[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
SUPPORTING INNOVATION IN
THE 21ST CENTURY ECONOMY
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HEARING
BEFORE THE
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 24, 2010
__________
Serial No. 111-90
__________
Printed for the use of the Committee on Science and Technology
Available via the World Wide Web: http://www.science.house.gov
______
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COMMITTEE ON SCIENCE AND TECHNOLOGY
HON. BART GORDON, Tennessee, Chair
JERRY F. COSTELLO, Illinois RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas F. JAMES SENSENBRENNER JR.,
LYNN C. WOOLSEY, California Wisconsin
DAVID WU, Oregon LAMAR S. SMITH, Texas
BRIAN BAIRD, Washington DANA ROHRABACHER, California
BRAD MILLER, North Carolina ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois VERNON J. EHLERS, Michigan
GABRIELLE GIFFORDS, Arizona FRANK D. LUCAS, Oklahoma
DONNA F. EDWARDS, Maryland JUDY BIGGERT, Illinois
MARCIA L. FUDGE, Ohio W. TODD AKIN, Missouri
BEN R. LUJAN, New Mexico RANDY NEUGEBAUER, Texas
PAUL D. TONKO, New York BOB INGLIS, South Carolina
JOHN GARAMENDI, California MICHAEL T. MCCAUL, Texas
STEVEN R. ROTHMAN, New Jersey MARIO DIAZ-BALART, Florida
JIM MATHESON, Utah BRIAN P. BILBRAY, California
LINCOLN DAVIS, Tennessee ADRIAN SMITH, Nebraska
BEN CHANDLER, Kentucky PAUL C. BROUN, Georgia
RUSS CARNAHAN, Missouri PETE OLSON, Texas
BARON P. HILL, Indiana
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
KATHLEEN DAHLKEMPER, Pennsylvania
ALAN GRAYSON, Florida
SUZANNE M. KOSMAS, Florida
GARY C. PETERS, Michigan
VACANCY
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Subcommittee on Technology and Innovation
HON. DAVID WU, Oregon, Chair
DONNA F. EDWARDS, Maryland ADRIAN SMITH, Nebraska
BEN R. LUJAN, New Mexico JUDY BIGGERT, Illinois
PAUL D. TONKO, New York W. TODD AKIN, Missouri
DANIEL LIPINSKI, Illinois PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona
GARY C. PETERS, Michigan
BART GORDON, Tennessee RALPH M. HALL, Texas
MIKE QUEAR Subcommittee Staff Director
MEGHAN HOUSEWRIGHT Democratic Professional Staff Member
TRAVIS HITE Democratic Professional Staff Member
HOLLY LOGUE Democratic Professional Staff Member
DAN BYERS Republican Professional Staff Member
VICTORIA JOHNSTON Research Assistant
C O N T E N T S
March 24, 2010
Page
Hearing Charter.................................................. 2
Opening Statements
Statement by Representative David Wu, Chairman, Subcommittee on
Technology and Innovation, Committee on Science and Technology,
U.S. House of Representatives.................................. 6
Written Statement............................................ 6
Statement by Representative Judy Biggert, Member, Subcommittee on
Technology and Innovation, Committee on Science and Technology,
U.S. House of Representatives.................................. 7
Written Statement............................................ 7
Witnesses:
Hon. Aneesh Chopra, Chief Technology Officer of the United
States, White House Office of Science and Technology Policy
(OSTP)
Oral Statement............................................... 8
Written Statement............................................ 10
Biography.................................................... 14
Dr. Mark Kamlet, Provost, Carnegie Mellon University
Oral Statement............................................... 15
Written Statement............................................ 17
Biography.................................................... 21
Dr. Robert D. Atkinson, President, the Information Technology and
Innovation Foundation (ITIF)
Oral Statement............................................... 21
Written Statement............................................ 23
Biography.................................................... 54
Dr. Dan Breznitz, Associate Professor, the Sam Nunn School of
International Affairs, Georgia Institute of Technology
Oral Statement............................................... 55
Written Statement............................................ 57
Biography.................................................... 63
Mr. Paul Holland, General Partner, Foundation Capital
Oral Statement............................................... 64
Written Statement............................................ 66
Biography.................................................... 72
SUPPORTING INNOVATION IN THE 21ST CENTURY ECONOMY
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WEDNESDAY, MARCH 24, 2010
House of Representatives,
Subcommittee on Technology and Innovation
Committee on Science and Technology
Washington, DC.
The Subcommittee met, pursuant to call, at 10:39 a.m., in
Room 2318 of the Rayburn House Office Building, Hon. David Wu
[Chairman of the Subcommittee] presiding.
hearing charter
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON SCIENCE AND TECHNOLOGY
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION
Supporting Innovation in the
21st Century Economy
wednesday, march 24, 2010
10:30 a.m.-12:30 p.m.
2318 rayburn house office building
1. Purpose
Innovation, ``the development of new products, services, and
process,'' \1\ has had an indelible impact on the lives of Americans
and is increasingly important for ensuring the well-being of the
Nation's economy. While new technology like the Internet dramatically
changed society in a short period of time, such profound innovation has
remained elusive in sectors like energy, where fossil fuels have
dominated for over a century. This hearing will examine factors that
drive innovation, as well as those that impeded it. In addition, this
hearing will discuss the role of the Federal Government in promoting
the innovation that is crucial for American prosperity.
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\1\ A Strategy for American Innovation: Driving Towards Sustainable
Growth and Quality Jobs, Executive Office of the President, National
Economic Council, and the Office of Science and Technology Policy.
September, 2009.
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2. Witnesses
The Honorable Aneesh Chopra is the Chief Technology Officer
of the United States at the White House Office of Science and
Technology Policy.
Dr. Mark Kamlet is the Provost at Carnegie Mellon
University.
Dr. Rob Atkinson is the President of the Information
Technology and Innovation Foundation.
Dr. Dan Breznitz is an Associate Professor at the Sam Nunn
School of International Affairs at Georgia Institute of
Technology.
Mr. Paul Holland is a General Partner at Foundation Capital.
3. Background
First developed in the late nineteenth century, the telephone
became one of the most important inventions in the twentieth century.
The technology, made possible by previous research in sound and
electricity, created a new industry and new infrastructure, and greatly
enhanced productivity across the entire economy. However, it is
notoriously difficult to predict the impact of technological advances
on society and the U.S. economy. For instance, in 1983 prominent
experts forecasted that the demand for mobile phones in the U.S. would
total only one million by 1999. Instead, by that time, 70 million
Americans had cell phones. Rapid improvements in technology and
reductions in costs made the original predictions obsolete.\2\ In
contrast, a Massachusetts company started in 1998 with promising
technology to revolutionize skin grafts suffered bankruptcy and near-
collapse before solving the manufacturing and logistical problems that
allowed it to finally succeed a decade later.\3\
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\2\ Innovation and Economic Growth, Nathan Rosenberg, Organization
of Economic Cooperation and Development, 2004.
\3\ Innovation Interrupted, BUSINESSWEEK, June 15, 2009.
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Regardless of the difficulty of predicting or creating it,
economists have long studied the impact of innovation on the U.S.
economy. Nobel Prize winner Robert Solow found that approximately 85
percent of the growth in the U.S. economy from the late nineteenth
century to the mid-twentieth century was the result of forces beyond
the traditional economic inputs of labor and capital. These
``intangible'' inputs--namely R&D and a more educated workforce--grew
in importance in the twentieth century as innovations moved away from
physical-capital intensive technology advancements, like railroads, to
more research-intensive advancements, like DNA sequencing.\4\
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\4\ The Search for the Sources of Growth: Areas of Ignorance, Old
and New, Moses Abramovitz, The Journal of Economic History, June 1993.
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The increasingly competitive nature of the global economy has
raised concerns among U.S. policy-makers and others that the U.S. has
not sufficiently invested in maintaining leadership for the intangible
inputs that drive innovation. The influential 2007 National Academies
Rising Above the Gathering Storm report took note of factors such as
declining Federal investment in R&D, poor performance in math and
science among American schoolchildren, and declining support for
corporate R&D within the U.S. The authors recommended increasing
support for science and engineering research and targeted action to
improve American students' capacity and interest in science, math, and
related fields. Congress acted upon the recommendations with the
America COMPETES Act, which put the budgets of the National Science
Foundation (NSF), the National Institute of Standards and Technology
(NIST), and the Department of Energy Office (DOE) of Science on the
path to doubling, and also provided for improvement in science and math
education through teacher development.
President Obama's FY 2011 budget request includes $147.7 billion
for R&D across the Federal Government, and reflects the commitments
made in COMPETES by increasing the budgets of NSF (by eight percent),
NIST (by 7.7 percent, core scientific and technical research services),
and the DOE Office of Science (by 4.6 percent).\5\ In addition to
increasing R&D expenditures (with the goal of reaching a total R&D
investment of three percent of GDP as a nation), the Administration has
identified a number of other priorities which are key to supporting
innovation for economic growth and job creation, such as broadband
coverage, strong protection for intellectual property, better support
of entrepreneurs, and increased effort to open-up foreign markets to
U.S. exports.\6\
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\5\ Federal Research and Development Funding: FY 2011,
Congressional Research Service, March 2010.
\6\ Executive Office of the President, National Economic Council,
and the Office of Science and Technology Policy. September, 2009.
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A number of Federal R&D programs use the word ``innovation'' within
their titles or mission statements. For example, NSF spent nearly $50
million in FY 2009 on Industrial Innovation and Partnership funding and
the Emerging Frontiers in Research and Innovation program (with an
additional $19 million for ARRA (P.L. 111-5) funding). These programs
fund a wide range of activities from research to making more efficient
use of radio frequencies to developing measurements for sustainable
construction practices and the development of applied mathematical
models for complex engineered systems. The Department of Energy also
makes a number of awards for innovation, such as the Energy Innovation
Hubs to fund research to bridge the gap between basic scientific
breakthrough and industrial commercialization. However, the authors of
Boosting Productivity, Innovation, and Growth Through a National
Innovation Foundation \7\ note that while the Federal Government
invests billions in R&D, there is very little funding directed toward
``firm-level'' innovation. They identified only two programs that
focused directly on stimulating commercial innovation, NIST's
Manufacturing Extension Partnership Program and its Technology
Innovation Program. Other Federal programs, like the Defense Advanced
Research Project Agency (DARPA) and the Small Business Innovation
Research (SBIR) program focus on spurring technological development,
but generally to accomplish a mission-related goal.
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\7\ Boosting Productivity, Innovation, and Growth Through a
National Innovation Foundation, ITIF & Brookings, April 2008.
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The authors of the Boosting Productivity report recommend that the
Federal Government take a more active role in supporting innovation to
help overcome some of the barriers faced by the private sector. These
barriers, or market failures that disadvantage innovation, include the
pressure to shift corporate R&D away from long-term breakthroughs,
towards short-term development projects and the difficulties faced in
aligning the needs of universities and the private sector to enable
effective collaboration. The authors propose creating a National
Innovation Foundation to remedy the shortcomings in Federal innovation
policy, which they view as ad-hoc, too focused at the Federal-level,
and too narrow (e.g., very little Federal science and technology
support directly for the service-sector). This Foundation, an
independent Federal agency, would fund industry-university research
partnerships, make state-level grants to help promote regional industry
clusters and technology commercialization, assist small firms in
adopting new technologies, and support innovation throughout the
Federal Government.
Investment in innovation is not confined to the Federal level. Many
states, recognizing that they now must compete globally, as well as
with each other, are making investments to improve the innovation
capacity of their economies. Collectively, states spend approximately
$1.9 billion per year on technology-based economic development
activity.\8\
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\8\ Boosting Productivity, Innovation, and Growth Through a
National Innovation Foundation, ITIF & Brookings, April 2008.
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These types of initiatives, like the Oregon Nanoscience and
Microtechnologies Institute, provide funds, facilities, and other
services to high-tech start-up companies. Some states are also
investing directly in R&D and in recruiting top science and engineering
talent, such as Maryland's $23 million per year investment in stem cell
research and Kentucky's decade long $350 million investment in
recruiting top faculty to its universities.\9\ States make many of
these investments not only to improve their economies over a range of
sectors, but also in an effort to spur the development of specific-
industry clusters. The rise of Silicon Valley demonstrates the powerful
force of cluster development both to regional economic growth and to
spurring innovation. The Council on Competitiveness has identified
clusters as a critical element to advancing regional competitiveness
and innovation capacity. The presence of related industries, though, is
only one piece of a strong innovative economy. A multitude of factors,
such as workforce, R&D capacity, demand conditions, availability of
capital, and local governance all affect the innovation capacity of
regional economies.\10\
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\9\ Innovation America: Investing in Innovation, National Governors
Association, The Pew Center on the States, 2007.
\10\ Clusters of Innovation Initiative: Atlanta-Columbus, U.S.
Council on Competitiveness
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A study of Rochester, New York, by the Council on Competitiveness,
illustrates the need for all of these factors to enable innovation. The
study found that Rochester had the fundamental building blocks for an
innovation economy, but lacked both the capital and culture to take the
necessary risks to innovate. The area, dominated by Eastman Kodak and
Xerox, has two well-regarded universities, a strong K-12 educational
system, a skilled workforce, and a good transportation and
communications infrastructure. However, despite the fact that workers
there produce six-times the average number of patents as workers
elsewhere in the country, the area ranked very low in terms of
licensing technology and launching start-ups or spin-out companies. The
authors attributed the low rate of entrepreneurship to the fact that
the area had long relied on a few strong corporate entities,
contributing to a risk-averse culture. In fact, between 1995 and 2003,
the area attracted only 0.6 percent of the total venture capital
market. The venture capital in the region tends to focus on the least
risky opportunities. The report did note that the region is attempting
to create coalitions around strengths like optics, and promote more
collaboration between business and the universities.\11\
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\11\ Fanning the Flames of Economic Progress: Igniting Greater
Rochester's Entrepreneurial Economy, U.S. Council on Competitiveness,
September 2004.
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Funding to bring new discoveries from the lab into
commercialization is critical for innovation. Experts have noted the
declining level of funding available for early stage
commercialization--the money needed for proof of concept or prototype
development. Angel investors, independent investors working with their
own funds, have traditionally focused funding at this early stage, but
their contributions have dropped dramatically, particularly with the
recent economic downturn ($19 billion in 2008, down from a five-year
high of $26 billion in 2007). At the same time, venture capital
investment is increasingly trending toward later stage investment. The
NSF Science and Engineering Indicators reported that venture
capitalists have largely abandoned seed and start-up stage funding from
a high of nine percent in 1996 through 1998, to a low of two percent
from 2002 to 2004. Currently, such funding stands at five percent, but
this lack of early stage funding contributes significantly to the
``valley of death phenomena'' which makes commercialization of new
technology notoriously difficult.\12\
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\12\ National Science Foundation Science and Engineering
Indicators, 2010
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Despite the increasingly competitive global environment, the U.S.
is still a leader in knowledge and high-tech industries. According to
the most recent National Science Foundation Science and Engineering
Indicators, the U.S. provided 34 percent of knowledge intensive service
industries (business, financial, and communications) in 2007 and 30
percent of the global value added for high technology manufacturing was
accounted for by the U.S. However, the U.S. trade deficit in high-tech
goods in 2008 was $80 billion.\13\
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\13\ National Science Foundation Science and Engineering
Indicators, 2010
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4. Overarching Questions
What factors have enabled innovation in the past?
What is the role of the Federal Government in spurring
innovation?
How can government best support entrepreneurs?
What factors enable regional innovation-based economic
growth? How can these be encouraged and sustained?
How should efforts to create innovation be measured or
assessed?
Chairman Wu. The hearing will come to order.
Good morning, everyone. I would like to thank you all for
being here, and also for helping us think about a very
challenging topic and one that frequently doesn't get addressed
as well as in our Nation's capital as sometimes it gets
addressed elsewhere in the country. We tend to get tied up in
the issues of the day and the issues of the moment rather than
looking a long ways down the road and also looking carefully at
our own history, and it is very instructive that economists
like Solow and others attribute at least 50 percent of our
economic growth, and in some instances up to 90 percent of our
economic growth, in the last century or especially in the
postwar era is attributable to innovation, to things other than
immediate changes in labor inputs and other factors. It is
absolutely crucial that we understand the past in order to set
our policies properly today to have the future that we want for
our country and the world.
I view this as the beginning of a very important
conversation that we are going to have here in the science and
technology community. I know that this is a discussion which
many of you have been initiating elsewhere but I think that
bringing this to the Congress and supporting the
Administration's efforts in this arena is absolutely crucial.
So today we have a beginning of the conversation, and I
look forward to holding probably several hearings on this topic
and looking at what pieces of legislation we can initiate from
this Subcommittee and from the Full Committee to better
encourage the innovative forces which have always been quite
strong in our society and our economy but which sometimes
suffer from some impediments and it is our task both to remove
those impediments and also to engage in those activities which
truly promote innovation and all the things that we want from
innovation.
Chairman Wu. With that, I would like to recognize Ms.
Biggert, the gentlelady from Illinois, for her opening
statement.
[The prepared statement of Chairman Wu follows:]
Prepared Statement of Chairman David Wu
Good morning. I would like to thank everybody for being at today's
hearing, particularly our witnesses.
Near the end of every year, Time Magazine publishes a list of that
year's best inventions. Some on the 2009 list include rubber from
dandelions, a 3-D camera, and highly maneuverable underwater robots. At
one point, no doubt Time's list would have included the telephone, the
transistor, or the polio vaccine. It is a challenging exercise in
imagination to look at lists like these and try to predict which
discovery will have the same level of impact as the Internet or the
combustion engine, which discovery will go nowhere, and which will be
tomorrow's airship--useful for a time, but made obsolete by superior
technology.
It is not an exercise in imagination to contemplate the impact
innovation has had on our economy and our lives. Economists estimate
that innovation has been responsible for 50 to 85 percent of the
economic growth in this country. The importance of innovation--creating
new ideas, products, and services--cannot be overstated. And in this
global, highly competitive economy, it is increasingly the intangible
inputs of R&D, education, and entrepreneurial risk-taking that drive
that growth. Innovation is key to creating new industries, and
therefore key to the creation of American jobs.
As I'm sure the witnesses will tell us today, the government's
commitment to funding research and education has had a major impact on
fueling innovation. Innovation, though, is not just about expanding
knowledge and making discoveries. Innovation brings new products and
services into the marketplace that can then drive economic growth and
future prosperity.
I hope the panel today can give us greater insight into the factors
that have promoted innovation in the past and a picture of the health
of our current innovation environment. I look forward to learning how
the government can best support innovation. This is an important
discussion to have as we look forward to reauthorizing America
COMPETES.
Ms. Biggert. Thank you, Mr. Chairman, and thank you so much
for calling this hearing on supporting innovation in the 21st
century economy. As we move forward reauthorizing the America
COMPETES Act, we can always learn from new ideas, from
listening to a broad range of viewpoints, so I welcome that
opportunity today.
And likewise, the President should be applauded for taking
a committed interest in innovation as he has demonstrated with
his strategy for American innovation, and we welcome you, Mr.
Chopra, to this side of the Capitol.
But Chairman Wu, I think you will agree with me that
innovation and competitiveness have long been at the forefront
of this Committee agenda for as long as we have been members. I
think we struggle to get some of our other members to be as
engaged as we are, and I think you are right that in the
hinterland there is probably a lot more emphasis on this. But
we do understand its importance and we will continue to work
towards ensuring that the United States remains the world's
leader in innovation, and it is not only imperative to maintain
our competitive edge but also to strengthen our economy.
And we took some major steps to reinforce our innovative
future with the 2007 America COMPETES Act, which was a result
of recommendations from the Rising Above the Gathering Storm
Report, and I think that is where we really took that on, the
previous Administration's American Competitiveness Initiative
and the bipartisan leadership of this Committee, so as the
chairman and I have both already mentioned, this hearing is a
part of that reauthorizing process.
We are still waiting to see the benefits of some of the
initiatives put into place in COMPETES as well as the return on
investment from the more than $10 billion dollars in stimulus
funding for R&D within this Committee's jurisdiction, so I hope
that given our current economic climate, we proceed very
cautiously with any new initiatives to spur innovation until we
know our current investments are worthwhile.
So I want to thank our witnesses for being here today and I
look forward to your testimony, and I yield back the balance of
my time.
[The prepared statement of Ms. Biggert follows:]
Prepared Statement of Representative Judy Biggert
Thank you, Mr. Chairman, for calling this hearing on supporting
innovation in the 21st century economy. As we move forward on
reauthorizing the America COMPETES Act, we can always learn new ideas
from listening to a broad range of viewpoints, so I welcome that
opportunity today.
Likewise, the President should be applauded for taking a committed
interest in innovation as he has demonstrated with his Strategy for
American Innovation, and we welcome you, Mr. Chopra, to this side of
the Capitol. However, I am sure you will agree with me, Chairman Wu,
that innovation and competitiveness have been at the forefront of this
Committee's agenda for as long as we have been Members. We understand
its importance and will continue to work towards ensuring that the
United States remains the world leader in innovation. It is not only
imperative to maintaining our competitive edge, but also to
strengthening our economy.
We took some major steps to reinforce up our innovative future with
the 2007 America COMPETES Act, which was a result of recommendations
from the Rising Above the Gathering Storm Report, the previous
Administration's American Competitiveness Initiative, and the
bipartisan leadership of this Committee. As the Chairman and I have
both already mentioned, this hearing is part of that reauthorization
process.
We are still waiting to see the benefits of some of the initiatives
put into place in COMPETES, as well as the return on investment from
the more than $10 billion in stimulus funding for R&D within this
Committee's jurisdiction. I hope that, given our current economic
climate, we proceed very cautiously with any new initiatives to spur
innovation until we know our current investments are worthwhile.
I would like to thank our witnesses for being here today, and I
look forward to your testimony. I yield back the balance of my time.
Chairman Wu. Thank you very much, Mrs. Biggert.
If there are Members who wish to submit additional opening
statements, your statements will be added to the record at this
point.
Now it is my distinct pleasure to introduce our witnesses.
Mr. Aneesh Chopra is the Chief Technology Officer of the United
States at the White House Office of Science and Technology
Policy. Welcome. It is absolutely wonderful to have an
Administration which seems to really get it in terms of
technology and innovation. Dr. Mark Kamlet, who is the Provost
at Carnegie Mellon University. Dr. Rob Atkinson is the
President of the Information Technology and Innovation
Foundation. Dr. Dan Breznitz is Associate Professor at the Sam
Nunn School of International Affairs at the Georgia Institute
of Technology, and our final witness is Mr. Paul Holland, who
is General Partner at Foundation Capital.
Welcome, one and all. You will each have five minutes for
your spoken testimony. Your written testimony will be included
in the record for the hearing, and I commend this to all of us
as audience and witnesses, the body of work in the written
testimony is truly impressive for its completeness and hitting
on so many of the issues important to innovation. Each Member
will have five minutes to question the panel after the spoken
testimony, and Mr. Chopra, please begin.
STATEMENT OF HON. ANEESH CHOPRA, CHIEF TECHNOLOGY OFFICER OF
THE UNITED STATES, WHITE HOUSE OFFICE OF SCIENCE AND TECHNOLOGY
POLICY (OSTP)
Hon. Chopra. Well, thank you very much, Chairman Wu and
Congresswoman Biggert. It is a pleasure to be with you and
others here on the Subcommittee.
It is my honor and privilege to discuss the President's
strategy for American innovation, an issue he addressed
directly on September 21, 2009, when he released his approach
for sustainable growth and quality jobs. As Chief Technology
Officer, I work to execute on that strategy by harnessing
technology, data and innovation to transform the Nation's
economy and to improve the lives of everyday Americans. As you
noted, I will briefly summarize the key highlights of my
testimony for us this morning, beginning with what we define as
the nature of the problem, which we call the problems of
bubble-driven growth of the past. So despite America's economic
strength historically, our economic growth has rested too long
on what we believe to be an unstable foundation. Time and
again, explosive growth in one sector of our economy provided a
short-term boost while masking what we consider to be some
long-term weaknesses. A short-term approach to the economy
masks the underinvestments in essential drivers of sustainable,
broadly shared growth. It promotes temporary fixes over lasting
solutions. That said, the American economy remains the most
dynamic, innovative and resilient in the world. America's
strengths are clear: world-class research universities,
flexible labor markets, deep capital markets, and an energetic
entrepreneurial culture. The United States must redouble its
efforts to give our world-leading innovators every single
chance to succeed. America cannot rest on our laurels while
other countries are clearly catching up.
So the need for innovation is clear. It is the foundation
for durable, sustainable expansion in both employment and
economic growth. From our perspective, it begins with the
development of a new product, service, or process. It then
proceeds with widespread diffusion throughout our economy and
at an appropriate scale, resulting in jobs and economic value.
So what is the proper role for government? The Obama
Administration proposes to strike a balance by investing in the
building blocks that only the government can provide, setting
an open and competitive environment for business and
individuals to experiment and grow, and by providing extra
catalysts to jump-start innovation in sectors of national
importance. I'd like to highlight just a few of those
components, the building blocks of innovation. We are committed
to making investments that will foster long-term economic
growth and productivity including R&D, a skilled workforce, a
leading physical infrastructure and widely available broadband
networks. Given last week's Federal Communication Commission's
release of the National Broadband Plan, I thought I would
simply note we have established a broadband subcommittee within
the National Science and Technology Council to advise this
Administration on the actions it should take to promote
broadband as a platform to improve the lives of everyday
Americans and drive innovation in the economy.
On the topic of promoting competitive markets that spur
productive entrepreneurship, here too we believe that this is a
key imperative to create a national environment that is ripe
for entrepreneurship. Part of this strategy is to change the
way Washington works by promoting a more open and innovative
government. Yesterday I was pleased to announce that the
Defense Advanced Research Projects Agency, DARPA, will begin
providing data on awardees in the Small Business Innovation
Research Program that utilize a streamlined process for
contracting and will extend this streamlined process to future
SBIR solicitations starting with their one coming out on April
21st. Initially, DARPA will display data on the number of
awardees that are eligible for this streamlined program, how
many awardees have opted for it and the average number of days
it took to complete.
Now, what does this mean? Typically, contracting can take
up to five or six months to complete after you have been given
an award. But we believe this streamlined approach will take on
average less than 60 days. That represents a 60 to 70 percent
reduction in both time and cost, saving small businesses tens
of thousands of dollars and letting them get to work months
faster.
Finally, on the topic of catalyzing breakthroughs for
national priorities, we are absolutely committed to harnessing
the power of science, technology and innovation to address our
challenges in clean energy, health care and, broadly speaking,
the grand challenges of the 21st century. Increasingly, our
efforts to spur innovation on these matters rely on an
effective, open and strategic collaboration between the Federal
agencies and the private sector to ensure that the
technological innovation needed to tackle these national
problems is an opportunity for economic growth and job
creation.
To that end, I am pleased to announce today that I am
joining our Federal CIO [Chief Information Officer], Vivek
Kundra, and OIRA [Office of Information and Regulatory Affairs]
Administrator, Cass Sunstein, in establishing a new
subcommittee on standards under the National Science and
Technology Council's Committee on Technology, which will be co-
chaired by Patrick Gallagher at NIST [National Institute of
Standards and Technology] as well as Phil Wiser from the
Department of Justice. This interagency group will provide
high-level leadership so that Federal agencies are
strategically focused and actively engaged in critical
standards-related issues. The improved coordination will in
turn ensure that agencies can work in a responsive and timely
fashion with the private sector so that effective standards are
developed or practiced to meet their needs. This subcommittee
will work closely with the existing Interagency Committee on
Standards Policy [ICSP], which also happens to be chaired by
NIST. The subcommittee we announce today will provide direction
and guidance to the ICSP and rely on them to fulfill their
traditional duties and coordinating assessing progress and so
forth.
In conclusion, Mr. Chairman, the United States is still the
land of the future. We retain this honor because America's
scientists, entrepreneurs and public officials have understood
the importance of applying the power of American curiosity and
ingenuity to the biggest economic and societal challenges.
Clearly, we welcome any questions you may have.
[The prepared statement of Hon. Chopra follows:]
Prepared Statement of Aneesh Chopra
Chairman Wu, Ranking Member Smith, and Members of the Subcommittee,
it is my distinct privilege to be here with you today to discuss the
Obama Administration's Strategy for American Innovation.
President Obama understands the importance of innovation for
sustainable growth and quality jobs. On September 21st, 2009, he
released his Strategy for American Innovation that identified three
critical roles for the Federal Government: to invest in the building
blocks of innovation; to create the right environment for private
sector investment and competitive markets by, for example, promoting
high-growth entrepreneurship, protecting U.S. intellectual property
rights, and fostering an open government; and to serve as a catalyst
for breakthroughs related to national priorities such as clean energy,
health care, and other ``grand challenges'' of the 21st century.
In my capacity as Assistant to the President, Chief Technology
Officer, and Associate Director for Technology in the Office of Science
and Technology Policy, my mission is to harness the power and potential
of technology, data, and innovation to transform the Nation's economy
and to improve the lives of everyday Americans. The Administration
envisions an economy in which jobs are more plentiful, American firms
are more competitive, Americans are safer and more secure, and energy
use is cleaner and more economical.
Problems with the Bubble-Driven Growth of the Past
Despite the American economy's historic strength, our economic
growth has rested for too long on an unstable foundation. Time and
again, explosive growth in one sector of our economy provided a short-
term boost while masking long-term weaknesses. In the 1990s, the
technology sector climbed to unprecedented heights of valuation. The
tech-heavy NASDAQ composite index rose over 650 percent between 1995
and 2000, but then lost two-thirds of its value in a single year.
After the tech bubble burst, a new one emerged in the housing and
financial sectors. This type of growth isn't just problematic when the
bubble bursts, it is not entirely healthy even while it lasts. Between
2000 and 2007 the typical working-age American household saw its annual
income decline by nearly $2,000.
A short-term approach to the economy masks under-investments in
essential drivers of sustainable, broadly-shared growth. It promotes
temporary fixes over lasting solutions. This is patently clear when
looking at how American education, infrastructure, healthcare, energy,
and research--all pillars of lasting prosperity--were ignored during
the last bubble.
Despite this underinvestment in key drivers of growth, the American
economy remains the most dynamic, innovative, and resilient in the
world. America's strengths are clear: world-class research
universities, flexible labor markets, deep capital markets, and an
energetic entrepreneurial culture. The United States must redouble its
efforts to give our world-leading innovators every chance to succeed.
America cannot rest on our laurels while other countries are catching
up.
The Need for Innovation
Innovation is at the core of a new foundation for durable,
sustainable expansion in both employment and economic growth. Robert
Solow won the Nobel Prize in economics by showing that factors other
than capital intensity, most notably advances in human knowledge and
technology, accounted for almost 90 percent of the growth in America's
output per hour in the first half of the last century. Growth
accounting has been refined since Solow's first attempts, yet
contemporary research still shows that human skill and innovation
remain far and away the most powerful force for improving prosperity
over the long-run, which is exactly what we need.
Given its importance, the process of innovation cannot be taken for
granted. It begins with the development of a new product, service or
process. But it does not end there. To create value, a new idea must be
implemented. Thus successful innovations will diffuse throughout an
economy and across the world, impacting various sectors and sometimes
even creating new ones. A diffused innovation must then scale
appropriately, reaching an efficient size at which it can have a
maximal effect.
The full process--from development to diffusion to scaling--has
many variables and many inputs. Ideas often fail before they make it
through the full chain. But those that do succeed can create value and
jobs while improving people's lives.
It is essential for the long-run prosperity of our society that
innovations flourish and progress along this chain. And here,
government has a fundamental role to play.
The Appropriate Role for Government
While it is clear that a new foundation for innovation and growth
is needed, the appropriate framework for government involvement is
still debated. Some claim that the laissez-faire policies of the last
decade capture the right strategy, and that the recent crisis was the
result of too much rather than too little government support. Another
view is that the government must dominate certain sectors, protecting
and insulating those areas thought to be drivers of future growth. The
Obama Administration rejects both sides of this unproductive and
anachronistic debate.
The United States proposes to strike a balance by investing in the
building blocks that only the government can provide, setting an open
and competitive environment for businesses and individuals to
experiment and grow, and by providing extra catalysts to jumpstart
innovation in sectors of national importance.
A Strategy for American Innovation
President Obama has already taken historic steps to lay the
foundation for the innovation economy of the future. In the Recovery
Act alone the President committed over $100 billion to support
groundbreaking innovation with investments in energy, basic research,
education and training, advanced vehicle technology, health IT and
health research, high speed rail, smart grid, and information
technology.
The Obama Innovation Strategy has three parts: investing in the
building blocks of innovation, promoting competitive markets that spur
productive entrepreneurship, and catalyzing breakthroughs for national
priorities.
Investing in the building blocks of American innovation
President Obama is committed to making investments that will foster
long-term economic growth and productivity. These investments are in
areas that include research and development, a skilled workforce, a
leading physical infrastructure, and widely available broadband
networks.
Recognizing the need for long-term and sustained investments in
R&D, President Obama has pledged to complete the doubling of funding
for three key science agencies, the National Science Foundation, the
laboratories of the National Institute of Standards and Technology, and
the Department of Energy's Office of Science. In his landmark address
before the National Academy of Sciences, President Obama set a goal of
lifting the sum of public and private investment in R&D to three
percent of GDP, which would exceed the level achieved at the height of
the space race. As the President noted, ``science is more essential for
our prosperity, our security, our health, our environment and our
quality of life than it has ever been before.'' To encourage private
sector investment in R&D, the President has proposed making the
Research and Experimentation Tax Credit permanent. The Obama
Administration is working to increase the impact of this investment by
providing greater support for university commercialization efforts, for
high-risk, high-return research, for multidisciplinary research, and
for scientists and engineers at the beginning of their careers. For
example, the National Science Foundation's FY 2011 budget proposes to
double support for the Partnerships for Innovation program, which will
help universities move ideas from the lab to the marketplace.
The Obama Administration is committed to expanding access to
broadband. Last week, the Federal Communications Commission (FCC)
released the National Broadband Plan, called for in the American
Recovery and Reinvestment Act, to identify ways to expand access to
broadband and promote economic growth and job creation.
In his statement on the plan's release, the President committed to
``build upon our efforts over the past year to make America's
nationwide broadband infrastructure the world's most powerful platform
for economic growth and prosperity.'' To that end, I've established a
Broadband Subcommittee of the National Science and Technology Council's
Committee on Technology, to focus closely on the plan that the FCC--an
independent agency--produced, and to advise the Administration on the
actions it should take to promote broadband as a platform to improve
the lives of everyday Americans and drive innovation in the economy.
Promoting competitive markets that spur productive entrepreneurship
The Obama Administration believes that it is imperative to create a
national environment that is ripe for entrepreneurship and risk taking,
and allows U.S. firms to compete and win in the global marketplace. The
Administration is pursuing policies that will promote U.S. exports,
support open capital markets, encourage high-growth entrepreneurship,
invest in regional innovation clusters, and improve our patent system.
The Administration also strongly supports public sector and social
innovation.
Competitive, high-performing regional economies are the building
blocks for national growth, and the Administration is stepping up its
efforts to cultivate regional economic clusters across the country. For
example, the Administration has just announced a $130 million
competition for an Energy Regional Innovation Cluster. This pilot
project is designed to spur regional economic growth while developing
energy efficient building technologies, designs, and systems. This will
allow a region to develop a strategy that includes support for R&D,
infrastructure, small and medium-sized enterprises, and workforce
development.
Innovation must occur within all levels of society, including the
government and civil society. The Obama Administration is committed to
increasing the ability of government to promote and harness innovation.
The Administration is encouraging departments and agencies to
experiment with new technologies that have the potential to increase
efficiency and reduce expenditures, such as cloud computing. The
Federal Government should take advantage of the expertise and insight
of people both inside and outside the Federal Government; use high-
risk, high-reward policy tools such as prizes and challenges to solve
tough problems; support the broad adoption of community solutions that
work; and form high-impact collaborations with researchers, the private
sector, and civil society.
The Administration launched the White House Open Government
Initiative to coordinate Open Government policy, support specific
projects, and design technology platforms that foster transparency,
participation and collaboration across the Executive Branch. The
principles of open government help to advance a set of key national
priorities with emphasis on demonstrating tangible benefits for the
American people.
As an example, I am pleased to announce that the Defense Advanced
Research Projects Agency (DARPA) will begin providing data on awardees
in the Small Business Innovation Research (SBIR) program that utilize a
streamlined process for contracting, and will extend this streamlined
process to future SBIR solicitations. The SBIR program is one of the
major Federal Government programs used to support innovative
technologies in America--yet the paperwork is cumbersome, lengthy and
time consuming. These new steps represent a significant improvement--
think of this as the 1040 EZ for Federal Government innovation grants.
Initially, DARPA will display data on the number of awardees that are
eligible for this streamlined process, how many awardees opted to
utilize this process, and the average number of days it took to
complete the streamlined agreement. In addition, the next round of
DARPA's SBIR solicitations, scheduled for April 21st, will for the
first time announce the wide availability of this streamlined option.
Typically contracting would take from five to six months to
complete, but we believe that the streamlined approach will take on
average less than 60 days. This represents a 60 to 70% reduction in the
time and cost, saving small businesses tens of thousands of dollars and
letting them get to work months faster.
By taking these steps, the Federal Government is matching young,
innovative companies responsible for creating new technologies, new
jobs and America's future economic growth with Federal funding that
meets their needs.
Catalyzing breakthroughs for national priorities
President Obama is committed to harnessing science, technology and
innovation to unleash a clean energy revolution, improve America's
health care system, and address the ``grand challenges'' of the 21st
century.
Smart Grid Technologies
Modernization of the Nation's electric grid is a vital component of
efforts to build a low-carbon economy. The ``smart grid'' will help
provide consumers with the information, automation, and tools they need
to control and optimize energy use. The tools and services enabled by
the smart grid will improve the reliability, security, and efficiency
of the electric grid. Smart grid technologies can facilitate energy
generation from clean energy supplies and enable more effective
integration with the electricity delivery system of renewable energy
sources, demand response resources, and plug-in electric vehicles. The
National Institute of Standards and Technology (NIST) has coordinated
an unprecedented, open, and transparent public/private collaboration
involving over 550 companies, organizations and government agencies to
create the interoperability standards needed to foster innovation in
the electric grid.
One month ago, in conjunction with NIST, we broadened participation
by launching the Smart Grid Forum, an on-line forum focused on the
Nation's energy consumers with an emphasis on spurring innovation in
smart grid products and services. We received comments from over 130
individuals and organizations contributing their solutions to some of
the most challenging smart grid goals that we have--from deployment of
smart grid solutions, to development of standards needed for
information exchange, to ensuring cybersecurity in the smart grid.
Healthcare IT
Another important Presidential priority is improving our health
care system. Broad use of health information technology has the
potential to improve health care quality, prevent medical errors,
increase the efficiency of care provision and reduce unnecessary health
care costs, reduce paperwork, increase administrative efficiencies,
expand access to affordable care, and improve population health. The
Recovery Act provides support for the deployment of health information
technology, such as electronic health records. The Office of the
National Coordinator for Health IT and the Centers for Medicare &
Medicaid Services are working to ensure that health information
technology products and systems are secure, can maintain data
confidentially, can work with other systems to share information, and
can perform a set of well-defined functions. NIST, in coordination with
the Office of the National Coordinator and others, is accelerating the
adoption of health IT standards by providing the critical testing
infrastructure needed to achieve these goals.
One month ago, the Office of the National Coordinator for Health IT
announced a new collaborative, NHIN Direct, which will organize a set
of standards, services and policies that enable secure health
information exchange over the Internet (www.nhindirect.org). Several
Federal agencies and healthcare organizations are already using the
Nationwide Health Information Network (NHIN) technology to exchange
information amongst themselves and their partners. This new effort will
provide an easy ``on-ramp'' for a wide set of providers and
organizations looking to adopt the exchange of health information--and
provide a framework to spur innovation in support of direct
communication amongst providers, and between providers and patients--in
a secure and simple manner.
Grand Challenges
Finally, the Obama Administration believes that grand challenges
should be an important organizing principle for science, technology and
innovation policy. They can address key national priorities, catalyze
innovations that foster economic growth and quality jobs, spur the
formation of multidisciplinary teams of researcher and multi-sector
collaborators, bring new expertise to bear on important problems,
strengthen the ``social contract'' between science and society, and
inspire students to pursue careers in science, technology, engineering,
and mathematics. The President's innovation strategy sets forth a
number of grand challenges, such as solar cells as cheap as paint,
educational software that is as compelling as the best video game and
effective as a personal tutor, and early detection of diseases from a
saliva sample. The National Economic Council and the Office of Science
and Technology Policy are encouraging multi-sector collaborations to
achieve these grand challenges that might involve companies, research
universities, foundations, social enterprises, non-profits, and other
stakeholders.
The Way Forward
Thanks to President Obama's leadership, the Administration has
taken large strides in developing and implementing an ambitious
innovation agenda. The Recovery Act alone provides over $100 billion to
support research and development and the deployment of advanced
technologies such as clean energy, health IT, the smart grid, and high-
speed rail. This commitment to investing in America's future continues
in the President's most recent budget, with sustained support for
research, entrepreneurial small businesses, education reform, college
completion, and a 21st century infrastructure.
The Administration is working with a wide range of stakeholders to
identify the most promising ideas for implementing and further refining
the Administration's innovation strategy. There are active inter-agency
working groups on issues such as prizes and challenges, regional
innovation clusters, research commercialization, spectrum reform,
broadband, open government, and standards. The National Science and
Technology Council is leading multi-agency research initiatives in
dozens of critical areas such as aeronautics, genomics, green
buildings, nanotechnology, quantum information science, robotics, and
information technology. Through the President's Council of Advisors on
Science and Technology, the Administration is able to receive high
quality advice from the Nation's leading scientists, engineers and
innovators on issues such as health information technology, advanced
manufacturing, clean energy, and STEM education.
America has always been a Nation built on hope--hope that we can
build a prosperous, healthy world for ourselves and for our children.
These long-standing American aspirations depend critically on our far-
sighted investments in science, technology and innovation that are the
ultimate act of hope and will create the most important legacies we can
leave.
The United States is still the land of the future. We have held
that honor since this continent was discovered by a daring act of
exploration more than 500 years ago. We have earned it anew with each
passing generation because America's scientists, entrepreneurs and
public officials have understood the importance of applying the power
of American curiosity and ingenuity to the biggest economic and
societal challenges.
I welcome any questions that the Committee may have.
Biography for Aneesh Chopra
Aneesh Chopra is the Chief Technology Officer and in this role
serves as an Assistant to the President and Associate Director for
Technology within the Office of Science & Technology Policy. He works
to advance the President's technology agenda by fostering new ideas and
encouraging government-wide coordination to help the country meet its
goals from job creation, to reducing health care costs, to protecting
the homeland. He was sworn in on May 22nd, 2009. Prior to his
appointment, he served as Secretary of Technology for the Commonwealth
of Virginia from January 2006 until April 2009. He previously served as
Managing Director with the Advisory Board Company, a publicly-traded
healthcare think tank. Chopra was named to Government Technology
magazine's Top 25 in their Doers, Dreamers, and Drivers issue in 2008.
Aneesh Chopra received his B.A. from The Johns Hopkins University and
his M.P.P. from Harvard's Kennedy School. He and his wife Rohini have
two young children.
Chairman Wu. Thank you very much, Mr. Chopra.
Dr. Kamlet, please proceed.
STATEMENT OF DR. MARK KAMLET, PROVOST, CARNEGIE MELLON
UNIVERSITY
Dr. Kamlet. Chairman Wu, thank you very much, and it is an
honor to be able to participate in this hearing.
As Provost and Executive Vice President of Carnegie Mellon,
I am here today to offer perspectives on supporting innovation
from the trenches, so to speak. I will cover two main areas in
my brief remarks. First, I would like to offer a quick overview
of Carnegie Mellon's experience in helping to shape a pathway
from research to innovation, and second, based upon these
experiences, I will offer a few thoughts for your consideration
on Federal policies that can help ensure continued U.S.
leadership in technology-based innovation in the future.
I should say that as with our peer institutions, we have
benefited immeasurably from the strong historic partnership
with the Federal Government that has made the American research
university truly unique in the world as an engine for new
business creation, and of course, this partnership was
dramatically energized by the Bayh-Dole Act, which over the
last 30 years has made technology transfer a critically
important university mission. But Carnegie Mellon's experience
highlights the importance, as well, of supporting the Federal
investment in research with deliberative strategies that create
a culture of innovation and speed research to the marketplace.
At Carnegie Mellon, we have implemented two strategic thrusts
to directly accelerate commercialization.
First, we overhauled our tech transfer process in 2004 to
create a streamlined, transparent approach for faculty seeking
to create new companies known as our ``5% go in peace'' policy,
named such because of the fact that we cap university equity at
five percent, up to $2 million dilution event, and that this
strategy has largely removed the conflicts that often accompany
negotiations over faculty startups. Combined with a series of
supporting initiatives that range from widespread
entrepreneurial education for faculty and students, to the
placement of embedded entrepreneurs right in the heart of
research labs, the 5% go in peace approach has more than
doubled our rate of new business creation. We now have 10 to 20
new companies that we launch each year, and we rank
consistently among the top three universities in the Nation in
surveys by AUTM [Association of University Technology Managers]
of university startups and first among universities without a
medical school.
Our second major strategic thrust has been a campus-wide
commitment to regional economic development born from a sense
of our need to contribute to our region's recovery from the
collapse of the steel industry. That focus has included
aggressive efforts to directly link faculty research to the
attraction of companies to Pittsburgh. As a result of this
focus on economic development, we have succeeded in helping
bring companies such as Apple, Intel, Google, Disney and
Caterpillar to Pittsburgh.
More critically, this economic development commitment has
fostered a vibrant environment for the industry-university
research collaboration as with the burst of new startups
created by our 5% go in peace policy. The collaborations
stemming from this focus on economic development have created
new channels for commercializing university research.
Let me offer three key suggestions on what lessons the
Carnegie Mellon experience may hold for policies that can
support innovation. First, I believe that we can significantly
improve the climate for innovation by focusing small but
targeted Federal investments to fill the gap between the end of
basic research and the point where private investments or even
SBIR funding can support startup development or licensing. This
gap often involves the development of pre-commercial prototypes
and other early market tests. The Obama Administration has
proposed $12 million in the innovation ecosystem funding in the
NSF budget. This and ideas such as the notion of regional
prototype centers offered by Secretary Locke will be valuable
steps towards filling this gap. This funding should come with
strings that hold universities accountable for creating the
policies and environment necessary for commercialization to
thrive.
Second, I believe there is great promise in seeking to
identify niche areas for Federal science funding where greater
synergy can be created between basic research and technology
development to accelerate commercialization. For example, over
the last two years, faculty from Carnegie Mellon have joined
with colleagues at ten other universities and a range of
industry leaders to create a roadmap for commercial robotics.
This roadmap outlines a shared vision for advances in both
fundamental research and shorter-term barriers to commercial
application that must be addressed to dramatically expand the
U.S. robotics industry.
Finally, we need to create the equivalent of a Bayh-Dole
Act for university-industry collaboration, a broad framework
that can reinvigorate partnership development. Two pillars to
build this framework would include a lessening of restrictions
that impede the ability of universities to conduct exclusive
research for companies in buildings funded with tax-exempt
bonds and more focused provisions for the industry-university
collaboration in the R&D tax credit.
In closing, I want to thank the Members of this Committee
for their commitment to preserving U.S. leadership in science
and technology. I have witnessed the fruit of it directly in
the research labs at Carnegie Mellon and we are grateful for
your leadership. Thank you very much.
[The prepared statement of Dr. Kamlet follows:]
Prepared Statement of Mark Kamlet
Introduction
Thank you Chairman Wu, Ranking Member Smith, and Members of the
Committee for the opportunity to speak to you today and to share
perspectives on strategies to maintain and reinvigorate the leadership
of the United States in innovation-led job and business growth. My name
is Mark Kamlet. I am the Provost and Executive Vice President of
Carnegie Mellon University. I serve as the chief academic officer of
CMU but I have also been very engaged in our tech transfer policies and
directly involved in a number of university spin-out companies. I also
serve on the National Academy of Sciences panel on intellectual
property--though my remarks today reflect only my views and not those
of the panel.
My comments will focus on two key areas. First, I will share
briefly with you Carnegie Mellon's experience in seeking to create a
culture that accelerates the path from basic research to
commercialization. Second, my remarks will seek to discern lessons from
these experiences that may be of value as you assess policy options to
ensure that the U.S. remains the world leader in innovation and,
particularly, the capacity for innovation to stimulate broad-based
economic opportunity.
However, it is important that I first begin by thanking you and the
members of this Committee for your tireless support of the advancement
of science and technology. This Committee has been a steadfast
proponent of policies to maintain U.S. science excellence and an
``incubator'' of the kinds of creative ideas needed to refresh and
rejuvenate our leadership for a changing world. I have witnessed the
impact of this leadership directly in labs within Carnegie Mellon and I
am grateful for your efforts.
Recognizing Our Strengths: The Vitality of the American Research
University Partnership
An effort to assess future directions for U.S. innovation policy
must begin with recognition of the core vision and values that have
been at the heart of our success to date. The fundamental partnership
between the Federal Government and American higher education in the
post-war period to create the modern research university has been the
greatest catalyst to economic growth in the last half century. While
the U.S. faces intense competition in the global economy it is worth
noting that we possess one asset that no other nation has yet
duplicated--the capacity of university based research to launch high
growth companies. There is virtually no equivalent of ``Google''
emerging from dorm rooms in universities in Europe or Asia. This is an
asset we must seek to nurture for the future.
The power of this partnership in creating the modern research
university was in my view greatly enhanced by the passage of the Bayh-
Dole Act. Bayh-Dole extended this partnership by fully engaging
universities in technology transfer and spin-out development. At its
essence, the Bayh-Dole Act created a vehicle for leveraging U.S.
investment in basic research into a stronger engine for
commercialization.
Bayh-Dole was enacted at a time when the U.S. economy faced
economic challenges nearly as severe as those we currently confront. In
1980 the U.S. economy was beset by double digit unemployment and double
digit inflation. The rise of international competition had brought the
phrase ``rust belt'' into the popular lexicon for the first time. In
Pittsburgh, America's epicenter of economic dislocation in the early
1980s, over 100,000 jobs were lost in the steel industry in less than
three years.
The Bayh-Dole Act created the foundation for the innovation-led
recovery of the 1980s and the growth of the 1990s. Since the enactment
of Bayh-Dole the university community's commitment to technology
transfer has skyrocketed. The number of university tech transfer
programs increased from 30 to over 300. Over 5,000 new companies have
been created and university-based patents and product introductions
have also risen dramatically.
Without question I believe that the U.S. investment in science and
basic research would never have produced the commercial and job
dividends so vital over the last two decades without the Bayh-Dole Act
and its impact on energizing universities to become partners and
advocates for commercialization.
But while a recognition of those historic strengths is vital to
charting a course forward, past achievements are no guarantee for a
future where we face fundamental new challenges from increasing
international competition, a critical need to overcome a period of
stagnation in Federal support for basic research, some evidence of a
plateauing in university-based patenting trends and unmistakable
indications that the vital link between basic research and innovation-
led job growth has weakened if not broken completely. I will seek to
identify lessons from Carnegie Mellon's experiences that may hold
promise for writing a new chapter in the innovation compact between the
Federal Government and American universities.
Searching for Strategies to Rejuvenate Innovation: Lessons from
Carnegie Mellon's Experiences
Carnegie Mellon University brings perspectives on these challenges
from a relatively unique history among leading American research
universities. Created in 1900 to be a technical trade school for the
sons and daughters of steelworkers, the University is the youngest Top
25 research institution in the U.S. Our roots have instilled a focus on
practical problem solving and a culture of interdisciplinary research
that have been critical to our capacity to stimulate innovation.
Nevertheless, we have faced the challenge of having to forge
policies and a cultural environment capable of generating significant
results. Upon becoming provost in 2000, I confronted the strong
findings of a University committee convened to guide the search for my
position that concluded that Carnegie Mellon's tech transfer process
was broken. The Committee found that the policies and processes in
place at that time instilled conflict between the University and our
faculty and choked off both commercialization and start-up creation.
Our response was an overhaul of Carnegie Mellon's tech transfer
process and the creation of what we call the ``5% go in peace''
approach. This approach creates a streamlined, common template for
faculty based start-ups that limits university equity to 5% capped at a
$2 million dilution event, establishes clear royalty guidelines with a
three year delay in payments and ensures virtually no University
interference in start-up operations. This streamlined template has been
augmented by supportive policies that allow faculty to incubate
companies in University labs for short periods and that also allow
faculty to hold C-level positions in the companies they create.
The 5% go in peace program has also been bolstered by the
establishment of a supportive innovation ecosystem across the
University. This ecosystem consists of aggressive entrepreneurial
training and outreach that engages over 10% of the student population
each year. It also includes the strategic placement of entrepreneurs in
residence in key areas to jump start the development of ideas for new
companies. In addition, a new initiative in computer science, known as
Project Olympus, is bringing focused assistance on entrepreneurship to
researchers in the earliest phases of research. One Project Olympus
supported start-up was recently acquired by Google. Finally, we augment
our streamlined processes for start-up creation with intense
collaboration with regional economic development organizations to
ensure that our companies have fertile ground for growth after leaving
the University.
The 5% go in peace approach has been a catalyst to innovation. The
rate of university spin-outs has doubled since the implementation of
this policy in 2004. Since 2007, Carnegie Mellon has ranked number #1
among all U.S. universities without a medical school in the number of
start companies created per research dollar spent and ranked number two
in the Nation among all universities in 2008 (source: AUTM, the
Association of University Technology Managers).
On average the University creates 10 to 20 new companies each year.
These start-ups range from robotics firms launching new applications
for manufacturing and services, to video game companies, to a new
battery storage company and a recent start-up that has developed a
technology to utilize a person's blood to engineer plastics for plates
to be used in medical procedures in order to reduce rejection rates.
While most of these start-ups focus on leading edge technologies,
nearly one-third involve the manufacturing of products. University-
based innovation is capable of far reaching impacts.
This focus on creating an ecosystem to support start-ups has been
mirrored by a University-wide commitment to economic development by
Carnegie Mellon's President, Jared Cohon. This commitment has resulted
in the creation of an on campus facility to ease the ability of
companies to launch operations in Pittsburgh. The facility is currently
home to Apple, Intel and Google. Carnegie Mellon has also helped to
attract Caterpillar, Disney Research and Rand to Pittsburgh. Other
major tech leaders such as Network Appliance, Foster Miller and Cadence
Design Systems have entered the Pittsburgh market by purchasing CMU-
related companies.
This focus on economic development has done more than simply
contribute to the nearly 9,000 jobs created by Carnegie Mellon related
companies in the Pittsburgh region that are central to the area's
recovery from the collapse of the 1980s. A University wide commitment
to economic development has helped to establish entirely new models for
industry/university research collaboration--the second core component
of the innovation equation. While each company tends to pursue its own
unique model of collaboration ranging on a spectrum from open source
research to highly proprietary engagements, our experience demonstrates
that a commitment to economic development is a vital catalyst to
building the strong faculty/company relationships that are essential to
stimulating innovation.
Challenges and Potential Strategies for the Road Ahead
The Carnegie Mellon experience demonstrates that a focus on
accelerating start-ups and a commitment to regional economic
development as a core university mission can help establish a culture
of innovation that produces tangible commercialization outcomes. At the
same time we confront clear challenges that illustrate the difficulties
the Nation faces in accelerating innovation-led job growth.
These challenges fall into two major areas. First, at a time when
universities and the Federal Government face enormous fiscal
challenges, the resources needed to advance basic research outcomes to
the point where a determination can be made as to whether they provide
the basis for licensing or start-up creation are virtually non-
existent.
The scale of resources required is not large. An investment of
$100,000 in a promising area, for example, can often enable a
researcher to make the leap from concept to commercial potential. But
currently, universities must rely on either internal sources or
foundations for these funds and the net result is a lower return on
U.S. investment in basic research.
The Federal effort most applicable to meeting this gap is the SBIR
program. However, the need for pre-commercial prototyping is often-
greatest before a researcher would be ready to start a firm and be SBIR
eligible.
The second challenge is the need to fundamentally reevaluate
strategies to encourage stronger partnerships between universities and
new industry. While Carnegie Mellon's focus on economic development has
fostered important collaborations, the overall climate created by key
tax policies is having a chilling effect on the capacity to stimulate a
stronger research partnership with companies. I believe that this
climate is hindering our capacity to link university research to
capturing manufacturing opportunities in the U.S.
Recognizing these two main challenges I would offer the following
three recommendations for consideration.
(1) Create funding sources to close the gap between basic
research and commercialization
I would strongly encourage Committee consideration of
experimental approaches to enhance investment in moving
basic research outcomes closer to commercialization.
The President has proposed one approach to fill this
gap by including $12 million in the proposed FY 2011
NSF budget for Innovation Ecosystem grants. The goal of
this proposal is to provide support for programs that
link researchers to resources that can evaluate the
potential for new business creation or commercial
licensing earlier in the research process.
Secretary Locke has also discussed the potential
creation of regional ``prototype development centers''
that would also facilitate pre-commercialization
refinement of research activities. A national pilot
program in efforts such as these could both test their
effectiveness and foster the creative development of
strategies.
This funding should come with clear requirements
however to ensure a Federal return. I would propose for
example that to be eligible, universities must
demonstrate that they have in place policies conducive
to start-ups and commercialization and have created the
economic development partnerships vital to foster
innovation. Where applicable these programs should also
enhance collaboration among universities in the
commercialization process.
(2) Invest in Targeted Research Initiatives that have the
Potential to Dynamically Link Fundamental Research and
Commercialization
The ability to stimulate innovation would also be
enhanced by exploring opportunities to target
investments towards areas where a strong synergy exists
between advancements in basic research and near term
commercial growth.
For example, over the last two years researchers at
Carnegie Mellon have joined their colleagues at ten
other universities and a number of major companies to
develop a roadmap for the future of U.S. commercial
robotics. Funded by the Computing Community Consortium,
the roadmapping process focused on identifying near
term, medium range and long term application and
research needs.
The outcome of this work is an integrated vision for
linking continued progress in fundamental research
areas vital to breakthrough advances with near term
technology gaps that can accelerate new product
innovations in manufacturing, health care, education
and service applications. This approach harnesses the
best strengths of U.S. research universities but
creates a framework for collaborations on near term
innovations that can stimulate new companies and
technology transfer. I believe similar initiatives in
areas such as the science of learning or the brain
sciences where major breakthroughs in fundamental
research have recently been made could also be fertile
ground for this type of approach.
(3) Establish a National Focus on Rejuvenating Industry-
University Collaboration
Just as the Bayh-Dole Act ushered in a boom in
university based start-ups, the U.S. is in need of an
overall strategy or policy framework for increasing
collaboration among companies and universities. Such a
framework should assess both current barriers and
opportunities for new incentives.
One starting point for developing this framework would
be an examination of the U.S. Tax code and Revenue
Procedure 97-14 which places restrictions on the
ability of universities to effectively engage
companies. This procedure precludes companies
sponsoring research projects from receiving
preferential treatment in licensing. In effect, it
requires universities to essentially stipulate that
companies cannot own the IP coming from research they
fund. It is a barrier unique to the U.S. and a major
competitive disadvantage.
Efforts were made in Revenue Procedure 2007-47 to
mitigate the impact of these provisions. But these
changes still largely preclude the ability of companies
to readily obtain exclusive licenses for research that
they fund in buildings financed with tax exempt bonds.
Arguments can be made that altering these provisions
would foster unfair competition with private sector
research or undermine the basic mission of
universities. I believe these issues can be addressed
and that the competitive challenges facing the U.S.
demand that we try.
A second starting point for this initiative would be
to continue to explore modifications to the R & D tax
credit that would incentivize university collaboration.
At a time when companies are increasingly off-shoring
research operations, tax incentives for university
collaborations could be a valuable tool for retaining
innovation capacity in the U.S.
Finally, an initiative to rejuvenate university/
industry collaborations should focus specifically on
opportunities to more closely link basic research to
manufacturing. Carnegie Mellon is launching a campus-
wide initiative called the Manufacturing Accelerator to
create more direct pathways between leading edge basic
engineering and computer science research and
manufacturing.
The Accelerator will leverage a network of over 200
small and medium sized Pennsylvania firms to focus
basic research on industry defined product and process
opportunities. Any effort to stimulate stronger
university/industry collaboration must include
strategies for extending that partnership to
production.
Conclusion
Thank you again for your commitment to American leadership in
science and the opportunity to share Carnegie Mellon's experiences in
seeking to ensure that the Federal investment in basic research
stimulates innovation. The U.S. confronts the challenges from a unique
position of strength. The American research university is an asset not
yet matched anywhere in the world.
But the times demand that we evaluate strategies that can insure
that this asset fosters broad-based economic opportunities in the
future. Carnegie Mellon has worked to foster a culture of innovation
that has accelerated new business creation and commercialization
research partnerships with companies. Our experiences suggest that
strategic policy initiatives could serve to reinvigorate the overall
climate for university-based innovation.
These strategic initiatives should include new funding sources that
bridge the gap between basic research and commercialization anchored in
strict requirements for universities to put in place and maintain
start-up supportive policies. Second, focusing some segment of basic
research funding on targeted areas where close collaboration to foster
synergy between fundamental science breakthroughs and barriers to
commercial applications, such as robotics, would be a critical step to
accelerate research-based innovation. Finally, a broad-based effort to
explore means of enhancing the environment for industry/university
collaboration is clearly needed. A focus on tax code and tax credit
actions as well as an assessment of opportunities that create closer
linkages between university research and manufacturing activities could
provide a starting point for establishing a policy framework as bold as
the Bayh-Dole Act proved to be in launching an era of start-up
creation.
In closing, let me pass on the observation that one cannot spend
time on the campus of an American university without coming away with a
renewed belief that our best times are ahead of us. Carnegie Mellon and
the entire university community stand ready to join you in advancing
ideas and policies that will match the vigor and creativity of our
students.
Biography for Mark Kamlet
Mark S. Kamlet is provost and senior vice president of Carnegie
Mellon University and professor of economics and public policy. He
received a B.S. in Mathematics from Stanford, and an M.S. in
Statistics, M.S. in Economics and Ph.D. in Economics from the
University of California at Berkeley. He has taught at Carnegie Mellon
since 1976. He has served as head of the Department of Social and
Decision Sciences, associate dean of the College of Humanities and
Social Sciences, and for eight years served as dean of the H. John
Heinz III School of Public Policy and Management.
Kamlet's research areas are in the economics of health care,
quantitative methodology, and public finance. He has over 75 published
papers, and has received the outstanding publication award from the
Association of Public Policy and Management for his work on the Federal
budgetary process.
He has served on a U.S. Public Health Service panel to produce
national guidelines on applying cost-effectiveness analysis in health
care; and on three National Institute of Health consensus panels to
make recommendations on national policies relating to prenatal genetic
testing; neonatal screening; and end-of-life care. He has served on the
Institute of Medicine's Board on Population Health and Public Health
Practice, National Institute of Health's Public Access Working Group,
and various consensus panels for the Centers for Disease Control.
Kamlet is chairman of the board of directors of Carnegie Learning,
Inc., past chairman of the board of Carnegie Technology Education, Inc.
He has served on numerous boards of regional not-for-profits, including
currently Pittsburgh Parks Conservancy, the Institute for Transfusion
Medicine, The Western Pennsylvania Hospital and Highmark Inc. He served
on the committee that drafted the rules and procedures for the new
Allegheny County Executive and County Council, chaired the transition
team for Allegheny County in the area of information technology, and
chaired the first advisory board for the County Chief Executive on
economic development.
Chairman Wu. Thank you very much, Dr. Kamlet.
Dr. Atkinson, please proceed.
STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, THE INFORMATION
TECHNOLOGY AND INNOVATION FOUNDATION (ITIF)
Dr. Atkinson. Thank you, Chairman Wu, Mr. Smith and other
Members. It is a pleasure to be here.
I want to start by making, I think, a simple but very
important point. In a report that we issued last year called
The Atlantic Century, we benchmarked the United States against
39 other nations or multi-nation regions on 16 different
indicators of competitiveness and innovation; factors like
corporate R&D, government R&D, venture capital, new business
startups, number of scientists and engineers and the like. What
we found was that in 2000, the United States was by far the
world leader. Our closest competitor was significantly below us
in overall ranking and score, and that was Sweden.
Unfortunately, by 2009, when we released the report, we had
fallen from number one to number six behind counties like
Denmark, Sweden, South Korea and some others.
The reason we fell so much and so fast is because we ranked
40th out of 40 nations or regions in change. In other words, we
were dead last in progress on these factors. Other nations
expanded their corporate and government R&D faster. Other
nations expanded their number of scientists and engineers
faster. They expanded their venture capital faster. So while a
lot of that is due principally to the fact that in the last
decade or so a wide array of other countries have woken up to
the fact that they need to be competitive in innovation. Just a
simple factoid on that. In the early 1990s the United States
had the most generous research and development tax credit in
the world. According to the most recent OECD data, we are 17th
out of 30 OECD [Organization for Economic Co-operation and
Development] nations in R&D tax credit generosity, and that is
just one example of many kinds of policies.
Why do we care about this? Why is it important? I would
actually argue that we can trace at least a portion of the
cause of the recent financial crisis to this trend we have seen
in innovation. We had an enormous amount of money in the United
States looking for a home, money coming in from overseas
including China, and it was looking for a place to be invested
and there just weren't enough good investment opportunities of
things we would consider good, i.e., innovation, and so the
money ended up going into essentially bad consumption
opportunities of subprime mortgages and other kinds of housing
investments, which did nothing to promote U.S. long-term
productivity or innovation and essentially, as we learned, was
unsustainable. So I think there is a connection between the
financial crisis and the lack of innovation or the suboptimal
amount of innovation.
I think the second key point here, though, is that
innovation can play a key role in driving jobs in the future.
One of the reasons is not just because you can get high-tech
jobs and innovation-based jobs that export and pay more, but
more importantly for what Keynes once talked about is the key
to capitalist economies working is the ``animal spirits of
capitalism.'' People have to have faith and optimism that there
is going to be a better tomorrow, and innovation is a key
enabler of that optimism to occur.
So what do we need to do? Let me just say, money is
important but I don't think money is enough. I think one of the
most important changes we need to make in our national
innovation policy system is, we need to increasingly put
partnerships and collaboration at the center of it. It is not
just enough to give money to NSF or other agencies and do
individual projects. We need to think about systemic
partnerships, and we lay out and propose several
recommendations in the testimony on some of those. A few
examples--science and technology STEM [Science, Technology,
Engineering and Mathematics] high schools. There are a number
of these STEM high schools around the country. They partner
with high-tech companies. They do a great job of educating kids
in science. One locally here is Thomas Jefferson High School in
Northern Virginia--there are a number of these. But there
aren't enough of them, and what we would propose is that there
is a role for NSF funding to help expand the number of these
specialty math and science high schools.
I think one of the key areas that we lack right now, and
Dr. Kamlet had alluded to this, is we do an OK job of funding
basic research. Where we fall down, though, is sometimes
translating that research into commercial opportunities, and
you have some leading institutions including Carnegie Mellon,
MIT, Stanford, and Georgia Tech who do a very good job of that
but they are the outliers. We need a national system that
really helps all universities and Federal laboratories do a
better job there. One of the proposals we have made is for a
new kind of SBIR. We call it an SCNR, ``Spurring
Commercialization of Our Nation's Research,'' which would take
a small portion of Federal R&D funds, about 0.15 percent,
allocate that to universities and Federal labs and states to do
this kind of bridging and commercialization.
Another component, I think Dr. Kamlet alluded to this, we
have proposed a collaborative R&D tax credit. Many countries in
the last five years have created special, more generous credits
if you are funding research at universities or Federal
laboratories because that research spills over.
And two final things. One, we think it is important that
Federal research do a better job of supporting sector-based
collaborations. We have got a very good one now in a program
called the Focus Center program that the semiconductor industry
and DARPA fund. It is a very, very good program, but it is only
one program. So we need to be working more on sector-based
efforts where industry comes to the table with ideas and money
and the Federal Government helps match that, and we need to do
a better job of supporting the state and local efforts that are
trying to revive the U.S. economy through innovation-based
economic development. They are very good efforts in many cases
but they are underfunded. One way to do that, but certainly not
the only way, would be to create as we have proposed with the
Brookings Institution, a National Innovation Foundation to
support that.
The final proposal or suggestion would be, one of the
things many countries have done in the last few years is create
a national innovation strategy to look more in a detailed way
where they are strong, where they are weak, what other
countries are doing. I think it would behoove us to also do
something like that akin to the national broadband strategy but
for innovation. Thank you.
[The prepared statement of Dr. Atkinson follows:]
Prepared Statement of Robert D. Atkinson
Mr. Chairman, Mr. Smith, and Members of the Committee, I appreciate
the opportunity to appear before you to discuss the critical question
of U.S. innovation leadership and what the Federal Government can do
about it.
The United States is no longer the global innovation leader and our
rank is rapidly slipping. The effects are seen in increased trade
deficits, relatively lower increases in standards of living, higher
unemployment and even the severity of the current economic crisis.
While ultimately businesses and other organizations (e.g.,
universities) will have to take the lead in driving innovation, the
Federal Government can and should take a much more proactive role. As I
describe below, Congress can take a number of important steps,
including: ensuring that USTR takes a more aggressive role in trade
enforcement, expanding the R&D credit, promoting science, technology,
engineering and math (STEM) skills and increasing support for research
and most importantly research commercialization. In addition, we
encourage the Committee to particularly consider two ideas discussed in
more detail below: the creation of a national innovation and
competitiveness strategy and the establishment of a National Innovation
Foundation, akin to the National Science Foundation (NSF), but for
innovation.
What is at Stake: Why is Innovation Important?
In recent years, a growing number of economists have come to see
that it is not so much the accumulation of more savings or capital that
is the key to improving standards of living; rather it is innovation-
the creation and adoption of new products, services, processes, and
business models.\1\ When economists Kienow and Rodriguez-Clare
decomposed the cross-country differences in income per-worker into
shares that could be attributed to physical capital, human capital and
total factor productivity, they found that more than 90 percent of the
variation in the growth of income per worker was a result of how
effectively capital is used (e.g. innovation), with differences in the
actual amount of human and financial capital accounting for just 9
percent.
Innovation is also essential if we are to create a future of better
jobs for all Americans. Properly conceived, innovation is not just
about creating more jobs for engineers and managers in high technology
industries. It is also about providing more and better training for
incumbent workers in manufacturing and ``low-tech'' services and
reorganizing work processes so that their companies can perform better.
Boosting innovation leads to higher real wages for American workers,
and in the moderate- to the long-term, (and often in the short-term as
well) leads to more jobs. Innovation, properly conceived, also benefits
not just the notable high-tech regions of the nation, but all regions.
The growth of international trade also makes it increasingly
important for the United States to innovate to maintain its standard of
living. Low-wage nations can now more easily perform labor-intensive,
difficult-to-automate work in manufacturing and in a growing share of
services. Indeed, it has become difficult for the United States to
compete in such industries as textiles and commodity metals.
Notwithstanding the efforts of countries like China and India to
compete in advanced technology industries, for the foreseeable future
their competitive advantage should remain in more labor-intensive, less
complex portions of the production process.\2\
By contrast, the United States' primary source of competitive
advantage should be in innovation-based activities that are less cost-
sensitive. To illustrate, a software company can easily move routine
programming jobs to India where wages are a fraction of U.S. levels.
There is less economic incentive for moving advanced programming and
computer science jobs there because innovation and quality are more
important than cost in influencing the location of these jobs.
Likewise, an auto company can easily move production of commodity car
parts to China. But the case for moving advanced research and
development or production of complex, technology-driven parts (such as
drive trains) there is weaker.
Nor does this mean that the United States must inevitably cede
entire industries to low-wage countries. Even in industries such as
apparel and textiles, which are dominated by labor-intensive
production, some firms have carved out innovation-based product niches
(e.g., high-fashion articles whose designs change rapidly or textiles
made of advanced materials) that make it possible for them to produce
in the United States. Moreover, with sufficient productivity growth,
companies can offset the cost of high U.S. wages, enabling them to
produce in the United States at costs equal to or below those of low-
wage countries.
The United States Led in Innovation from WWII to the End of the 20th
Century
Prior to World War II, it could be argued that Europe, and in
particular Germany and Great Britain, led in innovation. However, since
World War II until the early part of the last decade, the United States
led the world in innovation. A range of statistics consistently showed
this. We were leading on patents, corporate R&D, Nobel Prize winners,
high tech exports, etc. Indeed, as the Information Technology and
Innovation Foundation (ITIF) documented in a report, The Atlantic
Century, released last year, the United States was ranked first among
40 leading nations in 2000 according to an amalgam of 16 innovation-
based competitiveness factors (such as funding of corporate and
government R&D, venture capital as a share of GDP, new businesses
created, number of scientists and engineers as a share of the
workforce, etc.). And our lead was not slight; we were far ahead of our
closest two rivals (Sweden and Singapore).
What Factors Helped the United States Lead in Innovation-based
Competitiveness?
There are a number of policy and non-policy factors which
contributed to the United States lead in innovation from the 1940s
through to the 2000s.
On the non-policy side, a key factor was our large and growing
market which enabled U.S. corporations to have large enough markets to
invest in R&D at the scale needed to drive innovation. The large market
(both in number of consumers but also in their higher incomes) also
meant that U.S. firms could gain economies of scale and economies of
learning that enabled costs to be driven down and new generations of
products and services to become profitable faster. For example, in
1960, the number of automobiles sold in Los Angeles County alone
exceeded all those sold in Asia or South America.\3\
Indeed, the U.S. led the world in the application of mass
production manufacturing to virtually all sectors. Numerous production
innovations, including automated assembly lines, numerically controlled
machine tools, automated process control systems and mechanical
handling systems drove down prices in American manufacturing and led to
production of a cornucopia of inexpensively manufactured consumer
goods.
The United States was also the first nation to transform its
innovation system into a science-based one where innovation was derived
from a more fundamental understanding of underlying processes than from
one of mere tinkering and mechanical trial and error. As economist
Joseph Schumpeter argued in the 1940s, reflecting on the U.S. economy,
``Technological progress is increasingly becoming the business of teams
of trained specialists who turn out what is required and make it work
in predictable ways.'' \4\ As a result, U.S. R&D expenditures
skyrocketed by 400 percent between 1953 and 1964. For example, DuPont's
R&D expenditures increased from around $1 million per year in 1921 to
over $60 million by the mid-1950s.\5\ The number of research and
development laboratories increased from around 1,000 in 1927--with few
doing basic research--to almost 5,000 in 1956, with many, like Bell
Labs, conducting extensive basic research. As the innovation process
became systematized and corporatized, engineers became more important.
In 1900, engineers made up only 0.05 of the population, but by 1940, 2
out of 1,000 people were engineers, and by 1970, 6 out of 1,000
were.\6\ As a result, the locus of innovation also switched from
individual inventors like Edison and Bell tinkering in their garages to
scientists working in corporate R&D laboratories.\7\ One reflection of
this is the fact that in 1901 there were 20,896 patents issued to
individuals, with only 4,650 going to corporations. This evened out by
the 1930s, but by the mid-1950s the corporate rate took off. By 1980,
corporations obtained about five times more patents than individuals.
But our lead in scientific discovery alone was not enough to propel
the United States to the lead. That required firms willing and able to
make the investments needed to transform from invention to innovation
and commercialization. And a key factor was the new science of
management and the organization of firms able to handle large complex
production systems. After WWII, new forms of corporate organization
emerged, in which a top managerial cadre became empowered with the
information necessary to centrally manage massive, sprawling
enterprises. When the large, multidivisional company became commonplace
after World War II, CEOs put in place elaborate paper-based managerial
systems to coordinate these sprawling companies. Millions of new white-
collar middle managers were needed to make these behemoths work. This
rise of a new managerial class was one of the most profound changes
resulting from the rise of the corporate economy. Indeed, after World
War II, the formal discipline of management emerged. James Burnham's
1941 book, The Managerial Revolution, argued that the world was
witnessing the emergence of a new ruling class, the managers,' who
would soon replace the rule of capitalists and communists alike.
Combine this with the emergence of world class business schools that
educated managers who could manage innovation, and the United States
had another lead over its competitors who did not embrace the `new
managerialism' until decades later.
Other factors played a role. The American inventor and
entrepreneurial ethos also helped drive our innovation lead. More so
than any other nation at the time, America was a place where ``anyone
could make it,'' provided they worked hard and took risks. America was
able to draw on the talents of a larger share of the population to
drive innovation. And related to this, in contrast to many nations,
failure was not seen as a stigma from which recovery was difficult.
Rather, it was a mark that someone had the fortitude to take a risk,
and perhaps the second (or third, or fourth) time would be the charm.
Moreover, in those days, if one wanted to remake oneself, one simply
moved south or west. Indeed, the very size of our nation and the
relative underdevelopment of much of the West and South until the 1970s
meant that entrepreneurs could locate in places unconstrained by the
dead weight of tradition and inertia. No wonder that in the 1960s
Silicon Valley instead of Pittsburgh (where the largest electronics
firm in the world at the time, GE, was headquartered) became the
world's innovation leader. Pittsburgh was a place where if it hadn't
been tried before, it was probably because it was a bad idea. Silicon
Valley was a place where if it hadn't been tried before, it probably
meant it was a good idea that no one had yet before come up with. In
addition, in comparison to other nations that exhibited greater
institutional rigidities and hierarchies, the more flexible and
collaborative U.S. innovation system provided an advantage. Compared to
other nations, the U.S. innovation system has long been characterized
by collaboration and cooperation, with universities working more
closely with industry, small firms working with large ones, etc.
Finally, our financial system provided real advantages. Compared to
other nations it was easier for entrepreneurs to get financing for new
and risky ventures, and for those firms to pay back initial investors,
either by issuing stocks or getting large firms to finance their
acquisitions as the way to maintain a pipeline of new products.\8\
It would be a mistake to argue, though, that it was only, or even
largely, non-policy factors that led to America becoming the world's
innovation leader. Clearly some of our policy choices to regulate less
and to be more accepting of change propelled the United States to lead.
Our relatively open borders (itself a policy factor) made the
United States a mecca for talent. Welcoming the world's most skilled
foreign-born scientists and engineers into the land of economic
opportunity that America affords has long been one of the strengths of
the U.S. national innovation system. Both the U.S. economy and the
standard of living of American citizens have benefited enormously from
this influx of foreign talent. AnnaLee Saxenian, a professor at the
University of California-Berkeley, has shown that Indian and Chinese
entrepreneurs founded or co-founded roughly 30 percent of all Silicon
Valley startups in the late 1990s.\9\ During this period, many of the
leading scientists, managers and entrepreneurs came from other nations
where opportunities were more limited and in some cases where the
opportunities didn't even exist, as was the case in communist nations.
Likewise, our embrace of a light regulatory touch in the face of
new technologies allowed innovators to be confident that their
innovations would be able to enter the market. In contrast, regulatory
regimes such as the European ``precautionary principle,'' which sought
to limit innovation until all possible effects were known, slowed
innovation. And in fast-moving industries where competitive advantage
is related to how quickly players get in the market and establish a
position, the slower and more restrictive regulatory regimes in many
other nations benefited the United States.
The overall business climate and rule of law that the United States
has enjoyed has provided entrepreneurs and firms with the certainty
that if they invested they could make a market-based rate of return.
Likewise, the United States' leadership in promoting open markets and
globalization helped the United States, at least through the 1980s, for
it expanded the size of markets, allowing more dominant U.S.
technology-based firms to gain even more scale and profits (allowing
them respectively in turn to drive prices down even more and to invest
more into research and new technology).
In addition, while the United States brought a number of anti-trust
cases during this period, the emergence of a large number of large,
profitable companies meant that innovations were a way that firms could
charge premium prices or even gain market share from their competitors.
With constrained competition and consequent market control, these
companies could apply lower discount rates to new research
opportunities; in essence, they were willing to take on the higher
levels of risk required to pursue more radical but higher payoff
technologies. As a result, many of these dominant firms used the steady
flow of profits to invest heavily in their own research laboratories.
They created factories for inventions that brought large numbers of
scientists and engineers directly under the corporate umbrella. In the
1950s and 1960s, the central research laboratories of firms such as
AT&T, GE, IBM, RCA and Xerox were corporate jewels that attracted
highly productive researchers.
But proactive policies also played a key role. Perhaps the most
important one was the role of government as a buyer of technology and
funder of research and education. During the three decades immediately
following World War II, the Federal Government's role in supporting new
technologies centered on military and space imperatives. Such familiar
spin-offs as mainframe computers and jet airplanes had been largely
unintended consequence of government spending for the military and the
space program, both in support for research in these areas and
procurement of products using these technologies. Clearly the United
States' lead in many technology areas, including information
technology, would not have occurred without government procurement and
government support for R&D. Indeed, as late as 1992, Santa Clara County
(Silicon Valley) received more defense contracts than any other county
(in dollar value as a share of county economic output).
But support for research and research universities was also central
in driving U.S. innovation leadership. Federal and state support meant
that a large number of research universities were not only doing
cutting-edge research, much of it transferred to the private sector,
but also educating a regular crop of top notch scientists and
engineers. Our global lead in pharmaceutical and biotech industries,
for example, would not have been as strong without the significant
funding provided to NIH, much of which in turn supported leading
research universities.
As the United States excelled, its lead over other nations
expanded, leaving the Europeans fearful of being left behind. In the
1960s, French author Jean-Jacques Setvan-Schreiber wrote the best
seller, The American Challenge, which described an all powerful
American economic system widening its technological lead and utilizing
superior management ability and economies of scale to take over the
European economy.
But our unparallel leadership lasted only approximately 25 years.
For by the mid-1970s, evidence was emerging that the United States
faced new innovation competitors. But U.S. policy didn't stand still in
response to the challenges of globalization 1.0 in the 1980s (the
emergence of Japan and Europe as key competitors). Indeed, significant
changes occurred in Federal policies in the 1980s in direct response to
the heightened international competitive pressures experienced by U.S.-
based corporations. In that decade, both Congress and the Executive
Branch launched a series of initiatives that were intended to mobilize
public resources to accelerate the development and commercial
exploitation of new technologies. These programs extended well beyond
the defense and space sectors that had previously been the main areas
of Federal technology policy.
These initiatives can be usefully grouped into four separate areas.
First, there were a series of efforts to increase the commercial impact
of research already being funded by the Federal Government,
particularly in universities and government laboratories. Incentives
were created for scientists and institutions to push their research
discoveries into the commercial sphere either by creating new start-
ups, licensing technologies to private firms or engaging in
collaborative projects with business firms. The Bayh-Dole Act
encouraged universities to see their research enterprise as a potential
revenue source and concerted efforts were made over twenty years to
shift resources in the Federal Laboratories away from weapons
production and towards commercial applications.
Second, new programs were created to help finance pre-competitive
research and development costs for individual firms, both startup and
established firms.\10\ Most prominent among these programs was the
Small Business Innovation Research (SBIR) program through which
government agencies set aside a small percentage of their R&D budgets
for projects proposed by small firms, many of which are newly created
spinoffs from university or Federal laboratories. The Advanced
Technology Program (ATP) at the National Institute of Standards and
Technology (NIST) and a series of initiatives at the Department of
Energy provided matching funds to support particularly promising new
technologies among both new and more established firms. In addition,
the United States was the first nation to create a Research and
Development (R&D) Tax credit in 1981.
Third, the Federal Government expanded its ``in-kind'' technical
support to business firms trying to surmount technological barriers.
The Manufacturing Extension Partnership (MEP) has helped thousands of
small firms adapt to computerization and the more demanding schedules
of just-in-time production. The National Nanotechnology Initiative has
made a series of federally funded, university-based laboratories
available to business firms that want to avoid the costs of developing
their own laboratory infrastructure. Similarly, efforts by Federal
laboratories to form partnerships with firms provide them with
important technical support, including through the formation of
Cooperative Research and Development Agreements (CRADAs).
Fourth, the Federal Government played an active role in
facilitating and supporting research consortia that bring together
multiple firms in the same industry to solve technological problems.
The passage of the 1984 Cooperative Research and Development Act made
it easier for companies to collaborate. Federal investment in SEMATECH
in the 1980s and the Semiconductor Focus Center Program in the 1990s
helped the semiconductor industry maintain a leadership position.\11\
Congress created programs at NSF to spur more collaborative research,
including NSF's Engineering Research Centers, a group of 17
interdisciplinary centers located at universities and operated in close
partnership with industry.
The United States Has Lost its Lead in Innovation
The combination of its policy and non-policy strengths, combined
with policy and non-policy weaknesses in other nations, enabled the
United States to lead in innovation for over half a century. However,
changes both in the United States and abroad have meant that while the
United States continues to have many strengths, there is disturbing
evidence that our overall innovation lead has not only been lost, but
that we are continuing to rapidly lose ground. As ITIF documented in
The Atlantic Century, from the year 2000 to 2009, the United States
slipped from number 1 to number 6 in global innovation-based
competitiveness, behind nations such as Singapore, Denmark, Sweden and
South Korea. The primary reason for this is that every other nation or
region made faster progress than we did on a collection of 16
innovation competitiveness indicators. Overall, we ranked 40th out of
37 countries and three regions in making progress on innovation and
competitiveness.
We see signs of this relative decline in innovation capacity in a
wide array of indicators. The decline began at least in the 1990s with
the United States' shares of worldwide total domestic R&D spending, new
U.S. patents, scientific publications and researchers and bachelor's
and new doctoral degrees in science and engineering all falling from
the mid-1980s to the beginning of this century (figure 1), when we were
still number 1. But given our strong overall lead, the declines were
not enough to move us down from number 1 until this last decade.
There has been a declining share of American college graduates with
science and technology degrees. The United States now lags behind much
of the world in the share of its college graduates majoring in science
and technology. As a result, the United States ranks just 29th out of
109 countries in the percentage of 24-year-olds with a math or science
degree. Although Americans (citizens and permanent residents) are
getting graduate degrees at an all-time high rate, the increase in
graduate degrees in natural science, technology, engineering and math
fields has been minimal during the last two decades. The number of non-
science and engineering degrees increased by 64 percent between 1985
and 2002, while the number of science, technology, engineering and
mathematics degrees grew by only 14 percent during that period.\12\
The United States ranks only 14th among countries for which the
National Science Foundation tracks the number of science and
engineering articles per million inhabitants. Sweden and Switzerland
produce more than 60 percent as many science and engineering articles
in relation to the size of their populations than does the United
States.\13\
The United States ranks only seventh among OECD countries in the
percentage of its GDP that is devoted to R&D expenditures (2.6
percent), behind Sweden (3.9 percent), Finland (3.5 percent), Japan
(3.3 percent), South Korea (3.0 percent), Switzerland (2.9 percent),
and Iceland (2.8 percent), and barely ahead of Germany and Denmark (2.5
percent each).\14\ One reason explaining this is that the United States
is one of the few nations where total investments in R&D as a share of
GDP fell from 1992 to 2005 (largely because of a decline in public R&D
support).\15\ Moreover, corporate-funded R&D as a share of GDP fell in
the United States by five percent from 1999 to 2006, while in Europe it
grew by two percent and in Japan it grew by 12 percent.\16\
We also see the evidence of our decline in innovation-based
competiveness in other areas including our trade performance. The trade
deficit represents perhaps the most visible manifestation of the global
challenge. At five percent of GDP in 2008, the current account deficit
is at extremely high levels both in absolute terms and relative to the
size of our economy.\17\ The traditional U.S. trade surplus in
agricultural products is nearing zero and in high-technology products
has already turned negative. Meanwhile, our surplus in services trade
is small and only holding relatively steady. Moreover, the U.S. trade
surplus in services is only 17 percent of the overall trade deficit in
goods.
Moreover, companies are increasingly shifting R&D overseas. For
example, R&D expenditures from U.S.-based MNCs in emerging Asian
markets increased from five percent to 14 percent between 1995 and
2006.\18\ In the last decade, the share of U.S. corporate R&D sites in
the United States has declined from 59 percent to 52 percent, while the
share in China and India, specifically, increased from 8 to 18
percent.\19\
We also see it in the decline in U.S. manufacturing output. The
United States has experienced a hollowing out of many advanced
production supply chains, as more advanced manufacturing has moved
offshore than has expanded in the United States. I recently spoke with
the CEO of a major U.S. high technology company about a new product
line they were introducing. I asked him where he was sourcing the very
advanced display that was being incorporated in the device. His
response was ``we looked long and hard around the United States to see
if we could source it here. We couldn't find any company with the
capability of producing here, so we ended up sourcing it in Taiwan.''
This hollowing out of supply chains is overlooked by many
economists because the national economic accounts that track
manufacturing output provide a misleading picture of the health of U.S.
manufacturing by overstating output, particularly in the computer and
semiconductors industry. According to the Department of Commerce's
Bureau of Economic Analysis, manufacturing output as a share of GDP has
stayed somewhat constant between 1994 and 2008, at around 13.7
percent.\20\ But drilling down to more detail causes a different
picture to emerge. Over the last 25 years, the share of non-durable
manufacturing output peaked around 1993 and has declined from around
seven percent to 4.7 percent of GDP in 2008. The share of durables, in
contrast, increased to just over nine percent in 2007, with a very
slight decline in 2008, leading many to the rosy conclusion that while
manufacturing employment may have declined, manufacturing output is
still strong and therefore that employment declines were due only to
the higher levels of productivity in manufacturing relative to the rest
of the economy. But taking out computers and electronic products (NAICS
code 334) shows a very different picture, with durable goods output
share declining from seven percent in 1998 to 5.3 percent in 2008.
Overall manufacturing output minus computers and electronic products
declined from 13 percent of GDP in 1998 to just 9.7 percent in 2008.
Defenders of the status quo will respond that the proper measure is
overall manufacturing, not manufacturing minus computers. But does
anyone really think that the real inflation-adjusted value added of
computers and electronic products really doubled between 2003 and 2007,
which is what the BEA numbers suggest? The problem is that BEA counts
output of computers based on improvements in Moore's law and when
processing power doubles every 18 months or so it counts that in the
value-added. But this clearly overstates output and provides an
extremely misleading picture of the real health of the U.S.
manufacturing sector. For those who want to play down the threat to the
U.S. manufacturing base, these statistics provide reassuring, if false,
comfort.
Factors Contributing to our Relative Decline in Innovation-based
Competitiveness
There are a number of factors which have contributed to the United
States' relative decline in innovation-based competitiveness. Many
point to globalization. At one level there is no doubt that with the
emergence of globalization and the relatively faster growth in income
of many nations to ``catch up'' to the United States, one would expect
to see the global share of U.S. economic output fall. And it is
certainly true that as some advanced nations began to catch up to the
United States (in part by emulating our policies, as described below)
the U.S. share of global innovation output (e.g., R&D and patents)
would also fall, although by less than overall economic output since
the United States should actually be increasingly specializing in
innovation-based activities as more routine-based production shifts
offshore. But there was nothing preordained about the United States
falling from number 1 in 2000 to number 6 in 2009. The United States
can and should remain the global innovation leader.
So what happened? As in explaining our success, non-policy and
policy factors have played a role. There are a number of non-policy
factors that appear to be at work. First, the evolution of U.S.
financial markets has placed mounting pressure on large corporations to
prioritize increasing short-term returns to shareholders over growth or
investments with longer-term payoffs. And related to this, the market
environment has become much more competitive.
On the one hand, this has disciplined firms into being more
efficient. But at the same time it has led many firms to seek short-
term cost reductions (often through moving to lower cost locations)
even if similar or even greater cost reductions through innovation
could be achieved but over a slightly longer period of time. Likewise,
these new financial pressures have forced many firms to reallocate
their research portfolios more toward product development efforts and
away from longer term and more speculative basic and applied research.
From 1991 to 2007, basic research as a share of total corporate R&D
conducted in the United States fell by 3.6 percentage points, while
applied research fell by roughly the same amount, by 3.5 percentage
points. In contrast, development's share of corporate R&D increased by
7.1 percentage points, as figure 2 shows.
We see this focus on the shorter term in the venture capital
industry. As the venture capital market has matured, firms have found
it more profitable to invest in larger deals and less risky later-stage
deals. Even though the overall amount of venture capital has grown
since the mid-1990s, the actual amount invested in startup-and seed-
stage venture deals is smaller today than a decade ago, and a smaller
percentage of venture funding now goes to early-stage deals (the stage
just after seed-stage).\21\ The result is a gap between the completion
of basic research and applied R&D.
When it comes to policy, it is important to focus both on the
change in policy in the United States and externally. Externally, as we
discuss below, nations put in place aggressive technology and
competitiveness policies to lure internationally mobile technology
investment. U.S. firms are now competing against firms in a growing
number of national economies in which their governments actively help
them compete.
Over the last 15 years in particular, a large number of other
nations have woken up to the fact that they need to compete for
internationally mobile high technology manufacturing, and they have put
in place policies that reflect that determination, such as more
generous research and development tax treatments and stronger
government support for all stages of research. In contrast, the United
States has lagged behind, believing that it needed to do little since
it had long been the global innovation leader. In the early 1990s, for
example, the United States had the most generous research and
development tax credit among the 30 OECD nations. Now, because other
nations have expanded their R&D tax incentives, the U.S. rank has
fallen to 17th.
In response to increased global competition for internationally
mobile economic activities, most nations have established
competitiveness policies, including more competitive corporate tax
codes. In the early 1980s, the average statutory tax rate amongst OECD
nations was nearly 50 percent; by 2001 the rate had fallen to under 35
percent. Some formerly high tax nations have reduced their taxes
dramatically. For example, the statutory corporate tax rate in Sweden
in 1982 was 60 percent; by 1999 it had been reduced to 28 percent.
Overall, average corporate tax rates have declined by at least 15
percentage points in leading industrialized nations over the last 30
years. Not only have corporate tax rates declined, but a growing number
of nations, particularly Asian nations, use targeted tax incentives
(such as tax holidays on new plants) to attract internationally mobile
investment. The U.S. statutory rate has not changed since 1986, and the
Federal Government does not provide tax incentives to attract or retain
international investment.
We see the same trend in other areas. Among 36 nations, the United
States ranked just 21st in the growth of government investment in R&D
from 1999 to 2006, with a growth rate of just 20 percent the average of
the other nations. The major reason for this slippage has been a
slowdown in Federal R&D investment. Since the mid-1990s total Federal
R&D spending grew at a sluggish 2.5 percent per year from 1994 to
2004--much lower than its long-term average of 3.5 percent growth per
year from 1953 to 2004.\22\ Indeed, the United States is one of only a
few nations where total investment in R&D as a share of GDP actually
fell from 1992-2005, largely because of that decline in public R&D
support.\23\ When U.S. R&D intensity is compared to other OECD
countries, we find that at 2.6 percent of GDP devoted to R&D
investment, the United States ranks only seventh in R&D intensity,
behind a list of countries including Japan, South Korea, Finland and
Sweden.\24\ In more recent rankings (2006) from the OECD, the United
States placed only 22nd in the fraction of GDP devoted to nondefense
research.\25\
Finally, while many nations have practiced ``good'' innovation
policy, many have also put in place ``bad'' innovation policy: high-
tech mercantilism. Indeed, a key factor in the loss of U.S. innovation
leadership has been the dramatic increase in technology-oriented trade
protectionism engaged in by many U.S. competitors. While U.S. markets
are generally open, the same cannot be said for many other nations.
Many nations, and not just China, manipulate their currency as a way to
subsidize exports and raise the price of imports. On top of that they
use an array of tariff barriers to keep out U.S. exports. But these
nations go further, engaging in a kind of protectionism 2.0. This
involves aggressive anti-trust enforcement, particularly against U.S.
high tech companies (witness foreign actions taken against U.S. tech
companies like Microsoft, Intel and Qualcomm); technology standards
manipulation (the Chinese alone have developed over 15 proprietary
technology standards designed to keep out U.S. IT products); turning a
blind eye to and even engaging in rampant intellectual property theft
(over 85 percent of software in China is pirated, while many nations
attempt to force U.S. pharmaceutical companies to transfer intellectual
property in return for market access); and huge government subsidies to
prop up high-tech exporters (without EU government subsidies, Airbus
would have nowhere near the global market share it does).
But even absent what other nations have done, the U.S. relative
position would have declined because of policies at home. One policy
area that has been cited by many is K-12 education. While there is no
doubt that improving the quality of K-12 education will have some
positive benefit on our innovation-based competitive position, it would
be a mistake to believe that fixing K-12 will be the silver bullet for
innovation. K-12 quality has not been the major reason for the
precipitous and troubling decline in U.S. innovation leadership. In
fact, while the U.S. competitiveness position has declined relative to
other nations, at least by one measure, our educational performance has
not. For 20 nations for which there are comparable data, between 1999
and 2007 the United States ranked fourth in improvement in 8th grade
math scores an sixth out of 25 nations in 81' grade science scores
according to TIMMS (Trends in International Mathematics and Science
Study). The United States has also made greater improvement in 8th
grade science scores than several international leaders such as Japan,
Sweden, Norway and Singapore between 1999 and 2007.
The United States does less well on the OECD's PISA (Programme for
International Student Assessment) test, which focuses more on measures
of application of learning to real world situations than does TIMMS.
Still, the U.S. performance on PISA has not been so bad as to indicate
our economic decline. In reading, math and science, U.S. 15-year-olds
in 2000 (who would now be 25-years-old and entering the workforce)
performed about as well on average as 15-year-olds in the 27
participating OECD countries and ahead of the 4 non-OECD nations.
Compare the United States and Denmark. Denmark outperformed the United
States in innovation-based competitiveness, ranking fifth in progress,
compared to our last place rank. Yet, in 2000, U.S. 15-year-olds
outperformed Danish 15-year-olds on reading, math and science.
Likewise, U.S. 15-year-olds did better than 15-year-olds in Germany,
Spain, Russia and Brazil, all of which made faster progress on
competitiveness. Let us also remember that U.S. college education
levels are at historic highs. In 2007, 46 percent of high school
graduates between the ages of 18 and 24 were actively enrolled in
higher education. This is hardly the stuff of catastrophic failure.
An area of more concern is the reduced investment in innovation
infrastructure, including research. Total Federal funding for R&D
declined as a share of GDP from 1985 to 2004. To restore Federal R&D
support as a share of GDP to its 1993 level, we would have to increase
Federal R&D spending by 50 percent, or over $37 billion. Federal
investment in most of the programs that focus most directly on
innovation promotion have declined or grown more slowly than the
economy overall. Between 1998 and 2006, the budgets for the Advanced
Technology Program, the Manufacturing Extension Partnership, the Office
of Science and Technology Policy, and the Industrial Technologies
Program declined in nominal terms, while that of NSF's Engineering
Research Center program grew at less than one-fifth the rate of GDP
growth. Funding for NSF's Partnerships for Innovation also grew more
slowly than GDP since the program began operating in 2000. And while
our public and private research universities used to be the envy of the
world, 20 years of underfunding by state governments have meant that
many public research universities have fallen in capabilities relative
to private research universities.
Adequately investing in and developing innovation-enhancing
policies is crucial to national innovation competitiveness, as
Professors Jeffrey Furman and Richard Hayes found in a study of the
national innovation capacity (an economy's potential for producing a
stream of commercially relevant innovations) of twenty-three countries
from 1978 to 1999.\26\ Starting with the year 1979, they classify
countries as either world-leading innovators (the United States,
Germany, Japan), middle-tier (Great Britain, France, Australia), third-
tier (Spain, Italy), or ``emerging'' innovators (Ireland, Taiwan) based
on countries' patenting activity per capita, a proxy for commercialized
innovations.
A number of these ``emerging innovators''--among them Ireland,
Finland, Singapore, South Korea, Denmark and Taiwan, in particular--
achieved remarkable increases in innovative output per capita from 1978
to 1999, moving to the world's technological frontier and overtaking
the innovative capacities of many mid- and third-tier countries,
including Great Britain, France and Italy, whose economic conditions
started off much more favorably in the early 1980s. Furman and Hayes
conclude that innovation leadership among countries requires not only
the development of innovation-enhancing policies and infrastructure,
such as strong IP protections, openness to trade, highly competitive
markets, and strong industry clusters, but also a commitment to
maintaining substantial financial and human capital investments in
innovation.
Additionally, Federal agencies have not responded as nimbly as they
should too many of the changes in the innovation environment. For
example, the U.S. Patent and Trademark Office (PTO) used to be the envy
of other nations around the globe for its effectiveness and efficiency.
But today backlogs at the PTO mean that most patent applicants will
wait years before finding out if their invention is granted a patent.
Moreover, even as services innovation has become much more
important, U.S. innovation policy has not responded. U.S. innovation
policy is largely focused on innovation in goods-producing industries,
e.g., developing a new energy source or coming up with new materials.
In the past, when goods production was a much larger share of the
economy than it is today, such a focus made more sense. But in an
economy where more than 80 percent of civilian jobs lie in service-
providing industries, the lack of focus on services innovation makes
little sense. The emerging discipline of service science brings
together ongoing work in computer science, operations research,
industrial engineering, business strategy, management sciences, social
and cognitive sciences, and legal sciences to develop the skills
required in a services-led economy.\27\
Finally, as the U.S. innovation system has spread out to all states
and corners of the nation, the Federal system has remained national in
scope. Washington is often far removed from the firms and other
institutions that drive innovation. This is particularly true for small
and mid-sized firms. In contrast, state and local governments and
metropolitan-level economic developers have a long track record of
creating organizations that work more closely with firms.
Unfortunately, most existing Federal programs do not work through or in
collaboration with state or local governments or regional
organizations, which are often more flexible and less remote from
production processes. Indeed, there is very little appreciation in
Washington for the fact that virtually every state has in place
technology-based economic development programs.\28\ Federal program
managers and policymakers all too often seem to assume that there is
one uniform national economy in which regional agglomerations are at
best a sideshow.
What Can We Learn From Other Nations?
Many forward-thinking countries have made innovation-led economic
development a centerpiece of their national economic strategies during
the past decade. These nations know that moving up the value chain to
more innovation-based economic activity is a key to boosting future
productivity, and that losing the competition can result in a
relatively lower standard of living as economic resources shift to
lower-value-added industries. These countries are implementing
coordinated national innovation agendas that boost R&D funding,
introduce policy changes and government initiatives that more
effectively transfer technologies from universities and government
laboratories to the private sector for commercialization, and ensure
that immigration policies support innovation.
While many nations have taken the innovation challenge to heart and
put in place a host of policies to spur innovation, the United States
has done little, consequently falling behind in innovation policies and
in innovation performance as well. We see this gap in at least four
main areas: programs to establish civilian technology and innovation
promotion agencies, services innovation initiatives, tax incentives for
research and development, and policies regarding high-skill
immigration.\29\
1. Civilian Technology and Innovation Promotion Agencies
A number of advanced countries are well ahead of the United States
in creating national agencies that support innovation. In recent years,
Finland, France, Iceland, Ireland, Australia, Japan, the Netherlands,
New Zealand, Norway, South Korea, Canada, Germany, Taiwan, Switzerland
and Great Britain have all either established or significantly expanded
separate technology-and innovation-promotion agencies. Other nations,
such as Denmark, Sweden and Spain, have longstanding agencies of this
type.\30\ All these countries have science- and university-support
agencies similar to America's National Science Foundation, which
largely fund basic research, universities and national laboratories.
But these countries realized that if they were to prosper in the highly
competitive, technology-driven global economy, they needed specifically
to promote technological innovation, particularly in small and mid-
sized companies and in partnership with universities.
Perhaps the most ambitious of these efforts is Tekes, Finland's
National Agency for Technology and Innovation. In the last two decades,
Finland has transformed itself from a largely natural resource-
dependent economy to a world leader in technology, with Tekes a key
player in the country's transformation. Affiliated with the Ministry of
Employment and the Economy, Tekes funds many research projects in
companies, multi-company partnerships, and business-university
partnerships. With a budget of $560 million (in a country of only 5.2
million people), Tekes works in partnership with business and academia
to identify key technology and application areas--including nano-
sensors, ICT and broadband, health care, energy and the environment,
services innovation, and manufacturing and minerals--that can drive the
Finnish economy. Tekes also operates a number of overseas technology
liaison offices that conduct ``technology scanning,'' seeking out
emerging technologies bearing on the competitiveness of Finnish
industries, and sponsors foreign outreach efforts to help its domestic
companies partner with foreign businesses and researchers.
Similarly, Japan's New Energy and Industrial Technology Development
Organization (NEDO) is a quasi-public agency that receives its $2
billion budget from the Ministry of International Trade and Industry.
Great Britain's new Technology Strategy Board is a non-departmental
public body (similar to an independent government agency in the United
States) whose mission is to drive forward the government's national
technology strategy. In South Korea, the Korea Industrial Technology
Foundation, established in 2001, engages in a wide range of technology
activities, including providing training to develop industry
technicians and cooperating with international entities to promote
industrial technology development. A host of other nations have similar
bodies dedicated specifically to promoting innovation and
competitiveness.\31\
Most foreign innovation-promotion agencies provide grants to
companies for research, either alone or in consortia, including in
partnership with universities. All support university-industry
partnership grant programs, whereby companies or business consortia can
receive grants (usually requiring matching funds) to partner with
universities on research projects. Vinnova, Sweden's innovation-
promotion agency, gives most of its grants to research consortia
involving companies and universities.
Most agencies focus their resources on specific areas of
technology. For example, by working with business and academia, Tekes
has identified 22 key technology areas to fund. Many foreign programs
have expanded their focus to include service sector innovation. One of
Tekes' focus areas is innovation in services, including insurance and
finance, retail and wholesale trade, logistics, and knowledge-intensive
business services. The United Kingdom's Technology Strategy Board is
working with knowledge-intensive industries such as creative and
financial services in addition to the high-tech and engineering
sectors. Most programs insulate their grant making from political
pressure by using panels of outside experts to review grant
application, just as our National Science Foundation and the Technology
Improvement Program (TIP) do.
Most agencies also support national sector-based activities that
bring together researchers in the private, non-profit and public
sectors. For example, the UK's Technology Strategy Board established
its Innovation Platforms program to bring together government
stakeholders and funders, engage with the business and research
communities to identify appropriate action, and align regulation,
government procurement and other public policies to support innovative
solutions. To date, this program has identified two priority areas,
intelligent transport systems and network security.\32\
One of the benefits of these programs is that they not only fund
research projects but also facilitate networking and collaboration. For
example, Tekes brings together in forums many of the key stakeholders
in the research community. For each of its 22 technology areas there
are networking groups of researchers. In addition, Tekes publishes a
description of each project it funds. Through these processes,
researchers learn more about research areas and gain opportunities to
collaborate. Many agencies also work with industry on ``roadmapping''
exercises, whereby key participants (industry and academic researchers
and government experts) identify technology challenges and key areas of
need over the next decade. They then base their selection of research
topic funding on the results of the roadmap exercise. The UK's
Technology Strategy Board is funding over 600 collaborative business-
university research projects which have been launched over the past two
to three years. Like Tekes, it is also responsible for more than 20
industry-and technology-based knowledge transfer networks, with more
being established.
Foreign innovation-promotion agencies do not limit their activities
to R&D support. The Danish Technological Institute and Iceland
Technology Institute, for example, help small and mid-sized firms
upgrade their technologies and business processes. Enterprise Ireland
offers workforce training grants to small and mid-sized businesses.
Many innovation-promotion agencies also have foreign outreach
efforts to help domestic companies partner with foreign companies or
researchers. For example, Tekes has a number of overseas offices that
act as technology liaisons including in Washington, DC, Singapore and
South Korea. Indeed, 40 percent of Tekes-funded projects involve
international collaboration. Spain's innovation-promotion agency, CDTI,
also helps Spanish businesses find partners in other nations and
provides up to 60 percent funding to the participating Spanish firm.
Most of these organizations are affiliated with, but separate from,
national cabinet-level agencies similar to our Commerce Department.
However, some are independent government agencies or government-
sponsored corporations. The Danish Technological Institute is a
private, nonprofit organization. In virtually all cases, though, these
nations have made an explicit decision not to place their innovation-
promotion initiatives under the direct control of large government
departments. Although most innovation-promotion agencies are affiliated
with those departments, they usually have a substantial degree of
independence. It is common for these agencies to have their own
executive director and a governing board of representatives from
industry, government, university, or other constituency groups. For
example, Japan's government recently made a conscious choice to
establish NEDO as an autonomous agency because it realized that MITI,
as a large government bureaucracy, did not have the flexibility needed
to manage such a program. NEDO is governed by a board of directors,
with the Chair appointed by MITI and members from industry,
universities and other government agencies. Similarly, Tekes is
affiliated with the Ministry of Trade and Industry but has its own
governing board that includes national and regional government,
businesses and union representatives.33 The Technology Strategy Board,
begun in 2004 as a unit of the Department of Trade and Industry, was
established in 2007 as an executive non-departmental public body. While
it is now affiliated with the Department for Innovation, Universities
and Skills, it is governed by a board made up mostly of technical
experts from industry.\34\
One reason for structuring innovation-promotion agencies this way
is that they have more flexibility, including the ability to pay
salaries high enough to attract staff from the business world and the
ability to employ some staffers who are on leave from positions in
private business. For example, about one-third of the NEDO staff is
from industry and one-third is from universities, while the remaining
third is full time NEDO staff. Rotating in outside staff helps keep the
agency in touch with current business practices and cutting-edge
technology. (For similar reasons, NSF employs some people who are on
leave from academic and research positions outside the Federal
Government.) The Technology Strategy Board has been able to source a
fairly large share of its staff from industry, enabling it to have the
kind of expertise that would be difficult without this ability. In
addition, independent government bodies can adapt more quickly than
those that are subject to the tight control of larger agencies. It is
easier for them to start new initiatives and abolish less effective
ones. Likewise, many national technology agency programs are able to
pay employees more than the standard government salaries, enabling them
to attract higher quality individuals, often with industry experience.
Nevertheless, most of these agencies are fairly lean. For example,
Tekes, with a budget equivalent to $560 million, has a staff of just
300.
To be effective, these agencies need to be flexible and able to
work closely with industry. For this reason they are less bureaucratic
than traditional ministries or departments. As the UK government notes,
``As separate legal entities, non-departmental public bodies can
operate more flexibly than executive agencies, entering into
partnerships and taking commercial and entrepreneurial decisions.''
Moreover, ``their distance from government means that the day-to-day
decisions they make are independent as they are removed from ministers
and civil servants.'' \35\ Foreign innovation-promotion agencies today
are a far cry from the strongly directive Japanese MITI of the 1980s.
They do not try to decide the path of business innovation and then
induce firms to follow that path. Instead, they exemplify the
cooperative, facilitative government role that is needed to address the
market failures that hamper the innovation process.
If the United States wanted to match Finland's outlays per dollar
of GDP in innovation-promotion efforts, it would have to invest $34
billion per year. While other nations invest less in their innovation-
promotion agencies than Finland, they still invest considerably more
than the United States. As a percent of their countries' GDPs, Sweden
spends 0.07 percent, Japan 0.04 percent and South Korea 0.03 percent on
their innovation promotion agencies. To match these nations on a per-
capita basis, the United Sates would have to invest $9 billion to match
Sweden, $5.4 billion to match Japan, and $3.6 billion to match South
Korea.\35\ It is astounding that economies a fraction the size of the
United States spend more on innovation-promotion in actual dollars, let
alone as a percentage of their economy.
But compared with other industrialized democracies, the U.S.
government invests relatively little in innovation-promotion efforts.
In fiscal year 2006, the Federal Government spent a total of $2.7
billion, or 0.02 percent of gross domestic product, on its principal
innovation programs and agencies: the National Institute of Standards
and Technology's Advanced Technology Program and Manufacturing
Extension Partnership, the White House's Office of Science and
Technology Policy, three NSF-administered innovation programs (Small
Business Innovation Research, Small Business Technology Transfer and
Industrial Technologies Program), and the Department of Labor's
Workforce Innovation Regional Economic Development (WIRED) program.
This places U.S. industries and corporations operating alone at a
disadvantage against foreign corporations that benefit from coordinated
and enlightened national strategies among universities, governments and
industry collaborations to foster competitiveness. For example, the
Japanese government has recognized advanced battery technology as a key
driving force behind its competitiveness, and views battery technology
as an issue of ``national survival.'' \37\ It is funding Lithium-ion
battery research over the five-year period from October 2007 to October
2012 at $275 million (y25 billion), and longer term has committed to a
20-year Li-ion battery research program. Germany's government will
provide a total of =1.1 billion ($1.4 billion) over ten years to
applied research on automotive electronics, lithium ion batteries,
lightweight construction, and other automotive applications.\38\
2. Services Innovation Initiatives
As services increasingly drive employment, productivity, and
economic growth, a number of countries have developed explicit national
services innovation policies focused on spurring innovation in the
services sectors of their economies. Policymakers in these countries
have recognized that knowledge of services innovation has largely been
informed by studies of the manufacturing sector, and acknowledged the
need to tailor unique measures to the needs of services firms and
industries.\39\
The focus on service innovation began in the mid-2000s with a
coterie of small Northern European countries--Finland, Denmark, Norway,
The Netherlands and Sweden--and has since grown to include additional
small countries in Europe and Asia (Taiwan, Ireland and Singapore) and
large nations (Great Britain, Canada and Germany). Finland was the
first to implement a national services innovation policy, with a five-
year, =100 million \40\ program launched in 2006 called ``SERVE--
Innovative Services Technology Programme.'' \41\ Finland's neighbors
soon followed suit, recognizing the increasing importance of services
as their domestic manufacturing industries departed for cheaper
production centers abroad, particularly in the form of ``near-shoring''
to Baltic and Eastern European countries. The same phenomenon affected
developed Pacific Rim countries, as manufacturing moved first from
Japan and Taiwan to cheaper production centers in China, and now out of
China and on to the poorer nations of Southeast Asia. This process has
forced almost all industrialized countries to seek to migrate their
economies up the value chain towards knowledge-based, high-value-added
services activities such as R&D, design, finance, consulting/training,
and post-installation service and support.
Policy approaches quickly evolved into two main strands. First,
these countries strove to develop framework conditions that support
competitive services industries. As they began to scrutinize their
services industries, these countries found they first needed
considerable work in setting favorable framework conditions, such as
removing barriers to labor market mobility in services industries,
further opening and integrating cross-border services markets,
developing better accounting practices for intangible assets, updating
intellectual property and trade laws to accommodate the unique
characteristics of services, developing core information technology
infrastructure, and providing structures and incentives to encourage
services exports.
Second, with this supportive policy framework in place, these
countries implemented specific programs to support innovation in
services businesses. Specific efforts (and at least one sample country
implementing them) include: \42\
Boosting academic research in the area of services
innovation and services business, especially research on
creating innovative services-based business models, quantifying
improvements in services productivity, and enhancing the
quality of services delivery. (Finland, The Netherlands,
Denmark)
Funding Services Science research; that is, cross-
disciplinary research that draws on fields such as computer
science, management, operations, marketing and organizational
behavior. (Singapore, Taiwan)
Extending research and experimentation tax credits to
services industries; especially, defining where the
``innovative step'' occurs for services firms. (Norway and The
Netherlands)
Developing innovation metrics that measure innovation
in services, not just advanced manufacturing, and looking for
``hidden innovation'' in services industries. (Great Britain,
the United States, Ireland)
Supporting the development of creative industries
through establishing regional design centers. (South Korea, the
Netherlands, Great Britain)
Providing online self-assessment tools that allow
companies to benchmark their innovation infrastructures (R&D
budgets, number of employees, intellectual property strategies)
against in-nation and in-industry peer companies. (Great
Britain and European Union)
Benchmarking services innovation policies across
European countries. (European Union)
3. Tax Incentives for Research and Development
The tax incentives the U.S. government provides corporations for
R&D activities have fallen from the most generous in the world in the
late 1980s to 17th among 30 OECD countries in 2004.\43\ Many nations
now provide significantly more generous tax incentives for research
than does the United States. From leading the world in the late
1980s,\44\ the United States by 1996 fell to seventh most generous
among OECD nations, behind Spain, Australia, Canada, Denmark, the
Netherlands and France.\45\ By 2004, we had fallen to 17th in
generosity for general R&D; 16th for machinery and equipment used for
research; and 22nd for buildings used for research.\46\
Among nations with a tax incentive for R&D, the United States now
provides one of the weakest incentives, below our neighbors Canada and
Mexico, and behind many Asian and European nations. Japan's credit is
almost three times as generous as the United States', and for small
companies it's four times as generous. In 2004, France adopted a credit
essentially equivalent to a 40 percent incremental R&D tax credit. In
an explicit effort to attract U.S. corporate R&D, our neighbor to the
north is even more generous. In Canada, large companies are eligible
for a flat 20 percent credit while small companies can receive a 35
percent credit; in many provinces, equally generous credits can be
taken on top of the Federal credit. Indeed, over the past decade, all
other nations with R&D tax incentives have boosted the generosity of
their R&D tax incentives, particularly since 2000.\47\
At a time of increased concern about America's growing
competitiveness challenge, our tax credit has been getting weaker, both
in absolute terms and relative to other nations, in part because of
changes made by Congress over the years that have diminished its
generosity.\48\ In fact, until the passage in 2006 of the Alternative
Simplified Credit, the credit was about half as generous as it was in
the early 1980s.\49\ Even with the recent increases in R&D tax
incentives (the passage of the Alternative Simplified Credit in 2006
and its expansion in the Emergency Economic Stabilization Act of 2008),
the United States moved up only to 14th place. Out of the 21 OECD
nations that offered R&D tax credits in 2008, the United States ranked
17th. The United States would need to increase the ACS to 20 percent to
move up to 10th place, 31 percent to move to 5th place, and 47 percent
to become the most generous of the OECD nations.\50\ However, this
doesn't include non-OECD nations such as India, China and Brazil, all
of which have significantly more generous tax incentives to attract
multinational R&D. India's R&D tax credit is now four times that of the
United States. On top of salaries for R&D personnel that are as low as
one-sixth of the costs in the United States, China provides a 150
percent deduction on R&D expenses (provided that R&D spending increased
ten percent over the prior year). Some countries, including Denmark and
the Netherlands, have begun to extend R&D tax credits to cover process
R&D activities, effectively extending the R&D tax credit from their
goods to services industries as well.
4. High-Skill Immigration
Over the last decade, many nations have liberalized their policies
regarding high-skill immigration, while the United States, in stark
contrast, has restricted its policies. In a study benchmarking high-
skill immigration policies in eight nations (the United States, Canada,
New Zealand, Australia, Japan, Great Britain, Germany and France),
``Global Flows of Talent: Benchmarking the United States,'' ITIF found
that the United States trails other peer countries in developing a
proactive approach to attract high-skill foreign workers.\51\
Using data from 2001 to 2006, the United States received an average
of about 67,000 highly skilled permanent immigrants per year, with
Canada receiving 56,000 per year, Australia 20,000 and New Zealand
about 10,000.\52\ As a share of their populations, these rates are all
several times larger than those in the United States--more than 11
times larger in the case of New Zealand.
ITIF's study of the immigration policies of those eight countries
found three broad approaches. The first group--Australia, Canada and
New Zealand-conceive of immigrants as a source of economic growth and
consider highly skilled immigrants especially valuable contributors.
The second group-the United States and Great Britain--are more amenable
towards immigration but do not place high priority on tilting the mix
of immigrants toward the talented. The third group--France, Germany and
Japan--tend to view highly skilled immigrants (and immigrants in
general) more as threats to native workers than as positive additions
to national well-being.
While the United States may not be as reflexively anti-immigration
as some other industrialized countries, in recent years it has severely
limited the flow of foreign talent entering the country at a time when
the science and engineering workforce in the United States has become
increasingly reliant on foreign talent. In 1995, non-U.S. citizens
accounted for only six percent of the U.S. science and engineering
workforce; by 2006, that percentage had doubled to 12 percent, and for
the youngest cohort of scientists and engineers (ages 21 to 35), the
percentage rose to 20 percent.
With the United States restricting the number of H-1B visas issued
annually to 85,000 from 2006 to 2008 (and 65,000 as of today),\53\
almost 50 percent of highly talented foreign professionals who applied
for temporary work in the United States in the years 2006 to 2008 were
turned away. Limiting the influx of talented foreign-born science and
engineering professionals not only hurts U.S. competitiveness, it may
also contribute to the decision of companies to source R&D operations
abroad to be closer to local pools of S&E talent.
Why Does the United States Need a Robust Innovation Policy?
The global competitive landscape continues to stiffen as a number
of countries get serious about creating favorable climates that attract
foreign direct investment and R&D activities and that support the
innovation efforts of their domestic corporations and workforce. It is
time for the United States to articulate and implement an innovation-
led economic growth strategy to respond to global economic
competitiveness challenges.
But before detailing some of the key elements of such a strategy,
it is first worth briefly discussing why there is a need to develop
such a strategy. Unfortunately in the United States too many
conventional ``neoclassicalist'' economists hold on to the antiquated
view that economic welfare is maximized by individual firms acting as
independent utility maximizers, doing what is best for them
individually. In fact, according to this view, many policy efforts to
help firms become more innovative will only make things worse. Indeed,
the worst possible sin in the eyes of neoclassical economists is to
``pick winners and losers'' (an absurd characterization since nations
only pick winners, not losers). Substituting for the wisdom of the
market can only lead to a worse, not better, allocation of resources,
they opine.
Because of that, many conventional neoclassical economists argue
that policy makers should be indifferent to the occupational and
industrial mix of the U.S. economy. For most neoclassical economists,
the right industrial structure is the one that ``the market'' provides,
because by definition market exchanges engaged in by two parties are
what is known as ``Pareto optimal.'' Why else would the parties engage
in them? Any attempt by policy makers to try to alter this invisible
hand by increasing innovation output can only reduce, not increase,
economic welfare. This view, it should be noted, is almost unique in
the world. In no other nation, perhaps with the exception of British
Commonwealth nations, does the economics profession consist of such a
large cohort of neoclassicalists counseling such blind faith in market
processes.
This helps explain a key reason why so many neoclassical economists
advising Washington have been so blase about the decline in U.S. high-
tech manufacturing. To the extent that they are even willing to admit
that high-tech manufacturing has declined, they simply assert as a
matter of faith that domestic resources left idle by offshoring will
automatically shift to new higher-productivity industries. The magic of
the market will optimally reallocate resources. But only if one
believes that economies are largely made up of ``Coasian'' factors of
production that assemble and reassemble on the basis of prices could
one take this view seriously. As innovation economist Greg Tassey
argues, ``The central failure of current economic growth models is the
assumption that shifts in relative prices will automatically elicit a
Schumpeterian-type efficient reaction from domestic private markets--
namely an adjustment involving development and assimilations of new
technologies to replace offshored ones.'' \54\
According to this view, if a high-wage, high-tech firm like Boeing,
for example, were to go out of business because of unfair European
Commission subsidies to Airbus, as long as America maintains flexible
labor and capital markets, these resources will flow into other
industries, including into expanding or new firms and sectors. In such
a market environment, policies are needed only to facilitate the
transition of resources from losing to winning companies, including
making sure that losing companies are not protected from this tough but
necessary discipline, and helping workers get reemployed quickly. As a
result, proponents of this view believe that as long as we have a good
education system and don't restrain creative destruction, then all
should be well.
This conventional view may have accurately described a country's
economy before the emergence of the globalization era over the last two
decades. During the old economy era, if firms could not compete and
went out of business, the only issue was making sure that their assets,
including employees, were quickly redeployed to other companies that
could compete successfully. If Boeing failed, Northrop Grumman or
Lockheed Martin would add capacity.
But in the new global economy, in which knowledge is increasingly
the major factor of production, this framework no longer sufficiently
explains industrial and economic change. As such, in the 21st century
global economy, nations can no longer be indifferent to the industrial
and value-added mix of their economy. In contrast to the neoclassical
view, knowledge is not a free-flowing commodity held solely by
individuals. It is embedded in organizations and if organizations die
so too does a significant amount of knowledge. Moreover, there are
significant spillover effects from firm activities and significant
first-mover advantages, including learning effects that enable firms'
early leads to translate into dominant positions. There are also
significant network effects that mean that advancement in one industry
(e.g., broadband telecommunications) can lead to advancement in a host
of others (e.g., Internet video). As a result, for many parts of the
U.S. economy exposed to international competition, if you lose it, you
can't easily reuse it. In these cases, foreign high-value imports may
end up substituting for the defunct U.S. product.
To bring this back to a company like Boeing, if America were to
lose Boeing, in all likelihood it could not rely on market forces, even
a dramatic drop in the dollar, to later recreate a domestic civilian
aviation industry. For to do so would require recreating not just the
firm, but it's complex web of suppliers, professional associations,
university programs in aviation engineering and other knowledge-sharing
organizations.
Clearly if Boeing were to go out of business, the economy would
quickly regain ``equilibrium'' as factors of production were
reabsorbed. But neoclassical economics assume that there is only one
equilibrium and it is the role of government to make sure that that the
market attains it. But new research suggests that there may be multiple
equilibria in an economy, some better than others. Indeed, while
economies can attain equilibrium, absent a robust innovation policy
that equilibrium may not be a high-wage, high-skill equilibrium.
Research by economist Elvio Accinelli has shown that there is strategic
complementarily between the percentage of high-skill workers and high-
value added, innovative firms in an economy. He finds that economies
can be in perfect neoclassical equilibrium at either a high level of
innovation or in a ``poverty trap'' of low skills and underinvestment
in innovation. Since the poverty trap can be avoided if the number of
innovative firms in an economy exceeds a threshold level leading to an
increased number of skilled workers, there is a role for public policy
to move economies to a high-level equilibrium on innovation.\55\
But there is a second reason for an innovation policy and that is
because economies are subject to a host of ``market failures'' with the
implication that markets acting alone will not always lead to optimal
performance. Following are five market failures that cause markets to
perform suboptimally:
1. Because individual firms cannot capture all the benefits of
their own innovative activity, firms will produce less innovation
activity than society needs. The first market failure has to do with
who benefits from private companies' investments in innovation. The
knowledge needed to create new products, processes and organizational
forms is not something that can be completely contained within an
individual firm. It inevitably spills over to other firms, which can
use it without paying the costs of creating it. For example, an
entrepreneur develops a new business model that others copy. A
university transfers discoveries from the lab to the marketplace. A
company makes a breakthrough that forms the basis of innovations that
other companies can use. This is why studies have found that the rates
of return to society from corporate R&D and investments in IT are at
least twice the estimated returns that the company itself receives.\56\
Firms' inability to capture all the benefits of their own innovative
activity means that firms, left on their own, will produce less
innovation than society needs.
2. R&D increasingly depends on collaboration between firms and
universities but the interests of the collaborators are not well-
aligned. Problems with the important interactions of firms and
universities represent another area of possible market failure. As
short-term competitive pressures make it difficult for even the largest
firms to support basic research and even much applied research, firms
are relying more on university-based research and industry-university
collaborations. Yet, the divergent needs of firms and universities can
hinder the coordination of R&D between these two types of institutions.
University researchers are not necessarily motivated to work on
problems that are relevant to commercial needs. University technology
transfer offices do not always promote the licensing of university
intellectual property to firms. Conversely, individual businesses
sometimes want to ``rent'' universities' research capabilities and
appropriate the resulting research discoveries for themselves. This can
impede the free flow of knowledge that can contribute to innovation
elsewhere in the economy.\57\
3. Many industries and firms lag in adopting proven technologies.
Market failures also plague the diffusion of innovation. Outside of
relatively new, science-based industries such as information technology
and biotechnology, many industries lag in adopting more productive
technologies. For example, the health care industry has lagged in
adoption of available technologies that could boost productivity and
health care quality.\58\ The residential real estate industry has
resisted moving toward more Internet-enabled sales.\59\ The
construction industry is plagued by inefficiencies and failure to adopt
best-practice technologies and techniques.\60\ A host of market
failures, including chicken-or-egg issues related to standards and
technology adoption and principal-agent problems where innovation may
hurt the implementers of it (e.g., real estate agents embracing e-
realty systems) impede faster productivity growth in these sectors of
the economy.
4. The innovation producing benefits of industry clusters are
under-realized. A fourth market failure involves the under-recognition
of industry clusters' role in innovation. Both the creation and the
diffusion of innovation often occur in geographic clusters. Geographic
industry clustering enables firms to take advantage of common resources
(e.g., a workforce trained in particular skills, technical institutes
or a common supplier base), to facilitate better labor market matching
and to facilitate the sharing of knowledge. This process may be
particularly relevant in industries that rely more on the creation or
use of new knowledge, as clustering appears to spur knowledge
transfers. Such industries are especially likely to cluster in large
metropolitan areas.\61\ Perhaps the best known cluster is Northern
California's Silicon Valley, where a large agglomeration of high-tech
firms, research universities such as Stanford, technical colleges to
train high-tech workers, venture capitalists, and other supporting
institutions make it the world's most vibrant technology region. But
Silicon Valley is not the only region in the United States with
industry clusters: From the furniture cluster in Tupelo, Mississippi;
to the jewelry cluster in Rhode Island and southern Massachusetts; to
the recreational vehicle cluster in Elkhart, Indiana; to the
biotechnology clusters in the Boston, Washington, DC, and San Diego
metropolitan areas, regional industry clusters abound. And as these
examples show, clusters are not only made up of ``high-tech'' firms.
Moreover, clusters are not confined to manufacturing, but also exist in
a host of service industries, including financial services in New York,
movies and music in Hollywood, software in Seattle and gaming in Las
Vegas. Evidence suggests that industry clustering may have become more
important for productivity growth during the last three decades; the
extent to which an industry was geographically concentrated (at the
metropolitan or county level) was increasingly associated with
subsequent productivity growth during the last three business
cycles.\62\
Yet because the benefits of geographic clustering spill over beyond
the boundaries of the firm, market forces produce less geographic
clustering than society needs. Each firm in a cluster confers benefits
on other firms in the cluster, but no individual firm takes these
``external'' benefits it produces into account when making its own
location decisions. In addition, the firms in a cluster have common
needs (e.g., for worker training or infrastructure) that they cannot
meet on their own. Clustered firms usually require external
coordination (e.g., from governments or industry associations) to meet
these needs because no one firm can capture all the benefits. Failure
to meet these common needs makes clusters smaller and less productive
than they would otherwise be. If the benefits of clustering to all
firms in the United States were considered and the common needs of all
firms in each cluster met, there would be more clustering, and thus
more innovation and higher productivity.
5. The interests of geographically mobile firms in locating
innovative activity may diverge from those of U.S. residents. There is
one other failure that has emerged in the last decade or so and that,
while not a market failure per se, results in too little innovation in
the United States. That failure is the potential divergence between the
interests of geographically mobile firms and those of the residents of
the United States.\63\ Firms' decisions about where to locate
innovative activity are based on their own interests, which may or may
not coincide with the interests of a place's residents. Since World War
II and the emergence of a truly national market, most U.S. states have
put in place policies to tilt the choice of corporations to invest in
their states. To be sure, even the most liberal governors recognize and
respect the power and primacy of markets as the key driver of
prosperity. But even the most conservative governors recognize that
this market-produced bounty does not always automatically end up in
their own jurisdiction. For this reason, both Republican and Democratic
governors ``intervene'' in their economies with robust economic
development policies. They are not content to let the ``market''
determine what kind and how many jobs are created: they work to ensure
that they gain more high-paying, high-productivity jobs. With the rise
of the globally integrated enterprise, the United States faces the same
reality states faced after World War II: without robust economic and
innovation policies, it risks losing out in global competition.
These failures in the process of innovation and its diffusion
suggest that, left to itself, the market will produce less innovation
and lower productivity in the United States than our society needs. In
a globally competitive world, this is a limitation that we can no
longer afford. What is more, these market failures in turn suggest that
there are several ways in which government can improve the process.
What Steps Should Congress Take to Boost U.S. Innovation and
Competitiveness?
The government's role in addressing these market failures is not to
regulate business or to direct the path of technological or economic
development. We do not advocate a heavy-handed, government-driven
industrial policy. Indeed, such a policy cannot be nimble enough to
respond to the kinds of market failures that afflict the innovation
process. At the same time, though, we do not advocate giving away
public funds to companies without any public benefit. Government should
be a facilitator that spurs firms to innovate in ways that serve the
public interest. Economist Dani Rodrik captures this view of the
appropriate relationship between government and business with respect
to innovation policy when he describes ``an interactive process of
strategic cooperation between the public and private sectors which, on
the one hand, serves to elicit information on business opportunities
and constraints and, on. the other hand, generates policy initiatives
in response.'' \64\ Political scientist Dan Breznitz similarly writes
that a government innovation-promotion agency should not pick strategic
products or technologies but should motivate firms, individually and in
cooperation with other firms and government, to make the investments
needed to innovate.\65\ In short, while we believe that the private
sector should lead in innovation, we also believe that in an era of
globalized innovation and intensely competitive markets the Federal
Government can and should play an important enabling role in supporting
private sector innovation efforts. Indeed, many nations have already
come to this realization. In recent years, they have come to understand
that markets relying on price signals alone will not always be as
effective as smart public-private partnerships in spurring higher
productivity and greater innovation. It is time for the United States
to do the same. There are two major areas where the United States needs
to act, one domestic and one international.
More Robust Trade Enforcement
It will be difficult for the United States to regain global
innovation leadership if we continue to largely turn a blind eye to
rampant foreign policies that distort the spirit, if not often the
letter, of the WTO, with the goal of limiting U.S. imports of high tech
products and services and promoting their exports. These countries want
it both ways. They desperately want access to the U.S. market (and as
reflected by the fact that the United States has run massive annual
trade deficits, for instance, of almost $800 billion in 2006 alone,\66\
they are getting it) but they don't want to buy U.S.-produced goods and
services. They want U.S. foreign direct investment, particularly high-
tech investment, through outsourcing, joint ventures and other types of
investment, but they also want to systematically weaken the competitive
advantage of U.S. technology companies in favor of their domestic
technology companies. They want our wonderful technology and
intellectual property, but they don't want to pay for it. ``Take'' is
not ``trade.''
These aggressive technology mercantilist policies have resulted in
fewer high paying technology jobs in the United States and have eroded
the United States' global innovation leadership position. As such if we
want to stop the continued erosion of America's technology leadership,
the Federal Government will have to be much more vigilant and make
fighting these unfair trade practices a top priority. Both Congress and
the Obama Administration need to let countries know that they can't
expect to get the WTO's benefits when they aren't meeting its
obligations. Countries are willfully violating these agreements and we
need to make them live up to their commitments.
While many of the tools for more aggressive enforcement of global
trade policies are in the hands of the administration, Congress can
play an important supporting role. To start with, we urge Congress to
pass S.1466: The Trade Enforcement Act of 2009, which strengthens
USTR's trade enforcement powers and restructures the agency to more
greatly focus on eliminating foreign barriers to exports.\67\ In short,
Congress should hold USTR's feet to the fire and expect them to wake up
every morning figuring out how they are going to enforce trade
agreements, and defend American technology jobs from the assault of
unfair trade practices.
Develop and Implement a More Robust National Innovation Policy
Even with the orientation of many neoclassical economists there is
a somewhat broad consensus that the role of the Federal Government
should include support for basic research, education, and provision of
a good regulatory climate. But while these are necessary ingredients,
they are woefully inadequate in enabling the United States to increase
its global rank in innovation-based competitiveness. Indeed the
neoclassical model which not only posits an overly simplistic
innovation process (the linear model) but also assumes that it is only
basic research which requires a government role is a poor guide to
policy. Generic platform technologies, infra-technologies and risk
reduction all also require a public-private approach. What are
essentially ideological statements put forth by neoclassical
economists, such as that the role of government is not to support
applied research, are supported by little logic and even less data and
only serve to stop, not advance, needed reasoned analysis and
discussion. With this in mind, I list a number of specific proposals
that if enacted would help the U.S. regain its innovation lead.
1. Spur Science, Technology, Engineering and Math (STEM) Education and
Skills
Ensuring an adequate supply of talented scientists and engineers is
one key step in the U.S. innovation agenda. Following are three
proposals to address the STEM challenge:
1a) Fund Specialty Math and Science High Schools
A wide array of proposals before Congress seek to intervene
upstream in the STEM pipeline at the K-12 level. These include
expanding professional development programs for science teachers;
enhancing science enrichment programs; using No Child Left Behind to
judge scientific educational outcomes; and boosting science teacher
quality, either through stricter requirements, providing incentives to
attract higher quality teachers to science, and/or making it easier for
scientists and engineers to become teachers.
While these proposals have received the lion's share of attention
in the policy debates over STEM education, we believe that the focus is
too broad. If funding were unlimited, such a broad-based strategy might
make sense. But since funding is limited and since less than ten
percent of the U.S. workforce is engaged in STEM-related careers, it
makes more sense to focus limited funds more narrowly. In particular,
we believe that the most effective strategy to address the STEM
challenge at the high school level is to significantly expand the
number of specialty math and science high schools (MSHS).
There are only about 100 math and science high schools across the
nation, ranging from pull-out programs with 125 students, to full day
programs and dedicated high schools of over 4,000 students, to state
sponsored residential schools, enrolling over 47,000 students in
total.\68\ By creating an environment focused more intensely on science
and technology, these schools have been able to successfully enable
students to study science and math, often at levels far beyond what
students in conventional high schools are at; they can then go on to
degrees in math and science at relatively high levels. It's time to
build upon this successful model and significantly expand the number
and scope of our nation's math and science specialty high schools.
Mathematics, science, and technology high schools differ from the
general education found in comprehensive high schools in key ways.
First, as the name implies, MSHSs focus much more extensively on STEM
curricula. For example, in addition to the three years of lab science
and three years of mathematics required by the state for high school
graduation, Florida's Center for Advanced Technologies offers students
an opportunity to declare a mathematics and science major by taking
four additional courses in mathematics and science, often Advanced
Placement Courses.\69\
Second, students don't just take more STEM courses; they take more
advanced courses and do more advanced work. Indeed, the coursework and
integrated curricula of MSHSs go over and above the normal graduation
requirements for general education students. For example, students at
the Arkansas School for Mathematics, Sciences, and the Arts can take
courses in Biomedical Physics, Immunology, Microbiology, Multivariable
Calculus, Number Theory, Differential Equations, Math Modeling,
Computer Programming III, and Web Application Development.
A third distinguishing feature of these schools is their level of
partnership with other organizations. Collegiate, corporate, and alumni
organizations have formed significant partnerships with these schools.
While some partnerships have been in support of specific events, others
have been long-term partnerships supporting research and innovation
among students and faculty. Collegiate partners, for example, often
provide classroom, dormitory, research and financial support to these
schools. For example, at the Governor's School of South Carolina, every
rising senior is placed for six weeks in the summer at an off-campus
program. Many of the students work with a research professor at an in-
state university.
While the educational environments are exemplary, the key question
is whether they produce results. While formal studies are few, there is
some evidence that these schools are highly effective at producing
graduates not only with high levels of aptitude in STEM, but who go on
to further study and careers in STEM. For example, one study of 1,032
graduates finds, 99 percent of graduates enroll in college within one
year of high school (compared to 66 percent nationally) while 79
percent complete college in four years (compared to 65 percent in
private universities and 38 percent in public universities).\70\
Moreover, graduates earn undergraduate and graduate degrees in
mathematics, science, and technology fields in significantly higher
numbers than the general population. Approximately 56 percent of MSHS
graduates earn undergraduate degrees in mathematics or science-related
fields, compared to just over 20 percent of students who earn an
undergraduate degree. Over 40 percent of females earn such degrees,
nearly double the national average.
A key part of any solution to the STEM challenge needs to be the
significant expansion of specialty math and science high schools. But
because more so than other high schools, math and science high schools
produce benefits that local communities, and even states, will not
capture, local school districts will under-invest in them. Rather than
be seen as solely the responsibility of local school districts, or even
states, they should be seen for what they are: a critical part of the
scientific and technological infrastructure of the nation. Thus, we
believe that the National Science Foundation should play a key role in
supporting and expanding such schools. As a result, Congress should set
a goal of approximately quintupling enrollment at such high schools to
around 250,000 students. This will require both the creation of a
significant number of new high schools, but also expansion of others
with room to grow. To do this, Congress should allocate $100 million a
year for the next five years to the National Science Foundation to be
matched with funding from states and local school districts and
industry to invest in both the creation of new MSHSs and the expansion
of existing ones.\71\ Moreover, a share of these funds should go toward
establishing MSHSs focused on under-represented populations. States
and/or local school districts would be required to match every dollar
of Federal support with two dollars of state and local funding.
Industry funding would count toward the state and/or local school
district match.
1b) Fund Joint Government-Industry STEM Ph.D. Fellowships
One key factor in producing more Ph.D. degrees in STEM, especially
by U.S. residents, is the ability to support doctoral fellowships. But
as Richard Freeman notes, the number of NSF graduate research
fellowships awarded per thousand of college students graduating with
degrees in science and engineering went from over seven in the early
1960s to just over two in 2005. Today the same number of NSF graduate
research fellowships are offered per year as in the early 1960s,
despite the fact that the number of college students graduating with
degrees in science and engineering has tripled.\72\ But rather than
simply expand funding for the NSF Graduate Research Fellowship program
(funded at $102 million) to do this, Congress should instead create a
new NSF-industry Ph.D. fellows program. Currently the program provides
up to three years of support over a five year period and supports
approximately 3,400 students per year at $40,500 per year.\73\ The new
NSF-industry program would work by enabling industry to fund individual
fellowships of $20,250 with NSF to match industry funds dollar-for-
dollar. Congress should allocate an additional $21 million to a joint
industry-NSF STEM Ph.D. fellowship program. This would allow NSF to
support an additional 1,000 graduate fellows.
Individual companies could commit to supporting American residents
in whatever fields that the companies are interested in. Students would
of course be under the supervision of their university faculty, and
ultimately dissertation advisor, but industry would be able to build a
relationship with the student. For example, a company might offer the
student a summer internship at one of the company's laboratories,
helping the student to get a better sense of actual research challenges
the company faces.
To be sure, this program would be slightly more complicated to
administer. First, companies would have to be informed of the program
and propose graduate fellow areas of study. Prospective fellowship
applicants would have to identify which awards they are most interested
in applying for. However, with the Internet, such matching would be
relatively straightforward, with students indicating their intended
areas of study and the online program identifying relevant fellowship
opportunities. If after three years, it turns out that industry does
not support the program in great enough numbers or students and
universities are not interested in the program, then it could and
should be terminated and the funding redirected into the regular
fellows program.
However, this program would have two advantages over the regular
NSF fellows program. First, by leveraging industry funds, Federal
dollars would go twice as far. Instead of having to appropriate $42
million to fund 1,000 additional fellowships, they could appropriate
$22 million instead. Second, and more important, engaging industry as a
partner would help selected graduate students better understand how
research is conducted in industry and better understand the
interdisciplinary nature of today's innovation process. Both of these
challenges have been the subject of increasing focus by scholars
writing about STEM graduate education. There have been several studies
about the growing disconnect between the training that graduate
students receive and their future job responsibilities.\74\ Most
doctoral programs still train students as if they were going to be
going into academic teaching and research careers. But increasingly
this is not the case.\75\ For example, one survey of doctoral chemistry
students found that only 36 percent intended to go into academia
(compared to 76 percent of English students).\76\ As Campbell, Fuller
and Patrick have argued, ``graduate education needs to be broadened
from its research focus to include a wider range of training for the
careers students are pursuing and to reflect the versatility needed to
work in an increasingly global job market, where collaboration between
industry, universities, and government agencies is the norm rather than
the exception.'' \77\ Finally, for those who worry that industry
funding will somehow taint the scientific learning process, it is
important to remember that students would be guaranteed the funds as
long as the university agreed that the student was performing up to
standards.\78\
1c) Allow Foreign Students Receiving STEM Ph.D.s from U.S. Universities
to Automatically Qualify for Green Cards
While ideally the supply of American STEM workers will expand to
fill the gap, the likelihood of that happening in the near- to
moderate-term is unlikely, even if Federal efforts to support STEM
education expand significantly. Yet welcoming the world's most skilled
foreign-born scientists and engineers into the land of economic
opportunity that America affords has long been one of the strengths of
the U.S. national innovation system. The U.S. economy and the standard
of living for American citizens have benefited enormously from this
influx of foreign talent. AnnaLee Saxenian, a professor at the
University of California-Berkeley, has shown that Indian and Chinese
entrepreneurs founded or co-founded roughly 30 percent of all Silicon
Valley startups in the late 1990s.\79\
Recognizing this, over the last decade many nations have
liberalized their policies regarding high-skill immigration, while the
United States, in stark contrast, has restricted its policies. In a
study benchmarking high-skill immigration policies in eight nations
(the United States, Canada, New Zealand, Australia, Japan, Great
Britain, Germany and France), ITIF found that the United States trails
other peer countries in developing a proactive approach to attracting
high-skilled foreign workers.\80\
Moreover, the current system of employer sponsorship signals only
that potential immigrants are desirable employees. A system that
allowed additional criteria to be considered, like those used in the
point systems of Australia, Canada and New Zealand, would meet policy
objectives better. (Applicants for immigration in these countries
receive points for such characteristics as education, work experience
and language skills. Those surpassing an adjustable point threshold are
admitted. Having a job offer in hand and meeting a designated
occupational shortage may add points to an individual's application,
but it is usually possible to meet the pass mark without either of
these attributes.) Toward that end, foreign graduate students in STEM
fields should be given special preference within such a system, even if
they have not received job offers. To do this, Congress should
automatically make recipients of advanced science and engineering
degrees eligible for permanent residency. Providing additional
opportunities for green cards not tied to employment could allow highly
skilled foreign graduates to make more creative contributions to the
economy more quickly by working in smaller and riskier businesses.
2. Create a National Innovation and Competitiveness Strategy Modeled on
the National Broadband Strategy
The United States needs to create millions of new good-paying jobs
over the next decade. If the United States wants to do this and be
successful in the global economy, it is critical that the Federal
Government develop a serious, in-depth, and analytically-based national
competitiveness strategy. We are in fact one of the few nations without
one. Denmark, the United Kingdom, South Korea, The Netherlands and
Ireland are just a few of the nations that in recent years spent the
time and effort to craft a national competitiveness strategy. The last
time the United States did anything similar was President Carter's
Domestic Policy Review on Industrial Innovation in 1978. This review
was in fact extremely important in setting the stage for a number of
important Congressional initiatives in the following decade, including
the R&D tax credit, the Bayh-Dole Act, the National Cooperative R&D
Act, and the Stevenson-Wydler Technology Innovation Act.
It should be noted that ITIF is not advocating industrial policy or
top-down direction of innovation. Thus we have deliberately chosen the
term ``agenda'' to describe the outcome of a process that we believe
must engage private and civil society constituencies and reflect the
bottom up as well as top down nature of innovation. This would allow
the development of a robust national innovation agenda. Its value would
be apparent in allowing our country to more effectively address complex
challenges with ``whole of government'' solutions, galvanize the public
by advancing a useful narrative around innovation, enable us to engage
more effectively with global innovation constituencies, and most
importantly allow us to reinvent the traditional sources of our
economic and societal success.
The American Recovery and Reinvestment Act charged the FCC with the
development of a national broadband plan. The next America COMPETES Act
should charge the White House Office of Science and Technology Policy
with the development of a national competitiveness strategy. Adequate
funding should be provided to bring in an outside director with deep
technical and policy knowledge and hire individuals with technical and
business experience.
A national innovation strategy would provide an opportunity to
engage in a comprehensive analysis of the key factors contributing to
future U.S. competiveness. Legislation to create this could require
that the strategy focus on a number of broad issues, going more in
depth on each. These should include assessing: 1) current U.S.
competitiveness, including at the major industry level; 2) current
business climate for competiveness (including tax and regulatory); 3)
trade and trade policy issues; 4) education and training; 5) science
and technology policy; 6) regional issues in competitiveness (including
the role of state and local government and impacts on rural, urban and
other regions); 7) measurement and data issues; and 8) proper
organization of government to support a comprehensive innovation and
competitiveness agenda.
3. Spur Technology Commercialization
While the United States remains a leader at nurturing innovation
and commercializing new inventions, the process can and should be
improved. The United States will forfeit technology leadership unless
it finds ways to accelerate entry of new growth sectors. The U.S.
innovation system separates fundamental research from incremental
development, with the former increasingly performed at research
universities and labs with Federal support, and the latter performed by
industry. Connections between these sectors need significant
strengthening, so there is a smoother and more active hand-off process.
Recommendations include:
3a) Create an SCNR (Spurring Commercialization of Our Nation's
Research) Program to Support University, State and
Federal Laboratory Technology Commercialization
Initiatives
The current Federal system for funding research pays too little
attention to the commercialization of technology, and is still based on
the linear model of research that assumes that basic research gets
easily translated into commercial activity. In fact, the process is
ripe with barriers, including institutional inertia, coordination and
communication challenges, and lack of funding for proof of concept
research and other ``valley of death'' activities. It is time for
Federal policy to explicitly address this challenge and allocate more
funding to commercialization activities.
However, in an era of fiscal constraint adequate new funding may be
difficult to obtain. As a result, one idea would be to establish an
automatic set-aside program taking a modest percentage of Federal
research budgets and allocating them to a technology commercialization
fund. Currently the SBIR program allocates 2.5 percent of agency
research budgets to small business research projects; the STTR program
allocates 0.3 percent to universities or nonprofit research
institutions that work in partnership with small businesses.
3b) Thus, Congress should allocate 0.15 percent of agency research
budgets (around 5110 million per year) to fund university, Federal
laboratory, and state government technology commercialization and
innovation efforts. The 0.15 percent share could either be added on top
of the existing 2.8 percent allocation currently going to SBIR and
STTR, or it could be taken from the SBIR share.
This program would be different than the STTR program which funds
small businesses working with universities.\81\ Half the funds would go
to universities, and Federal laboratories could use the funds to create
a variety of different initiatives, including mentoring programs for
researcher entrepreneurs, student entrepreneurship clubs and
entrepreneurship curriculum, industry outreach programs, seed grants
for researchers to develop commercialization plans, etc.
The other half of funds would go to match state technology-based
economic development (TBED) programs. Since the 1980s, when the United
States first began to face global competitiveness challenges, all
states have established TBED programs. Republican and Democratic
governors and legislators support these programs because they recognize
that businesses will not always create enough high-productivity jobs in
their states without government support. State and local governments
now invest about $1.9 billion per year in TBED activities.\82\ This is
about 70 percent of the amount that the Federal Government spends on
its principal innovation programs and agencies.
States and regions engage in a variety of different TBED
activities. They spur the development of cutting-edge, science-based
industries by boosting research funding. For example, Oregon's
NanoScience and Microtechnologies Institute serves as a forum for R&D
synergy among Oregon's three public research universities, the Pacific
Northwest National Laboratory, the state, and the ``Silicon Forest''
high technology industry cluster. States also try to ensure that
research is commercialized and good jobs created in both cutting-edge,
science-based industries and industries engaging in related
diversification. For example, the Georgia Advanced Technology
Development Center at Georgia Tech is a technology incubator that
offers services including consulting, connections to university
researchers and networking with other entrepreneurs and service
providers. States have also established programs to help small and mid-
sized firms support collaborative research at universities. For
example, Maryland's Industrial Partnerships program provides funding,
matched by participating companies, for university-based research
projects that help companies develop new products or solve technical
challenges.\83\ Finally, states have established initiatives to help
firms commercialize research into new business opportunities. For
example, Oklahoma's non-profit i2E organization helps Oklahoma
companies with strategic planning assistance, networking opportunities,
and access to capital. i2E's Oklahoma Technology Commercialization
Center assists researchers, inventors, entrepreneurs and companies in
turning advanced technologies and high-tech startups into growing
companies.\84\ But without assistance from the Federal Government,
states will invest less in TBED activities than is in the national
interest. A formula-based allocation to help fund state TBED efforts
would help correct this limitation.
We propose that NIST be responsible for administering this program.
Universities and Federal labs would submit proposals explaining their
proposed activities. States would submit proposals to NIST laying out
their TBED strategy and explaining how NIST support would enable them
to do more and better. Qualifying activities would include a host of
TBED activities, such as technology commercialization centers,
industry-university research centers, regional cluster development
programs, regional skills alliances, and entrepreneurial support
programs. In addition, where relevant, states would need to spell out
in detail how they intended to create innovation alliances among local
governments, businesses, educational institutions, and other
institutions (such as economic development organizations or labor
unions) in metropolitan areas. States would have to explain how their
activities would meet the needs of firms following innovation
trajectories that currently exist or that can reasonably be developed
within the state. The precise mix of TBED activities would be left up
to each state because the mix of innovation trajectories and the
specific needs of firms in each trajectory vary among and within
states. However, proposals would have to be economically realistic. For
example, a state proposal to develop a new biotechnology cluster in a
metropolitan area that had no existing institutions to support such a
cluster and no realistic strategy to develop those institutions would
be unlikely to be funded. Proposals that built appropriately on TBED
activities in neighboring states or that included plans for interstate
collaboration in TBED would receive extra points in the review process.
To be eligible for NIST funding, states would need to provide at least
two dollars in actual funding for every NIST dollar they receive.
Rotating panels of TBED experts would review proposals. In most
cases these would be experts in the field (e.g., consultants,
academics, venture capitalists and economic development professionals).
For states there would be a two-stage proposal review process. States
would submit initial proposals describing activities and use of funds.
Based on review from the TEED panel and NIST staff, the program would
provide feedback to states on how to modify and improve their
proposals. States would then submit final proposals that would be
reviewed and scored by the outside panel of experts. Proposals that
were judged acceptable would be funded to the extent that funds were
available, with priority going to those with the highest scores. States
with proposals judged not fundable would be eligible to receive modest
planning grants and technical assistance from NIST staff to develop a
proposal for the subsequent year's competition.\85\
4. Expand the R&D Tax Credit
As ITIF has demonstrated, the U.S. R&D tax credit is no longer
generous when compared to other nations. It is not enough to make the
credit permanent, it also needs to be expanded. There are several
reforms that are needed. One is to provide greater incentives for
collaborative R&D. Increasingly, firms are collaborating with other
firms or institutions in order to lower the cost of research and
increase its effectiveness by maximizing idea flow and creativity.
Indeed, a growing share of research is now conducted not only on the
basis of strategic alliances and partnerships but also through ongoing
networks of learning and innovation.\86\ Moreover, participation in
research consortia has a positive impact on firms' own R&D expenditures
and research productivity.\87\
Most collaborative research, whether in partnership with a
university, national laboratory, or industry consortium, is more basic
and exploratory than research typically conducted by a single company.
Moreover, the research results are usually shared, often through
scientific publications. As a result, firms are less able to capture
the benefits of collaborative research, leading them to under-invest in
such research relative to societally optimal levels.\88\ This risk of
underinvestment is particularly true as the economy has become more
competitive, and a reflection of this is the fact that for the first
time since the data were collected in 1953, the percentage of U.S.
academic R&D supported by industry has declined in each of the last
five years.\89\ This may stem from the fact that university contracts
are often undertaken as discretionary activities and are the first to
be cut when revenues are down.\90\
Other countries, including France, Norway, Spain and the United
Kingdom, provide firths more generous tax incentives for collaborative
R&D. Denmark and Hungary provide more generous tax deductions for
collaborative R&D with public research institutions.\91\ Japan's R&D
incentive is almost twice as generous for research expenditures
companies make with universities and other research institutes.\92\
France provides a 60 percent flat tax credit for business-funded
research conducted at national laboratories.
The U.S. tax code allows firms a basic research credit of 20
percent of expenses above a base period amount.\93\ But the credit is
not significantly more generous than the regular credit. Moreover, its
applicability is limited because rules require that such research not
have any ``specific commercial objective.'' At a minimum, Congress
should delete this restrictive language from current law and allow any
research expenditures at universities to qualify for the basic research
credit.
But Congress should go further and provide a more generous
incentive for collaborative research. As part of the Energy Policy Act
of 2005, Congress created an energy research credit that allowed
companies to claim a credit equal to 20 percent of the payments to
qualified research consortia (consisting of five or more firms,
universities, and Federal laboratories) for energy research. In 2006,
several bills were proposed allowing all research consortia, not just
energy-related ones, to become eligible for a 20 percent flat
credit.\94\ Congress should go further and allow firms to take a flat
credit of 30 percent for collaborative research conducted at
universities, Federal laboratories, and research consortia.
In addition, Congress needs to expand the Alternative Simplified
Credit. Currently the ASC provides a credit of 14 percent of qualified
R&D expenditures in excess of 50 percent of base period expenditures.
Congress should increase the Alternative Simplified Credit rate from 14
percent to between 20 and 40 percent, depending on the level of
increase in research investment. Congress should also broaden the
definition of qualified R&D from beyond that involved in inventing a
new product, to that involved in developing a new production process.
Under current law only product R&D is eligible for the credit. But a
key source of U.S. manufacturing renewal will come from more advanced
production processes. Allowing companies to take a credit against
process R&D investments would spur more of this kind of research.
Taking these steps would put the U.S. R&D tax credit back among the top
5 most generous in the world.
5. Fund Industry-University-Government Manufacturing Research and
Deployment Centers
The debate over science and technology policy has tended to
oscillate between those who argue that the Federal Government should
fund industry to conduct generic pre-competitive R&D and those who
maintain that money should be spent on curiosity-directed basic
research at universities. This is a false dichotomy. There is no reason
why some share of university basic research cannot be oriented toward
problems and technical areas that are more likely to have economic or
social payoffs to the nation. Science analyst Donald Stokes has
described three kinds of research: purely basic research (work inspired
by the quest for understanding, not by potential use), purely applied
(work motivated only by potential use), and strategic research
(research that is inspired both by potential use and fundamental
understanding).\95\ Moreover, there is widespread recognition in the
research community that drawing a bright line between basic and applied
research no longer makes sense. One way to improve the link between
economic goals and scientific research is to encourage the formation of
industry research alliances that fund collaborative research, often at
universities.
While the government supports a few sector-based research programs,
they are the exception rather than the rule.\96\ Moreover, existing
ones are largely underfunded. As a result, Congress should fund a
competitive Industry Research Alliance Challenge Grant program to match
funding from consortia of businesses, businesses and universities, or
businesses and national labs. This program would resemble the current
Technology Improvement Program (TIP) operated by NIST but would have an
even greater focus on broad sectoral consortia and would allow large
firms as well as small and mid-sized ones to participate. It could be
housed in either NSF or NIST.
To be eligible for matching funding, firms would have to: form an
industry-led research consortium of at least five firms, agree to
develop a mid-term (three-to-ten year) technology roadmap that charts
out generic science and technology needs that the firms share, and
provide at least a dollar-for-dollar match of Federal funds. This
initiative would increase the share of federally funded university and
laboratory research that is commercially relevant. In so doing it would
better adjust the balance between curiosity-directed research and
research more directly related to societal needs.
6. Establish a National Innovation Foundation
If Congress wanted to go further, it could establish a National
Innovation Foundation (NIF)--a new, nimble, lean, and collaborative
entity devoted to supporting firms and other organizations in their
innovative activities.\97\ The goal of NIF would be straightforward: to
help firms in the nonfarm American economy become more innovative and
competitive. It would achieve this goal by assisting firms with such
activities as joint industry-university research partnerships,
technology transfer from laboratories to businesses, technology-based
entrepreneurship, industrial modernization through adoption of best
practice technologies and business practices, and incumbent worker
training. By making innovation its mission, funding it adequately, and
focusing on the full range of firms' innovation needs, NIF would be a
natural next step in advancing the innovation agenda that Congress put
in place when it passed the America COMPETES Act. A National Innovation
Foundation would:
Catalyze industry-university research partnerships
through national sector research grants.
Expand regional innovation-promotion through state-
level grants to fund activities like technology
commercialization and entrepreneurial support.
Encourage technology adoption by assisting small and
mid-sized firms in taking on existing processes and
organizational forms that they do not currently use.
Support regional industry clusters with grants for
cluster development.
Emphasize performance and accountability by measuring
and researching innovation, productivity, and the value-added
to firms from NIF assistance.
Champion innovation to promote innovation policy
within the Federal Government and serve as an expert resource
on innovation to other agencies.
By doing these things, NIF would address quite robustly each of the
major flaws that weaken current Federal U.S. innovation policy. We
recognize that in the current fiscal climate it will be difficult for
the Federal Government to launch major new investment initiatives,
especially since strong political forces on either side of the aisle
oppose raising taxes or cutting spending. Nevertheless, the compelling
need to boost innovation and productivity merits a substantial
investment in NIF. We propose that the Federal Government fund NIF at
an initial level of $1 billion per year (with around $350 million
coming from several programs that would be consolidated into NIF),
ramping up to $2 billion after several years. At $2 billion, NIF's
budget would be approximately one-third the size of NSF's. In addition,
because of its strong leveraging requirements from the private sector
and state governments, NIF would indirectly be responsible for ensuring
that states and firms spend at least one dollar on innovation for every
dollar NIF spent.
7. Federal Institutional Reforms to Spur Innovation
Innovation policy is not just about tax incentives or funding for
government programs. It is about a wide array of government actions
that can have an impact on innovation. But currently, the institutional
ability of the Federal Government to strategically and comprehensively
spur innovation is more limited than it needs to be. To remedy that we
propose two recommendations:
7a) Form an Office of Innovation Policy in OMB (i.e., an Office of
Information and Regulatory Affairs for Innovation)
\98\
The relative absence of innovation from the agenda of many relevant
Federal agencies--as well as interagency processes such as the
centralized cost-benefit review performed by the Office of Information
and Regulatory Affairs (OIRA) within the Office of Management and
Budget (OMB)--manifests the confluence of two regulatory challenges:
first, the tendency of political actors to focus on short-term goals
and consequences; and second, political actors' reluctance to threaten
powerful incumbent actors. Courts, meanwhile, lack sufficient expertise
and the ability to conduct the type of forward-looking policy planning
that should be a hallmark of innovation policy.
7b) To remedy these problems, Congress should create a White House
Office of Innovation Policy that would have the specific mission of
being the ``innovation champion'' within these processes. OIP would be
an entity that would be independent of existing Federal agencies and
that would have more than mere hortatory influence. It would have some
authority to push agencies to act in a manner that either affirmatively
promoted innovation or achieved a particular regulatory objective in a
manner least damaging to innovation. OIP would operate efficiently by
drawing upon, and feeding into, existing interagency processes within
OIRA and other relevant White House offices (e.g., the Office of
Science and Technology Policy). It is important to note that OIP would
not be designed to thwart Federal regulation; as a matter of fact, in
some cases, the existence of OIP might lead to increased Federal
regulation (e.g., more Environmental Protection Agency regulations
might pass muster under cost-benefit analysis if innovation-related
effects were calculated).
Some might question the significance of this proposal. Isn't
creating an OIP a fairly small change to the system? Certainly adding
OIP to the existing mix is a smaller change than jettisoning the
existing substantive agencies in favor of a new agency with authority
to regulate, and promote, innovation across all government agencies.
But implementing this proposal will significantly change the regulatory
environment. First, an entity focused on innovation would add an
important new voice to the regulatory conversation. There would now be
an entity speaking clearly and forthrightly on the centrality of
innovation. Second, and more important, OIP would not merely have a
voice: it would be able to remand agency actions that harm innovation.
It would also have as part of its mission proposing regulation that
benefits innovation. This is no small matter. Indeed, it would change
the regulatory playing field overnight.
To those who might oppose an OIP on the grounds that making
predictions about the future is very difficult and that experts are
often wrong when they make such predictions, our response is
straightforward: Agencies are already making predictions about the
future (whether consciously or not) when they make laws that affect
innovation. They are simply doing so in a manner that is unsystematic,
haphazard, and subject to undue influence by well-funded incumbents. We
can do better.
Conclusion
For over half a century, the United States led the world in
innovation on a per-GDP and per-capita basis. This leadership role not
only enabled America to be the leading military power, it enabled us to
be the leading economic power, with the resultant economic and social
benefits that came with that. But now more than ever, the American
standard of living depends on innovation: To be sure, companies are the
engines of innovation and the United States has an outstanding market
environment to fuel those engines. Yet firms and markets do not operate
in a vacuum. By themselves they do not produce the level of innovation
and productivity that a perfectly functioning market would. Even
indirect public support of innovation in the form of basic research
funding, R&D tax credits, and a strong patenting system, important as
they are, are not enough to remedy the market failures from which the
American innovation process suffers.
At a time when America's historic lead in innovation has evaporated
and its relative innovation competitiveness continues to shrink, when
more and more high-productivity industries are in play globally, and
when other nations are using explicit public policies to foster
innovation, the United States cannot afford to remain complacent.
Relying solely on firms acting on their own will increasingly cause the
United States to lose out in the global competition for high-value
added technology and knowledge-intensive production. Congress has an
opportunity to take steps now to stop and reverse this slide, but only
if it adopts the kinds of policies and makes the kinds of investments
needed to help firms in the--United States do a better job of driving
innovation here at home.
Endnotes:
\1\ Elhanan Helpman, The Mystery of Economic Growth (Cambridge,
Massachusetts: Belknap Press, 2004).
\2\ This is not to say that these nations have not developed some
technology-based jobs. It is to say that relative to the rest of their
economies, technology jobs will be a much smaller share than is the
case in the United States. For an analysis of how, because of very low
wages, China is specializing in manual assembly production, see Thomas
Hout and Jean Lebreton, ``The Real Contest Between America and China,''
Asian Wall Street Journal, September 16, 2003.
\3\ Ronald J. Oakley, God's Country: America in the Flies, (New
York: Red Dembner Enterprises, 1986), 239.
\4\ Joseph Schumpeter, Capitalism, Socialism and Democracy (New
York: George Allen & Unwin Ltd.,1975), 132.
\5\ Total private industrial research and development expenditures
as a share of GDP grew 28 times from 1920 to 1960 (0.07 percent to 2.0
percent). By the mid-1950s, over 3,000 companies had R&D facilities.
Public and private R&D expenditures grew from $3.6 billion in 1940 to
$23 billion in 1967 (in constant dollars). See http://www.nsf.gov/sbe/
srs/seind00/c1/tt01-03.htm.
\6\ The process was the same with scientists. The 1900 census had
only two scientific occupations: chemical assayers and metallurgists.
\7\ Under the census categories, `inventor' was a separate
occupation since 1900, but was downgraded to a title within
professional workers not elsewhere classified in 1940.
\8\ Robert D. Atkinson, ``The Globalization of R&D and Innovation:
How Do Companies Choose Where to Build R&D Facilities?'' October 4,
2007, Testimony to the House Science Committee, http://www.itif.org/
index.php?id=102; Richard Rosenbloom and William J. Spencer. Eds.
Engines of Innovation: U.S. Industrial Research at the End of an Era
(Boston, Massachusetts: Harvard Business School Press, 1996).
\9\ Richard Florida, ``The World is Spiky,'' Atlantic Monthly,
October 2005, 48-51, http://www.isites.harvard.edu/fs/docs/
icb.topic30774.files/2-2-Florida.pdf.
\10\ Pre-competitive research is defined as everything before the
development of a saleable prototype.
\11\ Raymond E. Corey, Technology Fountainheads: The Management
Challenge of R&D Consortia (Boston: Harvard Business School Press,
1997); Andrew P. Cortell, Mediating Globalization: Domestic
Institutions and Industrial Policies in the United States and Britain
(Albany, New York: SUNY Press, 1997).
\12\ Robert D. Atkinson et. al, ``Addressing the STEM Challenge by
Expanding Specialty Math and Science High Schools,'' Information
Technology and Innovation Foundation, March 2007, http://www.itif.org/
publications/addressing-stem-challenge-expanding-specialty-math-and-
science-high-schools.
\13\ Authors' analysis of data on scientific articles from National
Science Foundation, ``Science and Engineering Indicators 2008,''
National Science Foundation, 2008, Appendix Table 5-34; population data
from the World Bank World Development Indicators database.
\14\ Organization for Economic Co-operation and Development, OECD
Science, Technology and Industry Scoreboard 2007, http://
ocde.p4.siteinternet.com/publications/doifiles/922007081
P1G2.xls.
\15\ Organization for Economic Co-operation and Development, OCED
S&T and Industry Outlook, 2004.
\16\ Organization for Economic Co-operation and Development, OECD
Science, Technology and Industry Scoreboard 2005, 2005.
\17\ U.S. Bureau of Economic Analysis, ``U.S. Current-Account
Deficit Increases in 2006,'' News Release, March 14, 2007, www.bea.gov/
newsreleases/international/transactions/2007/pdf/
transannua106-fax.pdf.
\18\ ``Science and Engineering Indicators: 2010,'' National Science
Foundation, 2010, http://www.nsf.gov/statistics/seindl0/cO/cOs3.htm.
\19\ Booz Allen Hamilton and INSEAD, ``Innovation: Is Global the
Way Forward?'' (n.p.: Booz Allen Hamilton, 2006), 3.
\20\ U.S. Bureau of Economic Analysis, ``Real Value-Added by
Industry.''
\21\ While venture capital in the United States more than doubled
from $113 billion in 1996 to $26.4 billion in 2006, the amount invested
in startup- and seed- stage deals fell from $1.3 billion to $1.1
billion. The amount invested in early-stage deals rose from $2.8
billion to $4.0 billion between 1996 and 2006, but the early-stage
share of total venture funding fell from about 25 percent to about 15
percent. Similarly the number of startup- and seed-stage deals fell
from 504 to 342; the number of early-stage deals rose from 762 to 918,
but this represented a relative decline from about 30 percent to about
25 percent of all deals. Authors' analysis of 2006 data from
PricewaterhouseCoopers/National Venture Capital Association MoneyTree
Report, available at https://www.pwcmoneytree.com/MTPublic/ns/nav/
jsp?page=historical.
\22\ Titus Galama and James Hosek, U.S. Competitiveness in Science
and Technology (Santa Monica, California: RAND Corporation, 2008), 67.
\23\ Organization for Economic Co-operation and Development, OECD
Science Technology and Industry Scoreboard 2005.
\24\ Organization for Economic Co-operation and Development, OECD
Science, Technology, and Industry Scoreboard 2007, 2007, http://
oecd.p4.siteinternet.com/publications/doifiles/922007081PIG2.xls.
\25\ Norman Augustine, Is America Falling Off the Flat Earth?
(Washington: National Academies Press, 2006), 53.
\26\ Jeffrey L. Furman and Richard Hayes, ``Catching up or standing
still? National innovative productivity among `follower' countries,
1978-1999,'' Research Policy 33 (2004): 1329-1354.
\27\ See Abe Tadahiko, ``What is Service Science?'' Research Report
246, Fujitsu Research Center, Tokyo, Japan, December 2005. The America
COMPETES Act calls for a National Academy of Sciences study of service
science (a useful first step) but does not create any means for the
Federal Government to advance this discipline or diffuse its findings
to foster innovation in services. See America COMPETES Act, section
1005, P.L. 110-69, 121 Stat. 593 (2007).
\28\ Issues of the State Science and Technology Institute's Weekly
Digest provides examples (www.ssti.org).
\29\ In this context, ``civilian'' means non-defense-focused
technology and innovation promotion agencies focusing on private sector
and non-defense public sector technology and innovation funding and
support.
\30\ Information about foreign technology and innovation-promotion
agencies is from the following sources: Denmark-Danish Technological
Institute Web site, www.danishtechnology.dk; Finland--Tekes Web site,
www.tekes.fi/eng, and personal communication with Peter Westerstrahle
of Tekes; France--OECD Reviews of Innovation Policy: France (Paris:
Organization for Economic Cooperation and Development, 2006); Iceland--
Technological Institute of Iceland Web site, www.iti.is/english;
Ireland--Enterprise Ireland Web site, www.enterprise-ireland.com;
Japan--NEDO Web site, www.nedo.go.jp/english, and personal
communication with Hideo Shindo of NEDO; Netherlands--TNO Web site,
www.tno.nl/index.cfm?Taal=2; New Zealand--New Zealand Trade and
Enterprise Web site, www.nzte.govt.nz; Norway--Innovation Norway Web
site, www.innovasjonnorge.no; South Korea--Korea Industrial Technology
Foundation Web site, http://lenglish.kotef.or.kr; Spain--CDTI Web site
www.cdti.es/index.asp?idioma=es&r-1024*768; Sweden-Vinnova Web site,
www.vnnova.se/misc/menyer-och-funktioner/Global-meny/In-English;
Switzerland-CTI Web site, www.bbt.admin.ch/kti/index.html?lang=en;
United Kingdom Technology Strategy Board Web site, www.dti.gov.uk/
innovation/technologystrategyboard.
\31\ It is difficult to obtain information on actual results.
However, discussions with government officials suggest that overall,
the programs have been successful. Moreover, agencies work to improve
performance. For instance, Tekes conducts regular evaluations of
specific programs. An example of such an evaluation may be found at
http://www.tekes.fi/julkaisut/FENIX-arviointi.pdf (in
Finnish, with English summary).
\32\ Technology Strategy Board Web site, www.dti.gov.uk/innovation/
technologystrategyboard/page40223.html.
\33\ Tekes Web site, http://tekes.fi/eng/contact/personnel/
hallitus.htm.
\34\ Technology Strategy Board Web site, www.dti.gov.uk/innovation/
technologystrategyboard/page40218.html.
\35\ United Kingdom Cabinet Office, ``Public Bodies: A Guide for
Departments,'' (June 2006).
\36\ Expenditures for Finland, Sweden, Japan and South Korea are
based on personal correspondence between the authors and
representatives of the respective nations' innovation-promotion
agencies. Inference for the United States is from the authors'
analysis.
\37\ Testimony of Don Hillebrand, Ph.D., Director, Center of
National Transportation Research at Argonne National Laboratory, to
House Appropriations Subcommittee on Energy and Water Development,
February 14, 2008.
\38\ Auto Industry UK, ``Germany invests =420M in lithium-ion
battery development,'' May 13, 2008, http://www.autoindustry.co.uk/
news/13-05-08-2.
\39\ Forfas, Service Innovation in Ireland--Options for Innovation
Policy, (Dublin, Ireland: Forfas, September 2006), 10, http://
www.forfas.ie/media/forfas060928-services-
innovation-full-report.pdf.
\40\ =100 million converted into $120 million according to exchange
rates at the time. (=100 million converts to $135 million in today's
dollars.)
\41\ Tekes, the Finnish Funding Agency for Technology and
Innovation, = (Helsinki, Finland: Tekes, 2006).
\42\ While this is a small sampling, a comprehensive inventory of
European services innovation policies is available via the European
Innovation Policy Project in Services available at http://www.europe-
innova.org/serv/et/Doc?cid=9268&lg=EN.
\43\ Robert D. Atkinson, ``Expanding the R&D Tax Credit to Drive
Innovation, Competitiveness and Prosperity,'' Information Technology
and Innovation Foundation, April 2007, http://www.itif.org/node/1280.
\44\ Bronwyn Hall and John van Reenen, ``How Effective Are Fiscal
Incentives for R&D? A Review of the Evidence,'' Research Policy 29
(2000): 449-469.
\45\ Dominique Guellec and Bruno van Pottelsberghe de la Potterie,
``Does Government Support Stimulate Private R&D?'' OECD Economic
Studies 29 (1997).
\46\ In fact, government support declined significantly over this
period and as a result, the United States was one of the few nations
where the share of R&D-to-GDP ratio fell between 1991 and 2002.
\47\ Martin Falk, ``What Drives Business R&D Intensity Across OECD
Countries?'' Paper Presented at the DRUID 10th Anniversary Summer
Conference, Copenhagen, Denmark (June 27-29, 2005).
\48\ In 1985, the rate was reduced from 25 to 20 percent, and other
restrictions (such as the 50 percent rule and the recapture of benefits
through reductions in expensing) were put in place in the late 1980s.
\49\ K.C. Whang, A Guide to the Research Tax Credit: Why We Have
It, How It Works, and How It Can Be Improved (Washington, DC: U.S.
Congress, Working Paper Series, Offered to the Joint Economic Committee
Minority, Dec. 1998).
\50\ Robert Atkinson and Scott Andes, ``U.S. Continues to Tread
Water in Global R&D Tax Incentives,'' Information Technology and
Innovation Foundation, 2009, http://www.itif.org/filesJWM-2009-03-
rd.pdf.
\51\ David M. Hart, ``Global Flows of Talent: Benchmarking the
United States,'' Information Technology and Innovation Foundation,
November 2006, 12, http://www.itif.org/files/Hart-
GlobalFlowsofTalent.pdf.
\52\ Australian data are drawn from the Australian Department of
Immigration and Multicultural Affairs (DIMA) annual Immigration Update,
http://www.immi.gov.au/media/publications/statistics/. New Zealand data
are drawn from OECD, SOPEMI 2006, 303-304. Canadian data are drawn from
Citizenship and Immigration Canada annual Facts and Figures, accessible
at http://www.cic.gc.ca/english/research/menu-fact.html. All figures
are for principal applicants only.
\53\ However, the 65,000 cap doesn't apply to all countries. For
example the United States-South Korea Free Trade Agreement allows for a
higher number of H-1B visa applicants from South Korea.
\54\ Gregory Tassey, ``Rationales and Mechanisms for Revitalizing
U.S. Manufacturing R&D Strategies,'' December 2009, forthcoming in
Journal of Technology Transfer, June 2010.
\55\ Elvio Accinelli, Silvia London, and Edgar J. Sanchez Carrera,
``Complimentarity and Imitative Behavior in the Populations of Firms
and Workers,'' 2008, http://www.ssrn.com/abstract=1136323, (accessed on
February 28, 2008).
\56\ See Charles I. Jones and John Williams, ``Measuring the Social
Return to R&D,'' Quarterly Journal of Economics 113 (1998): 1119-1135;
Edwin Mansfield, ``Social Returns from R&D: Findings, Methods, and
Limitations,'' Research Technology Management 34 (1991): 24-27; Eric
Brynjolfsson, Lauren Hitt, and Shinkyu Yang, ``Intangible Assets: How
the Interaction of Information Technology and Organizational Structure
Affects Stock Market Valuations,'' Brookings Papers on Economic
Activity 1, (2000): 137-199.
\57\ On the conflict between firms' desires to appropriate
university research capacity and universities' broader social and
economic role in promoting the free flow of knowledge, see Richard K.
Lester and Michael J. Piore, Innovation: The Missing Dimension
(Cambridge: Harvard University Press, 2004).
\58\ Daniel Castro, ``Improving Health Care: Why a Dose of IT May
Be Just What the Doctor Ordered,'' Information Technology and
Innovation Foundation, 2007, http://www.itif.org/node/1238.
\59\ Shane Ham and Robert Atkinson, ``Modernizing Home Buying: How
IT Can Empower Individuals, Slash Costs, and Transform the Real Estate
Industry,'' Progressive Policy Institute, 2003.
\60\ Barry LePatner, Broken Buildings, Busted Budgets: How to Fix
America's Trillion-Dollar Construction Industry (Chicago: University of
Chicago Press, 2007).
\61\ For a comprehensive overview of the causes and consequences of
geographic industry clustering, see Joseph Cortright, Making Sense of
Clusters: Regional Competitiveness and Economic Development
(Washington: Brookings Institution, 2006). On the geographic clustering
of innovation and the special importance of large metropolitan areas
for innovation, see Andrew Reamer with Larry Icerman and Jan Youtie,
Technology Transfer and Commercialization: Their Role in Economic
Development (Washington: U.S. Department of Commerce, Economic
Development Administration, 2003), 57-110.
\62\ The authors' analysis of Bureau of Economic Analysis data on
value added and employment at the national level and Economy.com data
on the geographic distribution of industry employment shows that, for
the 17 nongovernmental industry supersectors other than real estate
(accommodation and food services; administrative and waste management
services; arts, entertainment, and recreation; construction;
educational services; finance and insurance; health care and social
assistance; information; management of companies and enterprises;
manufacturing; mining; other services; professional, scientific, and
technical services; retail trade; transportation and warehousing;
utilities; and wholesale trade), the cross-industry correlation between
an industry's Herfindahl index of employment concentration at the
county or metropolitan level (a measure of the extent to which an
industry is geographically concentrated rather than spread out evenly
across the nation) at the beginning of the business cycle and the
growth of inflation-adjusted value added per job in the industry over
the course of the business cycle increased over the course of the 1979-
89, 1989 2000, and 2000-05 periods. (Business cycles here are
approximated by periods that begin and end in the last pre-recession
year. The most recent period ends in 2005 because of data limitations.)
At the county level, the correlation coefficient rose from ^0.18 in
1979-89 to ^0.07 on 1989-2000 to 0.36 in 2000-05. At the metropolitan
level, it rose from ^0.12 in 1979-89 to 0.00 in 1989-2000 to 0.15 in
2000-05.
\63\ For a detailed treatment of this issue in the context of
international trade, see Ralph Gornory and William J. Baumol, ^
(Cambridge, Massachusetts: MIT Press, 2000).
\64\ Dani Rodrik, ``Industrial Policy for the Twenty-First
Century,'' Kennedy School of Government Working Paper, Harvard
University, 2004, 38.
\65\ Dan Breznitz, Innovation and the State (New Haven,
Connecticut: Yale University Press, 2007), 29.
\66\ Annual U.S. trade deficits have subsequently shrunk somewhat,
to $731.2 billion in 2007 and to $673.3 billion in 2008; however, these
annual trade deficits are still extremely high.
\67\ ``S.1466: Trade Enforcement Act of 2009,'' Govtrack.us, 13,
http://www.govtrack.us/congress/bill.xpd?bill=s111-1466. See also
Robert Atkinson, ``Combating Unfair Trade Practices in the Innovation
Economy,'' Testimony before the Committee on Finance, United States
Senate, May 22, 2008, http://www.itif.org/files/
atkinsonfinancecommitteetestimony.pdf.
\68\ Robert D. Atkinson et. al, ``Addressing the STEM Challenge by
Expanding Specialty Math and Science High Schools.''
\69\ Many MSHS students are able to take these extra courses by
taking regular education graduation requirements such as Economics,
American Government, Physical Fitness, and Health online at the Florida
Virtual High School.
\70\ Source for national figures are: U.S. Department of Education,
National Center for Education Statistics, ``Digest of Education
Statistics,'' Table 18, http://nces.ed.gov/programs/digest/d05/tables/
dtO5-181.asp, and U.S. Department of Education, National
Center for Education Statistics, ``2000101 Baccalaureate and Beyond
Longitudinal Study,'' http://nces.ed.gov/das/library/
tables-listings/show-nedre.asp?rt=p&tableID=1378.
\71\ Some of the expansion would come from construction and
creation of new MSHSs. Costs for building such a high school can range
from around $11 million (for rehabilitating an existing building) to
over $50 million for constructing a new MSHS in an area where land
prices are more expensive. Some expansion of enrollment would come from
expanding existing high schools, where the price would presumably be
less. However, even at these schools the costs can be higher,
particularly for more extensive laboratory equipment. Overall these
funds will be used as an incentive to spur states and local school
districts to create more specialty math and science high schools.
\72\ Richard Freeman, ``Investing in the Best and the Brightest:
Increased Fellowship Support for American Scientists and Engineers,''
The Brookings Institute, 2006, http://www.brookings.edu/views/papers/
200612freeman.pdf.
\73\ Established in the early years of NSF, the program provides
the nation's most promising graduate students with great flexibility in
selecting the university of their choice and gives them the
intellectual independence to follow their research ideas unfettered by
the exigencies of mode of support.
\74\ Donald Wulff, Ann Nquiest, and Jo Sprague, ``The Development
of Graduate Students as Teaching Scholars: A four-year longitudinal
study,'' in Paths to the professoriate: Strategies for enriching the
preparation of future faculty, ed. Donald Wulff and Ann Austin (San
Francisco: University of Chicago Press, 2006); Chris Golde and Timothy
Dore, ``At Cross Purposes: What the experiences of today's doctoral
students reveal about doctoral education,'' Pew Charitable Trusts,
2001, http://www.phd-survey.org/report%20final.pdf.
\75\ Jody Nyquist , BJ Woodford , and Dale Rogers, ``Re-envisioning
the Ph.D.: A challenge for the twenty-first century,'' in Paths to the
professoriate: Strategies for enriching the preparation of future
faculty, ed. Donald Wulff and Ann Austin (San Francisco: University of
Chicago Press, 2006).
\76\ Chris Golde and Timothy Dore, ``At Cross Purposes: What the
experiences of today's doctoral students reveal about doctoral
education.''
\77\ Steven Campbell, Angela Fuller and David Patrick, ``Looking
beyond research in doctoral education,'' Frontiers in Ecology and the
Environment, 3, no. 3, (2005), http://www.biology.duke.edu/jackson/
ecophys/153-160-ESA-April05.pdf
\78\ Moreover, research suggests that there is little difference in
ethical behavior by faculty whether they are funded by industry or
government; see Brian Martison, Lauren Crain, Melissa Anderson, and
Raymond De Vries, ``Institutions' Expectations for Researchers' Self
Funding, Federal Grant Holding, and Private Industry Involvement:
Manifold Drivers of Self-Interest and Research Behavior,'' Academic
Medicine, 84, no. 11 (2009).
\79\ Government Accountability Office, ``Streamlined Visas Mantis
Program Has Lowered Burden,'' GAO 05-198, February 2005, http://
www.gao.gov/new.items/d05198.pdf
\80\ David Hart, ``Global Flows of Talent: Benchmarking the United
States.''
\81\ U.S. Small Business Administration, ``Description of the Small
Business Technology Transfer Program,'' STIR, http://www.sba.gov/
aboutsba/sbaprograms/sbir/sbirstir/
SBIR-STTR-DESCRIPTION.html.
\82\ Dan Berglund, State Science and Technology Institute, in-
person interview with Rob Atkinson, January, 2010.
\83\ Connecticut's Yankee Ingenuity program and Pennsylvania's Ben
Franklin Technology Partners program work in a similar manner. See
Yankee Ingenuity Competition, http://www.ctinnovations.corn/funding/
ccef/yankee.php and Ben Franklin Technology Partners, http://
www.benfranklin.org/about/index.asp.
\84\ The Great Lakes Entrepreneur's Quest, a program in Michigan,
is similar. Its organizers represent Michigan's entrepreneurial
community: academics, investors, lawyers, CPAs, corporate executives
and other entrepreneurs. Program gives competitors a chance to win seed
capital and valuable services (e.g., legal, accounting, and consulting)
and provides other opportunities to help entrepreneurs launch or grow a
business.
\85\ This kind of assistance to states with unsuccessful proposals
is based on similar assistance that JumpStart, a nonprofit pre-venture
capital fund in the Cleveland area, and Adena Ventures, an Athens, OH-
based venture capital firm, provide to applicants whose proposals are
not yet fundable. See www.jumpstartinc.org/Process/Assist.aspx and
www.adenaventures.com/serviceprograrns/opsassist.aspx.
\86\ Jane E. Fountain and Robert D. Atkinson, Innovation, Social
Capital, and the New Economy: New Federal Policies to Support
Collaborative Research, Progressive Policy Institute, July 1998, http:/
/www.ppionline.org/ppi-ci.cfxn?knlgAreaID=140&subseclD=293
&contentID=1371.
\87\ L. Branstetter and M. Sakakibara, ``Japanese Research
Consortia: A Microeconometric Analysis of Industrial Policy,'' Journal
of Industrial Economics, 46 (1998): 207-233.
\88\ For example, spillovers from company-funded basic research are
very high--over 150 percent according to one study: Albert Link,
``Basic Research and Productivity Increase in Manufacturing: Additional
Evidence,'' The American Economic Review, 71, no. 5 (Dec. 1981): 1111-
1112.
\89\ According to NSF, industrial R&D support to U.S. universities
and colleges in current dollars reached its peak in 2001 and has
declined every year since then (to 2004). The share of academic R&D
provided by industry peaked in 1999 and has declined every year since.
See Alan I. Rapoport, ``Where Has the Money Gone? Declining Industrial
Support of Academic R&D,'' National Science Foundation, Division of
Science Resources Statistics, September 2006, http://www.nsf.gov/
statistics/infbrief/nsf06328/.
\90\ Barry Bozeman and Albert N. Link, ``Tax Incentives for R&D: A
Critical Evaluation,'' Research Policy 13, no. 1 (1984): 21-31.
\91\ Denmark looks to promote public and private co-operation in
R&D by having a 150 percent deduction of investments co-financed by a
public university or research institute and the industry.
\92\ Jacek Warda, ``Tax Treatment of Investment in Intellectual
Assets: An International Comparison,'' OECD Science, Technology and
Industry Working Papers, 4, 2006, Appendix 1.1.
\93\ Expenditures firms make to outside organizations are treated
two ways. Qualified expenses cover just 65 percent of payments for
contract research, unless the payments are to a qualified non-profit
research consortium at which point the company can count 75 percent of
the payments as qualified expenses. However, firms contracting with
certain nonprofit organizations (e.g. universities) to perform basic
research may claim a credit of 20 percent.
\94\ The 109th Senate considered versions of HR.4297 (Thomas, (R-
CA)), S.14 (Stabenow (D-MI)), S.2199 (Domenici (R-NM)), and S.2357
(Kennedy (D-MA)). S.2357 would institute a flat credit for payments to
qualified research consortia.
\95\ Donald Stokes, ``Pasteur's Quadrant,'' Brookings Institution,
1997.
\96\ See the Focus Center Program, http://fcrp.src.org/member/
about/about-centers.asp.
\97\ Robert Atkinson and Howard Wial, ``Boosting Productivity,
Innovation, and Growth Through a National Innovation Foundation,''
Information Technology and Innovation Foundation and The Brookings
Institution, April 2008, http://www.itiF.org/publications/boosting-
productivity-innovation-and-growth-through-national-innovation-
foundation.
\98\ This is based on a report by Stuart Benjamin and Arti Rae,
``Structuring U.S. Innovation Policy: Creating a White House Office of
Innovation Policy,'' Information Technology and Innovation Foundation,
June 2009, http://www.itif.org/files/
WhiteHouse-Innovation.pdf.
Biography for Robert D. Atkinson
Robert Atkinson is the founder and president of the Information
Technology and Innovation Foundation, a Washington, DC-based technology
policy think tank. He is also author of the State New Economy Index
series and the book, The Past And Future Of America's Economy: Long
Waves Of Innovation That Power Cycles Of Growth (Edward Elgar, 2005).
He has an extensive background in technology policy, he has conducted
ground-breaking research projects on technology and innovation, is a
valued adviser to state and national policy makers, and a popular
speaker on innovation policy nationally and internationally.
Before coming to ITIF, Dr. Atkinson was Vice President of the
Progressive Policy Institute and Director of PPI's Technology & New
Economy Project. While at PPI he wrote numerous research reports on
technology and innovation policy, including on issues such as broadband
telecommunications, Internet telephony, universal service, e-commerce,
e-government, middleman opposition to e-commerce, privacy, copyright,
RFID and smart cards, the role of IT in homeland security, the R&D tax
credit, offshoring, and growth economics.
Previously Dr. Atkinson served as the first Executive Director of
the Rhode Island Economic Policy Council, a public-private partnership
including as members the Governor, legislative leaders, and corporate
and labor leaders. As head of RIEPC, he was responsible for drafting a
comprehensive economic strategic development plan for the state,
developing a ten-point economic development plan, and working to
successfully implement all ten proposals through the legislative and
administrative branches. Prior to that he was Project Director at the
former Congressional Office of Technology Assessment. While at OTA, he
directed The Technological Reshaping of Metropolitan America, a seminal
report examining the impact of the information technology revolution on
America's urban areas.
He is a board member or advisory council member of the Alliance for
Public Technology, Internet Education Foundation, NetChoice Coalition,
the Pacific Institute for Workforce Innovation, and the University of
Oregon Institute for Policy Research and Innovation. He is also chair
of the Congressionally-created National Surface Transportation
Infrastructure Financing Commission. He also serves on the advisory
panel to Americans for Computer Privacy, is an affiliated expert for
the New Millennium Research Council, a member of the editorial board of
the Journal of Electronic Government and the Journal of Internet
Policy, a member of the Reason Foundation's Mobility Project Advisory
Board, a member of the Global Innovation Forum Brain Trust and a
Nonresident Senior Fellow at the Brookings Institution. Dr. Atkinson
was appointed by President Clinton to the Commission on Workers,
Communities, and Economic Change in the New Economy. He is also a
member of the Task Force on National Security in the Information Age,
co-chaired by Markle Foundation president Zoe Baird and former Netscape
Communications chairman James Barksdale. In 1999, he was featured in
``Who's Who in America: Finance and Industry.'' In 2002, he was awarded
the Wharton Infosys Business Transformation Award Silver Medal. In
addition, Government Technology Magazine and the Center for Digital
Government named him one of the 25 top Doers, Dreamers and Drivers of
Information Technology. In 2006, Inc. Magazine listed Atkinson as one
of 19 Friends of Small Business in Washington. Ars Technica listed
Atkinson as one of 2009's tech policy People to Watch. Dr. Atkinson has
testified before a number of committees in Congress and has appeared in
various media outlets including CNN, Fox News, MSNBC, NPR, and NBC
Nightly News. He received his Ph.D. in City and Regional Planning from
the University of North Carolina at Chapel Hill in 1989.
Chairman Wu. Thank you very much, Dr. Atkinson.
Dr. Breznitz, please proceed.
STATEMENT OF DR. DAN BREZNITZ, ASSOCIATE PROFESSOR, THE SAM
NUNN SCHOOL OF INTERNATIONAL AFFAIRS, GEORGIA INSTITUTE OF
TECHNOLOGY
Dr. Breznitz. Mr. Chairman and Members of the Committee,
thank you for the opportunity to take part in this hearing. In
this testimony, I hope to do three things: clarify some
baseline points with regards to innovation policy, give an
example of successful foreign innovation policy, its negative
and positive consequences, conclude by sketching the need for
the United States to concentrate on all three roles government
can play in stimulating more innovation, and urge for new
Federal-state partnerships.
There are some baseline points to be made when discussing
innovation policy. Stimulating and promoting innovation is a
critical role of government and is a very different strategic
exercise from promoting specific industries, sectors, or even
skills. Good innovation policies need to allow experimentation
and change. In order to promote innovation, there is a need to
balance with different interests of the public represented by
the elected government and the private actors who are going to
be the major agents of innovation in our country.
Two key strategic constraints: When you talk about
innovation-based growth, it calls for a different logic of
policies. You have undefined markets and undefined products.
You basically aim to come up with new technologies and new
products which you don't know what they are. It is a very
different exercise when trying to restructure the car industry
where we know what cars are, we know what the troubles are, we
know what the markets are, and we have a pretty good idea of
how to make better cars and what skills we need. When we think
about the ideal kind of innovation policy, we aim to equip the
economy with agents of change that are stimulated for action in
ways we cannot yet foresee.
Second, production is now globally fragmented. Activities,
not whole industries, are clustered in specific nations and we
have to take that into account if we want to understand how our
innovation activities are going to impact job growth in this
country. Government needs to make innovation less risky and
more rewarding for entrepreneurs in order to maximize
innovating activities. It also needs to ensure positive global-
local interconnection in order to maximize our national
spillovers. The ways in which different countries have
successfully done this have led to very diverse national
industries with different outcomes in terms of economic
distribution as well as the current and future challenges each
of those models have.
To optimize the impact of a public funding of innovation,
governments need to meet three challenges: trust--the need to
establish trust between government and those private actors and
we need the private actors themselves; coordination--the need
to coordinate R&D across different institutional actors; and
motivation--the need to motivate private actors to innovate in
a way that contributes to the domestic economy, which is the
main reason for public funding in the first place.
Broadly speaking, there are three roles by which government
successfully supports this: public finance of private
innovation where, if a government supplies capital to private
agents who use it to engage in R&D, public production of
innovation and a facilitator role. Here the main emphasis is on
the government role in anchoring professional
interinstitutional networks and more generally on the
government's role in fostering relations with and between
private actors. The importance of these facilitating policies
cannot be overemphasized as government-sponsored networks have
been shown to be one of the most important factors for creation
of a favorable environment for radical innovation, and Dr.
Atkinson just mentioned the semiconductor industry.
Let me give you the example of Israel. Facing crisis
starting in 1968 with 886 R&D workers with academic education
in the whole industrial sector, probably less than what we have
in this building right now, the government opted to focus on
what they called science-based industry and concentrated on
financial and facilitator roles, implementing horizontal R&D
policy, meaning trying to sponsor R&D activities to novel
products in all industries, all sectors, and emphasizing the
conduction of the local and the global, especially with the
United States, the BIRD [Binational Industrial Research and
Development] Foundation, which is cosponsored by the U.S.
government and the Israeli government, and anchoring
cooperation around innovation. Outcomes have been the great
success of Israel as the supplier of new technologies and
products, the largest number of high-tech companies after the
United States--more than the EU in total--and the challenges,
however, with industry migrates to the United States, exactly
the opposite of what we think about in globalization, building
of sustainable success and major economic inequality, mainly
because you have a high-tech sector but you have measurable
positive spillover to the rest of the economy.
To conclude, innovation policy can significantly enhance
economic growth and national competitiveness. Innovation
policies are contact specific and need to evolve in tandem with
industry. To be successful at implementing innovation policies,
government needs to be able to engage in all three roles:
financier, producer and facilitator. In the U.S., much
attention has been given to the financier role. I argue that
much more attention needs to be given to the facilitator role,
and in order to be successful in this, we have to devise new,
and build upon old, Federal-state partnerships as well as
public-private partnerships. I think it is time that we apply
innovation to our own innovation policies.
Thank you for the hearing.
[The prepared statement of Dr. Breznitz follows:]
Prepared Statement of Dan Breznitz
Chairman Wu, Ranking Member Smith, and members of the Subcommittee,
thank you for the opportunity to take part in this hearing. I was
invited here to talk about innovation for economic growth, and what we
can learn from the extensive efforts of other nations to excel in this
domain so we can secure the long-term economic welfare of the American
people.
There are some baseline points to be made when discussing
innovation policy:
1. Spurring and promoting innovation is a critical role of
government, and is a very different strategic exercise from
promoting specific industries, sectors, or even skills.
2. Good innovation policy needs to allow experimentation and
change as it, and the industries it helps to develop, evolve.
3. In order to promote innovation there is a need to balance
the different interests of the public, represented by the
elected government, and private companies and individuals that
will be the major agents of innovation in our country.
Current U.S. policy debates have been clouded by significant
misunderstandings in relation to these principles. A careful analysis
of other nations' efforts to use the tremendous forces of competition
and entrepreneurship to spur innovation, can help us sort out these
misunderstandings and improve our innovation policies.
In this testimony I will:
1. Lay out the challenges associated with government efforts
to enable innovation.
2. Describe three roles a government can take on to support
rapid innovation-based growth and illustrate how some other
countries have implemented policies to fill these roles.
3. Discuss the lessons the U.S. might take from international
experiences in innovation policy.
Innovation, growth and the U.S.
Innovation has been a tremendous force for good. Innovations in
industry, health, and agriculture have advanced the quality of life of
the American people to such a degree that today the average American
child has a much better, more comfortable, luxurious, and healthy life
than the Emperor of China had in the beginning of the 20th century.
Thanks to innovation, the world no longer faces imminent hunger,
diseases that were once both common and fatal are vanquished, and the
sum set of appliances in an average American home gives its owner the
ability to do things that were impossible with a regiment of workers
and scholars just a few generations ago. We might forget, but what we
now consider as low-tech traditional industries, were, only a few
decades ago, the cutting edge of high-technology. Indeed, in the 1967
movie, The Graduate, Mr. McGuire famously said to Benjamin one word
that embodied the future of industrial innovation: ``Plastics.'' For
this country to stay a world leader, our children will need to be able
to react in the same bemused way we do to the idea of plastics as the
future, when someone in circa 2050 would say: ``Nano-technology.''
The U.S. has grown to prominence as the place where people with
vision and drive can become educated, generate novel ideas, and secure
specialized financing to transform their ideas into superior products
and services. Furthermore, it was in the U.S. where one could pursue
that course without its being squashed in infancy by stronger
corporations, the legal system, or the growing costs of doing business
and staying independently employed. With each new innovation-based
revolution--agriculture, steel, electricity, internal combustion
engine, aviation, space, information technology, and biotechnology--the
U.S. has led the world, becoming richer and stronger as a result. This
has been true not only with regard to novel technologies brought to the
market for the first time, but with regard to new ideas all along the
production chain. To accomplish this, the United States has developed
the world's best centers of higher education and research and the
world's most efficient system for transforming ideas into marketable
realities. Today, however, in each and every part of this system we
face increased international competition.
Choices matter
Contrary to commonly held belief, the current processes of
intensified globalization give countries a larger number of rapid-
innovation-based economic growth alternatives than they had in the
past. A general truism today is that both the onslaught of
international economic forces and the fragmentation of production limit
the power of governments to set unique courses of successful economic
growth. And yet, these same conditions have given countries more
choices of action than ever before, for the increasing complexity and
openness of the world allow nations that wish to engage with the
international economic system a far larger number of entry points than
in any other period. This does not mean that stimulating development
has become an easier task for government, nor that success, if it is
achieved, is without cost.
Rapid-Innovation-Based growth--the misunderstood strategic policy
implication
The case of rapid-innovation-based growth presents a variety of
problems for those who try to understand the role of government. Since
the main aim is to bring to fruition novel ideas--ideas that cannot be
known in advance--for products and services that are as yet unimagined,
we cannot develop policies assuming that we know the markets, the
products, the industries, the specific skills needed, or how they will
be combined (Breznitz 2007b). This is not the case of developing or
restructuring an existing industry, such as the car industry, where the
products are well understood, and where we have a clear idea of how to
make them, and a pretty good guess about the capabilities we would need
to make better vehicles.
In the case of innovation, the aim of the government is to spur
agents, some of whom are currently unknown or do not yet exist, to come
up with novel ideas and transform them into products and services,
which, as of now, cannot be defined. Accordingly, in its idealized form
innovation policy aims to equip the economy with agents of change that
are stimulated for actions in ways we cannot foresee. Furthermore, with
globalization--that is, the growing fragmentation of production where
products are produced in discreet stages across many locales--we at
best have only a limited ability to predict the exact division of labor
between the local agents and the international economy that would allow
for the making and sale of these products and services for maximum
profits. Hence, we need to develop agents (both individuals and
organizations) that have the capacity to understand science and
technology as well as the market, and the capability to generate novel
ideas. In addition, we need to ensure that they work within a system
that enables them, as smoothly as possible, to transform these ideas
into products and services to be sold worldwide.
What we do know, however, is that the inherent characteristics of
industrial research and development (R&D) would lead, under free
competitive market conditions, to under-investment in innovation from a
social optimum point of view (Arrow 1962; Nelson 1959). For this reason
almost every nation on earth now engages in public funding of
innovation in an attempt to lower the risk and stimulate more activity.
Similarly, many nations now try to increase the rewards for innovation
in the hope of making them more attractive. This is part of the logic
behind systems, such as the patent system, that grant monopoly rights
to inventors who come up with ideas that are deemed original.
Consequently, in our era of globalization governments now need to
actively engage in two critical domains: i) solutions to the industrial
R&D market failure; ii) local-global relationships. My research has
found that different countries successfully solve these issues in very
different ways, leading to significantly varied outcomes both in the
scope of activities and in the distribution of the economic fruits of
success within their societies.
None of these issues are considered to be outside the mainstream of
policy and theory. Most scholars and policy makers would fully agree
that there is a need for public funding of industrial R&D. However, the
common policy prescription urges government to go no further than
minimal `market-enhancing' intervention. It is here where the most
common misunderstandings about innovation policy occur.
Three Challenges
Once governments commit to funding of industrial R&D, a host of
issues that are not fully acknowledged in policy debates and theory
comes into play. Specifically, nations that subsidize industrial R&D
face three overlapping challenges (Breznitz and Zehavi 2010):
1. Trust: the need to establish trust both between public and
private actors and among private actors.
2. Coordination: the need to coordinate R&D across
institutional actors. Both the trust and coordination
challenges are closely associated with the overarching goal of
establishing cooperation among private and quasi-private
actors.
3. Motivation: the need to motivate private actors to innovate
in ways that contribute to the domestic economy--the prima
facie reason for public funding in the first place.
Trust: The importance of trust for industrial R&D is manifested in
two different types of relationships: trust between the government and
private actors and trust among the private actors themselves. The
`trust' deficit with regard to `government-private' relations is
associated with the problem of information asymmetries. One of the
government's main objectives in financing R&D is the creation of new
industries and the introduction of new activities into the local
economy. As a consequence, by definition, markets are either
underdeveloped or not yet in existence. Under these circumstances, the
government cannot rely on market signals to ensure that: a) its
investments are used properly; and b) that its policies lead to the
stated goal of creating new industries and capabilities within the
national economy. Because governments cannot fully rely on the market
for information, adherence to a pure financier/provider division might
create significant information asymmetry problems between the
government and private firms. Even in the private market it is assumed
that these problems can never be optimally resolved, and hence, that
financing of new R&D-based companies is, supposedly, best handled by
specialized financiers, such as venture capitalists, who use a variety
of instruments to negate, but can never fully eliminate, these
information asymmetries.
Second, as we have learned from the multidisciplinary study of
innovation in the last few decades, innovation is a collective endeavor
that necessitates close cooperation among agents if it is to flourish
and result in long-term economic growth (Antonelli 2000; Carlsson et
al. 2002; Edquist 1997; Hagedoorn 2002; Kenney 2000; Lester and Piore
2004; Lundvall 1992; Nelson 1993; Powell et al. 1996). Therefore, for
public investments in private R&D to deliver sustained economic growth
there is a need to accommodate close cooperation among firms. However,
against the backdrop of fully competitive free markets it is to be
expected that inter-firm collaborations would be laced with suspicion
and distrust. Balancing cooperation and competition is no simple matter
even when firms possess complementary knowledge and capabilities.
Moreover, even in situations in which private firms do choose to
cooperate, insufficient trust is likely to push partners to restrict
the scope of cooperation (Li, Eden et al. 2008). Government-facilitated
cooperation has, over time, successfully engendered trust among
cooperating private actors. Closely related to this problem, countries
that rely solely on public funding to stimulate R&D growth might well
discover, to their dismay, that firms are underutilizing public funding
because of capacity problems in the private sector (Sustman and Teubal
1995). This problem is compounded by inter-firm competition that
engenders distrust and discourages professional cooperation across
firms. This is a major problem because R&D is a collaborative venture
in which the interplay of different skills and ideas allows
professionals to achieve together what would have been well nigh
impossible on their own. Isolated professionals might well fail to make
substantial breakthroughs, where the same professionals working in
cooperation would have had a far better chance.
Coordination: Meaningful and sustained interaction among diverse
actors that are separated organizationally, geographically, or both, is
not a given regardless of concerns regarding trust. The system of
innovation literature shows that private firms that engage in R&D
activities cannot operate in an optimal manner without the support of
an array of other institutions (Carlsson et al. 2002; Edquist 1997;
Lundvall 1992; Nelson 1993). The development of a high technology
industry does not happen in an institutional vacuum. Many locales must
undergo a fair amount of industrial restructuring before the conditions
are right for high technology growth. For example, dynamic R&D-led
industries lead to the need to have ever greater flexibility in the
labor force. This flexibility must be achieved while preventing severe
political backlash against innovation when it leads to deep crises in
specific locales. Such a feat, however, can be accomplished only with
close coordination between private market actors and public actors that
work together to legitimize and facilitate flexibility-enhancing
restructuring (McDermott 2007; Ornston and Rehn 2006; Traxler and Unger
1994).
Domestically-oriented Motivation: Governments would like private
actors not only to be motivated to innovate, but to do so in ways that
would benefit the local economy. Yet there is little assurance that
this would be the case because private actors' prime need and interest
is to maximize their personal utility regardless of effect on other
domestic firms or the geographical locale in which their value-added
activities take place. These different goals create two distinct
conflicts of interests between the government, on the one hand, and
private companies, on the other.
First, one of the main justifications for public support of
industrial R&D is the expectation that private R&D would generate
positive spillovers for the rest of the economy. The government
therefore aims to maximize local spillovers from its industrial R&D
investment. However, in their search for profits, companies prefer to
maximize the appropriability of their R&D outcomes. Private firms do
their best to create the most competitive R&D possible--certainly a
public interest--but would also do their utmost to fully appropriate
its benefits and limit the spillover effects--something that
governments would like to prevent.
Second, governments prefer that individuals and firms contribute
first and foremost locally. But what could motivate private domestic
actors to stay, or for that matter, return, home? While the government
hopes to keep as much high value-added business at home, commercial
firms would relocate abroad if they deem such a move advantageous. The
traditional economic viewpoint is that, even if commercial firms indeed
choose to pick up and leave, it is all for the best because the
reallocation of resources would be more efficient and benefit domestic
consumers (Krugman and Obstfeld 1991). Nonetheless, the rationale for
public investment in R&D is specifically to create positive spillover
at home, and this will not occur if both the R&D and the diffusion of
its results are conducted abroad as it is more and more the case in our
globalizing world (Gomory and Baumol 2000).
The three related problems of trust, coordination and motivation
are by no means unique to innovation. In the R&D field, however, these
concerns are accentuated for at least three reasons. First, distrust--
especially among private actors--is likely to be prevalent because of
the nature of the product and also that of the firms involved. Where
innovation is at the epicenter, then a firm's advantage is to be found
primarily in its ability to create new know-how. Transfer of
information and technology to other firms, and with it a firm's
competitive advantage, is relatively easy (Lundvall 1999). Hence, firms
have a strong incentive to limit the lines of communication with other
firms so as not to suffer from unwelcome knowledge transfer. As a
result, establishing trust between private firms is a challenging
venture. Second, the R&D field is relatively internationalized compared
to most other production domains. This means that coordination is
likely to involve not only domestic but also international actors.
Obviously, this implies an additional challenge for coordination.
Finally, in R&D-intensive high-technology sectors, such as information-
or bio-technology, both firms and professionals are comparatively far
more footloose than in traditional industries or services (e.g., steel
manufacture or healthcare). Therefore, the question of how to motivate
private actors to contribute locally is more pertinent than in most
other fields.
Three Government Roles, Many Games: What do other countries do?
There are three broad roles by which governments, using very
different modes which are tailored to their specific conditions,
support rapid-innovation-based growth:
i) public-financing of private-innovation, where the
government supplies capital to private agents who use it to
engage in R&D and innovation;
ii) public production of innovation, where public production
is commonly understood to imply industrial R&D conducted in
government research institutes, universities, and non-profit
research institutes such as hospitals; and,
iii) the government acting as a facilitator, where the main
emphasis here is on the government role in anchoring
professional, inter-institutional networks, and more generally,
on the government's role in fostering relations with--and
among--private actors.
The importance of the third role, facilitating policies, cannot be
over-emphasized, as government-sponsored networks have been shown to be
one of the most important factors for the creation of a favorable
environment for radical innovation (Godoe 2000; Kushida 2008; Kushida
and Zysman 2008; O'Riain 2004). Actor interaction within these networks
helps shape a common vision of the future, and R&D efforts, which are
then channeled towards realizing this vision (Lester and Piore 2004).
Indeed, some argue that DARPA's excellence in conducting this role in
the American context is the base for its greatest successes (Fuchs,
forthcoming).
Since public financing of private innovation activities is the best
known and most discussed role of the three, let me briefly describe
some international examples of successful usage of the two others.
Taiwan has received much attention for its extremely successful
application of the public production strategy. The government had
mitigated the market failure and information asymmetries problems by
undertaking the core R&D itself. This created a unique division of
labor between government and industry in the case of the IT industry.
The specificity of this division of labor stems from the state's high
level of participation in the development of the technological
capabilities of the industry. In this division of labor, public
research institutions do most of the R&D up to the level of a working
prototype, and then disseminate the results to industry, which
concentrates on final development and integrated design. It is this
division of labor that is considered responsible for Taiwan's leading
role in the global information technology industry, most famously in
semiconductors. This strategy also allowed Taiwan to create a large
number of jobs--not just jobs for the very high-skilled and educated,
but jobs at many levels, thereby spreading the fruits of its innovation
success more widely across the society (Amsden and Chu 2003; Berger and
Lester 2005; Breznitz 2007b; Fuller et al. 2003; Hong 1997; Mathews and
Cho 2000; Meany 1994; Park 2000).
This public production-anchored model also addresses the capacity
problem. The government concentrates scarce capacities, and by so
doing, overcomes the private non-cooperation obstacle. Arundel and
Geuna contend that in Europe public research is an especially important
resource for firms that lack the financial resources, or capabilities,
to obtain knowledge abroad (Arundel and Geuna 2004). Therefore, a case
can be made for more direct public intervention in R&D. However, for
such interventions to work the incentives for public R&D production
should be carefully aligned with the growth and creation of a local
privately-owned industry and the government should set a premium on
bureaucratic flexibility in its research institutions. Otherwise, the
negative outcomes will outweigh the positive ones.
Israel is an example of a highly successful use of the facilitator
strategy. A measure of the success of its innovation policies is the
fact that in 1968, when the first government committee on R&D policy
was convened, there were only 886 academy-trained R&D workers in the
entire industrial sector. Within three decades of implementing its new
innovation policies, Israel boasted the highest number of high-tech
companies listed on NASDAQ after the United States. As part of these
efforts, as early as 1975, the Israeli Office of the Chief Scientist of
the Ministry of Trade, Industry and Employment (OCS), Israel's main
industrial innovation agency, launched a joint program with the
American Government that matched local companies with American
multinational corporations (MNCs). This program, known as the Bi-
national Industrial R&D foundation (BIRD), concentrated on fostering
and financing cooperation between Israeli and U.S. companies (BIRD
2000; Breznitz 2007a; Teubal 1997; Trajtenberg 2001; Yahalomi 1991).
Its mode of operation has been to fund projects co-designed by American
and Israeli companies, in which the R&D was done in Israel, and the
marketing and product definition handled in the U.S. As a consequence,
the Israeli government stimulated international cooperation that
ensured R&D would commence in Israel, and mitigated the information
asymmetries between itself and the private firms it sponsored by
receiving high-quality ``external'' evaluation from world-leading
American MNCs. In 1992 Israel went further in its network facilitating
policies with the MAGNET program. MAGNET, which stands for Generic Non-
Competitive R&D, addresses two problems related to the development and
maintenance of the long-term innovative advantage of companies. The
first problem is a large number of companies in the same technological
space, all of them too small to compete on the basis of, or to advance,
cutting-edge infrastructural research activities that are crucial to
their survival. The second problem is the underutilization of academic
research. MAGNET solves some of these issues by creating a consortium
to develop generic technologies. MAGNET consortiums are created for a
period of up to three years. All IP outputs are shared among the
consortium members, at least one of which must be a university. The
consortium members also must agree to license this IP to local
companies at a cost that does not reflect monopoly status. MAGNET has
been critical in allowing Israeli firms to tap into otherwise
inaccessible knowledge domains, and to develop new technologies and
products for markets and niches whose needs they did not understand,
using technologies they could not afford to develop alone. However,
while Israel's sole focus on novel-product R&D and intimate ties with
the American industry led it to great success, the economic gains of
this success have been very narrowly distributed, and the success of
the high-tech industry has resulted in only negligible spillovers to
the rest of the business sector (Breznitz 2007a; Breznitz 2007b;
Trajtenberg 2001).
Finland is a classic example for the government role as a
facilitator using a very different strategy. In Finland, after the fall
of the USSR, national employer and labor associations created long ago
for collective bargaining and resolution of labor-capital conflicts
were infused with a new mission as they morphed into institutions to
regulate the transition from a traditional to a high-technology ``new''
economy (Ornston 2006; Ornston and Rehn 2006). Consensus among the old
actors created a platform on which new dense inter-firm networks were
built. A panoply of government actions established new public
commissions, and agencies pushed the old partners towards agreement on
new objectives for the economy and new channels for public expenditure,
for example, the Science and Technology Policy Council, which
subsequently gave rise to Tekes. These broad agreements legitimized the
deep structural transformations involved and formed the bedrock of
multi-polar networks on the local level. In the most successful cases
of development of new technology industries in Finland, for example in
the city of Tampere, new networks were constructed by combinations of
previously-developed skilled labor, university strengths, industrial
commitment, and municipal leadership. However, Finland's inability to
create new companies and its growing reliance on one--Nokia--is
apparent even in the case of Tempere, where Nokia is by far the biggest
employer (Juba and Sotarauta 2002).
Back to the home court--Lessons Learned
Successful innovation policies throughout the world have taught us
a few valuable lessons:
i) innovation policy can significantly enhance economic
growth and national competitiveness;
ii) innovation policy are context-specific and need to evolve
in tandem with private industry;
iii) there are many different modes of devising and
implementing innovation polices, each of which leads to
different social and economic outcomes;
iv) to be successful in innovation policy implementation
governments need to be able to engage in all three roles:
financer, producer, and facilitator.
While far from ensuring success, these points lead to a few
principles, which if applied, can increase the chances of success and
induce a better policy learning curve. First, the Federal Government
should sustain and enhance its important role as financier. While that
by itself will not yield a qualitative change, it is necessary as the
minimal first step. Second, the government needs to carefully evaluate
its R&D production activities to decide which serve useful purposes and
which should be restructured or cancelled, and to determine in which
domains timely, and perhaps finite (that is limited in time-scope),
public production could stimulate large-scale undertaking by private
actors, which should always be the ultimate goal of innovation policy.
Thirdly, and perhaps most importantly, the Federal Government needs to
think more constructively and comprehensively on the role that the
government can play as a facilitator of innovation activities. Here
scope for experimentation is needed, and while the ARPA/DARPA model has
worked in the past it is far from being the only approach that should
be pursued.
It is critical to note that in order to conduct the three roles,
specifically the facilitating role, a nation must have deep knowledge
of the technological domains, as well as a nuanced understanding of the
current, and always changing, needs of private actors. This includes
knowing and having access to individuals (such as leading researchers
in specific labs) as well as organizations, and understanding business
dynamics in multiple sectors.
In the case of a the U.S., a big Federal democracy aiming to
stimulate growth throughout its economy in all locales, a dual
approach, local and Federal, might be the key to success. Creating new
Federal-state partnerships could also have the benefit of stimulating
states to compete in the development of different, experimental, and
creative policies.
From many levels of analysis, American states, in terms of size,
economic history and capacity, and unique contextual situation, are
similar to many of the European and Asian countries that are widely
viewed as the paragons of successful innovation policy experimentation
and implementation. Many of these policies necessitate close
collaboration among actors within a particular spatial unit, and hence,
lend themselves much more easily to state rather than Federal
engagement. Furthermore, since many successful innovation policies need
to be tailored to specific conditions, both the intimate knowledge
essential for the development, and the capacities critical for their
implementation, exist on the local and not Federal level.
One way, certainly not the only one, of tapping this potential,
creating a dynamic of innovative thinking among policymakers, and
devising a working public-private partnership, is to allow for Federal
funding to be allocated on competitive basis for states and local
governments that develop unique and comprehensive ten to fifteen-year
programs that take into account local needs and capabilities as well as
the national innovation agenda. Winning proposals should get
substantial Federal funding (50-60%), and should be evaluated around
the seventh year of the program, by which time the first signs of
change should be evident. If successful, these programs should be
funded for another finite period of time. In addition the Federal
agency responsible for these programs should arrange workshops that
allow collaboration and learning among participating states, as well as
replication of the more successful models across the country.
We need to recruit the tremendous forces of competition and
ingenuity to help us seriously apply innovation to our innovation
policies. We must think outside of conventional constraints as we seek
to develop policies to enhance the innovativeness of the American
business sector and secure our future economic growth.
Biography for Dan Breznitz
Professor Dan (Danny) Breznitz (Georgia Institute of Technology,
Sam Nunn School of International Affairs & The School of Public Policy,
Ph.D. MIT) has extensive experience in conducting comparative in-depth
research of Rapid-Innovation-Based Industries and their globalization.
Dr. Breznitz's first book, Innovation and the State: Political Choice
and Strategies for Growth in Israel, Taiwan, and Ireland (Yale
University Press), won the 2008 Don K. Price for best book on Science
and Technology given by APSA and was a finalist for the 2007 best book
of the year award in political science by Fore Word Magazine. His
second book (co-authored with Michael Murphree) The Run of the Red
Queen: Government, Innovation, Globalization, and Economic Growth in
China is forthcoming with Yale University Press in 2010. In addition,
his work was published in various journals, as well as chapters in
edited volumes. Breznitz is one of five young North American scholars
to be selected as a 2008 Industry Study Fellow of the Sloan Foundation.
Breznitz has also been an advisor for local and national governments on
Science Technology and Innovation Policies in the U.S., Asia, and
Europe.
During 2006 Breznitz was a visiting scholar at Stanford
University's Project on Regions of Innovation and Entrepreneurship, and
during 2007 he was a Visiting Fellow at the Bruegel Institute for
International Economics, Brussels. His work is sponsored by the Sloan
Foundation, the Kauffman Foundation, and the Samuel Neaman Institute
for Advance Studies, the Bi-National Science Foundation (U.S. Israel),
the NSF, Georgia Research Alliance, and the Enterprise Innovation
Institute. In addition, Breznitz is the co-director with John Zysman of
UC Berkeley of a collaborative study titled ``Can Wealthy Nations Stay
Rich in a Rapidly Changing Global Economy?'' A former founder and CEO
of a small software company, Breznitz is also a research affiliate of
MIT's Industrial Performance Center. In addition he is a senior
researcher of the Science, Technology, and Innovation Policy Program
(STIP) and the Academic Director of the Initiative for Sustainable High
Tech Cluster at The Enterprise Innovation Institute (EI2), and the
director of the Globalization, Innovation, and Development program at
the Center for International Strategy, Technology and Policy (CISTP) in
the Sam Nunn School of the Georgia Institute of Technology.
Chairman Wu. Thank you very much, Dr. Breznitz.
Mr. Holland, please proceed.
STATEMENT OF MR. PAUL HOLLAND, GENERAL PARTNER, FOUNDATION
CAPITAL
Mr. Holland. Chairman Wu, Ranking Member Smith and Members
of the Committee, my name is Paul Holland. I am a general
partner at Foundation Capital, a venture firm in Menlo Park,
California, commonly known as the Silicon Valley. We invest in
early-stage companies driving innovation in software, clean
tech, the Internet, telecommunications and semiconductors.
Since our first fund in 1995, we have invested $1.5 billion in
well over 100 innovative startups.
In addition to my responsibilities as a venture investor, I
am also a member of the National Venture Capital Association
located here in Arlington. The NVCA represents more than 400
venture capital firms and more than 90 percent of the venture
industry in the United States by dollar volume.
So let us talk a little bit about innovation. Historically,
our government has helped pave the path with policies that
encourage innovation at many levels, yet the environment has
changed significantly in the last decade and the United States
is no longer guaranteed a monopoly on entrepreneurship and
innovation.
So I will spend a moment talking about how venture capital
works, and I think most of you are probably familiar with this.
We take in large pools of capital from endowment funds,
universities, foundations, charitable organizations, employee
pensions and so forth, and we take our own capital, combine
that, and we invest it in hundreds and hundreds of innovative
companies over the course of any given year. We do not employ
leverage or issue debt as part of our investments, so we are
not like a hedge fund or other forms of private equity you
might have heard of. We also generally take a seat on the
company's board and we work for five to ten years, often
reinvesting several times in that company over the course of
that time period until we achieve an exit, either an IPO or a
mergers and acquisition exit.
The venture class has been recognized for building a
significant number of high-tech industries including
biotechnology, semiconductors, online retailing and software.
Within the last several years, we have invested billions of
dollars in clean technology including smart grid, renewable
power, power management, recycling, water purification and
conservation. In fact, I coordinate the clean tech practice at
my firm, Foundation Capital, and I had the honor of giving a
nationally televised speech last year with President Obama on
clean tech investing, and it was truly a highlight.
My partners and I are extremely proud of the work we do
each day and we are working very hard to create a positive
future for this country. So what are the results of all this
hard work on behalf of venture capitalists and entrepreneurs?
Since 1970, companies that were started with venture capital
have accounted for $12.1 million jobs, or 11 percent of private
sector employment, and also $3 trillion in revenue by 2008.
Such companies include historic innovators such as Genentech,
Intel, Federal Express, Microsoft, Google, Amgen and Apple.
These companies have brought to market thousands of innovations
that have improved, and in the case of life sciences, actually
saved millions of lives.
So I often get asked why is so much of this happening in
the Silicon Valley, and many of you are regular visitors to our
region. Forty percent of venture capital in this country is
deployed between the cities of San Francisco and San Jose.
There are a number of reasons for that, too long to get into in
the time that we have today. We have two outstanding
universities there in Stanford and U.C. Berkeley. We leverage
those as much as we can. But I think maybe the biggest factor
is that we have a very strong risk-taking culture and our
society supports it in all the different dimensions including
Federal, state and local government. But it is not just Silicon
Valley where this is occurring. It is in Boston with MIT, it is
in Philadelphia with Penn, Pittsburgh with CMU, Atlanta with
Georgia Tech, Duke and University of North Carolina, the
research triangle. This is happening across the country and it
has been a very, very successful model, particularly over the
last 40 years or so.
So that is a look at what is happening on the regional
level in our world. Let us take a look at the national level,
and the big issue there is competition. Competition is looking
internationally like we have never seen before. At the same
time we are seeing all sorts of benefits of globalization, and
we are big fans of it, we want to see, you know, open standards
and open trade provisions from our government. At the same
time, there is a significant rise of venture capital and
entrepreneurial activity in Asia, Eastern Europe and South
America, and foreign governments are being very aggressive in
promoting favorable tax policies and improving their
infrastructure. So for the first time we have got very, very
viable competitors outside of the United States. They are
giving us a run for our money.
That is one of the reasons why we support the America
COMPETES Act of 2007. Some of the major components of that Act
are things like support for basic research, so we leverage NIH,
DOD, DARPA and ARPA-E, and if we have time later, I will give
you some really fun examples of companies that have been
started as a result of this that are now employing thousands
and thousands of Americans.
Another component of this is support for a highly skilled
workforce. This is very critical for us. The venture capital
community wholeheartedly supports improving math and science
education for U.S. students, particularly in K-12 students,
things like STEM curriculum and other fundamentals of 21st
century education, some of which I am fortunate enough to see
practiced in my children's schools in California at Ormondale
and Cormadera and Castalella.
But other critical elements for us are things like
immigration reform. Twenty-five percent of venture-backed
public companies were founded by immigrant entrepreneurs. We
have immigrant entrepreneurs represented at this table. In
fact, I would daresay that if you go back a couple of
generations, we are all represented in one form or another by
immigrants. These companies include stars such as Intel, eBay,
Google, Yahoo and Sun, and yet in recent years U.S. immigration
policy has become relatively restricted when it comes to
bringing in the best and brightest from overseas. We have to
stop that and we have to reverse these policies. India and
China are welcoming these bright minds. We have to be first in
that regard. For that reason, we are supportive of the Start Up
Visa initiatives that are in the House and the Senate. Passage
of these types of bills will signal the entrepreneurial
community around the world that the United States is indeed
open for business.
Another major category for us is access to capital. A
significant part for us and a very, very serious near-term
threat to our entire industry is what is being contemplated by
Congress now in changing the capital gains rate associated with
venture capital and innovation. Going back to 1968, Congress
passed a watershed law that had risk capital rewarded with a
lower capital gains rate, not ordinary income rates. There is a
discussion underway right now within Congress to reverse that
and to in fact install ordinary income rates on capital gains.
If that happens, make no mistake, you are tripling the rates of
taxation on our industry and you will absolutely kill the goose
that is laying the golden eggs. I can't make that any clearer
for you. It is just that simple.
The need for capital, however, does not end with venture
investment. We need a lively and a vibration IPO market. Go
back to 1996. Sixty percent of the IPOs in the world in 1996
were done in the United States. By 2006, 22 percent were done.
Last year, two-thirds of the clean tech exits in clean tech,
the field in which I work, were in China, not in the United
States. There are a number of things that we have to improve
and we have to get stronger around this. The implementation of
Sarbanes-Oxley, some of the restrictive provisions around
financial regulation are starving our young companies of the
ability to have early exits. That is very, very difficult for
us. I realize you are not the Finance Committee but we could
use your help on that wherever we can.
Finally, on intellectual property protection, we have some
of the strongest intellectual property protection in the world
but it needs to be even stronger and we need to continue to
reform and augment the work of the U.S. Patent Office.
So in conclusion, let us make no mistake about it, the race
is ours to lose but to maintain our innovation advantage we
must rededicate ourselves to what has made us successful:
increasing support for basic R&D, improving math and science
education, supporting immigration and patent reform, and
improving access to capital through smart tax policies. Without
action on these fronts, the United States may find itself in
the unfamiliar role of an also-ran in the innovation race. The
venture capital community looks forward to working with you,
the Federal Government, on this, and I will be happy to take
any questions. Thank you.
[The prepared statement of Mr. Holland follows:]
Prepared Statement of Paul Holland
Introduction
Chairman Wu, Ranking Member Smith, and members of the Committee, my
name is Paul Holland and I am a general partner at Foundation Capital,
a venture capital firm based in Menlo Park, California. Foundation
invests in early stage companies that are driving innovation in the
areas of software, clean technology, the Internet, telecommunications
and semiconductors. We look for new and innovative ideas that don't
simply improve the status quo incrementally, but rather disrupt it in
positive ways. Specifically, we fund companies that promise to change
the way businesses, consumers and even entire industries behave. Since
our first fund in 1995, Foundation has invested more than $1.5 billion
dollars into innovative start-up companies located primarily in
California but across the United States as well.
In addition to my responsibilities as a venture investor, I am also
a member of the National Venture Capital Association (the NVCA) based
in Arlington, Virginia. The NVCA represents the interests of more than
400 venture capital firms in the United States. These firms comprise
more than 90 percent of the venture industry's capital under
management.
It is my privilege to be here today to share with you, on behalf of
the venture industry, our perspective on the critical factors that
foster innovation on a regional and national basis in the United
States. Our country is home to many of the brightest minds on the
planet. And that intellectual prowess has benefited our economy in
countless ways. Yet we all know that the process of bringing innovation
to life is not simple. There is a critical path along which many
stakeholders--including entrepreneurs, venture capitalists and policy
makers--play important roles. Historically, our government has helped
pave that path with policies that encourage innovation on many levels.
Yet the environment has changed significantly in the last decade and
the United States is no longer guaranteed a monopoly on
entrepreneurship and innovation. We have a tremendous opportunity to
shape our future and I look forward to discussing today how we can
ensure our technological and economic leadership going forward.
The Role of Venture Capital in the Innovation Life Cycle
I would like to share a brief overview of the role of venture
capital in the innovation life cycle. For decades, the venture capital
industry has dedicated itself to finding the most innovative ideas and
bringing those ideas to market. We raise money from institutional
investors and our firm partners for the express purpose of identifying
and investing in the most promising ideas, entrepreneurs and companies.
We only choose those with the potential to grow exponentially with the
application of our expertise and venture capital investment. Often
these companies are formed from ideas and entrepreneurs doing work in
university and government laboratories--or even someone's garage. Many
of these ideas would never see the light of day were it not for venture
investment.
Once we have identified a promising opportunity, we conduct a
thorough due diligence process on the entrepreneur or scientist, the
technology on which the opportunity is based, and the potential market.
For a venture capitalist to invest in a company, the discovery process
must be well underway. Oftentimes, we will delay an investment until
further research is successfully completed. Put another way, venture
capitalists invest in applied research--not basic research. For those
companies that have moved through the basic research process and have a
functioning product that passes muster with our firm, we make an
investment in exchange for equity ownership in the business. Venture
capitalists do not employ leverage or issue debt as a part of our
investment. We also generally take a seat on the company's board of
directors and work very closely with management to build the company
and bring the innovation to market.
The innovation process is long and characterized by significant
technological and entrepreneurial risk. We typically hold a venture
capital investment in an individual company for at least eight to ten
years, often longer and rarely much less. During that time we continue
to invest follow-on capital in those companies that are performing
well; we cease follow-on investments in companies that do not reach
their agreed-upon milestones. Our ultimate goal is what we refer to as
an exit--which is when the company is strong enough to either go public
on a stock exchange or become acquired by a strategic buyer at a price
that ideally exceeds our investment. At that juncture, the venture
capitalist ``exits'' the investment, though the business continues to
grow and innovation continues to take place.
The nature of our industry is that many companies do not survive,
yet those that succeed do so in major ways. Our asset class has been
recognized for building a significant number of high-tech industries,
including the biotechnology, semiconductor, online retailing and
software sectors. Within the last several years, the venture industry
has also committed itself to funding companies in the clean technology
arena. This includes renewable energy, power management, recycling,
water purification and conservation. Many of the young companies that
we fund serve as the de facto R&D pipeline for larger corporations as,
in many cases, our start-up technology is far superior than what can be
generated in a corporate R&D environment. This phenomenon is especially
true in the life sciences and software sectors, where our companies are
regularly acquired for their technology and intellectual property. We
believe this dynamic will ultimately become the reality in the energy
and clean tech sectors as well. My partners and I are extremely proud
of the work that we do each day because we are indeed creating the
future.
Historically, venture capital has differentiated the U.S. economy
from all others across the globe in terms of job creation and
innovation. According to a 2009 study conducted by the econometrics
firm IHS Global Insight, companies that were started with venture
capital since 1970 accounted for 12.1 million jobs (or 11 percent of
private sector employment) and $2.9 trillion in revenues in the United
States in 2008. Such companies include historic innovators such as
Genentech, Intel, FedEx, Microsoft, Google, Amgen and Apple. These
companies have brought to market thousands of innovations that have
improved and, in the case of the life sciences sector, actually saved
millions of lives.
Venture-backed companies are responsible for the introduction of
Internet navigation and search, microprocessors and wireless
applications. On the medical side, our companies brought to market
drugs to treat cancer, diabetes, heart disease and spinal chord
injuries. And on the clean technology side, we are actively working on
innovations to reduce our dependence on foreign oil and create a more
sustainable environment for the next generation. It is almost
inconceivable that these monumental advances were once small ideas
tucked away in a lab or a living room. But we assert that the next
great innovation is today a small idea waiting somewhere. We are
committed--along with the government--to finding and funding it. Our
country's future depends on it.
The Silicon Valley Phenomenon
No other region in the country can attest to the positive impact of
innovation on the economy than California. In fact, most people who are
familiar with venture capital--even remotely--tend to associate it with
Silicon Valley. It is indeed the industry's Fertile Crescent, with
approximately 40 percent of all venture capital dollars invested in
companies from San Jose to San Francisco. For this reason, VCs are
often asked what factors drive Silicon Valley's ongoing growth and keep
the region successful in fostering innovation and growing new
companies. It is a relevant question because the answer offers a
blueprint for other regions that wish to emulate the Valley's success.
This blueprint is also consistent with what our country must do as a
whole to keep innovation alive.
Like Silicon Valley, most successful venture capital hubs begin as
communities of extremely bright, best-in-class innovators. These
innovators are usually drawn together by a top-flight research
university, government laboratory or a highly innovative, often
venture-backed company. Stanford University has been the source of
countless innovations around which venture capitalists have formed
Silicon Valley-based companies. The same can be said for MIT in Boston,
University of Pennsylvania in Philadelphia and Duke and North Carolina
in the Research Triangle region. Silicon Valley is also home to
important anchor companies: Intel, Genentech, Cisco and Google are just
a few. These companies regularly spin-out new entrepreneurs who pursue
their own ideas and start-ups from existing operations. They also
foster a pool of technical talent available to the region. We have seen
similar types of spin-out companies in places such as Austin, Texas
with Dell, in Minneapolis with MedTronic, and in Seattle with
Microsoft.
Often, these communities coalesce around a certain industry or
technological niche. Silicon Valley has a long and successful history
of embracing these niches early on, beginning with semiconductors and
following up with biotechnology, enterprise software, consumer Internet
and now, clean technology. Other examples of regions that have
successfully built an ecosystem around a specific technology include
New York with new media, Tennessee with healthcare IT, and Northern
Virginia with telecommunications. Concentrating on these niches creates
a virtuous circle that spurs research and innovation, draws more talent
and attracts more capital to the region. And while regions such as
Silicon Valley and Boston account for a majority of the investment in
certain sectors, there is room for more than one region to claim space.
To wit, Florida, in its quest to become a life sciences center,
recruited the new Scripps Institute to locate there and has benefited
from that institution's presence in Palm Beach County. Many regions are
now vying for a stake in the clean technology sector. Rocky Mountain
states like New Mexico, Colorado and Arizona making strides in this
area.
Innovators become entrepreneurs only when they have the supporting
environment to do so. Venture capital alone is not enough. There must
be a sound mechanism for transferring technological innovations from
the research institutions and scientists that spurred them to the
company that will guide them to market. To support that process, a
robust network of lawyers, accountants and other business professionals
to help with business planning, networking, intellectual property
protection, IPO registration compliance and hiring issues is also
important. In addition, though as simple as it sounds, the region must
have an infrastructure that can support growing companies. That means
efficient local and regional transportation systems, convenient
airports, affordable housing, quality schools and vibrant cultural and
social scenes.
Government and civic support is also essential. This starts with
favorable tax policies, common-sense regulatory structures and
encouragement of basic research. State and local initiatives that
reward emerging growth companies also make a significant difference.
Please understand that is different than giving massive tax abatements
to large local corporations. Instead, a program like Ben Franklin
Technology Partners in Pennsylvania, that supports start-up companies
in their earliest stages, helps create a pipeline from which venture
capitalists can draw. Also, state pension funds that invest in local
venture capital firms also drive success. States such as California,
Pennsylvania, and Wisconsin have strongly supported local venture firms
in recent years, resulting in increased investment by indigenous firms
in their states' start ups.
It is important to note that venture capitalists do not create
these conditions favorable to investment. We seek them out. For those
looking to replicate Silicon Valley's success, it starts with these
factors and builds from there. States should understand that growing
such an environment is an expensive, long-term endeavor. However, I'm
sure that Californians will tell you that the economic pay-off is worth
it.
Looking Forward on a National Level
The ingredients that make for successful venture capital hubs like
Silicon Valley are not unlike the ingredients for a thriving innovation
ecosystem in the U.S. as a whole. Access to strong basic research, the
best and brightest minds, public policy that promotes access to
capital, and an infrastructure that supports the entrepreneur are in
fact the precise components that have historically allowed the U.S. to
thrive on the innovation spectrum. And these same drivers will
determine our fate going forward.
Yet, it is important to recognize that the global environment for
innovation has changed dramatically in the last decade--creating both
opportunities and threats to U.S. innovation. Technology has indeed
made the world flat and our companies today all employ global
strategies when it comes to markets, product development and
operations. The global markets offer our companies tremendous growth
opportunities--provided the U.S. maintains open trade provisions. Yet,
at the same time, there has been a significant rise of venture capital
and entrepreneurial activity in regions outside the United States such
as Asia, Eastern Europe and South America. As entrepreneurialism grows
on a global scale, we face a new competitive environment in which
innovation can be developed anywhere. Foreign governments are being
extremely aggressive in promoting favorable tax policies, improving
their legal, accounting and intellectual property structures, and
boosting their R&D spending to foster more innovation in their
countries. The U.S. needs not only to maintain our current commitment
to an innovation agenda but rise up to meet the challenge set by our
foreign competitors or risk losing our technological edge.
For these reasons, the venture capital industry supported the
America Competes Act and continues to support the spirit in which it
was passed in 2007. In order for the U.S. to maintain its competitive
advantage and economic leadership, we must continue to aggressively
promote a public policy agenda that rewards risk takers and embraces
innovation at a national level. Components that are particularly
relevant to the venture capital industry and our role as purveyors of
innovation are as follows:
Support for Basic Research
The government has a critical role to play in the area of basic
research. It is from this pipeline of scientific advances in fields
such as information technology, life sciences and now, clean
technology, that the venture capital industry has traditionally drawn
many of our innovations. Often, early stage research into new
discoveries is first funded with Federal dollars in a university or
government lab and then commercialized by a venture investor.
Such was the case with Atheros Communications, founded by leading
experts in radio and signal processing at Stanford University. Atheros
benefited early on from access to DARPA research on semiconductors and
communications. My firm helped to shepherd the researchers out of
Stanford and invested the first $100,000 into the company in 1997.
Since that time, the company has become the leading provider of WiFi
communications, providing the technology that powers innovations such
as wireless local area networks (WLAN), mobile WLAN, global positioning
systems (GPS), Bluetooth, Ethernet and powerline communications.
Atheros went public in 2004 and today employs more than 1,300 people
and has a market capitalization of $2.5 billion.
Sources of these basic research funds have historically included
the NIH, DOD, DARPA and, most recently ARPA-E. Continuing to support
federally funded research through these agencies will allow the
symbiotic relationship between the government and venture capital to
continue. Essentially we pick up where government funding leaves off.
We believe this relationship will be especially important in the area
of clean tech innovation. We have been very encouraged by the funding
of ARPA-E at the $400 million level. We hope to see a continued
commitment at that level or above going forward, so that the exciting
work taking place in those labs has the opportunity to be brought to
the American public. We also ask that policy makers continue to exhibit
the same patience they have shown in the past for the high-risk and
long-term nature of the innovation process. This support is critical to
our ability to see our projects through to success.
Support for a Highly Skilled Work Force
In addition to supporting the research, government must also
support the entrepreneurial and technological talent that brings this
research to life. The venture capital community wholeheartedly supports
improving math and science education for U.S. students, particularly in
grades K through 12. Other countries have been committed to the
Science, Technology, Engineering and Math (STEM) components of
education for some time. Our understanding is that we are making
strides in these areas; but we can not ease up on our commitment to
engage our students more fully.
In addition to better educating our own students, it is also
critical that we ensure that the best and the brightest scientists and
entrepreneurs from all over the world want to come to the United States
to innovate and grow their businesses. The venture industry has long
supported highly skilled immigration reform that would make it easier
for foreign born nationals to build companies in the United States. The
NVCA-commissioned study, American Made: The Impact of Immigrant
Entrepreneurs and Professionals on U.S. Competitiveness found that 25
percent of venture-backed public companies were founded by immigrant
entrepreneurs. These companies include innovation stars such as Intel,
eBay, Google, Yahoo and Sun.
Yet in recent years, U.S. immigration policy has become restrictive
relative to the policies of foreign countries--and just when they are
proactively growing their own entrepreneurial and innovation
ecosystems. As the United States is making it more difficult for
foreign scientists and entrepreneurs to enter our country, other
countries such as India and China are welcoming these bright minds to
their shores. Unless we see a significant change in immigration policy
for highly skilled workers, we risk losing the brightest talent to our
global competitors.
For this reason, we are very supportive of the Start Up Visa
initiatives that have been introduced in both the House and the Senate.
Under these bills, immigrant entrepreneurs can obtain a special visa to
build their companies in the United States if they have secured venture
capital financing from a qualified investor. The passage of such a bill
would send a much needed signal to entrepreneurs around the world that
United States wants them innovating here. Companies that are formed
here drive innovation here. There is no other way to say it.
Access to Capital
Support for innovation also hinges upon the government's
understanding of the importance of capital formation and support for
incentives for long-term investment and risk taking. While we know that
this committee does not have jurisdiction on developing tax policies,
it is an area that remains of critical concern to the venture industry
and has the potential to impact our ability to fund innovation.
Entrepreneurs and venture capitalists must continue to be rewarded for
the risks they take. Today there is a meaningful differential between
ordinary income and capital gains tax rates, which offers an incentive
for the long-term investment in innovative companies as opposed to
short-term speculation. Without this differential, the reward for
building and growing a company from scratch is significantly lower and
less likely to promote this type of activity.
We also continue to support the current tax policy that allows both
entrepreneurs and the venture capitalists who invest their time and
capital alongside management to receive capital gains tax treatment
when they have successfully built and grown companies. This policy--
which grants capital gains tax status to venture capitalists who
successfully invest in and help companies to grow--has been under fire
as certain lawmakers have sought to change the tax status of carried
interest to ordinary income. The result will likely be a long-term
reduction of venture capitalists, a lower risk threshold for existing
venture capitalists, and fewer innovations funded overall. By enacting
this policy, Congress will put innovation and job creation at
tremendous risk. Our position on this issue is publicly available from
previous hearings and we continue to welcome the opportunity to work
with lawmakers to better understand the implications of this troubling
proposal.
The need for capital does not end with venture investment. The goal
of many venture-backed companies is to one day thrive as a publicly
traded entity. However, the last decade, and the last three years in
particular, have been especially hard for venture-backed IPOs. A
healthy venture-backed IPO market would see close to 100 new issues
each year. In 2008, we saw just 6 venture-backed IPOs; 2009 had 12; in
the first three months of 2010, there have been just 5.
While much of this lackluster environment can be attributed to the
financial crisis and skittish investors, we believe that there are
fundamental structural issues that need to be more closely examined.
The implementation of Sarbanes Oxley, the separation of research and
investment banking, and decimalization--among other factors--have all
contributed to a market that is not receptive to small cap IPOs. This
situation is critical to the future of innovation because without an
IPO market recovery, venture capitalists are not in a position to make
new investments at the pace we have kept in previous years. We will
spend more time with existing companies, wait longer to take them
public, and complete fewer new deals. We do not want these good
companies to wither on the vine if we can jump start the IPO market
once again.
We believe there is a role for policy makers and regulators to
better support emerging growth companies and commit formal resources to
understanding the dynamics and challenges of today's IPO market.
Dedicating senior SEC officials to address the collective interest of
these rising stars will send a message to the market that the
government is there to help, not hinder, their growth and innovation.
We believe the formation of such a group would be extremely well
received and we as an industry would commit to supporting its
endeavors.
Intellectual Property Protection
The U.S. must also enact some essential reforms to its patent
system. Few systems have protected and rewarded innovation better, but
the system has gone 50 years without so much as a tune up. Patents are
particularly important to the start-up community because they are
sometimes the only asset of value that an emerging company holds. Often
venture capitalists evaluate the quality of a company's patent or
patents when deciding whether or not to invest. Thus, patents protect
the value of both the innovation and the investment.
For this reason, the U.S. must focus on improving the quality of
the patents it grants and the predictability of its protection process.
Stronger patents will help reduce the amount of needless litigation
generated by specious or spurious challenges and infringement claims.
Greater predictability in how the U.S. Patent and Trademark Office, or
PTO, awards and protects patents will also reduce risk for emerging
companies and their investors. Current patent reform legislation moving
through the Senate addresses many of these challenges and we are
hopeful that the final outcome will institute reform that adequately
funds the PTO and protects small innovative companies.
Conclusion
As we've seen, the United States has harnessed innovation to power
economic growth, raise standards of living and improve our lives. The
Federal Government has played a vital role in this success through
innovation-friendly policies and incentives. We applaud policy makers
who seek to foster an ecosystem where risk taking and entrepreneurship
are rewarded. Yet the bar continues to rise as many foreign governments
have begun to emulate our success and seek to surpass it. Their
successes mean that we no longer hold a monopoly on innovation and its
benefits.
Make no mistake: The race is still ours to lose. But to maintain
our innovation advantage, we must rededicate ourselves to what made us
successful: increasing support for basic R&D, improving math and
science education, supporting immigration and patent reform, and
improving access to capital through smart tax policies. Without action
on these fronts, the United States may find itself in the unfamiliar
role of also-ran in the innovation race. The venture capital community
remains committed to doing our part to ensure this is not the case. We
look forward to working with Members of this Committee, Congress and
the Administration to support the best and brightest ideas and continue
to fill a robust pipeline of innovation for our country. I want to
personally thank you for the opportunity to discuss these important
issues with you today and I am happy to answer any questions.
Biography for Paul Holland
In addition to coordinating the CleanTech practice at Foundation
Capital, Paul's primary focus is on helping early-stage start-ups go
from zero to $100M in revenue. He helped take public two venture-funded
software start-ups, Kana Communications (KANA), and Pure Software
(RATL). Paul currently serves on the board of directors for Bella
Pictures, CalStar Products, Chegg, Coverity, Ketera, Serious Materials,
and TuVox; and previously for Talking Blocks (acquired by Hewlett-
Packard) and RouteScience (acquired by Avaya).
Prior to joining Foundation Capital, was senior vice president of
worldwide sales at Kana Communications, a leading supplier of
Enterprise Relationship Management solutions to strategic e-businesses.
Paul went on to build a team of over 350 people that secured more than
900 customers worldwide, helping Kana become one of the top ten IPOs of
1999. Before Kana, Paul was a vice president and general manager for
another highly successful start-up, Pure Software, helping raise their
market value from $2 million to over $1 billion in his five-year tenure
there. He began his professional career at SRI International (formerly
the Stanford Research Institute).
Paul enjoys spending time with his wife Linda Yates, and their
three daughters, Kylie, Devon, and Piper. In his spare time he enjoys
golf, volleyball, poker, traveling (he has visited over 50 countries to
date), and is building a LEED Platinum home in Portola Valley. Paul has
been guest lecturer on entrepreneurship at Dartmouth's Amos Tuck School
of Business, Harvard Business School, James Madison University, and the
Stanford Graduate School of Engineering. He is an active advisor and
supporter of Project BUILD in East Palo Alto, the Bing School at
Stanford and Sustainable Silicon Valley. Paul received an MBA from the
University of California at Berkeley; an MA in Foreign Affairs from the
University of Virginia; and a BS from James Madison University.
Chairman Wu. Thank you very much, Mr. Holland. At this
point we will open for our first round of questions, and the
Chair recognizes himself for 5 minutes.
I just want to point out that we have a number of
opportunities right before us. It is not just the
Administration's deployment of broadband but the Administration
already has statutory approval and funding for health IT
initiatives, for its energy initiatives. We have a couple of
very important legislative opportunities in front of this
Congress. One is the reauthorization of SBIR and of course the
big one is the reauthorization of America COMPETES, which
affects so much of what you all have addressed.
I am going to begin by throwing you a puffball for you all,
and I think I will just go from my left to right and ask that
you, from your view, don't repeat anything that is cited to
your right but list additional factors, and the question is,
what are the biggest barriers, what are the biggest barriers to
entrepreneurship and what are your top one, two or three
priorities, priority recommendations to help address those
particular barriers. Mr. Chopra, why don't we start with you?
Hon. Chopra. We are squarely focused on strengthening the
commercialization success rate out of research and development
investments as a Nation, and you heard a terrific body of
testimony from Dr. Kamlet. But Secretary Locke is leading a
dialog with the university community throughout the country
specifically on how we address this issue. I will simply
highlight one basic phenomenon. As my mentor describes, we have
a terrific portfolio of ideas throughout our university system
and we have a challenge to bring market relevance to those
ideas. In combination we can achieve a much higher rate of
entrepreneurship, and so a great deal of the reason you saw the
$12 million investment in the partnership for innovation fund
in the National Science Foundation in the President's budget--
was to bring more of the market relevance capabilities to the
ideas that are coming out of our universities. You see that our
innovation clusters work, and we are going to continue to focus
on that as an important lever to see, we think, an improvement
in the rate of entrepreneurship in the country. Obviously the
factors I had cited earlier-about ensuring the conditions for
an open and competitive marketplace, the capital markets
success, an open and efficient government--are all factors as
well but we are first and foremost going to look at the
commercialization aspect.
Chairman Wu. Terrific. Thank you.
Dr. Kamlet.
Dr. Kamlet. Thank you. I will focus on one that is specific
to universities and in particular to university-industry
partnerships. Right now a company may come to the university
and to a faculty member and say I would like to give you $1
million to do research in this particular area, and the faculty
member will say that is fabulous, that is exactly what I want
to do and this is going to be critically important research,
and then we tell the company but you do know that you will not
own the intellectual property, that we can't guarantee that we
will license it to you and we cannot guarantee we won't license
it to your competitors instead. And then the company says I am
sorry, you must have misunderstood, I said we were going to
give you $1 million. And we say yes, we heard you correctly but
those are the conditions, and then the company says here we go
to Singapore. And this is a reflection of an unintended aspect
of the tax laws pertaining to doing research that is funded by
industry in buildings that were originally once upon a time
financed by tax-exempt bonds. It seems like it is a small thing
but when you are trying to find good ways to interface with
industry, it is a huge impediment and we would be happy to
provide more details about that. It is something that is not
recognized very broadly but affects us quite a bit.
Chairman Wu. You know, a staffer brought that to my
attention about five years ago, and I had a hard time
understanding it until just this moment. Thank you.
Dr. Atkinson.
Dr. Atkinson. Let me list two, one that isn't this
Committee's jurisdiction but I do think it is a central one,
and that is what you could term foreign technology
protectionism or mercantilism. I think it is much harder for
entrepreneurs to succeed in this country now when you have
intellectual property theft on a rampant basis, when you have
standards manipulation, when you have a whole set of other
practices that countries, not just China, but other countries
are engaged in that that violate the spirit and oftentimes the
law of WTO. I think that is a key factor that we are going to
have get right.
But the second thing I think is, we don't do anywhere near
as good a job of creating support systems for entrepreneurs at
the ground level, and you compare that to a country like
Finland which has a wonderful support system linked to their
universities where if you are an entrepreneur with an idea, you
can get help, you can get technical assistance, you can find
maybe an incubator to be in. You can get easy technology
transfer from universities. So I commend what the
Administration has done and I hope we can continue to improve
on that because I think that is the right direction to go as we
have got to beef up these regional innovation clusters. I think
that would be an important step.
Chairman Wu. Thank you. Dr. Breznitz.
Dr. Breznitz. I would like to follow Dr. Atkinson and the
Honorable Chopra and also to talk about people, and in this
case with great opportunity we have with this financial crisis
that we just had. If you look at other countries, Finland,
Israel and Ireland, one of the most important things for the
high-tech industry was a crisis after which there were released
a resource of a great genius who are in their middle ages with
families and kids that need to go to college that couldn't even
think about becoming entrepreneurs before and now they had to,
and what those countries did is help those kinds of people who
know the industry, know how to make products but never wanted
to do this job, now had to do this job, helped them to get the
education to be entrepreneurs and the environment to be
entrepreneurs and I think that is part of what we should do.
Chairman Wu. Thank you.
Mr. Holland.
Mr. Holland. I will try not to be duplicative. I got the
bad seat for that. It is pretty straightforward from our
perspective.
Chairman Wu. Well, I knew that you were up to the
challenge.
Mr. Holland. Thank you so much, Chairman. I appreciate your
confidence.
So straightforward for us. Please don't triple the tax rate
on the industry that has created 11 percent of the high-quality
jobs and about 20 percent of the GDP in this country over the
last 40 years. It is pretty straightforward from our
perspective. Second, pass the Start Up Visa Act and take any
steps necessary to ensure that the best and brightest from
around the world continue to come to this country and don't
choose instead to go to China and India and other places that
welcome them in a more receptive way than it looks as if we are
about to as a society.
And finally, continue to drive for improvements in math and
science education and a 21st century curriculum in our K-12
system. If any of you saw the recent Friedman article on the
Intel Prize, which the top science students in the country
compete for, 80 percent of the kids that were there were either
first- or second-generation immigrants and many of whom's
parents had had training elsewhere. We have got to upgrade our
basic infrastructure in K-12 and get back on the forefront of
producing the best scientists in the world.
Chairman Wu. Thank you very much.
Mr. Adrian Smith of Nebraska, five minutes.
Mr. Smith. Thank you, Mr. Chairman, and thank you to the
panel for sharing your expertise. I am grateful for the many
perspectives that you bring and certainly I hope that we can
focus on innovation more so every day. I can't help but think
that the best driver for more innovation is available capital,
and so I want--and I think we need to be mindful of that. I
understand the government needs to provide a nudge here and
there but I struggle to think where the government should be
the most important driver of innovation because I think that
the private sector is underestimated with that. This has been
interesting hearing the various perspectives and so again I
just want to reiterate how much I appreciate your willingness
to come here today.
Dr. Chopra--I hope I am pronouncing that right--how
involved should the Federal Government be in terms of the
growth of innovation and what are the building blocks that you
mentioned only the Federal Government can provide?
Hon. Chopra. Well, thank you for the question. We actually
strongly agree with the view that our private sector has been
at the heart of job creation and the success of our
entrepreneurial economy. But we, as I referenced in testimony,
believe that there is a balance to be struck around building
blocks, and the building blocks in particular are very
straightforward, basic research and development, the work this
Committee had done on putting us on track to doubling the basic
research investments at NIST, the National Science Foundation
and the basic science office within the Department of Energy.
We very much believe in the importance of basic research
investments and that is why the President has done as much as
he can both in the stimulus act and in the proposed budget-to
get us on track for the investment.
On the workforce piece: I think, to underscore Mr. Holland,
we are absolutely committed to making sure that our educational
system focuses on science, technology, engineering and
mathematics. That is why in the Race to the Top Fund, the only
competitive differentiator a state could get extra points for
when they applied for the Race to the Top funding was the
degree to which they incorporated STEM into their application.
It is the only differentiator. That is why the President, with
basically no government money, collaborated with dozens of
companies to create the Educate to Innovate Initiative which
has already tallied over $500 million in private sector and
philanthropic commitments to focus on STEM education. His
priority goal is having America achieve the highest proportion
of college graduates in the world by 2020, all of that is an
essential building block. But we also believe in advanced IT
infrastructure and the degree to which we have effective and
efficient broadband, affordable and universal broadband
throughout the country is a key priority for this
Administration. If you are in a rural part of the country and
you have a terrific idea and you want to build that application
to generate wealth in your neighborhood, with the access to
high-speed affordable broadband, we think you deserve every
right to have the ability to compete. So those are the key
building blocks as we see them, and I would be happy to go into
more detail if you would like.
Mr. Smith. So I hear you saying that perhaps research
wasn't exactly ignored during the tech bubble, 1995 to 2000 or
2000 to 2007. I think you mentioned previously that it was
ignored. Really? I mean, do you really mean that?
Hon. Chopra. Maybe I misunderstood your characterization. I
never said that research and development investments per se had
been ignored, but I think if you looked at the overall
performance, the statistics that Rob Atkinson cited very
clearly were that there is a distinction between flat year
after year, or I should say consistent with historical
purposes, and how others around the world are competing. I
think Rob's statement that we had been at the top on a range of
these measures and that if you look at the rate at which we
have improved on those numbers from 2000 to 2009 that the rate
of change in our investments in these areas hadn't kept up the
pace. I think that is the heart of the COMPETES Act, about
putting us on track to doubling R&D. It is not that per se the
numbers had fallen and we have ignored them. We have been
funding universities forever. But it is the notion that we
hadn't put more of the research emphasis in that area, and I
think that was where I was referring to, the notion of the
historical perspective.
Mr. Smith. Okay. Thank you. I appreciate that. I do want to
also add, you know, as I am across not only my district but I
do get out of Washington and my district now and then, there is
an immense concern that some of the goings-on in Washington
will indeed stifle innovation, whether it is tax policy as has
been mentioned a little bit here, and I don't want to elaborate
in the interest of time on exactly what these things are, but I
want to give emphasis and pass along the concern of many
Americans that many of these policies, tax policy among them
but just one of them, would constrain innovation, would have a
lockdown among our economy that is especially damaging,
especially to innovation, especially to technology, ultimately
to prosperity, and as we know, our budget relies heavily on
those who have prospered and the fewer prosperous folks and
entities we have, the more our budget hurts.
And so I know that my time is up and so I want to close
with that, at least for now, but again, let me say thank you
for your expertise.
Chairman Wu. Thank you very much, Mr. Smith.
Ms. Edwards.
Ms. Edwards. Thank you, Mr. Chairman, and thank you to all
of our witnesses. As is always the case whenever we are in this
Subcommittee, we hear much more interesting and creative things
than in some other places here in Congress, so thank you.
I want to ask about this notion of innovation and
entrepreneurship because I do think that there is a distinction
and I think sometimes we get confused that merely investing in
entrepreneurship is investing in innovation, and I wonder if
some of our witnesses could actually discuss that, and along
those lines, also this notion of investing in risk taking and
the role of government, particularly in early stages in risk
taking which might be distinct from the kind of risk taking,
Mr. Holland, that you spoke about, where you are making
decisions about where to place venture capital. And perhaps
starting with Mr. Chopra, Mr. Holland, I wonder if you could
weigh in on that.
Hon. Chopra. Very thoughtful questions. Thank you. Let me
begin by saying the distinction between innovation and
entrepreneurship may be slightly less broad if you focus on
high-growth entrepreneurship, and a great deal of our policy
framework is focused on high growth, and of course, neither are
sufficient. Simply investing in high growth, one has to make
some leaps of faith as to what is in fact a high-growth
business, and there is a whole body of work around how one does
that. Experts like Paul at the end are focused there.
On the topic of risk capital, we see that the President has
made investment decisions to reflect this, that high-risk,
high-reward basic research should remain a priority within the
government. So while we have asked for the rate of growth to
continue to rise in investments in National Science Foundation
and so forth, we are also innovating within how that money is
deployed so that we are pushing as much as we can to ensure
that those programs that they fund allow for creativity and
innovation. That is what I would call the productivity with
which our R&D investments flourish, and I think high-risk,
high-reward opportunities that we are focused on-for a specific
example, ARPA-E in the energy domain--allow us to take a chance
in areas that may not be as viable for traditional private
investment but might make sense given the construct of where we
are from a basic research perspective.
When it comes to risk capital in the commercial setting, as
we said earlier, creating the right market conditions that spur
productive entrepreneurship is where we have focused our policy
priorities. So making sure that we are doing what we can to be
supportive of our private sector participants and ensuring that
we are doing what we can to make government work, where we
engage, that we have created a capital markets environment that
is supportive and encouraging of the kind of investments that--
--
Ms. Edwards. Well, can you tell me how that relates to the
new rules around--the new policies around SBIR? Because we have
heard testimony in our larger subcommittee and this Committee
about the tensions between the sort of private smaller business
entrepreneurs and the institutional-based educational research
institutions.
Hon. Chopra. Well, actually I think there is a great deal
of creativity and innovation taking place. I wouldn't call it
matchmaking--that may not be the right word--but just last week
the National Science Foundation announced a $4 million
solicitation, kind of a matchmaking service, to find the most
innovative SBIR firms coupled with the most successful
engineering research centers to see if they could collaborate
together in spurring new economic activity. So we are focused.
I think the comment that I was making about SBIR was, DARPA as
just one agency has tried to streamline it. You know, one of
the things that is frustrating, if you are a small business and
you are successful in winning an award but you have to wait six
months to get a contract, you can't carry your cash flow for
that long. It is almost not worth the effort. So by getting
them to streamline the operations and say well, in 60 days we
are going to get you paid to get you to work, we think that is
more in line with the notion of a small business. So there are
some operational aspects to this that we are trying to get
right.
Ms. Edwards. Before I run out, Mr. Holland.
Mr. Holland. Yes. Thank you. It is an honor to take a
question from you, Representative Edwards. I was born in
Baltimore a long time ago, so I am very proud of my birth State
of Maryland.
I think, simply put, when Steve Jobs and Steve Wozniak were
forming Apple, when Gordon Moore and Bob Norris were forming
Intel, when Serge and Larry were forming Google, to put it
bluntly, they didn't give a frog's fat behind about what was
going on back here in Washington. It just doesn't work that way
in entrepreneurial circles. We just do what we do. It is almost
as if the entrepreneurs are almost genetically programmed to
start companies and to raise capital and to hire people. It is
just the way they exist. It is like artists who create art. It
is like writers who write. It is a form of existence that
people do.
Where government can help is in the areas that Dr. Chopra
is referring to. Interfering in the way that capital is formed
and capital is deployed and making it less efficient for that
capital to be deployed is an incredible hindrance. That is the
hallmark of Second World countries. That is not a hallmark of
this country. And so that is one of the things that we are
very, very concerned about as we look at what happens. So we
have plenty of private capital available to help start these
companies and get things to happen. Just putting us in a
position where we can go and operate and do what we do and
enable entrepreneurs is all we ask of the Federal Government at
that level. All the work that we are hearing about here with
the universities, the national labs and so forth is very, very
important but we deal with things at the end of the line. We
are where the rubber meets the road in trying to make these
into businesses that will hire millions and millions of people.
We know how to do that. The industry knows how to do it. But we
are at risk right now.
And just as a footnote, just to give you an idea, there
were 1,200 firms practicing venture capital by the year 2000.
There are probably close to something like 600 or 700 firms
now. Only 95 of those, according to some sources, did more than
four investments last year. That is a very scary statistic for
anybody that thinks about job growth over the next five or ten
years. And if you add on to that some of the things that are
being contemplated, that is only going to get worse.
Ms. Edwards. Mr. Chairman, I have greatly exceeded my time.
Chairman Wu. Mr. Smith, five minutes.
Mr. Smith. I would yield if the Member from Maryland wishes
for any more time. If she is on a roll, I don't want to stand
in the way. Okay. Thank you.
Now, we have heard here this morning that America is one of
the only countries in the world that does not have a national
competitiveness strategy yet the Committee is continually
examining our innovation and competitiveness needs through
various hearings, culminating in the passage of the 2007
America COMPETES Act and continuing with its legislation
reauthorization this year. To all the witnesses, what do you
see as the failures in the current America COMPETES that would
lead to perhaps such a conclusion?
Dr. Atkinson. Let me start. I can't resist the last
question so let me do 30 seconds on that, because I think one
of the problems with our innovation policy is, we are torn
between, is this something the private sector does or is it
something the government does. And with all due to respect to
Mr. Holland's last comment, when you look at many of the
Silicon Valley companies, they can trace their roots very
clearly back to government funding in one way, shape or form.
Google had an NSF grant and others had NSF grants around
library technology, searching technology. Intel, one of its
first customers was the Defense Department. In fact, in 1992,
the county in the United States that had the most defense
contracts--this was a study I did for OTA [Office of Technology
Assessment] when OTA still existed--was actually Santa Clara
County. So it is sort of I think a false choice to say it is
all entrepreneurs who are creative and it is all the
government--the government didn't create Apple nor could it,
but certainly it helped, and I think we have got to think about
our policies in that regard.
So to your point about COMPETES, we are big supporters of
COMPETES. I think it was a very important first step. But
COMPETES is a little different than a strategy. COMPETES is a
set of policies and programs, and I think what we would argue
needs to be framed on that is a very in-depth strategy to
really look at exactly where our weaknesses are, where our
strengths are. And the last point on COMPETES, and I would echo
Dr. Breznitz's point, I think we need innovation in our
innovation policy. I think COMPETES was principally about what
economists would call supporting factor conditions, in other
words, more basic research and more STEM personnel. Those are
very important, and we have not done enough of that in this
country. But there is a whole set of other things around tax
policy, around institutional frameworks, what Mr. Chopra was
talking about, public-private partnerships, research consortia,
better university relations with entrepreneurs and companies,
and I think that is where the next COMPETES could do a little
more with.
Dr. Breznitz. If I can add, I can also tell something about
what other nations are doing since I have done this for both
Finland and Israel and other nations do every seven years in
the case of Finland, which I think is the Nation that does it,
convey a group of experts, both local and foreign so they know
they have somebody to evaluate them, and try to really look at
how the country works, what are the policies and do they make
sense together, not just as one act but all the tax laws, all
the education facilities, all the entrepreneurship policies, do
they make sense together? How they can be fixed? What are good
ideas to fix them? And that I think is what put both Israel and
Finland from peripheral economies--let us call them that--to
being on the forefront, and I think that this is what we should
do. So I do think that we need to, as Dr. Atkinson said, think
strategically about those issues.
Mr. Holland. And if I could just tag onto Dr. Atkinson's
comments, I certainly don't mean to give the impression that we
don't appreciate some of the groundbreaking work that has been
done over the years from the Federal Government in the Silicon
Valley. In fact, I will give you an example out of portfolio.
There is a company. I will mention the name of the company. It
is Atheros Communications. I am going to guess that perhaps
some of the people on this panel would know but most of the
people in the public won't know Atheros. When I tell you what
they do, you will all know. This is a company that was funded,
we funded it with $100,000 in 1997. There was a professor named
Theresa Mung, first-generation Chinese, Ph.D. at Stanford
University, and she had come up with an innovation in
communications and we brought her into our group. We brought
her whole lab over into our building. I will fast forward this.
Eighty million dollars of private investment later including
some really interesting work early on with DARPA, and this
company is now the inventor of what is now known as WiFi, so
most of us now in our personal computers, when we fire up our
personal computer, there is a wireless chip in it and it is
almost guaranteed it is by this company called Atheros. The
company is worth several billion dollars and employs close to
10,000 people. It integrates all the different things that we
are talking about here today. I think that point that Dr.
Breznitz is making about, I will describe that as a holistic
and an integrated strategy. I think that is often really hard
to do in this country but it is worth it in this case if we can
find a way to do that.
Mr. Smith. Anyone else? If not, thank you.
Chairman Wu. Thank you very much.
The gentleman from New Mexico, Mr. Lujan, for five minutes.
Mr. Lujan. Mr. Chairman, thank you very much. I appreciate
very much the conversation today and the emphasis on R&D, the
emphasis with commercialization, but I am very concerned of the
lack of mention of our national laboratories when we talk about
commercialization, tech transfer, trying to understand what is
not working there with legislation that has been brought forth
in the past to create an environment such that tech can
transfer and we can commercialize it, but we do know that we
don't see much of it. Back in the 1990s, we saw an acceleration
that created the cooperative research and development
agreements with lack of utilization going into 2000 and 2001,
and we need to figure out how to integrate them more into this
and see how we can involve them.
Dr. Atkinson, I very much appreciate that you did mention
the national laboratories with your bullets that you
highlighted. The one thing that I would ask is your perspective
on how we can use our national laboratories as part of the
nucleus for the regional innovation clusters. As we all know,
the national labs currently engage in a range of tech transfer
activities but we still don't see that strength, and you
highlight with your first bullet to see what we can do to
remove the restrictions on universities from having specific
commercialization objective. I wonder what your thoughts are
around that, and also, Mr. Chopra, around what we could do with
creating incentives so that we can see more commercialization
and this kind of activity and even incentives for
entrepreneurial lead so that way we can create certainty for
companies that Mr. Holland would bring in, the scientists, the
engineers, the physicists that help develop these ideas is able
to partner with those entrepreneurs that have the ability to
manufacture, and your thoughts on that.
Dr. Atkinson. Excellent question and comment. We did a
report last year with a colleague of ours at University of
California Davis, Fred Bloch, and Fred did a report called
``Where Do U.S. Innovations Come From,'' and he did an analysis
over 40 years with the top hundred innovations every year. What
Fred and his team found was that Federal labs actually play a
more important role than you think, that about two-thirds of
award-winning innovations today, actually more than that, about
75 percent, come from collaborative partnerships. That is very
different than 30 years ago when most innovations came from one
company having it in their lab, figuring out how to do it and
commercializing it. Today it is much more about collaboration--
SBIR award winners, Federal laboratories, universities, small
businesses, big businesses. So in that new ecosystem, Federal
labs can play an important role. And we see that in New Mexico,
for example, the Sandia Science Park, very effective. There is
an innovative approach to try to get some of those technologies
out of there.
I think we could do two things. One, in the 2005 energy
bill, there was a provision put in there by Senator Bingaman, I
believe Senator Domenici at the time, on a collaborative energy
R&D tax credit so if you worked with a Federal laboratory, you
are a company and you worked with a Federal laboratory on
energy R&D, you could get a more generous credit because the
logic is, a lot of that benefit is going to spill over. A
scientist at the lab will publish those results. I think we
could just change that provision and say that any R&D done at a
Federal laboratory by a company could get a more generous R&D
tax credit. That would be one thing. I think the second part of
this would be to make sure that any provisions or proposals
that the Administration has or other proposals that try to
engage universities in better efforts on technology transfer
that we also apply that to Federal laboratories because there
are certainly some Federal laboratories that have a lot of
potential and could do a lot more.
Mr. Lujan. I appreciate it.
Mr. Chopra and Mr. Holland.
Hon. Chopra. Let me begin by saying I hope I didn't convey
the impression that it was only a university focus. I think the
Federal labs have a great deal to offer. In fact, I was with
the Chief Technology Officer at Procter and Gamble who has
created a multimillion-dollar benefit out of a collaboration
with Sandia itself. So we are seeing the same principles apply.
Now, there are some peculiarities in how we promote bringing of
industry relevance into research activities and so there are
some processes that are different, but no, we are very much
committed to servicing best practices and understanding what we
can do to make it work. We are doing a deep dive on the
experiment that had been done in the labs to bring in
entrepreneurs and residents. It may not have achieved the
results we had anticipated. The venture capital community
participated in that program. Trying to gather lessons learned
and see how we can think anew. I was with Christina Johnson at
the Department of Energy, very focused on this issue within the
portfolio in collaboration with Koonan. So we are very much
open and interested to finding ways in which we can collaborate
on best practices with the universities and Federal labs and
see that as a strong engine of new ideas for the commercial
sector.
Mr. Lujan. And I apologize, Mr. Holland. My time has run
short. Just quickly.
Mr. Holland. So Representative Lujan, I think it is a good
news/bad news thing. The bad news aligns with the frustration
that I heard in your question. The good news is, I think the
venture industry is waking up to the potential in the national
labs so that the NVCA does clean tech road trips where we take
40 VCs out to Sandia, Enrel, Oak Ridge and Argonne, and a
number of us, including me, have actually funded projects out
of the labs. On the bad news side, we were one of the
participants in the EIR [Entrepreneur in Residence] program. We
took a brilliant Ph.D. physicist, we embedded him in a national
lab, not in your state, for a year. He looked at a thousand
projects and at the end of that time period we concluded there
were none that we could put venture money behind, that we had
confidence would succeed, and so I think the issue there is, it
goes back to your original question. There is a fundamental
disconnect, I think, between some of the activities in the work
and their ability to apply those in a commercial realm, so
there is sort of a bridge too far in some ways that we have to
figure out.
Mr. Lujan. And Mr. Chairman, I know my time is up, but if
you give me the flexibility to--we mentioned this to Secretary
Chu as far as how can we put these incentives in to create a
stronger environment, and I will give you just a quick example.
There was a brain imaging scientific exploration going on at
Los Alamos National Laboratories. The spin-off was that we were
as a result of what happened on the failed attempt on
Christmas, we were able to take that brain imaging technology
and use that magnetic resonance technology to now be able to
put a molecular footprint on chemicals, liquids, materials that
we could identify that could be harmful in a plane. Now, there
may not be an obvious technology but the spin-offs are endless,
and I certainly think that as we talk about the competitiveness
of the United States, Mr. Chairman, that we need to look to see
how we can include our national labs in this process and see
how we can get this technology off the shelf and into the
market. Thank you, Mr. Chairman.
Chairman Wu. Mr. Lujan, always happy to give you a couple
of additional minutes. You are a great representative for the
country and especially those two national labs, absolutely
wonderful.
I was just stunned. I was in a conversation with some of
the folks at Los Alamos recently and just as an aside asked how
many Ph.D.s do you have there, and the fellow said 2,700.
Absolutely stunning, and we need to build a different culture
perhaps and do a better job of mining what is there.
Dr. Kamlet, a couple of quick questions for you. I used to
represent folks doing spinouts. Most of the time I represented
the institution, and we engaged in protracted discussions about
how to do the spinout, and at the risk of starving some future
attorney families, you all have found an interesting way of
doing business with this five percent go-in-peace policy. Have
other universities adopted it? It apparently has worked well
for you all. What is you evidence that it is causality rather
than correlation in the step up in your spinouts, and just a
couple of other questions, is it the decrease in transactions
cost or an important signal to your PIs or some of each of
that?
Dr. Kamlet. Well, first I should say, I mean, most of our
technologies are in the IT and engineering space and it is
possible that other approaches in biotech would have to take
other forms, but for us it has been transformational. When I
came in as Provost ten years ago, the committee that had
searched for the provost had identified tech transfer as the
single most broken thing at Carnegie Mellon, and it is almost
impossible to overstate the ill will that occurs when you start
negotiating hard with your own faculty and the transaction
costs are stupendous. We have found that the simple template,
five percent go in peace, has made things very transparent. It
has made things very quick. It has made things very mutually
friendly on both sides between us and our faculty, and we know
from advisory groups that come to evaluate different parts of
campus that we are now seeing by the faculty, by the
researchers as this being a competitive strength for Carnegie
Mellon. It is something that attracts both students and faculty
to us because we have these kinds of policies, and I think
other universities have not adopted this very widely but we are
on their radar screen and hopefully they will in the future.
Chairman Wu. Terrific. Thank you.
Mr. Holland, do you care to comment if you have had
experience in negotiating with universities or research
institutions and whether that has been hard or easy?
Mr. Holland. I guess I would say I think it is getting
better in part because of the kind of innovation we are seeing
from Dr. Kamlet and others. I think that we went through a
period of time where nobody really knew how to do the dance and
now we have kind of figured it out. We figured out the rules
that make the most sense. We have been extraordinarily
fortunate in terms of rolling projects directly out of
university and having them be incredibly successful, and I
won't bore you with all the examples. I could give you six
right off the top of the bat, and we are one of hundreds of
venture firms. One that is notable is a company called
Financial Engines. We funded that directly out of Nobel prize-
winning work out of Stanford University. We took the professor
and his top graduate student out and started this company back
in 1996. Financial Engines creates these algorithms that are
very interesting. They automatically help invest your
retirement money. It is a lot more complicated than that but
there are 58 patents associated with the work there. This is a
company that took 13 years for us to get to the point where it
could reach the public market. It went public two weeks ago on
Monday and is now trading at about a $800 million market cap on
NASDAQ so it is employing hundreds and hundreds of people, very
high-quality jobs, and it was a research project directly out
of a university, but as I can tell you, I can give you many,
many more of those and I think, you know, quite frankly there
are just some places that do it better than others. The schools
that are represented on this panel do it very, very well.
We were at Carnegie Mellon two weeks ago. We commissioned
some work there, a study on some things that we can't handle
within our own firm on some algorithms we want to develop and
so we spent a day at Carnegie Mellon, had a competition, had a
bunch of students and faculty come forward with some great
ideas. It was very cost-effective for us, so we love that type
of collaboration.
Chairman Wu. Great. Thank you very much.
Dr. Kamlet, just very quickly, this project at Olympus and
the entrepreneur in residence program, I am fascinated by that.
How do you set that up and how do you select the people to
participate?
Dr. Kamlet. Well, the people who participate are self-
selected but it is amazing how many of them respond incredibly
well to a little bit of assistance. They didn't see themselves
necessarily as knowing how the dance works, so to speak, in
terms of commercialization and we have found both students and
faculty to be enormously receptive. We have tried to create
what you might call an entrepreneurial ecosystem trying to
provide assistance across all the points in which faculty and
students interface with us, and in terms of entrepreneurs in
residence, it is a process that has worked amazingly smoothly.
We have to find the funding for it, but we have a very good
culture for welcoming some entrepreneurs.
Chairman Wu. Thank you very much, Dr. Kamlet.
I recognize the gentlelady from Maryland.
Ms. Edwards. Thank you, Mr. Chairman.
I want to go back to Dr. Atkinson. In your testimony you
talked particularly about tax policy, and this isn't the
committee to do tax policy but it is actually important to our
consideration about how we structure investments in innovation,
and you talked about other countries and their tax policies
that have elevated them to spur investment, and one of our
recommendations goes to a 30 percent credit around the idea of
collaboration, which you have spoken to a great deal. I believe
in investing in collaboration and I don't think you necessarily
get the kind of collaboration you want unless you do invest in
it. But I wonder if there is a point in time or process or
research at which it is important to scale up those investments
and collaboration as opposed to some other times because you
could make those investments really early or allow for a 30
percent credit early but it still doesn't necessarily at the
end product result in the kind of collaboration that you want
to spur something toward one form of innovation into the
commercial sector. So I wonder if you can give us some ideas
about that or what the limitations or hazards might be in
putting in and enabling that kind of credit at the outset at
such a substantial amount.
Dr. Atkinson. Sure. I guess we do see that this notion of
collaborative innovation systems is critical to driving high
rates of innovation that are commercialized within the United
States, and we need a multitude of different policies, and we
have heard a lot of them today, different policies around how
intellectual property is licensed and different incentive
policies and all. I do think the tax policy is one component of
that. I don't think in and of itself a collaborative R&D tax
credit is going to solve all the problems but I think it will
help. Right now if a company wants to invest at Carnegie
Mellon, and you have many, and there are at Georgia Tech as
well, a lot of that research is going to be a benefit to
everybody. So even though Google has a lablet there and Intel
has a lablet there, the faculty aren't prohibited from
publishing articles. In fact, they do publish articles. So
economists would call that knowledge has spilled over and other
sort of free riders, if you will, can just take it and
innovate. And so there is an underinvestment of industries in
university collaborative research, and to Mr. Lujan's point, in
Federal labs as well. So that is why we think that a tax credit
could play an important role there.
One of the nice things about that too, by the way, this
wouldn't involve the government picking a winner or a loser. If
an industry and a university or a lab come together and they
think there is something valuable in that partnership, they
would be able to do that under the system. So I don't really
see a lot of risks with that other than the risk of if we only
did that, I think we wouldn't do enough because you have to
have a whole ecosystem.
Ms. Edwards. And are there standards--and maybe, Mr.
Chopra, you can answer this. Are there standards or principles
that could be set so that when government makes grant-type
investments that you don't just encourage collaboration but you
actually buy it?
Hon. Chopra. Well, in fact, we make those judgments within
the program areas, so let me answer your question in two parts.
One example is health IT as a new research and development
endeavor that was called for because of the Recovery Act, and
because for health IT there is a closer gap between what is
done in the research environment there and what could actually
be seen in the hands of the software companies who produce the
goods for doctors and hospitals. Collaboration was a
requirement as part of the grant request and so there was an
explicit notion there that you had to collaborate not only
across research institutions but also with the private sector.
So that is one. And two, and this is an important point and I
think the term ``innovation cluster'' can be described in lots
of ways. From a policy standpoint, there are program mission
restrictions about what they should or shouldn't fund, but what
we tried to do to promote collaboration was to say if we could
bring multiple agencies that have mission alignment around a
particular policy objective--but come to it with their own
perspectives--that we could actually achieve the kind of
collaboration we are looking for without bearing all that
burden on a single funded program area.
So the reference we made earlier, maybe a month ago in
February, the Department of Energy initiated an energy
innovation hub on building efficiency, and we are scoped to
make an investment that looked like as defined in the program,
but we wrapped around it the engineering research centers in
the National Science Foundation. We wrapped around it Small
Business Administration grant opportunities. We wrapped around
it NIST opportunities to the Manufacturing Extension Program.
So we stitched together seven Federal agencies who offered if
an applicant could describe their approach to the innovation
cluster, the collaboration that would help bring about the
economic growth we would like to see out of the investment,
they could apply for multiple buckets, in a sense, in a
coordinated fashion. This is our first pilot of this regard.
It seems that the demand out in the field is pretty high.
We had a couple of public hearings about people's interest in
this. Normally you get 100 people to show up at these things.
Four hundred-plus people showed up at the first of these to
talk about how they could take advantage of this new
initiative. As we see the results of this program, we might
factor that into future activities. So some programs will have
more specific language about collaboration and the
solicitations themselves. Others will take this collaborative
approach where they bring multiple agencies to the table to
achieve the same goal. I am sure there is a better and cleaner
and more efficient way of doing this but we are doing it within
the constraints of the current environment, and you all will, I
am sure, engage on these issues during the course of your
deliberations.
Ms. Edwards. Thank you, Mr. Chairman.
Chairman Wu. Thank you, and thank you very much, Mr.
Chopra. I saw that group of 400 individuals and it was an
interesting gathering, and I just want to let you know that the
folks that we brought together for our little regional
application for that project, the red-team analysts commented
that this is the most complex offering, shall we say, that they
had ever seen, and I am not sure which way to take that, but--
--
Hon. Chopra. We are learning as we go, Mr. Chairman.
Chairman Wu. Mr. Lujan for five minutes.
Mr. Lujan. Mr. Chairman, thank you very much, and I just
want to say, what a useful and very valuable discussion that
this has been today to get some insight and especially the
level of detail that you went to in the testimony that you
submitted to us as well prior to this hearing. Very insightful.
A very simple question directed to Mr. Chopra. It seems
that a lot of the R&D directorates that we see with the
Department of Defense and DOE are top down that we push what we
want to see but there are a lot of ideas that are percolating
from the bottom up. What can we do or how can we work to create
an environment that can support a lot of that as well to have
some flexibility with those programs as well, which is those
centers were originally created for but other programs that do
exist for some of these collaborations to allow for that to
happen?
Hon. Chopra. Well, thank you very much. That happens to be
an area that I have a great deal of passion for, which is
balancing the top down from the bottom up, and here I would
like to invoke the President's open government initiative where
we are trying to change the way Washington works by being much
more transparent and collaborative and participatory so we can
find great ideas from the bottom up and see that they have a
chance to take hold, and this applies beyond R&D. This is a
philosophy we are taking to every Federal agency. I will mark
the date April 7th when each of the Federal agencies, the
Cabinet agencies in particular, will be publishing open
government plans as directed by the directive that had been
issued back in December. You will see a great deal of strategy
in each of those plans outlining how agencies will service
bottom up new ideas that can be implemented. Specifically, I
will point to a line in that directive referencing prizes,
competitions and challenges.
When the President issued the open government directive,
one of the key deliverables coming out of it was produced on
March 8th, guidance from OMB [Office of Management and Budget]
to all Federal agencies on how we can thoughtfully utilize
prizes, competitions and challenges to do the kind of thing you
are describing, bring ideas up that hadn't been conceived and
detailed requirements that go over 500 pages of material where
you know exactly what you are looking for. That is a culture
change in Washington. I am not going to suggest it is going to
happen immediately but we are starting to see the fruits of
that activity. More and more of our agencies are thinking about
ways that they can capture both frontline worker innovations,
perhaps the Federal labs might be another example, as well as
innovations out in the private sector.
I will give you just one agency in particular, the Veterans
Administration. They have been trying to get the claims backlog
down forever, and as many of us know, it is a top priority for
nearly every presidency is to serve our veterans at the highest
standards yet the claims backlog continues. President Obama in
August said ``I want the 19,000 frontline workers to give us
your best ideas.'' We ran a business plan competition, picked
the 10 best. Those are being implemented as we speak, but a
gentleman from Togus, Maine had a simple idea that didn't cost
us a nickel to restructure our performance measures so that we
could create a culture of accountability for results. He
wouldn't know that his idea would go anywhere. Togus, Maine put
it in their business plan, came down to Washington, made the
pitch. Secretary Shinseki said yes, this is it. They are now
executing, and by July that will be implemented at zero
additional cost. So we are going to do this, I hope, in every
one of our agencies.
Mr. Lujan. I appreciate that.
And Mr. Holland, and this goes for the entire panel, I am
very interested in getting whatever analysis was conducted with
that pilot project that you engaged with, with working with the
national laboratories to see what failed, and for that matter,
hearing from any companies that you have worked with or that
are out there that have positive stories and negative stories
so that we can see what we can do to learn from that and see
how we can integrate that to make a much more friendly
environment to allow for this to move forward.
Mr. Holland. Given the nature of the time constraints, we
have other more positive stories to share and I am happy to
take those offline with you. One is around some of the work at
Oak Ridge around their energy efficiency smart homes, and our
clean tech practice at the foundation happens to specialize in
energy efficiency, smart grids, smart materials. So one of our
companies has their windows installed in this smart home. The
windows are actually manufactured in Pittsburgh, just outside
of Pittsburgh. But we have got great stories around that type
of thing. But the bottoms-up nature of what you are talking
about is a huge issue for us. It is what we call deal flow, and
it is actually probably the most important thing in our
industry.
One of the things that we are working on now, and you all,
thank you for so many things about this meeting but one is, you
saved me a couple plane flights because we are going to be
hitting up our friends at Carnegie Mellon and Georgia Tech to
participate in a program that we are going to start, having us
basically hire students to be campus reps, and we want those
campus reps to be the equivalent of kind of little miniature
AWACS [Airborne Warning and Control System] planes. We want
them sort of buzzing around the area and notifying us when they
see something that looks interesting, looks like it could be a
good project. A project can come from anywhere. It could come
from the university, come from the local area. We are looking
very closely at a company in Pittsburgh called Mod Cloth right
now that was funded out of two students that happened to be
married who were undergraduates at Carnegie Mellon. That is the
kind of stuff that we live and breathe for, so we are very
interested in this whole notion of bottom up and we are
spending a lot of time on it.
Mr. Lujan. Thank you.
Thank you, Mr. Chairman.
Chairman Wu. Thank you very much.
Mr. Holland, we read your materials about facilitating
collaboration and we acted on it promptly.
Three very, very quick questions. I hope to get this in in
my last five minutes. Dr. Kamlet, you suggest, and I think a
couple other people also suggested, that there are some funding
issues. The Technology Innovation Program and SBIR don't cover
the spectrum of taking a product from the lab to
commercialization and that we need to address earlier as well
as later funding, if we could quickly tap on that and then move
on.
Dr. Kamlet. Yes. The government's main role of course is in
the domain of basic research but it is also the case that
before Mr. Holland and his organizations can take a product, it
has to reach a certain potential in terms of commercial
capability and have progressed to the point in which there is a
clear functionality and intellectual property and so forth, and
it is really before something is ready for an SBIR or for
venture funding because that requires a company to already have
been formed. That chasm exists, and in order to get the most
mileage from the basic research to translate into
commercialization, spending some attention on trying to find
funding mechanisms to take not large amounts, $50,000,
$100,000. There should be a lot of accountability attached to
it but that is a current gap in which unless we find funding
from foundations or conceivably do it ourselves, there is no
basis in the ecosystem and the American structure and the
universities to fund those kinds of things.
Chairman Wu. Well, shoot, you know, maybe the feds can just
match what Carnegie Mellon is willing to put on the table in
terms of indirect cost recovery funds.
Dr. Kamlet. Well, we can talk.
Chairman Wu. If no one else wants to comment on that, Dr.
Atkinson, you and Dr. Breznitz mentioned that some of our
innovation is perhaps better done at the state level or that
coordination is better done at the state level, and I wanted
you to address that a little bit further because quite frankly,
that is something that I have not focused on despite all the
activity that has been going on in my neck of the woods with
Onami and others.
Dr. Atkinson. Sure. Within the last perhaps 15 years, I
think one of the biggest changes in the U.S. innovation system
is that virtually every state has developed some programs and
policies to spur technology-based economic development, and it
is completely divorced from party lines so Republican governors
do this just as actively as Democratic governors. The big
problem with that, though, is that the incentive for them is
limited because sometimes it takes innovation policies five to
ten years to pay off. I don't think a lot of governors are
thinking five to ten years down the line. Oftentimes they have
to worry about their reelection. And secondly, a lot of these
policies sometimes will spill over into other states. So our
view is that the United States is so big--Dr. Breznitz
mentioned Finland, great, interesting programs there. They are
sort of like a state. The United States is so big that we can't
really have a national innovation system that is completely run
from Washington. The people who are running the technology
group in Pittsburgh that the state helps fund, they know about
these projects in Pittsburgh pretty well but I don't think
Washington knows about them. Same thing in Portland. That is
why Oregon has a program like that. So the problem though, is
that these programs are underfunded, and if the Federal
Government could support them in a more systemic way and tie
them also to the development of long-term strategies around
innovation, as you, Dr. Breznitz, have alluded to in your
testimony, I think that would really go a long way. I think we
have an undervalued resource here as partners with the states
and it is, I think, time for a Federal-state innovation
partnership.
Dr. Breznitz. Thank you for this question since, as you
know, I am very much interested in this. I can give an example
from Georgia, so for example, we conducted a study at Georgia
Tech about what happens to a cluster of high-tech industries in
Atlanta and we found out it is stagnant, so it grew and then it
is stagnant for about ten years, and we tried to figure out
what it is. Money? No. Good people? No. We found out it is
basically a secret sauce of Silicon Valley, collaboration.
Companies do not collaborate. And in order to make the Atlanta
cluster better, therefore you had to have a program that
understands how to connect the actors within the Atlanta
region. This is something that the Federal Government can't
even know and therefore we need to go to the state levels if we
talked about bottom-up ideas and understand what some of the
limits, constraints, ideas that they have and we can probably
do that as the Honorable Chopra said by giving competitions. If
you want to have a really innovative idea to look for your
region and your city, you have to submit a proposal for a
competition and the Federal Government can give you a certain
amount of money or tax credits and make it happen. An
experiment that works can be replicated and the Federal
Government can make sure that if you want to do semiconductors,
which is all around the Nation, and have three or four of those
competitions, you can coordinate with them and that way we can
bring the forces and the knowledge from the bottom up and from
the Federal Government and have a national strategy at the same
time.
Chairman Wu. Terrific. Thank you. My understanding is that
there are no more questions form the panel except for this last
one from me. Lessons from DARPA, ARPA-E and NASA. Many people
have talked about the good model that DARPA has provided. DARPA
and NASA were started at about the same time, and we might have
some lessons about how each has or has not spurred private
sector innovation, and finally, our experience to date with
ARPA-E. I don't know if we have had enough run time to draw any
conclusions but if the panel would like to comment on at least
these three organizations and their effect on innovation in
America.
Hon. Chopra. You know, I would not want to speak for the
directors of the programs that you have referenced to describe
their success, but I will tell you from my vantage point, a key
to their success is understanding a problem that they wanted to
solve. When you have a problem, an itch you are trying to
scratch, a problem you are trying to solve, you can be much
more effective in bringing together an ecosystem to help you
address the particular problem that you are looking to solve.
That is, in a sense, that equation of ideas and relevance
equals innovation. So I think a key in DARPA in particular and
NASA as well, it is really early in ARPA-E but it is part of
the DNA there, is a really thoughtful understanding of the
problem. That allows there to be a creative approach to
tackling that problem and that I think has been much more
effective to produce relevant ideas that hopefully have the
ability to translate in the commercial sector.
Dr. Atkinson. I will just make one comment, there was a
report that we had an event on with a Carnegie Mellon
professor, Erica Fuchs, who is an engineering and also public
policy professor, and she has done a very in-depth study of
DARPA over the long history of DARPA and when it was more
successful and less successful at spurring innovation sort of
beyond just the Defense Department. And what she found was that
DARPA was most successful when it didn't just focus on their
narrow mission and it had a more broader and expansive role,
also going to Mr. Chopra's point about still had focus but it
wasn't just we are trying to do this very narrow thing. So I
think that is important for an agency like DARPA or ARPA-E to
maintain that somewhat broader focus on spurring innovation,
and DARPA has been able to do that sometimes quite successfully
and other times less successfully.
The last point I will make is, one of the things that I do
think, though, it is important to recognize that there are
innovation challenges in the United States that aren't related
only to mission needs, and I think that is a big gap that we
have and other countries--talk about a leader is Taiwan. I
mean, they really are focused on some technologies that are
driving their economy and have been quite successful but aren't
really related to national government mission needs.
Dr. Breznitz. On that point, two remarks. I think DARPA--
and I know Erica very well. We have been officemates at MIT
when we were both slightly less young. DARPA was very, very
successful when it managed to become a facilitator for private
actors and universities to work together and come up with great
ideas and fund them to do research that otherwise would not
have been funded. When it saw its main role in creating those
networks, making them happen and letting them run, it was
amazingly successful. And the same goes for Taiwan. When Taiwan
was amazingly successful as a research foundation, very similar
to a national lab, in creating the private industry--the most
famous one is semiconductors--is when it understood what its
main role and its main metrics and benchmarks would be the
creation of new companies that brings on billions and come up
from new ideas and new collaboration with itself, universities
and private entrepreneurs, and I think that is part of a
facilitating role of the Federal Government that I would like
to see more of.
Chairman Wu. Terrific. Thank you all very much. This has
been such an important discussion. I just wish that it had the
draw of, say, doing a hearing on steroids in baseball. But
putting the economy on steroids just doesn't have the same
draw.
I very much share with you all the view that America's best
days are ahead. The balance with that sort of quintessentially
American optimism about the future, I think it also behooves us
to look over our shoulder. A few years ago when I was visiting
China, and I visited a number of research institution and
universities, but I also took the time to visit a high school,
and we had a vigorous discussion there. It was absolutely
terrific. It was very similar to the discussions that I have
with high school students at home in Oregon. But the question
that came up that I want to recall now is this Chinese high
school student asked me what do you think is America's greatest
strength, and I thought about it for a second and I said well,
actually paranoia, paranoia about whether we are staying ahead,
whether someone is catching up, and I think that sometimes we
can overplay that concern and that can infect our optimism in
negative ways and we should not have either a blind optimism or
blind paranoia, and striking that balance is a very important
role for anyone who leads the public, and I think that we all
have an important role to play in that.
Again, I want to thank you all for appearing before this
Subcommittee. I view this as part of a continuing dialog and
look forward to looking for both legislative opportunities and
convening opportunities and other opportunities to push our
agenda forward in stimulating innovation in America.
The record will remain open for two weeks for additional
statements from the Members and for questions to the witnesses.
The witnesses are excused. Thank you very much. The hearing
is now adjourned.
[Whereupon, at 12:24 p.m., the Subcommittee was adjourned.]