Overview

While nations have always competed for territory, mineral riches, water, and other physical assets, they compete most vigorously today for technology-based innovations and the value that flows from them. Much of this value is based on creating scientific knowledge and transforming it into new products and services for the market. This process of innovation is complex and interdisciplinary. Sometimes it draws on the genius of individuals, but even then it requires sustained collective effort, often underpinned by significant national investments. Capturing the value of these investments to spur domestic economic growth and employment is a challenge in a world where the outputs of innovation disseminate rapidly. Those equipped to understand, apply, and profit from new knowledge and technical advances are increasingly able to capture the long-term economic benefits of growth and employment.1

In response to this new, more distributed innovation paradigm, the National Academies Board on Science, Technology, and Economic Policy (STEP) convened leading academics, business leaders, and senior policymakers from Germany and the United States to examine the strengths and challenges of their innovation systems. More specifically, they met to compare their respective approaches to innovation, to learn from their counterparts about best practices and shared challenges, and to identify cooperative opportunities. The symposium was held in Berlin and organized jointly by the German Institute for Economic Research (DIW) and the U.S. National Academies with the support of the German Federal Ministry for Education and Research (BMBF) and the American Embassy in Berlin.

Both U.S. and German participants described common challenges on a wide variety of issues ranging from energy security and climate change to low-emissions transportation, early-stage financing, and workforce training. While recognizing their differences in approach to these challenges, participants on

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1See National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, Charles W. Wessner and Alan Wm. Wolff, eds., Washington, DC: The National Academies Press, 2012.



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Overview While nations have always competed for territory, mineral riches, water, and other physical assets, they compete most vigorously today for technology-based innovations and the value that flows from them. Much of this value is based on creating scientific knowledge and transforming it into new products and services for the market. This process of innovation is complex and interdisciplinary. Sometimes it draws on the genius of individuals, but even then it requires sustained collective effort, often underpinned by significant national investments. Capturing the value of these investments to spur domestic economic growth and employment is a challenge in a world where the outputs of innovation disseminate rapidly. Those equipped to understand, apply, and profit from new knowledge and technical advances are increasingly able to capture the long-term economic benefits of growth and employment.1 In response to this new, more distributed innovation paradigm, the National Academies Board on Science, Technology, and Economic Policy (STEP) convened leading academics, business leaders, and senior policymakers from Germany and the United States to examine the strengths and challenges of their innovation systems. More specifically, they met to compare their respective approaches to innovation, to learn from their counterparts about best practices and shared challenges, and to identify cooperative opportunities. The symposium was held in Berlin and organized jointly by the German Institute for Economic Research (DIW) and the U.S. National Academies with the support of the German Federal Ministry for Education and Research (BMBF) and the American Embassy in Berlin. Both U.S. and German participants described common challenges on a wide variety of issues ranging from energy security and climate change to low- emissions transportation, early-stage financing, and workforce training. While recognizing their differences in approach to these challenges, participants on 1 See National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, Charles W. Wessner and Alan Wm. Wolff, eds., Washington, DC: The National Academies Press, 2012. 3

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4 MEETING GLOBAL CHALLENGES both sides drew out valuable lessons from each other’s policies and practices. In his opening remarks, Gert Wagner of the German Institute for Economic Research (DIW Berlin) predicted that the symposium would help identify best practices in stimulating innovation in key industries, as well as in suggesting areas where the two nations might cooperate in the future. Participants were also aware of the need to adapt to a new global environment where many countries have focused new policy measures and new resources to support innovative firms and promising industries. “We all need to pay attention to what the rest of the world is doing,” commented Alan Wolff, Chair of the National Academies’ study of Comparative National Innovation Policy. “The policies of others shape the environment in which we cooperate and compete.”“In fact,” he added, “there is not a country disinterested in innovation policy. They are all working hard to capture value in the 21st century.”2 SUSTAINING U.S.-GERMAN COOPERATION Sustaining strong U.S.-German relationships in trade, investment, and science was seen as important to sustaining the innovative strengths of both countries. As German Minister of State Werner Hoyer noted at the symposium, the United States is Germany’s most important trading partner outside the European Union, and Germany is the U.S.’s leading trading partner in Europe. While the 2008 global economic crisis “slowed trade between the two nations, transatlantic trade has been increasing again since 2009. Bilateral trade amounted to $130 billion in 2010, up from $115 billion in 2009.” The figures of foreign direct investment are also robust. In 2009, German companies invested an accumulated $334 billion in the United States, the second-largest amount by an EU country, behind the Netherlands. Germany was the fifth-largest foreign investor in the United States with investments of $116 billion. Citing these developments, Dr. Hoyer observed, “We see that the transatlantic relationship has come a long way since the Marshall Plan.” Today, he said, the United States and the European Union are the world’s most closely linked economic regions, jointly generating 54 percent of the world’s GDP and providing 30 percent of its consumers. In his keynote remarks at the symposium Philip Murphy, U.S. Ambassador to Germany observed that both countries have a long history of robust, bilateral scientific and technological investment. The United States and Germany have announced similar targets of investing more than three percent of GDP in public and private research and development. These investments in basic and applied research create incentives for private investments in 2 For a review of innovation policies of leading nations and the challenges facing the United States, see National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, Charles W. Wessner and Alan Wm. Wolff, eds., op. cit.

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OVERVIEW 5 Box A Sharing Best Practices Participants at the symposium identified many concrete areas where Germany and the United States can share best practices in innovation policy, such as funding initiatives, intellectual property rights, peer review, scientific exchange, public-private partnerships, and the role of NGOs. “It seems meaningful to ask: What is the state of affairs?” said Georg Schütte, Germany’s State Secretary for Education and Research. “How can we compare them? What can we learn from each other?” innovation. In both countries, the universities, federal labs, and industrial laboratories conduct research that ultimately leads to breakthrough products and new companies. German and American counterparts work closely together to foster research and innovation. The Fraunhofer Institutes, for example, have seven research centers in the United States, and the Max Planck Society now has a Center for Bio-Imaging in Tampa, Florida. There are more than 50 bilateral cooperation agreements between individual institutions on topics ranging from earth sciences to energy physics to public health. As strong and productive as this relationship has been, Ambassador Murphy said, it is desirable to reinforce and expand both long-standing and more recent connections. The relationship was given a more formal structure through a science and technology agreement signed by the two countries on February 10, 2010, which establishes a framework for further cooperation. The objective is to continue to identify and intensify relations in education and research, to coordinate joint research teams, and to interlink shared national priorities in science policy to the benefit of both sides. Speakers from both the United States and Germany emphasized the importance of cooperation and mutual learning in the area of innovation policy. According Minister of State, Dr. Hoyer, the “complexity of global challenges means that cooperation and competition in innovation go hand in hand.” In addition, he said that both the United States and Germany “must give priority to research, science, and education.” “Only an innovation-friendly climate and technological progress will allow for sustainable growth, employment, and prosperity.” At the same time, speakers from both countries also recognized unresolved challenges on many issues, including energy security, carbon capture and sequestration, costs of solar energy and battery technology, smart grids, electromobility, patenting, technology transfer, and network neutrality. Furthermore, as Carl Dahlman of the Georgetown University School of Foreign Service told the symposium audience, Germany and the United States now share a “demanding, dynamic, and uncertain global environment” with big new players and many possible uncertainties, from another financial crisis to

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6 MEETING GLOBAL CHALLENGES An innovation culture depends also on the wealth of people, their openness to new ideas, and their willingness to take risks, said Dr. Gert Wagner of DIW Berlin. “Only an open-minded and tolerant society can support sufficient innovative talent to allow the economy to grow rapidly.” internal problems disrupting China. “The world is in tremendous flux, with big challenges, and big constraints. This talk is an invitation to our North Atlantic alliance to better collaborate in rebalancing our global systems.” Given these challenges, State Secretary Schütte highlighted the common need on both sides of the Atlantic to communicate the sense of urgency to the governing electorate and general public: “If we share a consensus that education, research, and development are so important, how can we convince our political representatives? How can we convince the public that it is important, despite the need for fiscal restraint, to spend more money in this area than in other areas?” ONGOING BILATERAL COLLABORATIONS A rationale for collaboration mentioned by several participants is to combine American and German strengths in addressing challenges beyond the reach of either nation alone. These challenges could include: • Mitigation of environmental pressures. • Preparation for pandemics. • Improvement of energy efficiency and develop alternative energy technologies. • Development of CO2 sequestration. • Mitigation of diseases of aging populations. • Promotion of natural resource technologies. • Mitigation of social risk and instability. The degree of U.S.-German cooperation in science and technology is “huge,” declared Seth Winnick, Counselor for Economic Affairs at the Embassy of the United States in Berlin. Each invests heavily in the other’s innovation systems, and in a wide range of research, development, and innovation topics. And both countries have set the common objective of investing more than 3 percent of GDP in public and private research and development. In both countries, the universities, federal labs, and industrial laboratories conduct research that leads to breakthrough products and new companies. German and American counterparts work closely together to foster research and innovation. Describing the scope of cooperation, Mr. Winnick noted that German and U.S. institutions share more than 50 bilateral agreements in R&D areas

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OVERVIEW 7 ranging from earth sciences to energy physics to public health.3 Echoing Ambassador Murphy, he noted that in February 2010, Germany and the U.S. signed their first umbrella science-and-technology agreement and signed memoranda of understanding in the fields of energy and cancer research.4 Also, the U.S.-German Framework Agreement on Scientific and Technological Cooperation, concluded in 2009, adds a strategic component to bilateral cooperation. Through the Transatlantic Economic Council (TAC), founded in 2007 on a German initiative, the United States and EU cooperate on future- oriented economic issues, including e-mobility.5 Finally, said Mr. Winnick, the two countries signed a “significant S&T cooperation agreement” in 2010, which will be implemented over several years. Ongoing collaborations are taking place in several areas of priority to both nations. Some of these were described by Ambassador Murphy and Minister of State Hoyer at the symposium. Cooperation on Renewable Energy: Ambassador Murphy noted that the United States formally joined the International Renewable Energy Agency, or RENA, on March 4, 2011. In Germany, the Bonn Innovation Center for Renewable Energy opened in 2011. The United States will be a partner in the development of clean technologies at the Bonn Center. The U.S. National Renewable Energy Laboratory (NREL) in Colorado has collaborated since 2008 on solar research with three institutes of the Helmholtz Association. The partners are seeking to broaden the range of their research through a new MOU focusing on solar photovoltaic materials and systems, including solar fuels and concentrated solar power (CSP), as well as performance and reliability. The Fraunhofer Institutes also opened a Center for Sustainable Energy Systems in Cambridge, Massachusetts, several years ago. Ambassador Murphy offered two recent examples of commercial-scale collaboration. First, the world’s largest onshore wind energy park, located on former cotton farmland in Texas, is owned and operated by the German energy company E.ON. This huge generator, the Rock Hill Wind Farm, has 600 wind turbines capable of generating over 780 Mw of electricity. The second example is the decision of the world’s second-largest photovoltaics manufacturer, First Solar, a U.S. 3 For a comprehensive explanation of bilateral cooperation in science and technology, see Federal Ministry of Education and Research, “Germany and the United States Increase Their Cooperation,” March 24, 2011 (). 4 See also the presentation of John Holdren at November 1, 2010, National Academies Symposium on “Meeting Global Challenges,” held in Washington, DC. 5 See the summary of the presentation by Engelbert Beyer, in the Proceedings chapter of this volume.

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8 MEETING GLOBAL CHALLENGES company, to site its main manufacturing plant in Frankfurt on der Oder.6 Cooperation on Complex Hardware: Dr. Hoyer noted that another area with substantial partnerships is the development and use of complex hardware. This includes U.S. participation in the German electron synchrotron (DESY), the large hadron collider at CERN, and a joint project linking the Spallation Neutron Source (SNS) at Oak Ridge National Laboratory in Tennessee with the Neutron Spin Echo Spectrometer at the Technical University of Munich. The opening of the Max Planck Florida Institute in Jupiter, Florida, which focuses on bio-imaging, is another milestone in U.S.- German cooperation. There is also further bilateral cooperation on the International Space Station and the Stratosphere Observatory for Infrared Astronomy, as well as other basic research projects in physics, health, energy, and civil security. Cooperation on Academic Exchanges: The two countries also support several academic exchange programs. According to Dr. Hoyer, the German Foreign Office funds exchanges and scholarships that enable American students and scientists to visit Germany. The Foreign Office also operates the German Center for Research and Innovation in New York, which it established in 2010 in the federal Ministry of Education and Research. Dr. Hoyer described it as a “cornerstone of the German government’s strategy for international science and research.” Cooperation on Security Challenges: Dr. Hoyer added that both countries would be preparing for possible new security challenges in the 21st century, such as asymmetric threats and the larger menace of terrorism. “A U.S.-German agreement on cooperation in civil security research was signed in March 2009, designed to produce mutual benefits on issues such as visual analytics, cargo security, and detection of hazardous substances.” Similar collaboration is under way in climate change research. Dr. Hoyer emphasized that stronger cooperation with the United States “is part of the German government’s strategy for the internationalization of science and research.” The central purpose is to address the challenge of global competition, especially from newly competitive powers, notably China. “And this is going to be the hour of 6 Frankfurt on der Oder, or Frankfurt (Oder), is located in eastern Germany on the Oder River, which forms the German-Polish border.

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OVERVIEW 9 truth,” he said, “because the dynamics of development in other parts of the world is overwhelming. If we do not meet these challenges, if we do not interest our young people in science and technology, we are going to lose the technological leadership positions we still have.” CHALLENGES IN THE GLOBAL ECONOMY Speakers from both countries took note of the changes in the global economy, particularly the steadily increasing competition generated by China, India, Korea, Taiwan, and other emerging powers. “In almost all types of advanced technology, it is American research centers and enterprises that are leading,” said State Secretary Schütte. At the same time, he said, the United States is challenged to maintain this leadership as it recovers from the recent economic crisis and faces new competitive pressures. In his symposium presentation, Mr. Wolff noted that China is actively seeking to foster “indigenous innovation,” though increased support for university research and development, national laboratories, universities, science and technology parks, and a defensive IP environment. Current goals include intensive investments in crucial high-technology products, and the use of policy tools to draw in foreign technologies and promote indigenous innovative technologies, increase R&D spending to 2.5 percent of GDP by 2010, and support state projects to generate important strategic products.7 Dr. Carl Dahlman of Georgetown University pointed out in his presentation, this strategy brings difficulties for potential partners by forcing the use of Chinese standards, Chinese parts, skewed procurement, Chinese branding, and local purchasing mandates. At the same time, the rapid growth of China and other emerging economies poses important opportunities. Citing IMF data for growth rates of the eight largest economies from 2000 to 2010, Dr. Dahlman reported “a strong indication that in terms of purchasing power parity, China’s economy will surpass that of the United States around 2016.” India’s economy, he said, will move into third place, passing Japan, and continue its own climb at a slightly slower rate than China. “Both China and India face big challenges,” he said, “and history is not linear. But both China and India are becoming large players on world scene, and are likely to become larger and more important over time.”8 In terms of China’s outputs from 1998 to 2008, the volume of science and engineering articles rose from near zero to about 60,000, surpassing Japan and Germany. The same pattern is seen for patent applications. While the 7 For a review of Chinese innovation policies, see National Research Council, Building the 21st Century: U.S.-China Cooperation in Science, Technology, and Innovation—Summary of a Symposium, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011. 8 See Carl Dahlman, The World Under Pressure: How China and India Are Influencing the Global Economy and Environment, Palo Alto, Stanford University Press, 2011.

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10 MEETING GLOBAL CHALLENGES quality of these publications and patents vary, Dr. Dahlman noted that the Chinese are making a very big effort, “going from a focus on imitation, which they have done well, to tapping global knowledge, to beginning to innovate on their own account.” China has also rapidly built up its workforce. According to a report of the National Academies, China produced about 2,000 PhDs in science and engineering fifteen years ago; this figure rose to 22,000 by 2007. In the United States, the number of graduating PhDs rose from 17,000 to 23,000 over the same period.9 Another part of China’s effort to strengthen human resources has been to recruit overseas scientists and engineers, especially expatriate Chinese, by offering generous job opportunities.10 According to Klaus F. Zimmermann of the DIW Berlin, this “global tug-of-war” for talent will take on increasing importance for both Germany and the United States, which is accustomed to near-automatic access to the best students from around the world. “Whoever wins the battle for manpower,” he said, “will be the victor in the 21st century.”11 KEY FEATURES OF THE U.S. INNOVATION SYSTEM State Secretary Schütte characterized the U.S. innovation system as generally more productive and “disruptive” than that of Germany. He noted that the U.S. success with cutting-edge technologies is closely linked to several factors, beginning with the leadership of major research universities. A second factor, he said, is entrepreneurial spirit, which leads to success in new business models. A third factor for success has been the United States’ ability to attract the best talent from around the world. A fourth strength is its generally efficient capital markets, particularly the availability of venture capital and other risk capital. Finally, he said, technological success is supported by government investments in R&D, which are “markedly higher than in Germany and Japan.” These factors combine to create opportunities for disruptive innovations that are “significantly greater than in Germany and Europe.” Several participants highlighted the American “entrepreneurial culture” as a key feature of the U.S. innovation system. Noting that American culture places high social value on commercial success, Thomas Curran of Deutsche Telekom AG said that the early entrepreneurs and industrialists of the United States were regarded as “heroes” and were the first “globalizers of industrial 9 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine of the National Academies, Is America Falling Off the Flat Earth? Washington, DC: The National Academies Press, 2007. 10 For a review of Chinese policies to attract Chinese born scientist and engineers back to China, see National Research Council, Building the 21st Century: U.S.-China Cooperation in Science, Technology, and Innovation—Summary of a Symposium, C. Wessner, ed., op. cit. 11 See Amelie F. Constant, Bienvenue N. Tien, Klaus F. Zimmermann and Jingzhou Mengl, “China's Latent Human Capital Investment: Achieving Milestones and Competing for the Top,” Bonn: IZA Discussion Paper 5650, September 2010.

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OVERVIEW 11 Box B Federal Support for Small Business Entrepreneurship A key U.S. federal mechanism to promote the formation and survival of small, technology-based firms is the Small Business Innovation Research (SBIR) program. This program has several advantages. It is stable, having been in place for 25 years, and, as a set-aside mechanism, has no budget line, thereby providing a steady source of funding, allocating 2.5 percent of each federal agency’s R&D budget to small business awards and contracts.12 Speaking at the symposium, Charles Wessner of the National Academies noted that total SBIR spending by agencies is about $2.5 billion a year, large enough to achieve a significant “portfolio effect” through a diversity of topic areas. Other key advantages are that SBIR grants and R&D contracts do not have to be paid back, a company retains complete control of its intellectual property, and approval by SBIR often creates a “certification effect” that raises the perceived value of awardees’ firms, helping to attract outside investors.13 thinking.” In the 1960s through 1980s, the United States continued to generate many successful entrepreneurs, buttressed by a strong belief in technological change and a market eager for new products. In this regard, Ginger Lew, then of the National Economic Council, noted that creating an environment conducive for entrepreneurship was a key element of U.S. innovation policy, adding that in terms of policy, the country prefers to promote innovation with a “light touch.” In his symposium presentation, John Fernandez, then Assistant Secretary of Commerce, said that U.S. innovation depends on three basic building blocks: people, ideas, and infrastructure. First, innovation is possible only through the actions of a skilled and talented work force. For this reason, he noted, strengthening the U.S. work force is a key element of the Obama administration’s strategy for technology and innovation. The second building block, he said, is continued investment in basic research to accelerate the knowledge breakthroughs that mark the beginning of the innovation cycle. The third building block is modern infrastructural networks, including the smart grid, next generation air traffic control, new wireless communications systems, and 12 This amount was authorized in 2012 to increase to 3.1 percent by 2017. At the recommendation of the National Academies, based on a study led by former Defense Under Secretary Jacques Gansler, the legislation reauthorizing SBIR raised the standard size of individual grants from $100,000 to $150,000 for Phase I projects and from $750,000 to $1 million for Phase II projects. See National Research Council, An Assessment of the SBIR Program, C. Wessner, ed., Washington, DC: The National Academies Press, 2008. 13 See National Research Council, An Assessment of the SBIR Program, op. cit.

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12 MEETING GLOBAL CHALLENGES other networked systems that move people, energy, and ideas with speed and efficiency. Several participants also described some of the challenges facing the US innovation system including flat or declining U.S. investments in R&D. By contrast, public R&D investment has surged in Asia, with expenditures of the Asia-8 economies surpassing those of the EU-27 in 2003, and approaching those of the United States in 2010, the last date for which figures are available.14 At a time of growing R&D expenditures overseas, this has meant that the U.S. share of global R&D has declined. In addition, as Charles Wessner pointed out in his presentation, much of federal R&D spending is defense-oriented and skewed towards weapons systems development rather than fundamental discovery. The defense R&D budget totals $82 billion and accounts for about 55 percent of federal R&D spending, with about 90 percent of that spent on weapons systems development.15 RECENT U.S. INITIATIVES Since the Obama Administration took office in 2009, the federal government has taken several steps to support innovation. Philip Singerman of NIST noted that this support is reflected in the president’s budgetary commitment, the statutory authority issued through the bi-partisan America COMPETES legislation, and the enhanced role of NIST, particularly its support for manufacturing through the Manufacturing Extension Partnership. Ginger Lew, formerly of the National Economic Council, described the push by the Obama Administration for greater coordination among the federal research agencies charged with ensuring that small and medium-sized enterprises (SMEs) in the nation’s regions, states, and municipalities have the incentives, support, and resources they need to bring new products and services to the marketplace. She also drew attention to Startup America, an initiative launched by the White House in January 2011 to promote entrepreneurship across the country. Startup America is investing $2 billion to help entrepreneurs by lowering barriers to high-potential, fast-growing small companies, especially in high-tech fields such as clean energy, nanotechnology, biotechnology, and advanced manufacturing. Another new program, the Task Force on Advancing Regional Innovation Clusters (TARIC), was designed to encourage federal agencies to collaborate more effectively in advancing the growth of regional innovation clusters in the United States. These innovation clusters have the objective of forming public-private partnerships at many levels, and providing resources, linkages, and infrastructure to SMEs. 14 National Science Board, Science and Engineering Indicators 2011, Arlington, VA: National Science Foundation, 2011. Access at . 15 See National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy, op. cit., pp. 30-31.

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OVERVIEW 13 Secretary Fernandez noted that the Economic Development Administration (EDA) launched the Jobs and Innovation Accelerator Challenge in May 2011. This initiative, he said, is a joint effort of 16 federal agencies designed to promote growth through public-private partnerships in at least 20 pilot regions across the country that demonstrate high-growth potential. This program builds on the success of an earlier pilot project, the Energy Regional Innovation Cluster (ERIC), launched in 2010. As Ms. Lew noted in her remarks, ERIC provides about $130 million from seven federal agencies to create a regional research center, develop new building efficiency technologies, and cluster the work of local partners to implement these technologies in local businesses and buildings. In his presentation, Jerry Lee of the National Cancer Institute (NCI) said that his organization is seeking to use new research and analytical tools and new ways of thinking to understand the mechanisms causing cancer. This initiative grew out of the 1000 Genomes Project, specifically a request by NCI to the research community asking what they most needed to “conquer cancer.” Dr. Lee noted that the researchers responded by saying that they wanted more data, they wanted it publicly available, and they wanted it in “real time.” In turn, he said, NCI responded by placing unprecedented amounts of information in the public domain. Dr. Lee added that NCI also responded with innovative ways to use the data: to make a systematic identification of all cancer genomic changes, repeat the identification for all cancers, and make it publicly available. A new Cancer Genome Atlas was launched for brain, lung and ovarian cancers, with data on every patient who came through the program. As a result of this initiative, he said, a possible resistance mechanism inside the disease has been discovered; it was discernible because of the unprecedented availability of data. NCI then wanted to “do something more complex; to really understand the system, and try to predict it using all this new data,” noted Dr. Lee. “We thought the best way to do that is to bring in another point of view, and when it’s a hard problem, we always turn to the physicists.” NCI recruited some 300 physicists from outside with high interest in looking at this problem, and established the Physical Sciences Oncology Network “to build the infrastructure that can better understand and control cancer through the convergence of physical sciences and cancer biology. We envision a future where individualized medicine becomes a reality—individualized, targeted cancer care.” THE GERMAN INNOVATION SYSTEM Germany’s innovation system differs from that of the U.S. in several fundamental ways. While the U.S. has more of an entrepreneurial economy, explained Engelbert Beyer of the Federal Ministry of Education and Research (BMBF), the German model is more oriented toward “solid, high-quality progress” that is anchored in existing industries. Whereas labor and skilled talent move relatively freely in the U.S., mobility is more limited in Germany. In

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20 MEETING GLOBAL CHALLENGES the research associations, and closer collaboration between research organizations and universities. U.S. universities feel their own pressures, particularly in the form of budget cuts for public institutions and expectations that universities play a larger role in promoting economic growth. One public university, the University of Akron, in Ohio, has developed a new model that broadens the mission and image of the institution. In his symposium presentation, University of Akron President Luis Proenza noted that “Largely, we’ve tended to think of universities as producing human capital and some new knowledge. But in fact they generate many kinds of capital: creative capital, knowledge capital, human capital, social capital, financial capital, and natural capital.” In short, he said, their “product portfolio” is much broader than the common perception. The University of Akron evolved over the last 140 years amid the rubber and polymer industry, and developed close ties with the larger economy. Today, he said, the University of Akron seeks to engage with its community, and understands that if the community is not successful, neither is the university. Among many initiatives over the past decade, the university has led a neighborhood enhancement program, partnered with economic development groups, hospitals, and businesses, and converted unused or “weak” assets, such as patents, space, retirees, and outdated libraries, into strengths. “It’s a question of looking at the university not as a one- or two-product institution, but as a broad-based platform that can be both flexible and robust.” ENTREPRENEURSHIP, EARLY-STAGE FINANCE, AND STARTUP FIRMS While the generation of new knowledge and innovations provides essential raw material for economic growth, new innovation-based firms require a supportive climate of people and financing. A broad and sometimes intangible range of customs, values, and laws can either encourage or dampen the entrepreneurial spirit. For example, as Charles Wessner pointed out, bankruptcy laws in the U.S. are structured in such a way as to lower the risks of entrepreneurship. When entrepreneurs fail, as some must inevitably do, these laws permit prompt recovery and reallocation of human capital. Dr. Harhoff described what he called Germany’s “underdeveloped entrepreneurial culture” observing that while the MP3 player was invented in Germany, MP3 technology generated in its peak year only about $100 million in licensing revenues, or less than 0.01 percent of the value added to the industry. Eran Davidson, a venture capitalist in Germany, said that “our biggest constraint is the lack of entrepreneurs to start companies.” This comment was amplified by several speakers who described Germans’ “aversion to risk.” As Peter Terhart of the German Private Equity and Venture Capital Association (BVK) put it, “Should I take the risk of establishing myself independently with my own firm, or should I go to Siemens or a successful ‘hidden champion’ where the salary and employment are secure?” The lack of venture capital and

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OVERVIEW 21 concern about the risks of entrepreneurship may often persuade a young person to make the conservative choice, he said. “The culture here in Germany is not as tolerant of mistakes as it is in the United States. They don’t dream as big.” Alexander Kritikos, DIW’s Director for Entrepreneurship Research, expanded on the topic of risk, saying that the most successful entrepreneurs are those with a “moderate level of risk aversion.” Entrepreneurs who are too risk- averse, he has found, have a higher likelihood of failure; those who are “too risk-loving” likewise show a high incidence of failure. Achieving a “moderate level” of risk, he said, should be a key goal of policy makers as they shape innovation policy and subsidies.21 Dr. Lew emphasized the central role of startup businesses in job creation, despite the risks involved. In the United States, she said, small firms created more than 40 million net new jobs in the past 15 years, or two out of every three new jobs. At the same time, the risk of starting a new firm is amplified by fiscal constraints. “In the distribution of federal regulatory costs,” she said, “a disproportionately large share falls on small businesses. Very small firms, with fewer than 20 employees, fare the worst, spending 45 percent more per employee than large firms to comply with federal regulations.” Small firms face even more severe challenges in attracting early-stage financing. Despite the common belief that innovations by small firms will ultimately be recognized and supported, the reality is that potential investors have less than perfect knowledge, especially about innovative ideas, and this “asymmetric information” leads to suboptimal investments. While early-stage capital is scarce in the United States, Dr. Kritikos observed that it is even harder to find in Germany. In 2010, German firms or individuals invested some €650 million in small firms and entrepreneurs. One reason cited at the symposium was that Germany does not have pension funds, omitting a dominant investor from the venture capital market. Banks have been the primary provider of venture funding, but this is not part of their core business, and venture funds from banks dried up in the recent downturn. Dr. Harhoff agreed that venture capital “is really the bottleneck right now” for German startups, but said that the government had taken steps to provide more capital. In 2005, the BMBF formed a €272 million public-private partnership called the High-Tech Startups Fund. The fund can invest up to €500,000 in a new, promising company. The goal is to support young companies for up to two years, from the R&D stage through proof of concept and even market entry—by which time it is hoped that private financing will be available. In its first five years, the fund has pledged to take holdings in 177 technology companies. 21 See Marco Caliendo, Frank Fossen, and Alexander Kritikos, “The Impact of Risk Attitudes on Entrepreneurial Survival,” GfA Discussion Paper No. 12/2008.

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22 MEETING GLOBAL CHALLENGES In his remarks, Eran Davidson noted that his company, Hasso Plattner Ventures, is “trying to combine the two cultures into one,” working with German companies, German entrepreneurs with American roots, American CEOs, and others. The objective is to meld the international cultures of the two countries to improve startup performance. After five years, the firm has invested in 20 companies, several of them profitable, with a portfolio of $82 million from five investors in the EU and United States. In the United States, a portion of the Startup America initiative is dedicated to more effective early-stage financing, said Secretary Fernandez. Both the Angel Capital Association and the Angel Resource Institute have announced that they would double the number of high-caliber investors affiliated with angel groups across the country, increasing annual investments by more than $1 billion. Qualifying Startup America member companies would be matched with angel investor mentors to help grow their businesses. The National Venture Capital Association pledged to provide access to its 400+ venture capital firms, its 4,000-plus investors, and thousands of venture–backed companies’ CEOs. In Germany, a public-private partnership has been created with €240 million in state funds and €32 million in corporate funds to help young companies survive financially in their first year, especially high-tech companies. Dr. Jäkel noted that a Central Innovation Programme Mittelstand was launched in 2009 for “innovation consulting” and a small grant of €15,000, open to any field of technology. The companies learn in cooperation with Fraunhofers and others how to develop their business and how to collaborate in networks and clusters. Many universities now have entrepreneurship programs. In addition, bankruptcy laws have recently been changed to give people another chance when they have failed as entrepreneurs. The German government is seeking to increase R&D by smaller companies by connecting them to federal research programs and through expanded financial subsidies. In 2008, several SME-related activities within the BMWi were consolidated into the Central Innovation Programme SME, known by its German acronym ZIM.22 Normally, ZIM has an annual budget of around €300 million, but it received a major additional increase of €900 million through Germany’s economic stimulus program in 2009 and 2010. ZIM’s stated goals are to encourage SMEs to dedicate more efforts to innovation, reduce the risks of technology-based projects, and rapidly commercialize research. Germany’s tax policies are cited as a disincentive to investment. Accordingly, Germany cut its corporate tax rate from 38.65 percent to 29.83 percent in 2007, placing it near the median point of European economies, but the EFI Experts Commission notes that Germany is one of few industrial nations 22 In 2008 and 2009, the programs PRO INNOII, INNO NET, NEMO, and INNO-WATT were restructured and integrated into Central Innovation Programme.

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OVERVIEW 23 that do not offer a tax credit for R&D. The Experts Commission blames tax policies for falling R&D investment by small and medium-sized enterprises and the scarcity of private risk capital, and asserts that shortages of angel funding and venture capital could worsen unless Germany adopts an “internationally competitive, growth-promoting tax framework.”23 TECHNOLOGY TRANSFER Several speakers emphasized the weakness of technology transfer in both countries. Mr. Wolff said that the “single major gap in knowledge” for both the United States and Germany was “the right formula for transforming the benefits of innovation into high-quality jobs in large quantities. The challenge is to rediscover the alchemy of moving from innovation to strong domestic employment in an era of globalization.” Germany benefits from the public-private partnerships of the Fraunhofer-Gesellschaft, in which the needs of industry are connected to first- rate facilities and researchers. Despite its many contributions, Dr. Hoyer lamented Germany’s inability to capitalize on its own innovations. Mr. Davidson agreed that “it invents so much and profits from its inventions so little.” He displayed a chart of fundamental inventions made in Germany, including the light bulb in 1854, the telephone in 1859, the television in 1930, the maglev train in 1934, the computer in 1941, and the MP3 in 1987. “Guess what?” he said. “For all of those technologies and more, revenues are generated by American, Japanese, and recently Chinese companies.” Part of the reason, he said, was that in Germany, “perfection is valued with an almost religious fervor. Perfection in Silicon Valley, on the other hand, is likely to be regarded as time-consuming and inefficient. Longevity is important in Germany, where an idea must be assigned to a long-term plan of at least 20 years. In Silicon Valley, quick wins are important. A culture of thinking dominates Germany, while Silicon Valley has a culture of just doing.” Finally, he said, in Germany the managers tend to be engineers, while in the United States, managers are business-oriented people. “Marketing is the dominant theme of every company: marketing, marketing, marketing.” ENERGY Symposium participants held extensive discussions on energy, especially on the goals of energy security and the development of a low-carbon economy. Dr. Charles Ebinger of the Brookings Institution observed that the issue of climate change draws little interest from most U.S. voters, and that the 23 German Institute for Economic Research data cited in Juliane Kinast, Christian Reiermann, and Michael Sauga, “Labor Paradox in Germany: Where have the Skilled Workers Gone?” Spiegel Online, June 22, 2007.

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24 MEETING GLOBAL CHALLENGES debate over energy had narrowed to a focus on jobs rather than environmental or efficiency concerns. By contrast, the issues of energy and climate change resonate deeply with many German voters. The most spirited discussions of the symposium concerned Germany’s decision to phase out its nuclear plants and work toward an all-renewables energy policy by 2050.24 Dr. Ebinger noted that with the exit of Germany, and constraints on U.S. nuclear construction, China is now poised to become the “global vendor” of nuclear plants, and “is now building the best coal plants, moving toward carbon capture and sequestration, and building the largest renewable installations as well.” Dr. Hüttl noted that “getting out of nuclear” is not as simple as “just shutting down the power plants.” It requires a means of safe waste disposal, which is not yet available, and the desire to retrieve nuclear waste once there are technologies to treat it safely. In her roundtable remarks at the conference, Ms. Kotting-Uhl of Germany’s Green Party agreed that a nuclear phase-out would require additional research on safety, and the reactors in operation would still run for another decade or more before they could be safely dismantled. Nonetheless, Ms. Kotting-Uhl argued that aside from minimal research in winding down the nuclear sector, however, virtually all energy research funding should be dedicated to applied research on renewables. She opposed any further funding for nuclear fusion on the grounds that greater efficiencies and the use of renewable sources would make it unnecessary.25 Dr. Rossman, a representative of the Social Democratic Party (SPD), questioned whether it is sensible to “completely step away” from fundamental research, including nuclear energy research, saying that his party favored a broad portfolio of fundamental work. “We believe we should not exclude insights that can become important in a more distant future.” He did agree that the best way to build energy security and reduce foreign dependencies was “to steer Germany toward renewable, decentralized energies by 2050 in the most economical and efficient way.”26 In her comments, Dr. Arati Prabhakar, then a partner with U.S. Venture Partners, raised the point that renewables and other “clean tech” solutions faced a fundamental barrier: lack of sufficient financing. “If we don’t have adequate capital to deploy these technologies,” she said, “all the R&D investment and 24 Following the Fukushima Daiichi accident in Japan, the German government decided to shift energy demand away from nuclear power. “Germany plans to shut its remaining nine reactors by 2022 and raise the share of renewables to at least 35 percent of the power mix by 2020. It’s the biggest overhaul of the nation’s energy infrastructure since World War II.” Bloomberg News, “Germany Will Publish Progress Report on Nuclear Exit in December,” July 24, 2012. 25 Sylvia Kotting-Uhl, Member of the Bundestag, Green Party; Member, Committee for Education, Research, and Technology, symposium presentation, Berlin, May 24-25, 2011. 26 Ernst Dieter Rossman, Member of the Bundestag, Social Democratic Party; Member, Committee for Research, Education, and Technology, symposium presentation, Berlin, May 24-25, 2011.

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OVERVIEW 25 VC/private equity will be no more effective than pushing on a noodle.” She noted that VC firms entered this area with a burst of enthusiasm, but that the energy industry itself moves very slowly, given the huge infrastructure in place. Competitive pressures on the VC industry, she said, cause many firms to avoid clean technologies that might require expensive factories in favor of less capital- intensive business opportunities, such as energy efficiency or IT-like products that are not manufactured. Dr. Karsten Neuhoff, Director of the Climate Policy Initiative-Berlin, addressed the question of whether Germany had invested too much in solar energy. He observed that German progress in this area had also inspired China to raise its goals for solar deployment, “which created a general good. So yes, sometimes you have to take a first step; you might benefit yourself, but also contribute quite a bit to development elsewhere. It’s really about gradually evolving the system, and I think we are in a world where we can learn from each other in this process.” Dr. Ebinger noted that the International Energy Agency projects that the world is still going to derive about 85 percent of its energy from fossil fuels in 2050, even if Germany meets its targets for renewables. He said that Germany, as a great technological nation, could make valuable contributions to energy science, including CCS from coal and natural gas. “If we don’t solve those problems,” he said, “it doesn’t matter what else we do about climate change.” The Green Party’s Kotting-Uhl replied that Germany’s best contribution to the global energy effort is to be a “model and exemplar. I think that there has to be a country, among the highly-industrialized, which shows, first, economic standards and exports and success; secondly, a high quality of life; third, climate protection; and, fourth, a nuclear phase-out. Germany is on track to model all these features.” The SPD’s Mr. Rossman agreed that Germany should take “a true international perspective, enabling all countries to share the most modern technological options to develop what they need. The alternative is to advise them to take the path of large coal and nuclear plants. This cannot be a development perspective, and is why renewable energy should be the priority. We should serve as a model for these countries that renewables represent a secure, tradable energy supply, providing for mobility, health, and education in every country.” CLIMATE CHANGE AND CO2 In contrast to the political inaction on climate change at the national level in the United States, Germany has an aggressive national policy organized

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26 MEETING GLOBAL CHALLENGES around the EU roadmap for moving to a low-carbon society by 2050.27 This roadmap includes 2020 targets of reducing greenhouse gas emissions by 20 percent compared to 1990 levels and cutting primary energy use by 20 percent through efficiencies and the use of renewables. The specific targets for 2050 are more ambitious, and very close to a no-carbon economy. They call for an 80 percent reduction in greenhouse gas emissions, hastened by CO2 restrictions, improved energy efficiency, intelligent city planning, and hybrid engine technologies. Germany’s Roadmap 2050 calls for expenditures by 2020 of €100 billion for smart grids, €25 billion for insulation, and €50 billion for sustainable mobility. For carbon capture and sequestration (CCS), Germany faces strong local resistance. A central problem, according to Dr. Hüttl, is that despite the identification of a safe disposal site below capstone formations, “there is no acceptance for this technology here in Germany. People think CCS is dangerous, like nuclear waste.” On the positive side, added Dr. Hüttl, “climate change itself is an important driver of new technologies and innovation.” Hence, the research being done on mitigation and adaptation holds potential value for many related activities. He also described a “long-term interrelation” between innovation and sustainability, with innovation enabling sustainability through new products and processes, and sustainability in turn driving innovation through global challenges. ELECTROMOBILITY In developing the vehicles and infrastructure for battery-powered transportation, both nations share a desire to be leaders. Germany plans to have 1 million electric cars on its roads by 2020, a goal regarded by many as ambitious. Germany will promote its industry through subsidies, tax exemptions, and R&D funding, said Dirk Arnold, an electromobility expert, though it counts on “competition as the best incentive for innovation. We can’t do anything without industry. We need them to focus the whole effort.” In the United States, a substantial challenge to the electric vehicle industry is battery pricing, which is now about $650/kWh. The goal is $300/kWh by 2014, and ultimately $150/kWh. “We need higher-performing 27 It is important to note that many state and local governments in the United States are addressing climate change, even in the absence of the federal government’s participation in the Kyoto Protocol. Although many of the state and local initiatives are unlikely on their own to have a big effect on mitigating global climate change, some policies, such as California’s recently proposed standards for greenhouse gas emissions from passenger vehicles, do have the potential to significantly reduce U.S. emissions. Collectively, these small and large distributed efforts could “result in U.S. emissions reductions of approximately 1 to 1.5 percent below “business as usual” by 2015-2020.” See Kristen Engel, “Mitigating Global Climate Change in the United States: A Regional Approach,” NYU Environmental Law Journal, 14: 54, 2005.

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OVERVIEW 27 basic chemistry,” said Ed Owens of the U.S. Department of Energy. The United States projects 1.2 million electric vehicles by 2015, but even this figure will represent only 0.4 percent of the nation’s vehicle fleet. One problem is the high up-front cost of an electric vehicle—even though the total cost of ownership is low. “Hybrids are already economically viable,” said Mr. Owens, “but consumers tend to focus on first cost.” Additional challenges for both countries, said Dr. Hüttl, are energy storage and grid integration. BUILDING SOLAR INDUSTRIES Both the U.S. and Germany have ambitious hopes of increasing energy independence through solar generation of electricity. Germany has become a leader in deployment of rooftop solar panels, spurred largely by its national feed-in tariff (FIT) program. This program is both stable and successful at increasing demand in the marketplace. The negative aspect is the cost to the ratepayer, but many are willing to bear it. The German FIT has been effective at stimulating the solar industry, resulting in global demand leadership. Rooftop photovoltaics (PV) are a central pillar of the Climate Policy Initiative, said to be capable of producing about one- quarter of German electricity. The continuing challenge is cost, which is gradually decreasing through both technical and organizational innovations. For the United States, a PV panel still costs about twice as much to put on a roof as it does in Germany, making it difficult to offer a fixed price, and capacity far exceeds demand. Both countries are challenged to find the right balance between too much support for R&D and too little. With too little support, the industry lags; with too much support, it is difficult to ensure that an innovative design can compete. Government does have a responsibility to reassure investors that demand will continue to grow over at least next three to four years. “This demand,” said Dr. Neuhoff, “is still going to be policy driven before the technology is cost-competitive at the wholesale level.” Unlike Germany, the United States relies heavily on the 30 percent R&D investment tax credit to push PV innovation; it also uses the advanced manufacturing tax credit and loan guarantee programs. While these programs are helpful, said Dr. Minh Le of the U.S. Department of Energy, they are not sustainable. “The private sector needs to take over if this sector is to expand,” he said. The total amount of VC and private equity financing deals in 2010, he said, totaled about $2.3 billion. About three-quarters of those deals were done in the United States, whose very strong venture capital community has been an engine for innovation. This is an important first link of the value chain, he said, but it is not sufficient. “Debt financing and asset financing will be required for this industry to expand much more widely than it is today.” Of the $44 billion in solar debt financing world-wide in 2010, the United States held only a 9 percent market share, and it has only 7 percent of the world market share of PV cells and modules.

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28 MEETING GLOBAL CHALLENGES Dr. Le said that a 75 percent reduction in cost is needed for the U.S. industry to be competitive. In the United States, the cost of residential solar installation was approximately $6.50 a watt in 2010. In Germany, it was approximately $3.80 a watt. “Given that the cost of PV modules is the same worldwide,” he said, “what’s really different is the balance of systems, especially installation and permitting costs.” Many secondary support mechanisms for both manufacturing and demand are fairly similar in the two nations. The favored mechanism to incentivize demand in the United States is the renewable portfolio standard (RPS), which has been adopted or planned by 30 states. “If we can reduce solar costs by a factor of three or four by the end of the decade,” he said, “we can play an important part in meeting President Obama’s clean electricity standard of 80 percent by 2035.” Progress is held back, he said, by the trillions of dollars in energy assets already deployed. Dr. Neuhoff noted that if Germany were to stop its PV support programs, financial participants would also stop their support, “and within a few months we would have cash flow issues across the sector. We would lose a lot of the capacity that was carefully built up and that might contribute both to global PV development and to German economic success. You need to maintain the momentum if you want to play in the game.” MUTUAL OPPORTUNITIES A frequent theme of the symposium was that Germany and the United States face common innovation challenges, and that they thus have common opportunities to address them in partnership. In particular, Minister of State Hoyer noted the need to develop renewable energy, improve energy efficiency, and safeguard their nations from terrorism and other asymmetrical threats. “We are more likely to succeed if we combine our resources and technology.” He also noted the complexity of those challenges. “Achieving prosperity for all in the face of limited resources, the challenges of climate change, energy security, food security—no one nation can address these challenges on its own,” he said. “The more closely we work together, the more likely we are to find solutions. In a climate of healthy competition, Germany profits from U.S. prosperity, and vice-versa.” By forging common strategies, he added, both countries gain in expertise, and in the synergies of complementary approaches. The approaches differ, for example, in areas such as risk management, tax policy, incentives for renewal energy, and application of federalism to national energy policy. And while Germany has decided to phase out nuclear power, the United States intends not only to continue operation of its existing nuclear fleet, but also to resume building new plants. Germany has relied on market-based mechanisms to innovate, especially the feed-in tariff, and the aggressive use of tax policy and gasoline taxes to incentivize efficiency.

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OVERVIEW 29 In his remarks, Ambassador Murphy noted that the two nations have long recognized the value of collaboration, and the desirability of sharing their abundant resources. He recalled that then candidate Barack Obama noted in his Berlin address of July 2008, “While the 20th century taught us that we share a common destiny, the 21st has revealed a world more intertwined than any time in human history.” Echoing this sentiment, Ambassador Murphy noted: “As the world’s pre-eminent manufacturing and innovation centers, Germany and the United States can not only set an example by growing their own economies; they can also advance technological know-how and innovative developments that grow the global economy and serve the greater international community.” Indeed, as Jens Schmidt-Ehmcke of the DIW Berlin observed of the symposium: “We learned from each other’s programs, compared tools, and discussed best practices. Our innovation systems are different, as are the roles of the governments. However, both nations share similar goals and challenges.”

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