Panel II
New National Models

Moderators:


Bradley Knox

House Committee on Small Business

and

Charles W. Wessner

National Research Council


Briefly introducing the speakers for the day’s second panel, Stefan Kuhlmann, Heikki Kotilainen, and Peter Nicholson, Mr. Knox thanked all three for traveling considerable distances and said those in attendance were anticipating their contributions with interest and excitement. He called on Dr. Kuhlman to present first.

THE RECORD AND THE CHALLENGE IN GERMANY

Stefan Kuhlmann

Fraunhofer ISI, Germany


Dr. Kuhlmann expressed gratitude at being offered a chance to participate in what he characterized as an interesting and challenging event being held in an environment that was impressive both institutionally and architecturally. He said that he had been asked to speak about the status of research in Germany and the country’s research innovation system, whose development is increasingly becoming part of a European research system.



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Innovation Policies for the 21st Century: Report of a Symposium Panel II New National Models Moderators: Bradley Knox House Committee on Small Business and Charles W. Wessner National Research Council Briefly introducing the speakers for the day’s second panel, Stefan Kuhlmann, Heikki Kotilainen, and Peter Nicholson, Mr. Knox thanked all three for traveling considerable distances and said those in attendance were anticipating their contributions with interest and excitement. He called on Dr. Kuhlman to present first. THE RECORD AND THE CHALLENGE IN GERMANY Stefan Kuhlmann Fraunhofer ISI, Germany Dr. Kuhlmann expressed gratitude at being offered a chance to participate in what he characterized as an interesting and challenging event being held in an environment that was impressive both institutionally and architecturally. He said that he had been asked to speak about the status of research in Germany and the country’s research innovation system, whose development is increasingly becoming part of a European research system.

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Innovation Policies for the 21st Century: Report of a Symposium Dr. Kuhlmann then outlined a presentation that was structured in four parts. Part one laid out the strengths and weaknesses of the German innovation system. Part two briefly introduced the governance structure of innovative research in Germany and the related institutional landscape. Part three delved into innovation policy and programs, at both the level of the German federal government and the level of the Länder, which in the German context was the equivalent of the U.S. state level. Part four considered a number of current developments and challenges for the future. Strengths of Germany’s Innovation System Germany’s strength is that it has been and continues to be highly “innovation oriented.” Its gross R&D expenditures have been running at just under 55 billion euros, or around 2.5 percent of GDP. Quite strong in the 1980s, the country’s spending on R&D had fallen during the early 1990s in conjunction with reunification but has been increasing in recent years. Companies account for 66 percent of R&D expenditure, a considerable share in Dr. Kuhlmann’s view, and Germany leads the European Union (EU) in the percentage of small and medium-sized enterprises (SMEs) innovating in-house. Germany’s 14.9 percent of the world market for R&D-intensive goods places it second behind the United States, and it is in the EU’s top three in share of manufacturing sales attributed to new products. Its number of patent applications per inhabitant, 127, is second-highest among large countries, and it ranks third among all nations in international publications with 9 percent of the total. Dr. Kuhlmann noted that in 2001, business provided the largest share of R&D financing by far, followed by the federal and Länder governments. A small amount of R&D expenditure came from abroad, from either the European Commission or private-sector sources, which had been funding R&D to be performed in Germany with growing frequency. Business dominated performance of R&D as well, followed by the higher-education sector and by nonuniversity research institutions, the latter being a feature typical of the German system and one that he promised to return to later in his talk. Germany’s Weaknesses Calling the persistence of risk-averse behavior among banks one of the major weaknesses of the German research system, Dr. Kuhlman noted that financing innovation has become increasingly difficult, especially for SMEs. He then listed some of Germany’s other weaknesses: It is suffering a clear loss of momentum in some, although not all, of the high-tech sectors in which it had been strong—among them, pharmaceuticals, computers, electronics, and aircraft.

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Innovation Policies for the 21st Century: Report of a Symposium Its technological performance has come to depend increasingly on the automotive sector. East Germany and Berlin together eat up nearly one-quarter of the 9 billion euro federal research budget while employing only 11 percent of the country’s R&D personnel and accounting for only 6 percent of its patent production. Yet, East Germany is “not very strong in competitive and innovation terms” despite the amount of money invested there. The performance of Germany’s educational system, long considered quite strong, has declined to the point that Dr. Kuhlmann talked of a “crisis” and envisaged an expensive restructuring. The growth of the public sector’s R&D spending is lagging that of the private sector over two decades ending in 2001. More recent data would show a slight increase in public and some stagnation in business R&D investment, he noted. Governance Structure of the German Innovation System Turning to the complex governance structure of Germany’s system of innovative research, Dr. Kuhlmann listed three levels in descending order—Federal (National), Länder (State), and Regional (substate groupings)—that he said were overarched by an “increasingly relevant” Supranational level, represented specifically by the European Union. Existing on the national level in Germany, exemplifying a phenomenon found in many European countries, is “a kind of competition” between the Federal Ministry of Research and Education and the Federal Ministry of Economics and Labor. Although there is collaboration within the government, there is some duplication as well, and it is not clear who was in charge of research, technological development, and innovation. At the state level, interstate competition mirroring that found in the United States is on the rise. Relations between the federal government and the Länder are marked by “coopetition,” with initiatives at the two levels sometimes in conflict, sometimes complementary. The regional level depends on the federal and state levels for investment. While governance at the European level is gaining in importance, the role of EU investments is of greater relative significance in the smaller nations among the EU-25. Germany, Dr. Kuhlmann estimated, receives some 5 percent of the R&D funding that comes through EU channels. Still, there are exceptions according to sector: In information and communications technology (ICT) in Germany, where national programs had not been very strong, EU funding has played a more important role than in other areas. Despite much discussion of “subsidiarity”—as complementarity among initiatives at the EU, national, and state or Länder levels was called in official EU parlance—there is, in practice, a great deal of both overlap and confusion.

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Innovation Policies for the 21st Century: Report of a Symposium The Institutional Landscape of German Research Dr. Kuhlmann noted that the German research system’s institutional landscape varies from basic to applied research, with funding sources spanning from public to private organizations. While industry, which contributes the lion’s share of the country’s R&D investment, is mainly occupied with applied research, it also participates in some areas of fundamental research. Universities receive state and federal funding, though they increasingly receive money from industry and conducted applied as well as basic research. The 8 billion euros received by universities covers research as well as teaching. Dr. Kuhlmann then focused specifically on the nonuniversity research institutions: the Max Planck Society (MPG), which does excellent basic research; the Helmholz-Gemeinschaft (HGF), a national organization with 15 major centers doing research in many fields and particularly in “problem-driven” areas; and his own organization, the Fraunhofer Gesellschaft (FhG), which does applied research on a contract basis and receives a small amount of institutional funding. Problems beset collaboration among the actors occupying the contract-research area, he said. But collaboration with industry is “quite well developed” and, as such, no longer the issue it was in the 1980s and 1990s. He next turned to the basic mechanisms of federal R&D funding in Germany. The leading category, at nearly 47 percent of the total, is “institutional funding,” which goes to such nonuniversity research organizations as Max Planck, Helmholz, and Fraunhofer. Project funding, routed through programs at the federal level, represents 40 percent; its share, greater in the 1980s, decreased through the 1990s as institutional funding rose. The role of project and program funding in innovation policy is thus exhibiting some shrinkage in Germany, although not to the point that it has lost its relevance. Innovation Policy Programs: BMBF The two main providers of funds at the national level, as mentioned above, are the Federal Ministry of Education and Research, or BMBF (Bundesministerium für Bildung und Forschung), and the Federal Ministry of Economics and Labor, or BMWA (Bundesministerium für Wirtschaft und Arbeit). The BMBF supports a broad variety of technology and innovation programs—so broad, in fact, as to be difficult to track. For this reason, said Dr. Kuhlmann, presenting a full list of these thematic programs is infeasible. Although there are official lists, none of these lists reflects a precise technology or innovation program. He and coworkers therefore assembled a table (Figure 8), that encompasses 3.4 billion euros’ worth of programs. These range from biotechnology and nanotechnology programs to initiatives on new materials and electronics. Some fund technological research, but many contain an element of innovation support. This element, when present, owes its

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 8 Innovation policy programs, federal level: BMBF (selection). SOURCE: Adapted from Federal Budget BMBF 2003, BMBF 2004. existence in large part to the programs’ having been conceptualized as cooperative; that is, as a basic precondition for getting them funded, they have to include some degree of collaboration between researchers from the public sector, including academia, and industry. The table’s remaining categories are likewise incomplete, Dr. Kuhlmann said, and for similar reasons. Among them was the InnoRegio program, which is aimed at networking in regions of eastern Germany. Also listed were: “Innovative Regional Growth Poles,” a program similar to InnoRegio; support for research in the Fachhochschulen (FH3), or universities of applied sciences; and EXIST, which helps universities develop a startup-friendly climate. He pointed out that a significant feature of this admittedly incomplete table is that funding for the four programs aimed specifically at innovation is small compared to funding for the thematic programs. Innovation Policy Programs: BMWA Next came a comparable table showing innovation-policy programs run by the BMWA (Figure 9), which, as mentioned earlier, is to some extent in competition with the BMBF. Heading the list is a program focused on innovation in East Germany, followed by the largest program in monetary terms, FoKo/Pro Inno, which targets collaborative work in innovation by SMEs. The next two programs were of similar size: The Promotion of Joint Industrial Research, a bottom-up research funding mechanism driven by industry and cofunded by the

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 9 Innovation policy programs, federal level: BMWA (selection). SOURCE: Adapted from Federal Budget BMBF 2003, BMBF 2004. ministry; and the European Recovery Innovation Program, which provides loans to innovating companies. Rounding out the table—which, like that for BMBA, is incomplete—are a pair of very small programs, InnoNet and NEMO, the latter an acronym standing for Network Management East Germany. Critics deride this profusion of programs in Germany as an “innovation-policy funding jungle” and claim that no one can understand it fully, a charge both ministries rejected. While acknowledging that, as a political scientist, he had his own ideas about the origin and development of this funding structure, Dr. Kuhlmann said that on the present occasion he would keep them to himself. Programs Run by the Länder Conceding that it would only deepen the complexity of the policy picture, he then turned to the Länder, which are responsible for funding and operating the nation’s universities, the latter traditionally receiving most of the research money available to the former for distribution. But the Länder are increasingly going beyond supporting university research to set up programs designed to: spur technology development by funding both single-organization and cooperative R&D; foster technology transfer, including transfer of personnel; support startup companies by providing consulting, coaching, incubation, and financial assistance;

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Innovation Policies for the 21st Century: Report of a Symposium furnish venture capital and loan guarantees; encourage patenting activities; and participate in technology parks and incubators. Huge differences in investment existed from state to state. But while, for example, Bavaria accounts for just over one-fifth of total nonuniversity research spending by the Länder and Saarland for a mere 0.5 percent, EU and other sources supplement funding in weaker regions. Program Anatomy: Pro Inno Dr. Kuhlmann chose two examples from this broad variety of programs to examine in detail. The BMWA’s Pro Inno, which had been running for more than 10 years and through which 630 million euros were invested in the period 1999-2003, has as its goal increasing the R&D capability and competences of SMEs. This is to be achieved through collaboration on not only a national but also an international level. By this he meant that German companies could receive money in support of efforts involving partners outside the country. Pointing this out as “an interesting feature” of the program, he said that “internationalization is now understood as a relevant part of future R&D policies.” Subsidies under Pro Inno run at between 25 and 50 percent of the cost of R&D personnel ranging across four program lines—cooperation with firms, cooperation with research organizations, R&D contracts, and personnel exchange—with multiple applications totaling up to 350,000 euros per firm allowed. Since 1999, 4,850 firms and 240 research organizations have participated, with 4,000 R&D employees per year engaged in Pro Inno projects. A past evaluation in 2002 had shown that some three-fourths of participating firms would not have conducted the R&D had it not been for the program; Dr. Kuhlmann and colleagues were preparing an updated evaluation due later in 2005. Considered one of Germany’s most significant R&D programs, Pro Inno is widely known and accepted among its target group. Its outstanding characteristics are its broad, open approach, high transparency, easy access, and relative lack of bureaucracy. The program receives a high number of applications—even though there is no guarantee of funding due to budget constraints and despite significant problems, during market entry. Program Anatomy: InnoRegio The second example, BMBF’s InnoRegio program, is aimed at strengthening the endogenous innovation potential of weak regions in eastern Germany by setting up sustainable innovation networks. A complex, “multiactor” program, it encompasses not only SMEs, large companies, and research organizations but also many other public and private activities and initiatives, funding both network

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Innovation Policies for the 21st Century: Report of a Symposium management and projects aimed at developing products and services. Run as a competition, the program has three stages: a qualification round in which ideas are solicited for potential networking initiatives (444 proposals were submitted in 1999); a development round in which the regions selected (25 of the 444) refine their concepts and projects; and a realization round in which the winners (23 of the 25) receive multiyear financial support for their initiatives. The InnoRegio program is linked to an increase in innovation activities. In the prior two years, two-fifths of the firms selected by the program have received patents and almost all have introduced new products. Since 2000, 50 new firms have also been founded. But this last fact is less impressive in Dr. Kuhlmann’s judgment than, what he considered the program’s main impact—i.e., the creation of innovation networks across eastern Germany that comprises both public and private actors. Nevertheless, he noted that “in East Germany there is still a tendency to expect public funding to be the main source of stimulus towards innovation.” Moreover, although there is scant disagreement that networking is a basic precondition for innovation, the question of whether the impact of such initiatives will be sufficiently long-term, stable, and robust to justify the investment they require remains unanswered. Germany’s “Partnership for Innovation” Taking up a theme that Dr. Dahlman had earlier discussed in the U.S. context, Dr. Kuhlmann suggested that, in light of the variety of public policies affecting innovation, major countries may see the need to introduce some kind of coordination and collaboration across the agencies responsible for such policies. Germany’s current response, a federal innovation initiative, was born in October 2003, when Chancellor Schroeder summoned representatives of various stakeholders in the field—policy actors, public agencies, major companies, associations of SMEs, and major research organizations—to a forum where they debated challenges for the country’s innovation performance. In the aftermath, they created the Partnership for Innovation and started some longer-term “pioneering” activities. The overarching aim of this initiative’s broad agenda is to improve the framework for innovation in Germany through the collaboration of public and private actors. The Partnership for Innovation had established a number of working groups of stakeholders, some of which Dr. Kuhlmann and his colleagues contribute to. “In some areas there is just talk, and they will continue just to talk,” he said. But “in some areas these working groups have actually started policy initiatives, regulatory [and institutional] reforms, and so on.” Under the rubric of “High-tech Masterplan,” an effort is under way to ease access to venture capital; while some activities it comprised had predated it, a high-tech startup fund was kicked off only weeks before the symposium with 10 million euros, and is expected to grow in time. As the initiative grouped such a wide variety of activities, its efficacy will not be easy to evaluate, he said.

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Innovation Policies for the 21st Century: Report of a Symposium Germany’s Future: Threats and Opportunities To conclude, Dr. Kuhlman provided an appraisal of the threats and opportunities Germany was facing, as well as a rundown of the federal government’s immediate priorities. He began his enumeration of the threats by emphasizing Germany’s high degree of dependence on its automotive cluster. Even if it had not hurt the country yet, this dependence is leaving Germany open to challenge in the longer term, particularly from East Asian competition. Second, he cited an anticipated shortage in the supply of highly qualified labor, especially in the engineering field. Like their contemporaries in the United States and East Asia, young people in Germany are not studying engineering and science in sufficient numbers. But Germany is also laboring under the problem of not having a big enough population of high-skill workers and of having had, until recently, regulations restricting immigration of engineers and scientists. Third, he reiterated that the country’s technological performance is losing momentum in some areas. Finally, he noted that public financing for the national science infrastructure is shrinking relative to financing coming from the private sector. Nevertheless, Dr. Kuhlmann said, there were opportunities. The technological and marketing prowess of Germany’s automotive sector might allow it to turn the challenge it was facing to its benefit. Efforts were being made to build on the strong position that Germany, like other traditional EU members, enjoy in the growing markets of both Eastern Europe and East Asia. The country has an excellent science base in such advanced fields as biotechnology, chemicals, and nanotechnology. And its labor force remains highly qualified, at least in comparative terms. The Potential of European Integration Finally, Dr. Kuhlmann expressed his personal conviction that Europe’s integration, not in the political arena but in the area of research systems, could lend Germany’s national system huge potential. Possessed of the biggest research system in Europe, Germany has in the past tended toward both a domestic orientation and a degree of complacency. Increasingly, however, major research organizations and individual researchers alike are learning that they needed not only to collaborate on the European level, but also to reestablish themselves institutionally in a European context, if they wished to avoid overlap and to create new clusters of strength with worldwide visibility and potential. These developments were so recent that, he cautioned, some of the impressions he was conveying were still in the realm of speculation. While the single market offered significant opportunity, national governments, and particularly the German government, were yet to comprehend the existence of this potential and the difference between national and European. While this had been the source of some difficulties for those in charge, there was, he asserted, “no alternative to more collaboration and integration on this level.”

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Innovation Policies for the 21st Century: Report of a Symposium Identifying the immediate priorities for the German federal government, Dr. Kuhlmann said there is recognition of a need to improve linkages within the country’s fragmented research system, whose existing boundaries are rigid to the point that horizontal professional mobility was scarcely possible. Changes should, he recommended, be designed to take account of European integration as well. Meanwhile, work needed to reform the country’s university system with the goal of achieving international excellence has begun, although in his own opinion, progress has been slow compared to that observed in other countries, both within and outside Europe. THE TEKES EXPERIENCE AND NEW INITIATIVES Heikki Kotilainen Tekes, Finland Dr. Kotilainen expressed his appreciation for the opportunity to present Finland’s “small-country approach to innovation policy.” His presentation began with a very brief statistical overview, and continued with descriptions of Finland’s innovation system. He concluded with examples of the system’s achievements. Before embarking on it, however, he would acknowledge a handful of factors that could be seen as drivers of change and, at the same time, challenges to be met. Various phenomena surrounding globalization discussed earlier are having quite an impact on Finland, as many companies move manufacturing and other operations to such countries as China, Malaysia, and Indonesia. Finland is also undergoing a very serious demographic change of the kind affecting all of Europe, a problem for which solutions are not yet become apparent. Sustainable development is another challenge commonly faced in the industrialized world, as is the management of knowledge and competence; in the latter, Finland, as a small country with limited resources, has to exercise great prudence. Technology and networking are two drivers, or challenges, that Dr. Kotilainen viewed as one: When companies move, countries find themselves having to find new technologies to replace those that parted, while the companies, because they applied R&D independently of where it is performed, need to be on the lookout for technological and business alliances. Finally, he noted, change in the character and dynamics of innovation constitutes a challenge in itself. Dr. Kotilainen noted that Finland is placed near the top of the world rankings in science and technology, second only to the United States. How could a small country whose only true natural resource are its people accomplish this? What had happened, he said, was that Finland’s industrial structure changed tremendously over the previous four decades. The pulp-and-paper sector, which accounted for a little more than two-thirds of the country’s exports in the 1960s, saw its share fall to below one-quarter by 2004, while exports in the electronics sector, including telecommunications, had taken off.

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 10 R&D/GDP in Finland, 1981-2003. A major factor in this change, according to Dr. Kotilainen, has been “conscious and continuous investment” by Finland that has raised its R&D spending as a percentage of GDP from around 1.5 percent in 1985 to nearly 3.5 percent by the beginning of the current decade. Coinciding with this increase has been the evolution of Finnish policy in the realm of science and technology (Figure 10). Even though Finland’s science policies have been in place since the 1950s, technology policy formulation did not happen until the mid-1980s, following the establishment of Finland’s Science and Technology Policy Council. It was only after it began to implement technology policy that innovation policy appeared on the agenda. While Dr. Kotilainen attributed this progression to chance rather than to any special wisdom—and noted that, in fact, a similar evolution can be seen in other countries—he said that it had turned out to be a fortunate one. For innovation policy, had it made its appearance prematurely, might have been met by silence from the government and suffered a consequent loss of credibility. “You cannot,” he remarked, “jump from pure science to innovation immediately.” Dr. Kotilainen pointed out that private-sector spending has shown the most growth since 1985 and has accounted for some 70 percent of the current total investment, which has been running at around five billion euros annually. Even so, the public sector has been the prime mover: Only when the government began

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 15 Federal support for innovation: Examples. NOTE: Federal funding is labeled annual in some cases and in others covers the investment for the full period. (*)—Purchasing-Power Parity estimated at USD 0.85 per CDN dollar. (**)—Includes indirect costs of research and graduate student support. (IRAP). But before turning to describe them, Dr. Nicholson estimated that the R&D tax credit generates a benefit of $1.5 billion to Canadian corporations conducting research. In cases of companies that are not publicly traded, he specified, these credits are refundable, so that benefits are not available only to firms that are turning a profit. Posting a table containing data on his four selected programs (Figure 15), Dr. Nicholson noted that with the sole exception of IRAP, founded in 1962, they date from the previous decade. Still, all have enough experience that conclusions about their performance can be drawn. Pointing to the column that presents amounts of federal funding, he called attention to the fact that the Foundation for Innovation has invested the largest amount at $3.1 billion, and that the university research granting councils distribute just under $1.7 billion a year. Canada Foundation for Innovation (CFI): Building Leading-Edge Infrastructure CFI, the first of the four programs to be described, was set up to cofund leading-edge research infrastructure in universities and hospitals in response to a precipitous mid-1990s decline in the quality of research infrastructure in

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Innovation Policies for the 21st Century: Report of a Symposium Canadian universities—“another evil consequence,” in Dr. Nicholson’s words, “of the fiscal problem that the country was mired in.” This foundation, which is government endowed, receives a grant worth a total of $3.1 billion in two or three installments; of that, it commits $2.5 billion to fund 4,000 projects through competition-based awards that are limited to 40 percent of project costs. In addition, there are special funds to encourage first-time researchers—a part of the program that has proved to be “extremely popular and high-leverage.” There are also funds to help operate facilities, a “critically important” function because many advanced infrastructure components require highly technical operational assistance. Finally, funds are available to finance international collaboration. CFI’s board, although it includes some government appointees, operates at arm’s length from the government. The objectives of the Canada Foundation for Innovation are fourfold: to transform research and technology development in Canada; to foster strategic research planning in universities, which Dr. Nicholson called an “interesting objective” and said had been “brilliantly achieved”; to attract and retain world-class researchers, something that was taking place as well, as he would demonstrate with figures in a moment; and to promote collaboration and cross-disciplinarity, which he called “a huge success” of the program. “The bottom line,” he declared, “is that if you want to work at the leading edge, you need to have tools at the leading edge.” Fostering Strategic Research Planning CFI’s selection process begins with proposals that come almost exclusively from universities and research hospitals. These proposals are required to fit with an institution-wide strategic research plan at the applicant institution. Dr. Nicholson described the evaluation criteria as “fairly predictable”—research quality and need for infrastructure; contribution to innovation capacity building; and benefits to Canada. In a two-tier review, applications are grouped by subject matter and sent first to experts in their specific field, then to a multidisciplinary committee with the ability to make cross-area comparisons. This selection process has forced institutions to develop long-term research plans and set priorities, in some cases for the first time. Its most significant consequence, in Dr. Nicholson’s view, is that it has improved the quality of applications. Proposals worth $1.4 billion, a large percentage of them “absolutely top-drawer,” were presented in the latest selection round even though the funding available covered only one-quarter of that sum. Every round, in fact, has raised the bar, with projects becoming larger and more complex. “While you would have expected that, once the low-hanging fruit was picked, the program might

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Innovation Policies for the 21st Century: Report of a Symposium start running out of energy,” he commented, but “exactly the opposite has happened.” Collaboration among institutions has multiplied, research excellence has been stimulated at smaller universities as well as large, and most provinces have been led to establish similar programs at their own level. The latter are allowed to contribute to the 60 percent of complementary funding required by CFI, which has produced a “huge multiplier effect” within Canada’s innovation system and has started to “put Canadian research opportunities on the world map.” A Virtuous Circle: Collaboration and Upgrading CFI has “triggered a virtuous circle of collaboration and upgrading,” Dr. Nicholson said, asserting that “strength begets strength.” But, at the organizational level, he added there are three other lessons: CFI’s arm’s-length institutional structure and governance make its decisions credible to the point of being virtually unassailable, “not an easy thing to do in modern democratic systems.” The endowed-foundation model has enabled CTI to plan beyond annual budget cycles. “They know how much money they have,” he commented. “They always want more, but at least [they] know what [they’re] playing with.” The incentives are right, so that if the objectives of the foundation are met, further government funding is expected. Such funding is “not necessary, because this is an endowment,” he said, “but the board and the people who run this program understand what they have to do.” Still at issue, however, is the level of investment that is appropriate for CFI. “At what point do you stop?” he asked. “Or do you keep following this bootstrapping process to higher and higher levels?” Canada Research Chairs: Complementing Infrastructure with Talent A human-resource complement to CFI is the CRC, whose objective is to develop a cadre of world-class researchers to exploit the infrastructure built up under CFI. CRCs’ 2,000 chairs support all subject domains; 1,400 are filled to date. The potential number of chairs allocated to each university depends on the proportion of research grants it wins in other national competitions, although a bonus is reserved for smaller institutions. The CRCs are divided into two tiers. The first, for world leaders in their disciplines, is an award of seven years’ duration, renewable indefinitely, at $170,000 in support per year; winners in this category have access to numerous other kinds of support as well. The second, for “exceptional young faculty,” provides support for 5 years at $85,000 per year that was renewable just once, for another 5 years. Under the selection process, universities are expected to nominate candidates for

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Innovation Policies for the 21st Century: Report of a Symposium the CRCs in line with the same institution-wide strategic research plan to which CFI applications need to conform. Winners are selected by a three-person review panel or, in the absence of a consensus among panel members, by a standing interdisciplinary adjudication committee. The approval rate has been running at 85 to 90 percent of submissions, and acceptance by those approved has been around 95 percent. CRC’s outcomes have been extremely positive. At first, universities tended to nominate their best faculty in hopes of keeping them—although the program did not, as it turned out, inspire significant poaching among institutions. The focus has since shifted to recruitment, evidenced by the fact that, more recently, about 40 percent of chairs have been awarded to nominees from outside Canada. The relationship between the winning of research grants and the potential number of chairs has increased general interest in both; more specifically, the CRC program has significantly improved the research capacity of smaller universities. Together, CRC and CFI have “powerfully boosted Canada’s research capacity at the front end,” Dr. Nicholson stated. The only cloud over CRC’s success has been the underrepresentation of women, who hold only around 15 percent of chairs reserved for world leaders and 20 percent of chairs overall. “To some extent that may be a factor of age demographics still,” he speculated, adding, “It’s something the program managers are very concerned about.” Assistance to Industry: IRAP Moving from support for basic research to support for industry, Dr. Nicholson next described the IRAP, which he called “the classic one in Canada for small-business innovation.” Its funding, about $135 million a year, underwrites the activities of 260 Industrial Technology Advisors operating from 90 sites across the country who are available to all small businesses engaged in technology. About one-third of IRAP’s budget goes to consulting advice, which absorbs about 50 percent of these specialized advisors’ time; about two-thirds, 30 percent of which is subject to repayment, goes to project support. The scope of project support is quite broad, encompassing everything from feasibility studies and precompetitive R&D to international sourcing and youth hiring. Of 12,000 clients served annually through the program, only 20 to 25 percent receive funding; the average level of such support is $30,000 per year, the maximum $425,000. Still, those 3,000 projects have encouraged formation of a network of 1,800 subcontractors, among them suppliers, consultants, universities, even the National Research Council. Dr. Nicholson called project approval “very fast”—2 weeks for projects under $12,000, up to one month for those up to $85,000. While pronouncing himself cautious about accepting existing evaluations of multipliers for IRAP spending, he quoted estimates as high as $12 in downstream investment for every dollar of spending on IRAP help, and up to 20 to 1 in sales or an equivalent. “The main point here,” he said, “is that this is a real

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Innovation Policies for the 21st Century: Report of a Symposium body-contact sport: These are people all over the country engaged face-to-face with small businesses.” One lessons from IRAP is that cost recovery for technical advisory services is unlikely to work. “Companies will not pay for what they don’t know,” said Dr. Nicholson, relaying wisdom from the program’s director. Other noteworthy observations follow: The consulting industry values IRAP advisors as prescreeners and referral agents and, seeing its relationship with IRAP as symbiotic, has not complained about the program. The selection of sectors and topics of programs at this level needs to be client-driven. Proposals are better assessed as and when they are received rather than in request-for-proposal batches, as the former procedure fits with the firm’s innovation cycle and also avoids peak-load processing problems. More focus is needed on mid-sized SMEs, those with 100-500 employees. Increasingly, SMEs need to be connected with national and global innovation networks. TPC: Risk-Sharing and “Repayability” The purpose of Technology Partnerships Canada, which has functioned as the Defense Industry Productivity Program until 1996, is to risk-share industrial research and precompetitive development across a wide spectrum. Designed to address a “persistent and frustrating” gap in Canadian firms’ development of new technology, it covers from 25 to 30 percent of the costs involved in R&D, development of prototypes, and testing. In addition to significant cofinancing by industry, it features repayability, which depends on results. Targeting firms of all sizes and partnering with IRAP for SMEs, TPC parses its activities into three rather broad sectors: aerospace/defense, which, if considered separately, raise the number of focus sectors to four; environmental technologies; and “enabling” technologies, including biotech, materials, and ICT. Only the program’s budget, about $250 million per year on average, imposes a limit on the size of individual projects. From 1966 through 2004 about $2.3 billion has been committed, a little over one-third of that amount to SMEs—which, however, account for 90 percent of the 673 projects supported. Three-fifths of all funding goes to the aerospace and defense sector. Dr. Nicholson said that, according to “fairly careful calculations,” private-sector recipients have matched TPC investments at an average ratio of 4 to 1. Project selection, which at 12 to 18 months takes much longer than in the case of IRAP, begins with the screening of applications, usually taking the form of “skeleton outlines,” by in-house experts. Winners at that stage are invited to submit full proposals, which become

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Innovation Policies for the 21st Century: Report of a Symposium the object of detailed due diligence. Negotiation then follow, where repayability and intellectual property provisions are among the major items covered. Criticisms from Public and Participants Dr. Nicholson then identified a number of “conundrums” raised by TPC that he judged “fairly characteristic” of such programs. Chief among these, perhaps, are those centering on repayability. This feature has been “oversold a bit,” creating expectations among the public that have not been met. “Only about 3 percent of the funds out the door have actually come back so far,” he stated. “But the truth is that we knew there was a long lead time for the repayment to come back; and, in fact, the program managers claim that repayment is on schedule.” Compounding the issue, designing repayment terms that properly reflect the program’s risk/ reward-sharing component has been very difficult, since it was usually impossible to track what portion of a company’s returns has accrued exclusively to a project supported by TPC. The selection process has been another source of criticism. For one thing, project approval is protracted. For another, a perception exists in the political arena that TPC has been too focused on large companies—in particular, those in the aerospace sector—although the great majority of awards have in reality gone to SMEs. In addition, program objectives are so broad that it is difficult to maintain a consistent approach—or, put another way, there are so many grounds for approval that it is sometimes difficult to justify turning a project down. “That tends to invite a lot of objections from people who were disappointed,” Dr. Nicholson said, “because someone can always find a precedent and say, ‘But you approved that one, so what’s wrong with me?’” “What Does It Mean to Capture National Benefits?” As “probably the most fundamental question” arising from the TPC experience, however, Dr. Nicholson cited the following: “In a world of global supply chains, what does it really mean to capture national benefits with programs like this?” Observing that many of the program’s customers are multinationals—past TPC recipients include IBM, Pratt & Whitney, and RIM—he declared that it was “not quite clear that one can capture the benefits [for a national economy] to the extent that one once could.” Summing up, Dr. Nicholson expressed the opinion that Canada has rapidly built a strong basic research capacity that is paying off in terms of reputation and reversal of the country’s brain drain. Its technology-development programs have evolved from subsidy-oriented to more sophisticated risk-sharing models, recalling a similar evolution in Finland. Finally, the lesson of Canada’s experience, and one that he had seen reiterated throughout the morning’s talks, is that any national innovation strategy today has to be globally linked.

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Innovation Policies for the 21st Century: Report of a Symposium DISCUSSION Having commended the speakers for being on target in their presentations, and noting that he had taken over as moderator from Mr. Knox, Dr. Wessner called on Mark Myers to open the questioning. The Special Demands of German Integration Dr. Myers asked Dr. Kuhlmann to assess innovation programs in Germany since reunification from the time perspectives of the former East and West, as well as to look at economic growth in eastern Germany and to compare it with that seen in Poland, the Czech Republic, and Hungary. He expressed a specific interest in the equalization of salaries that took place right at the moment of unification in Germany, remarking that the other countries enjoyed, during at least part of their own restructuring, the “advantages of lower wages.” Dr. Kuhlmann replied that the question had been debated in Germany as well, but that historical circumstances had left no alternative. The East European countries, having become EU members, were gradually availing themselves of the opportunities offered by “a European research system that is growing together.” Salaries there had been relatively low 10 years ago but were slowly rising as those countries integrated with the European network. Thanks to this integration, he added, Eastern Europe can expect to develop advanced national research infrastructures in the longer term. Germany’s path had been different. Sudden integration caused a breakdown of the existing East German research system, which had not been compatible with that in the West. A marked brain drain resulted from salary discrepancies between the two regions: Especially early on, industrial researchers from eastern Germany found work with companies in western Germany and made their way there. Eastern Germany, meanwhile, was (and still is being) kept alive by huge public investments, without which there would be inadequate employment. Innovation Policy—Also on the Demand Side? Egils Milbergs of the Center for Accelerating Innovation, observing that most of the commentary from all three panelists had concerned enhancing innovation inputs—“more R&D, more scientists and engineers, more capital, etc.”—suggested that a full discussion of innovation policy should include the demand side as well as the supply side. He urged consideration of macroeconomic policy’s impact on innovation, specifically the role of interest rates; how tax policy affects the demand for innovation; standards; trade policy and how nations integrate with global markets; procurement policy; and competition policy. “It seems like there’s an entire domain with huge influence on innovation that people who talk about national innovation systems don’t really address in a meaningful way,” he

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Innovation Policies for the 21st Century: Report of a Symposium asserted. “They give recognition to these factors, but when you look at what the policies are, it’s all about enhancing input, not maximizing output.” Canada: Political Obstacles on the Demand Side Dr. Nicholson registered his agreement, saying that in his general policy role he probably spent more time on the demand side than on the supply side. But he allowed that, with the exception of tax cuts, the supply side is more visible politically because of the complexity of many demand-side issues, trade policy and competition policy being examples. Having spent most of his career in the private sector, he personally viewed competition as paramount: “Necessity is the mother of invention, there’s no question about that,” he said. “At the companies I’ve worked in, we were at our most inventive when the competition’s breath was at our heels.” This reality had been particularly salient as competition, once largely domestic, became global; finding a response to what was both a new source of demand and a challenge would occasion “a lot more head-scratching in all governments.” Against this backdrop, Canada has worked hard on its macroeconomic fundamentals, first getting control of monetary policy, then moving to fiscal policy. Amid massive tax cuts, its corporate tax rate is now down to below that of the United States. More recently, under a “smart regulations initiative” fueled by recommendations from a blue-ribbon panel for improvements in such areas as drug approval, the country has started to eliminate “the little differences that don’t make a difference” but nevertheless interfered with trade across the U.S.-Canada border. Another area ripe for streamlining—admittedly, “a very dangerous word”—is environmental regulation. But while ample “low-hanging fruit” in the regulatory area offer ways in which “government policy [could] be helpful on the demand side of the equation,” he said, “none is easy politically.” Germany: Trying To Go Beyond Classic Recipes Dr. Kuhlmann also pronounced himself in agreement with the statement that far more elements of public policy have an impact on innovation than those included within the “narrow notion of innovation policy.” As understanding of this area grew, European governments were more frequently becoming the object of criticism that their innovation programs did not take account of broader economic issues. Those formulating innovation policy, meanwhile, are finding themselves obliged to design their initiatives in the context of other policies whose impact on “what actually happens in companies” might be greater by far. Discussion of these questions is increasing in numerous European countries, Germany among them, although the debate is limited to experts rather than taking place among the general public.

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Innovation Policies for the 21st Century: Report of a Symposium Former Chancellor Schroeder’s Partnership for Innovation was an attempt at a systemic or holistic approach to influencing the basic conditions of innovation that went far beyond classical policy instruments. But, speaking from his experience with governments at different levels in Germany, Dr. Kuhlmann saw a problem in the prevalence of competition among agencies. Unlike some competition, this variety is not productive; rather, being rooted in claims by each agency that its work was more important than that of the others, it results in gridlock, “quite a mess from the perspective of innovating companies.” Some degree of coordination, including some effort at mutual information and collaborative design, is therefore necessary. In Finland, perhaps, designers of demand-oriented innovation policies ask “What is the problem, and what can we do about it?” rather than occupying themselves with the borders among ministries. Only at the end of the design process might they ask, “Who is in charge of what, and how would we have to redesign structures?” This sequence does not, however, represent the norm in public policy making in Germany. Cross-Border Comparisons of Attitudes, Programs Dr. Wessner then posed three questions that, although quick in the asking, he judged likely to demand lengthy responses. He requested that Dr. Nicholson, whom he complemented on a superb presentation, discuss how the Canadian government had dealt with what sounded like charges that some of its innovation programs were vehicles for corporate welfare that funneled the majority of available funding to large companies. Referring to the STEP Board’s assessment of the U.S. Small Business Innovation Research (SBIR) program, which was in progress, he described himself as having been heartened to hear that someone—in this case, Dr. Nicholson—shared his acquaintance with the difficulty of ascertaining the consequences of a single award for the future of a company. He then asked Dr. Kotilainen whether he regarded the budget of the United States’ Advanced Technology Program, which had been running at around $140 million per year, as adequate to the U.S. economy in light of the fact that Finland, a nation with 5.1 million inhabitants to the United States’ 300 million, was spending between $530 million and $560 million annually on a very similar program. Finally, Dr. Wessner said he had observed that while Europeans enthused over the creation of a European research space and innovation system, they often had barely concluded when they began speaking about their own national programs. He asked Dr. Kuhlman to talk about those two elements in relation to one another, then very briefly to discuss the impact of the EU programs, a subject Americans were very interested in, and to assess whether innovation efforts in Europe are primarily driven at the EU or national level.

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Innovation Policies for the 21st Century: Report of a Symposium Parrying the “Corporate Welfare” Charge Dr. Nicholson said that, as charges of corporate welfare are still to be heard, the problem that Dr. Wessner alluded to is yet to be solved. Because subsidies to business have been cut “pretty dramatically,” however, he felt that “just in terms of the gross dollars” the critics could no longer make as strong a case. Canada’s federal budget surpluses had also ameliorated the situation, by rendering the trade-offs less obvious. A more substantive change, the move to risk-sharing with repayability as featured in the Technology Partnerships Program, had placed a new obstacle before opponents of the programs, although they nonetheless took the line: “You haven’t gotten all your money back yet, so obviously this must still be corporate welfare.” Also helpful is that, increasingly, potential criticism is arising in the context of a local facility where a large number of jobs are at stake. Then, “frankly, the political shoe is sometimes on the other foot,” Dr. Nicholson said, for “if there isn’t a little bit of big-company support, there’s a larger price to pay.” Administering Supply-, Demand-Side Policies Separately Dr. Kotilainen began his response by taking up the issue of demand-side measures in support of innovation that Drs. Nicholson and Kuhlmann had previously addressed. At Tekes, he said, innovation policy is viewed as far broader than most other policies implemented by the government, including science policy, technology policy, and industrial policy. And because it incorporates elements of all the others, innovation policy is difficult and complex to run. “Therefore, we think we should concentrate on that,” he said, “leaving the other policies to the private sector or to other parts of the government to take care of.” Even though Tekes finances research, the main focus of its awards is always industrial competitiveness and networking, a strategy that leaves the rest to the companies themselves. Addressing the matter of the Advanced Technology Program (ATP), Dr. Kotilainen emphasized its philosophical similarity to Finland’s national innovation programs. Those programs have been extremely beneficial for the country because they combine the skills of its universities with those of its companies. Projects are planned jointly by the universities and industry from the very beginning, so that both know exactly what to expect from the research, and companies also got acquainted with university researchers, a very good basis for subsequent recruiting. This, he remarked, is an essential function no matter what the size of a country is. On the specific subject of ATP’s annual budget, Dr. Kotilainen recommended that, rather than being cut, it should be favored with the addition to the end of a zero or two.

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Innovation Policies for the 21st Century: Report of a Symposium Balancing Europeanization, National Programs Dr. Wessner, announcing that the luncheon speaker had arrived and that the session would thus have to be concluded quickly, asked Dr. Kuhlmann to be brief in his remarks on the relationship between Europeanization and those national programs still in place within the EU. Dr. Kuhlmann said he had speculated in a paper published just two weeks before on how “this very contradictory relationship,” so fraught with tension at that moment, might develop in the future.10 There were some government officials who are opening up to collaboration across borders; there is, in fact, a program called ERA-net that funds only those intergovernmental collaborations aimed at developing joint national programs on a European platform. At the same time, however, other officials still fail to see the value of such efforts, whose very existence, at least partially, call into question their role as national policy makers. 10 J. Edler and S. Kuhlmann, “Towards One System? The European Research Area Initiative,Edler and S. Kuhlmann, “Towards One System? The European Research Area Initiative, the Integration of Research Systems and the Changing Leeway of National Policies,” Technikfolgenabschätzung: Theorie und Praxis, 1(4):59-68. Accessed at <http://www.itas.fzk.de/tatup/051/edku05a.pdf>.