010. "Military R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 1219-1256, Elsevier.
    45. Martin, Stephen & Scott, John T., 2000. "The nature of innovation market failure and the design of public support for private innovation," Research Policy, Elsevier, vol. 29(4-5), pages 437-447, April.
    46. Prebisch, Raúl, 1950. "The economic development of Latin America and its principal problems," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 29973, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    47. Stephany Griffith-Jones & Judith Tyson, 2013. "The European Investment Bank: Lessons for Developing Countries," WIDER Working Paper Series wp-2013-019, World Institute for Development Economic Research (UNU-WIDER).
    48. Mariana Mazzucato, 2013. "Financing innovation: creative destruction vs. destructive creation," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(4), pages 851-867, August.
    49. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
    50. Martin Feldstein, 2009. "Rethinking the Role of Fiscal Policy," American Economic Review, American Economic Association, vol. 99(2), pages 556-559, May.
    51. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
    52. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    53. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(4), pages 1007-1017, August.
    54. L. Wray, 2011. "Minsky's Money Manager Capitalism and the Global Financial Crisis," International Journal of Political Economy, Taylor & Francis Journals, vol. 40(2), pages 5-20.
    55. Dosi, Giovanni, 1993. "Technological paradigms and technological trajectories : A suggested interpretation of the determinants and directions of technical change," Research Policy, Elsevier, vol. 22(2), pages 102-103, April.
    56. Hyman P. Minsky, 1993. "Community Development Banks: An Idea in Search of Substance," Challenge, Taylor & Francis Journals, vol. 36(2), pages 33-42, March.
    57. Foray, D. & Mowery, D.C. & Nelson, R.R., 2012. "Public R&D and social challenges: What lessons from mission R&D programs?," Research Policy, Elsevier, vol. 41(10), pages 1697-1702.
    58. Micco, Alejandro & Panizza, Ugo, 2006. "Bank ownership and lending behavior," Economics Letters, Elsevier, vol. 93(2), pages 248-254, November.
    59. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    60. Joseph Stiglitz, 1974. "Growth with Exhaustible Natural Resources: Efficient and Optimal Growth Paths," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(5), pages 123-137.
    61. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(6), pages 1461-1465, December.
    62. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    63. Joseph E. Stiglitz, 1991. "The Invisible Hand and Modern Welfare Economics," NBER Working Papers 3641, National Bureau of Economic Research, Inc.
    64. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    65. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    66. Pavlina R. Tcherneva, 2008. "Keynes's Approach to Full Employment: Aggregate or Targeted Demand?," Economics Working Paper Archive wp_542, Levy Economics Institute.
    67. Carlota Perez, 2002. "Technological Revolutions and Financial Capital," Books, Edward Elgar Publishing, number 2640.
    68. Mowery, David C. & Nelson, Richard R. & Martin, Ben R., 2010. "Technology policy and global warming: Why new policy models are needed (or why putting new wine in old bottles won't work)," Research Policy, Elsevier, vol. 39(8), pages 1011-1023, October.
    69. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(5), pages 1273-1289, October.
    70. ,, 2002. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 18(3), pages 819-821, June.
    71. Shikhar Ghosh & Ramana Nanda, 2010. "Venture Capital Investment in the Clean Energy Sector," Harvard Business School Working Papers 11-020, Harvard Business School.
    72. Falck, Oliver & Gollier, Christian & Woessmann, Ludger (ed.), 2011. "Industrial Policy for National Champions," MIT Press Books, The MIT Press, edition 1, volume 1, number 026201601x, April.
    73. Hyman P. Minsky, 1992. "The Capitalist Development of the Economy and the Structure of Financial Institutions," Economics Working Paper Archive wp_72, Levy Economics Institute.
    74. Gregory Tassey, 2012. "Beyond the business cycle: The need for a technology-based growth strategy," Science and Public Policy, Oxford University Press, vol. 40(3), pages 293-315, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mariana Mazzucato, 2015. "From Market Fixing to Market-Creating: A New Framework for Economic Policy," SPRU Working Paper Series 2015-25, SPRU - Science Policy Research Unit, University of Sussex Business School.
    2. Mariana Mazzucato & Caetano C.R. Penna, 2016. "Beyond market failures: the market creating and shaping roles of state investment banks," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 19(4), pages 305-326, October.
    3. Frigerio, Marco & Vandone, Daniela, 2020. "European development banks and the political cycle," European Journal of Political Economy, Elsevier, vol. 62(C).
    4. Marco FRIGERIO & Daniela VANDONE, 2018. "Virtuous or Vicious? Development Banks in Europe," Departmental Working Papers 2018-07, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    5. Mariana Mazzucato & L. Randall Wray, 2015. "Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis," LEM Papers Series 2015/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    6. Darcy W E Allen, 2020. "When Entrepreneurs Meet:The Collective Governance of New Ideas," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number q0269, December.
    7. Clò, Stefano & Frigerio, Marco & Vandone, Daniela, 2022. "Financial support to innovation: The role of European development financial institutions," Research Policy, Elsevier, vol. 51(10).
    8. Mariana Mazzucato & Douglas K Robinson, 2016. "Lost in space? NASA and the changing publicprivate eco-system in space," SPRU Working Paper Series 2016-20, SPRU - Science Policy Research Unit, University of Sussex Business School.
    9. Dawn Richards Elliott, 2009. "What is the Comparative Advantage of the Service Learning Pedagogy? Insights from Development Economics," Forum for Social Economics, Taylor & Francis Journals, vol. 38(2-3), pages 263-278, January.
    10. Claudia García-García & Catalina B. García-García & Román Salmerón, 2021. "Confronting collinearity in environmental regression models: evidence from world data," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 30(3), pages 895-926, September.
    11. Cambier, Adrien & Chardy, Matthieu & Figueiredo, Rosa & Ouorou, Adam & Poss, Michael, 2022. "Optimizing subscriber migrations for a telecommunication operator in uncertain context," European Journal of Operational Research, Elsevier, vol. 298(1), pages 308-321.
    12. Libura, Marek, 2007. "On the adjustment problem for linear programs," European Journal of Operational Research, Elsevier, vol. 183(1), pages 125-134, November.
    13. Christophe Loussouarn & Carine Franc & Yann Videau & Julien Mousquès, 2021. "Can General Practitioners Be More Productive? The Impact of Teamwork and Cooperation with Nurses on GP Activities," Health Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 680-698, March.
    14. Tschakert, Petra, 2016. "Shifting Discourses of Vilification and the Taming of Unruly Mining Landscapes in Ghana," World Development, Elsevier, vol. 86(C), pages 123-132.
    15. María-Consuelo Casabán & Rafael Company & Lucas Jódar, 2020. "Non-Gaussian Quadrature Integral Transform Solution of Parabolic Models with a Finite Degree of Randomness," Mathematics, MDPI, vol. 8(7), pages 1-16, July.
    16. Isabelle Boutron & Peter John & David J. Torgerson, 2010. "Reporting Methodological Items in Randomized Experiments in Political Science," The ANNALS of the American Academy of Political and Social Science, , vol. 628(1), pages 112-131, March.
    17. Ben Slimane, Faten & Padilla Angulo, Laura, 2019. "Strategic change and corporate governance: Evidence from the stock exchange industry," Journal of Business Research, Elsevier, vol. 103(C), pages 206-218.
    18. Bossert, Walter & Derks, Jean & Peters, Hans, 2005. "Efficiency in uncertain cooperative games," Mathematical Social Sciences, Elsevier, vol. 50(1), pages 12-23, July.
    19. Weijun Xie & Yanfeng Ouyang & Sze Chun Wong, 2016. "Reliable Location-Routing Design Under Probabilistic Facility Disruptions," Transportation Science, INFORMS, vol. 50(3), pages 1128-1138, August.
    20. Sin-Yu Ho & N.M. Odhiambo, 2018. "Analysing the macroeconomic drivers of stock market development in the Philippines," Cogent Economics & Finance, Taylor & Francis Journals, vol. 6(1), pages 1451265-145, January.

    More about this item

    Keywords

    Development Banking; Market Failure; Mission-oriented Finance; Public Finance; State Investment Banks;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_831. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Elizabeth Dunn (email available below). General contact details of provider: http://www.levyinstitute.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.