21st Century Manufacturing: The Role of the Manufacturing Extension Partnership Program (2013)

Chapter 7

Foreign Programs to Support Applied Research and Manufacturing

Addressing the second facet of the Statement of Task, we now describe the experience and practice of programs and organizations that support applied industrial research in the manufacturing sector in five leading countries. We review Germany’s Fraunhofer-Gesellschaft, Canada’s Industrial Research Assistance Program (IRAP), and Taiwan’s Industrial Technology Research Institute (ITRI). In addition, we describe two recent initiatives in the United Kingdom and France to reorient, rebrand, and reinvigorate existing applied research organizations.¹

This chapter, supplemented by detailed historical and programmatic analysis found in Appendix A, documents the significant scope and commitment of their efforts and provides an important comparative perspective for understanding U.S. policies and programs for supporting applied research and manufacturing. Some elements of these foreign programs may be relevant to the Manufacturing Extension Partnership (MEP), and some to other U.S. programs. Still others may not be applicable to the United States given that national innovation systems differ in significant ways. Rather than make direct comparisons, the objective of this review of foreign programs is to learn from international practice, which in itself is shaping the competitive environment of U.S. firms. A number of these institutions appear to deploy exemplary practices that could be considered in establishing or reinforcing U.S. partnerships for applied research and manufacturing. This chapter concludes by listing what the committee believes are their exemplary practices.

All of the foreign organizations surveyed here have the same basic mission, which is to translate knowledge from the research base into commercial

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¹These leading national programs are not an exclusive list. There are other national examples, such as the Korea Institute for Advancement of Technology (KIAT) and Brazil’s FINEP. The selection of programs in this review is based on the committee’s interest and knowledge about these programs.

products and industrial processes utilized by the private sector. All of them grapple with the challenges of globalization and seek to ensure that knowledge generated by national research institutions is applied domestically, giving rise to domestic value added and jobs.

THE RESEARCH ORGANIZATIONS

The organizations reviewed in this chapter include some of the finest applied research institutions in the world. Germany’s Fraunhofer-Gesellschaft and Taiwan’s ITRI have won widespread acclaim for their achievements and their methods have long been the subject of extensive study. The Catapult and Carnot groupings, although bearing designations that have been established only recently, include storied research institutes of strong reputation in the science and technology community, such as INRIA of France and the UK’s Advanced Manufacturing Research Centre. Canada’ IRAP has been recognized as “one of the best managed and effective government programs to facilitate R&D and commercialization by small and medium enterprises (SMEs).”²

Germany’s Fraunhofer-Gesellschaft

The Fraunhofer-Gesellschaft (Fraunhofer Society) is a not-for-profit association based in Germany comprised of a headquarters organization, 60 research institutes, and 20 other domestic research centers, and international research centers in the United States, Chile, Austria, Portugal, and Italy. Its mission is to perform contract research for public organizations and companies that transforms basic research from university and nonuniversity laboratories into commercial products and industrial processes. Each Fraunhofer institute specializes in a particular technological competency and is paired with a German university that has relevant scientific knowledge. The institutes perform research and development (R&D) on their premises utilizing their own professional staff as well as undergraduate students and postdocs. Pursuant to contractual arrangements with companies, the institutes develop product prototypes and processes and enable companies to test equipment and processes on pilot manufacturing lines and simulation platforms. A byproduct of the institutes’ research for industry is a continual flow of Fraunhofer alumni with theoretical knowledge and practical skills into German industry. The institutes occasionally spin off small start-up companies.

The Fraunhofer derives roughly one-third of its funding from so-called core funds provided by the German federal and Länder (state) governments, one-third from research contracts with government agencies and other public organizations, and one-third from contract research for private companies. Of

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²The 2011-2012 Departmental Performance Report for the National Research Council of Canada. Access at
<http://www.nrc-cnrc.gc.ca/eng/reports/2011_2012/dpr.html>.

the latter, some of the revenue derived from the companies represents incentive payments by state, federal, and European Union government entities.

Taiwan’s Industrial Technology Research Institute

Taiwan’s Industrial Technology Research Institute is a not-for-profit government research organization conducting applied industrial research for Taiwanese industry. It draws upon Taiwan’s university research base as well as a highly sophisticated network of international relationships to secure basic research that it transforms into commercially relevant products and manufacturing processes. ITRI transfers technology to industry through the conduct of joint research with companies; licensing of technology; sale and auction of intellectual property; movement of ITRI personnel into jobs in the private sector; and spin-offs of start-up companies. Some of ITRI’s spin-offs have been spectacularly successful, including the United Microelectronics Company (UMC) and Taiwan Semiconductor Manufacturing Corporation (TSMC), today two of the most competitive semiconductor manufacturers in the world.

France’s Carnot and Britain’s Catapult Initiatives

The Carnot (France) and Catapult (United Kingdom) initiatives both are recent attempts by European countries to emulate what they see as the best features of Germany’s Fraunhofer-Gesellschaft to improve the flow of technology from the national research base to private industry. Both of these initiatives assign a designation (“Carnot” in France and “Catapult” in Britain) to a group of existing institutes of applied research with the hope that the designation will develop into a recognized symbol of excellence, as has been the case with the Fraunhofer name. The Carnot and Catapult institutes are also being provided with core funding from their respective governments, with the expectation that most of their revenue will be derived from contract research. Although the institutes in these programs are being accorded a considerable degree of autonomy, they are expected to align their activities with coherent national innovation strategies.

Canada’s Industrial Research Assistance Program

Canada’s 50-year-old Industrial Research Assistance Program (IRAP) is a government program administered by the National Research Council of Canada (NRC), which provides technical and business advisory services to small businesses and distributes financial assistance (1) to small companies to develop technologies, (2) to third-party innovation organizations supporting SMEs, and (3) to companies to facilitate the hiring of new graduates for R&D projects. Unlike the other programs surveyed, IRAP does not perform research

for companies itself but provides advice and dispenses government funds in support of private innovation efforts.

IRAP connects companies to Canada’s innovation research base through the Industrial Technology Advisers (ITAs) and Innovation Network Advisors (INAs), who focus on creating and improving regional innovation system relationships and working with innovation organizations to provide technological assistance to SMEs. The ITAs and INAs collaborate to determine where gaps exist in regional innovation infrastructures and where to locate research resources to address unmet research requirements.

CROSS-COUNTRY COMPARISONS

Hermann Hauser, a UK-based entrepreneur, produced a seminal survey of global institutes of applied research in 2010 that provided much of the intellectual foundation for Britain’s Catapult initiative.³ He emphasized that the role of each institute was “context dependent” based on a given country’s industrial structure, innovation culture, and other research organizations, and that the variation in national contexts might inhibit transfer of a model from one country to another. As the Hauser Report made clear, the institutes tend to share certain common features, including public financial support, a training function, and an intermediate role in the innovation ecosystem between the research base and private industry.⁴ But beyond such similarities, the institutes are significantly differentiated in their objectives and basic approach.

ITRI’s greatest achievements have been the creation of entirely new high-tech industries that did not previously exist in Taiwan. It obtained the necessary technologies from foreign multinationals, assembled teams of researchers to master the requisite product and process technologies and spun off start-up companies from its own staff, in some cases forming entire industry supply chains. As new industries became established and competitive, ITRI curtailed its support and moved on to develop another generation of new industries. In this way, ITRI fostered Taiwan’s semiconductor, LCD, computer, and photovoltaic industries and is now developing the country’s electric vehicle, flexible electronics, and biotechnology industries. ITRI places large bets on what it sees as industries of the future, committing substantial resources to large-scale, long-term R&D projects. While this involves substantial risk, the payoffs for success have been enormous, helping to transform Taiwan from a developing country to a major technology-intensive economic power.

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³Hauser, Hermann, 2010, The Current and Future Role of Technology and Innovation Centres in the UK, for Lord Mandelson, Secretary of State, Department of Business Innovation and Skills, March 2010. Hermann Hauser is a Vienna-born entrepreneur closely associated with Scotland’s “Silicon Glen,” and was a cofounder of Acorn Computers Ltd. He holds a PhD in physics from Cambridge University’s Cavendish Laboratory.

⁴Hauser Report, 2010, op cit. pp. 8-10.

The Fraunhofer provides support to industries that already exist and that, in many cases, were well established in Germany before the Fraunhofer was founded in 1949—medium-tech industries like machinery, autos, chemicals, pharmaceuticals, and engineering. While the Fraunhofer engages in some large R&D projects, most of its work involves comparatively small projects of short duration (six months to two years) designed to produce incremental improvements in existing products and processes that will have an immediate market impact. Thousands of these projects are launched every year across an extremely broad range of industry sectors. Their cumulative effect over time has been to enable German firms to produce high-quality products very efficiently and to compete successfully with low-cost Asian manufacturers. In particular, the Fraunhofer’s incremental R&D projects have supported Germany’s Mittelstand—medium-sized companies that dominate niche industrial subsectors and are frequently characterized as the backbone of the German economy.⁵ In contrast to ITRI, which phases out its support of new industries as they mature, the Fraunhofer has maintained high levels of R&D support for successful individual companies and industry sectors over decades. While it has not given rise to entirely new industries, Fraunhofer has enabled Germany to retain a leading position in its traditional industries over the very long run.

Britain’s Catapult initiative seeks to capitalize on that country’s superb capabilities in basic science. The concept underlying Catapult is that the initiative will pick a few thematic areas where British science is strong and where an industrial capability exists in Britain to commercialize the fruits of that science. The effort will be limited to sectors where major and rapidly growing global markets are expected to exist in the future. The role of the Catapult centers will be to serve as an intermediary between Britain’s science base and British companies. Like ITRI and Fraunhofer, the Catapults will perform contract research for companies to turn scientific ideas into products and industrial processes.

The primary objective of France’s Carnot initiative is to foster stronger ties and partnerships between that country’s extensive public research organizations, on the one hand, and “other socio-economic actors,” on the other hand, mainly private companies. The Carnot designation, as well as additional government money, is bestowed based on a given institute’s demonstrated willingness and ability to engage in contract research work for industry. Underlying the Carnot initiative is the recognition that France’s strengths in basic research do not necessarily translate into enhanced innovation capacity in French industry, a reflection of the historically weak links between public research organizations and the private sector.⁶

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⁵See Wall Street Journal, “The Engine of Growth,” June 26, 2011.

⁶Blanca Vakova, “Reconceptualizing Innovation Policy: The Case of France,” Technovation 26, p. 453, 2006.

Although all of the organizations surveyed here cite support for small and medium enterprises) as an important part of their mission, none are as singular in their focus on SMEs as IRAP. IRAP offers technical and commercial advisory services to SMEs, helps them recruit young people, and dispenses government funds to them directly. It is currently administering a CN $80 million pilot program to support SME adaptation and absorption of digital information and communications technologies.

Physical Sites

The German, Taiwanese, British, and French organizations all feature substantial physical sites with the infrastructure necessary to conduct research and to create a manufacturing environment with onsite production lines and simulation platforms. Company personnel can work on the premises to conduct research and to prove equipment and industrial processes. The institutes are staffed by professionals with deep scientific and engineering competencies. The Fraunhofer and ITRI develop product prototypes for the industrial clients, and ITRI proudly displays scores of recent prototypes in its visitors’ center in Hsinchu. These characteristics make the organizations particularly important for small and medium enterprises that cannot afford extensive R&D expenditure or equipment purchases.

Governance and Supervision

All of the organizations surveyed are subject to government supervision. Although in a strictly legal sense the Fraunhofer is not answerable to the German government, given its dependency on government core funding and contract research, it is not surprising that its policies and practices tend to align with the priorities of the German federal government and, to a lesser extent, the EU authorities. ITRI’s strategic direction is determined by Taiwan’s Ministry of Economic Affairs (MOEA), but the process involves extensive consultations between and among MOEA, ITRI, and a system of highly competent advisory bodies. The Technology Strategy Board, a nondepartmental public body that is largely staffed by individuals with business experience, supervises Britain’s Catapult centers. The individual Catapults are run by autonomous, business-led management boards and headed by individuals with business or science backgrounds. The Carnot institutes are selected, monitored, and funded by France’s National Agency for Research. Canada’s IRAP is a government program managed by the National Research Council, a government organization.

Although governance structures of the research organizations surveyed vary considerably, most of them accord a substantial degree of autonomy to individual institutes within larger networks. The Fraunhofer has a complex internal organization directed by a headquarters that sets the organization’s strategic priorities, allocates resources and oversees performance evaluations.

Although sometimes criticized for being too bureaucratic, the Fraunhofer lets its institutes establish their own research strategies, build relationships with industry, and spend their money with little interference from headquarters. France’s Carnot initiative features an association to which each Carnot institute belongs. Carnot provides support services, branding and networking, but no common governance or direction. Britain’s Catapult centers are to be governed by autonomous, business-oriented management boards under the loose supervision of the Technology Strategy Board (see Table 7-1).

Geographic Footprint

The German, French, British, and Canadian applied research organizations are comprised of a number of institutes that are distributed around the respective countries’ geographic space. A number of individual institutes in these countries operate facilities in multiple locations.⁷ By contrast, most of ITRI’s operations are concentrated at one alpha site in Hsinchu, with only one other satellite location, ITRI South, in Tainan. ITRI managers are critical of the geographic dispersion of research locations, which they see as undermining the benefit otherwise accruing from innovation clusters. Canada’s geography is so vast that even the establishment of a significant number of institutes of applied research would leave some regions underserved. Accordingly, its innovation model is characterized by mobile individual experts, the Industrial Technology Advisers, who bring their knowledge and skills to the premises of the small and medium companies that they serve.

Innovation Clusters

Most of the institutes surveyed in the paper are located in innovation clusters of technology-intensive companies and other research organizations, including universities. ITRI is located in proximity to Hsinchu Science Park, and together with two universities and numerous high-tech companies, comprise one of the most famous and successful innovation clusters in the world. The Fraunhofer is responsible for establishing innovation clusters throughout Germany and is currently pursuing 19 cluster initiatives, each of which usually involves one or more Fraunhofer institutes, a local university, and an array of small, medium, and large industrial partners. Some Carnot institutes are responsible for governance of French Competitiveness Clusters (pôles de compétitivité) involving collaborations between research organizations, companies, and universities. Britain’s High-Value Manufacturing Catapult is

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⁷The UK’s High Value Manufacturing Catapult operates sites at Bristol, Manchester, Sheffield, Coventry, and Glasgow. The Fraunhofer for Material and Beam Technology IWS operates facilities at Dresden, Dortmund, Wroclaw in Poland and East Lansing and Plymouth in Michigan.

TABLE 7-1 Governance Structures of Leading Research Organizations

NOTES: ^*IRAP integrated into 18 institutes of the National Research Council of Canada. ^**Converted to dollars at prevailing rate, December 12, 2012.

NOTES:

*IRAP integrated into 18 institutes of the National Research Council of Canada.

**Converted to dollars at prevailing rate, December 12, 2012.

comprised of five existing research organizations, each linked with a university and serving local industrial customers.

Government Funding

The research organizations surveyed here in Taiwan, Germany, the United Kingdom, and France receive government funding that they use to equip, staff, and operate research facilities that provide services to industry.⁸ They also receive revenue from public organizations pursuant to research contracts that is calculated on the basis of the cost of each project. These organizations do not disburse government funds to companies and in fact charge companies and public bodies for research services. IRAP, by contrast, distributes government funds directly to companies for the development of technologies, to third-party innovation organizations that provide services for SMEs, and to companies to cover part of the cost of hiring graduates for R&D projects.

In addition to federal funding, Fraunhofer and Carnot institutes also receive substantial funding from the state and regional governments and the European Union. One objective of the Catapult initiative in the United Kingdom is to emulate the manner in which the continental organizations have succeeded in securing EU financial support.

A comparison of funding levels underscores the extent to which the volume of government core funding for Fraunhofer and ITRI dwarfs that being made available by the British government for core funding of the Catapult Centres. Moreover, the German figure would roughly double if annual revenues derived from by the Fraunhofer from contract research for government organizations were added to the core funding figures.⁹

Talent Shortage

All countries surveyed in this paper suffer significant shortages of engineers, scientists, and technicians, notwithstanding the existence of excellent education and training programs, some of which are operated by the research organizations covered by the survey. Taiwan has experienced a major talent drain of skilled professionals to mainland China and Southeast Asia, and government forecasts indicate that the island’s educational system is not turning

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⁸The Fraunhofer has also been receiving funding from the European Regional Development Fund and stimulus funding from the federal and Länder governments, which is being used for capital expenditures on plant and equipment.

⁹Within the research networks, the proportion of each institute’s income that is attributable to government expenditures varies dramatically from institute to institute. For example, the Fraunhofer Institute for Silicon Technology ISIT receives 56 percent of its income from the private sector and 44 percent from public sources (Annual Report 2011). The Fraunhofer Institute for Wind Energy and Energy System Technology IWES derives only about 17 percent of its revenue from companies (Annual Report 2011/12).

out enough graduates to support local high-tech industries.¹⁰ In any given month in 2011, Germany averaged 92,000 vacant engineering jobs, and the manpower shortage is seen as a major threat to the country’s economic model.¹¹ Britain and France are hampered by the fact that not enough of their young people pursue careers in science and engineering.¹² A 2012 survey reported that 66 percent of Canada’s employers have trouble finding the right people for specific jobs, and shortages are reported of mechanical engineers, mechanical designers, machinists, electro-mechanics, industrial mechanics, welders, and supervisors in industrial management.¹³

Given the realities of the manpower situation, one of the most important roles played by the research organizations surveyed is the training of significant numbers of young people in the practical application of science in an industrial setting. ITRI, Fraunhofer, Britain’s High Value Manufacturing Catapult and many Carnot Institutes partner with nearby universities, and students from those institutions are drawn into part-time and sometimes full-time jobs at the research institutes. The Carnot institutes are staffed with 7,700 PhD students. Graduates taking positions in ITRI and the Fraunhofer institutes typically remain for six years before departing for positions in industry for which they are, at that point, highly qualified. IRAP’s Youth Employment Program provides up to $30,000 in the form of nonrepayable contributions to companies to hire recent graduates for R&D projects, giving these young people specialized career-related work experience and skills.

Intellectual Property

The Fraunhofer and ITRI have amassed large patent portfolios that are a substantial source of income. It is the normal practice of the Fraunhofer to retain the patent and other intellectual property rights when a research contract is concluded; an industry partner may receive an exclusive license from the institute, but only for the particular application that was the target of the research. While ITRI also holds the intellectual property derived from its research, it licenses technology to Taiwanese companies on more favorable terms than they could secure from foreign sources. ITRI also periodically auctions off blocks of its patents. Although Britain’s Catapults received numerous comments from interested parties during their formative period to the effect that they should not seek to establish large IP portfolios, the Technology

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¹⁰Central News Agency, “Taiwan Faces Serious Brain Drain Crisis,” April 18, 2011. Taiwan Economic News, “Taiwan’s Hi-Tech Manufacturers Go to the U.S. to Solicit Talents,” September 13, 2010.

¹¹Spiegel Online, “Lack of Engineers Costs Germany Economy Billions,”. April 16, 2012. Deustche Welle, “Labor Bottleneck Squeezes Germany’s solar Sector,” November 23, 2010.

¹²European Commission, 2011, ERAWATCH Country Reports 2011: France, p. 14. James Dyson, Ingenious Britain: Making the UK the Leading High-Tech Exporter in Europe, 2010.

¹³Canada Newswire, “Skill Shortage: Survey Says Canadian Employers Have Difficulty Finding the Right Talent,” October 3, 2012.

Strategy Board has adopted IP guidelines similar to those followed by the Fraunhofer.

Transparency

The organizations surveyed here operate in a research space that is close to the market—some Fraunhofer projects have a commercial impact within six months of their inception. Information about recent and ongoing contract research for companies is therefore sensitive and the research institutions are reticent to disclose details of projects undertaken for industry. The Fraunhofer institutes publish extensive details of their contract research for public organizations, but very little information about their contract research for industry.¹⁴ ITRI publicly displays product prototypes developed in its laboratories, but will not necessarily disclose the identities of the companies that will take them to market. While the importance of the Fraunhofer as a research resource for Germany’s specialized middle-sized companies, the Mittelstand, is widely acknowledged, little public information exists to support a systematic independent verification of that fact. While the Carnot institute CETIM (Technological Institute of Mechanics), which supports manufacturing technology research, publishes an extensive collection of examples of its work for companies—which are identified—the information nevertheless is fragmentary, anecdotal, and dated.

Other aspects of the research organizations are to some degree opaque. It is difficult to secure a full accounting of the fate of spin-off companies from the institutes, which prefer to emphasize success stories. The Fraunhofer publishes comparatively detailed financial information in its annual reports, and some of its individual institutes do likewise, but with respect to the other research organizations, detailed financial information is difficult to locate.

Small Business and the “Missing Middle”

All of the organizations surveyed have a mandate to support small businesses, a recognition of the key role played by small firms to driving innovation. A theme that is growing in importance is the “M” part of the acronym “SME,” e.g., the medium-sized businesses with several hundred to several thousand employees that have the scale and financial stamina to carry an innovation across the “valley of death” to commercialization. British, French, and Taiwanese policymakers are discovering that their industrial fabric “does not have enough medium-sized companies”.¹⁵ The phenomenon extends beyond

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¹⁴The Fraunhofer Institute for Silicon Technology ISIT publishes a list of its industrial customers in its annual report, but most of the other institutes do not. Fraunhofer ISIT Annual Report 2011, pp. 22-24.

¹⁵Comment by Institut Carnot spokesman, October 2012. A recent study by the French Centre d’Analyse Strategique suggested that France’s gap with the United States in R&D intensity was due

these countries—a 2012 Australian commentary lamented the fact that the country’s economy was comprised mainly of a relatively few large companies and a “very high proportion of micro-businesses, the majority of which are non-employing.”¹⁶

Germany’s Mittelstand, medium-sized firms that specialize in and frequently dominate obscure niche industrial subsectors, are widely viewed as the key to the country’s impressive ability to compete in export markets.¹⁷ The Mittelstand are typically manufacturing and engineering firms based in small towns and rural areas with a deep sense of social obligation to their own workers and their local communities. They tend to resist offshoring and layoffs in economic downturns. The Fraunhofer institutes are cited as comprising “external, very well equipped research departments of the Mittelstand companies.”¹⁸ To the extent that this view is accurate, it validates the widely held view of the Fraunhofer-Gesellschaft as one of the most successful research organizations in the world. It does not necessarily follow, however, that programs that consciously seek to emulate the Fraunhofer model will be able to foster new communities of Mittelstand-like firms outside of Germany. The Mittelstand’s main strengths arise less from size or methods than from core values and industrial traditions handed down over the generations that cannot readily be replicated by government programs and public expenditures alone.

BEST PRACTICES

The research organizations surveyed here frequently cite certain practices, policies, methods, and approaches as key to the way in which they operate. While these may or may not constitute “best practices,” give the success of organizations like ITRI and Fraunhofer, their techniques command attention. The fact that some of these practices are found at more than one of the organizations studied is partially a reflection of “borrowing” from other innovation models.

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to two main factors: (1) patterns of French industrial specialization, and (2) a shortage in France of R&D-intensive enterprises of intermediary size—Enterprises de Taille Intermediare (ETI)—with between 250 and 5,000 employees and either less than 1.5 billion Euro turnover or a balance sheet under 2 billion Euros. CAS, 2010, R&D et Structure des Enterprises, une comparaison France/Etats-Unis. Cited in European Commission, Erawatch Country Reports 2011: France. p. 7.

¹⁶The Conversation “The Missing Middle: What Australia Could Learn from Germany,” May 19, 2012.

¹⁷The Economist, “German Business: A Machine Running Smoothly,” February 3, 2011. The Wall Street Journal, “The Engine of Growth,” June 26, 2011. Berad Venohr and Klaus E. Meyer, The German Miracle Keeps on Running: How Germany’s Hidden Champions Stay Ahead in the Global Economy, Berlin: Berlin School of Economics, May 2007.

¹⁸Christian Hamburg, Structure and Dynamic of the German Mittelstand. Heidelberg and New York: Physica-Verlag, 1999, pp. 58-59.

Maintaining Mission Focus

The Fraunhofer and ITRI were founded decades ago to perform applied research of commercial value to industry, and they have remained relevant and successful by maintaining a disciplined focus on their original mission.¹⁹ Within the scientific community, basic research is often viewed as more interesting than applied research, and examples exist where institutes set up to perform applied research for industry have drifted into other activities.²⁰ That has not happened in Germany or Taiwan. Both Fraunhofer and ITRI have developed a strong sense of institutional pride in the fact that they must continually demonstrate their own relevance by securing commercial research contracts from companies.

International Technology Induction

All of the countries surveyed share a common aspect—that is, that most of the basic scientific discovery that occurs globally takes place outside their own borders. Accordingly, while the research organizations have a mandate to serve as a bridge between the domestic research base and industry, their comparative effectiveness will increasingly turn on their ability to engage foreign research organizations and technology-intensive companies. The Fraunhofer Institute for Material and Beam Technology IWS, which maintains a relationship with the U.S.-based Fraunhofer Center for Coatings and Laser Applications, explains that this relationship enables it to identify emerging trends, and “the research and development work performed in the United States generates additional know-how and competencies, which benefit the project acquisition in the German and European markets.”²¹

ITRI is “arguably the most capable institution of its kind in the world in scanning the global technological horizon for developments of interest in Taiwanese industry, and executing the steps required to import the technology— either under license or joint development—and then absorbing and adopting the

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¹⁹The Fruanhofer ousted its first President, Nobel Prize winner Walther Gerlach, because he was a basic scientist who had little regard for basic research. Christine Egger, “Nachdenken im Auftrag: Eine Geschishte der Fraunhofer Gesellschaft,”. Aventinus Bavaria, October 22, 2010.

²⁰The Hauser Report noted (p. 10) that Korea’s Electronics and Communications Research Institute (ETRI) had strayed away from applied and into fundamental research and was competing as well as collaborating with universities. Taiwan’s Development Center for Biotechnology (DCB) was set up to function as an ITRI-style intermediary organization for applied research in the life sciences, but moved toward a focus on basic R&D, one factor underlying Taiwan’s difficulty in establishing a viable biotechnology industry. Andrea Yung, “A Long Haul for Biotech,” Topics,. October 2009. The UK’s Faraday Centres were created in the early 1990s to perform a Fraunhofer-like bridging function between Britain’s research base and its private sector, but by the time they were operational the first five pilot sites for the Faraday project had become “merely a new way of training postgraduate engineers.” New Scientist, “German Lessons, Half Learnt,” November 21, 1992.

²¹Fraunhofer IWS Annual Report, 2011, p. 117.

technology for Taiwanese firms to use.”²² ITRI has an extensive array of joint R&D projects with world-class companies and research organizations, including Microsoft, IBM, Intel, Lawrence Berkeley National Laboratory, Novartis, Corning, and Applied Materials. Technology acquired from these collaborations is transformed in ITRI’s laboratories into prototype products and manufacturing processes that are transferred to Taiwanese companies for commercial application.

Some of ITRI’s international technology transfers have had epochal effects. ITRI established an R&D partnership with RCA in 1975 pursuant to which RCA agreed to transfer technology and know-how to ITRI for CMOS semiconductor design, process, and testing technology and to train ITRI engineers. RCA supplied CMOS technology and trained a group of 37 Taiwanese students—the so-called RCA 37—in the fundamentals of semiconductor manufacturing. Out of the RCA 37, “virtually the entire senior echelons of the subsequent semiconductor industry in Taiwan [were] formed.”²³ The ITRI trainees returned to Taiwan and built a pilot facility for manufacturing integrated circuits, serving as a practical confirmation for the trainees, whose “hidden knowledge” gained from RCA was passed on to other trainees that had not been chosen for the original mission. Ding-Yuan Yang, who led the RCA 37, recalled later that—

Now looking back, setting up an IC demonstration plant in a research institution was something truly unique in the world. Normally a private plant is set up, and they transfer technologies by themselves. Using the power of the government to establish a demonstration plant in a research institution, to plant it as a seed to spread it out, was a very unique method.²⁴

In retrospect, the technology induction from RCA to Taiwan was a Promethean moment that made possible not only the development of a world-class semiconductor industry in Taiwan but also follow-on industries such as displays, computers, photovoltaics, and telecommunications. The process continues today as ITRI acquires technology abroad and develops products and proves manufacturing processes on demonstration plants within the institute for dissemination to companies entering emerging industries such as flexible displays, green buildings, and cloud computing.

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²²John A. Matthews and Dong-Sung Chu, Tiger Technology: Thee Creation of a Semiconductor Industry in East Asia, Cambridge: Cambridge University Press, 2000.

²³John A. Matthews, “The Hsinchu Model: Collective Efficiency, Increasing Returns, and Higher-Order Capabilities in the Hsinchu-Based Industry Park, Taiwan,” Keynote Address, Chinese Society for the Management of Technology: 20th Anniversary Conference, December 10, 2010.

²⁴Interview with Ding-Yuan Yang. 2011. “Taiwanese IT Pioneers”. D.Y. (Ding-Yuan) Yang. Recorded February 23, 2011. Computer History Museum: 2011.

Spin-offs (ITRI, Fraunhofer, Carnot)

Many public research organizations around the world give rise to new companies as employees depart to commercialize technologies they have helped to develop. ITRI, Fraunhofer, and the Carnot institutes have formalized this process, endorsing the concept of spin-offs as a mechanism for technology transfer to industry and establishing institutional structures and programs to enhance their spin-offs’ prospects for success in the marketplace. ITRI has established a venture capital subsidiary, the Industrial Technology Investment Corporation, which screens proposed spin-offs and takes small equity stakes in roughly one-third of them, with the expectation of selling that interest at some point in the future. The Fraunhofer manages spin-offs through an internal division, Fraunhofer Ventures, which takes an equity stake of up to 25 percent in about half of the spin-offs. ITRI, Fraunhofer, and the Carnot institutes provide incubation facilities and services (legal, accounting, business counseling, technology support) to their spin-offs.

ITRI spin-offs are noteworthy because of their scale and market impact. The United Microelectronics Corporation (UMC) involved a spinoff of 31 people from ITRI microelectronics organization as well as a substantial portion of its semiconductor production equipment.²⁵ In 1986-1987, ITRI created Taiwan Semiconductor Manufacturing Corporation (TSMC) involving spin-off of 130 professionals (including Chairman Morris Chang), semiconductor process technology, and a complete manufacturing plant for integrated circuits. Winbond Electronics Corporation, created in 1987, involved spin-off of about 200 professionals from ITRI. These spin-offs dwarf those of the other organizations studied here in scale, degree of risk, and actual impact in the market, which was to create a national semiconductor industry and to project Taiwan into the ranks of the world leaders in the field within the space of a single generation. Some of ITRI’s smaller spin-offs have quickly developed into midsize successful firms. Phison Electronics Corp., a maker of flash memory systems, began as an ITRI spin-off with 12 employees in 2000 and by 2012 had become a company with 560 employees and annual revenues of over $1 billion.²⁶

ITRI has helped its spin-offs integrate into global supply chains. ITRI and the Taiwanese government arranged a joint venture with Philips when they created TSMC in 1987, the world’s first pure-play semiconductor foundry. This arrangement gave the new company one of the world’s biggest semiconductor producers as its first customer, at a time when the greatest perceived risk facing TSMC was the uncertainty of demand for its services. The fact that Philips was sourcing from TSMC soon drew the attention of companies like Intel and Texas

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²⁵ITRI’s microelectronics unit was the Electronic Research and Service Organization (ERSO), which now operates as the Electronics and Optoelectronic Research Laboratory.

²⁶Phison, Corporate Overview, 2012.

Instruments, who became customers. Philips also deployed its IP umbrella over the new company, using a web of cross-licensing agreements transferred to the new company, protecting it from lawsuits.²⁷ More recently, ITRI introduced its spin-off Phison Electronics Corp to Toshiba and on the basis of ITRI’s presentation, Toshiba invested in Phison and became an important customer.²⁸

Creating Industry Chains

ITRI has established “technology integration centers,” which coordinate and integrate research and technology from the institutes’ specialized core laboratories. The original rationale for the centers was to promote silo breaking and multidisciplinary collaboration among ITRI’s thematic core laboratories. But the centers have evolved into mission-oriented organizations that seek to establish indigenous capacity for the integrated production of advanced technologies throughout the creation of entire industry supply chains. The centers have their own budgets and can commission research by ITRI’s core laboratories. They oversee the development of capabilities with respect to production equipment, materials, components, manufacturing processes, testing, and certification. The director of ITRI’s Display Technology Center, Dr. John Chen, explained in 2012 that—

The biggest strength of ITRI is the multidisciplinary cooperation. We create a complete manufacturing supply chain in its early stages. That is the secret. Then you can scale it up, you can have a complete supply chain for the industry. So DTC does not just work with display companies, but also materials suppliers and equipment makers.²⁹

During the past three decades, as ITRI was creating domestic industry supply chains through spin-offs and technology transfer, Britain was witnessing the partial or complete disaggregation of many of its long-standing industrial chains as the application of orthodox-free market policies by successive Conservative and New Labour governments forced a punishing restructuring on the country’s manufacturing sector. “When the big factories closed, the supporting infrastructure decayed. Import dependency is the legacy…British manufacturing has downsized into workshops as it loses its industrial districts…on the available evidence, it is no longer possible to construct a large, heavy engineering product with high British content.”³⁰ The contrast with

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²⁷Tommy Shih, “Scrutinizing an Economic Model: The Taiwanese Semiconductor Industry Revisited,” Uppsala University, 2009, p. 14.

²⁸Interview with K. S. Pua, Phison Electronics Corp., Hsinchu, Taiwan, February 14, 2012.

²⁹Interview with DTC Director John Chen, Hsinchu, Taiwan, February 14, 2012.

³⁰Centre for Research on Socio-Cultural Change, Rebalancing the Economy (or Buyer’s Remorse), Working Paper No. 87, 2011, pp. 29-33.

Taiwan is stark. In 2011, Barry Lam, former head of Kinpo electronics and founder of Quanta Computer, observed the following about the Taiwanese IT sector:

The supply chain is very complete in Taiwan. We have semiconductor foundries here in Taiwan. We have good design houses. We have many good assembly houses. We also have many components, such as CD-ROM drive. We gave up on the hard drive business at the time, so we didn’t catch the momentum when the industry was blooming. Assembly was done mostly in Thailand or Southeast Asia. We pretty much know how to make most components in mass production. So from components…that’s why even when we make resistors and capacitors, our price is still very cheap. For components, from PCB boards to chips, we can make it all in Taiwan. So, we can even complete the design in Taipei. And, why? Because all the vendors are concentrated in Taipei. Taipei is not big, so it’s easy to deal with everything in Taipei and everything can be done here. This is good, isn’t it?³¹

The Fraunhofer has contributed to the survival and flourishing of industrial chains in established German industries like autos, machinery, and chemicals. Many of its industrial customers are small and medium firms that produce intermediate industrial products for incorporation into end products like construction equipment and motor vehicles. The technological support of Fraunhofer institutes enables these SMEs to remain competitive with their Asian counterparts, ensuring that all or most of the industry chains remain in Germany or other European countries.

Engaging the Private Sector

In Britain and France, a long-standing challenge has been the difficulty experienced by companies, especially small ones, seeking to ascertain which research organization could assist with a specific technological concern. In 2011, Dr. Tim Bradshaw, the head of Enterprise and Innovation at the Confederation of British Industry, told Parliament that no one “really knows” what potential support was available from the country’s welter of hundreds of technology intermediary organizations, and that “SMEs, in particular, do not know where the best facilities are that they could go and tap into.”³² In France,

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³¹Interview with Barry Lam, “Taiwanese IT Pioneers: Barry (Pak-Lee) Lam,” recorded March 2, 2011 (Computer History Museum, 2011), p. 29.

³²Testimony of Dr. Tim Bradshaw, House of Commons, Science, and Technology Committee, Technology and Innovation Centre Inquiry, Oral Evidence, December 15, 2010, Q27.

prior to the Carnot initiative, companies confronted a “vast, ossified public science and research system…and a lack of synergy between public research and industry.”³³ IRAP, Fraunhofer, and ITRI have been successful in forging close links with businesses, albeit through differing institutional mechanisms.

The key to IRAP’s success is a small, elite cadre of about 230 Industrial Technology Advisors, which deliver IRAP services and funding to individual companies across Canada. ITAs typically are veteran R&D professionals with extensive industrial experience and strong educational backgrounds.³⁴ The ITAs provide companies with R&D project advice, competitive technical intelligence, funding, networking, and technology and business advice. In one instance involving Boreal Laser, Inc., a maker of laser-based trace gas analyzers that detect hazardous gases, support from an IRAP ITA enabled the company to double its sales, move from an analog to a digital platform (improving flexibility and profits), establish clients in 45 countries, grow from 7 to 15 employees, develop a relationship with ExxonMobil worth over $3.5 million and create a community of suppliers with the ability to develop laser technology for other companies.³⁵ Britain and France offer advisory services to small businesses that resemble IRAP’s services, although they are not part of the Catapult and Carnot initiatives.³⁶

Fraunhofer institutes link the university system with private industry in parallel structures of thematic “research units” and “business units.” Contacts with industry are made by Fraunhofer business units, which play a role somewhat analogous to IRAP’s ITAs as a bridge between companies and the research base. The business units have business expertise as well as knowledge of the potential applications and markets for the particular technologies in which they specialize. When a company asks a Fraunhofer institute for research assistance, the business unit is the point of contact and the entry point into the system. The business unit evaluates the potential cost of research, its business feasibility, and the terms pursuant to which the parties will collaborate. The business units determine which Fraunhofer research units should perform the developmental research with respect to materials, equipment, processes, and so on. The business unit remains the point of contact with the client, while research

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³³Emmanuel Muller, Andrea Zenker, and Jean-Marie Heraud, “France: Innovation System and Innovation Policy,” in Fraunhfer ISI, GIGA and Georgia Tech New Challenges to Germany in the Innovation Competition, August 2008, p. 148.

³⁴Eighty percent of ITAs have specialized industrial experience, 75 percent of ITAs have masters or PhD education, 45 percent have run their own R&D facility or occupied a leadership position in an R&D facility, 34 percent have been entrepreneurs, and 41 percent have worked in institutions of higher learning. IRAP, “The ITA Advantage,”
<http://www.nrc-cnrc.gc.cn/eng/irap/uhwt/advisors.html>.

³⁵National Research Council of Canada, 2012, “Local, Digital, and Growth-Oriented,”
<http://www.nrc-cnrc.gc.ca/eng/irap/success/2012/boreal_laser_inc_trace_gas_analyzer.html>.

³⁶In the UK, the Manufacturing Advisory Service (MAS) is a government program that offers business and technological advice to SMEs. In France, regional technology transfer centers (Centres Regionaux d’Innovation et de Transfert de Technologie) known by the acronym CRITT, supports innovation by SMEs through specific advice by Conseilleurs en Developpement Technologique.

unit or units are the point of contact for the work with respect to university faculty laboratories and students.

The Fraunhofer has created formidable internal communications structures that enable staff to ascertain what competencies exist and what projects are under way throughout the Fraunhofer system. As a result, when confronting a technological challenge posed by a company, various Fraunhofer units can be assembled from one or more Fraunhofer institutes on an ad hoc basis to attack the problem, if need be on a multidisciplinary basis. Thus, a company that makes a contact with any Fraunhofer institutes engages the entire network and an appropriate research team quickly assembled. This process is facilitated by the fact that German scientific fields are traditionally highly networked and scientists are trained to work in concert on a multidisciplinary basis to achieve a given objective. A Fraunhofer scientist recently observed that establishment of collaboration networks is extremely difficult, but that once established, networks constitute a “huge competitive advantage.”³⁷

ITRI’s interface with companies is facilitated by the fact that many of its research customers are colocated with ITRI in the Hsinchu innovation cluster. In addition, many company executives are ITRI alumni, and “most of them graduated from the same university, took the same classes, were taught by the same professors, and had similar work experience at ITRI.”³⁸ The interface with industry is enhanced by ITRI’s “technology alliances,” which convene interested companies on a thematic basis for technology development and diffusion.³⁹

The primary purpose of the Carnot and Catapult initiatives is to improve the flow of technology from the national research base to private industry. The Carnot institutes typically enjoy research alliances with domestic universities and domestic and foreign research organizations. Like the Fraunhofer, in eight thematic areas, the Carnot institutes have formed “Carnot alliances” of research units with relevant multidisciplinary competencies that can be brought to bear on behalf of industrial customers. Britain’s Catapult centers have absorbed a number of “Knowledge Transfer Networks” (KTNs), networks established to connect companies in need of technology with research organizations capable of delivering it.

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³⁷Interview with Fraunhofer Institute for Manufacturing Engineering, Stuttgart, Germany, June 14, 2012.

³⁸Anna Lee Saxenian, “Taiwan’s Hsinchu Region: Imitator and Partner for Silicon Valley,” Stanford Institute for Economic Policy: Research Discussion Paper No. 00-44, June 16, 2001.

³⁹In 2008, ITRI formed the “A+ Machine Tool Technology Alliance” with six domestic manufacturers of numerically controlled machine tools to introduce “advanced techniques from Germany,” to improve the accuracy of Taiwanese machine tools down to the submicron level. Taiwan Economic News, “ITRI Forms A+ Machine Tool Technology Alliance,”. July 8, 2008.

Core Funding

One of Hermann Hauser’s key findings was that the foreign applied research organizations which he surveyed received between 10 percent and 70 percent of their funding in the form of “core” government funds not linked to the performance of research contracts. He observed that “core funding from the public sector appears to be most in need at start-up for infrastructure and capacity building, but studies have shown a need for continued core funding for three functions: strategic high risk research of medium to long term duration; competence development; and the acquisition and maintenance of large-scale facilities and specialist equipment.”⁴⁰ The Fraunhofer’s steepest growth trajectory occurred after its core funding was locked in by a federal-Länder pact in the early 1970s.⁴¹ The Carnot and Catapult initiatives in France and the United Kingdom involve provision of core government funding to research organizations in a conscious effort to replicate the Fraunhofer model.

Proportional Matching of Industry Funding (Fraunhofer, Carnot)

The Fraunhofer institutes’ headquarters allocates government core funding to individual institutes according to a formula that rewards each organization’s success in contracting with the private sector for research—the more contract research revenue from industry, the more funding the organization receives. France’s Carnot institutes operate according to a similar principle, with additional incentives which reward contract research for SMEs. The net effect of these arrangements is to direct government funds toward thematic areas regarded as important by industry. A potential shortcoming of this model is that because it is driven by the needs and demands of companies and industries that already exist, it is unlikely to foster transformational research in thematic areas where no companies yet exist.

Branding

In Germany, France, and Britain, a common branding of institutes of applied research is being used, unifying organizations that are somewhat disparate under a designation intended as a seal of excellence. For Fraunhofer, the emphasis on building a brand has worked very well, and its name is closely associated with the high quality of German products and engineering. Hermann Hauser observed in his 2010 report that “it is widely believed in Germany that the renewal and greater use of the Fraunhofer brand in recent years has made a difference and enabled the network to promote itself and compete effectively

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⁴⁰Hauser, Technology and Innovation Centres, 2010, op. cit. p. 11.

⁴¹Marksu Winnes and Uwe Schimack, National Report: Federal Republic of Germany, Institute for the Study of Societies, TSER Project No. SOE1-CT96-1036, May 1999, p. 14, 45.

both nationally and internationally.”⁴² The Carnot and Catapult initiatives represent attempts to establish comparably strong brands in France and Britain, respectively.

Dual System

The term “dual system” refers to a form of education practiced in Germany and some other European countries in which students concurrently receive vocational education and apprenticeships in companies. But the term could equally be used to characterize any curriculum that combines a course of theoretical study with practical experience and training in an industrial environment. In Germany, where institutions of higher learning have emphasized technical and scientific training as part of their curricula for many generations, the Fraunhofer embodies the dual system in practice at the pinnacle of the educational system, with PhD candidates and postdocs who are pursuing courses of scientific study also learning to function in highly sophisticated, real-world industrial settings. The thousands of Fraunhofer alumni comprise a scientific and engineering elite capable of applying their knowledge for the benefit of industry. While Britain and France have long bemoaned the disconnect between academia and industry, Germany has produced generations of scientists and engineers who are at home in both worlds.

External Evaluations (Carnot, Fraunhofer)

France has pioneered the practice of requiring periodic evaluations of all public research organizations (as well as programs, universities, and schemes) by independent committees. The evaluations are conducted under the auspices of the Agency for the Evaluation of Research and Higher Education. The visiting committees which conduct the evaluations are comprised of individuals with relevant expertise who have no connection to the institution and in a majority of cases are not French. Fraunhofer institutes are also subject to periodic performance audits by external experts drawn from the university and business communities.

Political Nonintervention

The most successful foreign applied research institutes, Fraunhofer and ITRI, have benefited substantially from a relative absence of political interference with their activities. Although the Fraunhofer has occasionally been assigned special missions by the German government, it has not confronted periodic demands from the government or Germany’s main political parties that it be shut down, downsized, subjected to budget gyrations, or assigned a

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⁴²Hauser, Technology and Innovation Centres, 2010, op. cit. p. 13.

fundamentally different role in the German research ecosystem. Its government founding has remained on a stable basis since a pact on research spending was reached between the federal government and the Länder in the early 1970s.⁴³ In Taiwan, ITRI benefited from the longstanding tradition of the Kuomintang Party—which held power from the time of ITRI’s funding until 2000—of relying on “scientific” government planning, according technocrats a large degree of freedom from party and military control.⁴⁴ In the United Kingdom, government funding of applied research has traditionally been a contentious issue, although at present both New Labour and the coalition government support the Catapult initiative.

LESSONS FOR MEP

An overview comparison of MEP with successful foreign programs promoting applied research, such as Germany’s Fraunhofer-Gesellschaft and Taiwan’s ITRI, raises the threshold question as to whether there are applicable lessons for MEP from the foreign efforts, given that foreign programs are so divergent from MEP in scale, level of public funding, and character.

The origins and operations of these programs, explored in detail in Appendix 1, suggests that in fact there are two distinct areas in which these programs have potential lessons for MEP:

1. The addition of innovation services. Recent MEP efforts to add innovation and globalization to MEP services have been noted in the Findings of this report, along with issues related to their implementation. These or similar initiatives are very likely to be part of the MEP portfolio in the future, and therefore insights drawn from programs with similar components can be relevant. Programs such as Fraunhofer and ITRI appear to be among the best global examples of government support for innovation in manufacturing. As MEP moves forward to help U.S. SMEs enhance their international competitiveness—including the creation of the requisite workforces, supply chains, global outreach, and innovation clusters supporting local manufacturing employment—examples and lessons drawn from leading programs internationally should be directly relevant.
2. Further improving efficiency services. While MEP has over 20 years of experience in deploying lean production techniques to meet the needs of small U.S. manufacturers, leading foreign programs like Fraunhofer and ITRI have provided similar services. Given the scale of their efforts

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⁴³Marksu Winnes and Uwe Schimack, National Report: Federal Republic of Germany, Institute for the Study of Societies, TSER Project No. SOE1-CT96-1036, May 1999, p. 14, 45.

⁴⁴Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton and Oxford: Princeton University Press, 1990, pp. 247-48.

The extent of the differences between MEP and leading international programs is underscored by consideration of different kinds of relevant capabilities (see Table 7-2). There are substantial differences in current capabilities between the foreign programs and MEP (we note that while MEP has been adding innovation-oriented services for only 6 years, Fraunhofer has operated for over 60 years, so their limitations at MEP are to some degree to be expected).

Although at present MEP does not possess the assets, budget, or expertise to engage in many of the activities that constitute core functions of organizations like the Fraunhofer and ITRI, those activities are nevertheless relevant points of reference for MEP. MEP’s mission now includes promotion of innovation in manufacturing by SMEs, and the methods employed by the most successful organizations seeking to foster innovation cannot simply be dismissed. If MEP cannot replicate such functions in their entirety as they are applied abroad, it may be able to capture some aspects of those functions either through its own internal processes as through expanded collaborations with other government programs, universities, and research organizations—all of which are important aspects of ITRI’s and Fraunhofer’s operations. Finally, organizations like the Fraunhofer and ITRI are of abiding relevance to programs like MEP because they are indicative of what the best U.S. competitors are doing to establish and maintain a competitive edge in manufacturing—whether or not U.S. policymakers approve of, or are prepared to replicate, such efforts.

The MEP’s traditional program of promoting lean manufacturing involves the application of long-established production protocols such as Six Sigma to existing production operations in order to foster greater efficiency and larger markets and higher return. Fraunhofer and ITRI also offer technical support, management training, and advice with respect to manufacturing processes as part of their larger function of promoting innovation. However, in addition, Fraunhofer and ITRI projects addressing manufacturing technology also emphasize the development, introduction, and diffusion of new processes and materials including proprietary technologies. Lean manufacturing programs may enable SMEs to close the efficiency gap or even catch up with their global competitors; the Fraunhofer and ITRI programs, when successful, propel their participating companies into positions of leadership. In other words, while the original MEP mission sought to help SMEs apply lessons learned from Toyota in the 1970s and 1980s, the Fraunhofer has sought to enable German companies to meet the challenge from Toyota for market share in the 21st century. IRAP has steadily moved in this direction as well, with an increasing emphasis on stimulating “wealth creation by supporting technological innovation.” To push new technologies toward the market, IRAP provides not only technical advice but also seed funding for promising projects.

TABLE 7-2 Comparing MEP with ITRI and the Fraunhofer Gesellschaft

MEP provides expertise and advice to individual companies with respect to manufacturing technologies based on observation and study of those companies’ existing production operations. ITRI and the Fraunhofer perform similar services, but they also establish demonstration manufacturing operations on their own premises to develop and test processes, machines, and materials that have often not been used previously, for the benefit of multiple industrial collaborators. Success in an MEP project is measured in terms of improvements to the client’s bottom line, increased sales, new products, and leveraged investment. Success in the foreign programs has been manifested in such terms and in the rapid dissemination of cutting-edge manufacturing processes

throughout an entire domestic industry, or the creation of entirely new industries (Taiwan), or the maintenance of a global competitive edge in manufacturing in traditional industries (Germany).

The establishment of organic manufacturing demonstrator capability at MEP’s centers may be beyond the reach of the program for the foreseeable future, given the current model and the existing resource constraints. However, the promotion of demonstrator projects and facilities through collaborations with universities and interested companies (such as the Timken-University of Akron collaboration) could benefit from MEP support.

MEP’s Next Generation Strategy, launched in 2007, seeks to “help firms grow by becoming more competitive and innovative.” In that sense, its mission has moved closer to the goals of ITRI, Fraunhofer, and IRAP, all of which focus on innovation rather than improvements in process efficiency. As a result, MEP is now grappling with some of the same challenges confronting the leading foreign organizations, which include connecting manufacturers’ needs with technology sources, technology scouting, supply chain issues, and the development and commercialization of products. Accordingly, MEP could benefit by reference to some of the practices and strengths of the foreign programs.

SMEs, whether located in the United States, Germany, Taiwan, or Canada, typically do not have much organic R&D capability and rely on external sources for most of the technologies which they may seek to adapt for commercial purposes. The principal sources of relevant research are universities, public research organizations, and technology-intensive major companies. The well-established foreign research organizations surveyed here (ITRI, IRAP, Fraunhofer-Gesellschaft) are successful largely because they have developed institutional arrangements for systematically linking the research base (national and international) to domestic companies, especially their SMEs, on their own premises. In addition, organizations like Fraunhofer and ITRI possess their own internal research infrastructure, expertise, and intellectual property. “The research facilities of Fraunhofer serve as external, very well equipped research departments at the Mittelstand companies.”

Close Ties to Universities

Although the United States arguably enjoys the world’s best system of research universities, the linkages between ITRI and Fraunhofer and the universities in Taiwan and Germany, respectively, are far more pervasive and intimate than the ties between MEP and U.S. universities. Some 18 MEP centers have a partnership with a U.S. university, whereas all Fraunhofer institutes are paired with one and sometimes multiple academic research institutions. ITRI is virtually colocated with two of Taiwan’s leading research universities, Chiao Tung and Tsing Hua, and the personal and professional ties between the three institutions are so close that the boundaries between them are sometimes indistinct. And with respect to U.S. universities, an interesting

question is presented as to which organizations’ research ties are closer—MEP, on the one hand, or ITRI-Fraunhofer, on the other hand, each of which has developed strong research collaborations with leading U.S. academic research institutions.

MEP’s Innovation Engineering initiative seeks to move in the direction of Fraunhofer-ITRI practice, which emphasizes the development of new manufacturing processes and materials rather than training companies to apply successful, but traditional, methods. This approach involves significant challenges. For example, staff at MEP centers are usually trained in lean manufacturing, not innovation, leading some staff directors to seek to replace current staff with new staff with different skills. Moreover, innovation in manufacturing takes places over a larger time frame than implementation of lean manufacturing. The Fraunhofer and ITRI address such challenges by “importing” expertise as need from university research departments and foreign companies (firms like Corning and Kodak have shared technology and know-how with ITRI projects). The involvement of university graduate and postdoc students in research projects (some of whom contribute through pursuit of relevant thesis topics) eventually generates a flow of expert graduates both in the research institutes and to companies. Some MEP centers are already involved in executive education programs with respect to manufacturing management; the programs could arguably benefit by observing the close integration of academic research, engineering, and business skill sets that occurs with respect to manufacturing innovation at the Fraunhofer and ITRI.

To be specific about the degree of integration between Fraunhofer institutes and German research universities, consider the relationship between the Fraunhofer Institute for Laser Technology ILT and RWTH Aachen, one of Germany’s leading research universities. Fraunhofer ILT works closely with four RWTH university chairs: Laser Technology, Technology of Optical Systems, Laser Physics, and Nonlinear Dynamics of Laser Processing. On the one hand, the Fraunhofer ILT’s “knowledge of current industrial and scientific requirements in the optical technologies flow directly into the planning of the [RWTH] curriculum.” On the other hand, undergraduates and postgraduates “can put their theoretical knowledge into practice through project work at the three chairs and the Fraunhofer ILT.” University courses at RWTH are jointly drawn up by the university and Fraunhofer ILT. Professor Thomas Taubner, who oversees a research working group at Fraunhofer ILT studying nano-optic concepts using lasers, also holds a junior professorship at RWTH Aachen for “Nano-Optics and Metamaterials,” where he supervises research by students in physics involving new imaging techniques with nanometric spatial resolution.

The director of each Fraunhofer institute is also a faculty member at the institute’s university partner, and typically identifies the most promising students to recommend for positions at the Fraunhofer. One Fraunhofer scientist who also serves on a university faculty observes that “my marketing effort is my lecture. I convince students to work [at Fraunhofer] 15-20 hours per week. I’m

positioned to find the best. They can stay until they get their Ph.D.s (5-8 years) and use our excellent network to find jobs.”

International Outreach

Internationally, ITRI and Fraunhofer have developed multiple research collaborations with high-tech multinationals and public research organizations which generate a steady flow of cutting-edge technology to domestic companies in Taiwan and Germany. The benefits of these collaborations are sufficiently evident to governments in the two countries that public funds may be used to support research projects in other countries. MEP does not have a network of international research collaborations and is not in a comparable position to serve as a conduit for new foreign technologies to U.S. SMEs. A question is presented as to how MEP could leverage existing U.S. government programs and resources to enhance its access to international technologies relevant to small and medium U.S. manufacturers.

Most MEP centers report that they are focusing more on multiple projects with repeat clients, a practice which is inconsistent with the National Institute of Standards and Technology’s current emphasis on the need for MEP centers to reach out to SMEs not currently served. It should be noted that in Canada, IRAP’s clients are SME firms “with the potential to innovate,” a different approach which emphasizes assistance to the most innovative companies rather than extending help to technological laggards. Fraunhofer and ITRI R&D programs are characterized by multiple projects with repeat clients, including large firms, a dynamic that has been associated, in the German case, with the spectacular success of the Mittelstand companies in world markets. A question is presented whether MEP should be encouraged to emphasize outreach to a broader base of SMEs as a way to concentrate its efforts on the most dynamic and innovation companies.

The Key Role of Networks

MEP’s partner, the consultancy RTI International, has been grappling with the fundamental challenge of “helping clients find technologies that they need,” an issue which continues to vex policymakers in other countries as well. Initiatives include workshops, creation of online clearinghouses, and other initiatives which resemble those elsewhere, such as Britain’s Knowledge Transfer Centers and France’s AiCarnot. However, such arrangements pale before the formal and semiformal technology networking arrangements in Germany, in which the Fraunhofer is perhaps the central player, and the informal networks linking Taiwan’s ITRI and a vast community of ethnic Chinese in Taiwan and abroad, including technology centers in Silicon Valley and Singapore.

The Fraunhofer relentlessly emphasizes networking and collaboration in every aspect of its operations, reflecting the recognition that competitive

innovation requires joint efforts by many actors with specialized competencies working in concert toward a common objective. Fraunhofer institutes are linked with each other in formal alliances that draw on differentiated but related skill sets. They also maintain vast formal and informal networks throughout the German university system and with other public research organizations such as the Max Planck Society, a system of public research institutes focused on basic research. Finally, the Fraunhofer institutes participate in a web of international technology alliances. The net effect of the Fraunhofer’s deep networking is the ability in response to a request from a client (at least in the best case) to assemble rapidly a multidisciplinary team of experts well qualified to develop a solution to the particular technological problem at hand. With reference to this example, MEP centers will benefit by greater attention to the capabilities and best practices of other MEP centers as well as increased familiarity with the research facilities and competencies of U.S. universities and public research organizations.

Projects vs. Prototypes

The MEP program focuses on improvements in manufacturing processes, tools, and sustainability. Historically, it has not emphasized the development of commercial product prototypes by individual companies. By contrast, ITRI and Fraunhofer themselves develop product prototypes— unilaterally or, more commonly, in industrial collaborations—and work closely with industrial partners to scale up production and commercialize those products. IRAP currently sees its mission as assisting SME firms to “develop, adopt and adapt technologies and incorporate them into competitive products and services to be commercialized in the global marketplace.” A question is presented as to the extent to which MEP can engage directly in activities such as proof of concept, prototyping, and pilot manufacturing of commercial products on behalf of clients in a manner similar to ITRI and Fraunhofer. Traditionally, activities on behalf of individual companies have been regarded as an inappropriate use of public resources. The same perspective is observable in some other countries, most notably the United Kingdom, although policy has shifted to support initiatives such as the Catapult program. However, public support of commercial product development—particularly at the R&D stage—is more the norm than the exception globally, and is generally not inconsistent with existing international trade rules.

The question of national attitudes toward the appropriate role of government with respect to bringing commercial products to market is not unrelated to the performance of the research organizations examined in this study. In Germany and Taiwan and to a lesser degree, Canada, there is a rough consensus that governments should play a role in bridging the gap between knowledge creation and its application in a commercial context. Reflecting this consensus in Germany and Taiwan, applied research organizations in these countries have enjoyed a substantial, stable flow of government funding, a

coherent and clearly-defined mission, and close linkages with and support from other government initiatives such as cluster promotion and support for SMEs. In countries where partnerships among governments, industry, and universities is taken as a given, the economy has benefitted from organizational and fiscal continuity in applied research. The resulting scale, concentration of resources, and institutional development has not proven effective, at least in the past.

The leadership of the Fraunhofer tends to assess the prospects for success of government-backed research institutes in other countries with reference to the commitment of governments to sustain core funding at adequate levels over the long term. Chronic uncertainty over the availability of funding and/or the need to devote substantial operational resources to fundraising activities undermines the ability of research organizations to attract and hold managerial and researcher talent and to maintain a focus on the primary research mission. A key lesson for U.S. policymakers with respect to MEP or any other program promoting industrial innovation to be drawn from the foreign experience is the critical importance of sustained public funding.