Financing for Science, Technology & Innovation

Transcription

1 Financing for Science, Technology & Innovation Capacity Building for Education and Research United Nations Conference on Trade & Development Commission on Science & Technology for Development Inter-sessional Panel Santiago, Chile November 12-14, 2008 Charles W. Wessner, Ph.D. Director, Technology, Innovation, and Entrepreneurship The National Academies 1 Charles W. Wessner Ph.D.

2 The National Academies National Academy of Sciences Chartered by Congress in 1863 A self-perpetuating Honorary Society National Research Council (1916) The Operating Arm of the National Academies National Academy of Engineering (1964) Institute of Medicine (1970) Today s Presentation reflects my personal views 2 Charles W. Wessner Ph.D.

3 Today s Presentation The Innovation Imperative The New Global Competition Chile s Innovation Strategy U.S. Strengths and Challenges in Innovation Diversity in the US Innovation System Trends in R&D Spending and Recent U.S. Policy Initiatives Myths and Realities in Innovation Policy Enhancing Innovation through Partnerships The Role of the SBIR Program The Academies Assessment of SBIR The Evolving Role of Universities Education, Research and Commercialization Universities as Poles of Regional Growth Conclusions Strategies for Growing a Knowledge Economy Our Common Challenge 3 Charles W. Wessner Ph.D.

4 The View From Some in the United States Life is good, so why worry about the future? The answer: A good life today may not be a good life tomorrow Things change, & change rapidly Dr. Wladawsky-Berger, IBM 4 Charles W. Wessner Ph.D.

5 The View from Abroad Innovation is a 21 st Century Reality Compete or Be Left Behind 5 Charles W. Wessner PhD

6 A Chinese Perspective In today's world, the core of each country's competitive strength is intellectual innovation, technological innovation, and high-tech industrialization. (1999) 6 Charles W. Wessner, Ph.D.

7 China s Drive for Innovation Government with strong sense of national purpose Strong investments in education and training Strategy to move rapidly up value chain Effective requirements for training and tech transfer Critical mass in R&D is beginning to be deployed to generate autonomous sources of innovation & growth Government goal is to acquire technological capabilities both to grow and to maintain national autonomy. Modified from C. Dahlman, Georgetown University 7 Charles W. Wessner, Ph.D.

8 Recent Trend: China s Remarkable R&D Growth % % 8 Charles W. Wessner Ph.D.

9 India s Innovation Strategy Economic liberalization unleashing private sector entrepreneurship Growing Hi Tech R&D and Services Industries Emerging as world s service center for software development, back office services Now, a cutting-edge innovation center for global companies like IBM, Google, HP, TI and Intel Expanding IIT system to grow S&T workforce New Policy Focus on developing Biotechnology sector based on success in IT Intellectual Property Protections enacted New public-private-partnerships launched A Bayh-Dole type bill to encourage commercialization of university research is now before Parliament 9 Charles W. Wessner Ph.D.

10 Singapore s Innovation Strategy Goal is to establish Singapore as Southeast Asia's preeminent financial and high-tech hub. To realize this goal, Singapore is Investing in and attracting a skilled R&D workforce Attracting major investments in pharmaceuticals and medical technology production Investing in Public Private Partnerships New S&T Parks Biopolis & Fusionopolis New programs to address the early-stage funding challenge for innovative firms 10 Charles W. Wessner Ph.D.

11 Finland s Innovation Strategy Make Substantial public R&D investments Internationalize the innovation environment Reform of university structures and public research institutes New Aalto University to foster innovation and commercialization of research Mobilize private capital for start-ups and growth companies ( eg. by introducing tax incentives) Introduce new partnership programs for greater productivity in the services sector (private & public) Source: Finland as a Knowledge Economy, Dahlman, Jorma Routti, and Pekka Ylä- Anttila, eds Charles W. Wessner, Ph.D.

12 The Innovation Imperative 3 Key Points Innovation is Key to Maintaining a Country s Competitive Position in the Global Economy Small Businesses and Universities Play a Key Role in the Innovation Process New Institutions and Incentives are Required to Address New Realities in Global Competition 12 Charles W. Wessner Ph.D.

13 Is Latin America Addressing the Innovation Imperative? The region is progressing in absolute terms but falling behind in relative terms to other regions Inter American Development Bank Source: IDB, Economic and Social Progress in Latin America, 2001 Report 13 Charles W. Wessner PhD

14 Latin America s Structural Challenges Low number of scientists and researchers per capita in many countries IDB (2001) Relatively Low levels of public R&D expenditure Alcorta & Peres (1998) Limited private sector R&D Investments and weak linkages between businesses and universities & research institutes IDB (2001) Import substitution policies for high technology often suppresses inherent entrepreneurial culture InDev (2006) Melo/IDB (2001) 14 Charles W. Wessner Ph.D.

15 Chile is Responding to the Innovation Imperative Challenges Remain, but a Promising Innovation Strategy is in Place 15 Charles W. Wessner PhD

16 Chile s Core Strengths * Stable political climate Strong macroeconomic performance Investor-friendly environment Competitive Markets Liberal trade regime * Source: OECD Reviews of Innovation Policy: Chile: November Charles W. Wessner Ph.D.

17 Chile s Main Challenges Raising the R&D intensity (0.7% of GDP in 2002) Linking Chile's geographically-dispersed and export-oriented industries with research institutions & universities and government agencies Expanding private-sector financing of innovation, Improving the education system to grow human capital * Source: OECD Reviews of Innovation Policy: Chile: November Charles W. Wessner Ph.D.

18 Chile s Innovation Strategy* More public funds for innovation Newly established US$150 million-a-year innovation fund Tax incentives for private-sector R&D for businesses that set up R&D deals with universities and/or research centers Creation of the National Innovation Council High level body, linked to the Presidency, will advise the government on innovation policy Goal is to promote greater policy coherence and foster synergies among different stakeholders and funding agencies *Source: OECD Reviews of Innovation Policy: Chile: November Charles W. Wessner Ph.D.

19 What is the United States Strategy? (Well, there is no Strategy)

20 The Myth of the Rational Policy Framework Myth: U.S. Innovation Policy is based on a coherent National Innovation Agenda, Generating a welloiled Innovation Machine Reality: There is no U.S. Ministry of Science and no Coherent Strategy Multiple sources of policy making are a source of confusion, overlap, and opportunity Congressional Committees, Federal Agencies DOD, DOE, NSF, NIH State Governments Strong Interest Groups Fashion and Immediate Needs Sometimes Dominate Scientific Opportunity 20 Charles W. Wessner PhD

21 Advantage & Disadvantages of US Distributed Decision-making + Positive: Multiple sources of experimentation means that the system can be more adaptive; responsive to new challenges Agencies, Regions, and State Compete for Companies and Research Dollars Negative: Lack of coherence can lead to de facto outcomes that can hurt innovation Example: Falloff in U.S. investments in Science & Engineering Education was not a product of rational U.S. policymaking during the 1990s 21 Charles W. Wessner PhD

22 Innovation in the U.S. : Advantages and Challenges

23 Current U.S. Advantages in Innovation Key Advantage: A society open to innovation Trust in Science & Scientific Institutions An economic and institutional infrastructure that quickly re-deploys resources to their most efficient use Strong & diverse higher educational system with Excellent Research Universities Deep and flexible capital and labor markets Strong S&T institutions Entrepreneurial Culture A large and integrated domestic market Ability to grow new Large Firms 23 Charles W. Wessner Ph.D.

24 U.S. Norms Create Positive Incentives for Entrepreneurs Positive Social Norms High Social Value on Commercial Success Forgiving Social Norms allow more than one try Entrepreneur-friendly Policies Markets Open to Competition Gentle Bankruptcy Laws permit rapid recovery Taxes give Prospect of Substantial Rewards Strong Intellectual Property Regime: Encourages Research & Diffusion A Regulatory Perspective that Encourages Local Initiative 24 Charles W. Wessner Ph.D.

25 Another U.S. Advantage: Robust Small Businesses Innovation Small Businesses generated 60 to 80 percent of net new jobs annually over the last decade Employ 39 percent of high tech workers, such as scientists, engineers, and computer workers Produce 13 to 14 times more patents per employee than large patenting firms Patents are of High Quality Twice as likely as large firm patents to be among the one percent most cited Small Companies are a Key source of Innovation by themselves and for Large Companies Sources: SBA Office of Advocacy (2005) data drawn from U.S. Bureau of the Census; Advocacy-funded research by Joel Popkin and Company (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, nc. (Research Summary #225); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration 25 Charles W. Wessner PhD

26 What are the Major Challenges Facing the U.S.? Improvement needed in Education System K-12 Challenges in Science and Math Fewer students pursuing Science Careers Insufficient Support for Commercialization Few programs Effective, but limited scope Market Oversell & Ideological Blockages limit the Commercialization of R&D Uneven & Insufficient R&D Funding Physical Sciences and Engineering Funding is down or flat U.S. spending on Research is overstated 26 Charles W. Wessner Ph.D.

27 Federal Funding for R&D has been declining in real terms 27 Charles W. Wessner, PhD

28 Growing Concern about the Effects of a Stagnant Federal Research Portfolio 28

29 Impact of Declining Health R&D Budgets Missed opportunities to pursue promising research and technologies Cohorts of new Post-Docs with limited opportunities for new RO1 grants Excludes the young and the women A growing budget should let NIH Invest in new grants for new researchers Encourage more cooperation across institutions and with industry 29

30 Concerns about Allocation: 58% of U.S. Federal R&D is for Defense 30

31 But DoD Focus is on Development Is U.S. R&D Leadership Therefore a Myth? The focus on weapons development and testing overstates the R&D element of the budget. It is often not basic or even applied research but rather testing and certification. 31

32 Growing Chorus of Concern on US Innovation Policy National Innovation Initiative (2004) Led by IBM and leading Universities Ignored by the White House, but not by the Congress President s Council of Advisors on Science and Technology s Reports (2004) Called for renewed investments in US Science & Engineering Capabilities Called Attention to Growing Global Challenge in IT Manufacturing & Competitiveness Rising Above the Gathering Storm (2006) A major National Academies assessment requested by the US Congress Warns of an abrupt loss of US leadership unless timely and adequate investments are made to support R&D 32

33 Concerns about U.S. Competitiveness led to the America Competes Act Signed into Law on August 6, 2007 Authorized (but did not allocate) $43.3 billion in federal spending in FY in Science, Engineering, Mathematics, & Technology research America Competes Promised to Double budgets of NSF, DOE s Office of Science, NIST, MEP Increase funding for new researchers Only one problem, the funding was not provided! 33

34 How does President-Elect Obama Propose to Support Innovation? Double federal funding for basic research over ten years Fully fund the America Competes Act New Investments in S&T Infrastructure Deploy Next-Generation Broadband Invest in an S&T workforce Reform the Patent System Financing for S&T and Innovation Appears to understand the Valley of Death facing high-tech SMEs 34

35 But the U.S. Faces Severe Fiscal Challenges Iraq: A $13 billion a month war Center for Arms Control Estimate (FT 2008) Afghanistan: $3 billion a month war Center for Arms Control Estimate (FY 2008) Afghan War to be escalated Financial Rescue Package: $700 billion Bailout for Mortgage Funders, Insurance Firms (AIG), and Wall Street Financial Institutions Detroit Automakers may be next: $25 billion Short-term fiscal stimulus to address expected economic recession Investments in S&T are long-term; not tailored for short term stimulus spending (Lawrence Summers) 35

36 Meanwhile, Popular Myths about Innovation Continue to Obscure Needed Policy Action 36 Charles W. Wessner, PhD

37 Why do Myths Matter? Policy Myths often derived from elementary Economics models Assume perfect information and costless transactions Some Economists Argue about what ought to be done instead of what nations actually do Impact: Sometimes, these myths distort US policymaking Mask problems in the innovation system Fail to recognize the role that institutions play in creating incentives for cooperation What are some common myths? 37 Charles W. Wessner, Ph.D.

38 The Myth of American Exceptionalism Myth: American innovation is based on extraordinary qualities of Americans Reality: Incentives found in the US motivate individuals from all over the world to innovate by combining ideas with capital, know-how, and talent Gentle Bankruptcy Laws permit rapid recovery Forgiving Social Norms allow more than one try High Social Value on Commercial Success Strong Clusters with Specialized Services, Markets Open to Competition, and the Prospect of Substantial Rewards all encourage Innovation What is the secret to Silicon Valley? 38 Charles W. Wessner, Ph.D.

39 The Myth of the Linear Model of Innovation 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 Many of our policies and institutions remain based on this linear model 39 Charles W. Wessner, Ph.D.

40 Non-Linear Model of Innovation Basic Research Feedback: Search for new ideas and solutions to solve longer-term issues Quest for Basic Understanding Applied Research Feedback: Design new product characteristics Potential Use Development New Unanticipated Applications Development of Products Commercialization Feedback: Market Signals/Technical Challenge E. Evans 40 Charles W. Wessner, Ph.D.

41 The U.S. Myth of Perfect Markets Strong 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 George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information What do these market imperfections create? 41 Charles W. Wessner, PhD

42 The Early-Stage Funding Valley of Death Federally Funded Research Creates New Ideas Capital to Transform Ideas into Innovations No Capital Dead Ideas Innovation & Product Development 42 Charles W. Wessner PhD

43 Venture Capital is a Powerful Tool Venture Capital refers to Equity investments made to fund the launch, early development, or expansion of a young company with perceived long-term growth potential. Involves a substantial element of risk Venture Capital brings Capital for Firm Development Management Expertise Market Expertise Reputational Benefits But Private Venture Capital Markets are Limited Reality not always recognized by U.S. Policymakers, and even less by policymakers overseas 43 Charles W. Wessner PhD

44 The Myth of U.S. Venture Capital Markets Myth: U.S. VC Markets are broad & deep, thus there is no role for government awards If you have a good idea, a good team, and you sell it well, you will be funded George Scalise, President SIA, 29 April, 2008 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 See the current Funding break out 44 Charles W. Wessner PhD

45 The Venture Capital Constraint Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage Firms U.S. Venture Captial by Stage of Investment 2007 Total: $29.4 Billion 41% Later Stage $12.2 billion 1168 Deals Expansion Stage $10.8 billion 1235 Deals Early Stage: $5.2 billion 995 Deals 18% Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA % 37% Seed Stage: $1.2 billion 415 Deals Charles W. Wessner PhD

46 Limits of U.S. Venture Capital Market: Not Focused on Early-Stage Firms Information on potential product is limited: Risk is too high Proof of concept/prototype often absent or not yet achieved Even Angel investors need more information Fund Operations: Small Investments have High Overhead Costs Most Early Stage firms need investments in the $100K to $700K range Average VC investment is $8.3 million Most VC firms do not want to manage numerous small investments 46 Charles W. Wessner PhD

47 Understanding Venture Funding Venture Funding Involves High Risks; Gains are Normally Concentrated* Many funds lose money Most investments lose money A small proportion make a lot of money Where Private Markets are Hesitant, should Public Programs be eager to go? Governments Seek to reduce risk for Venture Funds by sharing costs Governments seek to Create Markets. Well, what about creating Deal Flow? * John H. Cochrane, The Risk and Return of Venture Capital (2004) 47 Charles W. Wessner PhD

48 The Valley of Death is Real Angels provide one path Venture Funding is another limited path How do U.S. firms cross the Valley of Death?

49 The Role of the Small Business Innovation Research (SBIR) Program A Public-Private Partnership to Help Innovative Small Businesses Cross the Valley of Death

50 SBIR Program Key Features Long-lived: In place for 25 years Created by the Small Business Innovation Act of 1982 & renewed in 1992 & 2001 Decentralized: Each Agency uses its funds to support (or create) research by small companies Stable Budgets: Agencies must allocate 2.5% of their R&D budgets for small business awards Large Scale: Largest U.S. Innovation Partnership Program Currently a $2.3 billion per year Focus: Funds Proof of Concept to help firms across the Valley of Death and attract private capital or public contracts 50 Charles Wessner, Ph.D.

51 $143 billion The SBIR Open Innovation Model R&D Investment $100K Social and Government Needs PHASE I Feasibility Research $750K PHASE II Research towards Prototype Private Sector Investment Non-SBIR Government Investment PHASE III Product Development for Gov t or Commercial Market Federal Investment Tax Revenue 51.

52 The SBIR program is sound in concept and effective in practice. Key Finding of the National Academies Recently Concluded Assessment of SBIR

53 SBIR Awards are a Signal of Quality Create Deal Flow to Attract Funds from Business Angels & Venture Capitalists Angel Investors: 37 percent of NRC survey respondents attracted additional investment from Angels and other sources Venture Funding: SBIR is a signal of research quality and commercial potential. Over $1.5 billion in added VC investments between 1992 and 2005 Many firms grow without venture backing 53 Charles Wessner, Ph.D.

54 Academies Research Reveals SBIR Impact on Firm Formation and Growth SBIR Awards Have a Substantial Impact on Participating Companies. Company Creation: 20% of responding companies said they were founded as a result of a prospective SBIR award (25% at Defense) Research Initiation: SBIR awards played a key role in the decision to pursue a research project (70% claimed as cause) Company Growth: Significant part of firm growth resulted from award Partnering: SBIR funding is often used to bring in Academic Consultants & to partner with other firms 54 Charles Wessner, Ph.D.

55 SBIR Brings New Ideas to the Market Small Firms use SBIR to Advance Projects Develop Specific Capabilities Attract Additional Research Funding Commercialize Products Nearly half of projects reach the marketplace in some form (NRC Phase II Recipient Survey) Results are highly skewed Small number of big pay-off awards Commercialize Academic Research SBIR Awards encourage academics to found new firms that can commercialize research results 55 Charles Wessner, Ph.D.

56 The SBIR program has become a key force in the innovation economy of the United States SBIR Founded SBIR now accounts for nearly a quarter of all U.S. R&D 100 winners, an annual list of top 100 innovations Source: Block and Keller, Where do innovations come from? July, Charles W. Wessner Ph.D.

57 Universities play a Growing Role in Commercializing Innovation Universities that are able to connect with Industry Drive Regional Development and are Assets for National Competition

58 From the Ivory Tower to the Marketplace Pure Research is not the only University Role Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lives (and the tax dollars for Research) Industry s Needs and Questions can Drive Research and be a Source of Relevant Publications 58 Charles W. Wessner, PhD

59 The 21 st Century University must: 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 Generate Market-ready students Create a cadre of creative and curious team players 59 Charles W. Wessner, PhD

60 Research Universities often become the Hot Spots for Innovation The process of creating new knowledge and new technologies is a hands-on activity that tends to be concentrated in geographic hot spots. Research universities have a large concentration of very smart people They spin off new high-tech companies from their research labs They also attract other high-tech companies who want access to the talent and research that is focused there. Their graduates often stay nearby to work at the hightech companies they have created and attracted. Source: G. Wayne Clough, The Role of the Research University in Fostering Innovation The Americas Competitiveness Forum, June 12, Charles W. Wessner, PhD

61 The MIT Model: Successful Ecosystems Concentrate Resources Long-Term Commitment MIT is a Long Time Recipient of Federal Funds Defined Location: A Compact Campus 2 miles along the Charles River in Cambridge MA 155 Biotech companies within walking distance of the campus Relatively Small Number of Students 4000 Undergraduates and 6000 Postgraduates Limited Focus Areas: Engineering, History, and English Emphasis on applied work of use to Society & Industry 61 Charles W. Wessner, Ph.D.

62 Finland s New Innovation University Aalto University to promote innovation by fostering creative and collaborative research New autonomous university brings together the Helsinki University of Technology, Helsinki School of Economics and the Helsinki University of Art and Design Capitalized at EUR 700 million. Government donation of EUR 500 million + EUR 200 million from Finnish industries and other financiers. 62 Charles W. Wessner, PhD

63 Strategies for Growing and Sustaining a Knowledge-based Economy: Innovation as a path to Sustainable Growth

64 We need to Change the Traditional Development Mindset Standard View: Focus on achieving UN Millennium Development Goals Emphasis on aid interactions between donors and recipient governments and NGOs Aid to create capacity for development by adding capital and skills The CSTD Issues Paper Outlines a Better Path 64 Charles W. Wessner, PhD

65 Changing the Development Mindset Provide Incentives and Drop Disincentives Easier Labor rules & Taxes for Start-ups Encourage new businesses, job creation and competitiveness Eliminate outmoded Bankruptcy Laws Reinforce Cooperation and Entrepreneurial Activity Emphasis on improving productive collaboration across private sector, universities, and governments through public-private partnerships Public Funding is the Catalyst! 65 Charles W. Wessner, PhD

66 Invest in Education & Research Invest in education and skills and harvest them Produce and Attract Skilled Researchers and Engineers Build Top Quality Research Facilities Encourage International Exchanges to Build Networks Invest in Research Universities Reinforce Success with new resources Smaller countries should concentrate resources, both on best bets and existing strengths and needs Build links across existing institutions Focus Research on Traditional Areas of the Economy as Well as Emerging Sectors 66 Charles W. Wessner, PhD

67 Develop Partnerships between Government, Industry and Academia Target Funding for Research and Commercialization Avoid Reliance on High-Cost, Diffused Incentives, e.g., R&D Tax Credits Provide serious Financial Incentives for Collaborative Research by both Foreign & Domestic Firms Connect MNCs to Universities e.g., with S&T Parks 67 Charles W. Wessner, PhD

68 Draw from International Best Practice Some policies and practices worth looking at: Finland is investing in its Research Capacity and Developing a new Innovation University Singapore is connecting universities with industry New science research parks being developed Actively exploring role of SBIR to boost traditional university technology transfer The most innovative countries draw on international advisors for best practice The best innovators don t rest on their laurels They continue to reinforce success and commit the needed resources 68 Charles W. Wessner, PhD

69 Provide Policy Support and Funding Provide High Level Policy Attention New Initiatives with real power can drive policy change Substantial Resources are required Focused on Commercialization of new Technologies and Techniques Chile is already doing this Next Generation Challenges Require More linkages between Industry & Private R&D Use of Proven Mechanisms, including Consortia and Innovation Awards Careful Coordination Supporting Innovation is a Central Government Function 69 Charles W. Wessner, PhD

70 In Summary: What to do? Connect Institutions Cooperate Across Institutions Reward Cooperation Reinforce Success Evaluate Regularly Seek Best Practice

71 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: Charles W. Wessner Ph.D.