financing for science, technology & innovation...

Trade and Development Board Investment, Enterprise and Development Commission Multi-year expert meeting on enterprise development policies and capacity-building in science, technology and innovation Geneva, 20–22 January 2009

PAPER SUBMITTED TO THE EXPERT MEETING*

Financing for Science, Technology & Innovation Capacity Building for Education and Research

by

Mr. Charles W. Wessner

Director of Technology, Innovation and Entrepreneurship United States National Research Council

Thompson

________________ * The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.

© Charles W. Wessner Ph.D. 1

Financing for Science, Technology & InnovationCapacity Building for Education and Research

ðUnited Nations Conference on Trade & Development

Geneva, SwitzerlandJanuary 20, 2009

Charles W. Wessner , Ph.D.Director , Technology, Innovation, and Entrepreneurship

The National Academies


Today’s Presentation• The Innovation Imperative

– The New Global Competition• 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– Summary

• Today’s Presentation reflects my personal views


View of Some in the United States (At least until recently)

• The answer:“A good life today may not be a good life tomorrow”“Things change, & change rapidly”

• Dr . Wladawsky-Berger , IBM

– And they did!

“Life is good, so why worry about

the future?”


Crisis as an Opportunity• “You never want a

serious crisis to go to waste. ...”– Rahm Emanuel, chief

of staff for President Barack Obama

• The need for action opens opportunities for new initiatives


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

– Institutional Change is Necessary to Compete Successfully and New Incentives are Required for Change


How are Leading Nations Responding to the Innovation Imperative?

• They are providing three things:–High-level Focus, – Sustained Support for R&D–New Innovation Partnerships

7 © Charles W. Wessner, Ph.D.

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)


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


Recent Trend: China’s Remarkable R&D Growth

15.5%

6%

2007

1999


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


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

• A*Star’s new S&T Parks—Biopolis & Fusionopolis

– New programs to address the early-stage funding challenge for innovative firms


The Best Innovators are ChangingFinland, Sweden, the Netherlands, & France are

• Making Substantial public R&D investments• Internationalizing the innovation environment• Reforming university structures and public

research institutes• Mobilizing private capital for start-ups and

growth companies ( eg. by providing taxincentives)

• Introducing new partnership programs for greater productivity in the services sector(private & public)

• Many of these Strategies draw from perceived successful U.S. Policies and Programs

What is the United States Strategy?

Well, there is no Strategy(at least not yet!)

©Charles W. Wessner PhD14

The Myth of the Rational Policy Framework• Myth: U.S. Innovation Policy is based on a coherent

National Innovation Agenda, Generating a well-oiled Innovation Machine

• Reality: There is no U.S. Ministry of Science and no Coherent StrategyØ 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


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 States 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

Innovation in the U.S.

Advantages and Challenges


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


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 means easy entry– Gentle Bankruptcy Laws permit rapid recovery– Taxes give Prospect of Substantial Rewards

• Strong Intellectual Property Regime:• Encourages Research & Diffusion

• Decentralized Governance Encourages New, Local Initiatives

© Charles W. Wessner PhD19

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 CompaniesSources: 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


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

• Uneven & Insufficient R&D Funding– Physical Sciences and Engineering Funding is down or flat– U.S. spending on Research is overstated

• Insufficient Support for Commercialization– Few programs—Effective, but limited scope– Market Oversell & Ideological Blockages limit the

Commercialization of R&D


Government R&D Levels are Flat

22

Growing Concern about the Effects of a Stagnant Federal Research Portfolio

23

How does President Obama

Propose to Support Innovation?

üDouble federal funding for basic research over ten yearsüNew Investments in S&T InfrastructureüNew Financing for S&T and Innovation


Obama’s Proposed Support for Innovation• Encourage Science-based Policymaking

– Recognizes Global Warming

• Expand R&D Investments– Fully fund the America Competes Act--Double federal

funding for basic research over ten years – Encourage Multidisciplinary Research and Education

• Grow the Science and Engineering Workforce– Recruit teachers for K-12 math and science– $500 million Technology Investment Fund to bring new

technologies to schools– Triple the number of NSF Graduate Research Fellowships– Partner with states to encourage and measure STEM

learning

Sources: change.gov; barakobama.com


President Obama’s Proposed Support for Innovation

• Deploy Next-Generation Broadband• Reform the Patent System• Immigration reform to attract and retain

talent from around the world• Make the R&D tax credit permanent• Eliminate the capital gains tax on start-ups

and small businesses


President Obama’s Proposed Support for Innovation

• Address the “Grand Challenges” of the 21st Century– Accelerate the transition to a low-carbon,

oil-free economy– Encourage “green technologies” to sustain

the planet and the environment while creating new industries

– Use technology to improve the quality and lower the cost of healthcare

27

But the U.S. Faces Severe Fiscal Challenges• Iraq: A $13 billion a month war*• Afghanistan: $3 billion a month war*

– Afghan War to be escalated

• Financial Rescue Package: $700 billion and Rising– Bailout for Mortgage Funders, Insurance Firms

(AIG), and Wall Street Financial Institutions

– Detroit Automakers and more Banks: $16 billion and climbing

[* Center for Arms Control Estimate (FT 2008)]

28

Fostering Innovation is more than a Matter of Increasing InputsInnovation is not a Linear Process

Public-Private Partnership play a key role in Encouraging Collaboration

needed to Develop New Ideas into Products for the Market

© Charles W. Wessner, Ph.D. 29

• 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

The Myth of the Linear Model of Innovation

Basic Research Applied Research

Development Commercialization


Basic Research

AppliedResearch

Development

Commercialization

Quest for Basic Understanding

Potential Use

Development of Products

Feedback: Market Signals/Technical Challenge

Feedback:Designnew product characteristics

Feedback: Search for newideas and

solutions tosolve longer-term issues

Non-Linear Model of Innovation

NewUnanticipatedApplications

© E. Evans


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“


Federally Funded

Research Creates

New Ideas

Innovation &

Product Development

Capital to Transform Ideas into Innovations

No Capital

Result: The Early-Stage FundingValley of Death

Dead Ideas


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


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 and the prospect of high return

• Venture Capital brings many advantages– Capital for Firm Development—Scaling up Quality– Management and 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

• See the current Funding break out


The Venture Capital ConstraintLarge U.S. Venture Capital Market is

Not Focused on Seed/Early-Stage Firms

Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2007

U.S. Venture Captial by Stage of Investment 2007

4%18%

41%

37%

Seed Stage: $1.2 billion415 Deals

Early Stage: $5.2 billion 995 Deals

Expansion Stage$10.8 billion1235 Deals

Later Stage$12.2 billion1168 Deals

Total: $29.4 Billion


Small Innovative Firms Face Challenges in Obtaining Seed and

Early-Stage Funding

• Many Countries see Venture Capital, often with Public Support, to be the Solution

• Venture Capital is a Powerful Tool, but Limited, especially in the Current Financial Climate


Venture Capital Markets are in a Freeze• Markets are cyclical, and so is venture

capital • For the market to function, liquidity events,

(i.e., acquisition or initial public offering) must be possible– Last year , Silicon Valley saw only one IPO

• Venture Capitalists are retrenching – Conserving Capital to preserve the existing

portfolio investments– New investments are not being undertaken


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


Understanding Venture Funding• Venture Funding Involves High Risks; Gains are

Normally Concentrated*– Many funds lose money—about 15% give no return– Most investments lose money or break even– A small proportion (about 15%) 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)

One Source of Deal Flow:The Small Business Innovation

Research (SBIR) Program

Helping Innovative Small Businesses Cross the Valley of

Death

© Charles Wessner, Ph.D. 41

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: 2.5% of Agency R&D budgets set-

aside for small business awards• 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

. 42

The SBIR “Open Innovation” Model

PHASE IFeasibilityResearch

PHASE IIIProduct

Developmentfor Gov’t orCommercial

Market

Private SectorInvestment

Tax RevenueFederal Investment

PHASE IIResearchtowards

Prototype

Socialand

Government Needs

$750K$100K

R&

D In

vest

men

t

Non-SBIR Government Investment

$143 billion

. 43

$5 Million NRC Study of SBIRUnprecedented Large Scale Original Field Research• Surveys: Over 7000 Projects Surveyed

– Phase I Award Survey targeted 3000 firms– Survey on Phase II Awards (1992-2002)

involved over 4000 firms– Program Manager Survey– Technical Manager Surveys (TPOCs and COTRs)

• Case Studies– Approximately 100 case studies conducted– Case Study selection reflects program diversity

• Surveys & Case Studies Developed in Consultation with Agencies & SBIR users

“The SBIR program is sound in concept and effective in practice.”

Key Finding of the National Academies Recently Concluded

Assessment of SBIR


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


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

© Charles W. Wessner, PhD47

SBIR Helps Attract Additional funds from 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

• Acquisition: e.g., Philips acquisition of Optiva for $1 billion

• Choice: Provide New Options and Competition for Public Procurement

Recent Parallel Research Highlights the Impact of SBIR Awards

Recent Research from the University of California finds that SBIR contributes to

top U.S. innovations-Findings Complement NRC Research-


“The SBIR program has become a key force in the innovation economy of the United States”

• 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, 2008

SBIR Founded

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

Charles W. Wessner, PhD51

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


The 21st 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


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 high-

tech 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, 2007


Key Lessons from KU-Leuven

• Technology Transfer does not harm academic values nor academic productivity

• Technology Transfer must be competitive, international and geared towards excellence

• Funding & experienced staff are essential

• Universities are essential partners and sources of creativity and innovation in this economic race

Adapted from Prof. Koenraad Debackere, Sept 2006


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


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.

Strategies for Growing and Sustaining a Knowledge-based Economy:

“Innovation” as a path to Sustainable Growth


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

• This view too often fails to address need for incentives to capture the innovative capacity of the ‘bottom of the pyramid”


A New Approach to Development• Provide Incentives and Drop Disincentives for Local

Entrepreneurship– Easier Labor rules & Taxes for Start-ups– Eliminate outmoded Bankruptcy Laws

• Provide Funds to Spur Entrepreneurship– Encourage new businesses, job creation and ability to

meet local needs with local resources

• Reinforce Cooperation and Entrepreneurial Activity– Emphasis on public-private partnerships to generate

productive collaboration– Small Amounts of Funding can be a Powerful Catalyst!– The Action is in the Private Sector

To Conclude…


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, Tax Incentives, and Awards


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

• Next Generation Challenges Require– More linkages between Industry & Private R&D– Use of Proven Mechanisms, including Consortia

and Innovation Awards– Careful Coordination


“Innovation” is the Key to how Nations Compete and Grow in the 21st Century

• Supporting innovation should be recognized as a central function of the government– Key to a nation’s wellbeing and competitiveness

• Successful Innovation policies require sustained attention & regular review– Sustained, policy attention– Requires an understanding of the innovation

ecosystem

• Learning from each other is a must


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

mailto:[email protected]

http://www.nationalacademies.org/step

financing for science, technology & innovation...

Documents