Rethinking the role of the state in economic transformation

Economic development in the Global South has long been framed within the dichotomy of state-led versus market-led approaches. While neoliberal policies champion private-sector-led growth, Mariana Mazzucato's concept of the 'Entrepreneurial State' offers an alternative paradigm.

Under this model, the state plays a proactive, risk-taking role in fostering innovation and industrial development. This framework is particularly relevant for developing countries, where private-sector capabilities are often limited and long-term investments in innovation require significant public-sector involvement.

The concept of the 'Entrepreneurial State' posits that the government plays a crucial role not just as a regulator but as a proactive force in driving technological and industrial change—a notion that is particularly pertinent in the developing world. In Bangladesh, this perspective is especially significant, given the nation's limited private research and development (R&D) capabilities and its substantial dependence on garment exports.

Historically, nations that have successfully industrialised, such as South Korea and China, have benefited from robust state involvement in R&D, infrastructure development, and key industries. For Bangladesh, adopting a similar strategy could facilitate a transition away from reliance on ready-made garments (RMG) and foster the growth of high-value sectors like pharmaceuticals, renewable energy, and information technology.

It is important to note that transformative innovations often emerge from public investments, as private actors tend to avoid high-risk, capital-intensive research. This is particularly crucial for developing economies, where domestic private-sector firms typically lack the financial capacity and risk appetite to drive innovation independently. For example, in India, public investments in space technology through the Indian Space Research Organisation (ISRO) have led to advancements in satellite communications and remote sensing, benefiting multiple sectors, including agriculture and disaster management.

Similarly, Brazil's state-funded agricultural research agency, EMBRAPA, has played a pivotal role in transforming the country into a global leader in tropical agribusiness. Such cases demonstrate that state-led innovation is not only viable but essential for overcoming structural challenges in the Global South. 

Without state intervention, critical sectors such as renewable energy, biotechnology, and digital infrastructure may remain underdeveloped due to market failures and short-term profit incentives.

This is particularly true in Bangladesh, where most firms focus on short-term profits rather than research-intensive sectors. The government must step in to correct these market failures by directing capital toward high-tech industries. 

One example is South Korea's industrial policy, where state-backed investments helped firms like Samsung and Hyundai transition from low-tech industries to global innovation leaders. Bangladesh can adopt a similar approach by providing strategic subsidies and R&D grants to industries such as electronics, agro-tech, and shipbuilding.

Additionally, the entrepreneurial state model offers a framework for correcting market failures that are especially pronounced in developing countries. Weak capital markets, limited technological spillovers, and an underdeveloped venture capital ecosystem create barriers to entrepreneurship and industrial growth. Governments can address these gaps by directly funding innovation, supporting state-owned enterprises in strategic sectors, and fostering domestic linkages between research institutions and industries.

China's success in green technology illustrates this point. By providing subsidies, state-backed financing, and regulatory support, the Chinese government has positioned the country as a global leader in solar panel and battery production. A similar approach could help other developing nations leapfrog to high-tech industries rather than remaining locked in low-wage, low-productivity sectors.

While the public sector takes significant risks in innovation, the financial rewards are often disproportionately captured by private corporations. For developing countries, this issue is exacerbated by multinational corporations (MNCs) that extract resources and knowledge without adequately reinvesting in local economies. 

This is evident in Bangladesh's garment industry, where government incentives and infrastructure support helped build a globally competitive sector, yet multinational buyers and private firms reap most of the profits while workers remain largely underpaid.

To ensure inclusive growth, governments must implement mechanisms that allow the state to capture a fair share of the economic gains from innovation. The government can take a stake in companies benefiting from public R&D investments, ensuring that future profits contribute to public welfare. 

Moreover, multinational corporations operating in Bangladesh should be required to invest in local innovation and utilise domestic suppliers. Additionally, a state-backed venture capital fund can help finance high-risk, high-reward start-ups in deep-tech and industrial innovation.

In contrast, developing countries that have followed laissez-faire models—often under pressure from international financial institutions—have struggled to break free from commodity dependence and low-value-added industries. By embracing an entrepreneurial state model, these nations can proactively shape their economic structures rather than passively integrating into the global economy on unfavourable terms.

Despite its advantages, implementing an entrepreneurial state model in developing countries is not without challenges. Issues such as bureaucratic inefficiencies, corruption, and political capture can hinder effective state-led innovation. Therefore, governance reforms and institutional capacity building are crucial for ensuring that state interventions are strategic, transparent, and accountable.

Moreover, developing countries often face external pressures from international financial institutions and trade agreements that constrain their ability to pursue industrial policies. Policymakers must navigate these challenges by leveraging regional cooperation, negotiating strategic policy space, and fostering domestic consensus on the need for state-led development strategies. 

Likewise, Bangladesh must address governance challenges to prevent inefficiencies and corruption. Transparent public procurement, independent oversight agencies, and institutional reforms are necessary to ensure that government investments are both strategic and accountable.

Additionally, international trade agreements and WTO regulations may limit Bangladesh's ability to implement industrial policies. Careful negotiation and regional cooperation—such as through South Asian trade agreements—can provide policy space for state-driven development initiatives.

It is evident that the 'Entrepreneurial State' model provides a compelling framework for rethinking economic development in the Global South. By recognising the state as a key driver of innovation, developing countries can move beyond dependence on foreign investment and low-value industries. Strategic public investment in R and D, technology transfer, and industrial policy can create pathways for sustainable, inclusive, and high-tech economic growth.

While challenges exist, the success stories of East Asia, India, and Brazil demonstrate that an entrepreneurial state is not just desirable but essential for long-term development.

Dr Mohammad Kamrul Hasan is a researcher in Public Administration and Public Policy.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.