Prevailing wisdom holds that state capitalism is faulty because it doesn’t promote long-term innovation. In the U.S., government investments in technology, from the Internet to lithium cell batteries have shown good returns. But such intervention is fraught with political and ideological problems. The Internet, I think, is a particularly good example of how the public sector can incubate an industry until its ready for venture capital to help it innovate. But some nations are relying solely on the state aspect and turning out strong results. From “The Rise of Innovative State Capitalism,” Joshua Kurlantzick’s interesting new Businessweek article:

“It is a mistake, however, to underestimate the innovative potential of state capitalism. Rising powers such as Brazil and India have used the levers of state power to promote innovation in critical, targeted sectors of their economies, producing world-class companies in the process. Despite its overspending on some state sectors, the Chinese government has nevertheless intervened effectively to promote skilled research and development in advanced industries. In so doing, the state capitalists have shattered the idea that they can’t foster innovation to match developed economies. State capitalists’ combination of government resources and innovation could put U.S. and European multinationals at a serious disadvantage competing around the globe.

State intervention in economic affairs runs against the established wisdom that the market is best for promoting ideas. At the same time, throughout history, the governments of many developed nations have actively fostered groundbreaking companies, from Bell Labs in the U.S. to Airbus in Europe.

Brazil is perhaps the best current example of how a state-capitalist system can build innovative industries. Successive Brazilian governments have intervened—with incentives, loans, and subsidies—to promote industries that otherwise would have needed long-term private investment to make them competitive with U.S. and European rivals. At the same time, Brazil preserved strong, independent management of state-backed firms, ensuring they did not become political boondoggles.” (Thanks Browser.)