Innovation and the ‘Missing Middle’

Dr. Kota called innovation the “missing middle” in the process of developing new industries. “You have to put money into knowledge,” he said, “but unless you apply that knowledge, you don’t generate money at the other end. Someone else is then free to take those ideas and capitalize on them. The engineering and manufacturing is what converts that knowledge—something done far more effectively by other countries. For example, he said, Germany spends one-sixth as much as the U.S. in total R&D, but it spends six times as much on industrial production and technology.”

As further illustration he referred to TRLs, or technology readiness levels, that are used to characterize technology development on a scale of 1 to 9. The research supported by the NSF and the NIH, he said, is usually at TRL 1 to 3. “After that,” he said, “when you’ve proved this idea does not violate laws of physics, and it seems to be interesting or potentially useful, you need to build a proof of concept prototype and a simulated environment to advance to TRL 8 or so. Unless you do that the private companies don’t have the confidence to invest.” In the U.S., he said, the Valley of Death exists between TRLs 4 and 7, the realm of engineering and systems work, where both the technology and the manufacturing readiness are tested. Successful models for doing this exist in the German Fraunhofer Institutes and Taiwan’s Industrial Technology Research Institutes. “To transition home-grown discoveries into home-grown products,” he said, “we need ‘Edison Institutes’ modeled after Fraunhofer Institutes for maturing technology and manufacturing readiness.”9

In order to improve this transitional process, Dr. Kota said, we also need a new balance of strategic investments. In the FY2010 budget, approximately $100 billion were designated for R&D all the Federal agencies. Outside the Department of Defense, which focuses on weapons systems, most of this amount supports work below TRL 3. “That is new knowledge for the public good,” he said, “but that’s only the first step. None of the agencies spend enough in the middle, where innovation happens, where an idea is converted into a product.”

“How do we reconcile with investing so much and having little to show?” Dr. Kota continued. “Some might say there’s nothing we can do because there is too much labor competition from China and India.” He echoed Dr. Wessner’s point about Germany and Japan, however, which competed effectively without the advantage of lower wages. In Germany, he said, taxes are somewhat lower, but wages, overhead rates, energy expenses, and the raw cost index are higher. Yet, the bottom line is that Germany has a $200 billion surplus in manufacturing, vs. an $800 billion deficit for the U.S. The comparison with Japan, he said, shows similar results.

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9The Fraunhofer-Gesellschaft undertake applied research of direct utility to private industry. It uses a clustered approach with pilot production centers to close the gap between research and products.



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