II
FINDINGS AND RECOMMENDATIONS



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Government-Industry Partnerships for the Development of New Technologies II FINDINGS AND RECOMMENDATIONS

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Government-Industry Partnerships for the Development of New Technologies This page in the original is blank.

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Government-Industry Partnerships for the Development of New Technologies Findings and Recommendations SUMMARY OF FINDINGS Public-private partnerships, involving cooperative research and development activities among industry, government laboratories, and universities, can play an instrumental role in accelerating the development of new technologies from idea to market. Applications of new biomedical and information technologies, for example, hold the potential for tremendous advances in the health and productivity of Americans. Bringing the results of research to the market— that is, from ideas to innovations to commercial products—is a genuine challenge. Partnerships can be a valuable mechanism to facilitate this process. The nature of partnerships and their potential role in fostering and sustaining improvements in national security, social welfare, and economic growth are, therefore, issues of central policy concern. Experience shows that partnerships involving government participation in cooperative research and development among industry, universities, and government laboratories can work. They often contribute to national missions in health, energy, the environment, and national defense and to the nation’s ability to capitalize on its R&D investments. Partnerships help bring innovations to the point where private actors can bring them to the market. Accelerated progress in bringing the benefits of new products, new processes, and new knowledge to the market has positive consequences for economic growth and human welfare.

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Government-Industry Partnerships for the Development of New Technologies Partnerships offer a means to integrate the diverse participants in the U.S. innovation system.1 Bringing the benefits of new products, new processes, and new knowledge to the market is a key challenge for an innovation system. Partnerships contribute to our ability to facilitate the transfer of scientific knowledge to real products; they represent one means to improve the output of the U.S. innovation system. Because modern scientific advances hold tremendously positive prospects for humanity, learning how best to facilitate science-based growth is a central challenge for policy makers as we begin the new century. Early progress in, for example, disease detection, prevention, or treatment has direct consequences in terms of human welfare and healthcare costs. Partnerships provide an institutional structure with financial and policy incentives within which companies, universities, national laboratories, and research institutes can cooperate to accelerate the development of promising technologies. In many cases, no single participant could pursue the development of these technologies effectively. The diversity of U.S. partnerships provides a significant advantage to the innovation process in the United States. At the same time, cooperation among firms, universities, and government laboratories is often needed to harness complementary expertise and to realize new synergies. Blending these strengths in a case-by-case fashion is one of the great strengths of partnerships. Partnerships are diverse in structure, mechanisms, and goals. This is one of their advantages. Successful partnerships do tend to be characterized by industry leadership, public commitments that are limited and defined, clear objectives, cost sharing, and effective evaluation processes. Partnership structures, as diverse as the SBIR program, the Advanced Technology Program, and SEMATECH, demonstrate that partnerships, if properly structured, can yield positive results commensurate with their objectives and challenges. Flexibility, experimentation, and learning are key elements in effective policy for partnerships. Features common to successful partnerships include industry initiation and leadership of projects, cost sharing predictable limits to public commitments of resources, 2 clear objectives, and learning through evaluation of measurable outcomes. Effective leadership and cost sharing can help motivate participants in a partnership to act in ways that advance their 1   See Richard Nelson, National Innovation System, New York: Oxford University Press, 1993. 2   Open-ended public funding has the potential to create negative incentive effects. Kornai in this regard explores the implications of “soft budget constraints.” See Janos Kornai, Economics of Shortage, Amsterdam: North Holland, 1980.

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Government-Industry Partnerships for the Development of New Technologies joint objectives. Agreement on goals and metrics of progress, the development of roadmaps, and regular evaluations helps sustain joint effort; taken together, these features contribute to the success of partnerships.3 Although partnerships are a valuable policy instrument, they are not a panacea; their demonstrated utility does not imply that all partnerships will be successful. Indeed, the high risk – high payoff nature of innovation research and development assures some disappointments. In terms of both project scale and timing in the innovation process, properly constructed partnerships do not displace private finance. Entrepreneurs sometimes face challenges in attracting the private financing necessary to develop new technologies for the market. While the U.S. venture capital industry is well developed and often plays a key role in the innovation process, it does not provide early stage equity funding for some innovations.4 In fact, current trends in the venture industry—particularly the increase in deal size—may make certain types of small, early-stage financing less likely, despite the overall increase in venture funding.5 Partnerships focus on earlier stages of the innovation stream than many venture investments and often concentrate on technologies that pose greater risks and offer broader returns than the private investor will normally find attractive.6 Public-private partnerships are a mechanism to provide catalytic funding. They articulate needs, sometimes create early demand, and coordinate the needed expertise. In doing so, they help foster the creativity and invention needed to prime the process of innovation.7 Moreover, the limited scale of most partnerships—compared 3   Features associated with more successful partnerships are described in greater detail in the Introduction to this report. 4   See Lewis Branscomb and Philip Auerswald, Taking Technical Risk: How Innovators, Executives, and Investors Manage High-Tech Risks, Cambridge, MA: MIT Press, 2001. See also Lewis Branscomb, Testimony before Hearing of the Technology Subcommittee of the House Science Committee on the Advanced Technology Program at NIST/DOC, June 14, 2001 at <http://www.house.gov/science/ets/jun14/branscomb.htm>. 5   Venture capital funding has fallen off sharply from 1999 highs but overall fund size has increased substantially. This means that venture capital investments have recently been larger but fewer. For a broad overview of the early-stage equity market for high-growth ventures in the U.S., see Jeffrey Sohl, “The Early-Stage Equity Market in the USA,” Venture Capital 1(2):101-120, 1999. 6   Some programs also support broadly applicable technologies that, while desirable for society as a whole, are difficult for individual firms to undertake because returns are difficult for individual firms to appropriate. A major example is the Advanced Technology Program. 7   Joseph Schumpeter articulated the role of the entrepreneur—to seize these basic inventions and transform them into economic innovations. See Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, New York: Harper and Brothers, 1942. See also William H. Middendorf, What Every Engineer Should Know About Inventing, New York and Basel: Marcel Dekker, Inc. 1981.

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Government-Industry Partnerships for the Development of New Technologies to private institutional investments—and their sunset provisions tend to ensure early recourse to private funding or national procurement. Concerns about the crowding out of private capital by public funds may be overstated. Properly constructed public-private R&D partnerships can actually elicit “crowding in” phenomena with public R&D investments providing the needed signals to attract private R&D investment.8 The allocation of federal funding among fields of research has shifted sharply in the last decade with important implications for the future advance of information technology and its contributions to our ability to capitalize on existing and future investments in biomedicine. While among the most efficient in the world, the U.S. innovation system has seen considerable adjustment following the transformations in national priorities brought about by the end of the Cold War and more recently since the onset of the new war on terror.9 One impact of this adjustment and efforts in the mid-1990s to balance the federal budget has been that the R&D budgets of most federal agencies were reduced in real terms in the 1993-1997 period.10 When individual agencies cut research programs because of their own mission realignments, the collective impact on the federal investment research portfolio was not anticipated.11 8   David, Hall, and Toole survey the econometric evidence on “crowding out” over the past 35 years. They note that the “findings overall are ambivalent and the existing literature as a whole is subject to the criticism that the nature of the “experiment(s)” that the investigators envisage is not adequately specified.” It seems that both crowding out and crowding in can occur. The essential finding is that the evidence is inconclusive and that assumptions about crowding out are unsubstantiated. The outcome appears to depend on the specifics of the circumstance, and these are not adequately captured in available data. See Paul A. David, Bronwyn H. Hall, and Andrew A. Toole, “Is Public R&D a Complement or Substitute for Private R&D? A Review of the Econometric Evidence.” NBER Working Paper 7373, October 1999. Relatedly, Feldman and Kelley cite the “halo effect” created by ATP awards in helping firms signal their potential to private investors. See Maryann Feldman and Maryellen Kelley, “Leveraging Research and Development: The Impact of the Advanced Technology Program,” in National Research Council, The Advanced Technology Program, C. Wessner, ed., Washington, D.C.: National Academy Press, 2001. 9   See David Mowery and Nathan Rosenberg, Technology and the Pursuit of Economic Growth, Cambridge: Cambridge University Press, 1989. 10   The National Institutes of Health is a notable exception, benefiting from substantial real growth in this period. See National Research Council, Capitalizing on New Needs and New Opportunities— Government-Industry Partnerships in Biotechnology and Information Technologies, C. Wessner, ed., Washington, D.C.: National Academy Press, 2002 11   For example, The Department of Defense—the agency with the steepest reductions in R&D (more than 25 percent)—increased funding of oceanographic research and held funding of research in computer science constant. At the same time, research expenditures in other fields, e.g. physics, were reduced very substantially. For a more detailed analysis, see Michael McGeary, “Recent Trends in Federal Funding of Research and Development Related to Health and Information Technology” in Capitalizing on New Needs and New Opportunities, Government-Industry Partnerships in Biotechnology and Information Technologies, op cit. See also National Research Council, Trends in Federal Support of Research and Graduate Education, S. Merrill, ed., Washington, D.C.: National Academy Press, 2001.

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Government-Industry Partnerships for the Development of New Technologies As a result of these changes, financial support for such disciplines, as physics, chemistry, and engineering has fallen in real terms over several years. The substantial reductions in support for these disciplines are a source of concern because they underpin the future development of the information technology sector. These reductions did not emerge as the result of a national debate on R&D priorities and the lag effects of these cuts may have unforeseen, long-term consequences. Meanwhile, in response to new needs, new opportunities, and recently, new threats, there has been an expansion in the allocation of U.S. federal research investments toward the health and medical sciences sector. This increase in support for medical research is welcome.12 It is normal that the federal research portfolio should evolve over time in response to new scientific needs and opportunities.13 However, the real reductions in support that have occurred over a sustained period (1993-1999) for disciplines that underpin the information technology sector are a cause for concern. It is equally important to recognize that the information and biotechnology sectors—each very important to the nation’s economy, security, and well-being—are increasingly interrelated. Advance in one area is often dependant on progress in the other; sectors like the life sciences increasingly rely on parallel advances in information technology for their own advancement. For example, reaping the benefits of sequencing the human genome depends on processing and making sense of enormous amounts of data that in turn will be made possible by advances in computing and networking technologies. Capitalizing on the nation’s substantial investments in biomedicine therefore requires complementary investments to advance the fields of science and engineering supporting information technology.14 12   See The American Association for the Advancement of Science, “Congressional Action on Research and Development in the FY 2002 Budget” at <http://www.aaas.org/spp/dspp/rd/ca02main.htm>. The AAAS reports, “There are large increases for basic and applied research in FY2002, especially in NIH. The total federal investment in research is $48.2 billion, an increase of 11.0 percent or $4.8 billion over FY2001. NIH remains the largest single sponsor of basic and applied research; in FY2002, NIH alone will fund 46 percent of all federal support of research. All federal agencies receive increases for their research portfolios, especially agencies with defense or counter-terrorism programs.” (p.3) 13   See National Research Council, Capitalizing on New Needs and New Opportunities, Government-Industry Partnerships in Biotechnology and Information Technologies, op.cit., p. 30 and 63. 14   As the Committee’s study on new needs and opportunities in biotechnology and information technologies finds, multidisciplinary approaches are increasingly required in science and engineering research. Specifically, the Committee has found that “biotechnology and information technology R&D each provide tools and models useful to the other. Interdependencies also exist among chemistry, physics, and structural biology, and among mathematics, computer engineering, and genomics. Further examples of these interdependencies can be found in the complementary roles in the physical

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Government-Industry Partnerships for the Development of New Technologies Investments in a broad portfolio of disciplines with special emphasis on programs to bridge the gap among disciplines are important to the long-term health of the U.S. innovation system. In many instances efforts underway in the United States to support disciplines sustaining the technologies of the future do not match the rapid growth seen in corresponding foreign efforts. Over time this may negatively affect the relative competitiveness of U.S. firms in the global marketplace and may slow the overall pace of innovation in the United States. The case of the semiconductor industry illustrates that partnerships have contributed directly to furthering the global competitiveness of U.S. industry. Leading industrialists from the United States and abroad believe that the U.S. experiment with a government-industry partnership, i.e., the SEMATECH consortium, contributed to the resurgence of the U.S. semiconductor industry.15 One consequence of this perception of SEMATECH is that many countries around the world are engaged in substantial cooperative efforts to support technological advances in their national or regional semiconductor industry.16 The relative scope of these cooperative efforts and     sciences and engineering in nano-scale semiconductor work, and in the overall important role engi-neering plays in providing new research tools and diagnostics in all of these areas.” See National Research Council, Capitalizing on New Needs and New Opportunities, Government-Industry Part-nerships in Biotechnology and Information Technologies, op cit., part III, p. 65. 15   Leading Japanese industrialists have noted the contributions of U.S. partnerships in semiconductors. As Hajime Susaki, Chairman of NEC Corporation noted, “A major factor contributing to the U.S. semiconductor industry’s recovery from this perilous situation [in the 1980s] was a U.S. national policy based around cooperation between industry, government, and academia.” (“Japanese Semiconductor Industry’s Competitiveness: LSI Industry in Jeopardy,” Nikkei Microdevices, December 2000) Further, Hitachi’s Toshiaki Masuhara observes in his review of government-university-university collaboration in the United States that there has been a good balance of support by government and industry for research through the universities. This has included “a very good balance between design and processing.” He adds that the overall success of U.S. industry appears to have come from the contributions of five overlapping efforts. These include the SIA roadmap to determine the direction of research; the planning of resource allocation by SIA and SRC; the allocation of federal funding through the Department of Defense, National Science Foundation, and the Defense Advanced Research Projects Agency; the success of SEMATECH and International SEMATECH in supporting research on process, technology, design, and testing; and The Focus Center Research Project. See Dr. Masuhara’s comments in the proceedings of National Research Council, Securing the Future: Regional and National Programs to Support the Semiconductor Industry, op.cit. See also Kenneth Flamm and Qifei Wang, “SEMATECH Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D” in National Research Council, Securing the Future, op. cit. 16   See Thomas R. Howell, “Competing Programs: Government Support for Microelectronics,” in National Research Council, Securing the Future: Regional and National Programs to Support the Semiconductor Industry, op. cit.

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Government-Industry Partnerships for the Development of New Technologies the level of funding for these programs are substantially greater in other producer countries than in the United States.17 Over time, these R&D efforts are likely to bear fruit and may alter the technological and competitive position of the U.S. industry. Properly constructed, operated, and evaluated partnerships can provide an effective means for accelerating the progress of technology from the laboratory to the market. Public-private partnerships have become an integral and growing part of the U.S. innovation system. The public-private cooperation they engender is—and will remain—an effective means for the creation, transfer, and dissemination of new welfare-enhancing technologies. Doctrinal views on the appropriateness of government-industry cooperation overlook the reality of its contribution to the development of the United States in the past, understate the contributions of such cooperation in the present, and run the risk of compromising positive contributions in the future. The Committee’s endorsement of the role of partnerships in the U.S. innovation system must, however, be put in context. Uncritical enthusiasm for partnerships as panaceas is certainly misplaced. On the other hand, blanket disparagement of partnerships as “corporate welfare” is equally misplaced, not least because it overlooks the pragmatic approaches to technology development throughout U.S. history and the need to continue constructive experiments today. 17   See National Research Council, Securing the Future: Regional and National Programs to Support the Semiconductor Industry, op. cit.

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Government-Industry Partnerships for the Development of New Technologies RECOMMENDATIONS Regular and rigorous program-based evaluations and feedback is essential for effective partnerships and should be a standard feature. Greater policy attention and resources to the systematic evaluation of U.S. and foreign partnerships should be encouraged. Evaluation must include real metrics reflecting the specific goals of the partnership, with the additional recognition that rapidly evolving technologies may well require goals and metrics that evolve over time. New national needs (e.g., combating terrorism) may also necessitate new objectives. Existing partnership programs such as ATP and SBIR bring core competencies well suited to these needs. Evaluations should occur with some frequency and regularity and should include analysis of both project successes and failures. The failure of a particular project need not imply the failure of a program as a whole. The willingness to cancel under-performing projects is essential. For evaluations to be effective their findings must be integrated into program operations. Learning from previous and current experience can improve the performance of partnerships and enable them to adapt to better capitalize on emerging needs and new opportunities.18 Learning from competitive and comparative experiences in the global economy is also vital for effective U.S. policy on partnerships and foreign policies and programs should be regularly assessed. In a global economy, what the rest of the world thinks and does is important; both because we may learn from policy experiments in other countries and because the measures they take may affect the competitive position of U.S. firms and industries. The U.S. approach to innovation is not the only model for success. The competitive and emulative element in programs abroad should not mask the opportunities and needs for mutually beneficial cooperation. Such cooperation is particularly relevant in the global semiconductor industry as it faces unprecedented technical challenges associated with sustaining Moore’s Law.19 18   The ATP program at NIST and the Fast Track program initiated at the Department of Defense are examples of regular evaluation and the integration of its lessons in program operations. See National Research Council, The Advanced Technology Program—Assessing Outcomes, op.cit., and National Research Council, SBIR—An Assessment of the Department of Defense Fast Track Initiative, op.cit. 19   See Gordon E. Moore, “Cramming more components onto integrated circuits,” Electronics 38(8) April 19, 1965. Here, Dr. Moore notes that “[t]he complexity for minimum component costs has increased at a rate of roughly a factor of two per year. Certainly over the short term, this rate can be expected to continue, if not to increase. Over the longer term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years.

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Government-Industry Partnerships for the Development of New Technologies Partnerships should be embarked on a case-by-case basis and should draw, where applicable, on previous experience. The Committee’s analysis strongly suggests that partnerships do make positive contributions in the right circumstances. Determining what those circumstances are and what type of partnership would be most appropriate represents a constructive challenge for policy makers. There is no “one size fits all” solution. Additional research—through intermittent comparisons and evaluations—could advance our understanding of the conditions for successful public-private partnerships. Partnerships that are appropriately constructed and carefully and regularly evaluated offer society a proven means of enhancing both the welfare of our citizens and the security of the nation. National policy with regard to partnerships should be flexible, fostering a culture of experimentation. It should include, as appropriate, features such as industry initiation (i.e., a bottom-up, not a top-down approach), industry leadership, defined limits to public commitments of resources, clear objectives, cost sharing, and learning through ongoing evaluation of the experiences of previous and current partnerships both in the United States and abroad. Strengthening public support for research in physics, chemistry, mechanical and electrical engineering, and materials science and engineering should be a national priority. These disciplines underpin continued advances in information technology, a source of economic growth, and are essential for continued progress in the area of health care through information technology-based advances in biomedicine. Significant increases in funding for physical sciences and engineering— including material sciences, chemistry, physics, and electrical engineering—are needed to build greater understanding of properties of nanostructures underpinning tomorrow’s information industries as well to capitalize on advances in biotechnology.20 Renewed policy attention is required to encourage cooperative research in information technologies, the disciplines that support them, and in     That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000.” See also, Gordon E. Moore, “The Continuing Silicon Technology Evolution Inside the PC Platform,” Intel Developer Update, Issue 2, October 15, 1997, where he notes that he “first observed the ‘doubling of transistor density on a manufactured die every year’ in 1965, just four years after the first planar integrated circuit was discovered. The press called this ‘Moore’s Law’ and the name has stuck. To be honest, I did not expect this law to still be true some 30 years later, but I am now confident that it will be true for another 20 years.” 20   See the recommendations and findings in National Research Council, Capitalizing on New Needs and New Opportunities, Government-Industry Partnerships in Biotechnology and Information Technologies, op.cit.

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Government-Industry Partnerships for the Development of New Technologies other promising sectors such as biotechnology. In particular, the level and distribution of resources and the evolving roles of universities, laboratories, and private investors require innovative policy responses. By bringing together various actors, public-private partnerships can make a valuable contribution to the long-term welfare and security of the United States and its continued leadership in the global economy.21 21   Ibid.