Multi-Year Expert Meeting on Enterprise Development Policies and Capacity-building in Science, Technology and Innovation (STI) (Fourth session) Geneva, 16-18 January 2012 The Innovation Imperative Entrepreneurship and Innovation for Development by Charles Wessner Director of Technology, Innovation and Entrepreneurship, Board on Science, Technology, and Economic Policy, the National Academies This view expressed are those of the author and do not necessarily reflect the views of UNCTAD.
The Innovation Imperative Entrepreneurship and Innovation for Development United Nations Conference on Trade and Development Geneva, Palais des Nations 16-18, January 2012 Charles W. Wessner, Ph.D. Director, Technology, Innovation, and Entrepreneurship The National Academies 1 Charles W. Wessner Ph.D.
What is Innovation? Innovation is a Successful Transformation of New Ideas into Products, or Known ideas into New Products 2 Charles W. Wessner PhD
Why must we Innovate? To Address Pressing Global Challenges that affect us all and to Grow our Economies in a Competitive World 3 Charles W. Wessner PhD.
Current Global Mega-Challenges Fostering Economic Growth through Innovation Driving domestic Growth and Employment Developing New Sources of Energy Commercializing renewable alternatives to oil Addressing Climate Change Growing a Green Economy; A major Growth opportunity Delivering Global Health Transforming large investments in research to affordable and personalized treatment and care Improving Security Innovation is key to addressing these challenges 4 Charles W. Wessner Ph.D.
Three Types of Countries Recognize the Innovation Imperative The Advanced Nations The Emerging Nations The Developing Nations But the principles and mechanisms for fostering innovation are the same for all three 5 Charles W. Wessner Ph.D.
How do we Address the Innovation Imperative? There is a Recipe 6 Charles W. Wessner PhD
A Proven Recipe for Success Positive Framework Conditions to support Growth Focused, Partnership Programs Well funded by a patient government 21 st Century Universities New Institutions e.g., S&T Parks All in support of Dynamic Small Business Entrepreneurs 7
First, Get the Basics Right! Innovation and Entrepreneurship thrive within a framework of Stable Fiscal and Monetary Policies Science Education and Skills Training Openness to Science and Innovation Effective Intellectual Property Protection Flexible Labor Policies High Social Value for Commercial Success Entrepreneur-friendly Policies 8 Charles W. Wessner PhD.
What are Entrepreneur-friendly Policies? Open Markets Encourage New Entrants Access to Early Stage Funding Public Programs that provide the first, hardest to get money can be important facilitators Ease of Firm Creation and Exit Gentle Bankruptcy Laws to permit rapid recovery Tax regimes that allow successful entrepreneurs to reap the rewards of success Stock options and Capital Gains can be powerful incentives Flexible Labor Markets: Firms that can t fire won t hire 9 Charles W. Wessner PhD.
Next, Get the Policies Right! Leading Countries are providing : High-level Focus on Growth and Competitiveness Sustained Support for Universities Rapidly Growing Funding for Research Support for Innovative Small Businesses Government-Industry Partnerships to bring new products and services to market They are investing very substantial resources to create, attract and retain the industries of today and tomorrow. 10 Charles W. Wessner PhD.
Growing Commitments to R&D China India Korea U S 11 Charles W. Wessner, PhD
Innovation is Shifting the Trajectory of Development Creating products to address social needs at the bottom of the Pyramid Introducing new crop varieties, new drugs Creating new market opportunities Linking expertise with needs across rich and poor countries Generating new Opportunities for Entrepreneurship and Cooperation Mobile Phones and Solar Cells to Power them 12 Charles W. Wessner Ph.D.
China s Goal: To Become an Innovation-Driven Economy by 2020 Boosting R&D Investments Expenditure on basic research doubled between 2004 and 2008 Tax incentives for enterprises that invest in R&D Building R&D Infrastructure and Facilities Focus on building world class universities to create a Skilled Workforce Government procurement favors Indigenous Innovation Foreign-owned technologies targeted for assimilation Financial Support for Indigenous Innovation Financing for large projects Facilitating Credit and investment capital for SMEs Source: Mu Rongpin, 2010 UNESCO Science Report 13
Brazil s Innovation Strategy Strengthen the National Innovation System Reinforce National S&T institutions Invest in a skilled workforce Support S&T infrastructure Promote innovation in enterprises Financial and Technical support for innovative firms Provide incentives to start-ups Increase R&D in strategic areas Bio, Nano, Health, Biofuels, Space, and Nuclear Use S&T and Innovation for social development Source: Secretary Francelino Grando, Presentation at February 2010 National Academies Symposium on Clustering for 21st Century Prosperity. 14
Key Role of Multinationals We used to debate about the advantages of MNCs--That debate is largely resolved FDI can be an Important Source of Innovation for Advanced, Emerging, and Developing Nations Provides inflow of expertise, technology, and equipment Multinational Firms bring opportunities for local entrepreneurs to grow and access to global supply chains Can also help develop 21 st Century Universities MNC can help build Facilities, endow Chairs Provide Training and Jobs for Students 15 Charles W. Wessner PhD.
What about Innovation in the United States? Current Challenges and Best Practices Charles W. Wessner PhD
U.S. has a large Share of Global R&D Others China Korea U.S. Japan Germany France Rest of EU UK Source: OECD, Main Science and Technology Indicators, 2008. 17
Leadership in World Class Universities 13 out of the top 20 are in the U.S. Harvard, MIT, Yale, U- Chicago, U-Penn and Columbia are 6 out of the top 10 worldwide Source: US News and World Report Best 400 Universities in the World in 2011 18 Charles W. Wessner, PhD
The U.S. Innovation System is Open to Cooperation At the Government Level At the University Level It is a richly funded system that welcomes international participation 19 Charles W. Wessner, PhD
But the U.S. also Faces Major Risks Complacency about our competitive position in the world Focus on current consumption rather than investment for the future A lack of investment in R&D on the scale of our fathers and our competitors Too much emphasis on research alone and not enough on its development and commercialization What is the best Vehicle for Commercialization? 20 Charles W. Wessner PhD
Small Businesses are Key to Innovation! Small Innovative Companies are Key Players in Bringing New Technologies and New Ideas to Market Audretsch & Acs Small Businesses Grow Jobs Increase Market Competition Generate Taxable Wealth Create Welfare-Enhancing Technologies Over time, innovative small businesses (like Microsoft, Intel and Google) transform the composition of the economy 21 Charles W. Wessner PhD.
Small Businesses are Important Sources of Growth But U.S. myths about Perfect Markets are a barrier to policies that encourage small business innovation 22 Charles W. Wessner Ph.D.
Another U.S. Challenge: The 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 George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information 23 Charles W. Wessner PhD
A Major Hurdle for Innovators The Valley of Death Federally Funded Research Creates New Ideas New Ideas are new ; often they cannot attract support Capital is Needed to Transform Ideas into Innovations No Capital Dead Ideas Innovation, Product Development and Growth 24 Charles W. Wessner Ph.D.
How to Move Ideas and Companies Across the Valley of Death? Isn t Venture Capital the Solution? Not really 25 Charles W. Wessner PhD
The U.S. Myth of Perfect 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 VC investments have moved towards later, less risky stages of technology development Venture Capital makes limited investments in the earliest seed-stage of investment 26 Charles W. Wessner PhD
Allocation of U.S. Venture Investments in 2010 U.S. Venture Captial by Stage of Investment 2010 Early Stage: $5.3 billion 1147 Deals 39% Later Stage $6.3 billion 746 Deals Expansion Stage $8.5 billion 1021 Deals 24% Total: 21.8 Billion Source: Jan 2011 PWC-MoneyTree 8% 29% Seed Stage: $1.7 billion 363 Deals 27
How do Entrepreneurs Obtain Funding to Cross the Valley of Death? There are many ways. Founder s own resources Friends, Family, Fools Public Innovation Awards Angel Investors Government Procurement And, sometimes, Venture Capital
Public Awards like the Small Business innovation Program (SBIR) offer one proven path across the Valley of Death 29 Charles W. Wessner, PhD
$148 billion SBIR Competitive Innovation Model R&D Investment $150K Social and Government Needs PHASE I Feasibility Research Federal Investment $1M PHASE II Research towards Prototype Private Sector Investment Non-SBIR Government Investment Tax Revenue PHASE III Product Development for Gov t or Commercial Market 30
SBIR s Best Practice Features Focus on Valley of Death: Funds Proof of Concept and Prototype: The first money is the hardest Stable Program: Long reauthorizations Secure Budget: 2.5% allocation of Agency R&D budgets for small business awards & contracts Large Scale: Largest U.S. Innovation Partnership Program: Currently a ~$2.5 billion per year Portfolio Effect: Substantial sums invested in new companies over a long period increase success Decentralized & Adaptive: Each Agency uses its funds to support research by small companies to meet its unique mission needs 31
SBIR is an Large, Open Program Large Number of Award Winners 4,257 Phase I awards in 2010 1,892 Phase II awards in 2010 Many New Participants: Every year, 1/3 of awards per year go to new firms Large Impact with over 6000 Phase I and Phase II awards in 2010 Compare with 363 Seed Stage Venture Deals in 2010 32 Charles W. Wessner, PhD
Why do Entrepreneurs like SBIR? Helps entrepreneurs get new projects started Academics can apply even without a company Gender and Race neutral No dilution of ownership; owners retain control No repayment is required Government recoupment is through the tax system SBIR recipients retain intellectual property developed using the SBIR award No royalties owed to the government, though government retains royalty-free use for a limited period Certification effect draws in additional investment Strong signal to private investors of technological validity and commercial promise of the innovation 33
Academies Research Reveals SBIR Impact on Firm Formation and Growth 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 34
SBIR links the University with Industry and helps create new Spin-outs SBIR Innovation Awards Directly Cause Researchers to create New Firms Lowers Risk: Faculty does not have to give up University post Lowers Overhead: Don t need to have a company to apply 15 to 20% success rates comparable to other grants New firms help grow the region and provide returns on R&D investments 35 Charles W. Wessner, PhD
Universities play a Growing Role in Commercializing Innovation Universities that are able to connect with Industry Drive Regional Development and are Assets for National Competitiveness Charles W. Wessner PhD
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 37 Charles W. Wessner PhD
Roles of the 21 st Century University Teach the next generation With up-to-date laboratories on real market questions Focus on science needed to address current and future questions (e.g., climate change, nuclear waste, stem cell research, genetically modified food) Conduct Research Curiosity-driven Research But also 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 38 Charles W. Wessner PhD
Concerns about the 21 st Century University Connection to Industry are Unfounded A focus on commercial results can enhance academic R&D More Research: Academics involved in tech transfer publish more, not less, basic scientific work. More Publications: Academic groups that collaborate with industry generate more fundamental scientific output as well as developmental research, as measured in number of publications. Focus on Real Problems: Industrial R&D also feeds academic R&D in solving real world problems. Source: Bart Van Looy, Koenraad Debackere, et al., Research Policy, 2004 39
The Role of University Research Parks A Catalyst for Innovation Clusters
S&T Parks are an Important Catalyst for University-Industry Cooperation Successful S&T Parks: Help advance university missions Build partnerships among researchers, small companies, and large companies Small Companies Government Funding S&T Park Large Companies Provide tangible outcomes from university research. This helps justify university funding University Researchers Research Institutions Incubators 41 Charles W. Wessner Ph.D.
To Conclude Innovation is Key to Growth and Development
Innovation Policy is not a Hobby but a Key Policy Focus Innovative Governance requires sustained attention by national leadership Innovation Programs require Sustained Funding and Regular Evaluation Framework conditions on labor, IP, and Bankruptcy matter a lot Money to Jumpstart Enterprise is key The Key Point: We all need to learn from, and adopt and adapt Best Practices from others There are no islands 43 Charles W. Wessner, PhD
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. 20001 cwessner@nas.edu Tel: 202 334 3801 http://www.nationalacademies.org/step 44 Charles W. Wessner Ph.D.