Innovation Policies for the 21st Century
The capacity to innovate and commercialize new goods and services remains vital to the future competitiveness of the United States and indeed all participants in the global economy. Reinforcing and sustaining this capacity is particularly salient as research, development, manufacturing, and the delivery of services, made possible by new information and communications technologies, become ever more global. The emergence of new participants in the global economy, focused on attracting and developing high-technology industries within their national economies, is increasingly significant. China, for example, combines the advantages of high-skill and low-wage knowledge workers with a strong sense of national purpose. Responding to these structural changes in the global economy, other advanced economies have already initiated major programs, often with substantial funding, that are designed to attract, nurture, and support innovation and high-technology industries within their national economies. In this new competitive paradigm, the United States cannot assume that its continued preeminence in science and technology is assured.
As the National Academies noted in its recent report, Rising Above the Gathering Storm, “this nation must prepare with great urgency to preserve its strategic and economic security. Because other nations have, and probably will continue to have the competitive advantage of low-wage structure, the United States must compete by optimizing its knowledge-based resources, particularly in science and technology, and by sustaining the most fertile environment for new and revitalized industries and the well-paying jobs they bring.”1
Responding to this challenge requires that we recognize that the nature and terms of economic competition are shifting as the United States cooperates and competes in a global economy.2 U.S. policy makers need to be aware of the wide variety of innovation and competitiveness policies that many nations have adopted. These policies are designed to build research capacities and to acquire knowledge, and then to transition that knowledge directly to companies and support their development. The power of such well-financed and integrated national programs to shift the terms of international competition is often underestimated. In addition, other national programs are more modest in scale, providing essentially market-based incentives to encourage the transition of new technologies to the market. Yet, they too can have a significant impact on the terms of competition. A comparative perspective is necessary to help us understand what policies are succeeding and why, how selected policies might be successfully adapted in the U.S. context, and what existing U.S. programs might be enhanced.
Above all, it is important to understand, as one recent report notes, that the pace of competition is accelerating.3 To better understand how competition is evolving, the National Academies’ Board on Science, Technology and Economic Policy (STEP) held a symposium on April 15, 2005, which drew together leading academics, policy analysts, and senior policy makers from around the globe to describe their national innovation programs and policies, outline their objectives, and highlight their achievements.
This introductory essay summarizes the key issues raised at this National Academies symposium on Innovation Policies for the 21st Century. Contemporary approaches to innovation policy draw explicitly and implicitly on the idea of an innovation ecosystem, and Section A introduces this concept and the role of intermediating institutions in delivering the fruits of research to the marketplace. Section B highlights new competitive challenges related to the emergence of China and India as major new participants in the global economy. Section C looks at innovation programs and policies adopted by several developed nations to innovate and commercialize knowledge in today’s global marketplace. Section D then reviews selected U.S. policies and programs designed to spur the commercialization of innovation. Finally, Section E draws together the need for a comparative perspective that draws on best practices in the United States and overseas.
“This symposium is about competitiveness: Some countries are tying to figure out how to get it, others how to keep it, and still others how to get it back. And it’s all about learning how to move fast and win in a brutally competitive global economy, such as we’ve never seen.”a Dr. Lewis Edelheit Senior Vice President of Corporate Research, General Electric, retired |
UNDERSTANDING THE INNOVATION ECOSYSTEM
How can we better capitalize on national investments in research? More specifically, how can we deliver the fruits of research through products and processes that both enhance welfare and generate wealth? And how do we generate the types of output from our universities and research centers that will help our regional economies grow and meet the challenges of the future? Beyond merely focusing on increasing inputs (such as more funds for basic research) on one hand or setting output targets and mandating results on the other, the innovation ecosystem approach examines the complex processes through which innovations emerge through a variety of collaborative activities to become commercially valuable products.4
Many of the speakers at the symposium drew on the idea of an innovation ecosystem. An innovation ecosystem is described below.
What Is an Innovation Ecosystem?
An innovation ecosystem captures the complex synergies among a variety of collective efforts involved in bringing innovation to market.5 These efforts
include those organized within as well as collaboratively across large and small businesses, universities, and research institutes and laboratories, as well as venture capital firms and financial markets.6 Innovation ecosystems themselves can vary in size, composition, and in their impact on other ecosystems. The strength of the linkages across a given innovation ecosystem can also vary.
Beyond this description, the term “innovation ecosystem” also captures an analytical approach that considers how public policies can improve innovation-led growth by strengthening links within the innovation ecosystem. Intermediating institutions (such as public-private partnerships) can play a key role in this regard by aligning the self-interest of venture capitalists, entrepreneurs and other participants within a complex innovation ecosystem with desired national objectives.7
The idea of an innovation ecosystem builds on the concept of a National Innovation System (NIS) popularized by Richard Nelson. According to Nelson, a NIS is “a set of institutions whose interactions determine the innovative performance … of national firms.”8 Too often, however, analysts and policy makers tend to see the innovation system as a static concept—a historical “given.” To some extent, this is true. Innovation systems, at least initially, are normally not consciously developed for the purpose of enhanced competitiveness; rather they evolve from a vast array of loosely related institutions and policies. By contrast, the idea of an ecosystem evokes our understanding of complex and dynamic interdependencies in the natural world. In biology, ecosystems refer to interdependencies among particular plant and animal communities and the nonliving physical environment that supports them.9 Taken together, the idea of a national
innovation “ecosystem” draws particular attention to the complex processes, interactions, and network relations taking place within a real economy.10
The idea of an innovation ecosystem thus highlights the multiple institutional variables that shape how research ideas can find their way to the marketplace. These include, most generally, rules that protect property (including intellectual property) and the regulations and incentives that structure capital, labor, and financial and consumer markets. A given innovation ecosystem is also shaped by shared social norms and value systems—especially those concerning attitudes towards failure, social mobility, and entrepreneurship.11 (See Box A.) Innovation ecosystems are also conditioned by interest rate and exchange rate structures found within modern economic systems. Importantly, innovation ecosystems can also be strengthened by developing new institutional mechanisms that create new patterns of interaction, market knowledge, and incentives that motivate new entrepreneurship.
Fostering Local Innovation Ecosystems
A national innovation ecosystem is made up of a network of local innovation ecosystems. In an economy as large and complex as that of the United States, these local innovation ecosystems are themselves often significant. In his luncheon address to symposium participants, John Marburger, the Science Advisor to the President drew on his own experience in creating a university-based research park as president of the State University of New York at Stony Brook to summarize five principles that he viewed as necessary for fostering vibrant local innovation ecosystems.
1. Build competencies with attention to regional strengths. This consideration, he noted, is important for a large country like the United States, whose markets display very strong regional differences but each of whose regions possess their own strengths and possibilities. Institutions cooperating in regional development must hire people whose interests enhance and complement what is already found in the environment, which “doesn’t happen unless somebody pays attention to it.” The idea is to build regional strength, not just institutional strength. When several research institutions are located in the same region, they
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The emerging NIS literature draws attention to the presence of interactions and flows among public and private sector organizations in initiating, modifying, and diffusing new technologies. See P. Patel and K. Pavitt, “National Innovation Systems: Why They are Important and How They Might be Compared?” Economic Change and Industrial Innovation, 1994. See also C. Endquist, ed., Systems of Innovation: Technologies, Institutions, and Organizations, London, UK: Pinter, 1997. |
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For a survey of attitudes towards entrepreneurship, see EOS Gallup Europe, Entrepreneurship, Flash Eurobarometer 146, January 2004. The survey shows, among other details, that Europeans have a greater fear of entrepreneurial failure—including loss of property and bankruptcy—than do Americans. Accessed at <http://ec.europa.eu/enterprise/enterprise_policy/survey/eurobarometer146_en.pdf>. |
BOX A National Attitudes and Support for Innovation and National Industries A significant transnational comparative issue that emerges from the conference concerns national attitudes or ideologies affecting innovation policies. In the case of innovation programs, for example, Finland’s Dr. Kotilainen characterizes government R&D funding, including payments to private industry, as “investment” rather than “expenditure.” In contrast, Canada’s Dr. Nicholson reports that the public discourse of innovation programs in his country emphasize “repayability” of government expenditures. As in the United States, critics in Canada often denounce government innovation programs as “corporate welfare,” charging that they interfere with the market and are too focused on large companies.a In the case of tax policies, China and Taiwan have created tax free (and even negative tax) environments for some high-technology sectors. As Thomas Howell points out in his analysis of China’s semiconductor industry, the magnetic effect of such policies have been considerable. In the United States, such treatment is often not politically feasible for profitable high-tech manufacturing, although state governments often make substantial tax concessions to attract and retain businesses.b From a U.S. perspective, the key point is that in many countries, the development of high-technology industry, with the growth in wages and jobs it entails, has the same broad political consensus that U.S. policy reserves for defense expenditure. |
benefit by cooperating in recruitment and group development. Stony Brook, Cold Spring Harbor Lab, and Brookhaven National Lab, for example, share information on an informal basis about areas of concentration and often collaborate on recruitment.
2. Identify a research strategy. Stony Brook’s conscious decision to make biomedical research a priority meant allocating university resources to proposals
and projects that work together to build a foundation for future successes—even if, “in terms of some sort of absolute measure of quality,” these were at times not the best proposals to come forward. While there were exceptions to this practice, a bias was maintained in favor of those fields that could be expected to help further the overall strategy. “That requires leadership,” Dr. Marburger declared. “It does not happen in a university environment unless someone is willing to push on it.” Faculty development and capital improvements were coordinated to enhance biotechnology capabilities. While other areas needed and deserved attention, the immediate opportunities for funding lay in the biosciences, which therefore received the focus.
3. Build a regional environment. In the early 1980s, Long Island business organizations were not aware of the rapidly growing opportunities in the biotechnology industry. They did not appreciate the significance of an emerging major tertiary health-care facility or the value of federal funding as a source of technology. The Long Island economy was then dominated by large aerospace contractors—principally, Grumman Corporation—that was to fall by the wayside as the cold war came to an end and industry shifted completely. “So it was important for me and my counterparts at the two laboratories to get together, pound the pavement, and talk to people—to take the biotechnology message to business groups, chambers of commerce, and state and local government agencies,” Dr. Marburger recalled. “The whole region had to cooperate in making this work, and somebody always has to take the first step to get others together.” Because Long Island’s business community was aware of the dangers of relying on a single industry, these efforts by the leading centers of research to work together with business were warmly received.
4. Form regional partnerships. Institutional rivalries are counterproductive; cooperation and collaboration are essential for regional-scale development; and regional-scale development is important for a stable pattern of growth. The fact that companies start up, grow, then frequently either die or move elsewhere is not necessarily the end of the world, but it does necessitate continual start-ups. Some of the new companies may survive and add permanently to the economy, some may have to be replaced with others that are sufficiently similar to stabilize the workforce. It is because regional partnerships enhance mobility and multiply opportunities for workers and for businesses that a critical mass of mutually compatible businesses is needed to stabilize the inevitable effect of startups’ moving away. “In Silicon Valley in its heyday, and it is presumably still somewhat like this, you had the phenomenon of frequent moves of technical personnel from one company to another,” Dr. Marburger observed. “There was a great deal of mobility—companies came and went, started and failed—and in general the makeup of the workforce was similar, which stabilized employment in the area despite the dynamics in the companies.”
5. Fund the machinery, which consists of facilities, people, and organizations. None of this happens without people who know that their job is to make it happen; neither regional development nor technology transfer can be made to work with volunteers. “I travel around the country looking for regions that are succeeding,” Marburger said, “and many are attempting to do it on a voluntary basis, but only those where there is some sort of executive center with a paid workforce [are having success].” In other words, whether at a state, county, or local government economic development office, or at an organization that is either freestanding or associated with a university or a business group, someone has to know that technology transfer is his or her job. Technology-related economic development usually entails investing state and local government funds in facilities so as to reduce costs for startup tenants, and people are needed to bring entrepreneurs together with financial and technical support. Nearly always, such people are more than brokers. They are teachers and counselors, too: for entrepreneurs, who know the technology but not business practices, and for investors, who are ignorant of the ways of engineers and scientists.
Concluding his address, Dr. Marburger acknowledged that while these lessons may not apply to every situation, the support for university-based research parks, and of research parks based around a nucleating asset other than a university, is growing, thriving, and becoming an important part of the U.S. innovation ecology.
Complementing Marburger’s perspective on developing successful local innovation ecosystems, other participants described policy efforts at the national level to develop national innovation potential and competitiveness. As participants learned at the conference, these efforts are being undertaken by reemerging powers such as China as well as established U.S. allies and competitors like Germany and Japan. We look next to how selected speakers at the symposium characterized these challenges.
THE RISE OF NEW COMPETITORS
In his opening address, Carl Dahlman of Georgetown University noted that, while the United States is the world’s preeminent economy, accounting for more than a quarter of the world’s gross domestic product today, “other nations are catching up fast.” Several developing countries in Asia are investing heavily in education and are building world-class science and technology infrastructures. Some nations are also acting decisively to attract and retain important high-technology industries within their borders, as seen in China.
The Challenge from China: National Policy with Purpose
In particular, Dahlman noted that the technology level and the scale of Chinese industry continue to grow at a very high rate, challenging strategic calculations of competitors around the world.12 China’s economy, he observed, grew at about 8 to 10 percent per year over the previous two decades.13 Its “gigantic” internal markets afford it a very important strategic advantage in negotiating externally, as evidenced by the fact that foreign investors have been willing “to bring in not the second or third rate technology, but the very best” for application to their operations in China.
China’s competitive advantages, according to Dahlman, include:
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A very high savings and investment rate (about 40 percent) compared with the rest of the world (about 20-plus percent);
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Skill in tapping into global knowledge both through direct foreign investment and the Chinese Diaspora;
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A critical mass in R&D that is increasingly deployed in a very focused effort to increase its competitiveness;14
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A large and growing manufacturing base combined with advanced export-trade logistics;
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Continuing strong investments in education and training, endowing China with the world’s third-largest scientific and technical work force focusing on R&D;
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A very large supply of excess labor in the agricultural sector (some 150 million-200 million people) that continue to keep down labor costs;
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A government with a very strong sense of national purpose, which “helps to coordinate things, although it creates some other kinds of problems.”
China, noted Carl Dahlman, has demonstrated the “importance of the nation-state” not only in implementing development plans and visions but also in providing a stable macroeconomic framework. He underlined what he called the “tremendous pragmatism” exhibited by the Chinese government in setting up needed
incentives within the Chinese innovation system: “Although it is supposed to be a communist system, they have stock incentive plans in the research institutes.” Similarly remarkable, he noted, is that one-third to one-half of the cost of higher education is paid by the students through tuition. While the Chinese have been focusing on technology and education for the previous two decades, the policies currently in development were more coordinated than those preceding them. “They are just really revving this up even more,” he commented.
China Grows a Semiconductor Industry
In his presentation, Thomas Howell illustrated how the focus and coordination of China’s innovation policies has resulted in the rapid development of a world-class semiconductor industry. Howell noted that China’s rise in semiconductors is all the more significant when one considers that much of that nation’s science infrastructure was destroyed during the decade of the Cultural Revolution (1966-1976). The previous command economy model ensured that Chinese technology remained 10 to 15 years behind the global state of the art, he added.
China introduced market reforms to its command economy in the early 1980s. However, around the beginning of its tenth Five-Year Plan in 2001 and concurrent with joining the World Trade Organization (WTO), China fundamentally reappraised its command economy and “essentially decided to jettison the whole system.” While retaining the economic nationalism that suffused all its earlier Five-Year Plans, China has largely abandoned the command method in favor of a system that uses incentives permitted under the WTO, including subsidies, tax measures, targeted government procurement, and the like.
Simultaneously taking place is a thorough decentralization, with most of the policies being implemented locally rather than at the national level; a fundamental redefinition of the industry-government relationship, with an emphasis on the independence of enterprises’ decision making; and liberalization of inward investment permitting foreign companies to establish fully owned subsidiaries. Tariffs were eliminated. And pressure to transfer technology eased, although that pressure has not ceased entirely.
These measures added up to a “paradigm shift” in which Chinese planners abandoned their own command system and embraced Taiwan’s state-directed market, said Howell. He displayed a table showing that virtually every current Chinese policy in the semiconductor field has a Taiwanese antecedent;15 indeed, many of them were implemented with the assistance of Taiwanese advisers.16 The
function of China’s central government in policy became “mostly hortatory,” he added, with the actual benefits and promotional measures implemented largely by the regional governments and local governments in line with the central government’s intentions (see Figure 1).
According to Howell, the Chinese also acted to effectively leverage their large internal market.17 Notably, China emphasized its market’s pull by applying in 2000 a differential value-added tax (VAT) that gave semiconductor devices manufactured in domestic fabrication plants a 14 percent cost advantage over imports into the Chinese market. Taiwanese companies, seeing that they might be shut out of China’s growing market unless they invested there, rushed across the Strait. Although the VAT measure was subsequently withdrawn, that investment that rushed over remained.18
As a result of these policies, the Chinese semiconductor industry has expanded faster than in any of the world’s major economies. Howell noted that it grew at a rate of 40 percent in 2004 and is expected to achieve a compound annual growth rate of over 20 percent for the period 2002-2008, compared to 7.3 percent for the United States and 13.8 percent for Taiwan. According to Howell, China’s semiconductor industry was valued in 2005 at about $24 billion19 and is expected to grow to something on the order of $65 billion by 2007.20
As the bulk of wafer-fab investment moves to China—and Howell projected that China will boast some 30 new fabrication plants in the ensuing 3 years compared to 6 in the United States—China is likely to attract more science and engineering graduates from around the world (many of Chinese descent) and develop into the world’s premier locus of semiconductor design and manufacturing. Given that semiconductors are the enabling technology of the modern information and communication age, this poses a major competitive as well as strategic challenge to the United States, he concluded.
Some Challenges Facing China
Although some believe the Chinese juggernaut to be unstoppable, Carl Dahlman outlined four key internal challenges to China’s continuing growth performance.
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China’s Closed Political System. Although China is moving more and more toward a market economy, it does not have a democratic political system. “At some point there is tension between people’s willingness to live in a more constrained system as opposed to a freer one,” Dahlman observed, saying it is not easy to predict how this issue will play out.
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Growing Economic Inequality. Inequality is growing in China among both people and regions, and it is becoming a serious concern.
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A Vulnerable Financial System. China’s many nonperforming loans may not be a problem if the economy continues to grow very fast, “but if it slows down, then the relative size of the non-performing loans is a big problem.”
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Natural Resource Constraints. On a per capita basis, China’s natural resources were quite thin. China is a highly energy-dependent nation, a problem it has been addressing by using its large foreign currency reserves to acquire access to raw materials around the world.
India’s Growing Potential
India has seen its annual growth rate rise from the 2 to 3 percent that was traditional prior to the past decade through the 5 to 6 percent level to around 8 percent. It is, in Carl Dahlman’s words, “poised to do a China,” held back only by its own internal constraints.21 Chief among these, he noted, is a surfeit of bureaucracy stifling a flair for entrepreneurship. Political wrangling over the rural-urban divide in this democracy has also stalled the development of much needed transportation facilities and other urban infrastructures needed to capitalize on current opportunities for growth.22 Still, India possesses major advantages, including a vibrant entrepreneurial class and a critical mass of capable, highly trained scientists and engineers, most notably in the chemical and software fields.23 The Indian Diaspora also maintains linkages back to the home market from overseas. These advantages, as well as the presence of a large English-speaking population, have already made India a major locus for outsourcing of business processes as well as an attractive place for multinational corporations to conduct R&D.
In fact, because of India’s tremendous cost advantage in human capital, foreign firms are increasingly locating large R&D facilities in India.24 In addition, Indian companies such as Wipro were beginning to do contract research in India on behalf of multinationals in pharmaceuticals as well as in information and communications technology. Dahlman added that India has relatively deep financial markets compared to other developing countries, and, under the pressure of China’s liberalization, is finally beginning to look not just internally but also outside. It is also seeking strategic alliances, aided by success in capitalizing on its own diasporas for access to information and markets.
Dahlman noted that one of the main lessons to be drawn from the Indian experience is the significance of the long term: The investments in high-level human capital that were now beginning to pay off for India were made as far back as Prime Minister Nehru’s time in the 1950s through the mid-1960s. The Indian Institutes of Technology and Indian Institutes of Management, world-class institutions that accepted only about 2 percent of applicants, have helped build
a “truly gigantic pool” of world-class talent.25 Galvanizing this skill pool could yield major competitive strengths. Harnessing the Indian Diaspora, so that the brain drain could be turned into a “brain gain,” could also play a major role in India’s development.
Key reforms needed for India to sustain its growth momentum, concluded Dahlman, include moving away from a very autarchic system to become a more integrated part of the global system, which will offer significant benefits from specialization and exchange and further reforming the legal and regulatory regimes, which continue to act as a brake on India’s growth.
NEW INNOVATION POLICY MODELS AMONG ESTABLISHED ECONOMIES
What are the implications for the United States? For the United States to remain competitive in the emerging competitive landscape, perhaps the main lesson is that it must pay attention. Important policy experiments are now underway in the advanced economies of Europe, Canada, and East Asia, and collectively they are shaping the conditions of international competition. These countries face challenges in innovation policy similar to those faced by the United States and, in some cases, share cultural attributes that might make elements of their innovation policies adaptable in the United States. While these models are not necessarily replicable in the American context, their descriptions at the conference did demonstrate the sustained, high-level policy attention that innovation policy receives abroad. Many of the programs have common objectives, and in some cases, common features. To capture the main features of these programs and their objectives, experts from Finland, Germany, Canada, Japan and Taiwan described their innovation programs and national policy initiatives. These are summarized below.
Finland’s Successful Innovation Model
Finland is an example of a small country whose commitment to innovation policy and R&D investment has enabled it to become a global leader in high technology. Finland’s Heikki Kotilainen26 began by identifying key structural challenges facing his country, including globalization and the movement of manufacturing to Asia, serious demographic changes, and the need for environmental sustainability in an economy that was traditionally reliant on forestry products. Finland has faced the need to be innovative to overcome these challenges, he noted, adding that responding to the rapidly changing dynamics of innovation in itself constituted a challenge.
During the post-cold war economic crisis of 1992, Finland made a collective national decision, partly as a result of real investments, investments in education, research, and new technologies. Finland has successfully transformed its industrial structure from one based predominantly on natural resources to a more diversified portfolio that includes significant investments in the electronics and telecommunications sectors. Today, Finland—a country of 5.2 million people—is ranked by a variety of measures as second only to the United States in science and technology.27 According to Heikki Kotilainen, this feat has been made possible through “conscious and continuous” investment and through the evolution of Finnish policy in the realm of science and technology.
Finland has increased its R&D spending as a percentage of GDP from 1.5 percent in 1985 to nearly 3.5 percent at the beginning of the current decade. While private sector spending has shown the most growth over this period, accounting for some 70 percent of current total investment, the public sector has been a prime mover. A key observation: Only when the government began to increase investments in R&D and related institutions did private investment follow.
This seriousness of purpose is reflected in Finland’s public organizations in the R&D domain. The Academy of Finland is charged with funding basic research while Tekes (Finland’s technology agency) is charged with funding applied research. Public sector R&D actors also include universities; VTT, a large multidisciplinary research institute; and a high level government council. The latter—called the Science and Technology Council—is a key element of the Finnish innovation policy system. This Council is chaired by the prime minister and includes key ministers; the directors-general of the Academy, Tekes, and VTT; as well as representatives of universities, industry, and unions. Together, they set out policy recommendations, revised every 3 years, based on reevaluations of Finland’s strategic challenges and opportunities. Based on this outline, lending organizations such as Tekes cooperate with its industry and university partners to develop operational plans.
Reflecting national perceptions of the need for innovation and its effectiveness, Tekes itself has enjoyed a steadily rising budget, reaching approximately 430 million euros in 2005. Research funding in the form of grants and company funding in the form of both grants and loans are distributed through a variety of instruments. While he acknowledged these instruments themselves are not unique to Finland, Kotilainen added that Tekes’ strength lay in its emphasis on implementation. This results-oriented approach places importance on cooperative networks between companies and universities so as to integrate technology
transfer into the process. Industry leadership and cost sharing, he added, are key elements to Tekes’ success. A major cultural advantage is the high degree of trust, and the resulting low administrative overhead, required to make selections and process funding.
The impact of Finland’s innovation institutions has been impressive, generating a remarkably sharp increase in Finland’s high-technology exports—from below 5 percent in 1988 to over 20 percent in 1998. Reflecting the results-oriented perspective, Kotilainen reported that coinciding with Tekes’ investment of 409 million euros in 2004, 770 new products reached the market and 190 manufacturing processes were introduced and that 720 patent applications, 2,500 publications, and 1,000 academic degrees were funded—reflecting, perhaps, that some Tekes awards may well be closer to the market than others. In addition, he noted that the receipt of Tekes funding has often caused project goals to be reset higher, and has caused project implementation to be speeded up in many cases. Finally, he noted that Tekes plays a major role in helping entrepreneurs surmount risk barriers: A study by Finland’s National Audit Office in 2000 found that 57 percent of projects would not have been undertaken without the support provided by Tekes.
Germany: New Innovation Policies in a Federal Context
Despite its low growth rates, Germany remains an economic powerhouse, and a leading world exporter. At the same time, there are emerging vulnerabilities, including a high degree of dependence on its automotive cluster and an anticipated shortage in the supply of highly qualified labor. Still, Stefan Kuhlmann of the Fraunhofer Institute argued that Germany continues to be highly “innovation oriented.” Germany’s gross R&D expenditures are about 55 billion euros, or around 2.5 percent of GDP, with companies accounting for two-thirds of this expenditure. He added that Germany’s 14.9 percent of the world market for R&D intensive goods placed it second to the United States and that it is in the European Union’s top three in share of manufacturing sales attributed to new products. With 127 patent applications per inhabitant, Germany is the second highest among large countries, and ranked third among all nations in international publications, with 9 percent of the total.
Germany’s innovation system is complex, with major decision making at the federal, Länder, and regional levels, involving much overlap of programmatic responsibilities. At the national level, both the Federal Ministry of Economics and Labor (BMWA) and the Federal Ministry of Research and Education (BMBF) fund a broad variety of technology and innovation programs—so broad, observed Stephan Kuhlman, as to be difficult to track sometimes. The Länder are responsible for funding and operating the nation’s universities, but are increasingly going beyond this traditional role to set up programs designed to spur cooperative R&D, encourage partnering, develop incubators and science and technology
parks, and furnish venture capital and loan guarantees. An additional source of R&D initiative and funding are the European Union programs although they are not as significant for Germany as for the smaller nations in Europe. Nonetheless, Kuhlmann observed that EU funding has contributed to R&D in the information and communications sector in Germany.
To take two concrete examples, Kuhlman reviewed BMWA’s Pro Inno and BMBF’s Inno Regio programs in more detail. Pro Inno has been in operation for more than 10 years and has invested 630 million euros between 1999 and 2003 with the goal of increasing R&D capability and SME (small- and medium-sized enterprises) competence. Subsidies under Pro Inno range 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, 4,870 firms and 240 research organizations have participated with 4,000 R&D employees per year engaged in Pro Inno projects. A 2002 evaluation showed that nearly three-fourths of participating firms would not have conducted R&D in the absence of this program.
The Inno Regio program is designed to strengthen the endogenous innovation potential of weak regions in eastern Germany by setting up sustainable innovation networks. The program encompasses not only SMEs, large companies, and research organizations, but also may other public and private activities and initiatives, funding both network management projects and projects aimed at developing products and services. The program is run as a three-stage competition—a qualification round (444 initiatives selected in 1999), a development round 25 out of 444), and a realization round where winners (23 of 25) receive multiyear financial support for their initiatives. An increase in innovation activities was observed under Inno Regio—two-fifths of the firms selected received patents and almost all introduced new products and, since 2000, 50 new firms have been founded. In Kuhlman’s judgment, the program’s main success is the creation of innovation networks across eastern Germany that brings together both public and private actors.
Finally, Kuhlman noted that Germany is trying to introduce more coordination and collaboration across agencies responsible for innovation policies. A “Partnership for Innovation” has been launched recently with the aim of improving the framework for innovation through the collaboration of public and private actors. A key initiative under this program has been a “High-tech Master Plan” to ease access to venture capital through the launch in early 2005 of a 10 million euro fund for start-ups.
Overall, Germany continues to launch new initiatives at the national level, but still suffers from limited resources per program, limited access to early stage finance and, above all, structural obstacles such as labor regulations that complicate the efforts of German entrepreneurs.
Canada: Strengthening Incentives to Attract Research Talent
Canada is a particularly interesting case in that it shares many social values with the United States. Many sectors of the Canadian economy are also highly integrated with those of the United States. At the same time, Canada has launched a wide variety of institutional and funding initiatives to encourage greater innovation, with positive results. Peter Nicholson of the Office of the Prime Minister noted that Canada’s investments in a strong basic research capability are now paying dividends. Canada, with a population of roughly 32 million, spends around 19 billion U.S. dollars annually on R&D. Business expense on R&D account for about 55 percent of the country’s total, government intramural expenditure on R&D is around 12 percent, with the remainder 33 percent of R&D spending coming from higher education. Given that Canada’s innovation system is highly integrated with that of the United States, Canada’s innovation programs have focused on building domestic capacity, largely by creating incentives to retain and attract scientific and research talent. These policies, described below, are now bearing fruit.
Traditionally, Canada’s economy has been resource based, with much of its technical dynamism arising from its unique level of integration with the United States. “If we wanted to have something that was home-grown and that could give a degree of independence,” he explained, “we [would have] had to build our innovation capacity from the ground up.” The effort to build this foundation has been gained strength thanks to Canada’s successful fiscal consolidation. With the federal budget in surplus since 1997, a “paradigm shift” in the federal government’s support for higher education has taken place.
At the federal level, there are now four major innovation programs in place: (1) the Canada Research Chairs (CRCs), (2) the Canada Foundation for Innovation, (3) Technology Partnerships Canada, and the (4) Industrial Research Assistance Program (IRAP). With the exception of IRAP, these programs all started life in the 1990s.
Research Chairs. The objectives of the Canada Research Chairs (CRCs) were to attract and develop world-class researchers. The CRCs, which are awarded to a variety of disciplines (from Agriculture Engineering to the Visual Arts) are divided into two tiers.28 The first is reserved for world leaders in their disciplines and provides an award of 7 year’s duration, renewable indefinitely at $170,000 per year. These awards serve to sustain and attract world-class researchers to Canada. The second tier is to support “exceptional young faculty.” It is renewable once and provides for $85,000 per year for 5 years. The program is successful,
28 |
Additional information about the Canada Research Chairs can be accessed at <http://www.chairs.gc.ca/web/about/index_e.asp>. |
Nicholson noted, moving from retaining faculty to recruiting well-qualified nominees from outside Canada. Over 1600 CRCs have been filled to date.29
Infrastructure. The Canada Foundation for Innovation is designed to set up and cofund leading-edge research infrastructure in universities and hospitals. The foundation has been endowed with a $3.1 billion grant from the federal government and has committed $2.5 billion in funding for 4,000 projects through competition based awards. The program’s yearly budget is approximately $250 million. Like the CRCs, the Foundation’s purpose is to attract and retain world-class researchers, promote collaboration and cross-disciplinary research, and foster strategic research planning, with the objective of transforming research and technology development in Canada.
Risk Share. The purpose of Technology Partnerships Canada is to risk-share industrial research and precompetitive development across a wide spectrum. Designed to address what Nicholson called a “persistent and frustrating” gap in Canadian firms’ development of new technology, it covered 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 featured cost recovery based on results. Targeting firms of all sizes, Technology Partnerships Canada focused its activities in aerospace and defense, environmental technologies, and enabling technologies including biotechnology and materials engineering.
Advising Services. The final technology program that Nicholson introduced is the Industrial Research Assistance Program, or IRAP. Funded at US$135 million a year, IRAP provides a range of both technical and business oriented advisory services and in some cases financial support to growth-oriented Canadian small and medium-sized enterprises. The program is delivered by an extensive integrated network of 260 professionals in 100 communities across the country. Working directly with these clients, NRC-IRAP is designed to support innovative research and development and commercialization of new products and services. The program is competitive, with only 20 to 25 percent of 12,000 applicants, receiving funding—with the average award at $30,000 per year with a maximum of $425,000 a year. Even so, Nicholson stated, the 3,000 or so funded projects have encouraged cooperation among subcontractors, suppliers, consultants, universities, and the Canadian National Research Council. Together, these programs
represent a comprehensive, yet market-oriented approach to strengthening related elements of the Canadian innovation system.
Japan: Restructuring for Resurgence
Despite its difficulties in the decade of the 1990s, Japan remains one of the world’s premier technology powerhouses. As David Kahaner pointed out, Japan faces severe challenges, including a languid economy, an aging population, and stiff low-wage competition from China and other East Asian nations. Like Finland, Japan recognized the importance of institutional reform, leading to a variety of reforms aimed at reviving Japan’s technological and commercial leadership. A major initiative in this respect, noted by Kahaner and Hideo Shindo of Japan’s New Energy and Industrial Technology Development Organization (NEDO), is the S&T Basic Law of 1995, which provides a framework to improve economic development, social welfare, and environmental sustainability.30
A major outgrowth of this legislation is the founding in 2001 of Japan’s Council for Science and Technology Policy (CSTP). The council is chaired by the Prime Minister and includes six cabinet ministers, five academics, and two industry representatives. The council is charged with developing a “grand design” for Japanese S&T policy. One of the CSTP’s most important duties is drafting the country’s 5-year S&T Basic Plan, which sets guidelines for the comprehensive and systematic implementation of Japan’s overall S&T promotion policy. The goal of the first Basic Plan, which went into effect in 1996 and thus predated CSTP’s creation, was to double government spending on R&D. The second Basic Plan, whose budget was set at $212 billion, is part of an effort to double the amount available for competitive funding.
Also in 2001, Japanese ministries were reorganized to streamline R&D funding and policy support. The administrative reforms include:
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The former Education Ministry and Science & Technology Agency were merged into the new Ministry of Education, Science, Culture, Sports, and Science & Technology (MEXT).
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A Ministry of Public Management, Home Affairs, Posts and Telecommunications—whose name was changed in 2004 to Ministry of Internal Affairs and Communications (MIC)—has arisen from the combination of the previous Management & Coordination Agency, Home Affairs Ministry, and Ministry of Posts & Telecommunications.
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The Ministry of International Trade & Industry (MITI) has been reborn as the Ministry of Economy, Trade & Industry (METI).
30 |
Access Japan’s S&T Basic Law of 1995 at <http://www.mext.go.jp/english/kagaku/scienc04.htm>. |
Mr. Shindo also noted that Japan has in addition adopted new industrial policies to complement the organizational reforms set out in the Basic Science and Technology Plan. He cited the Nakagawa Report, published in 2004, which identified steps needed to establish and accelerate “the virtuous cycle of demand and innovation in order to bring about Japan’s economic recovery and to create its future industrial structure.” To this end, the Nakagawa Report draws together what Mr. Shindo described as a “very comprehensive” list of concrete policy priorities, including the identification of promising industrial areas (such as fuel cells and digital consumer electronics) and the development of policies for regional revitalization. The Nakagawa Report also considers cross-cutting policy issues such as the development of human resources (including continuing education for mature workers), intellectual property rights, research and development, standardization, and policies to encourage the development of new businesses by small- and medium-sized enterprises. Within a year of publication of the Nakagawa Report, Mr. Sindo said, NEDO with METI and the National Institute for Industrial Science and Technology (AIST) has developed a Technology Strategy Map to implement these plans.
Reflecting this increased commitment, Japan’s total 2005 S&T budget rose to $36 billion, reflecting an increase of 2.6 percent over the previous year. Of that about $13 billion was for research expenses including researcher salaries, with the remainder financing infrastructure. Japan’s R&D budget focuses on four key areas—nanotechnology and materials, information technology, life sciences, and the environment, with aerospace technology to be added as a fifth area. These investments are significant, reflecting Japanese goals of creating one thousand biotech companies and developing leadership in nanotechnology. Japan spends almost as much as the United States on an absolute basis on nanotechnology. Other areas of research focus include fuel cells, robotics, and computing research. (See Figure 2.)
Universities are a key element in current Japanese policy reforms. According to Kahaner, Japanese policy is seeking a larger role for university research, including collaboration among industry, academia, and government. In a major step designed to foster more technology transfer from universities, national universities have been converted over the past few years into independent administrative agencies. While still funded by the government, these agencies now have more autonomy and flexibility. For example, universities can now seek private funds and cooperate with industry. Laws have been enacted that allow Japanese professors to “become millionaires if they’re good enough and have good enough ideas.”31 Over the past 5 years, many Japanese universities have established technology transfer offices, with technology management receiving unprecedented attention at Japanese universities. Japanese policy is also encouraging the forma-
tion of regional clusters around universities, while efforts are underway to raise at least 30 Japanese universities to the highest standards.
Taiwan’s Transformation to a Knowledge-Intensive Economy
Taiwan’s success reflects the power of state-led, market-oriented innovation policy. These policies have brought about a series of remarkable changes that has seen Taiwan grow from an agrarian economy with per capita GDP of $145 in 1951 to a modern industrial economy with GDP at $13,529 by 2004.32 Notwithstanding this success, Taiwan now faces new challenges in the global economy. Executive Vice President of Taiwan’s Industrial Technology Research Institute (IRTI), Hsin-Sen Chu, noted that Taiwan is in the process of transforming itself from a technology-intensive economy to a knowledge-intensive economy of the future.
While remaining market-oriented, government policies have, nonetheless, been instrumental in shaping Taiwan’s industrial evolution. Policies enhancing Taiwan’s industrial development include the founding of the Industrial Technol-
ogy Research Institute (ITRI) in 1973, the establishment of the Hsinchu Science Park in 1980, and the Southern Taiwan Science Park in the 1990s. These initiatives have been supported by major investments in basic infrastructure development through ten large-scale public construction projects.
Describing ITRI’s role in Taiwan’s innovation system, Chu noted that ITRI’s mission has been to engage in applied research and supply technical services to accelerate the industrial development of Taiwan. Specifically, ITRI develops key, compatible, forward-looking technologies to meet industrial needs and helps to strengthen Taiwan’s industrial competitiveness. ITRI has 13 research units covering research in information and communications technology, advanced manufacturing and systems, biomedical technology, nanotechnology, materials and chemicals and energy and the environment. ITRI’s role as a hub linking science parks, universities, and companies in Taiwan’s north, central, and southern zones helps to link different parts of Taiwan’s innovation ecosystem.
In 2004, ITRI employed 6,540 people, of whom 14 percent held doctorates. Of ITRI’s $579 million budget in 2004, 52 percent came from the government, of which ITRI devoted about a quarter to the development of high-risk technologies. Another 40 percent of ITRI’s revenue came from technology transfer to industry, with the remainder derived from its intellectual property. Describing ITRI’s impact, Hsin-Sen Chu noted that, over 30 years, ITRI has helped guide Taiwan’s transformation into the world’s fourth-largest producer of IT hardware. In addition, he noted that Taiwanese firms now make up 73 percent of China’s IT production.
Keeping in mind the competitive advantages of the mainland, Chu said that the Taiwanese policy makers see future opportunities in high-value manufacturing, novel applications and products, and knowledge-based service industries. To enhance the potential of Taiwan’s national innovation system in this new era, the government is not only pursuing the creation of basic infrastructure and enhanced technological competency of Taiwanese firms, it is also promoting the development of a business environment that will promote stronger partnerships among industry, academic organizations, and industrial firms. An effective transition to capture the opportunities of the 21st century requires an adjustment of mindset, he added, and he further observed that there was an effort to move from optimization to exploration, from ordering work by single discipline to multidisciplinary integration, from conducting research in-house to collaboration and partnership, and from developing components to developing system solutions.
COMMERCIALIZING INNOVATIVE TECHNOLOGY IN THE UNITED STATES
In comparison to the preceding tour de la table of foreign initiatives, what role do innovation programs play in the United States? Notwithstanding the frequent U.S. rhetoric concerning the primacy of idealized markets, national policies in the
BOX B Key Examples of U.S. Public-Private Partnershipsa 1798—U.S. grant for production of muskets with interchangeable parts, to Eli Whitney, who founds first machine-tool industry 1842—Samuel Morse receives an award to demonstrate feasibility of telegraph 1919—RCA is founded on the initiative of U.S. Navy with commercial and military rationale 1969-1990s—U.S. investment in forerunners of the Internet Present—U.S. investments in genomic/biomedical research |
United States have long helped to foster American innovation—often decisively.33 And recent public-private partnerships have been widely credited with reviving the U.S. semiconductor industry and the U.S. supercomputer industry.34
Indeed, such public-private partnerships have long played instrumental roles in developing new, game-changing industrial processes, products and services. (See Box B.) As Vernon Ruttan has observed, “Government has played an important role in the technology development and transfer in almost every U.S. industry that has become competitive on a global scale.”35
A Comeback in Supercomputing
As a recent example of a U.S. public-private partnership, Kenneth Flamm of the University of Texas described the role of the superconducting partnership in reclaiming U.S. leadership in this strategic technology. Flamm began his narrative
from the mid-1960s to the late 1970s, when the entire supercomputer industry basically resided in two American firms: Control Data and Cray. The Japanese, he said, entered the computer market only in the mid-1980s, initially producing IBM compatibles. However, a focused innovation policy initiated with the Fifth Generation Computer Project and the Super-speed Computer Project, helped Japanese producers to rapidly make significant inroads into the high-performance mainframe computer market.
Recognizing that superiority in information technology systems was essential to a qualitative advantage in defense systems, the Defense Advanced Research Projects Agency (DARPA) launched its Strategic Computing Initiative in the 1980s.36 Although DARPA managers originally focused on custom components to build new computer architectures, they gradually switched their emphasis to methods of lashing together relatively inexpensive commodity processors into massively parallel systems. This effectively shifted the “terms of the battlefield” rather than meet directly the threat from “very, very well done” high-performance processors from Japan.
The result has been the renewed ascendancy of the U.S. supercomputer industry. The U.S. industry share of the top 500 machines sold has grown steadily while the Japanese share has been shrinking. This positive picture differed little, Flamm added, if looked at from the point of view of total computing capability. Furthermore, U.S. market share has been increasing not only worldwide, but in each individual region of the globe in terms of sales as well as computing capability.
Citing a finding of a recent National Academies study, Flamm noted that the government-industry partnership formed to develop alternative methodologies for designing and building supercomputers successfully transformed the nature of the supercomputer market over the past 10 years.37 The policy implemented in the 1990s proved to be a huge success, even though the eventual outcome did not match the original plan. In closing, Flamm held up the resurgence of the U.S. supercomputing industry as “an example of a government-industry partnership in technology development that has yielded unforeseen but impressive results as an industrial outcome for the United States.”
Early-Stage Funding and the Advanced Technology Program
Public-private partnerships can also represent a pragmatic institutional response to market failures in early-stage finance.38 Although U.S. capital markets are relatively broad and deep, private investors often find the risk levels associated with investments in innovations that are still in their early stages to be too high and are therefore (understandably) reluctant to invest in unproven innovations. Even when private investors see manageable risk, they may not see ways to capture returns from their investment due to technology “leakage” or “spillovers” to other firms.
The Advanced Technology Program (ATP) is designed to address this challenge. As NIST’s Marc Stanley noted at the symposium, of the roughly $20 billion in venture capital investments in 2004, only $375 million was available for the initial seed rounds. This is because most private equity investors prefer to invest in less risky later rounds of investment. These investments also tend to concentrate in a limited number of geographical regions.39 This gap in investment at the seed and early stages is often called the “Valley of Death.”40 (See Figure 3.)
The mission of the ATP is to help bridge this valley between the research laboratory and the marketplace. To do so, ATP provides highly competitive awards, largely (about 70 percent) to small companies and to joint ventures designed to accelerate the development and dissemination of high-risk technologies with potential for broad-based economic benefits to the U.S. economy. (See Box C for a comparison of the ATP with Finland’s Tekes Program.) ATP funding is not a “fire and forget” program. The awards to larger firms must be matched on a cost-share basis. They are closely monitored and can only be directed to technical research and not product development.
The program is entirely industry-driven. Companies, whether singly or jointly, conceive, propose, and execute all projects, often in collaboration with universities and federal laboratories. ATP support for project costs is limited in time and amount. Based on a rigorous merit-based competitive evaluation that
admits less than 15 percent of applicants, single company awardees can receive up to $2 million for R&D activities, joint ventures considerably more.41
Stanley noted that ATP’s selection process, monitoring, and follow-up on projects have been recognized by the National Academy of Sciences as being exceptional, adding that the program has demonstrated both the ability and the willingness to identify unsuccessful projects and, if necessary, end them. “You have to terminate companies that are not successfully doing what they say,” he commented. “And then you should be able to speak not only of your successes but of your failures, because there are lessons to be learned from both.” Based on a sample of 41 of the 736 projects it has funded, ATP analysis has calculated net societal benefits of $17 billion—representing a partial return on the $2.2 billion investment by the federal government over the life of the program.
Improving Technology Transfer from the National Laboratories
This policy ambivalence has affected the returns from U.S. laboratories as well. While the United States makes significant investments in its national labo-
BOX C Comparing the U.S. ATP Program with Finland’s Tekes Program Several speakers at the conference compared the relative sizes of the United States Advanced Technology Program with Finland’s similar Tekes program. ATP’s impact at the cutting edge of new technologies is based on a relatively small annual budget. In 2005, the budget for ATP was $140 million, in the context of a $12 trillion economy and a population of 300 million. By comparison, Finland’s Kotilainen noted that Tekes—a program that is similar to ATP—is financed at an annual level of around $550 million, supporting the innovation system of a nation of five million. This relatively high level of expenditure reflects the strong consensus present in Finland regarding the need to support the technological enhancement of existing industries and to support the growth of promising new high-tech industries. Tekes awards for R&D effectively encourage partnerships between university researchers and small and large companies. Like the ATP, Tekes maintains a careful evaluation program that has recorded numerous success stories, with its early support for the research that contributed to the transformation of Nokia being perhaps the most notable example. The scale and scope of Tekes activity underscore the Finnish Government’s and society’s commitment to supporting the development and adoption of new technologies, particularly those subject to first mover advantage in order to capture the benefits of these innovations for the national economy. In recent years, U.S. policy makers have been much more ambivalent about the appropriate role of government contributions to the development of new technologies, even as government supported technologies have transformed the economy.a Support for the Advanced Technology Program has been uneven and subject to the vicissitudes of the political process despite a positive assessment by the National Academies. It appears slated for elimination perhaps reflecting in part longstanding U.S. ambivalence about the appropriate role for government in encouraging innovation, as distinct from basic research.b
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BOX D Spurring Technology Transfer from the National Laboratories Pace VanDevender pointed out that the Department of Energy’s (DoE) involvement in commercializing innovation began in 1980 with the Stevenson-Wydler Act, which established technology transfer as a mission for the federal laboratories, with a focus on disseminating non-classified information. This was followed by a series of acts that attempted to spur commercialization, beginning with the 1984 Trademark Clarification Act, which gave the contractors that operated the laboratories licensing and royalty authority for the first time as an incentive to commercialize innovative ideas that were born in the laboratories. The 1986 Technology Transfer Act then extended this responsibility to laboratory employees. Next, the National Competitiveness Technology Transfer Act of 1989 extended the technology transfer mission to the DoE’s weapons laboratories. It also allowed the contractors that ran the laboratories to enter into cooperative research and development agreements (CRADA) so that they could enter partnerships with industry in cofunding further R&D. This was followed by the 1989 NIST Authorization Act, which recognized intellectual property other than inventions that have been developed by CRADA, clarifying a legal uncertainty. Then, in 1995, the National Technology Transfer Act guaranteed to industry the ability to negotiate for rights to CRADA inventions and increased the royalty distribution that were placed on laboratory inventions, thereby increasing the motivation to invent. |
ratories, the record of successful technology transfer to commercial applications has been relatively limited, according to Pace VanDevender of Sandia National Laboratories.42 This modest outcome comes despite a long series of legislative experiments that have repeatedly sought to create the incentives needed to spur technology transfer from the national laboratories. (See Box D.)
How well have these technology transfer policies worked? According to Pace VanDevender, DoE transfer activities in 2004 included “some respectable numbers.” (See Figure 4.) At the same time, he acknowledged that a single laboratory was responsible for approximately half of the 10,000 technology transfer initiatives that took place during that year; on a lab-to-lab basis, therefore, technology transfer activity has been “fairly modest.” (He did not elaborate, however, on the reasons why this particular laboratory was relatively successful.)
Also of concern, he noted, was a significant drop-off in CRADA activity after a rapid increase from 1992 to 1996, when federal matching funds were no longer available. Similarly, the growth of invention disclosures similarly hit a plateau in the late 1990s. Meanwhile the growth of patent applications and patents granted remained modest. (See Figure 5).43
Success at Sandia Science and Technology Park
In contrast to the CRADA, patent applications, and other tech-transfer vehicles whose growth has recently flattened, VanDevender noted that science and technology parks are emerging as a new thrust for the Department of Energy’s technology-transfer efforts. The Sandia National Laboratories Science and Technology Park by its seventh year drew $167 million in investment (of which $146.6 million was private) and is still growing.44 A campus-style 200-acre installation,
Sandia Park by the spring of 2005 housed 19 organizations with 1,098 employees that occupied almost 500,000 square feet. Sandia and the park tenants enjoy a symbiotic relationship. Sandia National Laboratories provides redundant power and state-of-the-art connectivity to the park tenants and helps to accelerate city approval processes. Tenants in turn paid in $17 million to Sandia while acquiring contracts from the laboratory worth $85.6 million as of spring 2005. “The government, Sandia, and industry therefore benefit both ways” observed VanDevender.
Comparing DoE and ITRI Technology Transfer Models
Contrasting Taiwan’s ITRI and DoE’s technology transfer models,VanDevender said that ITRI was based on a single-purpose mission of technology development and commercialization with relationships, while the main mission of the DoE labs was “national security broadly writ.” For ITRI, therefore, technology transfer was a dedicated mission, whereas for DoE it was a supplementary mission, not one central to the management’s intent. The DoE labs received about ten times as much annual funding as ITRI, or $6 billion versus $600 million. But industrial contributions accounted for only about $60 million of the DoE labs’ funding, or 1 percent, while around $200 million, or one-third, of ITRI’s funding came from industry.
The DoE labs produced around 600 patents per year, half as many as ITRI’s 1,200; this translated to 0.1 patent per $1 million for DoE against two patents per $1 million for ITRI, a yawning gap in the rate at which commercially valuable property transferred. But the gap in patents per industry dollar was far narrower, and the figure for the DoE labs was higher—about 10 patents per $1 million versus six patents per $1 million for ITRI—because at DoE industry was leveraging the huge U.S. investment in national security. But these two rates were called “very comparable” by VanDevender, “given the uncertainty in the value of those patents, [and] particularly since a whole lot more companies get spun off from ITRI than from DoE.” Both models have their strengths and both were valuable, he concluded, suggesting that the comparison raised a question worth considering at the next stage of policy making: “whether [the United States] should reinvigorate a single-system kind of laboratory, perhaps much more like [what] ATP is doing with industry.”
U.S. POLICIES IN COMPARATIVE PERSPECTIVE
There is strong international interest in national measures to attract and grow globally competitive, high-technology industries. Perhaps what is most striking is the range of mechanisms, the similarity of goals, and the very substantial resources devoted to building the infrastructure and technological capabilities—not for national security—but for national competitiveness in the global economy.
With some exceptions (e.g., small business award programs, such as SBIR and ATP), U.S. policy is not focused on the innovation process itself; resources are instead concentrated on particular research challenges and national security missions. As technologies evolve more rapidly, often in a multidisciplinary fashion, the importance of cross-disciplinary public-private partnerships seems likely to grow. This international comparative focus on innovation policy adds value by reviewing the range of these programs, underscoring the role institutions play in national policies and, implicitly, by reminding Americans of the accelerating competition for technological preeminence.
Despite this policy lacuna, the United States does possess great strengths. U.S. economic leadership rests on its large, integrated domestic consumer markets; deep and flexible capital markets (including risk capital); and deep and flexible labor markets. The United States also enjoys the advantages of an institutional framework—characterized by strong competition, the rule-of-law, and a willingness and ability to adapt new technologies that facilitate the rapid deployment of resources to take advantage of new opportunities.45
Box E Research for Competitive Advantage “Basic research has become part of the international competition of overall national strength.” Strategy document of the July Chinese State Council Quoted by the New China News Agency, February 9, 2006 |
U.S. economic leadership is also supported by an entrepreneurial culture that encourages risk taking and tolerates failure. This entrepreneurial culture is reflected in and further reinforced by a supportive legal framework. This includes bankruptcy laws that do not excessively punish business failures and tax policies that permit successful entrepreneurs to retain significant portions of the wealth they generate. The legal regime is further reinforced by positive societal attitudes toward business success. This combination of mutually reinforcing attitudes and laws represents a unique competitive advantage for the United States, one that sets the U.S. apart. Calling this “a very special characteristic,” Carl Dalhman noted that “many other countries really are trying to imitate” it, but with debatable success. In many other countries, if you take a risk and your business fails, the social and economic consequences can be dire and permanent. These positive attitudes toward entrepreneurship represent a major U.S. advantage in the risky world of new technologies and high-tech start-ups.
Resting on these foundations are a multiplicity of strong science and technology institutions, complemented (particularly in the post-war period) by strong investment in education. Another advantage, also noted by Dalhman, is that the United States is home to more multinational corporations than any other country.
As many of the conference speakers made clear, directly or indirectly, the environment in which the U.S. economy is competing has become much more competitive.46 Many countries are now investing heavily in R&D, in education, and in science and technology infrastructure, often with a focus on specific technologies for the market. The U.S. advantage in terms of multinationals, with their benefits of expertise, integration, and market power, is also less preeminent. Other countries are now hosts to significant global corporations, not only in traditional areas (e.g., Europe) but increasingly in Asian countries such as Korea, Taiwan, India, and China.
As Sandia’s Pace Vandevender emphasized at the conference, participants in the global economy recognize the importance of dedicated institutions. New institutions such as ITRI and Tekes have made Taiwan and Finland formidable competitors in important markets and laid the foundation for future strength. Similarly, U.S. strengths in the availability and diversity of early-stage capital, while still unsurpassed, are nonetheless being challenged. Where other countries cannot emulate the private risk taking that characterizes early-stage finance in the United States, they are taking measures to provide publicly supported capital and incentive schemes designed to blend private and public funds as a means of reducing risk and encouraging investment.47
Even the traditional U.S. strengths of a large, unencumbered domestic market, while not yet matched, are no longer as unique. Emerging economic arrangements—such as the European Union and ASEAN as well as large economies of emerging nations like China and India—have the potential to counterbalance U.S. economies of scale in the long term. At the same time, a strategic approach that focuses on the ability of U.S. firms to access other national markets, build cooperative relationships, and seek out expertise in a way that benefits both the United States as well as its global partners is required for continued U.S. leadership. A crucial condition for U.S. competitiveness is the extent to which federal and state governments invest in a robust S&T infrastructure and in effective programs to ensure supplies of scientists and engineering graduates and to facilitate the transition of research to the market.
Common Challenges, Diverse Approaches
The intense competition which characterizes the global economy has placed a premium on the capacity to innovate. Innovative companies are able to provide attractive new products that meet or create market demand. Companies that benefit from a supportive national innovation policies are able to compete more effectively. They can draw on a steady stream of well-trained graduates, increasingly with practical experience, and they benefit from supportive financing (e.g., innovation awards) that enable companies to convert the fruits of research to new welfare-enhancing products.
The common challenge for most participants in the global economy is the need to capitalize on their intellectual assets, converting government funded research into the innovative technologies and processes that generate improved welfare, create international competitiveness, and create wealth for their citizens. It is, perhaps, exceptional that countries as diverse as China, India, Taiwan, Japan, Germany, France, Finland, Canada, and the United States are all devoting substantial policy attention to the transition of research into products and processes
47 |
See, for example, the presentations by Stephan Kuhlman and Finland’s Heikki Kotilainen in Panel II of this volume. |
of the future. What is equally remarkable is that, while the challenge is similar, the mechanisms and instruments adopted to encourage this transition show very considerable variation, albeit with some common features. The basic goal of this conference was to bring practitioners and analysts together to discuss the common goals and the diverse measures taken to achieve them.
The challenges of the twenty-first century point to the need to reexamine the policies supporting and building interconnections within the U.S. innovation ecosystem. As described in the conference proceedings that are summarized in the next chapter, the many foreign programs presented at this conference provide graphic evidence of the scope and scale of national efforts to enhance their national prospects in the global economy. The strong cooperative element of the conference also merits emphasis. The conference deliberations underscored the opportunity and indeed the need to learn best practice from the many national experiments underway.