Key Innovation Sectors

The innovation system in the United States is like an ecosystem, said Estrin, with different sectors serving particular functions in close cooperation with other sectors. To meet the competitiveness challenges now facing the United States, the individual sectors and the relationships among sectors must both change.

RESEARCH UNIVERSITIES

Universities play a major role in the U.S. innovation system, said Jean-Lou Chameau, president of the California Institute of Technology. For example, many studies have documented the influence of university faculty members in commercializing intellectual property, both directly and indirectly. Start-up companies created by university faculty have a higher percentage of success than start-ups that originate in other institutions. “We need to keep reinforcing the links between faculty and the corporate world,” Chameau said.

To enhance the benefits of university research, institutions of higher education need to embrace and support activities that merge academic disciplines. Some universities have taken steps in this direction, but much more needs to be done. The job of universities, said Chameau, must be “to create the physical, financial, and intellectual context for this merging to take place.” An example would be linking and implementing knowledge across very different physical scales, from biotechnology, nanotechnology, and information technology to large-scale systems, such as energy, the physical infrastructure, and the environment. In the area of infrastructure, for instance, scientists will develop novel materials for infrastructure systems, but much more 7



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Key Innovation Sectors The innovation system in the United States is like an ecosystem, said Estrin, with different sectors serving particular functions in close cooperation with other sectors. To meet the competitiveness challenges now facing the United States, the individual sectors and the relation- ships among sectors must both change. RESEARCH UNIvERSITIES Universities play a major role in the U.S. innovation system, said Jean-Lou Chameau, president of the California Institute of Technology. For example, many studies have documented the influence of university faculty members in commercializing intellectual property, both directly and indirectly. Start-up companies created by university faculty have a higher percentage of success than start-ups that originate in other insti- tutions. “We need to keep reinforcing the links between faculty and the corporate world,” Chameau said. To enhance the benefits of university research, institutions of higher education need to embrace and support activities that merge academic disciplines. Some universities have taken steps in this direc- tion, but much more needs to be done. The job of universities, said Chameau, must be “to create the physical, financial, and intellectual context for this merging to take place.” An example would be linking and implementing knowledge across very different physical scales, from biotechnology, nanotechnology, and information technology to large-scale systems, such as energy, the physical infrastructure, and the environment. In the area of infrastructure, for instance, scientists will develop novel materials for infrastructure systems, but much more 

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 REBUILDING A REAL ECONOMY needs to be known about how the components of the systems function together. Research universities also need to do much more to shape the public understanding of science, technology, and engineering. Science advisor John Holdren has suggested that scientists and engineers devote 10 percent of their time to such activities. “I’m not suggesting that, but we need to do better,” said Chameau. It also is important for scientists and engineers not just to describe problems but to focus on potential solutions. As with other parts of the innovation system, research universities are finding it harder to support highly risky undertakings. Universities and governments must work together to support high-risk research, not just research aimed at incremental advances. Some faculty members have been seeking funds from private foundations to do high-risk research, but this source of support is limited. One policy innovation that could encourage the commercializa- tion of ideas developed at research universities is for universities to Universities and governments provide more support for what must work together to Chameau called “vertical specializa- support high-risk research, tion.” Institutions that can enhance not just research aimed at incremental advances. the movement of early-stage tech- nologies from laboratories and Jean-Lou Chameau start-up companies to development by larger firms could be extremely beneficial in many industrial sectors. “This fits very well with what universities can do, and we’re going to see more of that.” ENTREPRENEURS The United States has traditionally had a very strong entrepreneurial sector that has driven the development of new companies and new industries. But several factors have recently limited the productivity of this sector in the United States. The major problem, said Estrin, is that the venture capital system “is broken.” As venture capital funds have gotten bigger and become more accustomed to short-term returns, the number of firms willing to invest in high-risk, high-return ideas has decreased. In addition, the recession has reduced the number of angel investors, and the market for initial public offerings has significantly changed. Estrin urged that the venture

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 KEY INNOVATION SECTORS capital industry become more like it was in the 1980s, when firms were more willing to take intelligent risks. Raymond Lane, managing partner with the venture capital firm of Kleiner Perkins Caufield and Byers, agreed with Estrin’s assessment. He said that too much venture capital is now available. If the venture capital market were more efficient, the available venture capital “would The venture capital system find the right entrepreneurs, and is broken. As venture capital the cream would rise to the top.” funds have gotten bigger His firm looks at roughly 3,000 and [investors] become proposals a year to fund maybe 20 more accustomed to short- term returns, the number companies. “That’s a lot of frogs to of firms willing to invest kiss to get those plans,” Lane said. in high-risk, high-return Also, many current venture capital- ideas has decreased. ists do not have the experience of running companies, which reduces Judy Estrin their ability to make good choices. Several panelists mentioned the legal climate as a barrier to entrepreneurs. The potential for litigation “is a fundamental problem,” said Diamandis. “We are becoming risk averse in this nation for a reason. If you are a large corporation and you take a large risk and you fail, you get hit with your stock price plummeting or lawsuits. If you are a government agency and you take risks, all of a sudden you have a congressional investigation. And without the ability to take risk, we are stuck at the status quo or at best incrementalism.” Holliday agreed that legal requirements can be a major factor in busi- ness decisions. When DuPont agreed to build its solar plant in China, in 60 days it had every permit it needed to build and operate the plant. “In this country, if I could do it in 12 months, I’d have a celebration.” Policies that address the needs of the entrepreneurial sector could boost the conversion of innovations into jobs and economic growth. Entrepreneurs need more than the short-term stimulus afforded by the American Recovery and Reinvestment Act to enhance long-term returns, said Diamandis. New policies, such as R&D tax credits, could provide a more extended lift. Entrepreneurs also need to be featured in society so that young people want to emulate them. “In society today, especially in America, our heroes are the television stars, the sport stars, and [simi- lar] individuals, which is unfortunate, because the real stars need to be the scientists, the engineers, the entrepreneurs. How do we focus our spotlight on these people?”

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0 REBUILDING A REAL ECONOMY Holliday described a program undertaken by the Council on Com - petitiveness to enhance the climate for entrepreneurs at a regional level. So far the program has targeted seven regions of the country. In Wilmington, Delaware, for example, a survey of entrepreneurs found that news coverage of entrepreneurial activities was severely limited. An effort to provide information to newspapers has generated much more public attention. Similarly, a clearinghouse for entrepreneurs to learn about sources of venture capital has provided a way to connect innova- tors with potential funders. In addition, a program that brought together university presidents in the area provided a way for entrepreneurs to tap into expertise at local universities. NATIONAL LAbORATORIES Laboratories supported by the federal government—including the large national laboratories funded by the Department of Energy—are unique American assets, said Steve Koonin, under secretary of science at the Department of Energy. They can conduct research, development, and demonstration projects that are not well suited to universities while also constructing and operating major facilities that are open to all researchers. More generally, they can serve as a bridge between research and commercialization to accelerate innovation. Universities, national laboratories, the private sector, and govern- ment all have different roles, said Koonin. Universities provide new basic knowledge and train tomorrow’s researchers and citizens. The private sector exists to make money, with start-up companies pursuing high- risk innovation and large corpora- “In sum, all of the players have current conceptions of their tions focused on taking new ideas to roles that are hard to change scale. The government establishes but indeed must change if a policy environment and shapes [innovation] is to proceed at the overall economy. Coordinating the pace to which we aspire.” the activities of these different sec- Jean-Lou Chameau tors can be difficult. Universities shy away from significant commer- cial involvement, and ownership of intellectual property is often a source of tension. Businesses must seek differential advantage if they are to be successful, while government seeks to provide a level playing field for companies. “In sum, all of the players have current conceptions of their roles that are hard to change

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 KEY INNOVATION SECTORS but indeed must change if [innovation] is to proceed at the pace to which we aspire.” In some ways, the national laboratories provide a research environ- ment similar to that created at some of the large industrial laboratories of the past, such as Bell Laboratories or the laboratories supported by IBM. Partnerships between national laboratories and other institutions also provide a way to couple different parts of the innovation system. For example, Chameau described an ongoing partnership among NASA, the Jet Propulsion Laboratory, and Caltech that has been a great success. MANUFACTURINg The United States has many strengths in the areas of invention, innovation, and early-stage research and development, said Koonin. But it has been less strong in the deployment of innovations into high-value- added manufacturing. Holliday noted that incentives and policies in place today in the United States discourage companies from locating manufacturing jobs in this country. For example, the tech- nologies deployed in the solar plant Incentives and policies in DuPont built in China were devel- place today in the United oped in the United States, but most States discourage companies of the jobs ended up in China. The from locating manufacturing jobs in this country. United States needs “to attract not just the technology development Chad Holliday here but the jobs here.” Koonin observed that federal agencies play an important role in boosting manufacturing in the United States. But the focal point for this issue is Capitol Hill, and legislators “need to get more focused on this issue than they have.” Diamandis asked whether government investments in U.S. manu- facturing are properly targeted. He pointed out that the federal govern- ment is spending on the order of $130 billion bailing out the automobile industry, representing an average of $200,000 per worker in the industry. “What if we spent that money retooling and reeducating those indi- viduals, keeping them employed but for other industries that are critical to our needs, such as energy production and installation, battery power, solar, whatever? We have to make some tough decisions about what industries—the riverboats versus the railroads—that we want to be in over the next ten years. And it’s going to hurt.”

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 REBUILDING A REAL ECONOMY Judy Estrin, author and serial entrepreneur. Photo by Tom Sullivan. Americans can still manufacture products at lower costs than the global competition, said Lane. But to do so they need to take advantage of new production systems that greatly improve efficiency. “If we think in old ways and say, ‘We’re going to build cars or any product the way we did 20 years ago,’ we lose, because our cost per hour is higher. But if we can use less labor and create higher-value manufacturing jobs, we win.” In this regard, Holliday pointed to agriculture in the United States as Looking at the U.S. an example of an industrial sector economy as a whole, there that has become a world leader by is a fine balance between adopting modern technologies and competitiveness and globalization. Too strong a production systems. focus on competitiveness Looking at the U.S. economy as can lead to protectionism. a whole, Estrin noted that there is a fine balance between competitive- Judy Estrin ness and globalization. Too strong a focus on competitiveness can lead to protectionism. But innovation can produce lots of winners, not just one. The United States must “partner within a global environment to solve the challenges that face us as a nation and a planet.”

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 KEY INNOVATION SECTORS However, the United States cannot be a partner from a position of weakness, Estrin continued. The best collaborations occur when each partner feels strong. Lane agreed that new industries can produce many winners. “But I, for one, am for globalization if American companies that build American jobs win, first, and global companies that build American jobs win, second, and globalization for the good of mankind, third.” Thirty years ago the number one concern of Americans was peace, he said. “Today it is jobs, jobs, jobs.”

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