6

Public Policies to Support Innovation

The discussion of innovation at both workshops turned repeatedly to public policies that have hindered innovation in the past, are enhancing innovation currently, or could promote innovation in the future. The parts of the discussion related to these policies are gathered in this final chapter of the summary as a guide to possible future actions.

HOW CAN THE BENEFITS OF INNOVATION BE RETAINED?

The United States does not have an innovation problem, said Borrus, given the “massive amounts” of innovation occurring at research universities. Rather, the United States has a problem benefitting from the innovations that occur in its universities. In a global economy, capital, technology, and increasingly people flow across national boundaries quickly.

Private capital markets in the United States also are reluctant to finance the scale-up of a first new facility in a fundamentally new area, Borrus said. As a result, innovators often have to go outside the United States to find the capital for such a facility. Otherwise, said Borrus, “you close the company, or you sell the intellectual property and whatever assets have been developed.” The Department of Energy hoped to solve this problem in the energy area through a large loan guarantee program, but the program encountered strong political headwinds after the bankruptcy of the Solyndra solar cell company. And even before that, according to Borrus, the program was operated so conservatively that it did not do what it was intended to do. It would only fund proven technologies, much as a commercial bank would do.

In exploring ways to retain the benefits of innovation in the United States, Borrus emphasized the need to hear from young researchers, innovators, and entrepreneurs. People in their 20s and 30s have grown up in a world radically different than the world experienced by older people, he said. “People younger than 25 are thinking in a completely different way than we might think, and that set of perspectives would be very useful for COSEPUP.”



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6 Public Policies to Support Innovation The discussion of innovation at both workshops turned repeatedly to public policies that have hindered innovation in the past, are enhancing innovation currently, or could promote innovation in the future. The parts of the discussion related to these policies are gathered in this final chapter of the summary as a guide to possible future actions. HOW CAN THE BENEFITS OF INNOVATION BE RETAINED? The United States does not have an innovation problem, said Borrus, given the “massive amounts” of innovation occurring at research universities. Rather, the United States has a problem benefitting from the innovations that occur in its universities. In a global economy, capital, technology, and increasingly people flow across national boundaries quickly. Private capital markets in the United States also are reluctant to finance the scale-up of a first new facility in a fundamentally new area, Borrus said. As a result, innovators often have to go outside the United States to find the capital for such a facility. Otherwise, said Borrus, “you close the company, or you sell the intellectual property and whatever assets have been developed.” The Department of Energy hoped to solve this problem in the energy area through a large loan guarantee program, but the program encountered strong political headwinds after the bankruptcy of the Solyndra solar cell company. And even before that, according to Borrus, the program was operated so conservatively that it did not do what it was intended to do. It would only fund proven technologies, much as a commercial bank would do. In exploring ways to retain the benefits of innovation in the United States, Borrus emphasized the need to hear from young researchers, innovators, and entrepreneurs. People in their 20s and 30s have grown up in a world radically different than the world experienced by older people, he said. “People younger than 25 are thinking in a completely different way than we might think, and that set of perspectives would be very useful for COSEPUP.” 33

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34 WORKSHOPS ON TRENDS IN THE INNOVATION ECOSYSTEM REGULATION Overly cautious or burdensome regulations can be another reason why innovations originating in the United States are commercialized elsewhere. For example, it can be easier to do the clinical trials of a new cancer drug in China than in the United States because of access to a large population, lower costs, and a cooperative government, said Hennessy. Citron highlighted the fact that the regulation of medical devices also poses many barriers to their commercialization in the United States, which means that these devices often are developed elsewhere and subsequently imported into the United States, even if they are based on ideas that originated in U.S. universities. The Food and Drug Administration (FDA) has a very difficult job, Hennessy acknowledged. The agency is charged with protecting the safety of the American public, and drug companies sometimes have broken the rules established to protect public safety. But the FDA has responded by setting up barriers that can make it very difficult for small companies to get products to the marketplace. Perhaps the FDA could establish separate categories for companies with stellar safety records and those with less than stellar records, Hennessy suggested. Another possibility would be to prioritize the review of important drugs with the potential to produce great benefits ahead of drugs intended to produce incremental improvements. In the past, said Borrus, when many U.S. industries were globally dominant, the country could afford to pay the costs associated with stringent regulations in such areas as health, safety, and environmental regulation. “I’m not saying do away with regulation,” he said, “but I do recommend taking a good hard look at all of the costs of doing business in a given area, where you are trying to commercialize a risky new set of technologies. . . . Things take too long, it’s too risky, and there are disincentives that tend to keep capital abroad.” By prudently lowering the costs of doing business, the United States could create an environment that is much more attractive to investors. Edward Penhoet mentioned one particular approach to reducing the burden of regulations. As a member of the President’s Council of Advisors on Science and Technology (PCAST), he has been involved in a review of the National Nanotechnology Initiative undertaken every two years in response to a request from Congress. The most recent nanotechnology report called on the nation to invest in regulatory science, which Penhoet defined as “the science that needs to be done to make an informed regulatory decision.”8 In nanoscience, for example, federal agencies fund studies of the effects of nanoparticles on cell cultures, but they do not support work, either individually or collaboratively, on the problem of how to move nanoparticles toward approval by the Environmental Protection Agency or the FDA. 8 President’s Council of Advisors on Science and Technology. 2012. Report to the President and Congress on the Third Assessment of the National Nanotechnology Initiative. Washington, DC: Executive Office of the President.

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PUBLIC POLICIES TO SUPPORT INNOVATION 35 PCAST also has been involved in an examination of the drug approval process at the FDA, Penhoet said.9 Today, the FDA simply counts the number of drugs it has approved as a measure of its impact, but many of these drugs have only incremental effects on the lives of patients. A much better measure is the impact of the new products the FDA approves. In particular, PCAST recommended a more facile way of dealing with breakthrough drugs. PCAST has also recommended reforms in the way clinical trials are done in the United States. For example, clinical trials are currently hampered by the need to gain approval from the institutional review boards at each institution participating in a trial. A more consolidated and streamlined review process could speed up drug development. Finally, Penhoet mentioned that the pharmaceutical industry could benefit by much more collaboration on precompetitive research that takes place before companies are in a position to compete in the marketplace. “There is an effort now to open up much more transparency in the drug development process,” he said. Citron added that the regulatory process governing medical devices is similarly in need of review and reform. SUPPORT FOR RESEARCH AND DEVELOPMENT The government has many ways of spurring investments in innovation beyond direct support for research and development, noted several speakers, including modification in its tax, regulatory, and trade policies. For example, the capital gains tax could be restructured in a way that further incentivizes investors to focus on a company’s long-term vision of its future rather than on short-term fluctuations in the company’s value, which tends to be the case today. A more exotic possibility discussed briefly at the first workshop would be to allow copyrighting of basic research for a long period─ say, 75 years─ and allow the holder of the copyright to charge a very small royalty for use of the results. Such an action would pose many practical difficulties but also would funnel money back into research while simultaneously allowing the uses of research to be tracked. Recognizing that the availability of venture capital for particular fields goes through cycles, workshop participants asked whether one role of government might be to invest against the cycles. Support for broad thematic areas that are currently out of favor could maintain activity and capacity until private sources of support recover. Foundations can be more innovative and nimble than government and should not assume that their efforts will be dwarfed or mirrored by those of the federal agencies, several speakers observed. For example, the Gordon and Betty Moore Foundation has supported the Public Library of Science and the Marine 9 President’s Council of Advisors on Science and Technology. 2012. Report to the President on Propelling Innovation in Drug Discovery, Development, and Evaluation. Washington, DC: Executive Office of the President.

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36 WORKSHOPS ON TRENDS IN THE INNOVATION ECOSYSTEM Microbiology Initiative. Similarly, the Howard Hughes Medical Institute, which supports investigators rather than projects, uses a funding model that is different from and complementary to those of federal agencies. Relatively few foundations currently fund science and technology─ even among those established on the basis of technological advances. Yet foundations could have a disproportionate impact on science by funding relatively risky projects that federal agencies do not fund or by supporting especially promising researchers. The role of foundations in science and technology could be the subject of an interesting workshop by COSEPUP or another organization, some participants suggested. Hennessy, who recently joined the board of the Moore Foundation, said that he is dismayed about the trajectory of funding for science and the growing risk aversion and unwillingness of government to play a role in precipitating the development of new areas. Government agencies used to be willing to support the initial development of entirely new areas of technology, as when the Defense Advanced Research Projects Agency catalyzed the very-large-scale integration revolution in semiconductors and the creation of the Internet. But agencies have become more risk averse over time. Foundations may be part of the solution to this problem, especially as more foundations are established that have a commitment to science. They could share best practices and form alliances to support faculty, especially young faculty, who are trying to take risks and are unable to get support. For example, the Alfred P. Sloan Foundation and the Moore Foundation are collaborating on a new program around the concept of big data, and others such as the Simons Foundation and the Kavli Foundation are supporting science. “Over time you might have a constellation of 10 foundations doing this. It could make a big difference in terms of funding early startup work.” With regard to a suggestion that endowment funding be used to smooth the ups and downs of federal research funding, Hennessy said that endowments would have to grow substantially to do so. He also said that to some extent the university has done that. Over the last 30 years at Stanford, the largest supporter of graduate students has shifted from the federal government to the university endowment, and the endowment has helped drop the average net cost of attendance at Stanford. Similarly, when he arrived at Stanford, the expectation was that all junior engineering faculty would pay their entire summer salaries and 25 percent of their academic salaries through government research, and that senior faculty would pay 50 percent of their academic salaries. Since then, the engineering school has raised the money to support 40 faculty chairs, and the academic year offset has fallen to 10 percent. However, as federal funding drops, universities will not be able to fill the entire research funding gap with their own resources, said Hennessy. “There is no way the university is going to step up and plug the hole, particularly with all the acute pressure around tuition and how fast tuition can go up.” The loss of the charitable deduction in the tax code would hurt universities, especially with medium-sized and small donors, which provide a

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PUBLIC POLICIES TO SUPPORT INNOVATION 37 considerable portion of the annual giving, Hennessy said. Stanford, for example, supports about 1,200 undergraduate scholarships and about 200 graduate fellowships with annual gifts given to support those students. “For the vast majority of universities, big gifts are not where the action is. It’s the smaller and medium-sized gifts.” FEDERAL INPUT IN RESEARCH PARKS In consultation with the Innovation Coalition, a collaborative group of national innovation- based associations, including some of the participants of the second workshop representing research parks, Brian Darmody of the University of Maryland prepared a list of federal actions designed specifically to make research parks more effective:  Improve technology transfer by allowing federally supported researchers to devote five percent of grants to commercialization activities such as filing patents.  Relax Internal Revenue Service rules on “private use” of research facilities built with tax-exempt bonds. Universities are wary of working too closely with industry because they fear they could lose their tax exempt status.  Facilitate technology transfer from national labs by creating intermediary organizations to work with industry, and establish entrepreneur-in-residence programs at federal technology transfer offices.  Expand the research and development tax credit to provide additional benefit to companies collaborating with universities.  Reform export controls to focus on a smaller number of real dangers and to encourage university-industry collaboration.  Embed entrepreneurship in STEM education. INTELLECTUAL PROPERTY PROTECTION Intellectual property considerations vary widely across technological fields and even within fields. Some companies want patents to trade them or to cross-license with other companies. Other may seek to amass a large portfolio of patents in a field with very short product lifecycles in an effort to control the evolution of that field. In some fields, such as pharmaceuticals, it takes a long time for innovations to reach the market, and patents are crucial to protect an idea until the innovator can profit from that idea. In other industries, patents are rare and are easy to work around when they do exist. Sometimes the impact of patents within an industry can change over time. Before the establishment of Chiron, the diagnostics industry concentrated

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38 WORKSHOPS ON TRENDS IN THE INNOVATION ECOSYSTEM on building large instruments that could handle multiple tests, and the industry was focused on the efficiency of testing with little proprietary advantage, said Rutter. Several key patents granted to Chiron enabled the development of a vibrant diagnostics industry. Chiron’s patents made it possible to invest in not only technology but discovery. The length of time that a patent can apply is a contentious public policy issue, Rutter acknowledged, “but some degree of protection in this area has been important for the development of the whole industry.” The stage of development of a technology also can be important. SPICE and RISC are both examples of technologies that developed from precompetitive research conducted before commercial products were imminent. Once the ideas had been developed, multiple people and companies could develop proprietary products based on those ideas. In addition, these companies could take advantage of the people who had helped develop those technologies in universities. Because some technologies take longer to develop than others, Cui wondered whether more of the groundwork for developing a commercial technology could be done in universities before moving that technology into a commercial setting. Research costs are much less in a university than outside a university, where equipment, people, and space must be paid for. Within a university, innovators have excellent infrastructure, colleagues with whom to discuss problems, and excellent graduate students. The research done in universities needs to be open so that graduate students can publish their work and advance their careers. But research done in a university laboratory and in a commercial laboratory can be synergistic, with each supporting the other. Hennessy agreed that such an approach is possible but raised several concerns. Graduate students may be a cheaper form of labor, but they are at the university for an education, and that education should not be sacrificed to develop a commercial product. The costs may be greater outside a university, but university research has costs as well. Conflict of interest issues can usually be resolved, said Hennessy, but they can become severe when research inside a university is tightly linked with commercial concerns or what an outside company is doing. Conflict of interest is less of a problem in the information technology sector, where the transfer of technology outside of the university is typically quick and sharp. But it can happen in the life sciences sector, and universities have had some “ugly incidents” involving conflicts. THE GLOBALIZATION OF INDUSTRY Living in a global economy means that Americans should not be overly concerned about whether an American-owned company or a foreign-owned company commercializes a product in the United States, said Borrus. Foxconn, a Taiwanese company, is building a large plant in Texas to build products for Apple, with financial incentives from the state, just as many large foreign pharmaceutical and automobile companies have invested in U.S. production

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PUBLIC POLICIES TO SUPPORT INNOVATION 39 facilities. The United States benefits both from these investments and from the spillover effects of having production occur in this country. Also, in this light, trade wars are counterproductive, because part of a company may be in the country with whom a trade war is being fought. “It shouldn’t matter to us who is doing the investing so long as the investment is happening here,” said Borrus. The United States needs “to create an environment that encourages more of that investment, . . . because at the end of the day, that’s where the economic benefits and long-term growth prospects for the U.S. economy lie.” This last point generated considerable discussion among the attendees and the COSEPUP members. Penhoet pointed out that economic gain is no longer synonymous with ownership. Others observed that companies are owned by whoever buys their stocks. The German company Siemens has more U.S. employees than German employees. Foreign companies may have their headquarters in the United States or elsewhere, but the distinction does not necessarily matter. However, countries do have an interest in where companies decide to invest their profits. Thus, the United States has an interest in having companies in this country that are successful and profitable regardless of ownership. Ruth David, a member of COSEPUP at the time of the workshops and President and Chief Executive Officer of ANSER (Analytic Services, Inc.), brought up the idea that some foreign-owned companies generate concern in the United States over corporate espionage (though some U.S. companies are viewed in much the same way in other countries). On the one hand, foreign companies in the United States are seen as interdependent economically. On the other hand, they are seen as a threat to national security. Policy makers need to be educated about how to reconcile these perspectives and grasp the interdependent complexity of the global economic system, so that when they move to change one part of the system they have a sense of how that change will affect other parts of the system. Even startup companies now tend to be multinational, especially if they are involved in the manufacturing of hardware. Multiple participants noted that many U.S. startup companies also move quickly to establish foreign operations to improve access to markets, information, and talent. Entrepreneurs therefore need to know how to manage a global supply chain and be comfortable in an international setting. Global investment decisions are changing because of the growing availability of fossil fuel energy in the United States, several speakers and COSEPUP members pointed out. The United States will gain a large competitive advantage over many other developed countries because of its abundant supplies of relatively inexpensive natural gas and other fossil fuels. Even basic manufacturing of products like cement or aluminum may shift back to the United States because of cheap energy. But this manufacturing will look much different than earlier generations of basic manufacturing. It will have a

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40 WORKSHOPS ON TRENDS IN THE INNOVATION ECOSYSTEM much greater component of information technology and robotics, requiring that the workers in these companies have higher and different skills than in the past. EDUCATION AND TRAINING Finally, education and training were frequent topics of discussion at the workshop. Penhoet, for example, described a PCAST report entitled Engage to Excel: Producing One Million Additional College Graduates with Degrees in Science, Technology, Engineering, and Mathematics, which focused specifically on the first two years of college for students interested in STEM fields.10 As that report pointed out, fewer than 40 percent of students who enter college intending to major in a STEM field complete a STEM degree, and the greatest loss of those students occurs during the first two years of college. Yet the United States has many jobs in technical fields for which U.S. workers do not have the needed skills. The report heavily engaged representatives of community colleges, which do much of the training for technical jobs in the United States and are extensively involved with the first two years of STEM education in college. It urged colleges and universities to think in a very different way about how they teach science courses to students so that students are more engaged in what they are learning and less likely to leave STEM fields for other majors. The report, as well as an earlier PCAST report on K-12 education, have received strong support from the Obama administration, which has adopted and promoted many of the recommendations from the report. Given the difficulty of attracting sufficient U.S. students to STEM fields, the United States will depend on the inflow of foreign graduate students in these fields for the foreseeable future, said Hennessy. “We should try to figure out how to make it work.” He agrees with many others that students who earn a PhD in a STEM field from a U.S. university should automatically qualify for permanent resident status in the United States. People are mobile globally, and many scientists, engineers, and innovators still want to come to the United States or stay in the country once they earn degrees from U.S. colleges and universities. More rational immigration and naturalization policies would benefit the United States, Hennessy said, specifically of highly educated individuals, whether they have degrees from U.S. institutions or from universities in other countries. 10 President’s Council of Advisors on Science and Technology. Engage to Excel: Producing One Million Additional College Graduates with Degrees in Science, Technology, Engineering, and Mathematics. 2010. Washington, DC: Executive Office of the President.

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Appendixes 41

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