Panel I

Current Trends in Innovation Policy

Jens Schmidt-Ehmcke
German Institute for Economic Research (DIW Berlin)

Dr. Schmidt-Ehmcke said that both President Barack Obama and Chancellor Angela Merkel had emphasized the importance of innovation in encouraging economic development, fostering growth, and creating jobs. The aim this panel, he said, is provide an overview of each nation’s policy initiatives to accelerate these activities. “We hope to learn from each other’s programs, compare tools, and discuss best practices. Our innovation systems are different, as are the roles of the governments. However, both nations share similar goals and challenges.” For example, both aim at creating the leading innovation systems of the world, he said, and both understand the power of innovation and technology to address societal problems. Both nations are also attempting to provide sufficient financial resources for the innovation ecosystem, and both find themselves facing intense competitive pressure in now-global markets, especially from Asian countries. He expressed confidence that this panel and symposium would provide the opportunity to learn more about valuable strategies to address these common goals.


Ginger Lew
Senior Counselor
White House National Economic Council

Ms. Lew noted that she and the following two speakers had all been entrepreneurs, and each had worked as a member of venture capital funds that invested in young companies. “It is from that perspective that we view innovation,” she said, “and its important role in our economy.” With that background, she continued, is it is natural to see innovation as a key to economic development from the perspective of the National Economic Council as well.

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50 MEETING GLOBAL CHALLENGES Panel I Current Trends in Innovation Policy Moderator: Jens Schmidt-Ehmcke German Institute for Economic Research (DIW Berlin) Dr. Schmidt-Ehmcke said that both President Barack Obama and Chancellor Angela Merkel had emphasized the importance of innovation in encouraging economic development, fostering growth, and creating jobs. The aim this panel, he said, is provide an overview of each nation’s policy initiatives to accelerate these activities. “We hope to learn from each other’s programs, compare tools, and discuss best practices. Our innovation systems are different, as are the roles of the governments. However, both nations share similar goals and challenges.” For example, both aim at creating the leading innovation systems of the world, he said, and both understand the power of innovation and technology to address societal problems. Both nations are also attempting to provide sufficient financial resources for the innovation ecosystem, and both find themselves facing intense competitive pressure in now-global markets, especially from Asian countries. He expressed confidence that this panel and symposium would provide the opportunity to learn more about valuable strategies to address these common goals. U.S. INNOVATION POLICY: NEW INITIATIVES Ginger Lew Senior Counselor White House National Economic Council Ms. Lew noted that she and the following two speakers had all been entrepreneurs, and each had worked as a member of venture capital funds that invested in young companies. “It is from that perspective that we view innovation,” she said, “and its important role in our economy.” With that background, she continued, is it is natural to see innovation as a key to economic development from the perspective of the National Economic Council as well.

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PROCEEDINGS 51 She expressed gratification that the Obama administration had made innovation one of its top priorities for the last two-and-a-half years. Typical of its approach, she said, was the new initiative Startup America, which is linked to the main innovation agenda. This initiative supports not only basic R&D activities, but also the activities that keep the economy competitive and vibrant, including change, risk taking, and new opportunities, “all of which are at the core of the entrepreneur’s DNA.” Startup America for High-growth Entrepreneurship Startup America, Ms. Lew said, is a White House-led initiative to “celebrate, inspire, and accelerate high-growth entrepreneurship across the country.” Startup businesses play a key role in job creation in the United States, she said, with small firms creating more than 40 million net new jobs in the past 15 years, or two out of every three new jobs. “We cannot predict what technologies or innovations are going to completely change the game or our lifestyle,” she said. “But we do know that when these bursts of innovation happen, it is very likely that an entrepreneur is responsible. These are the people who are willing to mortgage their homes, work 100-hour weeks, and throw caution to the winds in pursuit of an idea.” Some entrepreneurs go on to build large multinational companies, she said; most do not. They all contribute to a vibrant and innovative economy. “Consider the fact that small businesses in America generate 15 times more patents per dollar than large firms,” she went on. “Small businesses employ more scientists and more engineers than America’s universities and federal labs combined.” When the White House launched the Startup America initiative in January 2011, the President challenged leaders of both government and the private sector to accelerate the success and economic contributions of America’s entrepreneurs. He asked them to do so in four ways: mentoring, increasing access to capital, reducing regulatory burdens, and accelerating the commercialization of federally funded research. She said that all four were part of her portfolio at the White House. From the government side, Ms. Lew noted, the Obama Administration had designed this program with “a relatively light touch.” She gave the following description of the program’s four pillars: • Mentorship: We are looking to lead by example. When entrepreneurs are asked what they need help with, their first answer is not necessarily money; instead, they want access to successful CEOs to help coach them through their growth pains. The DoE and SBA have agreed to recruit 200 successful serial entrepreneurs who will mentor 100 companies that receive DoE funds to bring promising technology products to market.

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52 MEETING GLOBAL CHALLENGES • Access to capital: The administration had announced two new funds. The Impact Fund makes capital available to investment managers who invest in companies in underserved regions or industries considered a national priority. Seventy percent of all U.S. venture capital goes to three regions: Silicon Valley, Boston, and New York. Other regions also have vibrant entrepreneurial communities—yet lack the capital and resources that could allow them to blossom. The other fund is the $1 billion Innovation Fund, which will make capital available to investment managers who invest in very early-stage companies. The goal is to help companies that have found promising technologies at research facilities to develop those technologies beyond the proof of concept stage. • Regulatory barriers: Every country has regulations, and business people often contend that there are too many. In the case of startup companies, my office decided to ask the businesses themselves to name their top regulatory hurdles. We engaged in energetic discussions with entrepreneurs in Silicon Valley, Minneapolis, and Atlanta. We also set up an online platform to solicit suggestions. This exercise confirmed the value of a bottom-up solicitation of feedback, suggestions, and input. We truly believe that good ideas are to be found in the cities and towns where most of our citizens live and do business. We will take all 200 suggestions we received and choose the top 10 to eliminate or streamline. • Accelerating commercialization of federally funded research: While not all research should be commercialized, we want to move more of our ideas from the laboratory bench to the marketplace. We’re also focused on getting the best return from the $148 billion the United States invests annually in research. Recently the DoE launched a competition called America’s Next Top Energy Innovator. The goal is to cut up- front patenting/licensing costs and challenge entrepreneurs to commercialize more technology developed in our national laboratories. Clusters to Foster Public-private Partnerships A week before the Berlin symposium, Ms. Lew said, the Administration announced the Jobs and Innovation Accelerator Challenge, a multi-agency competition to support the advancement of 20 high-growth, regional industry clusters. She said that these clusters are designed to foster coordination between the private and public sectors to catalyze the unique

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PROCEEDINGS 53 strengths of various regions, and encourages federally funded research centers and their regional partners to participate.6 She returned to the importance of Start-Up America, which two weeks earlier had announced commitments from more than 15 companies and organizations. Each committed to delivering “strategic and substantive resources” to accelerate entrepreneurs who were starting and scaling businesses.7 These new private sector partnerships delivered more than $400 million in value to U.S. entrepreneurs, she said, building on the 20-plus companies already enlisted in the Startup America partnership, including Intel, IBM, American Express, Cisco, Ernst & Young, First Data, Google, HP, Intuit, Linked-In, and Microsoft. The partnership also included members from the non-for-profit and foundation sectors, including the Blackstone Foundation, which had recently announced the Master Entrepreneurship Program. This five-year effort was launched with four North Carolina universities. Ms. Lew said that the partnership has reached out in many directions to empower entrepreneurs. To expand its mentoring function, for example, the National Center for Women and Information Technology had agreed to help coach women entrepreneurs; Palindrome Advisors8 had committed to connecting 1,000 minority entrepreneurs with top industry advisors. In addition, the Angel Capital Association and the Angel Resource Institute 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. Finally, the National Venture Capital Association intended to provide access to its 400+ venture capital firms, its 4,000-plus investors, and thousands of venture–backed companies’ CEOs. “This public-private partnership,” Ms. Lew concluded, “together with the enthusiastic support of the private and foundation sectors, has the potential to be game-changing for American entrepreneurs. By leveraging limited 6 Winners of the 20 awards were announced by the Department of Commerce in September 2011 for proposals in advanced manufacturing, information technology, aerospace, clean technology, and other fields. Each winner receives an average of $1.8 million, contributing an additional $13 million in matching funds. Grantees estimate that their clusters will create more than 4,800 jobs and 300 new businesses, as well as retain another 2,400 jobs and train some 4,000 workers. 7 According to its website, the Startup America Partnership is a private organization working to help young companies succeed in order to accelerate job growth in America. The partnership has three main goals: (1) provide valuable resources and connections to help young companies grow; (2) support regional startup ecosystems throughout the country; (3) recognize startups as the drivers of our economy and their founders as American heroes. Its CEO is Scott Case, founding CTO of Priceline, and the Chairman is Steve Case (no relation), philanthropist and founder of AOL. 8 Palindrome Advisors is a nonprofit organization based in San Francisco that helps business executives “give back” to startup organizations through mentoring, board service, volunteering, and tool-building. .

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54 MEETING GLOBAL CHALLENGES government resources with the dynamic energy of the private sector, we believe we can elevate America’s entrepreneurs to the next level. We do this because we believe entrepreneurs are central to America’s ability to compete and to prosper in the 21st century.” NEW INITIATIVES IN GERMAN INNOVATION POLICY Dietmar Harhoff Chairman Commission of Experts for Research and Innovation Dr. Harhoff said that he, too, had attended the “precursor of this event” in Washington, and had found it to be a “helpful exchange of views on science and innovation policy.” He had spent much of his adult life in the United States, he said, so that he could confirm from personal knowledge Ms. Lew’s description of the entrepreneurial spirit that often drives U.S. innovation. Ms. Lew had pointed to the story of Apple and its founder Steve Jobs as a model of transforming ideas into profitable products. In contrast to this success, he cited the counter-example of the MP3 player, which was invented in Germany. Despite its provenance, MP3 technology generated at its peak year only about $100 million in licensing revenues, “which I estimate is less than one-tenth per million of the value added of the overall industry.”9 This exemplified a key difference between the two countries, he said, which is that innovators in Germany have been far less successful than their American counterparts at maximizing the profitability of their inventions. Results of an Independent Commission He turned to the Commission of Experts for Research and Innovation (the German abbreviation is EFI, for Expertenkomission Forschung und Innovation). The EFI had commenced work in 2006 and by 2011 had completed four reports for Chancellor Merkel and the German government. Independent of government, the commission was free to pick its own topics. He praised the policy makers who created the commission for this “risky” strategy. “I have to hand it to them,” he said. “But we have not disappointed their expectations. We do not seek to maximize pain or praise. We pick our topics because we think they are important to the long-term, sustainable welfare and growth of Germany.” EFI commissions also supported some 15 in-depth studies per year.10 9 Per mil, a term rarely used in the United States but common in Germany and many other countries, signifies per thousand, or 0.1 percent. One-tenth of per mil would be only 0.01 percent. 10 These are available at .

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PROCEEDINGS 55 Results of new policies for innovation, he continued, may “take a long time to work their way through the system.” Dr. Harhoff said that changes to the technology system that can make it “more equity friendly and venture capital friendly do not happen overnight, especially in Germany.”11 The broader task of the commission is to “engage in interdisciplinary discourse related to innovation research.” In particular, the EFI is asked to consult on scientific policy in three areas: • Description and analysis of structures and trends and of the technological performance of the German research and innovation system. • Analysis of central issues pertaining to the German research and innovation system. • Development of policy options and recommendations leading to improvements of the German research and innovation system. The commission’s 2011 report was issued by six members with expertise in such fields as taxation, sociology, venture capital, economics, renewable energy, and innovation management. A subsequent report was then in the planning stages, the contract for support services was about to be renewed, and some members were being reappointed in order to continue a smooth system of operation. Dr. Harhoff noted that all of the EFI reports comment on recent developments and new initiatives and discuss some core topics in greater depth. About half of each report consists of data, he added, because “we are academics, after all.” The 2011 report began with a look back at the impact of the financial and economic crisis. Despite the severity of the recession, the country had “bounced back nicely,” thanks in part to the existing R&I infrastructure and by the investment by a public fund in several new technologies. Support for Education—Even During a Recession Despite the recession, the EFI supported continued spending on education, even in 2008. Some people were surprised at the commission’s recommendation, he said, and the EFI coined the phrase “education is innovation policy” to make clear the purpose of its strategy. “We still have some serious challenges there, and major weaknesses.” 11 As an example of a policy that may work against successful innovation in Germany, he described the case of the director of the Fraunhofer solar research institution in Freiburg, Prof. Dr. Joachim Luther. Forced to step down as director at age 65 by mandatory retirement rules, Prof. Luther was invited by the government of Singapore to plan and direct that country’s new solar infrastructure, and his talents were lost to Germany.

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56 MEETING GLOBAL CHALLENGES The commission also focused on statistical measurement of innovation activities, using a technique he called community innovation service. Dr. Harhoff said that colleagues in the United States discussed the adoption of a similar technique, and urged them to do so. “This would be very welcome because then we could compare our activities in more depth.” The commission examined several other topics as well, including a new policy initiative for Germany called High-tech Strategy 2020, which laid out innovation goals for the coming decade. It also reviewed the European patent system, which it found high in quality but fragmented, which he called “the European disease.” Plusses and Minuses of Federalism Among the core topics addressed by the commission was federalism, which has important consequences for innovation policy. The federal system, which he said was similar to that of the United States, had “some nice features and some not so nice.” Federalism can be productive, he said, because it brings decision making down to where the information is. At the same time, he said, it can be hard to coordinate strategic themes in a federal structure. Dr. Harhoff explained that a federalism reform in 2006 had caused particular problems. One new policy made it very hard the German states to cooperate with federal agencies on any matter related to educational planning. One result is that 18 tests are used in the 16 states to rate language skills. There is no agreement on which tests are best, because they have not been systematically compared. He said that an excellence initiative in universities was doing better, with good coordination between the federal and regional levels. In addition, he said that while the United States had only one level of federalism, Germany had “two federalism problems”—one between federal and regional levels in Germany, and a second in regard to the European Union, which has its own innovation policies. “This brings even more of a need for coordination,” he said. Finally, Dr. Harhoff mentioned a discussion by EFI of “innovation without R&D,” or design-based innovation. This level of innovation, he said, was difficult to measure because current metrics are based on the relationship between R&D and GDP. “It turns out that the more we look at this model, the more we see that it is not the best measure we could hope for.” He commented that President Obama had “proven to be a very good partner for people who think about innovation and science policies,” and said he had experienced this commitment first-hand at a meeting in January 2011 at the U.S. State Department. “I was impressed by the intellectual leadership there,” he said, “with the projects undertaken, and the attempts to bring innovation policy into development policy.” He had also learned about Grand Challenges Canada,

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PROCEEDINGS 57 where people from any nation can apply for funding for health care innovation research.12 “What impressed me most,” he said, “was the openness of some young, energetic people in North America to think about these issues, and the clear indication that innovation was at the top on their list of priorities.” Innovation Leadership at the Top Dr. Harhoff said that meetings between the EFI and the chancellor and members of her government indicated that this openness was true for Germany as well. “Innovation must start at the top,” he said. “In Germany, there is willingness to talk about it; I think that support for additional spending for R&I in Germany is in part due to our leaders being familiar with the issues in science and innovation.” He turned to Germany’s High-tech Strategy 2020. The government had already encountered difficulties in gathering all the federal and state policy makers whose activities are relevant to innovation, and persuading them to communicate and coordinate their policies. In 2007 the previous government had started an initiative called the High-tech Strategy. The main element was to bring together not just the ministries related to economics, transportation, environment, and others in one forum; this had already been done with some success. The new element of the High-tech Strategy 2020 for Germany was “a very clear approach toward mission-oriented policies.” This broke with the past in an important way. Fifteen or 20 years earlier, innovation policy often consisted simply of identifying “this little market failure or that one, and fine- tuning it here or there. We’re coming now to an overarching view of the system, not just the externalities and market failures. It’s about coordination, communication, and maybe even about strategies.” A major topic on his list was electromobility, which describes the systems that support the widespread use of electric vehicles, including design, systems integration, energy generation and distribution, and storage technologies. “In 2008,” he said, “we were caught napping.” In the 15 years preceding the financial crisis, German universities had undone 15 to 20 professorships in electrochemistry, which is the basis of battery technology. Germany had suddenly awakened, he said, and was trying to catch up to countries such as Korea, China, and Japan, which are best positioned in battery technology. 12 Grand Challenges Canada, according to its website, is a “unique and independent not-for-profit organization dedicated to improving the health of people in development countries through innovation.”

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58 MEETING GLOBAL CHALLENGES A Venture Capital Bottleneck Turning to venture capital, Dr. Harhoff praised Ms. Lew’s “convincing speech on the virtues of entrepreneurship,” and recommended that her words be carefully noted in Germany. “When you look at the usual statistics,” he said, “we’re not doing all that well in entrepreneurship.” “It’s not that entrepreneurship is deficient from our genes. We had a very entrepreneurial face after World War II, and of course the 19th century had booming entrepreneurship. The Siemens, the Krupps, other companies are still here.” The problem for entrepreneurship, he said, lay with some of its “boundary conditions,” such as venture capital. This topic had been taken up recently, he said, including an “innovation dialogue” on April 7 with Chancellor Merkel and ministers. “Now VC is not everything,” he said, “but several studies point to the fact that for Germany it is really the bottleneck right now.” Dr. Harhoff closed on a note of optimism with an example of how entrepreneurship was increasingly international—and how its benefits can be shared by international partners. A start-up from his own institution, Ludwig Maximilian University (LMU) in Munich, received private funding from the university incubator. The firm moved its business development to Silicon Valley, where it hired an Indian CEO who had been a vice-president of marketing at Google. It was profitable within two years; Motorola then completed a trade sale for a significant sum of money, and followed the sale by investing in R&D at the Munich location. “It’s a complex example,” he said, that had been criticized by some as “selling out German technology.” But he concluded by urging his audience to hear a different message: that progress in a global marketplace is a function of cooperation and coordination. POLICY INITIATIVES AT THE U.S. NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY Phillip Singerman Associate Director for Innovation and Industry Services U.S. National Institute of Standards and Technology (NIST) Dr. Singerman began by recalling an OECD symposium on innovation as long as 20 years previously, where he spoke about “the American job creation machine” and about seed funding at the federal and particularly the state and regional levels.” He expressed gratitude to the organizers for another chance to participate in this topic, “not to lecture but to learn—about the innovative German manufacturing export engine. This is important to us in the United States,” he said, “because our policy makers have finally recognized the important role manufacturing plays in an advanced, innovation-driven economy.” He noted several reasons for this. His personal view, he said, was that because manufacturing creates high-wage, high-quality jobs, it is a key

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PROCEEDINGS 59 component of an export economy. “We simply cannot sustain an export-driven economy through financial services or a single aerospace company,” he said. A third reason was the importance of the defense industrial base. “Electronic warfare is really the warfare of the 21st century,” he said, “and with the erosion of an industrial base, we cannot manufacture the high-tech components necessary.” A final reason, important for this symposium, he said, was the close connection between manufacturing and innovation. “As mentioned earlier,” he said, “more than two-thirds of private-sector R&D in the United States is conducted by manufacturers. We have learned that R&D by itself is not enough, and it’s not sustainable if there’s no connection to the shop floor. We have seen frequently over the last 30 years that competitor nations first learn to do low-end commodity production and then work up the value chain to take over R&D capabilities. This is not a future that we can support.” Dr. Singerman noted that President Obama’s fiscal 2012 budget was a very strong statement of support for physical sciences in the NSF, the DoE’s Office of Science, and NIST. The total physical sciences budget exceeded $1 billion, an unprecedented level and a 17 percent increase over the previous budget. In addition, he noted that the America COMPETES Act rebalanced the federal government’s R&D portfolio “to meaningfully promote excellence in technology, engineering, and science.” Reauthorized in 2010, this legislation recognized manufacturing as an important component of the innovation agenda. It called for the designation of a Committee on Technology under the National Science and Technology Council that would be responsible for planning and coordinating Federal programs and activities in advanced manufacturing research and development. NIST’s Role in Extension and Assistance to Industry Dr. Singerman then turned to a discussion of NIST, which had been created more than a century earlier—as the National Bureau of Standards—to provide American industry with an intellectual infrastructure in measurement and standards that was necessary to compete with Great Britain and Germany. A century later, after the decline of the large industrial R&D labs, NIST had become “industry’s national laboratory.” He observed that NIST’s tradition of scientific excellence through a nationally funded set of research institutes is well known; not as well known is its work in extension and technical assistance to industry. This role was recognized in the America COMPETES Act, which upgraded the position of the NIST director to Undersecretary of Commerce for Standards and Technology, with responsibilities across the administration. Dr. Singerman said that four programs under his responsibility are focused on manufacturing. The first is the Manufacturing Extension Partnership, a federal-state partnership with funding shared by the private sector. It coordinates more than 1,600 field representatives at non-profit and quasi-public organizations in all 50

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60 MEETING GLOBAL CHALLENGES states. This program was established 25 years ago, in response to the competitive challenge from Japan, and began by focusing on cost saving and lean manufacturing. It is now expanding its services to help small firms develop new products and new markets. The America COMPETES legislation also gave NIST new assignments to work on green technologies, on the workforce needs of manufacturers, and with the Economic Development Administration (EDA) on a loan guarantee program for innovation manufacturing technologies. Fortunately, he said, the need to grow the manufacturing base has bipartisan support, and the MEP program received nearly all the funding requested. This program, he added, is the nearest U.S. analog to the Fraunhofer Institutes, although more limited in scope and not as well funded. The second NIST program was the Technology Innovation Program (TIP). This was originally the Advanced Technology Program, also created 25 years ago to focus on early-stage funding for high-risk, high-reward technologies. A portion of the program is being refocused to fund small and young manufacturing companies, supporting those that work with universities, federal labs, and industrial consortia.13 The third initiative is the new emphasis, led by Ms. Lew, to leverage the enormous annual investment of more than $50 billion a year in the mission- driven federal research institutions, such as those of the DoE, the NIH, and the DoD. NIST has several unique roles in transferring technologies from the federal labs. First, all regulations that govern the technology transfer have to be issued by NIST. Secondly, it is responsible for tracking and reporting on the performance of the federal agency laboratories. Third, NIST is the federal coordinator for the consortia of federal lab technology transfer offices. Fourth, it chairs the interagency working group on technology transfer. It carries out these responsibilities in partnership with sister agencies within the Department of Commerce, particularly EDA. The fourth initiative was a pilot program for advanced manufacturing technology consortia. The objective is to stimulate the creation and to support the existence of industry-led consortia working collaboratively on pre- competitive manufacturing technologies. A model for this program is SEMATECH, created more than 20 years ago by the semiconductor industry and the DoD to strengthen manufacturing capabilities in the semiconductor industry. It was so successful that after four years industry decided to fund the 13 Independent evaluations by the National Research Council found ATP to be “an effective federal partnership program.” See National Research Council, The Advanced Technology Program: Assessing Outcomes, Washington, DC: National Academy Press, 2001. The successor to the Advanced Technology Program, the Technology Innovation Program (TIP) at the National Institute for Standards and Technology “supports, promotes, and accelerates innovation in the United States through high-risk, high-reward research in areas of critical national need” through “targeted investments in transformational R&D that will ensure our nation’s future through sustained technological leadership.” See . Despite its broad mandate, funding for TIP was modest, and no funds were appropriated for this program in the FY 2012.

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PROCEEDINGS 61 program on its own. More recently, NIST has partnered with the Nano- Electronics Research Institute to provide funding to university research consortia, supporting early-stage technologies of broad interest to companies. In closing, Dr. Singerman said he was interested in the lessons of Germany has learned from its expertise in manufacturing, and in bringing those lessons to the U.S. innovation eco-system. Conversely, he said, he hoped there were reciprocal lessons U.S. speakers were bringing to their German colleagues, perhaps including some of those supported by NIST. “I’m eager now or in subsequent communications to receive your views on these issues,” he concluded, “and to discuss further the Obama administration’s interest in manufacturing and its connections to innovation.” DISCUSSION A questioner asked about the role of the U.S. government in terms of encouraging innovation. Ms. Lew said that the government tries to do this with “a light touch,” offering them access to technologies of potential value that may be sitting unused in research laboratories, but “basically getting out of the way of entrepreneurs and allowing them to take risks. “I think it has to do with both culture and attitude,” she said. “In the United States, we really do encourage risk taking and failure. We accept the fact that entrepreneurs can and should fail, because you don’t always get it right the first time. We try to adopt policies that give access to the technology, reduce regulatory hurdles, and catalyze the access to capital without interfering with the private capital markets. We want to just be catalytic and remove some of the risk from the marketplace without getting too involved.” A questioner asked how much the U.S. regulatory requirements of the state and federal governments overlapped or conflicted. Dr. Singerman noted that there is a long-running ideological debate in Washington over whether the federal government should engage in “industrial policy,” favoring certain technologies or industries. The official position is that it cannot, but the states all have some form of industrial policy, regardless of whether they have Republican or Democratic governors. NIST is very interested in working with the states, and many have close connections with federal funding sources. “Partnership is really the key to the national agenda,” he said. “Unfortunately, with state budgets reduced, there’s a gap in the ability to support small firms, if not in willingness.” Ms. Lew said that for 10 years she was on the supervisory board of a European investment fund that invested in early-stage companies. She learned how much young start-up companies were affected by restraints on company formation, limited access to private sources of capital, and employment regulations. In the United States, she said, there is considerable collaboration between the federal and state governments “because at the end of the day, if we have stronger regional economies, we have a stronger national economy.” As an example she mentioned an index that ranks the states on how business-friendly they are. As such knowledge circulated, the states began to compete to score

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62 MEETING GLOBAL CHALLENGES high in the index. For example, 10 states have already established tax credits for angel investors. “I think goal at all levels of government,” she said, “has been to find ways to collaborate and remove obstacles,” she said. The questioner also asked whether there were direct monetary incentives for open source innovation. Ms. Lew said that, again, the federal government intentionally tries not to intervene in such processes. The government does involve itself in some issues, such as cyber security, privacy, or consumer protection, “but I think, again, let the marketplace do what it needs to do, and we get out of the way.” Dr. Harhoff commented on similar considerations in Germany, such as the policy initiatives favoring the formation of innovation clusters. “It’s a multi- level process with lots of folks and agencies becoming involved, and it poses its own difficulties.” The German government also becomes involved in financing firm formation because the angel sector is so small. A student or private individual can apply for a founder’s stipend worth up to 100,000 Euros from the Ministry of Economics. “We ought to do something about that,” he said. “It should be private capital that finances these businesses from the early stage onward.” On the other hand, he said, the share of R&D financed by the private sector in Germany is very high by comparison to the United States, and this adds to the stability of the innovation system.