The success of government support for innovation is determined not by how much money is spent, but by knowing when to stop and resisting the urge to do what markets do better. For the past fifteen years, governments around the world have bet on the opposite approach: more spending on entrepreneurship, more public venture funds, more technology parks, more programs financing young companies – all based on the assumption that higher investment alone will accelerate technological progress. Global experience has consistently failed to validate that assumption. The more capital governments allocate, the clearer it becomes that innovation does not follow the logic of budget planning.
The problem is almost never a lack of funding. The United States committed more than $34 billion to high-risk clean energy projects – an amount that would have seemed unimaginable two decades ago. Public investment in the sector exceeded the total private venture capital invested over the same period. One would have expected an explosion of innovation. The opposite happened. Private investors stepped back, reasoning that if the government had become the market’s largest player, it made sense to wait and see where it chose to place its bets. Lobbying quickly emerged around the distribution of public funds, several of the most celebrated government-backed companies collapsed, and within a few years clean energy accounted for a smaller share of venture investment than it had before the program began.
Saudi Arabia offers a similar story. For years, the government poured enormous resources into building an innovation ecosystem: regulatory reforms, a more business-friendly environment, new investment funds, and major international technology partnerships. The scale of spending was impressive, yet domestic venture capital activity remained modest relative to the size of the economy. The money was there. The market never truly emerged.
China provides perhaps the clearest example of the paradox. In a single year, new government commitments to venture capital exceeded the total amount raised by venture funds across the rest of the world combined. At first, it looked like an extraordinary success. The market expanded, more funds were created, and startup valuations soared. Then came an equally dramatic reversal. Venture capital investment contracted by almost 90%, while Chinese companies lost a significant share of the global venture market. The harder the government accelerated the boom, the more painful the correction became. There is no single methodology that fully explains all three cases, and venture capital cycles are rarely driven by government intervention alone. Interest rates, economic conditions, regulation, sanctions, and shifts in technology valuations all matter. But none of that changes the broader pattern.
All three examples share one common feature: the government attempted to replace the market’s mechanism for selecting promising ideas. That misunderstands how innovation actually happens. For years, economists assumed that large corporations would be the main engine of technological progress because they had the money and the research capacity. In practice, the biggest commercial breakthroughs came from startups. Fundamental discoveries originated in universities and research labs, but it was entrepreneurial teams that recognized market opportunities first and transformed ideas into products faster than anyone else.
That creates a second paradox. If startups drive innovation, governments somehow have to predict which one of thousands of projects will eventually reshape an industry. That is an almost impossible task, even for professionals. Venture capital firms review thousands of proposals and invest in roughly one percent of them. Even then, their role is far from over. They join boards, recruit executives, connect founders with customers and partners, and – most importantly – release funding in stages. Miss the next milestone, and financing stops. Capital is constantly redirected toward the strongest teams.
Governments operate differently. They are designed to work through predetermined budgets, formal procedures, and administrative rules. Innovation rarely fits that framework. A young technology company can completely reinvent its business model or pivot into a new market within six months. For a bureaucracy, that kind of uncertainty is difficult to manage. The more public money enters the system, the greater the competition over access to it. Some entrepreneurs inevitably begin competing for subsidies rather than customers. That is where the line between supporting markets and replacing them becomes dangerously thin. Once governments begin deciding who tomorrow’s winners will be, markets stop performing their most important role: continuously testing whether ideas are commercially viable.
There is also a structural reason why governments keep returning to these programs. Innovation has never been geographically balanced. It clusters around a handful of cities where universities, investors, entrepreneurs, and skilled workers reinforce one another. Successful companies attract capital. Capital attracts talent. Talent creates more entrepreneurs. Attempts to spread innovation evenly across regions usually produce the opposite outcome. Spending becomes more evenly distributed, while returns decline.
Venture capital itself is also deeply cyclical. During booms, money becomes cheap and investors finance even questionable ideas. Then sentiment reverses abruptly. Governments, for some reason, tend to launch new programs precisely at the peak of these cycles. High activity is mistaken for proof that the strategy is working, and public funding pours into markets that are already overheated, making the eventual downturn even more severe. Public money does not eliminate market cycles. More often, it amplifies them.
At first glance, bureaucrats and venture capitalists appear to solve the same problem. In reality, they treat risk very differently. Venture investors know that most of their investments will fail, and they accept failure as part of the business. For public officials, failure almost always becomes a political liability. As a result, government systems naturally gravitate toward predictable, low-risk projects – precisely the ones least likely to produce breakthrough innovation. The entrepreneurs who create transformative companies are often those who do not fit neatly into government programs and choose to build markets that do not yet exist.
That leads to two principles that could genuinely improve the effectiveness of public innovation policy.
The first is that government should never try to replace markets. It should use markets as a filter. If a project cannot persuade private investors to commit their own capital, policymakers should approach it with caution.
The second is that decisions about innovation require long time horizons and insulation from short-term political priorities. Strong innovation ecosystems are built over decades, not budget cycles.
Kazakhstan is not a hypothetical case for testing these principles. Nearly the entire institutional architecture already exists: QazInnovations, Astana Hub, the Science Fund, Qazaqstan Investment Corporation within the Baiterek holding, and the Damu Fund. The question is no longer what institutions are missing. The real question is whether the existing ones behave like filters or simply function as cash dispensers.
Astana Hub is arguably the most market-oriented institution in the system. It offers a preferential tax regime through 2029, accelerator programs, investor access, and a nationwide network of IT hubs. According to its own figures, more than 1,600 startups have passed through the platform, attracting over $612 million in investment. Those numbers deserve independent verification through tax records and export data because they are self-reported, and rising resident numbers are easily mistaken for the emergence of globally competitive companies. This resembles a scaled-down version of China’s “quantity first, correction later” model. Until it is clear how many of those 1,600 startups are generating meaningful sales outside Kazakhstan, resident counts alone say little about real effectiveness.
The Science Fund is closer to the right model. It finances early-stage scientific research, where technologies remain unproven and private investors are understandably absent. That is exactly where governments should assume risk. The weakness appears later. Grants are awarded as one-off payments at the application stage rather than evolving into equity investments or requiring private co-financing once commercial demand begins to emerge. Without that transition, the fund remains a source of money without the market filter needed to distinguish commercially viable technologies from well-written grant applications.
The same mismatch between the government’s budget cycle and a startup’s development cycle appears in Kazakhstan in a very practical way. Rather than operating as a single pathway – research, prototype, first customer, certification, manufacturing, private investment, exports – the country’s institutions function as disconnected programs. At every stage, companies must apply to another organization and undergo another evaluation from scratch. The result is not one “valley of death” but several: between research and prototype, prototype and first customer, pilot project and industrial contract, grant funding and private investment.
None of this means the government can withdraw entirely from choosing strategic priorities. Kazakhstan sits between Russia, China, Central Asia, and Europe while playing a central role in the Middle Corridor. That makes issues such as computational sovereignty, cybersecurity, and energy resilience matters of national security rather than fashionable technology trends. But within that framework, governments should choose missions, not winners. Instead of trying to predict which startup will become the next unicorn, they should define measurable technological challenges and pay for results rather than polished applications.
Innovation cannot be created by government decree. What governments can do is create an environment where capital, talent, and entrepreneurship naturally find one another without constant administrative intervention. For Kazakhstan, that means not building a sixth support institution, but ensuring the five that already exist behave like filters rather than cash registers.
Aidar Kakimzhanov, independent expert, specifically for www.economyKZ.org
