Silicon Valley Subsidy Babies

A “subsidy baby” is a company set up to benefit from government support more than making money from its customers

The success of the internet skyscrapers Google, Amazon, Facebook and Apple is often told as the story of bold entrepreneurs, smart engineers and disruptive technology. But there is another story, one about tax money. The 13 Billion Euro tax breaks Apple has received from Ireland is only the latest chapter in this tale, Silicon Valley has a long tradition of taking government funds. The basic research for the technology that became the internet was carried out by the US Defence lab ARPA in the 60s. The following decades the internet was the domain of primarily universities, it is only since the early 90s that the internet has been the commercial project that we know today. University of Sussex Professor Mariana Mazzucato describes in her book The Entrepreneurial State (Anthem, 2013) how almost every part of the innovations that go into smart phones were results of public research: GPS navigation and signal compression came from the military, multi-touch screens, microchips, micro hard drives, liquid crystal displays, lithium-ion batteries… the list goes on.

Apple’s tax deal with Ireland is only the continuation of a long tradition of Silicon Valley’s dependence on public money

But not only the technology research was publicly-funded, even the capital for the businesses was provided by government. The famous venture capital firms of Sand Hill Road did not start out by investing the money of wealthy individuals with an appetite for risk and innovation, as conventional wisdom would suggest. The US federal government’s Small Business Investment Act of 1958 provided loan guarantees to investment bankers. For every private dollar invested, the government guaranteed four(!). In the following decades, the budding technology industry in California was the perfect match for cash-doped investors. Combined with a steady flow of innovations from publicly-funded research and defence industry contracts, it made a perfect departure point for world domination.

When Apple opened shop in Cork in 1980, it continued the successful strategy of using public money, taking advantage of the low corporate tax level (as well as of course things like a talented work-force, native English-speakers, access to the EU single market etc). What did Ireland get from the deal? Lots of good jobs, is the likely answer. Let’s have a look: Apple employs about 5500 people in Ireland, according to its webpage. Assuming it was always that many (it probably grew over time but let’s give Apple a break), this means the 13 Billion Euros breaks down to almost 70 000 Euros per job per year.*) Of course at least some of those jobs are highly qualified and there are knock-on effects for the surrounding economy, but in any case it is safe to say the Irish government paid a lot for each of those jobs over the years (or lost tax income, more correctly than paid).

Apple’s tax deal with Ireland is only the continuation of a long tradition of Silicon Valley’s dependence on public money to run its businesses. It may be nothing wrong if that’s what we want, but let’s not buy the story of the bold entrepreneurs and the smart engineers. Next time tech pundits say a government policy stands in the way of innovation, let’s remind ourselves who paid for that innovation in the first place.

 

* 13 Billion Euros divided by 5500 jobs times 35 years (1980-2015) = 67 500 Euros per job per year. Thanks to Twitter users @gchampeau, @clarinette02 and @Aenor01 for inspiring this calculation

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  1. […] instead make an ambitious investment plan so European champions can compete (Silicon Valley built its fortunes on federal loan guarantees, 4 public dollars to one private!). And while tax- and antitrust case […]

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