© charles w. wessner phd. 1 addressing the innovation imperative collaboration, institutions, and...
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© Charles W. Wessner PhD. 1
Addressing the Innovation Imperative
Collaboration, Institutions, and Incentives
SDC Seminar in honor of H.E. Dr. Tobias KrantzWashington DC
February 4, 2010
Charles W. Wessner, PhD.Director, Technology, Innovation, and Entrepreneurship
The National Academies
© Charles W. Wessner PhD. 2
Current Global Mega-Challenges are Areas for
Cooperation• Fostering Economic Growth– Driving domestic Growth and Employment through
Innovation• Developing New Sources of Energy
– Commercializing renewable alternatives to oil– Increasing the capacity to fuel growing global demand for
electricity• Addressing Global Warming
– 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– Through all of the above
© Charles W. Wessner PhD3
How can we address these
Global Challenges?
Congress
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Innovation is Essential• Leading nations are providing four
pillars of support:– High-level Focus– Sustained Support for R&D: Leveraging
Public and Private Funds– Support for Innovative SMEs– New Innovation Partnerships to bring new
products and services to market• Many countries are investing very
substantial resources to create, attract and retain industries in a variety of sectors
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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.
• Focused, Committed, and Willing to SpendModified from C. Dahlman, Georgetown University
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Changing Shares of Global R&D Spending
1999 2008 2009 2010
United States
39% 35.4% 35.0% 34.8%
China 6% 9.1% 11.1% 12.2%
Japan 15% 13.2% 12.5% 12.3%
Europe 26% 24.9% 24.0% 23.2%
Source: Battelle, R&D Magazine December 2009
© Charles W. Wessner, PhD7
Singapore’s Innovation Strategy
• Total Focus, Commitment, and Long-Term Spending by the Government – Goal is to establish Singapore (population: 4.5 million) as
Southeast Asia's preeminent financial and high-tech hub. • A*STAR’s task, with $5 Billion in funding is to:
– Invest in and attracting a skilled R&D workforce– Attract major investments in pharmaceuticals and medical
technology production– Invest in Public Private Partnerships
• New S&T Parks—Biopolis & Fusionopolis– Develop new programs to address the early-stage funding
challenge for innovative firms• Generating local entrepreneurs and firm growth
remain challenges
© Charles W. Wessner, PhD8
What about Sweden?
The Good News: Sweden tops the Innovation Capacity Index Rankings 2009-2010
(Innovation for Development Report)
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Characteristics of the Swedish Innovation System
• The economy is strongly internationally linked• R&D-system dominated by big international
companies• Low investment by SMEs in R&D• Universities dominate the public R&D-system• Government invests very little R&D-money in
companies outside the military sector
Source: Olof Sandberg, Senior Adviser, Ministry of Enterprise, Energy and Communications (June 2008)
© Charles W. Wessner, PhD10
Key Challenges for Sweden
• Encourage New Equity based Hi-tech Firms with Innovation, Jobs, and Growth– Few Major New Firms Created in Sweden Since
1970 (30 of top 50 created before 1914)
• Improve collaboration between universities and business*
• Improve the commercialization of research results*
*Source: Sandberg, 2008
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Deciphering the Swedish Paradox
• The Lisbon Agenda is an input measure– Without institutional change, little discernable
additionality will occur– What do you get for 0.2% more R&D?
• The Swedish Paradox is two-fold– On one hand, existing levels of R&D need to
be augmented by new incentives to bring research across the Valley of Death
– On the other hand, existing high levels of funding for research and certainly for commercialization may not be sufficient, given Sweden’s admirable tendency to “punch above its weight” in the global economy.
© Charles W. Wessner, PhD
Innovation in the United States
New Focus on Applied Research to address challenges in Energy, Health,
and the Environment
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Strengths of the American Model
• Sustained Growth: Despite the debt-fueled bubble, the U.S. economy grew by 63% between 1991 and 2009, – Compare with 35% for France, 22% for
Germany, and 16% for Japan• Stability: In 1975, the U.S. had 26.3% of
world GDP; today it is 26.7%– We’re not going away
• Science and Innovation are key to our future, as is new leadership
Source: New York Times, December 7, 2009
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A Renewed Focus on Innovation
Science and innovation is "more
essential for our prosperity, our security, our
health, and our environment than it
has ever been."
President Obama at the National Academies—April 27, 2009
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Obama Pledges to Raise R&D and Create new
Incentives for Innovation • “We will devote more than 3 percent of
our GDP to research and development.”– The U.S. joins the quest for the Lisbon Target
• “We will not just meet, but we will exceed the level achieved at the height of the space race, through policies that– invest in basic and applied research, – create new incentives for private innovation, – promote breakthroughs in energy and
medicine, and – improve education in math and science.”
Address to the National Academy of Sciences, April 27, 2009
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National Economic Council: “A Strategy for American
Innovation” September 21, 2009• Invest in the Building Blocks of American
Innovation – Investments in human, physical, and
technological capital• Promote Competitive Markets that Spur
Productive Entrepreneurship• Catalyze Breakthroughs for National
Priorities– Develop alternative energy sources– Reduce costs and improve lives with health IT– Manufacture advanced vehicles
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New Commitments to Support Innovation
Doubling of federal funding for basic research over 10 years at NSF, NIST, DOE (Office of Science)
New Investments in S&T InfrastructureNew Financing for S&T and InnovationMaking the research and
experimentation tax credit permanent
Increases are for Research, but not for
TransitionMyths about “Perfect Markets” mean insufficient focus on collaborations
essential for transitioning new ideas to the market
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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
– George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information“
Charles W. Wessner PhD20
Federally Funded
Research Creates
New Ideas
Product Development
and
Firm Growth
Capital to Transform Ideas into Innovations
No Capital
Reality: The Early-Stage Funding
Valley of Death
Dead Ideas
Charles W. Wessner PhD21
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
Charles W. Wessner PhD22
Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage
Firms:
Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2009
U.S. Venture Captial by Stage of Investment 2008
5%19%
37%
39%
Seed Stage: $1.5 billion440 Deals
Early Stage: $5.3 billion 1,013 Deals
Expansion Stage$10.6 billion1,178 Deals
Later Stage$10.8 billion1,177 Deals
Total: $28.2 Billion
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U.S. Venture Investments Down 37% in 2009
U.S. Venture Capital by Stage of Investment 2009
9%
26%
31%
34%
Seed Stage: $1.7 billion312 Deals
Early Stage: $4.6 billion 883 Deals
Later Stage$5.9 billion799 Deals Expansion
Stage$5.5 billion801 Deals
Total: 17.7 Billion, 2795 dealsSource: PWC-MoneyTree Report, 2010
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The Venture Capital Obsession• Investment in Public VC Funds = Substantial Risk
• “Extraordinary skewness of returns” on VC Investments in the United States*– About 15 percent of investments fail completely– 35 percent of returns are less than 100 percent– Only 15 percent of the firms that go public or are acquired
give a return greater than 1,000 percent!• Source: John H. Cochrane, “The Risk and Return of Venture Capital,”
Journal of Financial Economics, 75(1):3-52, 2005.
• Many companies live and grow without Venture Funding– “Hardly ten percent of the serial entrepreneurs took venture
money in their first startups”• Source: Duke University Survey, October, 2009 by V. Wadhwa
• Where is the Deal Flow?
Crossing the Valley of Death is a Major Challenge
There are many paths:The Small Business Innovation Research
(SBIR) Program is a Proven Approach
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Oxygen for Innovation: What is SBIR?
• A Competitive Innovation Award Program that– Provides seed funding to worthy
entrepreneurs– Signals that there are promising
opportunities for private investors– Solves problems for government
agencies and improve markets– Creates products to address social
needs at the bottom of the Pyramid
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The SBIR “Open Innovation” Model
PHASE IFeasibilityResearch
PHASE IIIProduct
Developmentfor Gov’t orCommercial
Market
Private Sector Investment
Tax RevenueFederal Investment
PHASE IIResearchtowards
Prototype
Social and Government Needs Drive the Program
$750K$100K
R&
D
Investm
en
t
Non-SBIR Government Investment
$151 billion
Solicitation Solicitation
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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
29 © Charles W. Wessner, PhD
Universities play a Growing Role in Commercializing
Knowledge
Universities that are able to connect with Industry Drive
Regional Development and are Assets for National Competitiveness
©Charles W. Wessner PhD30
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
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Roles of the 21st 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
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Where are the 21st Century Universities?
• In California: Stanford and CalTech• In Massachusetts: MIT• In Flanders: KU Leuven• In Sweden: Chalmers and Jönköping
University • In Finland: the new Aalta University• We need to build more 21st Century
Universities– Is Sweden replicating its successes?
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Today, Industry (and Regions) Rely on University Research to Create
Future Growth• University research draws ideas from commercial
trends—feedback loops from industry to universities are sources of Quality Research
• Regional economies rely on research universities for jobs, branding, growth, & entrepreneurship
• University innovation + early government funding are key to the growth of many successful technology companies
• A Supportive University Culture & Real Incentives are essential for the development of vibrant Innovation Clusters
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New Focus in the U.S.
on Innovation Clusters
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Greater Federal Role Seen for Fostering Regional Innovation
Clusters• “Regional industry clusters represent a potent
source of productivity at a moment of national vulnerability to global economic competition.”– Karen Mills, Clusters and Competitiveness, Brookings
2008
• The U.S. can facilitate knowledge exchanges and provide additional funds to encourage regional cluster development
• President Obama has called for a new federal effort to support regional innovation clusters
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S&T Parks can be a Catalyst for Cluster Development
• Well-conceived and well funded S&T Parks can – Build partnerships among
researchers, small companies, and large companies
– Help create companies
– Advance university missions in education, research, and commercialization
SmallCompanies
University Researchers
ResearchInstitutions
PublicSupport
Large Companies
Universities
S&T Park
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New National Academies Report on Research Parks
• Understanding Research, Science and Technology Parks: Global Best Practices (2009)
• Key Points– Research Parks stimulate and manage the flow of
knowledge among universities, R&D institutions, firms and markets
– They facilitate the creation and growth of innovation-based companies through spin-off and incubation
– They provide value-added services together with high quality space and facilities
– They help create a “Community of Innovation” or Cluster needed to transfer new ideas from universities and laboratories into the marketplace
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Key Findings: Successful Research Parks Require…
• Critical Mass– Involvement of a Local Major Research Universities– Availability of Skilled Workers– Access to Finance– Good Park Infrastructure and Quality of Life Amenities
• Strong Leadership– Committed Political Champions– Strong and Committed Park Leadership– Attract Entrepreneurs and Skilled Managers
• Patient and Supportive Public Policies– Predictable, Substantial, and Sustained Funding– Complementary programs like SBIR
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Parks are now a Worldwide Phenomenon
• Governments around the world are building research parks to– Facilitate the commercialization of new technologies– Attract leading technology companies from abroad– Benefit from and contribute to university research
• Significant financial and policy support from national & state governments drives park growth– Zhangjiang High Tech (ZHT) Park in Shanghai
• MNC R&D Centers encouraged to team up with Chinese research institutes
• Overseas Chinese scientists lured home with tax breaks and low rent—253 returnees for ZHT park alone in 2003
• Shanghai New Pudong Area Venture Fund provided more than $25 billion in venture capital in 2006 for the ZHT Park
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U.S. Proposals to Support Clusters
• 2009 Appropriations Act provides the Economic Development Administration (EDA) $4 million to begin a regional innovation clusters program
• 2010 Legislation provides Support for Research Parks– Senate: Building a Stronger America Act
• Provides $500 million grants and loan guarantees for the development and construction of science parks over 5 years
– House: Science Parks Research and Innovative New Technologies (SPRINT) Act
• Authorizes $7.5 million for competitive grants for studies to develop new parks or expand existing research parks
• Guarantees up to 80 percent of loans for the construction of science parks
• Question of Critical Mass…
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NAS Conference “Growing Innovation Clusters
for American Prosperity” • We are organizing a conference on
February 25, 2010 to: – Review the government’s new initiatives in
stimulating clusters– Explore role of universities and foundations
in their development.– Study specific strategies in place around the
country and around the world– Highlight institutions and programs that can
be leveraged now to grow and sustain clusters
42 © Charles W. Wessner, PhD
To ConcludeKey Take Home Points
Our Common Challenge
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The Global Innovation Imperative
• 3 Take Home Points– Innovation is Key to Growing and
Maintaining a Country’s Competitive Position in the Global Economy and to address Global Challenges
– Collaboration is Essential for Innovation as Small and Large Businesses, Universities, and Research Institutes Contribute to Regional Growth and Job Creation
– New Institutions and New Incentives, are increasingly important to foster innovation and collaboration
©Charles W. Wessner PhD44
Our Common Challenge: New Incentives
• Overcome Complacency: Sweden and the United States need to address the Global Innovation Imperative by initiating change: – Incentives for entrepreneurial activity for
Small Firms, Large Firms, and Universities– New, better institutions that incentivize
cooperation among all actors
• Mutual Learning and Cooperation are Essential for our Common Future
©Charles W. Wessner PhD45
Thank You
Charles W. Wessner, Ph.D.Director, Program on
Technology, Innovation and EntrepreneurshipThe U.S. National Academies
500 Fifth Street NWWashington, D.C. 20001
[email protected]: 202 334 3801
http://www.nationalacademies.org/step