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Innovation Inducement Prizes: At the National Science Foundation 1 Prizes in the National Innovation System PRIZES IN HISTORICAL CONTEXT A hallmark of contemporary industrial societies is that their governments employ a wide array of public policies to strengthen their national systems of innovation.1 They do because innovation—the development and adoption of new ways of solving problems and creating opportunities—is universally understood as a powerful contributor to a strong economy, a healthy and dynamic society, and a secure nation. National innovation policies typically include strong financial support for research and development; funding for higher education in mathematics, science, and engineering; tax and other incentives for private sector innovative activity; a system for protection of intellectual property rights; and consideration of the effects on innovation of policies in such domains as environmental regulation, structural policies (antitrust, incentives for new firm formation), and standards setting. Governments have also incorporated the awarding of prizes for successful innovation in their arsenal of programs and incentives to encourage innovation. Typically, these are awards recognizing outstanding in- 1 The concept of a national innovation system has been developed most thoroughly by Nelson. See Nelson, Richard. National Innovation Systems: A Comparative Analysis. Oxford University Press, 1993. One of the key tenets of the national innovation system concept is that effective innovation policy almost always involves multiple complementary mechanisms.
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Innovation Inducement Prizes: At the National Science Foundation novative accomplishments after they have occurred and been recognized as such. Inducement prizes—prizes intended to encourage innovators to address defined objectives that the sponsor identifies clearly in advance—have been used only sparingly by governments. There have been a few, relatively high-profile exceptions. A recent book recounted the history of the 18th century prize offered by the British government for development of a successful method for determining the longitude of ships at sea.2 This prize resulted in development of the ship’s chronometer, which revolutionized ocean-going travel and transportation. Much more recently, the U.S. Defense Advanced Research Projects Agency (DARPA) has sponsored a series of prizes awarded to teams that develop programmed land vehicles that can complete a challenging overland course without further human intervention.3 NASA has recently contracted with several nonprofit organizations to assist it in offering inducement prizes for several relatively small-scale improvements in aerospace technologies through its Centennial Challenges program.4 Private interests have been somewhat more active than governments in offering inducement prizes for innovations in various fields. Commercial aviation has featured privately sponsored prizes for many decades. Charles Lindbergh’s celebrated solo flight over the Atlantic in 1927 was in response to a prize of $25,000 offered by Raymond Orteig.5 The privately funded Ansari X-Prize of $10 million was recently won by a team headed by a renowned flyer, Burt Rutan, and Paul Allen, financier and cofounder of Microsoft Corporation. Their team completed a successful pair of suborbital flights in a manned, rocket-powered vehicle, fulfilling the Ansari X-Prize requirements.6 The National Academy of Engineering (NAE) is administering an innovation inducement prize funded by the Grainger Foundation. The NAE will award $1 million in 2007 to the team that develops the best way to remove arsenic from drinking water obtained from underground sources in developing nations, such as Bangladesh.7 Prizes have been fairly common in the field of mathematics. In 2000, for example, the Clay Mathematics Institute established a series of $1 million Millennium Prizes for the solution of seven critical problems in mathematics.8 2 Sobel, Daval. Longitude: The True Story of A Lone Genius Who Solved the Greatest Scientific Problem of His Time. Penguin, 1996. 3 See http://www.darpa.mil/grandchallenge/index.asp. 4 See http://exploration.nasa.gov/centennialchallenge/cc_index.html for a description of the program, the initial array of prizes, and NASA’s partner organizations. 5 Schroeder, Alex. “The Application and Administration of Inducement Prizes in Technology.” The Independence Institute, Golden, Color. December 2004, pp. 7-8. 6 See http://www.xprizefoundation.com/prizes/xprize_ansari.asp. 7 See http://www.nae.edu/nae/grainger.nsf?OpenDatabase. 8 See http://www.claymath.org/millennium/.
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Innovation Inducement Prizes: At the National Science Foundation During the past decade, largely as a result of a 1999 report of a workshop convened by the NAE, interest has grown in exploring ways for the federal government to add inducement prizes to its toolbox of methods for encouraging innovation. The NAE report9 recommended that federal agencies experiment with the use of innovation inducement prizes. The DARPA autonomous vehicle prize was in part prompted by the NAE support of the concept. The 109th Congress had under consideration a bill, H.R. 5143, entitled the “H-Prize Act of 2006,” that would authorize the secretary of energy to carry out a program to competitively award cash prizes to advance the research, development, demonstration, and commercial application of hydrogen energy technologies. The bill passed the House of Representatives in May 2006. The present study has been carried out in response to a mandate of Congress in appropriating FY 2006 funds that the National Science Foundation (NSF) establish a program of innovation inducement prizes and that it seek the advice of the National Academies in setting up this program. The specific charge to the NSF and the Academies is discussed below. STRENGTHS AND LIMITATIONS OF INNOVATION INDUCEMENT PRIZES Owing to the limited experience with innovation prizes, relatively little is known about how they work in practice or how effective they may be as compared with, for example, R&D grants and contracts, or tax incentives. The theoretical academic literature suggests that not all research problems call for the same incentive instrument. The choice depends on, among other things, the degree to which rewards can depend on cost or on success or failure and the degree to which sponsors rather than researchers can assess research plans in advance.10 The limited practical experience with prizes underscores the importance of topic selection, prize 9 National Academy of Engineering. Concerning Federally Sponsored Inducement Prizes in Engineering and Science. Report of the Steering Committee for the Workshop to Assess the Potential for Promoting Technological Advance Through Government-Sponsored Prizes and Contests, National Academy Press 1999. On the Web at www.nap.edu/catalog/9724.html. 10 See, generally, Scotchmer, Suzanne. Innovation and Incentives. Cambridge, Mass.: M.I.T. Press, 2004, Chap. 2. For a discussion of the strengths and weaknesses of inducement prize contests in the context of climate change, see Newell, Richard G., and Nathan E. Wilson. “Technology Prizes for Climate Change Mitigation,” Resources for the Future Discussion Paper, RFFDP 05-33, June 2005.
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Innovation Inducement Prizes: At the National Science Foundation design, and procedural rules in realizing the claimed advantages of prizes and minimizing or overcoming their alleged limitations. One of the rationales for a program of innovation inducement prizes at NSF is that such a program will yield a body of experience and evidence that can be mined for lessons about how prizes work and the conditions under which they can be an effective alternative for or complement to other policy instruments. Here we present some general perspectives on the expected strengths and limitations of innovation inducement prizes drawn from the theoretical literature about and past experience with innovation policy instruments. In some cases we suggest comparisons with the more familiar tools of R&D grants and contracts, since the latter—especially grants—are the traditional mainstay of NSF’s support of innovation. It is important to recognize that owing to the limited empirical basis for judgments about the use of innovation inducement prizes, these statements stand more as hypotheses to be tested than as empirically supported findings. More than hypotheses, however, they are pointers to the kinds of responses that may be elicited from the various communities that may participate as contestants, supporters, analysts, or commentators. Thus, we believe it is important to have these potential effects in mind as NSF proceeds to implement its prize program: Prize programs can focus the attention of policy makers, entrepreneurs, and the attentive public as well as researchers on the goals11 of an innovation program. They may be less well suited than grants and 11 Throughout this report we use a variety of similar or related terms to characterize what innovation inducement prizes are about or are intended to accomplish. To avoid confusion we have tried to be consistent in the use of these terms, as follows: “Purpose” refers to the motivation for the NSF prize program as a whole to strengthen the nation’s capacity for innovation; Other terms refer to particular prize contests: “Goal” refers to the societal interest being served by a prize (e.g., reducing pollution); “Objective” refers to a concrete statement of what a particular prize is for, (e.g., to develop a benign substitute for a polluting chemical). (Note that we also use “objective” as an adjective, meaning requiring little or no subjective human judgment.) “Topic” refers to the field of inquiry of a prize or category of technology of a particular contest (e.g., “green” chemistry). Finally, “Near-term impact” refers to the subsidiary purposes of prize contests, correlates of successful administration that can be measured and evaluated, such as attracting diverse participants in the competition, involving students and young professionals, inducing private parties to support contestants, stimulating public interest in science and technology, and enhancing the public reputation of the prize-giving institution.
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Innovation Inducement Prizes: At the National Science Foundation contracts to the development of basic scientific and engineering understanding underlying the achievement of goals. Prizes, like peer-reviewed grants, can shift the origin of ideas for innovations to address a particular goal away from the federal government toward the nongovernmental performers who carry out the related research and development. Prize programs can instill in the innovator a single-mindedness and focus regarding the need to accomplish the objectives set out in the prize contest. Prize programs can stimulate a high degree of competition among the teams that undertake to pursue a prize. Although this is often a virtue, it can be wasteful if the prize chosen is too large. Prize programs are likely to attract as contestants an array of individuals and organizations that is somewhat different from the scholars and academic institutions that typically apply for NSF grants. Compared with grant or contract programs, prize programs impose fewer demands on contestants by reducing or eliminating the requirement for ex ante demonstration of the capability to succeed and by eliminating the administrative burden of accounting for expenditure of public funds, whereas prize programs impose a greater burden on participants to raise private funds to support their participation in the contest. Thus, compared with grant programs, prize programs may be expected to attract more individuals, informal teams, and for-profit firms of various sizes and perhaps not as many academic institutions. Prize programs, compared with grant and contract programs, can attract more interest from the general public, conceivably encouraging support of and participation in the science and engineering enterprise. Prize programs can create incentives for nongovernmental organizations and individuals to invest financial resources in support of the activities of prize contestants, and these investments may exceed the value of the prize purse to be awarded to the winner. If the incentives for nongovernmental investments are sufficiently strong, the sponsoring agency may need to expend only the amount of the prize purse plus the costs of contest administration, while all the costs of research are paid for by nongovernmental parties. The requirement in a prize contest that would-be innovators fund the research up front may inhibit participation by entities that do not otherwise have access to discretionary funding for innovative activities. Prize programs are likely to inhibit the exchange of information among researchers and other innovators, at least for the duration of the contest, while sponsors can condition research grants or contracts on information sharing. Although prize programs may involve students as members of
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Innovation Inducement Prizes: At the National Science Foundation competing teams, they tend to put less direct emphasis on the education and training of the next generation of researchers, which is often an important outcome of research grant programs. For academics, prize programs tend to substitute expectations of financial rewards and public acclaim for the traditional reward of enhanced professional reputation. For many topics or fields of interest it may be difficult to identify a set of conditions for winning that would make for a sensible prize contest. As this brief discussion of the potential strengths and limitations of innovation inducement prizes indicates, prizes offer some advantages over grants and contracts while also having some disadvantages. A program to explore the potential utility of such prizes at NSF offers an unprecedented opportunity to try various approaches to such prizes, to gather systematic data on the prize process and its outcomes, and to learn more about where prizes have the greatest payoff and about where they may work best as substitutes for or complements to grant programs. NSF ENGAGEMENT IN INNOVATION INDUCEMENT PRIZES In the FY 2006 appropriation for NSF the House Appropriations Subcommittee on Science, State, Justice, and Commerce sent a strong message to the NSF that it should establish an innovation inducement prize program. The bill as enacted said simply, [t]hat funds under this heading may be available for innovation inducement prizes.12 The subcommittee went further in House Report 109-118 accompanying the bill: The recommendation includes language that allows funds provided under this account to be available for innovation inducement prizes. The concept of inducement awards to encourage broad involvement in solving a specifically stated scientific problem has been a catalyst for scientific advancement since at least the early 18th century. In 1999, a National Academies workshop on this topic encouraged federal agencies to make more extensive use of this mechanism to pursue particular scientific and technological objectives. The Committee expects NSF to engage the National Academies to craft a prize or categories of prizes that would be of 12 H.R. 2862, Science, State, Justice, Commerce, and Related Agencies Appropriations Act, Fiscal Year 2006 (Public Law 109-108), National Science Foundation, Research and Related Activities account.
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Innovation Inducement Prizes: At the National Science Foundation an appropriate scale and to develop the rules and conditions for awarding prizes, and to report back to the Committee on plans to initiate a prize program in fiscal year 2006. The Committee strongly encourages NSF to use this mechanism, particularly in programs that specifically emphasize innovation, to focus on high risk/high payoff research projects. The Committee also expects NSF to encourage private sector involvement in the effort to create a prize program.13 The brief provision of law, agreed to by the Senate and signed by the President, allowing NSF to spend appropriated funds on innovation inducement prizes, along with the guidance in the House Appropriations Subcommittee report on how to use the funds, poses a substantial challenge to NSF. From its establishment in 1950 NSF has been seen and has seen itself as an agency that works principally through the competitive award of grants to academic scientists and engineers for self-initiated proposals about how to advance basic understanding of natural and social phenomena. In 1968 NSF’s role was broadened somewhat to make explicit that it also has a responsibility to make similar awards for applied research, although NSF has exercised this authority with greater or lesser ease at various times. NSF has a few award programs, notably, the Waterman Award for outstanding achievement by a young scientist or engineer, but in no previous case known to the committee has NSF employed an inducement prize program to encourage innovation in basic or applied research.14 Clearly, NSF will need to take full advantage of the limited contemporary experience with innovation inducement prizes at DARPA and NASA (see below) as well as in the private sector. In its guidance to NSF, Congress indicated that it wanted NSF to develop a program of “innovation inducement prizes” and “to use this mechanism … to focus on high risk/high payoff research projects” in the pursuit of “scientific and technological objectives.” This guidance sug- 13 House Report 109-118, Science, State, Justice, Commerce, and Related Agencies Appropriations Bill, Fiscal Year 2006, p. 111. 14 Ours is not, however, the first proposal that NSF investigate the use of prizes to stimulate innovation. After the termination of the federal supersonic transport development (SST) program in 1971, President Nixon ordered a comprehensive review of the nation’s policies affecting innovation. The effort was headed by William McGruder who directed the SST program at NASA. One of the outcomes was the National R&D Assessment (RDA) Program at the NSF, a small-scale sponsor of studies of the economics, processes, and outcomes of innovation. The original draft agenda of research, dated November 1, 1972, listed the following as one of six key issues under the policy studies part of the program: “Prizes: To what extent have prizes been effectively used by governments to stimulate R&D and innovation? What standards have been used to make awards, and how has the value of awards been set?” So far as we know, the RDA program did not undertake any research along these lines.
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Innovation Inducement Prizes: At the National Science Foundation gests that Congress had in mind that prizes would be offered not only for what in the management and economics literature is considered “innovation” (namely, the commercialization of new products, services, or processes) but also for major advances in the core of scientific and engineering knowledge that can enable such useful technological advances in the future. We encourage NSF to adopt this broader notion of innovation. NSF faces a further challenge in setting up an innovation inducement prize program to focus on problems of national importance because it has not generally been viewed as having a charter to support innovations intended to address societal needs. Such responsibilities have been given to agencies with specific spheres of responsibility, such as space exploration (NASA), defense (DOD), energy supply and utilization (DOE), health (NIH), and agriculture (USDA). By contrast, the rationale for the establishment and operation of NSF, going back to the arguments for a National Research Foundation advanced by the Bush report in 1945,15 has been that the financial support of undirected basic research in all major fields of the natural and social sciences and engineering would in the long run be the most effective way for the federal government to support innovation for national needs. To be sure, NSF is constantly aware of society’s needs and aspirations as it designs its research support programs. However, only rarely, and then usually with controversy, has NSF engaged in direct support of research intended to generate innovations of immediate use to society.16 Innovation inducement prizes are generally thought to have the greatest promise in encouraging scientific and technological advances to address national goals and opportunities. To some extent, then, an innovation inducement prize program that includes prizes for applied research 15 Bush, Vannevar. Science the Endless Frontier: A Report to the President. Washington, D.C.: Government Printing Office, 1945. 16 Perhaps the most well known such effort was NSF’s program of Research Applied to National Needs (RANN), which operated during the middle 1970s. While one can point to a number of important lines of research and innovation that were initiated and nurtured by RANN, including programs in solar energy and energy conservation that were transferred to the Department of Energy after its establishment in 1977, RANN was widely viewed in the academic research community as a misdirection of NSF’s resources away from NSF’s proper mission. NSF has approached such programs with great care since. In more recent times NSF has fielded a number of programs that have the indirect or very general support of innovation as one of their goals, including the SBIR (Small Business Innovation Research), ERC (Engineering Research Centers), STC (Science and Technology Centers), and PFI (Partnerships for Innovation) programs. None of these programs, however, has been organized around encouraging innovation toward specific societal goals or needs specified in advance by NSF.
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Innovation Inducement Prizes: At the National Science Foundation and development outcomes will demand of NSF a broader than usual understanding of the scope of its mission relating to innovation. The committee recommends that NSF embrace the House Appropriations Committee’s challenge as an opportunity to explore a new mode of research and innovation support that may prove valuable for the country as well as for the agency. It is by no means clear that the founders of NSF more than a half century ago appreciated fully the range of mechanisms that NSF could productively employ in mobilizing the nation’s scientific and technical talent in the exploitation of the “endless frontier” of science. Experimentation with an inducement prize program, like all good research, will yield both anticipated and unanticipated outcomes, some positive and some not so positive. It is with this perspective in mind that the committee offers in the remainder of this report a set of observations and recommendations on the establishment and operation of an NSF innovation inducement prize program that, at least at the outset, will be experimental.
Representative terms from entire chapter: