2012 10 09_wessner_ft-worth

The Global Innovation Imperative The Challenge of Sustaining U.S. Leadership

Aerospace States Association Fall General Meeting Fort Worth, Texas October 9, 2012

Charles W. Wessner, Ph.D. Director, Technology, Innovation, and Entrepreneurship

The National Academies

Today’s Presentation

• The Innovation Imperative

– The changing Global Environment

– China, Singapore, Taiwan, Germany

• Innovation in the United States

– U.S. Strengths and Challenges

– The Role of the SBIR Program

– Manufacturing in the U.S.

• “Rising to the Challenge”

– Recommendations of the National Academies Report

• Conclusions

NB: Today’s presentation reflects my personal views

Current Global Mega-Challenges • Fostering Economic Growth through Innovation

– Driving domestic Growth and Employment

• Developing New Sources of Energy – Commercializing renewable alternatives to oil – Increasing the capacity to fuel growing global demand for

electricity

• Addressing Climate Change – 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

• Addressing these Global Challenges requires Innovation

The Global Innovation Imperative

• The capacity to innovate and capture the benefits of innovation is fast becoming the most important determinant of a nation’s ability to compete globally—

• A nation’s innovative capacity is tightly linked with its potential for economic growth, high-value job creation, and national security.

• Because governments around the world recognize this, they are providing significant support in five key areas…

Leading Countries and Regions are

Responding to the Innovation Challenge

• They are providing five things: – High-level Focus on Growth and Strength

– Sustained Support for Universities

– Rapidly Growing Funding for Research

– Support for Innovative Small Businesses

– Government-Industry Partnerships to bring new products and services to market

• They are investing very substantial resources to create, attract and retain the industries of today and tomorrow.

Asia and the

Innovation

Imperative

China’s Goal: To Become an

“Innovation-Driven Economy” by 2020

• Boosting R&D Investments – Expenditure on basic research doubled between 2004

and 2008 – Tax incentives for enterprises that invest in R&D

• Building first-world R&D Infrastructure and Facilities

• Developing World Class Universities – Investing in Higher Education at Record Levels

• Building Innovation Clusters though the development of large S&T Parks

• Acquiring technologies and talent from abroad

Source: Mu Rongpin, 2010 UNESCO Science Report

©Charles W. Wessner PhD 7

National Strategy -- China

Foster technology transfer by

– Attracting foreign investment in high-tech manufacturing (with conditions)

– Mandating foreign R&D to be carried out in China

– Encouraging return of trained overseas Chinese

Spur indigenous innovation by

– Educating a vast talent pool

– Supporting university R&D

– Creating science and technology parks

– Mandating procurement of “indigenous innovation”

– Providing low cost capital especially to State Owned Enterprises

Its not just Size but Focus!

Singapore’s Innovation Strategy

• Singapore (population: 4.5 million) goal is to be Asia's preeminent financial and high-tech hub. – Positioning itself as the key to Asia’s markets, talent, and

intellectual properties – Seeking to be a ‘plug-and-play’ platform for research

companies for global and domestic R&D activities.

• Government investing $12.8 billion under the Research, Innovation and Enterprise 2015 plan

• A*STAR is Singapore’s lead innovation agency – Over $5 Billion in funding to develop human capital, R&D,

and innovation. – Oversees 14 biomedical sciences and physical sciences

and engineering research and commercialization institutes – Fostering clusters with Biopolis and Fusionopolis labs

Taiwan’s Innovation Strategy

• Population: 23 million

• High-level Policy Focus

– “Innovation is unquestionably the key to Taiwan’s sustained economic growth,” --National Science and Technology Development Plan 2009-12

• University Reforms and Rising Commitment to R&D

– Seeking Greater Financial and Regulatory Autonomy

– More public support for Research Universities

– Taiwan has achieved the 3 percent R&D target

• Small Business Support, including SBIR

• Government-Industry Partnerships

Taiwan’s Public-Private Partnerships • Hsinchu Park Complex

– Multi-billion dollar S&T Park with Universities and Research Institutes and Business

– Home to the world's top two semiconductor foundries, Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC)

• Industrial Technology Research Institute – R&D in information and communications

technology, electronics and optoelectronics, nano and biotechnology, advanced manufacturing, and environmental technologies.

– ITRI’s budget is $510 million (half from the Gov’t. and half from private sources)

Growing Commitments to R&D

Charles W. Wessner, PhD 12

How do you compete with low-

wage Asian countries?

Germany’s Approach is to support Applied Research, Manufacturing,

and Exports

Germany’s Innovation Strategy

focuses on Manufacturing • Germany is a high-wage, highly-regulated, high-

tax, unionized developed economy

• Factors behind Germany’s manufacturing success* – Support for “traditional” industries: Cars, Machines, and

Chemicals

– Focus on niche markets

– Continuous vocational training for workers

– Manufacturing firms enjoy stable access to finance

– Support for applied research in cooperation with companies

– Well funded export promotion programs

• Vibrant “Mittlestand” – Over 1000 German SMEs are #1 or #2 in world market or #1 in

Europe *Susan Helper et al., “Why does Manufacturing Matter?” Brookings, 2012

14 © Charles W. Wessner PhD.

Germany’s Fraunhofer Model is an

Example of Global Best Practice

• Focus on application-oriented research

• Provides effective R&D support both for SMEs and large Companies: More than 20,000 staff

• €2 billion annual budget – 1/3 from German Federal and State funding

– 1/3 from publicly funded research projects, including EU projects

– 1/3 from contracts with Manufacturing Clients, who often receive public funds

• Dense network of 60 research institutes in Germany and more institutes around the world. – 7 are now in the U.S.

German Exports to China Soar

“Germany’s economic

fortunes have become

linked to China’s;

exports to the country

were worth €65 billion

last year, more than

double the 2007 level.”

Financial Times, April

20, 2012

Germany is not Resting on its Laurels

• Germany’s Federal and State Governments will raise spending levels for education and research to 10% of GDP by 2015.

– 7% targeted for education and 3% for research.

• New High Tech Strategy 2020 seeks to

– Create lead markets in Germany

– Intensify cooperation between science and industry

– Improve the framework conditions for innovations, including the climate for start-ups

Innovation in the United States

Good News, Bad News,

U.S. Framework Conditions favor

Innovation and Entrepreneurship • Openness to science and innovation

• Trust in Science & Scientific Institutions

• Positive Social Norms • High Social Value on Commercial Success

• Forgiving Social Norms allow more than one try

• Entrepreneur-friendly Policies • Markets Open to Competition

• Gentle Bankruptcy Laws permit rapid recovery

• Taxes give Prospect of Substantial Rewards

• Strong Intellectual Property Regime:

• Encourages Research & Diffusion of Research Results

Good News: The U.S. has a Large

Share of Global R&D

Others

Total global R&D spending reached $1,252 billion in 2010.

SOURCE: Battelle and R&D Magazine, 2012 Global R&D Funding Forecast (December 2011).

Germany

Europe

Others

U.K. India

France

But: The DoD R&D Budget is over 50%

Source: AAAS, 2010

22 © Charles W. Wessner PhD

And, ~90% of Defense R&D Spending is

for Weapons Systems Development

Source: AAAS, 2010

Federal R&D Spending: A Declining Share of GDP

• Given the particular importance of federal R&D expenditures for basic research, the long-run implication of declining federal investment as a share of total R&D is slower technological progress and potentially slower growth.

The Major Risks to the U.S.

• Complacency about our competitive position

• Focus on current consumption rather than investment for the future

– A lack of investment in R&D on the scale of our fathers and our competitors

• Limited attention to the composition of the economy, including trade and investment policy

• Failure to focus on the commercialization of research and on manufacturing

A Major U.S. Problem

• We seem to no longer understand the complementary roles of Government and Industry in developing new industries and supporting the ones we have.

• Government has played a crucial role in the development of many U.S. industries

• Let’s look back a moment, then forward…

What does History Show us about

the U.S. Government Role? • 1798 - Grant to Eli Whitney to produce muskets

with interchangeable parts, founds first machine tool industry in the world

• 1842 - Samuel Morse receives award to demonstrate feasibility of telegraph

• 1903 – Wright Brothers fly, fulfilling the terms of an Army contract!

• 1915 – National Advisory Committee for Aeronautics instrumental in rapid advance in commercial and military aircraft technology

More Recent History of Picking Winners • 1919 – Radio manufacturing (RCA) founded on

initiative (equity and Board Membership) of U.S. Navy with commercial and military rationale.

• 1925 – U.S. Postal Act launched U.S. Aircraft Industry

• 1940s, ’50s, ’60s – Radar, Jet Aircraft, Computers, Satellites, Nuclear Energy, Semiconductors

– Government-supported industries are “the Foundations of the Modern Economy,” Cohen & Noll

• 1969-1990s - Government investment in forerunners of the Internet (Arpanet) and establishment of the Global Positioning System

• 2000s – Focus on Nanotechnologies, Flexible Electronics, Biomedical Research

Government Role in Innovation

– But what, apart from the roads, the sewers, the medicine, the Forum, the theater, education, public order, irrigation, the fresh-water system and public baths... what have the Romans ever done for us?

(and the wine, don’t forget the wine…)

• Listening to some Americans critical of the government’s role brings to mind the Jewish patriot criticism of the Romans in the Monty Python film “Life of Brian”. “

– The Economist, May 1, 2004

A Major U.S. Asset

Innovative Small Businesses

In the U.S., Small Businesses Drive

High-Technology Innovation

• Small Companies are Key Players in Bringing New Technologies to Market

– Audretsch & Acs

• Innovative American Small Businesses – Increase Market Competition – Generate Taxable Wealth – Create Welfare-Enhancing Technologies – Over time, innovative small businesses (like

Microsoft, Intel and Google) transform the composition of the economy

Key Role of Immigrant Entrepreneurs

• Immigrants have played a key role in starting new high technology businesses in the U.S.

– Many market transforming companies have been founded by immigrants.

• But there is new evidence of a “historically unprecedented halt in high-growth, immigrant-founded start-ups.”

– Vivek Wadhwa, “The Immigrant Exodus” (October, 2012)

• Current immigration rules mean that some of the most educated and talented entrepreneurial immigrants see no choice but to take their innovative ideas elsewhere.

Entrepreneurs face High Regulation

and Venture Funding Challenges

• Regulatory compliance exerts a disproportionately large burden on small companies

– The fixed costs of adhering to rules can be spread out over more revenue in large firms than in small ones

• Early Money is Hard

– Myths about “Perfect Markets” are widespread.

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

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

Federally Funded

Research Creates

New Ideas

Innovation,

Product Development and Growth

What’s needed? Capital to Transform Ideas into Innovations

No Capital

A Major Hurdle for Innovators The Valley of Death

New Ideas are “new”; often they cannot attract support

Charles W. Wessner PhD 35

The Myth of Perfect

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

– VC investments have moved towards later, less risky stages of technology development

– Limited investments in the seed stage of investment—$1.7 billion (363 deals) in 2010: • Important but not large

Seed Stage Investments

Dropped by 48% in 2011

Limits of Venture Capital

• Venture Capital is great for scaling of production and new products

• Bringing Companies forward to the Market

• Gaining Market Access and other Sources of Capital

• But it is only one Path

• The First Money often is not VC

The “First Money” is Needed to

cross the Valley of Death

One Proven Path Across the Valley of Death is the U.S. the

Small Business Innovation Research Program (SBIR)

What is SBIR?

• SBIR is a highly-competitive, double-gated innovation system, providing awards to small companies to

– Phase I: Provide Proof of Principle

– Phase II: Develop Prototypes

• Founded in 1982, SBIR provides money to convert Knowledge into Products to meet Government and Societal Needs

• Successful Companies Attract Private Capital and/or win Public Contracts

The SBIR “Open Innovation” Model

PHASE I Feasibility Research

PHASE III Product

Development for Gov’t or Commercial

Market

Private Sector Investment

Tax Revenue Federal Investment

PHASE II Research towards

Prototype

Social and

Government Needs

$1M $150K

Non-SBIR Government Investment

$142 billion

Who Gets SBIR Awards?

• Top SBIR States are

–California 20.8%

–Massachusetts 14.5%

–Virginia 5.5%

–Maryland 5.1%

–New York 4.2%

–Texas 4.0%

To Score, you have to Shoot

• States with the most applications get the most awards.

• Number of awards depends on – State population – The number of eligible high-tech

companies – The science and engineering talent in

the state – State, federal, and private R&D

expenditures – The number of research universities. – State SBIR support programs

Why Entrepreneurs like SBIR • Provides ‘first money’

– Helps get new projects started

– Academics can apply even without a company

• No dilution of ownership; owners retain control

• No repayment is required

– Government recoupment is through the tax system

• SBIR recipients retain intellectual property developed using the SBIR award

– No royalties owed to the government, though government retains royalty-free use for a limited period

• Certification effect draws in additional investment

– Signal to private investors of technological validity and commercial promise of the innovation

SBIR’s Advantages for Government

• A low-cost technological probe – Enables government to explore more cheaply

ideas that may hold promise – Identifies dead-ends before substantial

investments are made

• Quick reaction capability – Solicitations topics can respond rapidly to urgent

national needs – Anthrax attacks led NIH to seek and get

innovative bio-defense technologies

• Diversifies the Government Supplier-base – Brings in competition, low-cost solutions, new

approaches to address mission needs

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

SBIR Success takes Many Forms

• Employment Success – SBIR helps new Start-ups grow, creating the high quality

jobs of the future

• Innovation Success – New products, patents, licenses, and publications

• Government Mission Success – Acquisition and Procurement – NASA uses SBIR-funded Lithium-ion batteries to power the

Mars Rover – DOD uses SBIR developed armor to shield against IEDs

• NASDAQ Success – SBIR investments contributed to the success of companies

like Qualcomm, ATMI, Martek, Luna

The American Manufacturing

Challenge

Manufacturing Matters for Innovation and Competitiveness

Why does Manufacturing Matter? • Fosters Economic Growth

– U.S. manufacturing produces $1.6 trillion of value each year

• An important Source of Employment – Manufacturing supports an estimated 18.6 million

jobs in the U.S.—about one in six private sector jobs

• Strengthens our Nation’s Technological Capacity – U.S.-based manufacturers conduct half of all private

R&D done in the United States

• Improves Competitiveness and Expands Trade – It provides goods for export, and the currency

earnings that come with exports to maintain national economic independence

Source: National Association of Manufacturers, 2009

Declines in U.S. Manufacturing

Employment

Aren't manufacturing job losses are due to

superior productivity performance?

• Manufacturing job loss reflects actual output decline, not just productivity increases.

• Output productivity growth in U.S. manufacturing sectors may well be overstated – Off-shoring can lead to overstated measures of output and

productivity growth for the U.S. manufacturing sector

– Productivity measures reflect the gains in efficiency associated with lower-cost imported inputs (Source BEA, 2012)

• U.S. manufacturing decline is neither “inevitable” nor “normal,” demonstrated by the fact that manufacturing is growing in many nations, including advanced nations with high costs, high taxes & high regulations.(ITIF, 2012)

Other Causes of Shifts in U.S. Output

• Modern mercantilism:

– Currency manipulation

– Closed markets

– Tax subsidies and tariffs

– Direct subsidies—e.g., land and capital

– Discriminatory national procurement

– Standards and regulations

– Organized theft—forced transfer of IP & obligatory joint ventures

Declines in U.S. Trade Balance for

Manufactured Products

Erosion of

America’s high-

manufacturing

base can

undermine

U.S. leadership

in next-

generation

technologies.

U.S. based Manufacturing is Closely

Linked to U.S. based Innovation

•Anchoring more production onshore provides

– More high paying, quality jobs and

– Synergies for further innovation.

•This is a challenge in an environment where fiscal constraints are leading to

– Stagnant Federal R&D spending

– Declines in university funding

– Too little policy attention to manufacturing incentives

– Inadequate investments in infrastructure

So, how must the U.S. Address

the Competitive Challenges

of the 21st Century?

The Focus of a major new National Academies Report

The 21st Century Challenge

• A New Global Economy: The rapid transformation of the global innovation landscape presents opportunities and tremendous challenges for the United States.

• Others are working harder, making investments, staying focused, and using the global trading system to their advantage

• Current U.S. efforts are insufficient to grow & sustain globally competitive U.S. industries & a prosperous and secure future.

New National Academies Report

• Rising to the Challenge: U.S. Innovation Policy for the Global Economy – Documents the rapid transformation of the global

innovation landscape

– Identifies major challenges as well as important opportunities for the United States in this new world

– Sets out what the U.S. must do to retain its leadership in science and technology

The Report Identifies

4 Key Goals for the U.S.

• Monitor and Learn what the Rest of the World is Doing

• Reinforce the policies and programs that provide the foundations for our own knowledge-based growth

• Capture greater value from its public investments in research through partnerships and applied research

• Cooperate more actively with other nations to advance innovations that address shared global challenges

What does the Report

Recommend we do? • Raise federal and private R&D

investment

• Provide more Support for and less Regulation of universities

• Reinforce partnerships that foster commercialization of research

• Foster the development of innovation clusters

More Report Recommendations

• Educate and attract a skilled workforce

• Expand programs and find institutions to support manufacturing

• Create opportunities to connect research to products

• Provide risk capital and reduce regulatory burdens for small businesses and revisit tax burdens on large companies

To Conclude

What we need to do is to work out a deal to make needed spending cuts and generate new revenue to put government back to work for us

Recognize the Challenge of Global

Competition for our Security, our Standard

of Living, and our Children’s Future

• Governments around the world are assertively implementing policies and programs to win the global competition for new (and old) industries and the jobs and growth they bring.

• There is a growing convergence of capabilities across the globe to connect research to industries.

• We need to work harder and work together.

Thank You

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

Technology, Innovation and Entrepreneurship The U.S. National Academies

500 Fifth Street NW Washington, D.C. 20001

cwessner@nas.edu Tel: 202 334 3801

http://www.nationalacademies.org/step

2012 10 09_wessner_ft-worth

innovative

national academies

global innovation

national academies

small companies

applied research

united states

venture capital

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