1

Best Practice in State and Regional Innovation

Systems

Supporting Regional Innovation Systems

Morgantown, West VirginiaOctober 21, 2009

McAlister ClabaughThe National Academies

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The Program on Technology, Innovation and Entrepreneurship

(TIE)The TIE program evaluates innovation initiatives:

• In the rest of the world: – Comparative Innovation Policy– China, India, Taiwan, Japan, Sweden, Finland, Poland,

• In the US, at the federal, state, regional, and foundation level: – State and Regional Innovation Policy – Assessing the SBIR Program

• Provide recommendations on how to convert R&D into successful firms and stimulate innovation-led economic development through innovation awards, institutional incentives, and infrastructure development

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The Global Innovation Imperative

• 4 Key Points– Innovation is Widely Recognized as Key to

Growing and Maintaining a Country’s Competitive Position in the Global Economy

– Collaboration is Essential for Innovation as Small Businesses and Universities Play a Growing Role in the Innovation Process

– Institutional Change is Necessary to Compete Successfully

– New Incentives are Required for Change

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Global Competition is Increasing in Scale and

Effectiveness• China brings scale advantages, national focus and resources– National Goal to become a Global Manufacturing &

Leading Edge R&D Center– Intense Focus on Innovation & Institutional Change– Major Investments: over 100 S&T parks

• India’s Policy Liberalization is unleashing growth– Emerging as a center for high-end R&D

• Japan is Restructuring its Innovation System– High level policy focus and major investments

• The UK, France, Netherlands, and Germany are renewing & funding up tech programs

The Pace of Competition is Accelerating

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China’s Remarkable R&D Growth

15.5%

6%

2007

1999

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What is a Region To Do?• All Economic Growth is Local & Grounded

– Place Matters• Complex, self-organizing systems

– Healthy ecology of actors & institutions – Appropriate Incentives– Black Swans

• Can we really anticipate new technology? • Or future Economic change

• Government’s Objective Function– More complex when compared to firms– Maximize residents’ income and wealth

• Designing economic development strategy may be the ultimate local innovation

• Innovation is needed to address 21st Century Challenges in Growth, Energy, Climate, Health, and Security

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Key Challenges for the United States

• How do we transform investments in R&D into competitive new products for the market?

• How can we encourage collaboration among innovative small and large companies, universities, and national laboratories to stimulate growth and employment?

• How do we meet the locational competition for investment in the industries of today, as well as the industries of tomorrow?

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Myths that Obstruct Policy Solutions

• Capital Markets: “If it is a good idea, the market will fund it” & “U.S. VC Markets are broad & deep, thus there is no role for government awards”– Reality: Potential Investors have less than perfect knowledge, especially

about innovative new ideas, which leads t0 suboptimal investments• Limited information on new firms• Prone to herding tendencies and trends• Focus on later stages of technology development• Seek early exits

• Linear vs Non-Linear Innovation Models: 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

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Federally Funded

Research Creates

New Ideas

Innovation

Product Development

Firm Growth

Capital to Transform Ideas into Innovations

No Capital

The Result: A Widening Valley of Death

Dead Ideas

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Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage

Firms: Aggregate Amounts are Falling

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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The Early Stage “Valley of Death”

Pre-Seed Seed/Start-Up

Early Later

Founders, Friends, Family & Fools

Federal SBIR Grants/Angel Investors/ Angel Groups

Venture Funds*

$25,000 $100,000 $1 to 2 million

$5 million

Funding Gap

VALLEY OF DEATH

Adapted from: Richard Bendis and Ethan Blyer, “Creating a National Innovation Framework, Science Progress, 2009

* NB: Average Venture Investment is $8.3

million

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Where Should Innovation Policy Focus?

• Private activity is the Tip of the Iceberg– Government and Universities play major

roles in innovation and economic development

• What enables innovation?– Capacity – Incentives – Institutions

• New Quasi-Governmental Entities – Public-Private Partnerships– Non-profits & Foundations

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Opportunities for Policy Initiatives

• Capacity, Incentives, and Institutions: How do we improve these to encourage growth?

• Greater role for Small Businesses in Innovation• Focus on University-Industry Collaboration

– More encouragement and collaboration among SMEs, MNCs and Universities

– Better Commercialization of Research– Closer ties, with less overhead in University-Industry relations

• More Intermediating Institutions – Science Parks can serve as catalysts to bring actors together– Public-private partnerships like Sematech, SRC and Semi offer

a proven path forward for technologies like semiconductors and photovoltaics

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The Small Business Innovation Research Program

• Long-lived: In place for 25 years– Created by the Small Business Innovation Act of 1982 &

renewed in 1992 & 2001. Currently up for reauthorization. • Decentralized: Each Agency uses its funds to

support research by small companies to meet its mission needs

• No New Money: 2.5% of Agency R&D budgets set-aside for small business awards– This provides budget stability and growth

• Large Scale: Largest U.S. Innovation Partnership Program– Currently a $2.3 billion per year

• Focus: Funds Proof of Concept and Prototype• Helps firms across the Valley of Death and attract

private capital or public contracts

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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

Socialand

Government Needs

$750K$100K

R&

D

Investm

en

t

Non-SBIR Government Investment

$151 billion

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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

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Transferring University Technology to Firms

RESEARCH $$ INVESTMENT $$

SALES $$

UNIVERSITYCOMMERCIAL

COMPANYNEW PRODUCTS

& PROCESSESINNOVATION

LicenseAgreement or Equity

• Licensing to existing companies – brings royalty $

• New company formation – brings royalties and/or equity

• Other, less direct, contributions to regional economic activity

ROYALTIES

or EQUITY PAYOUT

SBIR

Drawn from C. Gabriel, Carnegie Mellon University

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NRC Survey: SBIR Awardees Come From & Work Closely with

Universities• Over a third of the respondents in the NRC survey

Phase II Survey of 4000 firms reported university involvement in their SBIR project. Of these:– More than 80% of NIH respondent companies had at

least one founder from academia

– About 1/3rd of founders were most recently employed as academics before founding the company

– About 1/3rd of projects had university faculty as contractors on the project and 1/4th used universities themselves as subcontractors

– 15% of SBIR awards involved graduate students.

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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– 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

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Commercializing University Research is Politically Important because it…

• Provides a Return to Public Investments in Research– Ensures that new & promising ideas are not trapped in the

University laboratory

• Justifies New Research Allocations– Creates tangible outputs from public investments

• Provides a source of New Firms & Jobs– Needed for Economic renewal & competitiveness

• Provides Services to Firms within the Innovation Ecosystem– Fosters skill pools needed for innovation clusters

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S&T Parks Stimulate Regional Economic

Development• Parks provide short term stimulus from construction jobs, and long term benefit from research activities, firm creation, and growth

• Well-conceived and regularly assessed S&T Parks can– Facilitate Firm Creation– Generate Critical Mass for a Regional Economy– Encourage New and Existing Firms and the New Jobs and

Growth they bring– Have concrete impacts on jobs and growth that build

support in the Community and the State

• S&T Parks are a Valuable Part of the Innovation Ecosystem and need to be reinforced with federal incentives

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Research Parks are a Part of the Answer

• 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 incubation and spin-off

• They provide value-added services together with high quality space and facilities

• They help create a “Community of Innovation” needed to transfer new ideas from universities and laboratories into the marketplace

• They build partnerships among researchers, small companies, and large companies

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Key Factors for Successful Research Parks

• Critical Mass– Presence of a Strong Science and Industry Base– Involvement of a Local Major Research Universities– Availability of Skilled Workers– Access to Finance– Good Park Infrastructure and Quality of Life Amenities

• Leadership– Committed Champions– Strong and Committed Park Leadership– Presence of Entrepreneurs and Skilled Managers

• Patient and Supportive Public Policies– Predictable, Substantial, and Sustained Funding– Bridging Institutions to sustain vision over the long term

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Universities are Getting the Message

• The are integrating more with S&T parks– University faculty increasingly work with private

firms and firms rent laboratories and incubator space in universities.

– Beyond research universities, community colleges and regional technical schools are increasingly participating in research parks

• … often with substantial state support– Most research parks outside the U.S. are

planned as part of a national strategy for industrial competitiveness.

– S&T Parks can be found in more than 60 countries at all stages of development.

Source: Luger and Goldstein, 2006

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Next Steps: Regional Innovation Workshops &

Cluster Development• Planning a series of workshops focusing

on:– Current strengths, challenges, and

opportunities– Capacity building: Industry, universities,

local government– Aligning incentives and stakeholders for

regional development• Ohio: Solar, polymers • Michigan: Electric vehicles and batteries• Hawaii: Solar, wind power

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Thank You

McAlister ClabaughProgram Officer

The National Academies500 Fifth Street NW

Washington, D.C. 20001mclabaugh@nas.edu

Tel: 202 334 3019

http://www.nationalacademies.org/step