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Industrial policy shouldn't aim for profit
Equity looks free
Government equity stakes can look costless, since the government might turn a profit. The United States is now a nine percent owner of Intel, whose stock has more than tripled over the last couple of years. Profit still makes a poor guide for what the policy is for.
Profit as a guide
Government has other ways of making money. And if something is profitable on its own, the market could probably do it anyway, which raises the question of what the government is adding.
When equity fits
Equity does fit one case: an early-stage company with technology critical to the industrial base or to national security that is struggling to raise money from traditional venture investors. A mature company that can raise equity on its own is much harder to justify. Every industrial intervention carries costs. Tax credits and grants cost taxpayer money, and equity brings policy drawbacks and downsides on top.
Why do governments take equity stakes?
An equity stake lets taxpayers share in the upside if a company succeeds, which a grant does not. In 2008 and 2009 the US Treasury bought preferred shares in more than 700 financial institutions through the Troubled Asset Relief Program. Those stakes were meant to be temporary, and the government sold them as conditions improved. Treasury reported that its bank investments in the program returned more than was put in.
Why do venture investors skip critical technologies?
Hardware and deep-technology companies need large sums of money for years before they sell much. Venture funds want an exit within a fixed window. Customers for national-security technology are few, often just government agencies, which makes revenue hard to forecast. Venture funds are typically set up with terms of about ten years.
How can profit conflict with security?
A company or investor maximizing profit builds where costs are lowest and sells to the highest bidder. A security goal asks for capacity at home that may cost more and earn less in ordinary times. Those pulls diverge most in products the military needs in small volumes. The Defense Production Act of 1950 gives the president authority to direct industry for national defense.
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