This is a guest post by Robyn Klingler Vidra, CIV senior research fellow, see team for more information.
1) Over-engineer support: policies that build on existing strengths and make modest investments are favoured over initiatives that deploy large sums of public money, impose numerous restrictions, or comply with the “if you build it, they will come” mantra. Governments have tended to get into the “crowding out the private sector” zone by offering ongoing subsidies on which entrepreneurs or VCs come to depend and by being highly restrictive with respect to future fundraising, business plan pivots, etc. Also, in light of the costs of starting a business decreasing, public money at the very early – or even bootstrapping – phase should be small in quantities rather than distributions of many millions. Agile policies that encourage private sector activity enhance, while restrictive, over-engineered approaches can result in crowding out private sector activity.
2) Fund activities that are unlikely to be self-sustaining: this is a tricky “don’t” since much of the rationale for government investment in some types of venture is that the public sector need to invest where the private sector would not sufficiently invest. Most often, this argument goes as follows: the potential costs incurred in blue sky or world changing R&D are too big for private companies to bear – so the government needs to invest where the market fails. On the other hand, when governments build ‘ghost cities’, perpetuate a dependence on their annual subsidy, or are otherwise investing in products or services that are not commercially viable, the government is giving funding to projects that may not have diffuse or future benefits. Seeking, or requiring, private co-investment is one way to test if the projects are likely to be self-sustaining, impactful or commercially viable activities in the future.
3) Concede tax revenues unnecessarily: competing to attract (international) capital to venture activity, public policymakers have offered tax breaks. In a “race to the bottom” to attract money or talent, policymakers in countries around the globe have created low – or no – tax havens. Some tax credits have succeeded in promoting the desired activity – such as Taiwan’s 20% tax credit for investment in technology start-ups. Tax incentives can be deployed in a time limited fashion (e.g. for five or ten years) to encourage the establishment of local activity, without foregoing that government revenue stream in perpetuity. Alternatives to tax exemptions include improvements in regulatory environment, residency offers (e.g. Singapore’s GIP), investing in local talent, establishing clusters, etc.