I
INTRODUCTION



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Innovation Policies for the 21st Century: Report of a Symposium I INTRODUCTION

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Innovation Policies for the 21st Century: Report of a Symposium Innovation Policies for the 21st Century The capacity to innovate and commercialize new goods and services remains vital to the future competitiveness of the United States and indeed all participants in the global economy. Reinforcing and sustaining this capacity is particularly salient as research, development, manufacturing, and the delivery of services, made possible by new information and communications technologies, become ever more global. The emergence of new participants in the global economy, focused on attracting and developing high-technology industries within their national economies, is increasingly significant. China, for example, combines the advantages of high-skill and low-wage knowledge workers with a strong sense of national purpose. Responding to these structural changes in the global economy, other advanced economies have already initiated major programs, often with substantial funding, that are designed to attract, nurture, and support innovation and high-technology industries within their national economies. In this new competitive paradigm, the United States cannot assume that its continued preeminence in science and technology is assured. As the National Academies noted in its recent report, Rising Above the Gathering Storm, “this nation must prepare with great urgency to preserve its strategic and economic security. Because other nations have, and probably will continue to have the competitive advantage of low-wage structure, the United States must compete by optimizing its knowledge-based resources, particularly in science and technology, and by sustaining the most fertile environment for new and revitalized industries and the well-paying jobs they bring.”1 1 National Academy of Sciences/National Academy of Engineering/Institute of Medicine, Rising Above the Gathering Strom: Energizing and Employing America for a Brighter Future, Washington, D.C.: The National Academies Press, 2007.

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Innovation Policies for the 21st Century: Report of a Symposium Responding to this challenge requires that we recognize that the nature and terms of economic competition are shifting as the United States cooperates and competes in a global economy.2 U.S. policy makers need to be aware of the wide variety of innovation and competitiveness policies that many nations have adopted. These policies are designed to build research capacities and to acquire knowledge, and then to transition that knowledge directly to companies and support their development. The power of such well-financed and integrated national programs to shift the terms of international competition is often underestimated. In addition, other national programs are more modest in scale, providing essentially market-based incentives to encourage the transition of new technologies to the market. Yet, they too can have a significant impact on the terms of competition. A comparative perspective is necessary to help us understand what policies are succeeding and why, how selected policies might be successfully adapted in the U.S. context, and what existing U.S. programs might be enhanced. Above all, it is important to understand, as one recent report notes, that the pace of competition is accelerating.3 To better understand how competition is evolving, the National Academies’ Board on Science, Technology and Economic Policy (STEP) held a symposium on April 15, 2005, which drew together leading academics, policy analysts, and senior policy makers from around the globe to describe their national innovation programs and policies, outline their objectives, and highlight their achievements. This introductory essay summarizes the key issues raised at this National Academies symposium on Innovation Policies for the 21st Century. Contemporary approaches to innovation policy draw explicitly and implicitly on the idea of an innovation ecosystem, and Section A introduces this concept and the role of intermediating institutions in delivering the fruits of research to the marketplace. Section B highlights new competitive challenges related to the emergence of China and India as major new participants in the global economy. Section C looks at innovation programs and policies adopted by several developed nations to innovate and commercialize knowledge in today’s global marketplace. Section D then reviews selected U.S. policies and programs designed to spur the commercialization of innovation. Finally, Section E draws together the need for a comparative perspective that draws on best practices in the United States and overseas. 2 Kent Hughes has argued in this regard that the challenges of the 21st century require new strategies that take account of new technologies, new global competitors, as well as new national priorities concerning national security and the environment. See Kent Hughes, Building the Next American Century: The Past and Future of American Economic Competitiveness, Washington, D.C.: Woodrow Wilson Center Press, 2005, Chapter 14. 3 Ibid.

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Innovation Policies for the 21st Century: Report of a Symposium “This symposium is about competitiveness: Some countries are tying to figure out how to get it, others how to keep it, and still others how to get it back. And it’s all about learning how to move fast and win in a brutally competitive global economy, such as we’ve never seen.”a Dr. Lewis Edelheit Senior Vice President of Corporate Research, General Electric, retired    aSee comments by Lewis Edelheit in the proceedings section of this volume. UNDERSTANDING THE INNOVATION ECOSYSTEM How can we better capitalize on national investments in research? More specifically, how can we deliver the fruits of research through products and processes that both enhance welfare and generate wealth? And how do we generate the types of output from our universities and research centers that will help our regional economies grow and meet the challenges of the future? Beyond merely focusing on increasing inputs (such as more funds for basic research) on one hand or setting output targets and mandating results on the other, the innovation ecosystem approach examines the complex processes through which innovations emerge through a variety of collaborative activities to become commercially valuable products.4 Many of the speakers at the symposium drew on the idea of an innovation ecosystem. An innovation ecosystem is described below. What Is an Innovation Ecosystem? An innovation ecosystem captures the complex synergies among a variety of collective efforts involved in bringing innovation to market.5 These efforts 4 Drawing from presentations by the STEP Board staff to the PCAST, the concept of an innovation ecosystem was adopted by the President’s Council of Advisors on Science and Technology and the Council on Competitiveness, among others. For an early articulation of the concept, see Charles W. Wessner, “Entrepreneurship and the Innovation Ecosystem,” in David B. Audretsch, Heike Grimm, and Charles W. Wessner, Local Heroes in the Global Village: Globalization and the New Entrepreneurship Policies, New York: Springer, 2005. 5 Consciously drawing on this ecosystems approach, the Council of Competitiveness’ National Innovation Initiative (NII) report and recommendations address the need for new forms of collaboration, governance and measurement that enable U.S. workers to succeed in the global economy. Council on Competitiveness, Innovate America: Thriving in a World of Challenge and Change, Washington, D.C.: Council on Competitiveness, 2005.

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Innovation Policies for the 21st Century: Report of a Symposium include those organized within as well as collaboratively across large and small businesses, universities, and research institutes and laboratories, as well as venture capital firms and financial markets.6 Innovation ecosystems themselves can vary in size, composition, and in their impact on other ecosystems. The strength of the linkages across a given innovation ecosystem can also vary. Beyond this description, the term “innovation ecosystem” also captures an analytical approach that considers how public policies can improve innovation-led growth by strengthening links within the innovation ecosystem. Intermediating institutions (such as public-private partnerships) can play a key role in this regard by aligning the self-interest of venture capitalists, entrepreneurs and other participants within a complex innovation ecosystem with desired national objectives.7 The idea of an innovation ecosystem builds on the concept of a National Innovation System (NIS) popularized by Richard Nelson. According to Nelson, a NIS is “a set of institutions whose interactions determine the innovative performance … of national firms.”8 Too often, however, analysts and policy makers tend to see the innovation system as a static concept—a historical “given.” To some extent, this is true. Innovation systems, at least initially, are normally not consciously developed for the purpose of enhanced competitiveness; rather they evolve from a vast array of loosely related institutions and policies. By contrast, the idea of an ecosystem evokes our understanding of complex and dynamic interdependencies in the natural world. In biology, ecosystems refer to interdependencies among particular plant and animal communities and the nonliving physical environment that supports them.9 Taken together, the idea of a national 6 In his luncheon address, John Marburger noted that a recent report by the President’s Council of Advisors on Science and Technology identified five major categories of institutional participants. See President’s Council of Advisors on Science and Technology, “Sustaining the Nation’s Innovation Ecosystem,” Washington, D.C.: Executive Office of the President, June 2004. 7 National Research Council, Government-Industry Partnerships for the Development of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, D.C.: The National Academies Press, 2003. 8 See Richard R. Nelson and Nathan Rosenberg, “Technical Innovation and National Systems,” in National Innovation Systems: A Comparative Analysis, Richard R. Nelson, ed., Oxford, UK: Oxford University Press, 1993. Nelson notes that the idea of a “national innovation system” captures “a new spirit of what might be called ‘techno-nationalism’ … combining a strong belief that the technological capabilities of national firms are a key source of competitive prowess, with a belief that these capabilities are in a sense national, and can be built by national action” (p. 5). The National Innovation System model appeals to policy makers since it provides an interpretive scheme that focuses on the nation as a unit of analysis. For a critique of the nation as a unit of analysis, see John de la Mothe and Gilles Paquet, “National Innovation Systems, ‘Real Economies’ and Instituted Processes,” Small Business Economics 11:101–111. 9 For an early definition of “ecosystem,” as incorporating animal and plant systems in the context of other inorganic and living components, see A. G. Tansley, “British Ecology During the Past Quarter Century: The Plant Community and the Ecosystem,” The Journal of Ecology 27(2):513–530. See also Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting From Technology, Cambridge, MA: Harvard Business School Press, April 2003.

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Innovation Policies for the 21st Century: Report of a Symposium innovation “ecosystem” draws particular attention to the complex processes, interactions, and network relations taking place within a real economy.10 The idea of an innovation ecosystem thus highlights the multiple institutional variables that shape how research ideas can find their way to the marketplace. These include, most generally, rules that protect property (including intellectual property) and the regulations and incentives that structure capital, labor, and financial and consumer markets. A given innovation ecosystem is also shaped by shared social norms and value systems—especially those concerning attitudes towards failure, social mobility, and entrepreneurship.11 (See Box A.) Innovation ecosystems are also conditioned by interest rate and exchange rate structures found within modern economic systems. Importantly, innovation ecosystems can also be strengthened by developing new institutional mechanisms that create new patterns of interaction, market knowledge, and incentives that motivate new entrepreneurship. Fostering Local Innovation Ecosystems A national innovation ecosystem is made up of a network of local innovation ecosystems. In an economy as large and complex as that of the United States, these local innovation ecosystems are themselves often significant. In his luncheon address to symposium participants, John Marburger, the Science Advisor to the President drew on his own experience in creating a university-based research park as president of the State University of New York at Stony Brook to summarize five principles that he viewed as necessary for fostering vibrant local innovation ecosystems. 1. Build competencies with attention to regional strengths. This consideration, he noted, is important for a large country like the United States, whose markets display very strong regional differences but each of whose regions possess their own strengths and possibilities. Institutions cooperating in regional development must hire people whose interests enhance and complement what is already found in the environment, which “doesn’t happen unless somebody pays attention to it.” The idea is to build regional strength, not just institutional strength. When several research institutions are located in the same region, they 10 The emerging NIS literature draws attention to the presence of interactions and flows among public and private sector organizations in initiating, modifying, and diffusing new technologies. See P. Patel and K. Pavitt, “National Innovation Systems: Why They are Important and How They Might be Compared?” Economic Change and Industrial Innovation, 1994. See also C. Endquist, ed., Systems of Innovation: Technologies, Institutions, and Organizations, London, UK: Pinter, 1997. 11 For a survey of attitudes towards entrepreneurship, see EOS Gallup Europe, Entrepreneurship, Flash Eurobarometer 146, January 2004. The survey shows, among other details, that Europeans have a greater fear of entrepreneurial failure—including loss of property and bankruptcy—than do Americans. Accessed at <http://ec.europa.eu/enterprise/enterprise_policy/survey/eurobarometer146_en.pdf>.

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Innovation Policies for the 21st Century: Report of a Symposium BOX A National Attitudes and Support for Innovation and National Industries A significant transnational comparative issue that emerges from the conference concerns national attitudes or ideologies affecting innovation policies. In the case of innovation programs, for example, Finland’s Dr. Kotilainen characterizes government R&D funding, including payments to private industry, as “investment” rather than “expenditure.” In contrast, Canada’s Dr. Nicholson reports that the public discourse of innovation programs in his country emphasize “repayability” of government expenditures. As in the United States, critics in Canada often denounce government innovation programs as “corporate welfare,” charging that they interfere with the market and are too focused on large companies.a In the case of tax policies, China and Taiwan have created tax free (and even negative tax) environments for some high-technology sectors. As Thomas Howell points out in his analysis of China’s semiconductor industry, the magnetic effect of such policies have been considerable. In the United States, such treatment is often not politically feasible for profitable high-tech manufacturing, although state governments often make substantial tax concessions to attract and retain businesses.b From a U.S. perspective, the key point is that in many countries, the development of high-technology industry, with the growth in wages and jobs it entails, has the same broad political consensus that U.S. policy reserves for defense expenditure.    aWhile widespread, these views understate the role the government has often played in developing new high-technology industries. See Vernon Ruttan, Technology, Growth and Development: An Induced Innovation Perspective, Oxford, UK: Oxford University Press, 2002. Large companies, like small ones, often face a “Valley of Death” for new ideas. For a perspective from a large company (General Electric) on the challenges new technologies face in large companies, see National Research Council, The Advanced Technology Program: Assessing Outcomes, Charles W. Wessner, ed., Washington, D.C.: National Academy Press, 2001, p. 96; for a discussion of “picking winners and losers,” see p. 51.    bBy comparison, extractive industries such as mineral, oil, gas, and the agricultural industry often do benefit from favorable tax treatment and multiple direct and indirect subsidies in the United States and elsewhere. To some extent these differing measures reflect historical events and the effort to maintain farm incomes in commodity markets benefit by cooperating in recruitment and group development. Stony Brook, Cold Spring Harbor Lab, and Brookhaven National Lab, for example, share information on an informal basis about areas of concentration and often collaborate on recruitment. 2. Identify a research strategy. Stony Brook’s conscious decision to make biomedical research a priority meant allocating university resources to proposals

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Innovation Policies for the 21st Century: Report of a Symposium and projects that work together to build a foundation for future successes—even if, “in terms of some sort of absolute measure of quality,” these were at times not the best proposals to come forward. While there were exceptions to this practice, a bias was maintained in favor of those fields that could be expected to help further the overall strategy. “That requires leadership,” Dr. Marburger declared. “It does not happen in a university environment unless someone is willing to push on it.” Faculty development and capital improvements were coordinated to enhance biotechnology capabilities. While other areas needed and deserved attention, the immediate opportunities for funding lay in the biosciences, which therefore received the focus. 3. Build a regional environment. In the early 1980s, Long Island business organizations were not aware of the rapidly growing opportunities in the biotechnology industry. They did not appreciate the significance of an emerging major tertiary health-care facility or the value of federal funding as a source of technology. The Long Island economy was then dominated by large aerospace contractors—principally, Grumman Corporation—that was to fall by the wayside as the cold war came to an end and industry shifted completely. “So it was important for me and my counterparts at the two laboratories to get together, pound the pavement, and talk to people—to take the biotechnology message to business groups, chambers of commerce, and state and local government agencies,” Dr. Marburger recalled. “The whole region had to cooperate in making this work, and somebody always has to take the first step to get others together.” Because Long Island’s business community was aware of the dangers of relying on a single industry, these efforts by the leading centers of research to work together with business were warmly received. 4. Form regional partnerships. Institutional rivalries are counterproductive; cooperation and collaboration are essential for regional-scale development; and regional-scale development is important for a stable pattern of growth. The fact that companies start up, grow, then frequently either die or move elsewhere is not necessarily the end of the world, but it does necessitate continual start-ups. Some of the new companies may survive and add permanently to the economy, some may have to be replaced with others that are sufficiently similar to stabilize the workforce. It is because regional partnerships enhance mobility and multiply opportunities for workers and for businesses that a critical mass of mutually compatible businesses is needed to stabilize the inevitable effect of startups’ moving away. “In Silicon Valley in its heyday, and it is presumably still somewhat like this, you had the phenomenon of frequent moves of technical personnel from one company to another,” Dr. Marburger observed. “There was a great deal of mobility—companies came and went, started and failed—and in general the makeup of the workforce was similar, which stabilized employment in the area despite the dynamics in the companies.”

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Innovation Policies for the 21st Century: Report of a Symposium 5. Fund the machinery, which consists of facilities, people, and organizations. None of this happens without people who know that their job is to make it happen; neither regional development nor technology transfer can be made to work with volunteers. “I travel around the country looking for regions that are succeeding,” Marburger said, “and many are attempting to do it on a voluntary basis, but only those where there is some sort of executive center with a paid workforce [are having success].” In other words, whether at a state, county, or local government economic development office, or at an organization that is either freestanding or associated with a university or a business group, someone has to know that technology transfer is his or her job. Technology-related economic development usually entails investing state and local government funds in facilities so as to reduce costs for startup tenants, and people are needed to bring entrepreneurs together with financial and technical support. Nearly always, such people are more than brokers. They are teachers and counselors, too: for entrepreneurs, who know the technology but not business practices, and for investors, who are ignorant of the ways of engineers and scientists. Concluding his address, Dr. Marburger acknowledged that while these lessons may not apply to every situation, the support for university-based research parks, and of research parks based around a nucleating asset other than a university, is growing, thriving, and becoming an important part of the U.S. innovation ecology. Complementing Marburger’s perspective on developing successful local innovation ecosystems, other participants described policy efforts at the national level to develop national innovation potential and competitiveness. As participants learned at the conference, these efforts are being undertaken by reemerging powers such as China as well as established U.S. allies and competitors like Germany and Japan. We look next to how selected speakers at the symposium characterized these challenges. THE RISE OF NEW COMPETITORS In his opening address, Carl Dahlman of Georgetown University noted that, while the United States is the world’s preeminent economy, accounting for more than a quarter of the world’s gross domestic product today, “other nations are catching up fast.” Several developing countries in Asia are investing heavily in education and are building world-class science and technology infrastructures. Some nations are also acting decisively to attract and retain important high-technology industries within their borders, as seen in China.

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Innovation Policies for the 21st Century: Report of a Symposium The Challenge from China: National Policy with Purpose In particular, Dahlman noted that the technology level and the scale of Chinese industry continue to grow at a very high rate, challenging strategic calculations of competitors around the world.12 China’s economy, he observed, grew at about 8 to 10 percent per year over the previous two decades.13 Its “gigantic” internal markets afford it a very important strategic advantage in negotiating externally, as evidenced by the fact that foreign investors have been willing “to bring in not the second or third rate technology, but the very best” for application to their operations in China. China’s competitive advantages, according to Dahlman, include: A very high savings and investment rate (about 40 percent) compared with the rest of the world (about 20-plus percent); Skill in tapping into global knowledge both through direct foreign investment and the Chinese Diaspora; A critical mass in R&D that is increasingly deployed in a very focused effort to increase its competitiveness;14 A large and growing manufacturing base combined with advanced export-trade logistics; Continuing strong investments in education and training, endowing China with the world’s third-largest scientific and technical work force focusing on R&D; A very large supply of excess labor in the agricultural sector (some 150 million-200 million people) that continue to keep down labor costs; A government with a very strong sense of national purpose, which “helps to coordinate things, although it creates some other kinds of problems.” China, noted Carl Dahlman, has demonstrated the “importance of the nation-state” not only in implementing development plans and visions but also in providing a stable macroeconomic framework. He underlined what he called the “tremendous pragmatism” exhibited by the Chinese government in setting up needed 12 See Carl Dahlman and Jean-Eric Aubert, China and the Knowledge Economy: Seizing the 21st Century, Washington, D.C.: The World Bank, 2001. 13 This trend is expected to continue in the near future. See Reuters, “China Sees No Quick End to Economic Boom,” February 21, 2006. 14 On February 9, 2006, China’s cabinet listed 16 key technologies to receive more support from government and private industry. These included computer software, telecommunications, nuclear energy and a military-managed space program. To speed progress in these areas, the cabinet announced that research and development spending should rise dramatically to reach 2.5 percent of gross domestic product by 2010. In 2004, R&D spending was 1.23 percent of GDP, according to a Chinese ministry official from the statistics department. The Washington Post, “Chinese to Develop Sciences, Technology,” February 10, 2006, p. A16.

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Innovation Policies for the 21st Century: Report of a Symposium Early-Stage Funding and the Advanced Technology Program Public-private partnerships can also represent a pragmatic institutional response to market failures in early-stage finance.38 Although U.S. capital markets are relatively broad and deep, private investors often find the risk levels associated with investments in innovations that are still in their early stages to be too high and are therefore (understandably) reluctant to invest in unproven innovations. Even when private investors see manageable risk, they may not see ways to capture returns from their investment due to technology “leakage” or “spillovers” to other firms. The Advanced Technology Program (ATP) is designed to address this challenge. As NIST’s Marc Stanley noted at the symposium, of the roughly $20 billion in venture capital investments in 2004, only $375 million was available for the initial seed rounds. This is because most private equity investors prefer to invest in less risky later rounds of investment. These investments also tend to concentrate in a limited number of geographical regions.39 This gap in investment at the seed and early stages is often called the “Valley of Death.”40 (See Figure 3.) The mission of the ATP is to help bridge this valley between the research laboratory and the marketplace. To do so, ATP provides highly competitive awards, largely (about 70 percent) to small companies and to joint ventures designed to accelerate the development and dissemination of high-risk technologies with potential for broad-based economic benefits to the U.S. economy. (See Box C for a comparison of the ATP with Finland’s Tekes Program.) ATP funding is not a “fire and forget” program. The awards to larger firms must be matched on a cost-share basis. They are closely monitored and can only be directed to technical research and not product development. The program is entirely industry-driven. Companies, whether singly or jointly, conceive, propose, and execute all projects, often in collaboration with universities and federal laboratories. ATP support for project costs is limited in time and amount. Based on a rigorous merit-based competitive evaluation that 38 National Research Council, Government-Industry Partnerships for the Development of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, D.C.: The National Academies Press, 2003. 39 As the venture capitalist David Morgenthaler has observed, “It does seem that early-stage help by governments in developing platform technologies and financing scientific discoveries is directed at exactly the areas where institutional venture capitalists cannot and will not go.” See National Research Council, The Advanced Technology Program: Assessing Outcomes, Charles W. Wessner, ed., Washington, D.C.: National Academy Press, 2001. 40 In his presentation, Canada’s Peter Nicholson refers to an “orphaned domain” in the spectrum that ranges from basic research to commercial markets. In this domain, it is difficult to discern whether social returns or private returns on innovation are higher. This ambiguity leads to a lack of adequate funding. Similar to the concept of the Valley of Death, this orphaned domain is the focus of Canada’s innovation programs.

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 3 The Valley of Death. admits less than 15 percent of applicants, single company awardees can receive up to $2 million for R&D activities, joint ventures considerably more.41 Stanley noted that ATP’s selection process, monitoring, and follow-up on projects have been recognized by the National Academy of Sciences as being exceptional, adding that the program has demonstrated both the ability and the willingness to identify unsuccessful projects and, if necessary, end them. “You have to terminate companies that are not successfully doing what they say,” he commented. “And then you should be able to speak not only of your successes but of your failures, because there are lessons to be learned from both.” Based on a sample of 41 of the 736 projects it has funded, ATP analysis has calculated net societal benefits of $17 billion—representing a partial return on the $2.2 billion investment by the federal government over the life of the program. Improving Technology Transfer from the National Laboratories This policy ambivalence has affected the returns from U.S. laboratories as well. While the United States makes significant investments in its national labo- 41 For an assessment of ATP, see National Research Council, The Advanced Technology Program: Assessing Outcomes,, op. cit. The NRC assessment found that ATP “is an effective federal partnership program” and that it is meeting its legislative goals in creating broad-based benefits to society, contributing to important social goals such as improved health diagnostics, and improving the efficiency and competitiveness of U.S. manufacturing. The NRC Committee conducting this assessment also offered a series of operational recommendations to make the program more effective (p. 87).

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Innovation Policies for the 21st Century: Report of a Symposium BOX C Comparing the U.S. ATP Program with Finland’s Tekes Program Several speakers at the conference compared the relative sizes of the United States Advanced Technology Program with Finland’s similar Tekes program. ATP’s impact at the cutting edge of new technologies is based on a relatively small annual budget. In 2005, the budget for ATP was $140 million, in the context of a $12 trillion economy and a population of 300 million. By comparison, Finland’s Kotilainen noted that Tekes—a program that is similar to ATP—is financed at an annual level of around $550 million, supporting the innovation system of a nation of five million. This relatively high level of expenditure reflects the strong consensus present in Finland regarding the need to support the technological enhancement of existing industries and to support the growth of promising new high-tech industries. Tekes awards for R&D effectively encourage partnerships between university researchers and small and large companies. Like the ATP, Tekes maintains a careful evaluation program that has recorded numerous success stories, with its early support for the research that contributed to the transformation of Nokia being perhaps the most notable example. The scale and scope of Tekes activity underscore the Finnish Government’s and society’s commitment to supporting the development and adoption of new technologies, particularly those subject to first mover advantage in order to capture the benefits of these innovations for the national economy. In recent years, U.S. policy makers have been much more ambivalent about the appropriate role of government contributions to the development of new technologies, even as government supported technologies have transformed the economy.a Support for the Advanced Technology Program has been uneven and subject to the vicissitudes of the political process despite a positive assessment by the National Academies. It appears slated for elimination perhaps reflecting in part longstanding U.S. ambivalence about the appropriate role for government in encouraging innovation, as distinct from basic research.b    aSee, for example, National Research Council, Funding a Revolution: Government Support for Computing Research, Washington, D.C.: National Academy Press, 1999, pp. 5-14 and passim.    bComputer World, “Bush May End Federal Tech Funding Program—Program for High-risk IT Projects is at High Risk of Elimination,” February 12, 2006. The Office of Management and Budget provides this rationale for eliminating ATP: “Consistent with the Administration’s emphasis on shifting resources to reflect changing needs, the 2006 Budget proposes to terminate the Advanced Technology Program. This proposal is consistent with the 2005 Consolidated Appropriations Act which did not provide funding for new awards. The Administration believes that other NIST programs are more effective and important in supporting the fundamental scientific understanding and technological needs of U.S.-based businesses, American workers, and the domestic economy.” Executive Office of the President, Budget of the United States Government Fiscal Year 2006, accessed at <http://www.whitehouse.gov/omb/budget/fy2006/budget.html>.

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Innovation Policies for the 21st Century: Report of a Symposium BOX D Spurring Technology Transfer from the National Laboratories Pace VanDevender pointed out that the Department of Energy’s (DoE) involvement in commercializing innovation began in 1980 with the Stevenson-Wydler Act, which established technology transfer as a mission for the federal laboratories, with a focus on disseminating non-classified information. This was followed by a series of acts that attempted to spur commercialization, beginning with the 1984 Trademark Clarification Act, which gave the contractors that operated the laboratories licensing and royalty authority for the first time as an incentive to commercialize innovative ideas that were born in the laboratories. The 1986 Technology Transfer Act then extended this responsibility to laboratory employees. Next, the National Competitiveness Technology Transfer Act of 1989 extended the technology transfer mission to the DoE’s weapons laboratories. It also allowed the contractors that ran the laboratories to enter into cooperative research and development agreements (CRADA) so that they could enter partnerships with industry in cofunding further R&D. This was followed by the 1989 NIST Authorization Act, which recognized intellectual property other than inventions that have been developed by CRADA, clarifying a legal uncertainty. Then, in 1995, the National Technology Transfer Act guaranteed to industry the ability to negotiate for rights to CRADA inventions and increased the royalty distribution that were placed on laboratory inventions, thereby increasing the motivation to invent. ratories, the record of successful technology transfer to commercial applications has been relatively limited, according to Pace VanDevender of Sandia National Laboratories.42 This modest outcome comes despite a long series of legislative experiments that have repeatedly sought to create the incentives needed to spur technology transfer from the national laboratories. (See Box D.) How well have these technology transfer policies worked? According to Pace VanDevender, DoE transfer activities in 2004 included “some respectable numbers.” (See Figure 4.) At the same time, he acknowledged that a single laboratory was responsible for approximately half of the 10,000 technology transfer initiatives that took place during that year; on a lab-to-lab basis, therefore, technology transfer activity has been “fairly modest.” (He did not elaborate, however, on the reasons why this particular laboratory was relatively successful.) 42 These investments are expected to grow substantially. The Department of Energy’s (DoE) FY2007 budget requests of $4.1 billion for the DoE Office of Science is a $505 million (14.1 percent) increase over FY2006 funding. This budget puts DoE’s Office of Science on the path to doubling its budget by FY2016. See Department of Energy Press Release of February 2, 2006, “Department Requests $4.1 Billion Investment as Part of the American Competitiveness Initiative: Funding to Support Basic Scientific Research.”

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 4 Technology transfer supplements the primary missions of each lab. SOURCE: Presentation by J. Pace VanDevender, Sandia National Laboratories, “Sandia National Laboratories: DoE Labs and Industry Outreach,” in this volume. Also of concern, he noted, was a significant drop-off in CRADA activity after a rapid increase from 1992 to 1996, when federal matching funds were no longer available. Similarly, the growth of invention disclosures similarly hit a plateau in the late 1990s. Meanwhile the growth of patent applications and patents granted remained modest. (See Figure 5).43 Success at Sandia Science and Technology Park In contrast to the CRADA, patent applications, and other tech-transfer vehicles whose growth has recently flattened, VanDevender noted that science and technology parks are emerging as a new thrust for the Department of Energy’s technology-transfer efforts. The Sandia National Laboratories Science and Technology Park by its seventh year drew $167 million in investment (of which $146.6 million was private) and is still growing.44 A campus-style 200-acre installation, 43 An invention disclosure is a document which provides information about inventor(s), what was invented, circumstances leading to the invention, and facts concerning subsequent activities. See for example, Stanford University, Inventions, Patents and Licensing: Research Policy Handbook, Document 5.1, July 15, 1999. 44 See National Research Council, A Review of the Sandia Science and Technology Park Initiative, Charles W. Wessner, ed., Washington, D.C.: National Academy Press, 1999. The Sandia report and consultative process it stimulated helped the Sandia National Laboratory’s decision to establish an S&T park and helped to shape its structure.

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Innovation Policies for the 21st Century: Report of a Symposium FIGURE 5 Invention disclosures and patents have plateaued under current policies and priorities. SOURCE: Presentation by J. Pace VanDevender, Sandia National Laboratories, “Sandia National Laboratories: DoE Labs and Industry Outreach,” in Panel IV of this volume. Sandia Park by the spring of 2005 housed 19 organizations with 1,098 employees that occupied almost 500,000 square feet. Sandia and the park tenants enjoy a symbiotic relationship. Sandia National Laboratories provides redundant power and state-of-the-art connectivity to the park tenants and helps to accelerate city approval processes. Tenants in turn paid in $17 million to Sandia while acquiring contracts from the laboratory worth $85.6 million as of spring 2005. “The government, Sandia, and industry therefore benefit both ways” observed VanDevender. Comparing DoE and ITRI Technology Transfer Models Contrasting Taiwan’s ITRI and DoE’s technology transfer models,VanDevender said that ITRI was based on a single-purpose mission of technology development and commercialization with relationships, while the main mission of the DoE labs was “national security broadly writ.” For ITRI, therefore, technology transfer was a dedicated mission, whereas for DoE it was a supplementary mission, not one central to the management’s intent. The DoE labs received about ten times as much annual funding as ITRI, or $6 billion versus $600 million. But industrial contributions accounted for only about $60 million of the DoE labs’ funding, or 1 percent, while around $200 million, or one-third, of ITRI’s funding came from industry.

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Innovation Policies for the 21st Century: Report of a Symposium The DoE labs produced around 600 patents per year, half as many as ITRI’s 1,200; this translated to 0.1 patent per $1 million for DoE against two patents per $1 million for ITRI, a yawning gap in the rate at which commercially valuable property transferred. But the gap in patents per industry dollar was far narrower, and the figure for the DoE labs was higher—about 10 patents per $1 million versus six patents per $1 million for ITRI—because at DoE industry was leveraging the huge U.S. investment in national security. But these two rates were called “very comparable” by VanDevender, “given the uncertainty in the value of those patents, [and] particularly since a whole lot more companies get spun off from ITRI than from DoE.” Both models have their strengths and both were valuable, he concluded, suggesting that the comparison raised a question worth considering at the next stage of policy making: “whether [the United States] should reinvigorate a single-system kind of laboratory, perhaps much more like [what] ATP is doing with industry.” U.S. POLICIES IN COMPARATIVE PERSPECTIVE There is strong international interest in national measures to attract and grow globally competitive, high-technology industries. Perhaps what is most striking is the range of mechanisms, the similarity of goals, and the very substantial resources devoted to building the infrastructure and technological capabilities—not for national security—but for national competitiveness in the global economy. With some exceptions (e.g., small business award programs, such as SBIR and ATP), U.S. policy is not focused on the innovation process itself; resources are instead concentrated on particular research challenges and national security missions. As technologies evolve more rapidly, often in a multidisciplinary fashion, the importance of cross-disciplinary public-private partnerships seems likely to grow. This international comparative focus on innovation policy adds value by reviewing the range of these programs, underscoring the role institutions play in national policies and, implicitly, by reminding Americans of the accelerating competition for technological preeminence. Despite this policy lacuna, the United States does possess great strengths. U.S. economic leadership rests on its large, integrated domestic consumer markets; deep and flexible capital markets (including risk capital); and deep and flexible labor markets. The United States also enjoys the advantages of an institutional framework—characterized by strong competition, the rule-of-law, and a willingness and ability to adapt new technologies that facilitate the rapid deployment of resources to take advantage of new opportunities.45 45 Amar Bhidé, “Venturesome Consumption, Innovation and Globalization.” Paper presented at the Centre on Capitalism & Society and CESifo Venice Summer Institute 2006, “Perspectives on the Performance of the Continent’s Economies,” July 21–22, 2006, held at Venice International University, San Servolo, Italy.

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Innovation Policies for the 21st Century: Report of a Symposium Box E Research for Competitive Advantage “Basic research has become part of the international competition of overall national strength.” Strategy document of the July Chinese State Council Quoted by the New China News Agency, February 9, 2006 U.S. economic leadership is also supported by an entrepreneurial culture that encourages risk taking and tolerates failure. This entrepreneurial culture is reflected in and further reinforced by a supportive legal framework. This includes bankruptcy laws that do not excessively punish business failures and tax policies that permit successful entrepreneurs to retain significant portions of the wealth they generate. The legal regime is further reinforced by positive societal attitudes toward business success. This combination of mutually reinforcing attitudes and laws represents a unique competitive advantage for the United States, one that sets the U.S. apart. Calling this “a very special characteristic,” Carl Dalhman noted that “many other countries really are trying to imitate” it, but with debatable success. In many other countries, if you take a risk and your business fails, the social and economic consequences can be dire and permanent. These positive attitudes toward entrepreneurship represent a major U.S. advantage in the risky world of new technologies and high-tech start-ups. Resting on these foundations are a multiplicity of strong science and technology institutions, complemented (particularly in the post-war period) by strong investment in education. Another advantage, also noted by Dalhman, is that the United States is home to more multinational corporations than any other country. As many of the conference speakers made clear, directly or indirectly, the environment in which the U.S. economy is competing has become much more competitive.46 Many countries are now investing heavily in R&D, in education, and in science and technology infrastructure, often with a focus on specific technologies for the market. The U.S. advantage in terms of multinationals, with their benefits of expertise, integration, and market power, is also less preeminent. Other countries are now hosts to significant global corporations, not only in traditional areas (e.g., Europe) but increasingly in Asian countries such as Korea, Taiwan, India, and China. 46 See also NAS/NAE/IOM, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, op. cit.

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Innovation Policies for the 21st Century: Report of a Symposium As Sandia’s Pace Vandevender emphasized at the conference, participants in the global economy recognize the importance of dedicated institutions. New institutions such as ITRI and Tekes have made Taiwan and Finland formidable competitors in important markets and laid the foundation for future strength. Similarly, U.S. strengths in the availability and diversity of early-stage capital, while still unsurpassed, are nonetheless being challenged. Where other countries cannot emulate the private risk taking that characterizes early-stage finance in the United States, they are taking measures to provide publicly supported capital and incentive schemes designed to blend private and public funds as a means of reducing risk and encouraging investment.47 Even the traditional U.S. strengths of a large, unencumbered domestic market, while not yet matched, are no longer as unique. Emerging economic arrangements—such as the European Union and ASEAN as well as large economies of emerging nations like China and India—have the potential to counterbalance U.S. economies of scale in the long term. At the same time, a strategic approach that focuses on the ability of U.S. firms to access other national markets, build cooperative relationships, and seek out expertise in a way that benefits both the United States as well as its global partners is required for continued U.S. leadership. A crucial condition for U.S. competitiveness is the extent to which federal and state governments invest in a robust S&T infrastructure and in effective programs to ensure supplies of scientists and engineering graduates and to facilitate the transition of research to the market. Common Challenges, Diverse Approaches The intense competition which characterizes the global economy has placed a premium on the capacity to innovate. Innovative companies are able to provide attractive new products that meet or create market demand. Companies that benefit from a supportive national innovation policies are able to compete more effectively. They can draw on a steady stream of well-trained graduates, increasingly with practical experience, and they benefit from supportive financing (e.g., innovation awards) that enable companies to convert the fruits of research to new welfare-enhancing products. The common challenge for most participants in the global economy is the need to capitalize on their intellectual assets, converting government funded research into the innovative technologies and processes that generate improved welfare, create international competitiveness, and create wealth for their citizens. It is, perhaps, exceptional that countries as diverse as China, India, Taiwan, Japan, Germany, France, Finland, Canada, and the United States are all devoting substantial policy attention to the transition of research into products and processes 47 See, for example, the presentations by Stephan Kuhlman and Finland’s Heikki Kotilainen in Panel II of this volume.

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Innovation Policies for the 21st Century: Report of a Symposium of the future. What is equally remarkable is that, while the challenge is similar, the mechanisms and instruments adopted to encourage this transition show very considerable variation, albeit with some common features. The basic goal of this conference was to bring practitioners and analysts together to discuss the common goals and the diverse measures taken to achieve them. The challenges of the twenty-first century point to the need to reexamine the policies supporting and building interconnections within the U.S. innovation ecosystem. As described in the conference proceedings that are summarized in the next chapter, the many foreign programs presented at this conference provide graphic evidence of the scope and scale of national efforts to enhance their national prospects in the global economy. The strong cooperative element of the conference also merits emphasis. The conference deliberations underscored the opportunity and indeed the need to learn best practice from the many national experiments underway.

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