Panel V
Discussion Roundtable: What Are the Conditions for Success?

Moderator:

Mark B. Myers, The Wharton School


Stefan Kuhlmann, Fraunhofer ISI, Germany

Hsin-Sen Chu, Industrial Technology Research Institute (ITRI), Taiwan

Peter J. Nicholson, Office of the Prime Minister, Canada

Marc G. Stanley, National Institute of Standards and Technology

Lewis S. Edelheit, General Electric, retired


Dr. Myers explained that rather than asking the members of the final panel to speak, he would give the audience an opportunity to pose the questions that, he was sure, were accumulating as the day progressed. First, however, he turned to a fellow panelist, Dr. Edelheit, who indicated at the close of the previous session that he had numerous questions in mind.

MIGHT ATP SPONSOR PROGRAMS IN FOCUSED RESEARCH AREAS?

Dr. Edelheit, addressing Mr. Stanley, remarked that the presenters from other nations had all singled out areas that they viewed as important to their respective countries or companies in those countries and in which work is therefore focused. ATP, although the closest analogue to the foreign programs under which such work was taking place, did not seem to sponsor work in focused areas. He asked



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Innovation Policies for the 21st Century: Report of a Symposium Panel V Discussion Roundtable: What Are the Conditions for Success? Moderator: Mark B. Myers, The Wharton School Stefan Kuhlmann, Fraunhofer ISI, Germany Hsin-Sen Chu, Industrial Technology Research Institute (ITRI), Taiwan Peter J. Nicholson, Office of the Prime Minister, Canada Marc G. Stanley, National Institute of Standards and Technology Lewis S. Edelheit, General Electric, retired Dr. Myers explained that rather than asking the members of the final panel to speak, he would give the audience an opportunity to pose the questions that, he was sure, were accumulating as the day progressed. First, however, he turned to a fellow panelist, Dr. Edelheit, who indicated at the close of the previous session that he had numerous questions in mind. MIGHT ATP SPONSOR PROGRAMS IN FOCUSED RESEARCH AREAS? Dr. Edelheit, addressing Mr. Stanley, remarked that the presenters from other nations had all singled out areas that they viewed as important to their respective countries or companies in those countries and in which work is therefore focused. ATP, although the closest analogue to the foreign programs under which such work was taking place, did not seem to sponsor work in focused areas. He asked

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Innovation Policies for the 21st Century: Report of a Symposium what Mr. Stanley thought about that issue and whether, in fact, he views it as an issue that should be considered. Mr. Stanley responded that there were several ways to address the issue. The National Academies, in a review of ATP published 2 years or so before, recommended that ATP look at the United States’ highest priorities and create opportunities for thematic competitions in sectors that are either important to national security or technologically relevant for the nation’s future. The program’s funding has, however, been held at a reduced level for a number of years, and it remains all but impossible to run focused competitions of this sort in the absence of “a certain baseline of allocation.” Nonetheless, ATP management has, in observing submittals to its regular competitions, seen proposals that concentrate on particular areas that industry feels to be both important and relevant for the research of the ensuing 8 to 10 years, and ATP has succeeded in fashioning “virtual focused competitions” in those areas. For example, ATP has received a suite of proposals indicating a great deal of interest in optoelectronics. Similarly, new work has been identified in the areas of homeland security and technologies for assisted living and care for the elderly. Around 7 years earlier, ATP had started receiving proposals dealing with how the United States could improve its position in fuel cells, hydrogen, and various other alternative fuels. Thus, industry is using ATP in a variety of ways, and the program’s management can collect this data and show where the program fares in terms of focused competitions. COULD INCREASED FUNDING CHANGE ATP’S SELECTION METHODS? Dr. Edelheit then asked whether Mr. Stanley believed that, in the event that its funding rose, ATP would try to use at least some of the increase to develop areas of focus that made sense. Mr. Stanley said that this question was a difficult one for him to answer: He worked for the President of the United States and so had to abide by his budgetary proposal to Congress, which calls for the elimination of ATP in fiscal year 2006 in favor of other national priorities. “In the event that were to change by some congressional disposition of funds, and the amounts were appropriate,” he acknowledged, “then certainly we could consider that. But, at this particular point, I have to wait and see what happens.” CANADA’S MARKET: HOW MUCH POLICY DIRECTION? Dr. Myers then directed a question to Dr. Nicholson. He recalled that Dr. Marburger had talked about the strength to be drawn from the diversity of the U.S. system, and he commented that that statement reflects what had been the view of the U.S. government for some time: “that we do not have an industrial

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Innovation Policies for the 21st Century: Report of a Symposium policy, we do not pick areas of winners [and] losers.” But many of the day’s presentations had indicated that China, Japan, and Europe are clearly choosing which industries to support and have thereby drawn a distinction between two kinds of policies. As Canada, in his observation, tended always to fall “somewhere in between,” he wished to know the Canadian thinking on the subject. Dr. Nicholson, calling Dr. Myers’s question “terrific,” declared that Canada was indisputably “in the grip of schizophrenia.” The philosophy in the country, at its current state of development, is “very much to be guided by the market—in other words, a market pull rather than a technology push.” That said, however, Canada does not have as much native diversity as the United States simply because of the scale of its markets, and circumstances do matter in thinking about strategy. If a sector orientation does exist, and Dr. Nicholson sensed that one was developing, it is probably in the area of energy and environmentally related technologies. The former is obviously of great concern to the world, and Canada enjoys a relative abundance of energy resources. As for the latter, any projection of the world’s future needs will include increasing demand for ways to lower the carbon content, or the pollution content, of units of GDP. ENVIRONMENTAL TECHNOLOGY A SPUR TO INNOVATION Regarding environment as an emerging priority, Canada has created a couple of foundations devoted to it and has recently released a plan for meeting the Kyoto targets for reducing greenhouse gases sometime in the 2010-2012 period. Although admitting this is “a very stretchy target,” Dr. Nicholson called it “probably the toughest one in the world relative to the business-as-usual trajectory that we’ve got to cope with.” He added that whether or not the target is met, setting the target will generate new demands as some of the large emitters try to meet their specific targets. In turn, this will stimulate innovation in Canada, he predicted, and as “all kinds of smart people and entrepreneurs” compete for a significant amount of money available through the new Climate Fund.18 This is one of numerous instances in which the benefit of a policy that was established for rather different reasons might end up having the happy, unintended consequence of being a big driver for innovation. It might also prove “a bit of an equalizer vis-à-vis the [United States],” Dr. Nicholson said, suggesting that the incentive is about to burgeon in Canada “to really work hard on producing green energy that can be exported in its technological form around the world.” 18 Through a new Climate Fund, the Government of Canada intends to purchase 75–115 Mt of reduction credits a year, up to 40 percent of the total reduction needed in 2008–2012. The government agreed to allocate CAD$1 billion per year over the next 5 years and projects funding of $4 billion–$5 billion 2008–2012. Pew Center on Global Climate Change Web site, accessed at <http://www.pewclimate.org/policy_center/international_policy/canada_climate_plan.cfm>.

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Innovation Policies for the 21st Century: Report of a Symposium BASIC RESEARCH: HOW IMPORTANT TO INNOVATION? A questioner from the audience, who identified herself as a Swedish science reporter temporarily working at Science Magazine in Washington, observed that most countries are experiencing a decrease in governmental funding for basic research and asked for assessments of what that could mean for the future of innovation. Is basic research important for innovation, and does it need to be funded by governments, or are there other possible sources? Dr. Edelheit, while first acknowledging that complexity surrounds the issue of “basic research versus applied research,” stated that the answer depends on the country and on the economic drivers for R&D operating there. The United States remains the world leader in basic research by far, with other countries—and he pointed specifically to developing countries—doing much less “real basic research.” But in the end, he predicted, there will be a balance. As other countries become strong enough that they can afford it, they would in their own best interests start doing more basic research. What will happen in the United States, in contrast, is that funding for R&D will decline and some basic research will be converted to solving national needs more directly in the interest of speed. Recalling that Dr. VanDevender had talked about Sandia’s changing its model, and adding that industry has certainly changed its model, Dr. Edelheit remarked that the National Institutes of Health and ATP were beginning to go in the other direction. This shift might go too far and eventuate in a balance, he conjectured, adding: “There always needs to be a balance.” He also expressed his belief that too much basic research is being done in the United States relative to the kind of work on which the day’s discussion had focused. DO U.S. FIRMS NEGLECT THE PUBLIC GOOD? Dr. Myers said that he, like Dr. Edelheit, was a former corporate head of research, in his own case at Xerox, but that he had a somewhat different concern. For a period of time the United States has been an important source of information that, having come out of the private sector through “quasi-national research laboratories” such as Bell Labs, IBM Yorktown, GE, and Xerox PARC, “went into the public good.” One characteristic of that time was that all of the companies he had named were operating as monopolies. “Every industry loves a monopoly,” he remarked, saying that a “sort of openness” was possible in that era. While the corporate laboratories have not disappeared, the public-good functions they performed is no longer present in any of their organizations. This has not happened solely because the companies have lost their monopolies, he contended, observing that Microsoft, Intel, Hewlett-Packard to some extent, and others have replaced them. What has in fact happened is that the country has moved to a knowledge economy, and the information being created in private-sector research laboratories has become too valuable to be turned over to a public good. “Before, people were creating physical devices that could be protected in

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Innovation Policies for the 21st Century: Report of a Symposium certain ways, through manufacturing knowledge and so forth,” he explained, and so the output of research organizations, having a different value, could go into the open literature as “pure public knowledge.” Beginning with the enactment of Bayh-Dole, which Dr. Myers regarded as “a good idea on the whole,” there has been a continual privatization of information. Because of the way in which this privatization has taken place, he said, “we do need to worry about the balance of what I call ‘the public commons’ and what is privately held, [as] there is a creative balance which becomes important.” While a great deal of research is being conducted in both government and industry, he said that he was concerned that “a high level of freely appropriable basic knowledge [remains] available to fuel the innovation process,” warning that “there has been a trend somewhat away from support of that.” RESEARCH FUNDING CRITICAL TO TRAINING SCIENTISTS Olwen Huxley, a staff member of the House Committee on Science, asserted that government funding for basic research underwrites most of the education of U.S. Ph.D.s and post-docs. A reduction in such funding would eventually translate to fewer people coming out of labs with the background necessary to go into industry. And technology transfer takes place through people: No innovations could result from the biggest fund of knowledge, even if openly available, without people actually doing the work necessary to transfer a basic idea into a product. “So ultimately we cut our own throats” in the absence of adequate funding for basic research, she said, “but we’ll bleed to death over a period of several years, so we may not actually notice it happening.” While disavowing powers of clair-voyance, she said that no major increases in such funding are to be anticipated in light of the United States’ current level of budgetary deficit, “unless there’s some massive sea change that says we’re going to go into even more debt to fund basic research.” IS EUROPE MOVING TOWARD MORE BASIC RESEARCH? Dr. Kuhlmann, commenting from a European perspective on the question of the importance of basic research to innovation, said that discussion there over whether basic research or innovation should receive more focus had moved back and forth. Many programs, at both the national and European levels, have long supported what he called “longer term applied research,” which has then stimulated collaboration with industry. Increasingly, however, companies have begun to advocate taking the public-good argument voiced by Dr. Myers more into account. For all the reasons that others had mentioned, knowledge creation and open access to basic advanced knowledge are very important, in particular for innovation. His personal assessment was that Europe is turning in the direction of

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Innovation Policies for the 21st Century: Report of a Symposium more basic research, in part because of an increasing perception that the creation of a Europe-wide mechanism to support basic research is needed. As a result of this sentiment, concrete plans have arisen to establish a European Research Council within the new Framework Program in the coming 1 to 2 years. Although not a copy of the U.S. National Science Foundation (NSF), this new body would be modeled on NSF to some extent. The basic idea is to create in Europe something similar to what the United States has: a huge, single research area with a strong body for funding research. A EUROPE-WIDE EFFORT IN “FRONTIER RESEARCH” As a member of a high-level experts group working for the European Commission on this issue, Dr. Kuhlmann has contributed to a report to be released in the days ahead on the potential role of such a European Research Council. This group has argued that such a funding body would achieve the greatest impact if it supports not just basic research but also what is termed “frontier research.” As defined in the report, frontier research is collaborative, problem-oriented research into new problems that cut across disciplinary boundaries and might entail not only basic scientific research but also, depending upon the project, engineering, social science, or economics research. A European Research Council is needed to support such groundbreaking work because it would be only through competition for funds on a Europe-wide scale that the best projects and people could be identified. COST PER PATENT: NATIONAL LABS VS. INDIVIDUALS Jim Mallos of Heliakon noted that the U.S. Patent Office charges individuals and small businesses thousands of dollars in scheduled fees to process patents on their inventions, while data presented by Dr. VanDevender put at $10 million the per patent cost to the U.S. taxpayer for work at the National Labs. Positing that individuals and small businesses that hold patents were being “fined for doing what we would have paid $10 million at the National Labs to accomplish,” he asked whether this does not constitute “a perverse incentive for innovation.” Dr. Myers speculated that the intention of Dr. VanDevender, who had in the meantime departed, was to use that figure as an indicator of productivity. “I couldn’t come up with a very good rationale for the unit of analysis,” he admitted, “so I would not want to defend his number.” An employee of Sandia Labs, commenting from the audience, then said that because a great deal of money is spent there on activities that for a number of reasons “wouldn’t possibly be patented,” the number in question is unlikely to be reflective of actual productivity. Mr. Mallos, however, reiterated his wonderment that fees of such magnitude are charged to inventors when it is national policy to promote American-owned

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Innovation Policies for the 21st Century: Report of a Symposium inventions and patents, whereupon Dr. Myers said his concern was accepted and would be noted. RISK MANAGEMENT TECHNIQUES FOR POLICY OPTIONS? Egils Milbergs of the Center for Accelerating Innovation then raised a question about “valuing innovation strategy and innovation policy,” which he equated to “valuing what is increasingly an intangible.” According to the description offered earlier by Dr. Marburger, university research parks in the United States and abroad seem to share “many of the same thematics: bio, info, nano, and so on.” It was his own conviction, Mr. Milbergs said, that not all of these parks or all tech-led economic clusters are “going to win,” and that innovation means taking risk, whether that be policy risk, investment risk, career risk, or another sort of risk. His question for all those involved in innovation, therefore, was: Where is the state of the art in what might be called “risk management” that would make possible taking some sensible decisions or creating a sensible portfolio of policy initiatives and investment issues. His motive for asking, he said, lay in his sense that it is enthusiasm and political emotionalism, rather than any serious analysis of true uncertainties and risks that drives many innovation programs. Mr. Stanley began his response by recalling that during the Reagan Administration, the Department of Commerce, through the Economic Development Administration, conducted a review of what the states were establishing as their strategic technology assets and of how they were employing them. It found that fewer than ten states had either the leadership or the qualifications to make decisions about a number of issues concerning their universities: what goals to set for tech transfer, how to use their assets in collaboration with industry, which options to pursue and which to shun, how to keep their graduate students from leaving the state, and so on. Battelle later became involved in such issues, as did several trade associations. STATES LEAVING LONG-TERM CONSIDERATIONS ASIDE Mr. Milbergs had identified an important issue, Mr. Stanley said, one to which no existing formula can be applied and that needs to be reviewed. Luck is generally involved, but very strong leadership is also required at the level of the state governor. As has become clear in recent years, however, many governors are interested in moving into higher office and therefore, when it comes to investing in work for their states, see the “long term” as 4 years rather than 10 or 15. As for universities, they were busy fighting over technology transfer and intellectual-property issues; or fighting over whether to take warrants or options versus taking money out right away; or fighting with their state legislators for money. “And we’re not utilizing the assets of retired businessmen and women that have worked very hard in this area and could be very helpful,” he lamented.

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Innovation Policies for the 21st Century: Report of a Symposium In sum, said Mr. Stanley, the United States is a long way from understanding how to develop the various techniques that promote innovation. “And while university parks are good, and clusters are good, and Research Triangle Park is good,” he allowed, “I don’t think we’ve gotten the magic potion down yet.” Dr. Myers remarked that, as part of the National Academies study of ATP, he and a colleague had written a subsection about managing portfolios of R&D projects as portfolios of risk. “You not only have to look at the technical risk, you have to look at market risk, and at the interaction of market risk and the technical risk,” he pointed out. ATP, PENTAGON FEDERAL LEADERS IN PROGRAM ASSESSMENT Dr. Edelheit added that venture capitalists know how to measure risk for the kinds of businesses they invest in, and that there are good examples of industry’s best practices in wrestling with the kind of risks it takes on. For government-industry partnerships, such data are to be found in two places. One is in the assessments of ATP, which looks at rewards and risks and at measurements of them, and which he proposed as a good model for those undertaking similar efforts. The second was at the Department of Defense, which does not take a “laissez-faire attitude” toward funding R&D but uses some very clear measurements of risk and reward. He conceded that the latter might be “hard to get” but expressed the opinion that they in fact exist. PLUSES AND MINUSES OF U.S. POLICY FRAGMENTATION Larry Rausch of the National Research Foundation said that a conclusion might be drawn from the day’s presentations that, in the United States, national innovation policy is in truth a patchwork of different programs. Descriptions of the other countries’ more focused innovation policies have raised the following questions: whether the United States needs any more coordinated innovation policy and, if so, what sort of information is needed to guide it or to judge its performance. Dr. Wessner, praising the question as very interesting, opined that the U.S. system is a patchwork but pointed out that its lack of coherence is both a strength and a weakness. The strength lies in not having a Ministry of Science or a Ministry of Industry that gets it completely wrong. The downside of the United States’ distributed system is that “no one’s watching the store.” As an example of this lack of coherency, he noted that previous analysis by the STEP board first pointed out that the United States cut its R&D budgets for physics, chemistry, and engineering seriously, on a sustained basis, and in real terms between 1993 and 1999 as different agencies responded independently to the end of the cold war.19 On 19 National Research Council, Trends in Federal Support of Research and Graduate Education, Stephen A. Merrill, ed., Washington, D.C.: National Academy Press, 2001.

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Innovation Policies for the 21st Century: Report of a Symposium the other hand, Dr. Wessner stated, when OSTP was fully staffed—which at that moment it was not—there were more people watching the store. That leadership is critical, as is the funding, and the two are related. “I would argue,” Dr. Wessner declared, “that we have some of the best mechanisms in the world that are inadequately fueled.” Surprisingly, he observed, the United States was beginning to suffer what he referred to as “the tyranny of small scale”: In a $10 trillion or $11 trillion economy, good programs were funded for $10 million, or for $20 million, or, in the case of ATP, for $140 million. “You know it’s a good program, but you’d have scale effects that are larger,” he added.

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