Myths and Realities in the Global Innovation Ecosystem

Transcription

1 Myths and Realities in the Global Innovation Ecosystem Implications for Asian Innovation InnovAsia Bangkok, Thailand September 20, 2005 Charles W. Wessner, Ph.D. Director, Technology, Innovation, & Entrepreneurship The National Academies 1

2 The U.S. National Academies National Academy of Sciences (Chartered in 1863) A self-perpetuating Honorary Society National Academy of Engineering (1964) Institute of Medicine (1970) National Research Council (1916) The Operating Arm of the National Academies 2

3 The National Research Council The NRC Mission is the Advise the Government on Science, Engineering, and Medicine Studies for federal agencies, Congress, and some self-initiated; 270 Reports Issued Each Year Nearly 1,300 staff and 10,000 volunteers annually involved in NRC/IOM studies Budget of some $160 million: 85% from government agencies and 15% private Great Prestige. High Quality Analysis with Direct Impact on U.S. Policymaking 3

4 Today s Presentation The Global Innovation Ecosystem Innovation Myths and Market Realities in the US Ecosystem Myth of American Exceptionalism Myth of Linear Innovation Myth of Perfect Markets Linkages that strengthen the US Innovation Ecosystem Fostering Small Business Innovation The SBIR & ATP Models U.S. Universities and Regional Growth Implications for Asian Innovation Strengthening Thailand s Innovation Ecosystem Learning from each other 4

5 What is an Innovation Ecosystem? An adaptive network of institutions in the public and private sectors focused on innovation Commercializing new products & processes Innovation Eco-Systems Systems Grow & Evolve Innovation is hard to plan It can be encouraged Healthy Innovation Ecosystems require Sustained policy attention Intermediating institutions to facilitate cooperative synergies among key actors Firms, Universities, Government 5 Charles W. Wessner, PhD

6 Strengthening Innovation Ecosystems High Level Policy Attention is Needed New Initiatives (e.g. S&T Council) with real power to drive policy change Substantial Resources Focused on Commercialization of new Technologies and Techniques Next Generation Challenges Require More linkages between Industry & Private R&D Use of Proven Mechanisms, including Consortia and Innovation Awards 6 Charles W. Wessner, PhD

7 Global Innovation Ecosystems Innovation now occurs in Global Ecosystems Combine National and Regional Activity Multinational Companies play a Key Role Provide Technology, Capital, Knowhow, & Access to Markets and Networks Pro-innovation government policies are differentiators New (or renewed) Institutions are Needed The Policy Framework for Innovation needs regular Review & Refinement Rapid Decision Cycles are a Competitive Advantage 7 Charles W. Wessner, PhD

8 New Opportunities for Asia Most rapidly growing region in world Large Internal Markets (China, India) Critical mass in R&D and human capital Rapid increase in educational attainment Rapid increase in R&D efforts Governments working to overcome High dependence on US market Fragmented regional markets Less developed service sector Less developed value chains, marketing and distribution networks 8

9 China Strengths Structural Advantages Very high savings and investment rate Low wage advantage Efficient export trade logistics Becoming world s manufacturing base Government with strong sense of national purpose Strong investments in education and training Excellent at tapping into global knowledge through direct foreign investment and Chinese Diaspora Strategy to move rapidly up value chain from labor intensive to more technology intensive exports Critical mass in R&D is beginning to be deployed to increase competitiveness 9

10 India Strengths Structural Advantages Large critical mass of educated, skilled, and English speaking knowledge workers Strong science and engineering capabilities centered in chemical and software areas Has network of successful Indians in US and Europe providing links to markets, technology, and finance Relatively deep financial markets Policy Liberalization now Unleashing Growth Growth jumped from traditional rate of 2-3% growth in past decades to 6-8% last decade Emerging as world s service center for software development and back office offshore outsourcing Is also becoming center for contract innovation work for multinational companies 10

11 India: Policy Choices Big Consequences India s growth depends on how well government, private sector, and civil society can work together to unleash India s growth potential Source: Dahlman & Utz, India and the Knowledge Economy, World Bank Institute, % 3% 2.09% 1% 11

12 Thailand: The Good News Economic performance of Thailand during the past 40 years is Impressive 9% growth from 1985 to 1995 Transformation from an agriculturebased economy to a significant industrial/manufacturing economy Recovery from 1997 Asian Crisis Major center of a rapidly growing Regional Economy 12

13 Today s Policy Challenge How to create the policies, institutions, and national infrastructure to participate in global innovation?

14 In an evolving Innovation Ecosystem, Identifying and Strengthening Linkages is an Ongoing Task All systems have Gaps & Weaknesses This is equally true for the United States A Key Differentiator: Capacity to Identify Weaknesses and Opportunities and then to Act What are some of the Strengths & Weaknesses of the United States? 14

15 U.S. Norms and Market Rules Create a Positive Incentive Framework for Entrepreneurs Positive Social Norms High Social Value on Commercial Success Forgiving Social Norms allow more than one try Ease of Market Entry and Exit Markets Open to Competition Gentle Bankruptcy Laws permit rapid recovery Taxes are Transparent, Predictable, and give Prospect of Substantial Rewards Strong Intellectual Property Regime: Personal Incentive for Invention Encourages Research & Commercialization Provides Resources for next round of Innovation 15

16 US Faces Major Challenges in Innovation Inadequate Education System K-12 Challenges in Science and Math Fewer students pursuing Science Careers Post 9/11 Reductions in Foreign Students Uneven & Insufficient R&D Funding Physical Sciences and Engineering Funding is down Too Much Focus on Military R&D Insufficient Support for Commercialization Few programs Effective, but limited scope Too few Consortia Limited Funding, Limited Evaluation Ideological Blockages on the Commercialization of R&D Washington is a Land of Deep Complacency & Strong Myths 16

17 Some Myths & Realities about Innovation Popular Myths and Ideologies Condition Policymaking in the US and Abroad

18 The Myth of American Exceptionalism U.S. Myth: American innovation is based on extraordinary qualities of Americans Reality: Incentives found in the U.S. motivate individuals from all over the world to innovate by combining ideas with capital, know-how, and talent What is the Secret to Silicon Valley? Silicon Valley hosts entrepreneurs and researchers from around the world The secret lies in positive social norms, concentrated expertise, and effective institutions 18

19 The Myth of the Linear Model of Innovation Myth: Innovation is a Linear Process leading inexorably to Commercialization Basic Research Applied Research Development Commercialization Reality: Innovation is a Complex Process Major overlap between Basic and Applied Research, as well as between Development and Commercialization Principal Investigators and/or Patents and Processes are Mobile, i.e., not firm-dependent Many Unexpected Outcomes Technological breakthroughs may precede, as well as stem from, basic research Soviet Innovation Model Based on Linear Myth 19

20 Basic Research Feedback: Basic Research needed for discovery Search for new ideas and solutions to solve longer-term issues Non-Linear Model of Innovation Technology Development & Commercialization are Complex Feedback: Applied Research needed to design new product characteristics Quest for Basic Understanding New Knowledge Fundamental Ideas Potential Use Application of Knowledge to a Specific Subject Prototypicalization Applied Research Feedback: Market Signals/ Technical Challenge Desired Product Alterations or New Characteristics Cost/design trade-off Development New Unanticipated Applications Development of Products Goods and Services Commercialization 20

21 The Non-Linear Model means Policy Should Help Bridge Transition Gaps University Research can and should be both curiosity-driven and applicationoriented Policies to encourage transition from Universities and Laboratories are needed, as are Incentives for Industry to cooperate R&D Tax Credits Targeted Innovation Awards 21

22 The Myth of Military Spin-Offs Euro Myth: U.S. Defense Research and Procurement Directly Funds Civilian Technologies Reality: Very few technologies proceeded effortlessly from defense conception to commercial application. Secrecy, military specs, and long lead times slow diffusion of new defense technologies Billions for Stealth Technologies: What civilian market? Even efforts to use low-cost civilian technologies for defense use, i.e., spin-ins, are often blocked by complicated military procurement system Beyond Spin-off, John Alic, Lewis Branscomb, et al. 22 Charles W. Wessner, PhD

23 The U.S. Critique: Spinoff cannot serve as a realistic basis for technology policy --Alic, Branscomb, et al (1992) Defense R&D does not cover gaps in nation s technology policies Defense contributions are growing smaller & more specialized Many industries benefit little from Defense R&D Spin-offs offer only indirect, inadvertent contributions Focus on spin-offs denies more direct role for government in technology policy 23

24 The Myth of Perfect Markets U.S. Myth: If it is a good idea, the market will fund it. Reality: Potential Investors have less than perfect knowledge, especially about innovative new ideas Asymmetric Information leads to suboptimal investments This means that it is hard for small firms to obtain funding for new ideas Development of new technologies within an economy is not automatic Technology trajectories are not pre-ordained 24

25 The Reality: The Valley of Death Early-Stage Funding Gap Federally Funded Research Creates New Ideas Capital to Develop Ideas to Innovation No Capital Product Development & Innovation 25

26 The Public-Private Funding Transition & the Valley of Death Adapted from: L.M. Murphy & P. L. Edwards, Bridging the Valley of Death Transitioning from Public to Private Sector Financing, Golden CO: National Renewable Energy Laboratory, May 2003 Technology Creation Technology Development Early Commercialization Cash Flow Valley of Death Successful Moderately Successful SBIR & ATP Time Unsuccessful Unsuccessful Initial Public Investors Federal Agencies, Universities, States Entrepreneur & Seed/Angel Investors Venture Capitalists IPO 26

27 The Valley of Death: A Venture Capitalist s View A Series of Gaps Gap in Available Cash Necessary to develop technology to Proof of Principle, Prototype, and/or Product Gaps in Information between Entrepreneur and potential Investor about Technology: What is it? Will it work? Potential of Technology: What can it do? Business Opportunity What size is the market? What is the competition? What level of risk do investors want to accept? Changes over time and by sector 27

28 The Myth of U.S.Venture Capital Markets Myth: U.S. VC Markets are broad & deep, thus there is no role for government awards Reality: Venture Capitalists have Limited information on new firms Prone to herding tendencies Focus on later stages of technology development Most VC investors seek early exit Large U.S. Venture Capital Market is Not Focused on Early-Stage Firms See the current Funding break out 28

29 Large U.S. Venture Capital Market is Not Focused on Early-Stage Firms Breakdown of U.S. Venture Capital by Stage of Development-2004 $346 million 34.37% 1.65% 18.55% Startup/Seed 45.42% Total = $20.9 billion Startup/Seed Early Stage Expansion Later Stage 29

30 Turbulence in American VC Markets An Uncertain Source of Early-Stage Finance Total US VC Investments by Year Total Investment ($ Billions) Source: PriceWaterCoopers,

31 Why Do Funding Gaps Matter? Because Equity-Financed Small Firms are a Leading Source of Growth in Employment in the United States Equity-Financed Small Firms are One of the Most Effective Mechanisms for Capitalizing on New Ideas and Bringing Them to the Market Audretsch and Acs Key Goal: Encourage New Equity based Hi-tech Firms with Innovation, Jobs, and Growth Microsoft, Intel, AMD, FedEx, Qualcom, Adobe have changed U.S. Economy Sweden: No new large firms since

32 Importance of Small Businesses to the U.S. Economy Small Businesses are a Key Driver of the U.S. Knowledge-Based Economy Major Employment Generator Generated 60% to 80% of Net New Jobs in the 1990s Created 2.5 million of the 3.4 million total jobs created in Locus of all net new jobs Employs 39% of High-Tech Workers Scientists, Engineers, Computer Workers Produces 14 times more Patents per Employee than Large Patenting Firms Patents are of High Quality Twice as Likely to be Cited Source: SBA Office of Advocacy

33 The U.S. Government Role in Crossing the Valley More Important than Commonly Believed

34 Precedents for Public Role in Commercialization of Science-Based Products in the U.S Radio manufacturing (RCA) founded on initiative (equity and Board Membership) of U.S. Navy with commercial and military rationale. 1940s, 50s, 60s Jet Aircraft, Semiconductors, Computers, Satellites, Nuclear Energy The Foundations of the Modern Economy, Cohen & Noll s - Government investment in forerunners of the Internet (Arpanet) and establishment of the Global Positioning System Today: Current investments in genomic and biomedical research, advanced computing and new materials, e.g., nanotechnology initiatives 34 Charles W. Wessner, Ph.D.

35 Funding Sources for Early-Stage Technology Multiple Actors * Multiple Sources of Finance Focused on Different Stages * Development in the U.S. Government Role is Significant Branscomb & Auerswald, Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development, NIST, 2002 Figures based on 1998 data 35

36 Capital Required $30m plus $10m - $20m $2m - $10m $500k - $2m $250K-$500K $10K - $250K Less Founder The Funding Ladder: The Missing Step Friends, Family, Fools IPO Stock Market Expansion Funding Early-Stage VC The Missing Step Angel Investors Role for Government in Early-Stage Technology Development Concept Development Commercialization 36

37 Programs on the Innovation Ladder to Fill the Missing Step The Small Business Innovation Research Program (SBIR) The Advanced Technology Program (ATP)

38 The SBIR Program Created in 1982, Renewed in 1992 & 2001 Participation by all federal agencies with an annual extramural R&D budget of greater than $100 million is mandatory Agencies must set aside 2.5% of their extramural R&D budgets for small business awards Currently a $2 billion per year program Largest U.S. Partnership Program 38

39 The SBIR Model Social and Government Needs Private Sector Investment R&D Investment PHASE I Feasibility Research PHASE II Research towards Prototype PHASE III Product Development for Gov t or Commercial Market $100K $750K Tax Revenue Federal Investment 39

40 SBIR links Researchers to the Market Why SBIR is attractive to New Entrepreneurs Having a company not required to apply for a grant Attracts new companies No repayment required & no dilution of ownership No royalties owed to government Phase I permits entrepreneur to explore technical and commercial feasibility Awards attract private capital: Certification Effect Key Point: SBIR is Attractive to University Professors and Graduate Students seeking to Commercialize their Research 40 Charles W. Wessner PhD

41 The Advanced Technology Program Founded in 1989 Designed to Build Cooperation between Large and Small Companies to develop Technologies with broad Applications Fairly Small at $140 million per year but High Impact at the Cutting Edge of New Technologies Proven Effective 41 Charles W. Wessner PhD

42 The ATP Approach: Industry Leadership Industry-initiated proposals: Bottom-up approach Industry Managed Projects Highly Competitive: Only 12.5% receive awards Rigorous independent selection process Evaluation of the project s technical merit Commercial worthiness and broad-based benefits for the US Economy 42 Charles W. Wessner PhD

43 The ATP Approach: Industry Partnership Awards are limited in time Awards are limited in amount Industry cost-share required All awards are cost shared with industry. This acts as a reality check on feasibility Partnering encouraged: Small companies, large companies, and (increasingly) universities participate in the program Dissemination of enabling technologies is key to public benefits 43

44 The Evolving Role of Universities Linking the Ivory Tower with the Market 44

45 Myth of the Ivory Tower University Myth: Pure Research and Education are the central University Roles Reality: University Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lives Industry s Needs and Questions can Drive University Research and be a Source of Relevant Publications 45

46 Pasteur s Quadrant: Research can be Applied, Practical, and Basic All at the Same Time Use-inspired research increases existing understanding and creates improved technology. can take existing technology to new levels but it can also improve understanding of fundamental principles From Donald Stokes, Pasteur s Quadrant, 1997 Quest for Fundamental Understanding? Quadrant Model of Scientific Research Yes No Considerations of Use? No Yes Pure Basic Research (Bohr) Use- Inspired Research (Pasteur) Pure Applied Research (Edison) 46

47 The 21 st Century University For the Knowledge Economy, the University needs to Teach the next generation With up to date laboratories on real market questions About the sciences needed to address current and future questions (e.g., nuclear waste, stem cell research, genetically modified food) Conduct Research Curiosity-driven Research, certainly but the University also needs to bring Science to bear on Social Problems and Industry Needs Commercialize New Science-led solutions to societal problems New Products, Processes, and Market-ready students 47

48 Lessons from US Models: Policy Drives Change Before 1980: Few Incentives for University-Industy Collaboration Industry, Universities, and Federal laboratories researchers rarely collaborated Patents from Federally funded research were generally held by Government and not used Presumptions about Antitrust Laws Limited Joint Research Industry Research based on Corporate Laboratories e.g., Bell Labs Companies attracted University Graduates but did not fund much University Research 48

49 New Legislation in the 1980s changed the Cooperative Environment Stevenson-Wydler Act of 1980 Required federal laboratories to facilitate the transfer of federally owned technologies to state and local governments and the private sector Bayh-Dole University and Small Business Patent Act of 1980 Permitted government grantees and contractors title to federally funded innovations Small Business Innovation Development Act of 1982 Established the SBIR Program National Cooperative Research Act of 1984 Eased Antitrust penalties on cooperative research 49

50 Policy Innovations of the 1980s Create Positive Incentives for Commercialization The Case of the Bayh-Dole Act of 1980: Allows universities to patent the results of research that the federal government has funded Universities can earn royalties by licensing research innovations to private companies As a result, Research Universities have been actively involved in commercializing their proprietary technology Universities have opened and expanded Technology Transfer Offices Not all succeed! Some do. 50

51 Effects of Bayh-Dole are Real Increase in Patents granted to Universities 375 in in 2003 Total new patents filed=7203 Increase in University Royalties from Licensing $1.033 billion in 2003* More Startup Companies formed with University Patents Reforms take time to have an Impact, but with the Right Incentives, Behavior and Outcomes will Change *Source: AUTM 51

52 Upward Trend (over time) in University Royalties from Licensing Royalties to Universities/Hospitals in Millions of Dollars Source: Bremer, 2001 speech ( - data from AUTM Licensing Survey 52

53 University startups initiated by technology transfer processes Source:. Nature Biotechnology 22, (2004) 53

54 Key US Lessons Change is Possible Policy Experiments are Needed, though not all are successful Innovation Systems Evolve Policies have to adapt to new realities Hence Ecosystems Concept Progress depends on Positive Interactions among Participants Importance of creating institutions to promote cooperation, linkages 54

55 Progress but not Perfection: US Universities still miss full Potential New Kauffman Foundation assessment reveals signs of chronic underperformance Many innovations never reach the market While some research institutions lead, many lag in formal invention disclosures, patents, & licensing Lack of effective commercialization culture, practices and expertise in many universities seen Few universities understand that innovations move through multiple pathways This is reflected in how many universities organize tech-transfer Signs that university-industry relationships are suffering SBIR awards offer a market-oriented catalyst for commercialization 55

56 SBIR Primes the Pump of University Technology Transfer ROYALTIES or EQUITY PAYOUT SALES $$ UNIVERSITY INNOVATION COMMERCIAL COMPANY NEW PRODUCTS & PROCESSES SBIR License Agreement or Equity RESEARCH $$ INVESTMENT $$ Licensing to existing companies brings royalty $ New company formation brings royalties and/or equity Other, less direct, contributions to regional economic activity 5,000 Good New Jobs in Pittsburgh Area 56 Drawn from C. Gabriel, Carnegie Mellon University

57 The Benefits of University-Industry Cooperation: SBIR & ATP SBIR Innovation Awards Directly Cause Researchers to create New Firms Universities help diversify and grow the job base Increasingly universities are the largest regional employer for all types of employment ATP Brings Partners Together Cooperation validates Research Funding with Returns to Society in Health, Wealth, & Taxes ATP & SBIR are proven mechanisms in an uncertain game 57

58 The Challenge for Thailand Strengthening the Innovation Ecosystem through Institutional Deepening and Developing Institutional Linkages

59 How to Create the 21 st Century University? Shape Positive Incentives for Professors, Administrators, and the Institutions Focus on New Generation Provide Autonomy Thailand has done this! Ensure Rewards Create Facilitating Institutions 59

60 What are the Next Challenges for Thailand s Innovation Ecosystem? Need to nurture the Innovation Ecosystem to support continued industrial development and growth Many Thai firms have grown, but without deepening their R&D capabilities (World Bank, 2000) Research culture and capabilities in Thai Universities needs to be strengthened (Intarakamnerd et al.2003) Weak linkages among Firms, Government, and Universities (Intarakamnerd et al.2003) 60

61 New National S&T Council can Provide Necessary Policy Coordination Welcome action by Thaksin Government on S&T capabilities within firms and importance of clusters, among other strategic areas Incentive for R&D in Thai Firms Encourage research cooperation with Thai Industry Traditional Industries Merit Attention (e.g. Tekes in Finland keeps focus on wood products) Incentive Awards to encourage cooperation among Industry, University, and National Laboratories are needed 61

62 Recommendations 62

63 Enhancing Asian National Innovation Ecosystems Modify investment incentives with Taxes & Awards for National Firms Draw on Multinational Corporations for Expertise, Technology, & Global Networks Develop regulatory and legal structures needed for technological upgrading Expand education, technical training, and R&D initiatives Encourage Patents & Protect Intellectual Property Build the Institutions necessary to provide these Services 63

64 What is Needed Next? Capitalize on National Innovation Potentials--How? Provide Incentives for Entrepreneurs & Large Companies to collaborate in research, development, and marketing Innovation Awards to facilitate access to Capital Encourage Strategic Partnerships Provide Incentives to University Researchers to bring ideas from the lab to the market Allow Participation in Companies Reward Patent Activity & Protect Intellectual Property Develop Innovation Partnerships Creates forum for cooperation, cross-fertilization among large & small companies, universities, research institutes 64

65 Common Challenges National Innovation Systems are Different in Scale, Maturity, Flexibility Flexibility is a differentiator It is less how much is spent but how well All Systems Have Common Challenges Need to justify R&D expenditures by creating new jobs & new wealth Need to reform institutions (or invent new ones) Need to try new mechanisms that shift innovation incentives in a positive way Learning from each other is a Pathway to Progress 65

66 Thank You Charles W. Wessner, Ph.D. Director, Program on Technology, Innovation and Entrepreneurship The U.S. National Academies 500 Fifth Street NW Washington, D.C Tel: