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A customer holds up an Apple iPhone 5 for the photographer during an exclusive sale by Belgian operator Mobistar in Brussels, in this file picture taken September 28, 2012. Apple Inc has almost halved its order with suppliers of LCD panels for the iPhone 5 in the current quarter due to weak demand, the Nikkei reported on January 14, 2013. (Yves Herman/Reuters)
A customer holds up an Apple iPhone 5 for the photographer during an exclusive sale by Belgian operator Mobistar in Brussels, in this file picture taken September 28, 2012. Apple Inc has almost halved its order with suppliers of LCD panels for the iPhone 5 in the current quarter due to weak demand, the Nikkei reported on January 14, 2013. (Yves Herman/Reuters)

Does Apple owe a debt of gratitude to the U.S. government? Add to ...

Apple has been in all sorts of hot water recently. The company has had to contend with charges over troubling labour practices at its assembly facilities in China, as well as not doing enough for employment in the United States.

In addition, the fact that America's most iconic company had no manufacturing operations at home seemed to contravene the much-acclaimed rebirth of U.S. manufacturing. The company finally relented and has announced plans to start manufacturing some of its Mac computers at a so-far-unspecified U.S. location.

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The goodwill from that announcement proved short-lived. The company, like other U.S. multinationals, soon had to contend with charges that it had been too artful in booking its profits in locations that offer very low rates of taxation.

And yet, for all the twists and turns the Apple saga has taken over the course of little over a single year, what is truly remarkable is that the main issue at stake from the vantage point of the American people and American taxpayers has not even begun to be addressed.

The United States, which is by far the company's largest market, is not just where many of Apple's profits are generated. It is also the place where the initial innovation was funded – but not by Apple itself. In fact, many of the revolutionary technologies that make the iPhone and other products and services “smart” were funded by the U.S. government. Apple itself received its early-stage funding from the U.S. government’s Small Business Investment Company program (SBIC).

In fact, many new economy-type companies that like to portray themselves as the heart of U.S. “entrepreneurship” have very successfully surfed the wave of U.S. government-funded investments.

In a business context, the role of the U.S. government is often portrayed as providing a safeguard against market failure. But that traditional understanding must be widened to include the active – and often catalytic – role that the U.S. government’s risky investments have played for technology-based corporations. While many U.S. economists have focused on market failures to justify government intervention, the U.S. government's range of “mission-oriented” investments, which has funded development projects such as the Internet, points to a role far bigger than a mindset devoted to just fixing problems.

The big question for the American taxpayer is whether such support leads to a parasitic innovation ecosystem. Consider Apple. Despite benefiting directly from taxpayer-funded technologies, it has strategically underfunded the tax purse on which it has in the past directly depended.

Apple set up a subsidiary in Nevada, a state without a corporate income or capital gains tax. Apple channelled a portion of its U.S. sales there, instead of including it in the revenues Apple reported in California, where its headquarters are located. Apple reportedly saved $2.5-billion (U.S.) in taxes through this move.

While such tax loopholes need to be closed, the tax system is not the only way to recoup the benefits that the U.S. government helped trigger with its investments in risky innovation. Part of the solution must entail the government getting a reward for the high-risk areas it funds directly.

Wherever technological breakthroughs have occurred as a result of targeted public-sector interventions, there is potential for the government, over time, to reap some of the financial windfall. This can occur through retaining a “golden share” of the royalties from patents, retaining a portion of equity, or administering so-called income-contingent loans, similar to those now offered to students.

Clearly, the role of government is not to run commercial enterprises, but to spark innovation in strategic areas. But given ever-tighter public budgets, unless an innovation fund can be regularly replenished with some returns from the successes, innovation itself is under threat.

Government should never have an exclusive license or hold a large enough portion of the value of an innovation so that its commercial use would be deterred in any form or fashion. But at the same time, it is self-defeating even for private-sector innovation if private firms are the only ones to gain all the reward. Indeed, the same criticism made about banks – socialization of risk, privatization of reward – holds for the innovation economy.

If the United States wants to continue on its successful arc as a leading technology nation providing a good quality of life to all its citizens, then it must urgently redress the current grave imbalance in the risk-reward ratio governing the technology sector.

Mariana Mazzucato is Professor of Economics and RM Phillips Chair in Science and Technology Policy at the University of Sussex, www.marianamazzucato.com. This article originally appeared at www.theglobalist.com.

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