In many cases, such state investments require some conditions on the privately-run venture fund. The most popular conditions include: fixed percentage threshold of investment in the region or country, or certain number of jobs to be generated by their investments, or Attracting a certain multiple of investment from outside the state or region into the fund, or Limiting the venture investments to the types of technologies and industries which are of greatest interest to that state or region.

Examples of the above can include the Indiana Futures Fund, in which the State of Indiana invested $100 million in several venture funds. Among their conditions, 70% of the venture investment must be made in the State of Indiana. In addition, each of the venture funds must open an office in the State. Finally, the investments of interest to the IFF were biotech and high technology industries.

The neighboring state of Michigan created a $2 billion "fund of funds" in 2006 with similar conditions, including requiring the investee venture funds to open an office in the state (or be headquartered there) and to invest in "favored" industries, including pharmaceuticals, medical devices and automobile technology.

The general record of such state funds has been poor. The State of Ohio closed down its fund-of-funds investments after several scandals. The State of New Mexico, which had intended to invest over $200 million of state pension money, closed down its effort with an outside fund-of-funds manager due to differences between the managers (who wanted to focus on financial returns) and employees of the state (who wanted to direct money to political favorites).

Direct regional investment: Several states in Germany have created funds which are funded primarily by bonds or tax revenues in order to invest directly in small, innovative businesses. The primary argument used for the establishment of these funds is that the venture capital infrastructure in Germany is insufficient, and banks are too conservative to underwrite such financing. The states of Baden-Wuerttemburg and Bavaria have the most active programs, with Bavaria concentrating on biopharma investments, and the state of Baden-Wuerttemburg focusing more on high-tech, particularly related to machine tools and the auto industry. Since the primary goal is to support new companies, there is little or no reporting of the financial returns of these investments.

This model has been pursued in a number of other countries in Europe, particularly France, Spain and Italy. The UK, Netherlands and Scandinavian countries have been more laissez-faire about such companies, perhaps because each of these countries has a more active and focused local venture capital infrastructure.

In general, the argument that venture capital is underdeveloped in most European countries is true. The key factors blamed for this dearth of start-up investors include:

High capital gains and income taxes, which make it difficult for venture capital partners to maximize their personal returns on investment.

Few exits, due to a relatively underdeveloped IPO, or public stock market, access. In Germany, for example, the Neuer Markt was an abject failure on the Frankfurt Stock Exchange, which pushed many young companies to the London...

Those countries in "old Europe" suffer particularly from the difficulty of forming new corporations.
High cultural cost of bankruptcy. Since bankruptcy is an important part of new company formation experiences, the high cultural stigma

Definition of Successful Innovation

The primary creator of value is market valuation, whether through profit creation, stock market capitalization, or acquisition for a set value. The benchmark used for the success or failure of such systems in this paper, therefore, is the measure of the actual value created.

Most regional and national governments may add two additional conditions: employment growth and tax base. Such job creation is helpful on a political basis, but may ignore the other effects of wealth creation: entrepreneurs, banks, investors, venture capitalists and shareholders may all benefit from the increase in value created by innovators and innovative companies.

Whither Innovation and National or Regional Systems?

There is a lot of money and ink, in addition to time and treasure, on developing "innovation systems." This paper has attempted to illustrate that such efforts are doomed to failure. The difference in culture between governmental and academic groups, on the one hand, and entrepreneurial and innovative groups, on the other, is too great. The reward systems, organization, cultural status and attitudes towards risk are at polar opposites between the two groups.

Does the above mean that there is no role for regions and nations to encourage innovation? The best policy is to embrace creative destruction, a la Schumpeter, and trust in the market to create more jobs in the creation process than are destroyed in the destruction process.

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Business: National or Regional Innovation System