The Israeli model is successful because the Israeli government, rather than funding incubator managers, invest in start-up companies to the tune of $500k to $750k. The model integrates 85% government and 15% private first stage investment, with the government input reducing risk at the early stages of a company. The government is repaid through royalties.
Lets think about this model a bit. This isn’t the risk “disappearing” – this is the government (read taxpayer) taking on the risk.
Furthermore, risk is not independent of the choice of the private individuals running the firm – depending on the way these contracts are structured the firm may take on more or less risk then they would have otherwise. So not only does this involve putting risk on taxpayers, it also involves distorting the incentives for the firm itself … nice
More broadly this raises an interesting point for me – it is almost as if we do not believe firms should make any “rents” from innovation … unless the government explicitly decides to give them rents to innovate. Isn’t this strangely perverse? What sort of implied model of society does this make sense in?
Sure we can try building up some type of externality, but let us be a bit careful we are looking at the issue in an objective way rather than just trying to build up a ex-post justification for doing what we wanted to do in the first place 😉
From what I can tell, the problem is that we all tend to look at issues too much in isolation when we look at them quickly – there is too much static partial equilibrium (at best) logic used without thinking of the broader dynamic and general equilibrium effects … the ones economists are obsessed with. I love comparmentalising problems to help understand them, but when it comes to policy we have to fit it all together!
And this is what CGE (Computable General Equilibrium) and other similar types of models are trying to do – and why they often surprise us relative to our raw intuition.
Note: You may say that society should take on some risk as the firm is the one “making things”. I would note that the firm, and their interactions with others, get the benefit from “things” – trying to get the rest of us to take on risk for firms their own private benefit is and then pretending “jobs” and “output” are somehow benefits to people uninvolved with the transaction is not a justifiable argument.