If govt invests, give it slice of business profits
It is often said that governments have no business being in business. Public sector enterprises are seen as destroyers of wealth; therefore, the private sector is left with the task of creating big corporations and innovations and providing jobs. The widely held belief is that a government should, at best, be the facilitator. But if the government invests in a corporation, it should also receive direct gains from it.
Governments globally are investing massive amounts of public money to offer subsidies to companies setting up semiconductor plants. The US has announced a USD 39-bn subsidy for companies setting up semiconductor units in the country, and Germany will offer a USD 11-bn subsidy to Intel for a USD 34-bn plant. The Indian government has announced fiscal support of 50 per cent of the project cost to companies setting up chip plants in the country. In the recently announced Micron plant in Gujarat, Central and state governments will bear 70 per cent of the cost of setting up the plant. Despite contributing a major chunk of initial funding, both will not have any stake in the company.
The shortage of semiconductor fabs and chips in 2020 and 2021 forced governments across the world to secure indigenous sources of supply and reduce dependence on countries like Taiwan and China. To attract investments in the sector, governments in several countries have been doling out subsidies and funds to companies. There is a moral dilemma in all this for the governments. While the governments risk taxpayers’ money to create the semiconductor ecosystem, they don’t gain anything directly if the risk pays off. Like in the venture capital model, governments must ask for a minority stake in the corporations they are funding and exit with some gains if the ventures succeed. There could be other models as well. For instance, the US government has a condition that states that companies receiving more than $150 million in funding should share with the government a portion of profit if it exceeds a certain agreed threshold.
Economist Mariana Mazzucato, in her book The Entrepreneurial State, has rightly argued that risk-taking has been an increasingly collective endeavour — with the state playing a leading role in the ‘open innovation’ system — while the returns have been unequally distributed. The risk-reward dynamic currently is skewed too much in favour of private funds, and it is time for this to change.