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Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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Chapter 4

Recommendations

Many of the specific policy measures suggested below have deep historical roots, building on the steps taken by previous administrations and the Congress to nurture and grow the U.S. economy.1 Taken together, and with adequate and sustained resources, these measures can significantly enhance prospects for the United States to remain a leading center of innovation in the 21st century.2 Recognizing the fiscal constraints facing the country, our recommendations are limited to policies fostering investments that will, in our Committee’s view, repay the expenditures needed many times over.

FOUR CORE GOALS

1. Monitor and learn from what the rest of the world is doing: The United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations. It is generally recognized that there is much to be learned from the rest of the world in science. This

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1 For a review of the national response to the competitive challenge from Japan in the 1970s and 1980s and a call to develop responses to today’s complex challenges, see James Turner, “The Next Innovation Revolution, Laying the Groundwork for the United States,” Innovations, Spring, 2006. Turner notes that the 1979 President’s Industrial Innovation Initiatives, the result of an 18-month Domestic Policy Review, “reflected a strong belief in the free enterprise system and an equally strong belief in the federal government’s responsibility to nurture an environment in which industry, universities, and government can function smoothly together.” Key bi-partisan legislation of that era includes the Bayh-Dole Act, the expansion of the SBIR program, and the clarification of anti-trust policies to encourage collaborative pre-competitive research by the semiconductor industry. Turner notes the importance on building on previous successes but also the need to articulate a new vision around which policymakers can coalesce.

2 The Committee does not specify which agency should act on the particular recommendations made in this chapter; one or several agencies could take appropriate actions, depending on the sector, the policies, and the funding available.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     is equally true with regard to innovation policy. See Recommendation 1.

2. Reinforce support for U.S. innovation leadership: It is very important that the United States reinforce the policies, programs, and institutions that provide the foundations for our own knowledge-based growth and high value employment. These include measures to strengthen our research universities and national laboratories, renew our infrastructure, and revive our manufacturing base. See Recommendations 2, 3, and 4.

3. Capture greater value from its public investments in research: The United States should improve its ability to capture greater value from its public investments in research. This includes reinforcing cooperative efforts between the private and public sectors that can be grouped under the rubric of public-private partnerships, as well as expanding support for manufacturing. See Recommendations 5 and 6.

4. Cooperate more actively with other nations: In an era of rapid growth in new knowledge that is being generated around the world, the United States should cooperate more actively with other nations to advance innovations that address shared global challenges in energy, health, the environment, and security. See Recommendation 7.

This chapter presents the Committee recommendations. There are seven major recommendations, which are further elaborated in subrecommendations. The organization of these recommendations and subrecommendations is presented in an outline, below, as a guide to the reader.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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OUTLINE OF RECOMMENDATIONS

1. Monitor and Evaluate Investments, Measures, and Innovation Policies of other Nations

a. Benchmark best practices

b. Engage and cooperate abroad

c. Respond and adapt at home

2. Reinforce the traditional pillars of U.S. economic strength and innovation capacity.

a. Raise federal support for R&D

b. Sustain support for university research

i. Stabilize university funding

ii. Use dedicated taxes and sources of revenue

iii. Incentivize private donations

iv. Increase funding of tuition

v. Reduce and streamline regulations

c. Support innovative small businesses

i. Reauthorize and expand proven innovation programs

ii. Experiment with and evaluate new initiatives

iii. Provide policy support for innovation capital

d. Strengthen the skilled workforce

i. Support community colleges

ii. Encourage worker training

iii. Increase funding and opportunities for dislocated workers

iv. Create incentives to induce retirees and potential retirees to remain active in contributing to the American economy

v. Encourage immigration of scientific and entrepreneurial talent

3. Provide a Competitive Tax Framework

a. Benchmark tax and regulatory policy

b. Examine the tax code

c. Pursue prudent deficit reduction

d. Make the Research and Experimentation tax credit permanent

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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4. Build a 21st Century Innovation Infrastructure

a. Build world-class infrastructure

b. Expand broadband penetration

c. Secure cross-border data flows

d. Encourage energy conservation

i. Smart grid

ii. Innovative financing

5. Adopt specific policy measures to capture greater economic value from America’s public investments in research

a. Strengthen university links to the market

i. Provide matching seed funds

ii. Develop university incubators

iii. Expand SBIR support for commercialization of university research

iv. Develop additional Centers of Excellence

v. Use of innovation prizes

vi. Encourage private foundations to take equity positions in startups by amending SEC rules

b. Strengthen National Laboratories’ links to the market

i. Expand use of research parks

ii. Expand SBIR to the National Laboratories

c. Develop public private partnerships

i. New initiatives in early-stage finance

ii. Support for industry consortia

d. Expand support for manufacturing

i. Provide incentives for manufacturing

ii. Expand manufacturing support programs

e. Sustain federal programs to jump-start new industries

f. Create new institutions for applied research

g. Open foreign markets to business services

h. Expand support for U.S. manufactured exports

i. Foster cluster development

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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i. Assess foreign clusters

ii. Support the development of science and research parks

j. Leverage government procurement to establish early markets

i. Leverage defense procurement

ii. Encourage procurement from small businesses

6. Recognize that trade and innovation are closely linked

a. Provide a rules-based playing field

b. Develop an enforceable international code of conduct

7. Capitalize on the globalization of research and innovation

a. Strengthen international cooperation

b. Expand exchanges of scholars and students

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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RECOMMENDATIONS

1. Monitor and Evaluate Investments, Measures, and Innovation Policies of other Nations: In a world where other nations are investing very substantial resources to create, attract and retain the industries of today and tomorrow, the United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations.3

a. Benchmark Best Practices: The federal government should support a systematic, ongoing process to monitor and evaluate investments, measures, and policies of other nations aimed at improving their capacity to innovate and compete in the industries of tomorrow. This should include ensuring that U.S. science counselors and research agencies support the collection and analysis of relevant information.4 Foreign innovation programs should be benchmarked against those of the United States. This will require a very substantial investment of dedicated resources across a variety of public and private institutions.5

b. Engage and Cooperate Abroad: The governmental institutions of the United States should increase their cooperation and engagement with policymakers, research institutions, academics, and investors from around the world to both gain from their investments and better understand the rationale and objectives of programs to promote innovation, product commercialization, and development of emerging industries and learn best practices that can be applied to programs in the U.S.

c. Respond and Adapt at Home: Knowledge gained from this benchmarking process should be used to inform U.S. policymakers and legislators, and help to shape U.S. innovation programs, R&D investments, and incentives and other policy responses, including, importantly, incentives to encourage investments by industry.

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3 See related Finding 7 in Chapter 3.

4 There are initiatives to capture a broader view of foreign government innovation policies and the opportunities they present for cooperation. For example, the Office of Naval Research, in cooperation with its Global component, have launched a series of outreach activities designed to explore best practices in innovation policy and identify cooperative projects. The National Academies Board on Science, Technology, and Economic Policy is launching an Innovation Forum, with the support of ONR, to provide an on-going institutional mechanism to benchmark national innovation policies and to provide a mechanism for regular policy discussions and learning.

5 This recommendation complements Recommendation 10-1 of the National Academy report S&T Strategies of Six Countries. National Academy of Sciences, S&T Strategies of Six Countries, op. cit., p. 95. Recommendation 10-1 calls more generally for “monitoring the transformation from a national to a global S&T innovation environment.”

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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2. In a dramatically more competitive world, the United States needs to reinforce the traditional pillars of its economic strength and innovation capacity.6

a. Raise Federal Support for R&D: Federal support for R&D should be raised in line with the goal set by President Obama in a 2009 speech before members of the National Academy of Sciences, to increase the combined public and private investment in R&D in the United States to more than 3 percent of the U.S. Gross Domestic Product.7

b. Sustain Support for University Research: Basic research carried out at U.S. research universities and national laboratories is valuable in its own right; it is also the source of the knowledge and insights that drive U.S. innovation and growth. Universities should be provided with the necessary resources to maintain and grow their facilities, attract and retain outstanding faculty and students from around the world, and provide the educational experience necessary to maintain and enhance the innovative capacity that assures America’s position in the world.

i. Stabilize University Funding: The federal and state governments should reverse the cyclicality and negative trends in university financing. Steady, sustainable, predictable increases over the long term are needed for universities to plan their own investments in research, and would make federal and state research expenditures more effective and efficient.8

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6 See related Finding 2 in Chapter 3.

7 For a transcript of address by President Obama at the annual meeting of the National Academy of Sciences on April 28, 2009, see http://www.issues.org/25.4/obama.html. According to the Congressional Research Service, based on 2008 figures, reaching President Obama’s 3% goal would require an 8.4% real increase in national R&D funding. See CRS, “Federal R&D Funding FY 2012” June 21, 2011. Returns on federal R&D are considered to be very substantial. See Robert Solow, “Technical Change and the Aggregate Production Function,” in The Review of Economics and Statistics, August 1957, 39(3). For a review of the econometric evidence between R&D and productivity, see Zvi Grilliches, “R&D and Productivity,” NBER Monograph, 1998. More recently, the Chairman of the Federal Reserve Board has drawn a close link between government support for R&D and economic growth. See Ben S. Bernanke, “Promoting Research and Development: The Government’s Role” Speech presented at the Conference on New Building Blocks for Jobs and Economic Growth, Washington, DC: May 16, 2011, page 38. For a review of how the impact of federal investments in R&D can be measured, see, National Research Council, Measuring the Impacts of Federal Investments in Research, S. Olson and S. Merrill, rapporteurs, Washington, DC: The National Academies Press, 2011.

8 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for “stable, strong, and effective Federal funding for university-performed R&D so that the nation will have a stream of new knowledge and educated people to power our future, helping us meet national goals and ensure prosperity and security.”

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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ii. Use Dedicated Taxes and Sources of Revenue:9 Dedicated state funds and taxes are potential sources of reliable revenue for research universities.10 Shifting more university research funding from the general state budget to dedicated revenue sources will provide a more reliable funding stream for vital investments in the state’s economic future. 11

iii. Incentivize Private Donations:12 Consider expanding federal tax credits for companies that fund university research in order to stimulate additional funding for universities.13 In addition,

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9 See discussion in Chapter 2 section “U.S. Universities Face Financial Challenges.”

10 For a review of the use of dedicated taxes as a means of public finance, see Alan J. Auerbach, “Public Finance in Practice and Theory,” paper prepared as the Richard Musgrave Lecture, CESifo, Munich, May 25, 2009. A growing number of states earmark all or part of taxes on hotels, cigarettes, and alcohol for specific programs, such as road maintenance, schools, and construction of convention centers and sports stadiums. The attraction is that such sources provide recurring revenue streams for important programs, even during times of economic downturn, and are not subject to government budgetary restraints. Other sources of steady, non-tax state income include proceeds from lotteries, casinos, sales of public land, and oil and mineral rights. Notably, the State of Texas uses a Permanent University Fund (PUF), established in its 1876 Constitution, to fund higher education. Currently, PUF land assets deliver proceeds through oil, gas, sulfur, and water royalties, rentals on mineral leases, and gains on fiduciary investments.

11 A handful of states use non-tax revenue to fund activities relating to innovation. A New Mexico, for example, has devoted revenues from oil, gas, and land rights in a private-equity fund that has invested nearly $300 million into local companies in fields ranging from solar power to molecular diagnostics. (Details of New Mexico’s private-equity investments can be found on the State Investment Council Web site, http://www.sic.state.nm.us/investments.htm. Descriptions of specific investments are provided in Sun Mountain Capital, “New Mexico Private Equity Investment Program: Overview and 2010 Review,” June 2011.) Arkansas used a portion of increased cigarette taxes to help fund a campus of the University of Arkansas for Medical Sciences. See John Lyon, “Beebe Signs Tobacco Tax Hike Into Law,” Arkansas News, Feb. 17, 2009. Nebraska invested $106 million received from a 2002 court settlement with tobacco companies to fund medical research at state universities, a move that has generated more than $800 million investment and created nearly 1,800 jobs. See Steve Jordon, “Tobacco Money Gives Nebraska an Economic, Research Lifeline,” Omaha World-Herald, Feb. 3, 2011. Currently, only 20 states earmark some dollars for higher education, and the sums are quite small, according to the American Association of State Colleges and Universities. See Alene Russell, “Dedicated Funding for Higher Education: Alternatives for Tough Economic Times,” American Association of State Colleges and Universities, Higher Education Policy Brief, December 2008.

12 See discussion in Chapter 2 section “U.S. Universities Face Financial Challenges.”

13 Reversing a three-decades-long trend of increasingly strong ties between industry and universities, the absolute value of industrial R&D dollars to academic institutions—funds provided directly to academic institutions for the conduct of research—began to decline beginning in 2002 after reaching a high of $2.2 billion in 2001. Also, industrial R&D support to academia has historically been concentrated in relatively few institutions. See National Science Foundation, “Where has the Money Gone? Declining Industrial Support of Academic R&D,” InfoBrief, NSF 06328 September 2006. Leading university and industry leaders have pointed out that U.S. companies increasingly choose to work with foreign rather than U.S. universities, encouraged by the more favorable IP rights that foreign universities offer and the strong incentives for joint industry-

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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assess the potential for state matches for certain private endowment donations as a way to provide incentives for private donors or foundations to increase their support for research universities.14

iv. Increase Funding of Tuition. Students are borrowing more money to pay for college than ever before, with student debt in this country exceeding the level of credit card debt. 15 Tuitions keep rising.16 No other major economy with which the United States competes places as heavy a financial burden on its students.17 Although co-investment by students plays an important role in motivating students to capitalize on their education, the necessary growth of enrollment and matriculation as a percent of the U.S. population will be choked off in the absence of increased federal, state and private support for tuitions.

v. Reduce and Streamline Regulations: The expanding costs of compliance with federal regulations are making it increasingly expensive for universities to conduct research.18

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university research that foreign governments provide. GUIRR, “Re-Engineering the Partnership: Summit of the University-Industry Congress,” Meeting of 25 April 2006, Washington, DC.

14 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for the creation of a “R&D tax credit that incentivizes business to develop partnerships with universities (and others as warranted) for research that results in new U.S.-located economic activities.” For an analysis of the impact of financial shocks to a university’s resource base, see Jeffrey R. Brown, et al., “Why I Lost My Secretary: The Effect of Endowment Shocks on University Operations.”NBER, May 29, 2010.

15 Institute for College Access and Success, “Student Debt and the Class of 2010” November 2011. The report notes that two-thirds of college seniors graduated with loans in 2010, and they carried an average of $25,250 in debt.

16 Published tuition has barely increased at two-year colleges (by only $68 over the course of nine years), but has increased substantially at four-year colleges (by $3,004 over the same nine year period). From the 1999-2000 academic year to the 2008-09 academic year, Net Student Tuition actually fell by $849 at two-year colleges, representing a fairly dramatic decrease in net tuition at the two-year level, given that the national average for net tuition was never higher than $900 any single year. In contrast, Net Student Tuition has increased by $1,067 at four-year colleges over the same time span. While this absolute growth in net tuition at four-year institutions may not seem particularly high, keep in mind that per capita income in the U.S. declined by $1,325 from 2000 to 2009. See Andrew Gillen, et al., “Net Tuition and Net Price Trends in the United States (2000-2009), Washington, DC: Center for College Affordability, November 2011.

17 For a comparative review of “who participates in education, how much is spent on it and how education systems operate,” see OECD: Education at a Glance 2011: OECD Indicators, Paris: OECD, 2012.

18 Tobin L. Smith, Josh Trapani, Antony Decrappeo, and David Kennedy, “Reforming Regulations of Research Universities,” Issues in Science and Technology, Summer 2011. See also the January 21, 2011 filing by the AAU, APLU, and COGR on “Regulatory and Financial Reform of Federal Research Policy.” The document notes that “Rationalizing the Federal regulatory infrastructure is essential to the health of the university-government research partnership and to the efficient and

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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Federal and state policymakers and regulators should review the costs and benefits of federal and state regulations, eliminating those that are redundant, ineffective, inappropriately applied to the higher education sector, or impose costs that outweigh the benefits to society.19

c. Support Innovative Small Businesses: The availability of early stage funding for small entrepreneurial firms and start-ups is crucial for the vitality of the innovation process. There are three elements to address in this regard: public innovation programs, the policy framework and incentives for angel funding, and other measures and incentives to encourage entrepreneurship.

i. Reauthorize and Expand Proven Innovation Programs: The U.S. should expand successful innovation programs, as it recently has with the SBIR program, restore funding for NIST’s revamped Technology Innovation Program with its current focus on manufacturing, 20 and consider new programs such as the recently announced Start-up America.21 These early-stage funding programs support the development of new products and help promising small technology companies bring new ideas and products to the market, in part by creating

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productive use of federal research funding.” Access at www.cogr.edu/viewDoc.cfm?DocID=151794.

19 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for “a balanced regulatory environment in order to increase the costeffectiveness of our research universities.”

20 See Chapter 2 of this volume for a discussion of the Advanced Technology Program (ATP) and its successor, the Technology Innovation Program. A National Academies assessment of ATP found it to be “an effective federal partnership program.” National Research Council, The Advanced Technology Program, Assessing Outcomes, C. Wessner, ed., Washington, DC: The National Academies Press, 2001. See also the discussion of SBIR in Chapter 2. A National Academies assessment of SBIR found it to be “sound in principle and effective in practice.” National Research Council, An Assessment of the SBIR Program, Washington, DC: The National Academies Press, 2008.

21 Start Up America, a White House led initiative, is focused on increasing innovation and commercialization and accelerating support for U.S. entrepreneurs though a variety of policies and programs. These efforts are being deployed through federal agencies like the Departments of Energy, Labor, the Small Business Administration and Commerce including the Economic Development Administration. One example of this is the Jobs and Innovation Accelerator Challenge, which according to the EDA is “a multi-agency competition launched in May to support the advancement of 20 high-growth, regional industry clusters. Investments from three federal agencies and technical assistance from 13 additional agencies will promote development in areas such as advanced manufacturing, information technology, aerospace and clean technology, in rural and urban regions in 21 states.” See http://www.eda.gov/InvestmentsGrants/jobsandinnovationchallenge.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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new information that investors need.22 In addition, programs that fund collaborations between small businesses, and universities, such as ARPA-E, DARPA, and Energy Efficiency and Renewable Energy (EERE), should be expanded where appropriate and provide sustained support.23 When new ideas and promising technologies are not funded here in the United States, investors overseas may well fill the gap, thus capitalizing on U.S. investments in R&D.24

ii. Experiment with and Evaluate New Initiatives: Recent public-private initiatives such as the Administration’s Start-Up America program should be given clear metrics and carefully evaluated in conjunction with programs at state and regional levels.

iii. Provide Policy Support for Innovation Capital: Market inefficiencies and a long term shift away from seed stage investments have created a substantial gap between the demand by entrepreneurs for seed and early-stage funding and the supply in the risk capital market. Bridging this gap is essential for sustaining the flow of innovation from U.S. R&D investments and the growth and employment they generate.25

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22 See discussion of SBIR in Chapter 1, section on “Public-Private Partnerships” and Chapter 2, section on “Providing Early-Stage Finance.” See the discussion of ATP/TIP in Chapter 2, section on “Providing Early-Stage Finance.” See the discussion of StartUp in Chapter 3, Section 4f. Finally see discussion of EERE in Chapter 1, section on “National Laboratories.”

23 The National Academies 2006 report, Rising Above the Gathering Storm, (op cit.) recommended the establishment of an Advanced Research Projects Agency—Energy (ARPA-E) within the Department of Energy (DOE). The 2007 America COMPETES Act, which implemented many of the recommendations in the National Academies’ report authorized. ARPA-E, but without an initial budget. The new program received $400 million of funding in the 2009 American Recovery and Reinvestment Act. The America COMPETES Reauthorization Act of 2010 made additional changes to ARPA-E’s structure. ARPA-E is modeled after the successful Defense Advanced Research Projects Agency (DARPA). For a review of the history and the distinguishing features of DARPA, see William B. Bonvillian, “The Connected Science Model for Innovation: The DARPA Model,” in National Research Council, 21st Century Innovation Systems for Japan and the United States, Lessons from a Decade of Change, Report of a Symposium, Sadao Nagaoka et al., eds., Washington, DC: The National Academies Press, 2009. For a review of the Energy Efficiency and Renewable Energy program, see National Research Council, Energy Research at DOE: Was It Worth It? Energy Efficiency and Fossil Energy Research 1978 to 2000, Washington, DC: The National Academies Press, 2001.

24 For example, Rusnano, the Russian state technology firm, is seeking to make large investments in U.S. life sciences and technology companies whose products are to be manufactured in Russia. See Megan Davis, “Rusnano, US fund to invest $760 mln in pharma venture,” Reuters, March 6, 2012.

25 A study by Gittell, Sohl, and Tebaldi finds that technology-based entrepreneurship, particularly by small businesses, is a more powerful job creator than entrepreneurship in general. See Gittell, Ross; Sohl, Jeffrey; and Tebaldi, Edinaldo (2010) “Is there a Sweet Spot for U.S. Metropolitan Areas? Exploring the Growth in Employment and Wages in U.S. Entrepreneurship and Technology Centers in Metropolitan Areas over the last Business Cycle, 1991 To 2007, Frontiers of Entrepreneurship Research: Vol. 30: Issue 15, Article 13.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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•    Increase the understanding of the role and evolution of Innovation Capital in the United States: Capital is essential for innovation, but the market for innovation capital is often poorly understood by policy makers, with myths prevalent about the perfect operation of markets.26 Potential policy support for innovation capital needs to begin with a better understanding of the current trends, challenges and opportunities inherent in early stage financing of innovation. 27 A careful study of the role that public policies can play to support the formation of innovation capital is needed.

•    Develop complementary funds that Co-invest with angel investors: Although angel investors play an important role in funding innovation at the seed and early stages of a technology’s development, the size and reach of these investments remains limited.28 Recent initiatives that provide capital as part of co-investments with angel investors on a matching basis, often with the angel leading the deal, can increase the amount of innovation funding available and should be assessed and expanded where models prove successful.29 These complementary

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26 In economics, a perfect market is defined by several simplifying conditions, including perfect market information. The real world is characterized by pervasive information asymmetries. In 2001, the Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz “for their analyses of markets with asymmetric information.”

27 For example, the 5 to 7 year timeframes of venture capital funding, set by IT sector precedents, do not fit the developmental timeframes of many other sectors, including biomedicine and energy. To address this challenge, some analysts (e.g., Andrew Lo of MIT) have suggested alternative private sector approaches, such as pooling small investments from the public into a multi-portfolio risk pool. Relatedly, the Senate in March 2012 passed a “crowd-funding” bill that allows entrepreneurs to raise up to $1 million per year through approved crowd-funding portals. This legislation was signed into law in April 2012 by the President and became the JOBS Act.

28 Angel investors are affluent individuals who provide capital for a business start-up, usually in exchange for convertible debt or ownership equity. According to the Center for Venture Research, total investments in 2010 were $20.1 billion, with a total of 61,900 entrepreneurial ventures receiving angel funding in 2010. The number of active investors in 2010 was 265,400 individuals. Access at http://www.unh.edu/news/docs/2010angelanalysis.pdf.

29 For a review of the potential of the Archimedes fund, see Jeff E. Sohl, “The Organization of the Informal Venture Capital Market,” in Handbook of Research on Venture Capital, Hans Landström, editor. Northampton MA: Edward Elgar, 2007. In a recent initiative in the Netherlands and Belgium, angels receive a match of up to 50 per cent of the size of the investment, thus limiting the risk exposure of the angel and reducing the price of the deal, both of which can be expected to encourage angels to increase their investment activity. Also being experimented in Europe are hybrid funds that supplement private funds with public money. The funds are targeted to early stage firms with high growth potential in emerging technological sectors. For a review of seed and earlystage financing for high-growth companies in OECD and non-OECD countries with a primary focus

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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      funds have an advantage over direct public investments of capital into start-up ventures. State based seed funds in the U.S. and various country wide direct investment funds in Europe can generate over-valuations of investments, and may result in a lack of value-added in the post investment stage. Moreover, the additional terms and conditions required for use of public funds can in fact drive away potential angel investors.30

Educate angels and entrepreneurs: Programs that educate angel investors, sometimes known as “Angel Academies,” can help potential angels understand the complexities of angel investing and entrepreneurs appreciate the requirements necessary to become investor ready, leading to an increase in both available capital and quality deal flow. These academies can be based on university-private sector partnerships that draw in the appropriate individuals and garner the resources necessary to develop and implement a research-based education program.31 Small amounts of competitively awarded funding from state and federal sources can have a disproportionately positive impact in generating these partnerships.

d. Strengthen the Skilled Workforce: Expanding the skilled workforce through education, training, and retention, through the development of new curricula and delivery methods, and through attracting skilled immigration is needed to promote and encourage innovation. Scientists and engineers are required to develop new ideas and design new processes. Skilled workers and qualified managers are needed to transform those ideas into marketable products and services.

i. Support community colleges. Through their flexibility and proximity to employers and the opportunities they offer, community colleges can and should play an important role in developing industry-relevant skills and training for dislocated

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on angel investment, see OECD, Financing High Growth Firms, The Role of Angel Investors, Paris: OECD, 2011, page 96.

30 Freear and Jeff E. Sohl “Angles on Angels and Venture Capital: Financing Entrepreneurial Ventures” in Financing Economic Development in the 21st Century, 2nd Edition, Z. Kotval and S. White, eds., M.E. Sharpe, Inc: NY (forthcoming).

31 Amparo San José, Juan Roure, and Rudy Aernoudt, “Business Angel Academies: Unleashing the Potential for Business Angel Investment,” Venture Capital, Volume 7, Issue 2, 2005.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     workers.32 Initiatives to encourage community colleges train workers in new skills and provide technical credentials should be encouraged and reinforced.33

ii. Encourage worker training: U.S. workers should be encouraged to engage in life-long learning.34 Historically, the United States has devoted relatively few resources to worker training compared to other OECD countries, and this contribution is declining.35 The Federal government should consider providing tax incentives to encourage worker participation in training and skill enhancement programs.36 Incumbent U.S. engineers with bachelors’ degrees should also be encouraged through scholarships to pursue graduate degrees.

iii. Increase funding and opportunities for dislocated workers. The Trade Adjustment Assistance (TAA) should be made generic, creating training and therefore opportunities for

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32 Michael Greenstone and Adam Looney, “Building America’s Job Skills with Effective Workforce Programs: A Training Strategy to Raise Wages and Increase Work Opportunities,” Washington, DC: Brookings Institution, September 2011.

33 Skills for America’s Future is an industry led initiative that seeks to “dramatically improve industry partnerships with community colleges and build a nation-wide network to maximize workforce development strategies, job training programs, and job placements.” As a part of this effort, the Manufacturing Institute, the affiliated non-profit of the National Association of Manufacturers (NAM), has announced an effort “to help provide 500,000 community college students with industry-recognized credentials that will help them get secure jobs in the manufacturing sector.” White House Press Release, June 8, 2011, “President Obama and Skills for America’s Future Partners Announce Initiatives Critical to Improving Manufacturing Workforce.”

34 For a review of the need for lifelong learning in the globally competitive economy of the 21st Century, see National Academy of Engineering, Lifelong Learning Imperative in Engineering, Summary of a Workshop, D. Dutta, Rapporteur, Washington, DC: The National Academies Press, 2010. See also National Research Council, Building a Workforce for the Information Economy, Washington, DC: The National Academies Press, 2001, page 254.

35 Federal government spending on training and employment as a percent of GDP has fallen steadily since 1979, when it was approximately 0.0047 percent of GDP to 0.0006 percent of GDP in FY 2010, despite increased pressures on the U.S. labor market from international competition. Over the last decade the United States spent less on active labor-market programs, including training, career counseling and job search assistance, as a percent of GDP than almost all OECD countries. See Howard F. Rosen, “Designing a National Strategy for Responding to Economic Dislocation.” Testimony before the Subcommittee on Investigation and Oversight House Science and Technology Committee, June 24, 2008. For a review of German policies to foster lifelong learning, see Wilfried Kruse, “Lifelong Learning in Germany –Financing and Innovation: Skill Development, Education Networks, Support Structures,” Berlin: Federal Ministry of Education and Research (BMBF), 2003. Access at http://www.bmbf.de/pub/lifelong_learning_oecd_2003.pdf. For an empirical study of the positive impact of German worker training programs on productivity and employment, see Michael Lechner, Ruth Miquel, and Conny Wunsch, “Long-Run Effects of Public Sector Sponsored Training in West Germany,” Journal of the European Economic Association, Volume 9, Issue 4, 2011.

36 Brian Bosworth, “Lifelong Learning, New Strategies for the Education of Working Adults.” Center for American Progress, December 2007. Access at http://www.americanprogress.org/issues/2007/12/pdf/nes_lifelong_learning.pdf.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     workers displaced by shifts in technology and changes brought about by globalization. 37

iv. Create incentives to induce retirees and potential retirees to remain active in contributing to the American economy. Demographic shifts toward an aging population should be mined as an advantage rather than accepted as a weight on society.38 Citizens of retirement age represent a major investment of skills and knowledge which need to be tapped to train the less-skilled current and potential participants in the workforce. In a web-based global economy, content as well as transmission matters. Much of the needed content can come from this cohort. Entrepreneurship is not confined to the young.39 Indeed, there is growing evidence that entrepreneurial activity among those over fifty outstrips such efforts by those under twenty-five.40

v. Encourage Immigration of Scientific and Entrepreneurial Talent:

Visas for foreign graduates with advanced U.S. Degrees: The Congress should immediately establish a special immigration category to allow successful foreign students who have earned advanced science and technology degrees to remain in this country and work in

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37 See the discussion in Chapter 2, Section on “U.S. Support for Manufacturing.” See Harold F. Rosen, “Strengthening Trade Adjustment Assistance,” Policy Brief 08-02, Peterson Institute for International Economics, 2008. Access at http://www.iie.com/publications/pb/pb08-2.pdf. For a review of issues relating to training programs and global competitiveness focusing on the TAA program, see the transcript of the Hearing before the House Ways and Means Committee, “Promoting U.S. Worker Competitiveness in a Globalized Economy.” June 14, 2007. Serial No. 110-47, Washington, DC: USGPO, 2008. Access at http://www.gpo.gov/fdsys/pkg/CHRG110hhrg43113/pdf/CHRG-110hhrg43113.pdf.

38 The number of retirees today as compared with 1965-70 has nearly doubled, from 13 million to 24 million. This places a great burden on Social Security and Medicare funding, without adequately addressing the contribution to an innovative society and the GDP that this cohort can make. See John Shoven, Demography and the Economy, Chicago: University of Chicago Press, 2011.

39 Stanford University’s John Shoven argues that prevailing notions about old age no longer reflect reality. Emerging research is throwing light on a new stage of life between the prime working years and full retirement. See John B. Shoven, ed., Demography and the Economy. Chicago: University of Chicago Press, 2011.

40 According to recent research by the Kauffman Foundation, older Americans are working increasingly beyond their middle years. For 11 of the 15 years between 1996 and 2010, Americans between the ages of 55 to 64 had the highest rate of entrepreneurial activity of any age group. Twice as many founders of U.S. technology companies were over the age of 50 as were under the age of 25. See Robert W. Fairlie, “Kauffman Index of Entrepreneurial Activity, 1996-2010.” Kansas City, MO: Ewing Marion Kauffman Foundation, March, 2011.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     academia or elsewhere in their areas of expertise.41 Training of foreign students in this country to the masters or doctoral level involves significant public expenditure; asking such bright and ambitious individuals to leave the country can only hurt U.S. innovation, particularly in light of the significant contributions some make to the creation of new companies.42

International Agreements on Skilled Worker Mobility.43 International agreements ought to be entered into to facilitate the free movement of highly skilled individuals who can contribute to the U.S. economy.

Skilled Entrepreneur Visas: New rules promulgated by the U.S. Citizenship and Immigration Service to attract well-trained entrepreneurs with the funds and experience to found companies are an important positive step with significant potential to add employment.44 This administrative initiative should be reinforced through legislation that would provide visas, leading to permanent-resident status and ultimately citizenship, for foreign entrepreneurs who have secured financing to start businesses in the United States.45

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41 See the related Action C-4 called for in National Academy of Sciences et al. report, Rising Above the Gathering Storm, op. cit., page 173. The report recommends that “the federal government should continue to improve visa processing for international students and scholars to provide less complex procedures, and continue to make improvements on such issues as visa categories and duration, travel for scientific meetings, the technology alert list, reciprocity agreements, and changes in status.”

42 See discussion in Chapter 2, section on “Hunting for Global Talent.”

43 For a review of the characteristics, trends, and impacts of the global migration of skilled workers, see OECD, International Mobility of the Highly Skilled, Paris: OECD, 2002. Other advanced nations compete for skilled workers. For a Canadian perspective, see Industry Canada, “International Mobility of Highly Skilled Workers: A Synthesis of Key Findings and Policy Implications.” Ottawa, April 2008.

44 Recently, Secretary of Homeland Security Janet Napolitano and U.S. Citizenship and Immigration Services Director Alejandro Mayorkas announced a series of policy and operational initiatives to stimulate investment and firm and job creation by attracting foreign entrepreneurial talent, particularly in the high technology sectors. Wall Street Journal, “U.S. to Assist Immigrant Job Creators,” August 2, 2011. The impact of well-trained, highly motivated immigrants is not always fully appreciated. As Federal Reserve Chairman Bernanke recently observed, “Contrary to the notion that highly trained and talented immigrants displace native-born workers in the labor market, scientists and other highly trained professionals who come to the United States tend to enhance the productivity and employment opportunities of those already here.” See Ben S. Bernanke, op. cit., page 30.

45 Legislation for “Start-Up Visa”, endorsed by the Kauffman Foundation and supported by the Small Business Administration is pending in the U.S. Congress. The House Committee on the Judiciary, Subcommittee on Immigration Policy and Enforcement held a hearing on the “Investor Visa Program” on September 14, 2011.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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3. Provide a Competitive Tax Framework:46 The United States should assure that the tax framework supports new company creation and investment. In order to be competitive with those of its major trading partners, the U.S. should take measures to address policies that actually disadvantage U.S.-based industry.

a. Benchmark Tax and Regulatory Policy: Governments at the federal and state levels should engage in regular benchmarking of U.S. tax policies and regulatory costs compared with those of other nations and determine how these differences influence corporate decisions on where to build new industrial capacity and research centers.

b. Examine the Tax Code: The United States should assess the impact of U.S. based innovation and production of tax policies, and consider appropriate adjustments. 47 Where the tax code and regulatory costs are found to be serious impediments to U.S. investment and innovation, the government should seek to narrow or close these competitive gaps, not by abandoning well-grounded regulations, but by fully considering their competitive impact and undertaking measures to reduce the impact and/or provide compensating incentives.48 Alternatives to current policies should be examined and, if deemed beneficial to the nation, pursued. These alternatives for consideration could include a reduction in the corporate tax rate (now one of the highest nominal rates in the OECD), the limitation of residence based taxation (which may in its present form provide incentives for new companies to incorporate outside the United States), and an increased reliance on consumption taxes (which do affect the location investments.)49

c. Pursue Prudent Deficit Reduction: Efforts should be made to ensure that changes in taxation as well as reductions in spending to shrink the federal deficit are allocated with a full understanding of the potential consequences for future growth. Strong and steady public investments are necessary to sustain traditional U.S.

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46 See related Finding 3 in Chapter 3.

47 See the related Action D-3, “Provide Incentives for U.S. Based Innovation” in National Academy of Sciences et al., Rising Above the Gathering Storm, op. cit. page 197. The report calls for the examination of alternatives to current economic policies to spur innovation. “These alternatives could include changes in overall corporate tax rates and special tax provisions, providing incentives for the purchase of high-technology research and manufacturing equipment, treatment of capital gains, and incentives for long-term investments in innovation.”

48 Peter R. Merrill, “Corporate Tax Policy for the 21st Century,” National Tax Journal, December 2010, 63 (4, Part 1), 623-634.

49 See the discussion in Chapter 2, sections on “Improving Framework Conditions,” and “Institutional Support for Applied Research.”

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     advantages in innovation and to accelerate economic growth that will ultimately help address the nation’s fiscal challenges.

d. Make Research and Experimentation Tax Credit Permanent: In 1981, the United States became the first nation to use its tax code to spur innovation. Specifically, the research and experimentation (R&E) tax credit is designed to stimulate company R&D over time by reducing after-tax costs.50 To capture the benefits that the R&E credit is seen to provide the U.S., many nations have since followed suit with their own, often more competitive tax credits for research and experimentation.51 According to the OECD (2009) the U.S. tax incentives for R&E now ranks 24th lowest out of 38 countries analyzed.52 Moreover, the U.S. R&E tax credit has been subject to some 14 renewals, making the fiscal environment for innovation related investments in the United States necessarily uncertain.53 To draw full benefit from this instrument, The U.S. should make the R&E tax credit permanent to provide greater certainty for long term investments and simplify its administration to make the application process easier (and less expensive).54 Also, as recommended by National Academies reports, consideration should be given to expanding the credit significantly.55

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50 Francisco Moris, “The U.S. Research and Experimentation Tax Credit in the 1990s,” NSF InfoBrief, NSF 05-316, July 2005.

51 See Gregory Tassey, “Tax incentives for innovation: time to restructure the R&E tax credit,” The Journal of Technology Transfer, Volume 32, Number 6 (2007), 605-615. Tassey notes that “in the 25 years since the R&E tax credit was enacted, a steadily increasing number of countries have implemented or expanded competing tax incentives, which in many cases are better structured and larger in size.”

52 Organisation for Economic Co-operation and Development, 2009. OECD Science, Technology and Industry: Scorecard 2009. OECD, Paris, France.

53 Eric Spiegel, Make Permanent the Research and Experimentation Tax Credit, The Atlantic, July 12, 2011.

54 Currently, businesses must choose between using a complex formula for calculating their R&E credit that provides a 20 percent credit rate for investments over a certain base and a much simpler one that provides a 12 percent credit in excess of a base amount. Some analysts argue that the complexity involved in applying for the higher rate effectively lowers the level of credit available. See Robert D. Atkinson, “Expanding the R&E tax credit to drive innovation, competitiveness and prosperity.” Journal of Technology Transfer (2007) 32:617–628. Recent proposals by the National Economic Council have called for “simplifying its use and expanding its incentive payments by 20%.” National Economic Council, Council of Economic Advisers, and Office of Science and Technology Policy, “A Strategy for American Innovation, Securing our Economic Growth and Prosperity,” Washington, DC: The White House, February 2011.

55 See the discussion in Chapter 3, Finding 3b-iv. With regard to expanding the R&E tax credit, see Action D-2 in National Academy of Sciences, et al., Rising Above the Gathering Storm, op. cit., which calls for an increase in the credit from 20 to 40% of the qualifying increase in research expenditures by companies so that the U.S. R&E tax credit is competitive with that of other countries.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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4. Build a 21st Century Innovation Infrastructure: The U.S. should increase dramatically investment in state-of-the-art broadband networks and other infrastructure required to maintain American leadership in a 21st century global knowledge economy.56

a. Build World Class Infrastructure: America’s physical infrastructure, including road and rail networks, and electric power and natural gas grids—essential for innovation and economic growth—are in many instances aging and in extreme cases falling apart.57 This comes at a time when other nations are investing significant resources to build modern highways, ports and airports.58 Using new technological innovations in materials and sensors, inter alia, the U.S. should make significant investments to restore and upgrade the nation’s infrastructure. 59 To this end, the feasibility of a permanent, national infrastructure bank that could leverage private capital for projects of regional and national significance should be considered.60

b. Expand Broadband Penetration: Internet access is an important tool for the development and dissemination of knowledge and is closely linked with economic growth.61 The U.S. lags other advanced nations in broadband penetration, ranking 15th out of 30 countries in broadband penetration rates.62 While recognizing the

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56 See Related Finding 3 in Chapter 3.

57 The collapse in 2007 of the Route 35W bridge in Minneapolis aimed a spotlight on the nation’s poor infrastructure. See MPR News, “Minneapolis Bridge Collapse,” at http://minnesota.publicradio.org/collections/special/2007/bridge_collapse/. In a 2005 survey, the American Society of Civil Engineers issued an average grade of “D” to U.S. infrastructure. See The American Society of Civil Engineers. “Report Card for America’s Infrastructure,” 2005. Access at http://www.asce.org/reportcard/2005/page.cfm?id=203.

58 See discussion in Chapter 2, section on “Improving Framework Conditions.” Continuing its substantial investments over the past two decades, China plans to invest $1.03 trillion on urban infrastructure during its 12th Five-Year Plan from 2011 to 2015. China Daily, “China to invest 7t yuan for urban infrastructure in 2011-15,” May 13, 2010.

59 National Academy of Engineering, Grand Challenges for Engineering, Access at http://www.engineeringchallenges.org/cms/challenges.aspx.

60 Felix Rohatyn, The Case for an Infrastructure Bank, Wall Street Journal, September 15, 2010. In the U.S. Senate, legislation, known as the “BUILD Act, was introduced on May 15, 2011 to fund an infrastructure bank. See also Charles Phillips, Laura Tyson, and Robert Wolf, “The U.S. Needs an Infrastructure Bank,” Wall Street Journal, January 15, 2010.

61 A 2006 study by the Economic Development Administration of the Department of Commerce found that “between 1998 and 2002, communities in which mass-market broadband was available by December 1999 experienced more rapid growth in employment, the number of businesses overall, and businesses in IT-intensive sectors, relative to comparable communities without broadband at that time.” See EDA, Measuring Broadband’s Economic Impact, National Technical Assistance, Training, Research, and Evaluation Project #99-07-13829, February, 2006.

62 OECD Broadband Portal, Data updated as of June 23, 2011. Access at http://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00.html.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     political challenges involved,63 the United States cannot afford not to make the significant investments needed to upgrade and expand the nation’s information infrastructure.64

In light of this, a recent National Research Council report found that “further data is required to understand the scope and nature of broadband use by businesses, and more study is required to understand why a significant percentage of households are not linked to the computer and Internet culture that is central to the new, more productive U.S. economy.”65

c. Secure Cross-Border Data Flows Many countries want to control, restrict or limit the flow of data and information across international borders.66 Some countries are trying to affect the international provision of ICT services by favoring domestic interests over international firms or by requiring that international firms provide computing or information services through domestic facilities. Other countries are concerned about access of their citizens to uncensored information or have concerns about privacy or national security.67 The United States should seek to achieve agreed international norms and rules governing cross-border data flows and the related information technologies.

The following rules and commitments, as recently outlined by U.S. Internet and ICT companies, should form the basis of any international agreements: (1) prohibit restrictions on legitimate cross-border information flows; (2) prohibit local mandates for ICT infrastructure or investments; (3) promote international best practices and standards; (4) improve transparency and predictability concerning regulations of the Internet and the digital

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63 In the United States, three industry sectors with different transmission methods —telephony, cable, and satellite—are the primary providers of broadband connections to homes and business. These firms are regulated under dissimilar legal standards and each has opposed changes in rules that could differentially impact their sector. See Adam D. Thierer, “Solving the Broadband Paradox,” Issues in Science and Technology Spring 2002.

64 For a review of the FCC’s 2010 National Broadband Plan, see Jeffrey Rosen, “Universal Service Fund Reform: Expanding Broadband Internet Access in the United States.” Issues In Technology Innovation, Number 8, April 2011.

65 National Research Council, Enhancing Productivity Growth in the Information Age: Measuring and Sustaining the New Economy, D. Jorgenson and C. Wessner, eds., Washington, DC: The National Academies Press, 2007.

66 National Foreign Trade Council, “Promoting Cross-Border Data Flows: Priorities for the Business Community,” November 3, 2011.

67 Report of the Trilateral Committee on Transborder Data Flows: North American Leaders Summit, January 2010 at http://web.ita.doc.gov/ITI/itiHome.nsf/0657865ce57c168185256cdb007a1f3a/c444e0e6174952b5852575d1007eaec2/$FILE/Report%20of%20the%20Trilateral%20Committee.pdf.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     economy; (5) ensure that legitimate policy measures (such as those concerning privacy or national security) are not used to restrict legitimate data flows; and (6) ensure that trade agreements increase market access for ICT products and services and cover future technologies and services.68

d. Encourage Energy Conservation. The United States should pursue substantial improvements energy conservation and efficiency through the accelerated deployment of existing and emerging energy-supply and end-use technologies.69 U.S. buildings, which alone use more energy than any other entire economy of the world except China, should be an important focus of conservation efforts.70 U.S. buildings are generally grossly inefficient; it has been widely documented that energy use in new and existing buildings can be cut by 50% or more cost-effectively. 71 Lowering the cost base for location of production in the United States can be fostered by improving conservation, and the techniques learned are themselves marketable globally as innovative services.72

i. Smart Grid: It is estimated that making building more intelligent through use of smart grid and active building energy management systems can cut energy use by 20-40%. This would allow buildings to participate in utility pricing schemes that provide large financial incentives to cut peak power use and to enable utilities to reduce energy use demand in response to utility power shortages.73

ii. Innovative Financing: Recent studies suggest that potential gains in energy efficiency are significant, opening resources to rapidly expand investments and jobs while strengthening security and effectively addressing important sources of climate change.74 By some estimates, U.S. businesses and

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68 National Foreign Trade Council, Id.

69 See the related Findings in the report of the National Academy of Sciences, et al., America’s Energy Future, Technology and Transformation, Washington, DC: The National Academies Press, 2009.

70 U.S. Green Building Council, “Buildings and Climate Change,” Accessed on November 3, 2011 at http://www.documents.dgs.ca.gov/dgs/pio/facts/LA%20workshop/climate.pdf.

71 Greg Kats, Greening Our Built World, Costs, Benefits, and Strategies, Washington, DC: Island Press, 2010.

72 See discussion in Chapter 2, section on “Improving Framework Conditions.”

73 Ibid.

74 See National Academy of Sciences, Real Prospects for Energy Efficiency in the United States, Washington, DC: The National Academies Press, 2010. The NAS panel found that “taking advantage of technologies that save money as well as energy to produce the same mix of goods and services could reduce U.S. energy use to 30 percent below the 2030 forecast level, and even significantly below 2008 energy use. The result would be lower costs and a more competitive

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     consumers could save as much as two trillion dollars within a decade through more efficient use of energy.75 Despite these large prospective gains, financing energy efficiency remains a challenge, especially as ARRA funding surge drops off steeply in early 2012. To overcome this investment gap and to capture the very significant savings from improved energy efficiency, the U.S. should substantially raise the level of financing for energy efficiency from its current level of about $20 billion a year. Such investment has the potential to save many billions annually.76

5. The United States needs to adopt specific policy measures to capture greater economic value from its public investments in research.77 The America COMPETES Act calls for greater investment in innovation through research and development and Congress should appropriate the funding authorized in the legislation.78 A similarly comprehensive effort needs to be made to exploit the results of the nation’s investments in science, technology, and education into more innovative products, business, industries, and well-paying jobs.

a. Strengthen University Links to the Market: Universities should be encouraged to provide stronger incentives to promote applied research, ease cooperation with industry, and encourage commercialization in the United States of research results. Many U.S. universities have already recognized the need for programs that can help to transition good research ideas toward the commercial marketplace, a trend that can be encouraged.79

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economy that uses less fossil fuel, has lower emissions of greenhouse gases, and puts less pressure on environmental quality.” Also, see the discussion in Chapter 1, section on “Responding to the Innovation Challenge,” and Chapter 2, section on “Strengthening Manufacturing.”

75 See Greg Kats, Aaron Menkin, Jeremy Dommu and Matthew DeBold, “Energy Efficiency Financing - Models And Strategies,” Capital E For The Energy Foundation, March 2012.

76 Ibid.

77 See related Finding 5 in Chapter 3.

78 America COMPETES Act was signed by President Bush and became law on 9 August 2007. On January 4, 2011, President Obama signed the America COMPETES Reauthorization Act of 2010. However, as an ’authorization bill’, “COMPETES will have teeth only to the extent that the funding levels it lays out are appropriated in practice over the next three years.” Eugene Reich, “US Congress passes strategic science bill,” Nature, December 22, 2010. As this report went into review, the Department of Commerce, in consultation with the National Economic Council released the COMPETES Report, which highlights bipartisan priorities to sustain and promote the pillars of American innovation and economic competitiveness. See Department of Commerce, “The Competitive and Innovative Capacity of the United States,” January 2012. Access at http://www.commerce.gov/americacompetes.

79 See Robert E. Litan and Lesa Mitchell, “A Faster Path from Lab to Market,” in Harvard Business Review, January/February 2010. See also Krisztina “Z” Holly, “The Full Potential of University Research, A Model for Cultivating New Technologies and Innovation Ecosystems,” Science

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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i. Provide Matching Seed Funds: Some universities have experimented with seed funds that provide small amounts of capital, e.g., $5,000-10,000, typically to generate a proof of concept based on University research and begin to explore commercial applicability. Where successful, such funds can help to initiate the process of commercialization to the point where private investment can take hold. The federal (and/or state) government should consider providing a small pool of matching funding to help initiate new University seed programs and to defray the costs of starting-up incubation, where those efforts are modeled on successful prior examples. Universities can and should consider emulating those examples that have succeeded. Centers considered to be a success, such as the Deshphande Center at MIT, are managed by professionals, independent of the university.80

ii. Develop University Incubators: University incubators, which seek to support entrepreneurs as they move their ideas from the laboratory to the marketplace, are a growing phenomenon.81 In many cases, services provided by university business incubators, including laboratories, equipment, and student employees help nurture new technology based firms.82 Some universities have experimented with incubators that provide shared office and infrastructure (e.g., wet labs), and in some case shared services (e.g., legal, bookkeeping, etc.). Such incubators can help significantly to defray the cost of a nascent start-up that seeks

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Progress, June 2010. The author outlines a policy proposal for how the federal government can catalyze economic growth and societal benefit with ideas spawned at major research universities.

80 For a review of how proof of concept centers can facilitate the transfer of university innovations into commercial applications, see Christine A. Gulbranson and David B. Audretsch, “Proof of concept centers: accelerating the commercialization of university innovation,” Journal of Technology Transfer (2008) 33:249–258. See also the recommendations of the Hawaii Innovation Council to establish a seed fund to encourage the commercialization of university research. Access this report at http://www.hawaii.edu/offices/op/innovation/council-final-recommendations.pdf.

81 See for example, Georgia Tech’s Venture Lab, which seeks to “move university technologies out of the lab and into the marketplace” and “grow university-based start-up companies in Georgia to create a vibrant industrial base with high-value jobs.” For a review of the effectiveness of university incubators, see Frank T. Rothaermela and Marie Thursby, “University–incubator firm knowledge flows: assessing their impact on incubator firm performance.” Research Policy, Volume 34, Issue 3, April 2005, Pages 305-320.

82 Mian A. Sarfraz, (2011) “University’s involvement in technology business incubation: what theory and practice tell us?” International Journal of Entrepreneurship and Innovation Management, Vol. 13, No. 2, pages 113-121.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     to commercialize university research. Not all incubators prove successful. Additional research on best practices is required.83

iii. Expand SBIR to Support Commercialization of University Research: Universities should be encouraged to draw on the potential of competitive innovation award programs like SBIR and STTR.84 Recent research by the National Academies shows that the SBIR program is “sound in concept and effective in operation.” Its awards, particularly through the STTR program, act as a valuable link between universities and the market.85 In addition, some federal agencies provide commercialization training to SBIR award winners.86 Systematic efforts to heighten student and faculty awareness would enhance returns on the program while contributing to a culture of innovation.

iv. Develop Additional Centers of Excellence: Technological Centers of Excellence can be an effective means to develop specific commercial applications of university research through dedicated government-university-industry cooperation. Positive examples of Centers of Excellence include the Semiconductor industry’ four Focus Centers; the National Cancer Institute’s designated Cancer Centers; the four Nano-electronics research centers; and the Army funded Federal Display Center at Arizona State University. These centers need to be assured of sustained and sufficient funding,

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83 For a recent survey of incubator managers regarding best practices, see David A. Lewis, Elsie Harper-Anderson, and Lawrence A. Molnar, “Incubating Success; Incubation Practices that lead to Successful Ventures,” Washington, DC: Economic Development Administration, 2011. Access at http://www.edaincubatortool.org/pdf/Master%20Report_FINALDownloadPDF.pdf.

84 In testimony before the House Science and Technology Committee on April 23, 2009, Robert M. Berdahl, President of the Association of American Universities noted that “Indeed, SBIR and STTR programs are now widely viewed by many faculty and research administrators as an important tool that can help them transform the research generated in our university laboratories into new industrial products, good, and services. As a result, more and more of our faculty are directly engaged in research funded through these two programs.”

85 Over a third of the respondents in an NRC Survey of four thousand SBIR firms reported some form of university involvement in their SBIR project. Among these, more than 80 percent of respondent companies receiving grants from the National Institutes of Health had at least one founder from academia. The NRC survey also revealed that about one-third of the founders of SBIR firms responding to the survey were most recently employed as academics before founding the company. In addition, about a third of projects surveyed had university faculty as contractors on the project and about a quarter of projects surveyed used universities themselves as subcontractors. See National Research Council, An Assessment of the SBIR Program, 2008, op. cit.

86 These SBIR-related initiatives include, for example, the NIH’s Commercialization Assistance Program, and the U.S. Army’s Commercialization Pilot Program. These programs have not been subjected to a careful evaluation to date. Also noteworthy is NSF’s I-Corps program, which provides a business boot camp and a mentoring service for would-be entrepreneurs. This appears to be a promising initiative but new and small-scale and has not yet been evaluated.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     particularly the resources to maintain up-to-date equipment and facilities.87

v. Use of Innovation Prizes: According to a recent report of the National Academies, inducement prize contests are “thought to have in many circumstances the virtue of focusing multiple group and individual efforts and resources on a scientifically or socially worthwhile goal without specifying how the goal is to be accomplished and by paying a fixed purse only to the contestant with the best or first solution. Inducement prize contests with low administrative barriers to entry can attract a diverse range of talent and stimulate interest in the enterprise well beyond the participant pool.”88 Accordingly, the report recommended that “an ambitious program of innovation inducement prize contests will be a sound investment in strengthening the infrastructure for U.S. innovation. Experimental in its early stages, the program should be carried out in close association with the academic community, scientific and technical societies, industry organizations, venture capitalists, and others.”89

vi. Encourage private foundations to take equity positions in start-ups by amending SEC rules: Investments in innovative startups that balance the focus and discipline of venture investment with the philanthropic missions of private foundations can be an effective way of linking university research to commercial applications for the market. Recent initiatives, such as those by the Gates Foundation, could provide a template for a new approach to financing innovative startups.90

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87 In this regard, a committee of the National Academies has previously recommended that the Microelectronics Advanced Research Corporation’s Focus Centers, in which government and industry jointly support university researchers, be fully funded and, ideally, expanded. See Recommendation b on page 89 of National Research Council, Securing the Future, Regional and National Programs to Support the Semiconductor Industry, op. cit.

88 See National Research Council, Innovation Inducement Prices at the National Science Foundation, Washington, DC: The National Academies Press, 2007.

89 Ibid. Page 2.

90 See Luke Timmerman, “Gates Foundation Makes First Equity Investment in Biotech Startup, Liquidia Technologies,” xconomy.com, March 8, 2011. The Gates Foundation made its first direct equity investment of $10 million in Liquidia Technologies, a for-profit company in March 2011. The goal was to encourage the development and commercialization of technologies that can have a positive impact on global health, a core mission of the Gates Foundation.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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b. Strengthen National Laboratories’ Links to the Market

i. Expand use of Research Parks: The National Laboratories should continue to develop and grow research parks where feasible. The Sandia Science and Technology Park Initiative demonstrates that appropriately structured public-private partnerships can reinforce the mission of the National Laboratories as well as contribute to regional economic development.91

ii. Expand SBIR to National Laboratories: The National Laboratories should be encouraged to participate in the SBIR program.92 Although an important source of technical reviewers for SBIR proposals, the National Laboratories are currently not strongly involved in the SBIR program. As a result, the potentially significant role that they could play as partners with SBIR-award-recipient firms is not being fully realized.93

c. Develop Public-Private Partnerships: To better capture the economic value of U.S. investments in research, U.S. policy needs to focus on expanding successful U.S. partnership programs including innovation awards, prizes, and research consortia and, where appropriate, consider adopting and adapting successful models from other countries.

i. New Initiatives in Early Stage Finance: New initiatives that are modeled on U.S. programs (such as SBIR) with a proven record of turning new ideas into marketable products might be

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91 For a review of the mission and accomplishments of Sandia Park, see Richard Stulen, “U.S. and Global Best Practices, Sandia S&T Park,” in National Research, Understanding Research, Science, and Technology Parks: Global Best Practices, op. cit. For an early review of Sandia Park, see National Research Council, A Review of the Sandia Science and Technology Park Initiative, C. Wessner, ed., Washington, DC: The National Academies Press, 1999. The Park housed 33 companies as of 2011 and (according to an economic impact analysis carried out by SSTP in 2009) directly and indirectly helped create 7725 jobs, providing a significant boost to the region’s dynamism. See http://www.sstp.org/about-sstp/economic-impact.

92 See National Research Council, An Assessment of the SBIR Program at the Department of Energy, C. Wessner, ed., Washington, DC: The National Academies Press, 2008. Recommendation C-3 notes that “while the National Laboratories are an important source of technical reviewers for proposals (which is an important component of the administration of the SBIR program at DoE), the Laboratories themselves are not otherwise strongly involved in the SBIR program.” Fuller participation includes generation of topics and commercialization and/or adoption of SBIR technologies.

93 National Research Council, An Assessment of the SBIR Program at the Department of Energy, C. Wessner, ed., Washington, DC: The National Academies Press (2008) pages 28-29, 38.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     established with a sectoral focus and, perhaps, larger award amounts.

ii. Support for Industry Consortia: The federal government should consider assisting new public-private R&D collaborations for sectors, where feasible, such as flexible electronics,, additive manufacturing, photovoltaics, and medical devices modeled after the principles underlying the successful Sematech consortium of the 1980s, and/or wellfunded models from abroad, e.g., imec.94 These consortia should seek to establish industry standards, support precompetitive R&D cooperation, and provide mechanisms to pool public and private resources in order to accelerate widescale commercialization of transformative technologies in multiple industrial sectors.95 In this regard, recently created cooperative initiatives on manufacturing, nanotechnologies, and the Sunshot initiative for photovoltaics should be sustained and in the case of manufacturing, these efforts should be supported with significantly enhanced resources commensurate with the potential of the sector.

d. Expand Support for Manufacturing: Manufacturing is a key source of employment, growth, and a major contributor of R&D. However, individual companies often “cannot justify the investment required to fully develop many important new technologies or to create the full infrastructure to support advanced manufacturing.”96 This comes at a time when many nations are

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94 One such example is imec, established by the Flemish government in 1982. imec conducts advanced research in nano-electronics in partnership with leading global companies in information technology, health care, and energy. For a discussion of its operations, see Anton de Proft, “Introduction to imec” in National Research Council, Innovative Flanders, C. Wessner, ed., Washington, DC: The National Academies Press, 2008. For a review of Sematech, see Kenneth Flamm and Qifei Wang, “Sematech Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D,” in National Research Council, Securing the Future, Regional and National Programs to Support the Semiconductor Industry, op. cit.

95 A National Academies Symposium, “Flexible Electronics for Security, Manufacturing, and Growth in the United States,” held on September 25, 2010, discussed possible models for a consortium for flexible electronics. For a review of the potential of a consortium to advance solid state lighting, see, National Research Council, Partnerships for Sold State Lighting, Report of a Workshop, C. Wessner, ed., Washington, DC: The National Academies Press, 2002.

96 The President’s Council of Advisors on Science and Technology, “Report to the President on Ensuring American Leadership in Advanced Manufacturing,” Washington, DC: The White House, June 2011. The recommendations of this report build on an earlier report submitted to President George W. Bush. See President’s Council of Advisors on Science and Technology, “Sustaining the Nation’s Innovation Ecosystems, Information Technology Manufacturing and Competitiveness,” Washington, DC: The White House, February 2004. See also Stephen Ezell and Robert D. Atkinson, “The Case for a National Manufacturing Strategy,” Washington, DC: ITIF, April 26, 2011. Finally, see Gregory Tassey, “Rationales and mechanisms for revitalizing US manufacturing R&D

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     devoting substantial policy attention to attracting, nurturing, and growing national manufacturing capability, including industry supply chains and required infrastructure.97

i. Provide Incentives for Manufacturing: The U.S. needs to support the competitiveness of its advanced manufacturing sector by making federal incentive programs permanent and broadening the time horizons of tools such as manufacturing tax credits and loan guarantees so that companies can confidently invest for the long term.98 Regulatory and tax incentives should be considered and expanded where appropriate to drive downstream demand.99

ii. Expand Manufacturing Support Programs: Consideration should also be given to the creation or expansion of programs that directly support manufacturing.100 These programs, in

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strategies.” The Journal of Technology Transfer, Volume 35, Number 3, 283-333 (2010). Tassey argues that an advanced economy such as the United States needs a strong manufacturing sector and calls for Increasing “the average R&D intensity of the domestic manufacturing sector to 6 percent”; adjusting “the composition of national R&D to emphasis more long-term, breakthrough research and increasing the amount sufficient to fund a diversified portfolio of emerging technologies commensurate with the size of the U.S. economy”; and improving the efficiency of R&D performance and subsequent technology diffusion.”

97 See the discussion in Chapter 2, section on “Strengthening Manufacturing.”

98 The Department of Energy’s loan guarantee programs (through October 2011) committed $35.9 billion in guarantees to 38 projects including renewable and nuclear power generation, renewable energy manufacturing, energy efficiency manufacturing, energy storage, and electric vehicle production.98 This program has now been terminated.

99 Bronwyn Hall and Beethika Khan note that “the regulatory environment and governmental institutions more generally can have a powerful effect on technology adoption, often via the ability of a government to “sponsor” a technology with network effects.” See Bronwyn H. Hall and Beethika Khan, “Adoption of New Technology,” NBER Working Paper 9730, 2003. For an illustrative review of the impact of regulatory provisions for energy efficiency on new federal, state, and local policies, programs, and practices across the U.S., see Robert K. Dixon, Elizabeth McGowan, Ganna Onysko, and Richard M. Scheerb, “US energy conservation and efficiency policies: Challenges and opportunities,” Energy Policy Volume 38, Issue 11, November 2010, Pages 6398-6408.

100 The Hollings Manufacturing Extension Partnership (MEP) was created in 1988 to offer technical, business, and financial support primarily to small and medium-sized manufacturers in all fifty states. The National Research Council currently has an evaluation of the MEP underway. The assessment will document the achievements and challenges of the program. The Advanced Manufacturing Partnership was developed on the recommendation of the President’s Council of Advisors on Science and Technology, which called for a partnership between government, industry, and academia to identify the most pressing challenges and transformative opportunities to improve the technologies, processes and products across multiple manufacturing industries. See President’s Council of Advisors on Science and Technology, “Report to the President on Ensuring American Leadership In Advanced Manufacturing.” Washington, DC: The White House, June 2011. For a comparative perspective on innovation and manufacturing policy, see Philip Shapira, Building capabilities for innovation in SMEs: a cross-country comparison of technology extension policies and programmes,” International Journal of Innovation and Regional Development, Volume 3, Number 3-4/2010.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     conjunction with programs at the Department of Defense, offer a substantial framework for encouraging and sustaining U.S.-based manufacturing and developing promising new technologies, such as flexible electronics and additive manufacturing.101

e. Sustain Federal Programs to Jump-start new Industries: Promising federal programs aimed at accelerating commercialization of new technologies, including such areas as photovoltaic cells, advanced batteries, and biomedicine, should be continued with sustainable long-term funding.102

f. Create New Institutions for Applied Research: The recently announced National Network for Manufacturing Innovation (NNMI)—a private-public partnership program aimed at commercializing and manufacturing U.S. developed technologies—should be fully funded.103 NNMI calls for precompetitive consortia to conduct applied research on new technologies and design methodologies. Modeled on Germany’s Fraunhofer-Gesellschaft, NNMI can help improve the

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101 “The Department of Defense Manufacturing Technology (ManTech) Program is a joint program of the armed services and the Defense Logistics Agency. The purpose of the ManTech program is to develop manufacturing technologies for the affordable, low-risk development and production of weapons systems.” See National Research Council, Defense Manufacturing in 2010 and Beyond, Washington, DC: The National Academies Press, 1999. See also the discussion in Chapter 2, sections on “Institutional Support for Applied Research,” and “Strengthening Manufacturing.”

102 These include the NSF’s Engineering Research Centers and Industry-University Cooperative Research program. See also Chapter 5 of this report, which provides detailed case studies of the role of federal programs in the development and commercialization of semiconductor, photovoltaic and advanced battery technologies. For example, the $457 million Sunshot Initiative of the Department of Energy “is a collaborative national initiative to make solar energy cost competitive with other forms of energy by the end of the decade. Reducing the installed cost of solar energy systems by about 75% will drive widespread, large-scale adoption of this renewable energy technology and restore U.S. leadership in the global clean energy race.” Department of Energy website: http://www1.eere.energy.gov/solar/sunshot/.

103 “The proposed Network will be composed of up to fifteen Institutes for Manufacturing Innovation (IMIs or Institutes) around the country, each serving as a hub of manufacturing excellence that will help to make United States (U.S.) manufacturing facilities and enterprises more competitive and encourage investment in the U.S. This program was proposed in the President’s fiscal year (FY) 2013 budget and was announced by the President on March 9, 2012. The NNMI program will be managed collaboratively by the Department of Defense, Department of Energy, Department of Commerce’s NIST, the National Science Foundation, and other agencies. Industry, state, academic and other organizations will co-invest in the Institutes along with the NNMI program.” Federal Register Notice, May 4, 2012. The President’s FY 2013 budget requests $1 billion for the NNMI program. See also the discussion in Chapter 2, section on “Institutional Support for Applied Research.”

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     competitiveness of U.S. manufacturers and capture more value from U.S. funded research.104

g. Open Foreign Markets To Business Services. Services are a large and important component of the U.S. economy and the United States has much to offer the world in high value services. To capitalize on this comparative advantage, the U.S. should be pushing aggressively for services trade liberalization, making common cause with the European Union and other advanced economies to encourage the large, fast-growing developing economies to liberalize their service sectors through multilateral negotiations in the General Agreement on Trade in Services and the Government Procurement Agreement. 105 The infrastructure building boom, particularly in Asia, provides an enormous opportunity for U.S. service firms if the proper policies are in place. Increased trade in services might help rebalance U.S. trade, and both advanced and emerging economies would benefit from the productivity-enhancing gains brought by increased trade in services.106

h. Expand Support for U.S. Manufactured Exports: The government and private sector should work together to identify and seize new market opportunities and reduce barriers to U.S. exports for products of industries that use advanced manufacturing including electronics, aerospace, and biotechnology.107 In this regard, resources for export financing should be re-examined to be sure that export financing is fully competitive with foreign export credits.108 In addition the Department of Commerce should substantially expand the U.S. and Foreign Commercial Service in

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104 See Chapter 4 of this report for a description of the Fraunhofer Gesellschaft. See also the presentation by Roland Schindler, Executive Director of Fraunhofer CSE, at the National Academies Symposium on Meeting Global Challenges: U.S.-German Innovation Policy, Washington, DC, November 1, 2010. Germany’s Fraunhofer system has established seven research institutes based at U.S. universities, including Michigan State University, Boston University, Massachusetts Institute of Technology, the University of Maryland, the University of Michigan, Johns Hopkins University, and the University of Delaware. These institutes provide research and development services to help translate the fruits of research at U.S. academic institutions into products for the marketplace.

105 J. Bradford Jensen. “Global Trade in Services: Fear, Facts, and Offshoring” Peterson Institute for International Economics, 2011.

106 Ibid.

107 See the discussion in Chapter 2, section on “Strengthening Manufacturing.”

108 Export-Import Bank of the United States, Report to the US Congress on Export Credit Competition and the Export-Import Bank of the United States, June 2010. The U.S. Chamber of Commerce is partnering with the Export-Import Bank of the United States on its Global Access for Small Business initiative to help more than 5,000 small companies export goods and services produced by U.S. workers. For a concise review of the role and performance of the Export-Import Bank in promoting U.S. exports, see Stephen Ezell, “Understanding the Importance of Export Credit Financing to U.S. Competitiveness.” Washington, DC: ITIF, June 2011.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     order to capitalize on the rapid growth of markets in China, India, and other emerging economies.109

i. Foster Cluster Development: Recent pilot programs by U.S. federal agencies to align current economic development programs with specific regional innovation cluster initiatives by state and local organizations should be assessed and, where appropriate, provided with greater funding and expanded geographically.110 Efforts should be made to attract, on a competitive basis, more states and regions, while providing best practice guidance and incentives, preferably with reliance on matching funds.

i. Assess Foreign Clusters: The scope and scale of efforts by foreign governments to develop clusters in new technology areas are impressive. The U.S. needs to assess and draw policy lessons from these efforts that are helping to shape the global competitive landscape. A similar effort should be undertaken for science and technology parks.

ii. Support the Development of Science and Research Parks: In a similar vein, the U.S. should provide competitively awarded federal support to state and regional efforts to develop and sustain modern research parks. These parks can provide valuable means of supporting the missions of national laboratories such as those of the Department of Energy and NASA, national research institutions such as the National Cancer Institute, and university facilities.111

j. Leverage Government Procurement to Establish Early Markets: As it has done previously in industries such as semiconductors, computers, advanced aircraft, and nuclear power,

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109 In remarks at the U.S. Chamber of Commerce, U.S. Commerce Secretary John Bryson has called for restructuring the Foreign Commercial Service to intensify focus on markets where U.S. exports have the best potential for continued growth, including China, Brazil, India, Saudi Arabia and Turkey. See Department of Commerce Press Release, “Commerce Secretary John Bryson Lays Out Vision for Department of Commerce.” December 15, 2011.

110 For a review of recent federal and state efforts, see National Research Council, Growing Innovation Clusters for American Prosperity, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011.

111 For a review of the mission and accomplishments of the NASA Ames Research Center, see Simon (Pete) Worden, “NASA Research Park,” in National Research, Understanding Research, Science, and Technology Parks: Global Best Practices, op. cit. For an early review of the role of the NASA Ames Park, see National Research Council, A Review of the New Initiatives at the NASA Ames Research Center, C. Wessner, ed., Washington, DC: The National Academies Press, 2001. For a description of the National Cancer Institute’s plan to bring together much of its technology research and development in a park-like setting in Frederick, Maryland, see John Niederhuber, “The National Cancer Institute and NCI-Frederick,” in, Understanding Research, Science, and Technology Parks. Op. cit.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     federal agencies can play a key role in helping build domestic markets for important emerging industries such as electric-drive vehicles, solar power, and solid-state lighting through incentive programs and government procurement.112 Overall, procurement programs can enable domestic producers to move up the learning curve, push down the cost curve, and enable them to compete successfully in the U.S. and global markets.113

i. Leverage Defense Procurement: Defense procurement is an important driver of innovation, providing initial markets for products for the military as well as civilian sectors.114 Traditional defense procurement, however, operates within established and complex sets of regulatory and managerial practices. To shift from a culture of compliance to a culture of results based on performance, cost, and schedule, the U.S. should establish “incentives and rewards for innovation in products and processes that result in continuous performance improvements, at lower and lower costs.”115

Develop a skilled acquisitions workforce: The government should build an expanded workforce of experienced, smart buyers for the military, including experienced people from industry.116

Incentivize better performance: The U.S. should improve its law and regulations concerning procurement practices and export and import controls in order to

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112 For a historical perspective of the impact of federal procurement on innovation in the U.S., see Vernon W. Ruttan, 2006, op. cit. For a review of the academic literature, see Jakob Edler and Luke Gerghiou, (2007). “Public procurement and innovation –Resurrecting the demand side.” Research Policy. 36, 9, 949-963.

113 Note that federal procurement is generally open to foreign suppliers that are signatories of the World Trade Organization’s Government Procurement Agreement.

114 David Mowery identifies three channels through which public investments in defense-related R&D and procurement affect the innovative performance of sectors or the overall economy. First, defense-related R&D investments can support the creation of new knowledge with defense-related and civilian technology applications. Second, in some cases, defense-related R&D investment can lead to ‘‘spinoffs,’’ with civilian and applications. And third, by serving as a ‘‘lead purchaser,’’ for early versions of new technologies, defense procurement can enable supplier firms to reduce the costs of their products and improve their reliability and functionality. See David C. Mowery, “National security and national innovation systems,” Journal of Technology Transfer (2009) 34:455–473. For a contemporary review of the role that Defense procurement can play in advancing new energy technologies, see Ryan Fitzpatrick, Josh Freed, and Mieke Eoyang, “Fighting for Innovation: How DoD Can Advance Clean Energy Technology… And Why It Has To.” Washington, DC: The Third Way, June 2011.

115 Jacques Gansler, “Solving the Nation’s Security Affordability Problem,” in Issues in Science and Technology, Volume XXVII, Number 4, Summer 2011.

116 Ibid.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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reward companies that achieve higher performance at lower costs.

ii. Encourage Procurement from Small Business: Procurement from small firms, such as through the SBIR program, can diversify the supplier base and accelerate innovation through support for early stage funding while addressing the myriad mission needs of government agencies.117

6. Recognize that Trade and Innovation are Closely Linked:118

a. Provide a Rules-based Playing Field: It is the responsibility of the U.S. government to take an activist approach to enforce agreements and provide a rules-based playing field for its industries engaged in competition with foreign industries. Measures that distort foreign trade and investment should be rooted out or offset, especially when these measures risk having a serious adverse effect on U.S. firms continued ability to innovate119. This will require support from U.S. industry, but ultimately an independent and well-informed judgment on the part of the U.S. government of policy responses that are in the national interest.

b. Develop an Enforceable International Code of Conduct: Existing international rules have proved to be ineffective in governing the activities of government enterprises engaged in commercial competition. An enforceable international code of conduct is required.

i. Home governments need to be accountable for their support of their government enterprises as well as the conduct of these enterprises where trade and investment patterns are distorted.

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117 For a review of the opportunities as well as challenges small innovative businesses face with respect to federal procurement, see National Research Council, An Assessment of the SBIR Program. op. cit., pages 46-49. In recent years, the European Union has sought to expand the use of public procurement to foster innovation, particularly among small and medium sized enterprises. See the Speech of EU Commissioner Geoghegan Quinn to a meeting of IMCO on the role of public procurement policies in supporting EU innovation strategies, 1 February 2011. See also M. Rolfstam W., Phillips, and E. Bakker (2011) “Public procurement and the diffusion of innovations: exploring the role of institutions and institutional coordination.” International Journal of Public Sector Management, 24 (5).

118 See related Finding 5 in Chapter 3.

119 It is far from clear that protectionist measures actually promote innovation in the countries that adopt them.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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ii. Going forward, every U.S. government international trade or investment agreement should include a comprehensive code of conduct that includes detailed rules governing government owned, government invested and government supported enterprises (e.g. ensuring enforcement of intellectual property and competition laws and policies), transparency, and dispute settlement.

7. Capitalize on the globalization of research and innovation: The United States should capitalize on the globalization of research and innovation to cooperate with other nations to advance innovations that address shared global challenges in energy, environment, health, and security.120

a. Strengthen International Cooperation: The United States needs to better capitalize on the new knowledge that is being generated around the world. As one analyst has recently observed, “Gathered from afar and reintegrated locally, knowledge developed elsewhere can be tapped to stoke U.S. innovation.”121 However, international collaboration is supported by only about 6 percent of federal R&D spending, and the United States has no strategy to find and use knowledge from around the world in this regard. 122 The United States should strengthen and expand opportunities for research collaboration by American scientists and entrepreneurs with their counterparts in growing economies such as China, India, Brazil, as well as those in more established countries such as Japan and South Korea and historical partners such as Germany, France and Italy.123 New initiatives with countries such as Poland, the Czech Republic, Slovakia, Hungary, and Romania should also be undertaken in order to pool resources and talent devoted to solving common challenges in areas such as health, energy, security, and the environment.124 The need for cooperative efforts is great, and

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120 See related Finding 7 in Chapter 3.

121 Caroline S. Wagner, “The Shifting Landscape of Science,” Issues in Science and Technology, Volume XXVII, No. 1, Fall 2011.

122 Ibid.

123 For a review of opportunities and challenges for further cooperation with India, see National Research Council, India’s Changing Innovation System, C. Wessner and S. Shivakumar, eds., Washington, DC: The National Academies Press, 2007. For a first hand review of current trends in China’s innovation strategies and challenges, see National Research Council, Building the 21st Century, U.S. China Cooperation in Science, Technology, and Innovation, op. cit.

124 To review opportunities for cooperation on innovation with Poland, the National Academies convened two major symposia on “Rebuilding the Transatlantic Bridge: U.S.-Polish Cooperation on Science, Technology, and Innovation” in 2009 and 2010. The meetings reviewed potential for

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     the potential benefits are substantial. At the same time, considerable care needs to be devoted to the terms and structure of such cooperation, notably to ensure that contributions are comparable and that the fruits of such cooperation are shared in an equitable and sustainable manner. 125

b. Expand Exchanges of Scholars and Students: Expanding exchanges of scholars and students can benefit “both sending and receiving countries, providing access to leading research and training not available in the home country and creating transnational bridges to cutting-edge research.”126 In this regard, self-organized collaborative networks that are steered more by individual scientists linking together across borders for enhanced knowledge creation are found to more often lead to highly cited research articles.127 This is because researchers are motivated to “compete with each other for collaborations with the most highly visible and productive scientists in their fields, in their own country or abroad. Facilitating this global collaboration could have a considerable impact on knowledge creation and has been promoted, for example, by the EU Framework requirements.”128

Conclusion

Innovation—from invention through to commercialization—has a vital role to play in maintaining America’s position of in the world economy and in addressing the major challenges facing the world today in areas such as energy, climate, health and economic development. There is no single measure, nor even a small number of policy measures that can assure success in preserving

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cooperative activity in a variety of areas including developing clean coal energy technologies, environmental remediation, and cancer research.

125 “The costs, complexity, and risk associated with the development of new technologies provide great opportunities for international cooperation in both the public and private sectors….These powerful drivers of cooperation are at the same time a source of greater system friction.” See HWWA, IfW, and NRC, Conflict and Cooperation in National Competition for High-technology Industry,” Washington, DC: The National Academies Press, 1996, page 46. These challenges include identifying cooperative projects of equal interest to all parties, distributing the costs and benefits in an equitable manner, bridging social and cultural differences and divergent expectations, and ensuring long-term commitment to projects. See page 47. Soundly constructed and effectively managed International cooperation can bring value to all parties; managing expectations and assuring equitable arrangements is often a challenge for national bureaucracies. As the U.S. economic and technological leadership faces increasing competition, we have both greater opportunities for cooperation but greater care is required to ensure that it is mutually beneficial.

126 National Research Council, Policy Implications of International Graduate Students and Postdoctoral Scholars in the United States, Washington, DC: The National Academies Press, 2005.

127 Caroline S. Wagner. “Network structure, self-organization and the growth of international collaboration in Science.” Research Policy Volume 34, Issue 10, December 2005, Pages 1608-1618.

128 National Research Council, Policy Implications of International Graduate Students and Postdoctoral Scholars in the United States, Washington, DC: The National Academies Press, 2005.

Suggested Citation:"Chapter 4 Recommendations." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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and enhancing the magnificent record that this country has in innovation. Scientists in industry and government are now accustomed to developing what they call “roadmaps” to identify the challenges that need to be addressed and to bringing forward the next generations of innovative products. Looking abroad to assess what other countries are doing in facing common challenges, this report is designed to contribute to a better understanding of the strengths and weaknesses of the U.S. innovation system. Our purpose is to suggest a path forward. Most importantly, it is essential to understand that this series of cooperative interactions with other countries and efforts to benchmark American policies and measures should be continued in order to help U.S. policymakers improve U.S. performance.

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America's position as the source of much of the world's global innovation has been the foundation of its economic vitality and military power in the post-war. No longer is U.S. pre-eminence assured as a place to turn laboratory discoveries into new commercial products, companies, industries, and high-paying jobs. As the pillars of the U.S. innovation system erode through wavering financial and policy support, the rest of the world is racing to improve its capacity to generate new technologies and products, attract and grow existing industries, and build positions in the high technology industries of tomorrow.

Rising to the Challenge: U.S. Innovation Policy for Global Economy emphasizes the importance of sustaining global leadership in the commercialization of innovation which is vital to America's security, its role as a world power, and the welfare of its people. The second decade of the 21st century is witnessing the rise of a global competition that is based on innovative advantage. To this end, both advanced as well as emerging nations are developing and pursuing policies and programs that are in many cases less constrained by ideological limitations on the role of government and the concept of free market economics. The rapid transformation of the global innovation landscape presents tremendous challenges as well as important opportunities for the United States.

This report argues that far more vigorous attention be paid to capturing the outputs of innovation - the commercial products, the industries, and particularly high-quality jobs to restore full employment. America's economic and national security future depends on our succeeding in this endeavor.

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