Paper short abstract:

Challenging the polarisation in the literature between advocates of competitive markets and strong states, this paper uses Kenya's M-Pesa success story to demonstrate that innovation can occur within highly-particularistic, patronage-based contexts that conform to neither of these polar opposites

Paper long abstract:

While there is consensus that innovation is a key driver of long-run productivity growth, debates about the state's role in promoting innovation remain polarised between two analytical and ideological paradigms. The first is neoliberalism, which confines the state to correcting market failures, ensuring competition and supporting the innovative force of the private-sector. Referring to the developmental states, the second calls for a strong and visionary state to drive innovation by targeting industries for investment and protecting firms until they are ready for competition. The existing literature broadly falls within these camps, identifying innovation as a market- or state-driven process. This paper challenges both, arguing it can occur within a context that does not conform to either. To make this argument, it uses the example of Kenya's mobile money product M-Pesa, which has become a poster child for financial inclusion. Rather than competitive markets or a strong state, this paper argues that the M-Pesa success story has played out within a highly-particularistic and patronage-based political context, whereby the interests of key actors within Kenya's political settlement crystallised in such a way as to shield M-Pesa's parent company Safaricom, whose ownership structure - following two rounds of a politically-compromised privatisation process - comprises elites from across the political spectrum, from competition. This has afforded the company space to innovate with M-Pesa, engendering a form of 'developmental patrimonialism' since Safaricom has become a vehicle for centralising rents and deploying them per a long-term vision, parcelling profits back to elites through generous dividend payouts