What gives rise to a knowledge economy? And how does it create wealth? There are some common misconceptions, or ideas that are at best partial truths, in relation to this.

One such idea is the notion that innovation happens when governments withdraw and allow market forces, as well as a developed system of venture capital and private equity, to blaze away. The latter do have their role to play, but will be ineffective if the government does not do its bit as well.

Another way of putting this is that radical innovation and technological breakthroughs do not happen without an element of “industrial policy”, a bad word in some economists’ lexicon. The best example of this is how China, once known for goods manufactured with low-cost industrial labour, has leapfrogged technologically to make, in many sectors, the world’s most sophisticated products. Forced technology transfers, or intellectual property theft, do not tell the whole story.

Following the Chinese cultural revolution of the 1960s, when Chairman Mao sent scientists to work cleaning pigsties in Chinese villages, China turned on a dime and invested heavily in science and technology. President Xi Jinping built on this with his “Made in China 2025” programme announced a decade back. The programme is essentially an industrial policy designed to catapult China into pole position in a raft of high-tech sectors.

Take electric vehicles or solar cells. It is said that Chinese exports today hinge on “the new three” – electric vehicles, lithium-ion batteries and solar cells – taking the place of “the old three” – clothing, home appliances and furniture. Come 2025, and “Made in China 2025” has largely succeeded in its goals.

China now controls an estimated 80% of the global photovoltaic solar cell production supply chain, having managed to cut solar panel prices by 88% over the last decade. Overall, thanks to the success of “Made in China 2025”, China registered an unprecedented trade surplus of over a trillion dollars in 2024.

While China and South Korea are well-known examples of developmental states that climbed the value addition chain through sustained efforts in R&D and scientific innovation, what is less known is that the US is another example of such a developmental state. Large-scale and long-term government investments have been key to technological breakthroughs in the US, from electronics, computers, telecommunication, aeronautical and space sectors to life sciences, nanotechnology and clean energy. They have also been instrumental in the rise of tech clusters such as Silicon Valley.

The Internet is a good example. It grew out of a small Defense Department project funded by the US Defense Advanced Research Projects Agency (DARPA). Likewise, the critical technologies that make Apple products such as the iPhone or iPad functional – GPS, touch-screen displays, micro hard drives, batteries, voice-activated “virtual assistants” besides the Internet itself – were outcomes of government support and funding.

Thus tech breakthroughs often arise out of a public private partnership (PPP) model, even if the government’s role in producing R&D public goods which are subsequently leveraged by private firms seldom goes acknowledged. As Mariana Mazzucato’s slim but magisterial book The Entrepreneurial State amply showcases, most of the risk-taking behind radical tech innovations is done by the state rather than by swashbuckling private entrepreneurs. Venture capital usually enters the scene at a later stage when a technology is already mature.

Elon Musk may be celebrated as a tech entrepreneur, but a recent Washington Post analysis revealed that the US governments at federal and local levels have pumped in as much as $38 billion into Musk enterprises such as Tesla and SpaceX. This is not to say, however, that the entrepreneurial state always succeeds – just as public private partnerships do not always deliver the goods (it is extremely important to get the PPP model right).

A key reason why the US has been a successful entrepreneurial state is that its governmental science agencies are run by professional managers who may be world-class researchers themselves (it is another matter whether the US is undergoing its own mini-version of the Chinese cultural revolution at the current moment). Moreover, they have been able to use their funding support to create networks and nodes of knowledge sharing between government, industry and academia – knitting them together to form a robust research ecosystem – while promoting intense competition between the best scientists available for a project.

The non-profit Foundation for Advancing Science and Technology, or FAST India, closely studies models of what makes for tech innovation and high-quality science worldwide, and refines them to suggest programmatic interventions suitable for the Indian context and provide implementation support to the government and science institutions.

For a successful R&D policy designed to catapult India into the top ranks of scientific powers, the trick is to get the balance between technology, state and market right. Technology on its own is of little relevance unless there is a market for it. Maximising economic growth calls for developing technology that is competitive on the global market, and for giving the private sector adequate freedom to commercialize that technology. Yet, the initial spark that catalyzes the birth and development of innovative new technologies often comes from state investments in R&D as a public good. Countries that get this balance right come out on top in scientific innovation.