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Dr. Charles W. Wessner

Dr. Charles W. Wessner. Director, Technology & Innovation The National Academies of Sciences, USA. Advisor, US Congress & Executive Agencies Adjunct Professor, George Washington University; University of Nottingham, England; Max Planck Institute, Germany

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Dr. Charles W. Wessner

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  1. Dr. Charles W. Wessner Director, Technology & InnovationThe National Academies of Sciences, USA

  2. Advisor, US Congress & Executive Agencies • Adjunct Professor, George Washington University; University of Nottingham, England; Max Planck Institute, Germany • Advisor, OECD Committee on Science and Technology Policy • Advisor, Mexican National Council on Science and Technology • Advisor, Finland National Technology Agency (Tekes) • Advisor, Sweden National Technology Agency (VINNOVA) • Member, Norwegian Technology Forum

  3. Fostering Knowledge & InnovationAn Overview of the United States Innovation System  Innovation & Competitiveness Practitioners Workshop Istanbul, Turkey April 19, 2004 Charles W. Wessner, Ph.D. Director, Technology and Innovation National Research Council

  4. The U.S. National Academies National Academy of Sciences National Academy ofEngineering NRC Mission: • The NRC is the Operating Arm of the National Academies; it includes 1300 Staff and a Budget of $160 Million • The NRC Mission is the Advise the Government on Science, Engineering, and Medicine: 270 Reports Each Year Institute of Medicine National Research Council

  5. What is a National Innovation System? • A network of institutions in the public and private sectors whose activities and interactions initiate, develop, modify, and commercialize new technologies • Increasingly, governments around the world view the development and transformation of such systems as an important way topromote innovation —thus improving the competitiveness of domestic industries and services • Can be better understood as anEco-system

  6. Why National Innovation “Eco-Systems”? • “Eco-Systems” Because Innovation Systems Grow and Evolve • They are not constructed by an engineering team to reach a fixed point • The Good News: New policies and institutional change can help ecosystem to grow in new ways for new needs • Ecosystem characterized by dynamic linkages among multiple sub-systems…

  7. National Innovation “Eco-Systems” • Ecosystem strengthened through linkages among a Nation’s • Human Resource base, • Information Infrastructure • Universities and Research Institutes, • A Positive Business Environment • Enabling Government Policies and Programs • The Policies drive the System

  8. Strong Aggregate Commitments to R&D Distributed system with multiple paths of Inquiry and Trial Culture of Inquiry & Entrepreneurship Entrepreneurship-friendly Business Environment Distribution of research portfolio can cause gaps & shortfalls, and can reduce the impact of R&D investments Political myths about the primacy of markets inhibit commercialization mechanisms Dominance of Military R&D, Capacity Constraints & Waste lowers return on R&D investments U.S. Innovation EcosystemStrengths &Weaknesses

  9. Presentation Topics • Trends and Anomalies in US R&D Funding • Strong Aggregate Commitments • But Linkages to Commercial Realization are less robust • Myths and Market Realities about the US Innovation System • Myth of Perfect Markets mean that Promising New Ideas are often not adequately funded • The Path to Commercialization is Complex • Sustaining Innovation-Led Growth • Fostering an Enabling Business Environment • Government Awards to Spur Growth: The SBIR Model • Innovation Transfer from Universities • Concluding Points

  10. Trends & Anomalies in U.S. R&D FundingThe Good News and theBad News

  11. Strong U.S. Commitment to R&DShares of Total World R&D, 2001 • Total World R&D = $746.7 billion • U.S. share = $276 billion • EU share = $187 billion • Source: OECD Main S&T Indicators, 2004; AAAS, 2004 • Calculated using purchasing power parities, Jan 2004

  12. Trends in U.S. R&D FundingThere is Good News, but…Total R&D is Rising (but Federal R&D Spending is flat)

  13. U.S. Industry and Federal R&D: 2000Industry R&D is More Focused on Development than Basic or Applied Research Expenditures in Billions of U.S. Dollars Source: AAAS

  14. More Good NewsPublic Research has Surged in Health: A National Decision to Increase our Bet Source, AAAS, 2003

  15. Trends in U.S. R&D FundingThe Bad News: An Uneven Record Changes in Federal Research Obligations for All Performers and University/College Performers FY 1993–1999

  16. The Really Bad News Random Disinvestment: Real Declines for Research in Physics, Chemistry, & Engineering Risk a Lag Effect FY 1993–1999;constant 1999 dollars

  17. Anomalies in R&D Fundingin U.S. Innovation System • R&D Investments in IT-Related Disciplines Dropped in Real Terms in the 1990s • Yet, IT Innovation is the Main Driver of U.S. Productivity Surge • Investments in Biomedicine are Up • But complementary IT investments are needed to capitalize on biomedical progress • Super Computers needed for DNA Analysis • Imaging Technologies and Diagnostics rely on IT advances • Multi-disciplinary Approaches, e.g., Bioinformatics are required

  18. Criticisms of the U.S. Innovation System • Overall R&D Spending is Inadequate • Insufficient R&D investment in the future • 2% in the 1960’s—now 0.8% of GDP • Too Much Concentration on Military R&D – 52% • Low-utility for civilian economy • Slow or No spin-out for most R&D investments • Too Much Focus on Health Research at NIH and Not Enough on the Necessary Information Technologies • Surge in Bio-terrorism funding faces capacity constraints • Inadequate Commercialization Mechanisms • Ideological/political blockages for effective programs • U.S. myths about perfect markets and role of venture capital prevent effective policy making • U.S. programs are too few and under-funded

  19. Policy Myths & Market Realities • The Myth of Linear Innovation • The Myth of Military Spin-Offs • The Myth of Perfect Markets • The Myth of the Venture Capital Solution

  20. The Myth of the Linear Model of Innovation • Myth: Innovation is a Linear Process Basic Research Applied Research Development Commercialization • Reality: Innovation is a Complex Process • Major overlap between Basic and Applied Research, as well as between Development and Commercialization • Principal Investigators and/or Patents and Processes are Mobile, i.e., not firm-dependent • Many Unexpected Outcomes • Technological breakthroughs may precede, as well as stem from, basic research

  21. Non-Linear Model of Innovation • Quest for Basic Understanding • New Knowledge • Fundamental Ideas Basic Research • Potential Use • Application of Knowledge to • a Specific Subject • “Prototypicalization” • New • Unanticipated • Applications • Feedback: • Basic Research • needed for discovery • Search for new • ideas and solutions to • solve longer-term • issues Applied Research • Feedback: • Applied Research • needed to design • new product • characteristics • Development of Products • Goods and Services Development • Feedback: Market Signals/ • Technical Challenge • Desired Product Alterations • or New Characteristics • Cost/design trade-off Commercial- ization

  22. The Myth of Military Spin-Offs • Euro Myth: “U.S. Defense Research/Procurement Directly Funds Civilian Technologies” • Reality: “Very few technologies proceeded effortlessly from defense conception to commercial application.” • Secrecy, military specs, and long lead times slow diffusion of new defense technologies • Billions for Stealth Technologies: What civilian market? • Even efforts to use low-cost civilian technologies for defense use, i.e., “spin-ins,” are often blocked by complicated military procurement system Beyond Spin-off, John Alic, Lewis Branscomb, et al.

  23. The Myth of Military Spin-Offs • Defense Industry Contracted Sharply in Ten Years after End of Cold War • Major American Contractors dropped from 15 to 5 • Industry is detached from mainstream U.S. economy • Dedicated programs with limited spin-off now compounded by long-term, slow moving contracts • Defense R&D Funds Concentrated on Small Number of Engineers with Strong Applied Focus • Issue of scale: Intel at $100 Billion value vs. top three defense groups combined is $50 Billion • Spin-Off of Platform Technologies is Diffused • Semiconductors and Internet applied widely • Engines and Airframe: Spillovers are substantial

  24. The 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 • This means that it is hard for small firms to obtain funding for new ideas

  25. Reality: The Valley of Death Early-Stage Funding Gap Capital to Develop Ideas To Innovation Federally Funded Basic Research Creates New Ideas Applied Research & Innovation No Capital

  26. The Valley of Death • A Series of Gaps • Gap in Available Cash Necessary to develop technology to Proof of Principle, Prototype, and/or Product • Gaps in Information between Entrepreneur and potential Investor and Partner about • Technology—What is it? • Potential of Technology—What can it do? • Business Opportunity—What size market?

  27. The Cash Flow Valley of Death Adapted from: L.M. Murphy & P. L. Edwards, Bridging the Valley of Death—Transitioning from Public to Private Sector Financing, Golden CO: National Renewable Energy Laboratory, May 2003 Technology Creation Technology Development Early Commercialization Successful Cash Flow Cash Flow Valley of Death Moderately Successful Time SBIR & ATP Unsuccessful Unsuccessful Federal Agencies, Universities, States Typical Primary Investors Entrepreneur & Seed/Angel Investors Venture Capitalists IPO

  28. The Myth of U.S.Venture Capital Markets • Myth: “U.S. VC Markets are broad & deep, thus there is no role for government awards” • 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 Early-Stage Firms

  29. Sustaining Science-Based GrowthFirm Creation & Job Growth

  30. Basic Research and Small Companies Drive Science-Based Growth • Basic Research is Key in Supplying a Steady Stream of “Fresh and New” Ideas • Ideas, if Effectively Transferred to the Private Sector, can become Innovations • Basic research is Essential, but not Enough • Innovations can become Commercial Products driving Growth—with the Right Policy Support • Developing Incentives to spur Innovative Ideas for New Products is a Central Policy Challenge • Small Companies are Key Players

  31. Importance of Small Businesses to the U.S. Economy • Small Businesses are a Key Driver of the U.S. Knowledge-Based Economy • Generating 60% to 80% of Net New Jobs Annually • 2.5 million of the 3.4 million Total Jobs—1999-2000 • Employs 39% of High-Tech Workers—Scientists, Engineers, Computer Workers • Producing 14 times more Patents per Employee than Large Patenting Firms • Patents are of High Quality • Twice as Likely to be Cited

  32. Small Businesses… • Grow Jobs • Generate Taxable Wealth • Create Welfare-Enhancing Technologies • Transform the Composition of the Economy, Developing Products to Ensure our Well-Being and Productivity in the Future This is Why we Punish Them!

  33. Challenges Facing Small Firms in the United States: Regulation & Finance • SME’s Face High Regulatory Burdens • Very small firms (less than 20 employees) spend 60% more per employee than large firms to comply with federal regulations • New Firms Struggle for Adequate Financing • Start-Up funds from “Friends, Family, and Fools” • Over 80% of small firms in U.S. rely on credit but banks hesitate to lend

  34. VC Markets More Risk Averse Source: PriceWaterhouseCoopers/Venture Economics/National Venture Capital Association Money Tree Survey, 2004

  35. Breakdown of U.S. Venture Capital by Stage of Development-2001 $799 million Total= $41.284 billion Source: PricewaterCoopers, Venture Economics, National Venture Capital Association, 2003

  36. Breakdown of U.S. Venture Capital by Stage of Development-2003 Startup/Seed $354.3 million Total = $18.2 billion

  37. Why Do Funding Gaps Matter? • Because Equity-Financed Small Firms are a Leading Source of Growth in Employment in the United States • Equity-Financed Small Firms are One of the Most Effective Mechanisms for Capitalizing on New Ideas and Bringing Them to the Market • Audretsch and Acs

  38. Significance of Pubic Support forEarly-Stage Technology Development Collapse in Venture Funding Revealed Importance of Other Sources of Early-Stage Finance

  39. New Research: U.S. Funding Sources for Early-Stage Technology Development Multiple Actors * Multiple Sources of Finance Focused on Different Stages * Government Role is Significant Branscomb & Auerswald, Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development, NIST, 2002

  40. Surprising Role of U.S. Government in Early-Stage Technology Development • Markets for Allocating Risk Capital to Early-Stage Technology Ventures are not Efficient • Most Early-Stage Funding comes from • Individual “Angel” investors, • Corporations, and • Federal Government • Not Venture Capitalists! • Federal Technology Development funds Complement Private Funds • More important than we thought

  41. U.S. Entrepreneurial Environment A Key to Knowledge-Based Growth Sources and Limitations • Drive for Ownership: High Rates of Business Formation • High Social Value placed on business success • Low penalties for failure: Gentle Bankruptcy Laws • Low Regulatory barriers for entry • Ease of company formation • Access to early-stage financing—very important • Pace of activity increases the effective value of capital

  42. U.S. Policy Framework Strong but Uneven R&D Commitment • Spending Helps: Record funding for federal R&D: • FY 2005 R&D=$131.9billion • DoD R&D up 6.7% to $69.9 Billion • But funding for basic research remains flat • NIH has doubled over five years to $28.8 Billion • NSF to increase to $5.7 Billion • DOE to increase to $8.9 Billion • DHS rapidly expanding to $1.2 Billion • Problems with expenditure • Large increases in R&D funding for weapons development and homeland defense, but flat or declining funding for the rest of the R&D portfolio • Focus on military development misstates figures and reduces return on R&D portfolio

  43. Positive Policy Framework:Microeconomic Incentives • Positive Incentives for Entrepreneurs • Strong Intellectual Property Regime: Personal Incentive for Invention • Tax Policy: Potential High Returns are the Best Incentive for High Risks • Regulatory Policy: Low Regulation for New Entrants = Lower Cost, Faster to Market • Labor Flexibility: Hire and Fire as Needed • Firms that Can’t Fire, Will not Hire (or Invest) • Good Goals do not Guarantee Good Policy

  44. Positive Policy Framework:Intermediating Institutions • Public-Private Partnerships • Innovation Awards —SBIR, ATP • S&T Parks • University-Industry Clusters • Industry Consortia

  45. U.S. Policies for Innovation-Led GrowthGovernment Awards to Spur Innovation-Led Growth:SBIR

  46. Programs to Bridge the Valley of Death Pre 2002 Uncertainty and Distance to Market Startup: Friends, Families & Fools Strategic research Curiosity research Applied research Seed: Angel Investors The Financial “Valley of Death” The Focus of SBIR and ATP SBIR Procurement ATP Need for Supportive Policy Framework Prototype Product development Commercialisation 1st Round VC 2nd Round VC Capital Allocation Curve Business development Investment Expansion Total Allocated Resources

  47. U.S. Innovation Curve Post 2002 Uncertainty and Distance to Market Startup: Friends, Families & Fools Curiosity research Strategic research Applied research Seed: Angel Backers The Financial “Valley of Death” The Focus of SBIR and ATP SBIR Procurement and ATP are More Important Need for Supportive Policy Framework Prototype Product development Commercialisation 1st Round VC Capital Allocation Curve 2nd Round VC Business development Investment Expansion Total Allocated Resources

  48. The SBIR Program • Created in 1982, Renewed in 1992 & 2001 • Participation by all federal agencies with an annual extramural R&D budget of greater than $100 million is mandatory • Agencies must set aside 2.5% of their extramural R&D budgets for small business awards • Currently a $2 billion per year program • Largest U.S. Partnership Program

  49. SBIR:Critical Source of Predictable Funding for Early-Stage Finance • SBIR—Main Source of Federal Funding for Early-Stage Technology Development • SBIR over 85% of Federal Financial Support for Early-Stage Development • SBIR over 20%of Funding for Early-Stage Development from all sources * SBIR *Estimate of Federal Government Funding Flows to Early-Stage Technology Development—Based on total funding for ATP, SBIR & STTR programs by Branscomb and Auerswald 2002

  50. SBIR Model Social and Government Needs Private Sector Investment PHASE III Product Development for Gov’t or Commercial Market PHASE I Feasibility Research PHASE II Research towards Prototype R&D Investment $100K $750K Tax Revenue Federal Investment

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