© Charles W. Wessner PhD. 1 Addressing the Innovation Imperative Collaboration, Institutions, and...

© Charles W. Wessner PhD. 1

Addressing the Innovation Imperative

Collaboration, Institutions, and Incentives

SDC Seminar in honor of H.E. Dr. Tobias KrantzWashington DC

February 4, 2010

Charles W. Wessner, PhD.Director, Technology, Innovation, and Entrepreneurship

The National Academies


Current Global Mega-Challenges are Areas for

Cooperation• Fostering Economic Growth– Driving domestic Growth and Employment through

Innovation• Developing New Sources of Energy

– Commercializing renewable alternatives to oil– Increasing the capacity to fuel growing global demand for

electricity• Addressing Global Warming

– Growing a Green Economy; A major Growth opportunity• Delivering Global Health

– Transforming large investments in research to affordable and personalized treatment and care

• Improving Security– Through all of the above

© Charles W. Wessner PhD3

How can we address these

Global Challenges?

Congress


Innovation is Essential• Leading nations are providing four

pillars of support:– High-level Focus– Sustained Support for R&D: Leveraging

Public and Private Funds– Support for Innovative SMEs– New Innovation Partnerships to bring new

products and services to market• Many countries are investing very

substantial resources to create, attract and retain industries in a variety of sectors


China’s Drive for Innovation

• Government with strong sense of national purpose– Strong investments in education and training – Strategy to move rapidly up value chain – Effective requirements for training and tech transfer– Critical mass in R&D is beginning to be deployed to

generate autonomous sources of innovation & growth

• Government goal is to acquire technological capabilities both to grow and to maintain national autonomy.

• Focused, Committed, and Willing to SpendModified from C. Dahlman, Georgetown University


Changing Shares of Global R&D Spending

1999 2008 2009 2010

United States

39% 35.4% 35.0% 34.8%

China 6% 9.1% 11.1% 12.2%

Japan 15% 13.2% 12.5% 12.3%

Europe 26% 24.9% 24.0% 23.2%

Source: Battelle, R&D Magazine December 2009

© Charles W. Wessner, PhD7

Singapore’s Innovation Strategy

• Total Focus, Commitment, and Long-Term Spending by the Government – Goal is to establish Singapore (population: 4.5 million) as

Southeast Asia's preeminent financial and high-tech hub. • A*STAR’s task, with $5 Billion in funding is to:

– Invest in and attracting a skilled R&D workforce– Attract major investments in pharmaceuticals and medical

technology production– Invest in Public Private Partnerships

• New S&T Parks—Biopolis & Fusionopolis– Develop new programs to address the early-stage funding

challenge for innovative firms• Generating local entrepreneurs and firm growth

remain challenges


What about Sweden?

The Good News: Sweden tops the Innovation Capacity Index Rankings 2009-2010

(Innovation for Development Report)


Characteristics of the Swedish Innovation System

• The economy is strongly internationally linked• R&D-system dominated by big international

companies• Low investment by SMEs in R&D• Universities dominate the public R&D-system• Government invests very little R&D-money in

companies outside the military sector

Source: Olof Sandberg, Senior Adviser, Ministry of Enterprise, Energy and Communications (June 2008)


Key Challenges for Sweden

• Encourage New Equity based Hi-tech Firms with Innovation, Jobs, and Growth– Few Major New Firms Created in Sweden Since

1970 (30 of top 50 created before 1914)

• Improve collaboration between universities and business*

• Improve the commercialization of research results*

*Source: Sandberg, 2008


Deciphering the Swedish Paradox

• The Lisbon Agenda is an input measure– Without institutional change, little discernable

additionality will occur– What do you get for 0.2% more R&D?

• The Swedish Paradox is two-fold– On one hand, existing levels of R&D need to

be augmented by new incentives to bring research across the Valley of Death

– On the other hand, existing high levels of funding for research and certainly for commercialization may not be sufficient, given Sweden’s admirable tendency to “punch above its weight” in the global economy.

© Charles W. Wessner, PhD

Innovation in the United States

New Focus on Applied Research to address challenges in Energy, Health,

and the Environment

© Charles W. Wessner, PhD.13

Strengths of the American Model

• Sustained Growth: Despite the debt-fueled bubble, the U.S. economy grew by 63% between 1991 and 2009, – Compare with 35% for France, 22% for

Germany, and 16% for Japan• Stability: In 1975, the U.S. had 26.3% of

world GDP; today it is 26.7%– We’re not going away

• Science and Innovation are key to our future, as is new leadership

Source: New York Times, December 7, 2009


14

A Renewed Focus on Innovation

Science and innovation is "more

essential for our prosperity, our security, our

health, and our environment than it

has ever been."

President Obama at the National Academies—April 27, 2009


15

Obama Pledges to Raise R&D and Create new

Incentives for Innovation • “We will devote more than 3 percent of

our GDP to research and development.”– The U.S. joins the quest for the Lisbon Target

• “We will not just meet, but we will exceed the level achieved at the height of the space race, through policies that– invest in basic and applied research, – create new incentives for private innovation, – promote breakthroughs in energy and

medicine, and – improve education in math and science.”

Address to the National Academy of Sciences, April 27, 2009


16

National Economic Council: “A Strategy for American

Innovation” September 21, 2009• Invest in the Building Blocks of American

Innovation – Investments in human, physical, and

technological capital• Promote Competitive Markets that Spur

Productive Entrepreneurship• Catalyze Breakthroughs for National

Priorities– Develop alternative energy sources– Reduce costs and improve lives with health IT– Manufacture advanced vehicles


17

New Commitments to Support Innovation

Doubling of federal funding for basic research over 10 years at NSF, NIST, DOE (Office of Science)

New Investments in S&T InfrastructureNew Financing for S&T and InnovationMaking the research and

experimentation tax credit permanent

Increases are for Research, but not for

TransitionMyths about “Perfect Markets” mean insufficient focus on collaborations

essential for transitioning new ideas to the market

©Charles W. Wessner PhD19

The U.S. Myth of Perfect Markets

• Strong U.S. Myth: “If it is a good idea, the market will fund it.”

• Reality:– Potential Investors have less than perfect

knowledge, especially about innovative new ideas

– “Asymmetric Information” leads to suboptimal investments

– George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information“

Charles W. Wessner PhD20

Federally Funded

Research Creates

New Ideas

Product Development

and

Firm Growth

Capital to Transform Ideas into Innovations

No Capital

Reality: The Early-Stage Funding

Valley of Death

Dead Ideas


The Myth of U.S.Venture Capital Markets

• Myth: “U.S. VC Markets are broad & deep, thus there is no role for government awards”– “If you have a good idea, a good team, and you

sell it well, you will be funded”• George Scalise, President SIA, 29 April, 2008

• Reality: Venture Capitalists have– Limited information on new firms– Prone to herding tendencies– Focus on later stages of technology development– Most VC investors seek early exit


Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage

Firms:

Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2009

U.S. Venture Captial by Stage of Investment 2008

5%19%

37%

39%

Seed Stage: $1.5 billion440 Deals

Early Stage: $5.3 billion 1,013 Deals

Expansion Stage$10.6 billion1,178 Deals

Later Stage$10.8 billion1,177 Deals

Total: $28.2 Billion


U.S. Venture Investments Down 37% in 2009

U.S. Venture Capital by Stage of Investment 2009

9%

26%

31%

34%

Seed Stage: $1.7 billion312 Deals

Early Stage: $4.6 billion 883 Deals

Later Stage$5.9 billion799 Deals Expansion

Stage$5.5 billion801 Deals

Total: 17.7 Billion, 2795 dealsSource: PWC-MoneyTree Report, 2010


The Venture Capital Obsession• Investment in Public VC Funds = Substantial Risk

• “Extraordinary skewness of returns” on VC Investments in the United States*– About 15 percent of investments fail completely– 35 percent of returns are less than 100 percent– Only 15 percent of the firms that go public or are acquired

give a return greater than 1,000 percent!• Source: John H. Cochrane, “The Risk and Return of Venture Capital,”

Journal of Financial Economics, 75(1):3-52, 2005.

• Many companies live and grow without Venture Funding– “Hardly ten percent of the serial entrepreneurs took venture

money in their first startups”• Source: Duke University Survey, October, 2009 by V. Wadhwa

• Where is the Deal Flow?

Crossing the Valley of Death is a Major Challenge

There are many paths:The Small Business Innovation Research

(SBIR) Program is a Proven Approach


Oxygen for Innovation: What is SBIR?

• A Competitive Innovation Award Program that– Provides seed funding to worthy

entrepreneurs– Signals that there are promising

opportunities for private investors– Solves problems for government

agencies and improve markets– Creates products to address social

needs at the bottom of the Pyramid


The SBIR “Open Innovation” Model

PHASE IFeasibilityResearch

PHASE IIIProduct

Developmentfor Gov’t orCommercial

Market

Private Sector Investment

Tax RevenueFederal Investment

PHASE IIResearchtowards

Prototype

Social and Government Needs Drive the Program

$750K$100K

R&

D

Investm

en

t

Non-SBIR Government Investment

$151 billion

Solicitation Solicitation


Academies Research Reveals SBIR Impact on Firm Formation

and Growth• Company Creation: 20% of responding

companies said they were founded as a result of a prospective SBIR award (25% at Defense)

• Research Initiation: SBIR awards played a key role in the decision to pursue a research project (70% claimed as cause)

• Company Growth: Significant part of firm growth resulted from award

• Partnering: SBIR funding is often used to bring in Academic Consultants & to partner with other firms

29 © Charles W. Wessner, PhD

Universities play a Growing Role in Commercializing

Knowledge

Universities that are able to connect with Industry Drive

Regional Development and are Assets for National Competitiveness


From the “Ivory Tower” to the Marketplace

• “Pure” Research is not the only University Role

• Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lives– (and the tax dollars for

Research)

• Industry’s Needs and Questions can Drive Research and be a Source of Relevant Publications


Roles of the 21st Century University

• Teach the next generation– With up-to-date laboratories on real market questions– Focus on science needed to address current and future

questions (e.g., climate change, nuclear waste, stem cell research, genetically modified food)

• Conduct Research– “Curiosity-driven Research”– But also on Social Problems and Industry Needs

• Commercialize– New Science-led solutions to societal problems– New Products, Processes

• Generate Market-ready students– Create a cadre of creative and curious team players


Where are the 21st Century Universities?

• In California: Stanford and CalTech• In Massachusetts: MIT• In Flanders: KU Leuven• In Sweden: Chalmers and Jönköping

University • In Finland: the new Aalta University• We need to build more 21st Century

Universities– Is Sweden replicating its successes?


Today, Industry (and Regions) Rely on University Research to Create

Future Growth• University research draws ideas from commercial

trends—feedback loops from industry to universities are sources of Quality Research

• Regional economies rely on research universities for jobs, branding, growth, & entrepreneurship

• University innovation + early government funding are key to the growth of many successful technology companies

• A Supportive University Culture & Real Incentives are essential for the development of vibrant Innovation Clusters


New Focus in the U.S.

on Innovation Clusters


Greater Federal Role Seen for Fostering Regional Innovation

Clusters• “Regional industry clusters represent a potent

source of productivity at a moment of national vulnerability to global economic competition.”– Karen Mills, Clusters and Competitiveness, Brookings

2008

• The U.S. can facilitate knowledge exchanges and provide additional funds to encourage regional cluster development

• President Obama has called for a new federal effort to support regional innovation clusters


S&T Parks can be a Catalyst for Cluster Development

• Well-conceived and well funded S&T Parks can – Build partnerships among

researchers, small companies, and large companies

– Help create companies

– Advance university missions in education, research, and commercialization

SmallCompanies

University Researchers

ResearchInstitutions

PublicSupport

Large Companies

Universities

S&T Park


New National Academies Report on Research Parks

• Understanding Research, Science and Technology Parks: Global Best Practices (2009)

• Key Points– Research Parks stimulate and manage the flow of

knowledge among universities, R&D institutions, firms and markets

– They facilitate the creation and growth of innovation-based companies through spin-off and incubation

– They provide value-added services together with high quality space and facilities

– They help create a “Community of Innovation” or Cluster needed to transfer new ideas from universities and laboratories into the marketplace


Key Findings: Successful Research Parks Require…

• Critical Mass– Involvement of a Local Major Research Universities– Availability of Skilled Workers– Access to Finance– Good Park Infrastructure and Quality of Life Amenities

• Strong Leadership– Committed Political Champions– Strong and Committed Park Leadership– Attract Entrepreneurs and Skilled Managers

• Patient and Supportive Public Policies– Predictable, Substantial, and Sustained Funding– Complementary programs like SBIR


Parks are now a Worldwide Phenomenon

• Governments around the world are building research parks to– Facilitate the commercialization of new technologies– Attract leading technology companies from abroad– Benefit from and contribute to university research

• Significant financial and policy support from national & state governments drives park growth– Zhangjiang High Tech (ZHT) Park in Shanghai

• MNC R&D Centers encouraged to team up with Chinese research institutes

• Overseas Chinese scientists lured home with tax breaks and low rent—253 returnees for ZHT park alone in 2003

• Shanghai New Pudong Area Venture Fund provided more than $25 billion in venture capital in 2006 for the ZHT Park


U.S. Proposals to Support Clusters

• 2009 Appropriations Act provides the Economic Development Administration (EDA) $4 million to begin a regional innovation clusters program

• 2010 Legislation provides Support for Research Parks– Senate: Building a Stronger America Act

• Provides $500 million grants and loan guarantees for the development and construction of science parks over 5 years

– House: Science Parks Research and Innovative New Technologies (SPRINT) Act

• Authorizes $7.5 million for competitive grants for studies to develop new parks or expand existing research parks

• Guarantees up to 80 percent of loans for the construction of science parks

• Question of Critical Mass…


NAS Conference “Growing Innovation Clusters

for American Prosperity” • We are organizing a conference on

February 25, 2010 to: – Review the government’s new initiatives in

stimulating clusters– Explore role of universities and foundations

in their development.– Study specific strategies in place around the

country and around the world– Highlight institutions and programs that can

be leveraged now to grow and sustain clusters


The Global Innovation Imperative

• 3 Take Home Points– Innovation is Key to Growing and

Maintaining a Country’s Competitive Position in the Global Economy and to address Global Challenges

– Collaboration is Essential for Innovation as Small and Large Businesses, Universities, and Research Institutes Contribute to Regional Growth and Job Creation

– New Institutions and New Incentives, are increasingly important to foster innovation and collaboration


Our Common Challenge: New Incentives

• Overcome Complacency: Sweden and the United States need to address the Global Innovation Imperative by initiating change: – Incentives for entrepreneurial activity for

Small Firms, Large Firms, and Universities– New, better institutions that incentivize

cooperation among all actors

• Mutual Learning and Cooperation are Essential for our Common Future


Thank You

Charles W. Wessner, Ph.D.Director, Program on

Technology, Innovation and EntrepreneurshipThe U.S. National Academies

500 Fifth Street NWWashington, D.C. 20001

[email protected]: 202 334 3801

http://www.nationalacademies.org/step

© Charles W. Wessner PhD. 1 Addressing the Innovation Imperative Collaboration, Institutions, and...

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