[Senate Hearing 111-1018]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1018
INNOVATION IN AMERICA:
OPPORTUNITIES AND OBSTACLES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON COMPETITIVENESS, INNOVATION, AND EXPORT PROMOTION
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JUNE 22, 2010
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
------
SUBCOMMITTEE ON COMPETITIVENESS, INNOVATION, AND EXPORT PROMOTION
AMY KLOBUCHAR, Minnesota, Chairman GEORGE S. LeMIEUX, Florida,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri JIM DeMINT, South Carolina
TOM UDALL, New Mexico JOHN THUNE, South Dakota
MARK WARNER, Virginia SAM BROWNBACK, Kansas
MARK BEGICH, Alaska MIKE JOHANNS, Nebraska
C O N T E N T S
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Page
Hearing held on June 22, 2010.................................... 1
Statement of Senator Klobuchar................................... 1
Statement of Senator LeMieux..................................... 4
Statement of Senator Warner...................................... 5
Statement of Senator Udall....................................... 21
Statement of Senator Begich...................................... 30
Witnesses
Hon. Aneesh Chopra, Chief Technology Officer and Associate
Director, Office of Science and Technology Policy, Executive
Office of the President of the United States................... 7
Prepared statement........................................... 9
Remarks, dated June 8, 2010, by Peter R. Orszag--Center for
American Progress.......................................... 26
Dr. Robert D. Atkinson, President, Information Technology and
Innovation Foundation.......................................... 33
Prepared statement........................................... 36
Steven J. Ubl, President and CEO, Advanced Medical Technology
Association.................................................... 50
Prepared statement........................................... 52
Andrew M. Weiss, President and CEO, CoAxia, Inc.................. 61
Prepared statement........................................... 63
Rhys L. Williams, President, New World Angels, Inc............... 68
Prepared statement........................................... 70
INNOVATION IN AMERICA:
OPPORTUNITIES AND OBSTACLES
----------
TUESDAY, JUNE 22, 2010
U.S. Senate,
Subcommittee on Competitiveness, Innovation, and
Export Promotion,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:34 p.m. in
room SR-253, Russell Senate Office Building, Hon. Amy
Klobuchar, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Good afternoon, everyone. Thank you so
much for coming today. We're going to be talking today about a
very key subject to our economy, to our economic recovery, and
really to America's standing in the world, and that is
innovation.
I'd like to thank everyone that's here, especially The
Honorable Aneesh Chopra, who is the Chief Technology Officer
and Associate Director for Technology, Office in Science,
Technology Policy. The President has named as his point person
on these technology innovation issues. He is on our first
panel.
And then, after that, we have a second panel, and I will
introduce the witnesses when they come up.
But, I'd first like to thank Andy Weiss, who is the CEO of
CoAxia. CoAxia is a small medical device company based in Maple
Grove, Minnesota. And I think it's very important here that we
could have had CEOs from big companies, but a lot of our
entrepreneurship and innovation starts in America with our
smaller companies. I know, personally, Medtronic started in a
garage; 3M, in Minnesota, started as a sandpaper company in Two
Harbors, Minnesota; and Target started in a dry goods store.
That has been the story of America. It's a story of innovation.
The world has always looked to our country as a center of
innovation and entrepreneurship, a place where even the
smallest startup from the humblest beginnings can grow into a
household name.
My state, the State of Minnesota, is a state that brought
the world everything from the pacemaker to the Post-it Note;
and despite being 21st in the country for population, we are
now 7th for Fortune 500 companies. And, as I said, these all
started as small businesses.
I'm certain that the next Medtronic, 3M, or Mayo Clinic is
being created right now in a lab or in a garage or in a
manufacturing plant, and it is our job to support these
innovators and entrepreneurs, and to allow them to bring these
products to the market. The road from concept to
commercialization is full of hurdles to jump and barriers to
overcome, and we should focus our efforts to smoothing this
road.
I'm pleased to be here with my colleague, Senator LeMieux,
the Ranking Member on this committee, from the State of
Florida. And we have worked together on an export promotion
bill to help small and medium-sized businesses. It actually got
marked up through this committee 2 weeks ago.
We know that, every day in every State, small companies are
dreaming, doing, and driving the innovation agenda that we need
to compete in this world economy. Whenever I think about this
issue, I think about the beginning opening ceremony in the
Beijing Summer Olympics, with the 2,000 perfectly synchronized
drummers. Well, those drumbeats are only getting louder and
louder. And while China is investing billions in its technology
sector, we're still trying to get figure out some regulations.
And while India encourages invention and entrepreneurship, we
are still, sadly, playing ``Red Light, Green Light'' with stop-
and-go tax incentives. And while Brazil is training more
engineers every day, we are doing our best, but we simply still
haven't reached that point of graduating engineers and
scientists to the degree to compete in this world economy.
The world is moving ahead fast, and we can't let it pass us
by. We need to be a country that exports, that thinks, and that
invents, and that makes stuff again. In the words of Minnesota
native and New York Times columnist Tom Friedman, ``We need to
do some nation-building in our own Nation.''
So, how do we do this? How do we encourage innovation?
Well, first and foremost, we need policies that galvanize
investors and encourage companies to grow. And that includes a
strong and consistent R&D tax credit. We need greater
investment in small business innovators through programs like
the Small Business Innovation Research Program and the Small
Business Technology Transfer Program. I saw Senator Warner just
walked in; I know he has been working very hard--a group of us
have been working hard on making sure that credit is getting
out there to small businesses, as well.
We need an education system that emphasizes STEM courses,
like math and science and engineering, a system that trains our
children for jobs in a 21st-century economy, to do the kind of
innovative work that needs to be done.
We need to allow people that study in this country from
other countries, that come and work in our universities, that
have graduate degrees, to stay in this country and start the
next Google.
America has many innovative industries and companies, high-
tech companies--IBM, Symantec--we've mentioned a number of them
today--and we're going to hear from the biotech/high-tech
industries today.
But, I did want to focus on one issue which is very
important in my State. And I know we're going to hear from some
of the medical device industry people. I want you think about
medical device in another way, besides saving my hip, and that
is that the medical device industry is a poster child for
American innovation. The U.S. is the world's number-one
exporter of medical devices, and the medical device industry is
one of the few industries that, even today, is adding jobs.
From 2000 to 2007, from 2007 to 2008, employment in the overall
economy went down by 0.7 percent, but jobs in the medical
device industry increased by 1.5 percent. The industry is
expanding for a number of reasons. One reason is that the
science behind these devices is improving, and every day
doctors and scientists come up with new materials, new ways of
diagnosing diseases, and new ways of treating medical
conditions.
The industry is also expanding because advanced medical
care is expanding throughout the world. Just think about the
growing customer base in China and India. The middle class in
these countries is increasing at an amazing rate. And with this
expansion, the industry should also continue to grow.
Not only is the medical device industry creating jobs in
America, it is creating good high-paying jobs. Medical device
jobs pay around 30 percent more than the average American job.
Minnesota, in my State, has led medical innovation for more
than 60 years and boasts more than 400 medical device companies
that, together, employ more than 50,000 people. Plus, for each
job created by the medical device industry, 4.5 additional jobs
are created in the overall economy.
So, this is truly an industry that we can look to as we
look to how we expand this economy. When 95 percent of our
potential customers, for any American business, are outside of
the borders of the country, you should look to medical device.
I did want to mention one roadblock that we're going to be
discussing, and that is what's happening right now with changes
to the FDA's 510(k) approval process. This is an expedited
process by which the FDA approves medical devices when a
substantial equivalent of that device is already on the market.
Currently, 90 percent of devices on the market were approved
using the 510(k) process.
Changes to this process are always welcome. Safety should
be the number-one focus. But, what's happening right now is
that these changes are happening in the middle of individual
companies' approval processes. For example, the FDA is asking
for clinical data for devices that never before required
clinical data, with no warning to device companies that such
data would be needed. The device companies could not have
predicted that the FDA was going to need this data, because
these types of devices have not had any problems in the past.
These requests obviously delay the approval process. And the
longer the approval process, the longer it takes to get a
lifesaving technology to market. The longer it takes to get a
new device to market, the less certainty investors have and the
more capital businesses need.
Already, FDA's inconsistent approval process has dampened
investment. In the last 2 years, venture capital funding alone
has dropped by one-third. These declines have forced many small
manufacturers to close their doors. Still others have picked up
and relocated to Europe, taking jobs and revenue along with
them.
I'm aware of one American company that has had tremendous
trouble with this process. The company and the FDA reached
formal agreements regarding what kind of studies the company
needed. The company completed those studies, with great
results. However, the FDA, on multiple occasions, still goes
back and asks for additional studies. The FDA kept changing the
rules, even though the product had been approved in the market
in Europe for 10 years. That's 10 years. The company is now
going out of business. At its height, it had around 50
employees.
So, that's why I think it is very important, even for the
best intentions, that we make sure that we mesh what's going on
at our regulatory agencies with what we're doing to encourage
innovation.
I still believe that the industries we're going to hear
from today--high tech and biotech, as well as medical device--
are really key to our economic fortunes in the country, and
others should be brought along, as well, that can really create
these jobs, can export to the world, create a world of
opportunity, and bring our economy back to where it once was.
So, I'm excited to hear from our witnesses today--and I
want to thank you for coming.
And I'll turn it over to my colleague Senator LeMieux.
STATEMENT OF HON. GEORGE LeMIEUX,
U.S. SENATOR FROM FLORIDA
Senator LeMieux. Thank you, Madam Chair. I want to thank
you, Senator Klobuchar, for calling this hearing, and
continuing this discussion on the need to improve innovation
and competitiveness. It follows, as you mentioned, on the
hearings that we had on exports, specifically focusing on how
we can help spur development and improvement in small and mid-
sized businesses.
Advancements in science and technology and methods of
providing products and services are the foundation of economic
prosperity, and advance our security interests, as well. But,
as the Information Technology and Innovation Foundation
documented in a recent report, the Atlantic Century, the United
States has slipped from number one in global innovation-based
competitiveness to number six. The report identifies several
reasons for this, including declines in domestic research and
development delays for new U.S. patents, and a downturn in the
number of candidates seeking science and engineering degrees.
We have a responsibility in the Congress to work toward
ensuring Americans have every opportunity to compete in the
world marketplace. Congress has been focused, but a more laser-
like focus is required for the encouragement of candidates
seeking math, science, and engineering degrees.
We need modern and enforceable immigration policies that
afford an opportunity for us to retain the best and brightest
minds who come here seeking higher learning. We also need the
kind of flexibility in our regulatory framework that recognizes
that government should foster, rather than stifle, the
entrepreneurial spirit.
The recession has put enormous pressure on small and mid-
sized businesses, as well as investors, to find new and more
economic ways to remain competitive.
I look forward to our hearing today, and hearing from our
witnesses about measures that would help advance our innovation
and competitiveness in the world.
I would like to specially recognize my friend, Mr. Rhys
Williams, who is the President of New World Angels. He is a
successful entrepreneur, and New World Angels is the largest
angel investor group in Florida. He brings a unique perspective
on the need of small firms and the bridging of what we call the
Valley of Death, the--between innovation and the marketplace--I
know Senator Warner and I have talked about that before--which
is really a focus. You have this great support in our
universities, especially for scientists and entrepreneurs and
innovators who can develop things there in the lab. But,
getting that funding in that middle area before it's marketable
is very challenging, and it causes a lot of stifling of
innovation.
Madam Chair, this is a hearing that is very important to
Florida. Florida is trying to diversify its economy. We are now
under tremendous pressure, in this recession, with nearly 12
percent unemployment, one of the Nation's worst foreclosure
rates, one of the worst rates in folks being behind on their
mortgages. And that is because we've been too reliant upon real
estate and construction, and a couple of other industries, to
make our economic engine run.
Recently, in past years, we have attracted the life
sciences business and other high-tech businesses to Florida,
whether it's Scripps, whether it's Max Planck, whether it's the
Medical Village in Orlando, or the great work that our
universities are doing. This is a key focus for Florida, to
help us diversify and advance our economy.
So, I thank you very much and congratulate you on calling
this hearing today.
Senator Klobuchar. I'll now hand it over to Senator Warner,
who knows a little bit about this, as he started his own
business. I'm remembering, I know you two know each other well,
when we had a hearing on cell phones, and there were three
Senators up here chairing it. Senator Warner was brand new, had
to go down to his seat down there, and I actually sent a note
to him, as everyone was droning on, that said, ``What the hell
do you think you know about this?''
[Laughter.]
Senator Klobuchar. So, I'm glad he has taken his rightful
place, as he should, as a leader on these issues.
Senator Warner.
STATEMENT OF HON. MARK WARNER,
U.S. SENATOR FROM VIRGINIA
Senator Warner. Thank you, Madam Chair. Thank you, Senator
Klobuchar. And I guess I'm moving up the dais a little bit.
Let me echo Senator LeMieux's comments and thank you for
holding this hearing. It is long overdue. And I appreciate your
interest in both competitiveness and innovation. I also
particularly appreciate your focus on exports.
As Senator Klobuchar has said, the markets of tomorrow are
not just going to be domestic, they're going to be all over the
world. And I really appreciate you bringing this hearing, and
particularly having our chief technology officer for the
country, a great Virginian, Aneesh Chopra, who I've had the
pleasure of knowing for more than a decade. And I don't want to
steal his thunder. Aneesh will give us a good presentation on
what the administration is doing, and I look forward to asking
him a couple of questions.
I do want to make a couple of opening comments. I mean, and
this is not very PC, but I don't think our country's had much
of an innovation or growth strategy for the last decade-plus.
And I think, if you look at most metrics, compared to late
1980s and through most of the 1990s, innovation in America has
been, at best, lackluster. I'm not trying to point political
blame. I think there was a little bit of resting on our laurels
as the rest of the world leaped ahead. And there are clear
exceptions, companies in the last decade that have been
extraordinary successes, but they pale in comparison to the
numbers that took place during the 1990s.
And I think there are three or four areas that, beyond this
hearing, I'd love to work with my colleagues and others on. One
is--and I think we'll get to this in a second panel--this is
something I've been working with Dr. Atkinson on--America is
one of the few major industrial countries in the world that
doesn't even have a competitiveness strategy that's clearly
outlined, that we can at least peg with metrics against how
we're doing. If you look at some of the countries around the
world--the Koreas of the world, who have grown enormously in
innovation in the last decades-plus--they've got a strategy and
a plan.
Second, I do think there needs to be--and both Senator
LeMieux and Senator Klobuchar have mentioned this--we're going
to need a system that looks a little better at the regulatory
system. Too often, our regulatory system has become an
impediment to innovation. Senator Klobuchar mentioned the FDA.
I think we've seen challenges around the energy sector, well-
intentioned environmental regulations sometimes precluding
energy innovation. And this is tough, as a former telecom and
IT guy, to say, but I think the greatest job and wealth creator
in the next 25 years, worldwide, will be the energy sector,
and, in many areas, we're not in the game. And while there are
enormous challenges we've got to wrestle with, on IP protection
that this committee's jurisdiction has got to take on the one
area, regardless of where we fall on that issue is upgrading
the caliber and length of stay of folks at the Patent and Trade
Office, to make sure that those innovations can at least be
reviewed in a timely manner. That is very important.
Exports has been mentioned as an area that needs more
attention.
And then, my final comment--I know my time has run over--
and I'm very happy that Senator LeMieux has got--one of the
second panel--a guy who was an angel investor coming up--but,
one of the areas that we've had the most precipitous decline in
the last decade is the slowing of early-stage capital formation
in this country. Let's face it, over the last decade, why would
anybody--I'm biased; I used to be a venture capitalist, I used
to be somebody who started these companies--but, why would
anybody go out and do the very hard work of investing with an
entrepreneur, growing that company through that Valley of
Death, when, over the last decade, a much surer bet was to go
be a financial engineer on Wall Street and create a financial
product that was supposed to be about lowering the price of
risk, when, in reality, all we did was create an interconnected
network of financial obligations that almost brought the
country, and the world, to the brink of financial ruin?
Now, some of those instruments are useful. Many of them are
more about fee generation, I think, than lowering the price of
risk. And it would be great to have a few less financial
engineers and a few more real engineers that actually build
something. And one of the challenges is that we've got--and I
say this as we look at the migration toward hedge funds,
private equity--and, candidly, even in the venture capital
community--everybody's moved up the food chain to do larger and
larger deals, so the absence of angel funding, the absence of
early-stage venture funding, has made it extraordinarily
difficult for those startup companies, whether they come out of
the university lab or whether they come out of the garage, to
get past that angel round, and friends-and-family round, to get
that funding, to where the venture community now looks at deal
size. Oftentimes, you know, many of the venture community looks
at a minimum $10-million investment. You're going to be through
the Valley of Death if you can rate a $10-million investment,
with very few exceptions.
So, I appreciate, again, the Chair bringing this hearing. I
look forward to Aneesh's comments, and look forward to the
questions.
Thank you.
Senator Klobuchar. Well, very, very good. Thank you,
Senator Warner.
Our first panelist, as I said, is Mr. Aneesh Chopra, who is
the Chief Technology Officer and Associate Director for
technology within the White House Office of Science and
Technology Policy. He is our country's first-ever national
Chief Technology Officer, a job he entered after serving as the
Secretary of Technology for the Commonwealth of Virginia.
A entrepreneur himself, he is a Co-Founder of Avatar
Capital, a venture capital network that invested in 18 startups
during the dot-com boom. Mr. Chopra is a strong advocate for
the medical device industry, and is also a self-proclaimed
``tech geek'' who likes technological devices. We like that, on
this subcommittee. This is a welcome place for you.
Mr. Chopra, thank you for being here.
STATEMENT OF HON. ANEESH CHOPRA, CHIEF TECHNOLOGY OFFICER AND
ASSOCIATE DIRECTOR, OFFICE OF SCIENCE AND TECHNOLOGY POLICY,
EXECUTIVE OFFICE OF THE PRESIDENT OF THE UNITED STATES
Mr. Chopra. Thank you so much.
Chairwoman Klobuchar, Ranking Member LeMieux, and, of
course, my dear friend and Senator, Mark Warner, it's a real
pleasure to be with you today to discuss the President's
strategy for American innovation.
We do have more thoughtful and formal prepared remarks,
which I'll leave for the record and just describe for you some
of the key themes and case studies that I'd like to highlight.
I'd like to begin by referencing the themes that were
raised in your opening remarks, and highlight specifically the
study Senator LeMieux referenced about ranking from first to
sixth. The more telling statement was, for the decade that
Senator Warner had just mentioned, the rate of change that we'd
seen across the 16 metrics that Dr. Atkinson will describe
later. We ranked 40th out of 40 countries in the degree to
which we saw improvement across this index of 16 measures.
So, yes, one to six is an important specific statistic, but
that rate of change is the one that has us a little bit more
concerned.
In my capacity as Chief Technology Officer, it is my
responsibility to execute on the President's strategy for
American innovation, by highlighting the power of data,
technology, and innovation, both to improve the Nation's
economy and to improve the lives of everyday Americans.
And with your permission, what I'd like to do briefly is
summarize the key components of the President's strategy for
our discussion today.
The strategy rests on the notion that our country's at its
best when we invest in the building blocks of innovation. We'll
talk about R&D investments, the human capital aspect, and STEM
education, as well as the information technology infrastructure
necessary, whether it be broadband or other related
capabilities.
The second component of the strategy is that we look at
open and competitive markets, with particular emphasis on
entrepreneurship. I'm going to come back to this second pillar
for my case studies.
And then, last but not least, the President has identified
a few areas that he has called for an ``all-hands-on-deck''
approach to catalyze breakthroughs. We speak directly--and
address, Senator Warner, your comments--about the opportunities
in clean energy and in healthcare information technology, a
conversation that we will have later today.
I'd like to highlight three examples, though, in this
middle category, about focusing on entrepreneurship, and
highlight for you examples on where our strategy is taking hold
and where we're hoping to move forward.
First is on the issue of technology transfer. The
Administration is committed to strengthening the capacity of
economic regions to commercialize research through
entrepreneurship. In May, the Commerce Department released the
I6 Challenge, in collaboration with the National Institutes of
Health and the National Science Foundation, offering up to $12
million in grant funding specifically to reward six teams
around the country who have demonstrated the capacity to move
ideas from the university setting to the marketplace. This
particular program is active right now. Applications are due by
July 15. It will focus on startups like a company called
``iRhythm Technologies,'' which was born out of Stanford
University's Office of Technology Licensing, back in 2006, with
a powerful mission to both improve access to heart rhythm
monitoring services, up to a full 14 days of monitoring,
through a simple patch--and get this--that costs no more than
today's more prevalent monitoring technologies that, frankly,
dangle wires all over your body and often limit the monitoring
time to a day, 2, or 3.
Earlier this month, iRhythm formed a strategic partnership
with St. Jude Medical that included a $10- million early-stage
capital investment to deliver these innovative products to
market, and that now supports, what had been a single-person
faculty member's startup in 2006, a company that has over 80
employees manufacturing domestically here in the United States
and delivering those innovations throughout the country, and,
as you all alluded to, the opportunities for export.
The second component of entrepreneurship I'd like to
highlight is the President's commitment to an open and
transparent government. On the President's first full day in
office, he directed us to instill a new culture of open
government. And as part of that commitment, Secretary Sebelius,
in early June, specifically highlighted the Community Health
Data Initiative specifically to spur entrepreneurial activity
born off of information that we've held within our databases at
the Department of Health and Human Services. We met an
entrepreneur, living in rural Wisconsin, by the name of David
Van Sickle, who hailed from a community that had struggled with
the issue of asthma reporting. He developed a platform that
would help patients and public health professionals track the
geography of asthma attacks by attaching a real-time GPS sensor
to the inhaler so that it would record not only the location,
but the time when it was activated. This has allowed for a much
broader health surveillance system that would allow communities
and individuals to avoid specific environmental conditions and
be more preventive in their orientation with respect to asthma-
related concerns.
I will end my remarks, given the time here, to highlight
the importance of innovation clusters and the work that we're
doing, and I'll end with this simple statement: We do believe
that the United States is still the land of the future. We
retain this honor because of America's scientists and
entrepreneurs, and the public and private sectors, who are all
coordinated and organized to understand the importance of
applying the power of American curiosity and ingenuity to the
biggest economic and social challenges of our time.
With that, I'd look forward to your questions, comments,
and concerns.
[The prepared statement of Mr. Chopra follows:]
Prepared Statement of Hon. Aneesh Chopra, Chief Technology Officer and
Associate Director, Office of Science and Technology Policy, Executive
Office of the President of the United States
Chairman Klobuchar, Ranking Member LeMieux, 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 21, 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. Innovation begins from scientific research that creates new
opportunities for technological change. That basic research lays the
groundwork for the development of new products, services, or processes.
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.
For societies to prosper--both as producers of goods and services
as well as consumers of them--innovations need to 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. For the Obama Administration, the arguments about too
much or too little government involvement in innovation policy often
lead to unproductive debates. The real question is how can government
best create the conditions that will enable private sector
entrepreneurs to innovate. Stated differently, the real issue is how to
enable entrepreneurs to move our economy forward. As explained in the
Innovation Strategy document, the best way forward is for the United
States to invest in the building blocks that only the government can
provide, protecting 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 work force, 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 (DOE) 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 3
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 FY11 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. This past April, 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 job creation, and the Administration is
stepping up its efforts to cultivate regional economic clusters across
the country. For example, the Administration recently announced that
seven Federal agencies would work together on a $130 million
competition for an Energy Regional Innovation Cluster (E-RIC) around
one of DOE's Energy Innovation Hubs. The Department of Commerce's
Economic Development Administration is one of the partners, and will be
contributing funds to link the Hub with local economic development
strategies and to support economic adjustment efforts in the local
community. 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. What we are learning is that
whether the investment comes from the Federal or state government, or
the private sector, or ideally, all of the above, those dollars will do
a lot more good if they serve a well-developed regional strategy that
leverages core regional strengths.
The i6 Challenge launched by the Commerce Department's Economic
Development Administration, the National Institutes of Health, and the
National Science Foundation, is another example of these efforts. A
total of $12 million is available to six teams around the country with
the most innovative ideas to drive technology commercialization and
entrepreneurship in their regions. The i6 Challenge is aimed at
bringing together entrepreneurs, investors, universities, foundations
and non-profits in communities throughout the United States, with
applications due by July 15, 2010.
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.
An example of how prizes are being used to spur national priorities
is USDA's Apps for Healthy Kids challenge that was launched by First
Lady Michelle Obama in March as part of her Let's Move initiative. The
competition is based upon a recently released set of data on nutrition
by USDA and is aimed at encouraging entrepreneurs, software developers
and students to create applications and games that encourage children
and parents to make more nutritious food choices and to be more
physically active. Eight game jams, bringing together developers to
share tips and ideas, have been held across the country, and over
twenty applications have been submitted so far in advance of the
contest deadline on June 30.
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 promise improve the reliability, security, and
efficiency of the electric grid. Smart grid technologies can also
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.
Last March, 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.
Following the input received in that forum, I established another
Subcommittee of the National Science and Technology Council's Committee
on Technology to enable the Administration to develop a comprehensive
policy framework for Smart Grid policy.
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.
Last February, 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.
The recently launched Community Health Data Initiative (CHDI) is
another effort demonstrating how data and the innovative uses of
technology are resulting in immediate improvements to health care. A
public-private collaboration spearheaded by the Department of Health
and Human Services, CHDI is aimed at using health care data to raise
awareness and improve community health performance. Innovators from the
worlds of business, technology, academia, and community organizations
identified areas where exciting new applications to improve health
could be developed. In less than 12 weeks these partners put together
an amazing array of new or improved applications that utilize our data
in creative and powerful ways to help advance health care. The results
of these efforts, unveiled in early June, included the integration of
patient satisfaction ratings from Medicare's Hospital Compare database
into the web search results for hospitals, and a brilliant new
combination of GPS device and app that allows asthmatics to have their
inhalers automatically transmit the location and time of each use--
producing an anonymized, real-time map of asthma incidence that can
provide crucial guidance regarding how to target interventions to
reduce the burden of asthma.
Existing technologies are also being used in innovative ways to
improve health education, through the Text4Baby campaign that was
launched in February. Text4Baby is a free mobile health education
service to promote maternal and child health. Expecting mothers can
text baby, or bebe in Spanish, to 511411, and they will receive free
SMS text messages each week, timed to their due date or their baby's
date of birth. Fifteen wireless carrier have agreed to deliver
Text4Baby messages to subscribers at no charge for 2 years, and as a
result, nearly 50,000 individuals have signed up for this services
since February.
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 Obama Administration believes that the America COMPETES Act
should be reauthorized this year so that the Nation can continue to
build on the achievements of the original Act. I share the belief that
the President and the Vice President hold, who supported the original
COMPETES Act when they were Senators, that the COMPETES Act provides a
valuable roadmap to guide Federal policies in innovation,
competitiveness, and STEM education. We are supportive of this
Committee's efforts to reauthorize this landmark act this year, and we
very much look forward to working with the Committee to make the
reauthorization a reality during this session of Congress.
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.
Senator Klobuchar. Thank you very much, Mr. Chopra. I
really appreciate that, and thank you for that end, there. And
I think we all share the same commitment. I just want to figure
out how we're going to implement it, how we're going to get
there, and----
Mr. Chopra. Amen.
Senator Klobuchar.--you ended there, because you had to end
quickly, about the innovation centers and encouraging this on a
governmental level. I know China has instituted what they call
an innovation policy. The Indian government is building
industrial parks to spur innovation. What is our government
doing to ensure that we remain competitive along those lines?
What more can we do? I believe we're still the number-one
innovator, but people are really catching up fast. And what
should we be doing?
Mr. Chopra. Well, thank you very much. I believe the
President's strategy sets the framework, Senator, on how we
would attack this issue. But, if I were to highlight some key
investment decisions that we're making, I would say, first and
foremost, we're doing a significant job--you all, together with
the administration--to make good on the America COMPETES
commitment to double the core funding in our basic science and
research activities: NSF funding, the National Institutes of
Standards and Technology, and the work that's happening within
the Office of Science at the Department of Energy. That
investment decision, despite our tough economic climate, is
going to sow the seeds for the next decade of economic growth.
And I'm thankful that Congress has been supportive of that
particular commitment.
In terms of capacity, I would say the single biggest
opportunity that doesn't necessarily require a tremendous
amount of investment is to strengthen and improve our capacity
to move ideas--what we call ``the lab gap,'' as my colleague
Judy Estrin, one of the entrepreneurs in our society, has
described to move ideas from universities to the private
sector.
In many cases, this is a cultural and institutional
challenge; that is, organizations that do a better job of
identifying the relevance of a given research idea, and then
introducing that idea through some prototype activities that
don't cost a lot of money, to get them ``cooked,'' if you will,
in time for the private sector to pick them up, is actually an
area where, if you get the culture right and you change some of
the processes on technology transfer, you might actually see an
increase in the return on very modest taxpayer investment.
To this end, we have an active request for information
underway from the Administration--we called for this about 2
months ago--for the best ideas on how we can strengthen the
cultural and institutional capacities at our Nation's Federal
labs and universities. Secretary Locke and I are touring the
country. We're holding four regional workshops identifying best
practices, and we're hopeful that, by this fall, we'll put
together a pretty aggressive package that will demonstrate,
again, with limited to modest additional funds, in terms of
university research activities, to actually shift some of these
cultural norms.
There are areas--and we can talk at much greater length
about some of the other activities that we're doing
specifically in clean tech--where you might have more of a
direct relationship to how other nations have taken on a more,
vertical approach in a given area. I'm happy to discuss this if
you'd like to go deeper there.
Senator Klobuchar. What about commonsense innovation
promotion, in terms of our regulatory agencies, the issue I
raised, in specifics, with medical device, but that Senator
Warner raised more broadly, just in general? And how do you
make sure the agencies are doing their jobs, but also have an
understanding of how we must be able to compete internationally
against countries that have more streamlined processes, like in
Europe?
Mr. Chopra. One of the reasons the President created the
Office of the Chief Technology Officer was precisely to
understand how these new capabilities actually influence a
broader range of policy goals. And so, it is in that context,
within a month of my confirmation that I had convened our first
investor summit with the FDA, specifically on the topic, of
biotechnology investments; and strategies that the FDA could
embark upon, through a transparency initiative that is now
seeing its way through on implementation, that would bring more
visibility into the operations of the FDA, and has strengthened
that relationship between the investor community, the
entrepreneurial community, and the agency. I am convinced that
there is more to be done in this area, and we are focused on
continuing these industry collaborations, through both my
office, and through Dr. Hamburg's office.
We are very focused on making sure that we see emerging
capabilities--now, it strikes, in a couple of ways. There are
traditional medical devices that are now taking more advantage
of wireless capability. So, the intersection of information
technology and traditional medical devices opens up new
opportunities, but also creates some challenges in the
marketplace, in terms of, How does one manage this? On July 26
and 27, we're having a public forum bringing the FDA and the
FCC together specifically around this issue, a topic that had
been raised by Chairman Genachowski in the National Broadband
Plan. So, I intend to bring leadership on issues like, How do
you bring regulatory perspectives at the intersection of these
disciplines, in addition to strengthening the transparency and
the collaboration between the public and private sectors, so
that we achieve the President's call--and your comments were
rightly on point--for economic growth through investments in
innovation?
Senator Klobuchar. I appreciate that.
I'm going to turn it over to my colleagues, but I will
emphasize, again, that image of those drummers at those Beijing
Olympics, because it is getting louder and louder and louder.
And I say this not only to you, but also to our own Congress,
that we have got to unify and put some of the partisan politics
aside and move on these innovation issues, to compete as a
country.
And I'll turn it over to Senator LeMieux.
Senator LeMieux. Thank you, Madam Chair.
Mr. Chopra, thank you for being here today.
Mr. Chopra. My pleasure.
Senator LeMieux. I appreciate the work that you're doing on
this very important issue.
I want to ask you a general question and then get in some
specifics. This report, showing that we went from one to six,
and then, you measured, it's really worse than that, because of
the rate-of-change issues.
Mr. Chopra. Yes, sir.
Senator LeMieux. What do you think are the reasons that we
had such a precipitous decline?
Mr. Chopra. I would certainly welcome Dr. Atkinson to
provide his scientific and technological perspective. My humble
opinion is that this has to be a priority of the
administration. And I don't want to render judgments on any
particular priority sets that have been there in the past, but,
structurally, our President--this administration--has made this
a key priority. He has created this team of individuals, and
myself as Chief Technology Officer, where this is my job. My
focus, day and night, is ensuring that we have the right policy
frameworks that will promote the right investment decisions,
where we make them, but, more importantly, that we've got the
right interfaces between the public and the private sector to
spur activity.
So, focus and leadership, I think, are a component of this.
Senator LeMieux. So, were we more----
Mr. Chopra. Dr. Atkinson might be more specific about
investments in particular areas in education and----
Senator LeMieux. Were we more focused on this in the 1990s,
in your opinion?
Mr. Chopra. I don't----
Senator LeMieux. Or was it the private sector that came
forward and did this?
Mr. Chopra. I actually think that this is not an either/or.
In fact, if anything, more research will suggest to you that,
if you're an early adopter of a capability set, having trust
that the environment in which you're operating, that the
product or services you're actually using will actually work--
one of the benefits of having an FDA is that, if you're going
to try a new drug, the American people have greater confidence
that that drug should be consumed, because it's gone through a
rigorous process. If you do it right, they actually can be
synergistic; that is, the fact that we have an effective,
functioning and working regulatory structure should open up
markets of innovation, because you've created an environment
where you have greater confidence--as the first mover, if you
will--that when you take advantage of that new capability, that
it's backed with some confidence.
I understand, in today's environment, given the Gulf Coast
oil spill and some of the concerns we've had with the financial
markets, people's faith in our ability to execute on this may
be at risk. However, I do not believe this is an either/or
proposition. I think if we get both right, we would see that
rising tide lift all boats.
Senator LeMieux. Let me speak to you, if I can,
specifically on some of the conditions that make innovation
possible.
Mr. Chopra. Yes, sir.
Senator LeMieux. And one that I hear a lot about from
businesses in Florida right now is a great concern, no matter
what type of business they are, on certainty from their Federal
Government, is the regulatory certainty or predictability.
Because when things are unpredictable, businesses freeze up and
tend not to act.
Another thing that's important for entrepreneurs is a low
tax environment, and a predictability of tax environment. We're
about to have a debate, in the coming months, about capital
gains tax.
Mr. Chopra. Yes.
Senator LeMieux. And it's set to increase from 15 percent
to, potentially, 20 or more, all the way up to 39 and a half.
Do you have an opinion, does the Administration have an
opinion, on capital gains tax, where it should be in order to
promote as much innovation as possible?
Mr. Chopra. I don't have an opinion on the right capital
gains tax rate, but I do believe this President has been
explicitly clear. Making the R&E tax credit permanent has been
a priority of this Administration. As part of the health reform
bill, we included a billion dollars in the therapeutic tax
credit, precisely to offer tax credits, and, in that case,
grants, for those companies that don't yet have profitability--
a tax incentive, if you will--to promote innovations in new
therapies. We've been supportive of those activities. The
President has been very clear about areas like that R&E tax
credit.
So, you raise a very important topic, and I would certainly
look forward to that conversation. My colleagues at the
Treasury Department and the National Economic Council are
clearly engaged on those issues more specifically.
Senator LeMieux. Right.
Mr. Chopra. My focus is ensuring that we have the right
technological foundation for those discussions.
Senator LeMieux. But, as a business person, a person who's
the Chief Technology Officer----
Mr. Chopra. Yes, sir.
Senator LeMieux.--Capital gains tax is important. And
obviously, it has to be something in order to generate revenues
and to be a fair and equitable part of our tax system. But, a
lower capital gains tax is going to provide for more incentives
for innovation, is it not?
Mr. Chopra. Frankly, my priority is promoting top-line
growth. If you were to interview the top 20 CEOs, asking where
the growth sectors are in the economy, I think they would say
opening up overseas markets--because of the growth sectors that
are there, would rank as a high priority. I think if you were
to suggest domestic markets, the healthcare sector and the
energy sector--if we get the healthcare sector and energy
sector right--with respect to their willingness to embrace
innovation, you might see a tremendous opportunity.
Just as an example, as Madam Chairwoman described, venture
capital has seen a bit of a decline, but if you looked at the
2009 statistics compiled by the National Venture Capital
Association, healthcare IT venture capital, up 37 percent,
while overall venture capital saw a decline by roughly 31
percent. Those are their numbers, not ours.
I would argue that that's, in part, because of the focus on
top-line opportunity. The President's commitment to the
Recovery Act, on promoting the adoption of electronic health
records, has had an impact, I believe, that has created the
market conditions for more venture capital investment and more
opportunity.
If sectors of the economy that have not benefited from the
Information Technology Revolution find opportunities to do so--
because we get the rules right on cybersecurity, because we
think more thoughtfully about how to introduce health IT and
the Smart Grid--we believe that we will unlock tremendous
opportunities for economic growth, beyond any conversation that
one might have on tax policy.
That's my position and the thing that keeps me up at night
as I serve our Administration.
Senator LeMieux. My time is up, but we may have some time
for some more.
Senator Klobuchar. OK.
Senator Warner.
Thank you.
Senator Warner. Thank you, Madam Chair.
Let me start where my colleague Senator LeMieux mentioned.
I believe tax policies ought to encourage long-term hold,
early-stage capital formation. And I personally believe making
sure that we've got as low as possible capital gains rates make
sense, although I would argue that it's not always a direct
correlation. I would argue that, during President Bush 41 and
President Clinton, when capital gains rates were actually
higher than they had been in the last decade, there was more
innovation created.
Now, we've still got to get tax policies right. And some of
us up here have had some concerns with certain pay force
recently that might have even tripled the rates on the venture
community that is about early-stage capital formation, in terms
of current legislation. I've been trying to work through some
of that.
But, we've got that double-headed whammy right now, as we
want to make America business-tax competitive and business-tax
friendly. I personally believe not only should the R&E tax
credit be made permanent, but it should be raised from 14
percent, hopefully up to 20 percent, to be competitive with
other OECD countries. But, you can't do it in a revenue vacuum
at the same time dealing with--the other looming challenge
we've got out there, the deficit. A challenge I try to make
when I see tech companies is, I'll lead that fight, but they
should not carp when they raise personal taxes on people like
me, and them, back up to the rates during President Bush 1 and
President Clinton, because you've got to even it out somehow.
You can't get this fixed on the deficit side, on only one side
of the ledger.
I appreciate your comments on the regulatory efforts. And
it's tough, because we've seen, with the failure to regulate,
at times--the Gulf, between Wall Street and main street--but, I
hope we'd see from the Administration a little more clarity on
how we can use transparency----
Mr. Chopra. Yes, sir.
Senator Warner.--as a way to streamline the regulatory
process. If you look at the business functions, there's a lot
quicker movement from idea to implementation in the business
side than there has been on the government side. And I would
love to--you don't have to answer today--but, I would like to
see some real deliverables on what you've been working on----
Mr. Chopra. Yes, sir.
Senator Warner.--and specific examples, whether it's FDA,
whether it's EPA--other areas, where--in this, I think,
preeminent need to keep our innovation lead, we're going to
make it easier to get ideas into the business mode and
operational mode. Number one.
Mr. Chopra. Yes.
Senator Warner. Number two, I hope--and I appreciate the
fact that you mentioned Stanford as one of your case studies--
you know, candidly, regardless of what's going to happen,
Stanford, MIT, and a few other top-tier universities are going
to do fine. I wish we could have cited an example at the
University of Minnesota, University of Miami, University of
Florida; VCU, in Richmond; and trying to make sure that we have
a broader breadth of participation from our university sector,
other than just the regular suspects. Because, candidly, the
same idea we've had for years, has been the top ten
universities say, ``Give us more money, and trust us.'' And
it's had some mixed results, but not necessarily in a
financially constrained area, as much as we need.
I'd also like you to see--and perhaps you can answer this
so I can actually get an answer to the question instead of me
yakking on--in the stimulus, there was over $100 billion----
Mr. Chopra. Yes, sir.
Senator Warner.--that falls into different kind of
innovation buckets, whether it is, in NIH, areas around
education--or, around energy, Smart Grid, healthcare IT--I
think it would be very helpful--as most of the American public
still questions, I view, the stimulus was, while not pretty,
necessary--it would be very helpful to us, as we start to see,
What are the deliverables and what are the metrics that we can
measure from that $100-billion investment? Do you want to take
that one?
Mr. Chopra. Let me take that one first, Senator Warner.
We are absolutely committed to telling that story right.
And I'm confident, in the not too distant future, we'll have a
more thoughtful, complete inventory of----
Senator Warner. It would help, since a third of that was
tax cuts, and nobody in Virginia knew we gave them a tax cut,
either, so it really----
[Laughter.]
Senator Warner.--you know, we're almost 2 years in--or, a
year and a half into this--it would really help--the sooner the
better on this, but----
Mr. Chopra. Particularly on the impact on innovation, if I
may be very specific, we have been very active in tracking the
results of our recovery investments. We've actually even
introduced some innovations. One of the pilot projects we
initiated, called STAR METRICS, was an attempt to automate how
our investments in universities actually translated into job
creation more easily, more accurately, and more comprehensively
than perhaps the traditional method of tracking some of these
statistics in the past.
So, my confidence is that we'll respond very shortly to
you----
Senator Warner. When?
Mr. Chopra.--on it. I can't say exactly when. The----
Senator Warner. Sixty days?
Mr. Chopra. Oh, definitely within 60 days. That's an easy
one. Yes. Done. In less than 60 days, you will have a better,
more thoughtful report on the impact the Recovery Act has had
on the innovation investment.
Senator Warner. My time has run out, but I just would like
to make one other point.
Mr. Chopra. Yes, sir.
Senator Warner. I've had conversations with your colleagues
at Treasury on this, but I think it is a very big issue, this
question of early-stage capital formation. And as we kind of
sort through the Wall Street reform and try to get it right,
that we think about policies, not just for that earliest-stage
startup enterprise, which the President's been supportive of,
but on a broader basis, how we encourage early-stage capital
formation in this country. And my hope would be that there are
voices like yours and others from the tech side and the
innovation side who are kind of making this case inside the
Administration.
Mr. Chopra. Yes. If I may, just for a moment--I do want to
be respectful of your time--but, one of the responsibilities I
have as Chief Technology Officer is to lead interagency
activities, to make sure that we have all the voices at the
table. As one example--we've launched an Innovation and
Entrepreneurship Working Group, with over a dozen or so Federal
agencies, and we have a specific team dedicated to access-to-
capital issues.
And part of the goal, Senator Warner, is that there are
policy changes we can make within the current administrative
processes that we have, that can be improved, that can deliver
results sooner, and then there are broader questions about how
we work with you all on formal changes to the law, where
appropriate.
We're looking at any and all of those options, and I look
forward to coming back and sharing with you the results of that
work.
Senator Klobuchar. Very good.
Senator Udall.
STATEMENT OF HON. TOM UDALL,
U.S. SENATOR FROM NEW MEXICO
Senator Udall. Thank you, Chairman Klobuchar. And I
appreciate you doing this hearing, and chairing it for us.
Mr. Chopra, last year, Congress mandated that the FCC
create a National Broadband Plan to address one of the most
significant infrastructure challenges of our time: making
broadband available to all Americans. And in a rural State like
New Mexico, we really need that to happen.
A witness on our second panel points out that other
countries have created national innovation plans to identify
ways that their policies can better promote innovation and
entrepreneurship. For example, could OSTP help review current
policies that block innovation, as well as recommended policy
changes that promote innovation and entrepreneurship? And could
OSTP work with the Department of Commerce and other Federal
agencies to develop such a national innovation plan?
Mr. Chopra. Thank you very much for your kind question. We
are continuing to build upon the President's strategy for
American innovation that was released last year in the fall, to
continue with the improvement of that plan.
Now, the word ``plan'' is one of those that requires a bit
of clarity, in terms of, What do you mean by ``plan''? And
Senator Warner had some comments about specific metrics
deliverables and timelines. I think we will continue to iterate
on what we believe to be a national plan that is within the
constraints of our Nation's commitment to mostly private-sector
entrepreneurship and innovation, more so than a top-down
industrial model.
Whatever the case may be, we're always open to listening
and understanding strategies that you think would be more
productive, and we are committed to making sure that we've got
a harmonized approach across the Administration.
I would suggest that there are three things that are top of
mind in the question that you just asked. Are there policy
barriers that we should be removing, administratively?
Senator Udall. Right.
Mr. Chopra. I think this gets to the question that the
Chairwoman had asked earlier about, How are we creating more
certainty in the market? We're certainly open to those,
inventorying them, and we're hoping to take action. We've taken
some action here and there. We'll take more as the months go.
Second, when we do make investments, are we getting the
right return on investment? I think the spirit of greater
accountability and transparency for the dollars spent has been
a commitment of this Administration. OMB Director Peter Orszag
mentioned, earlier in June, that under my leadership and our
CIO, Vivek Kundra, we'll be developing an R&D investment
dashboard to bring greater transparency into the monies we're
spending, so that funds can be allocated to the highest-return
areas; and not just single-dimension definitions of ``return,''
but, more broadly, in terms of impact.
And then, third, I would argue that there may be
opportunities for new investments, more platform investments,
that have the ability to achieve a much greater degree of
innovation. A simple example there: We launched a website,
data.gov, a year ago, that now has over a quarter of a million
data assets that are available for the public, free of charge--
and entrepreneurs, in particular--to consume that data and
launch new businesses.
Secretary Sebelius, in March, said, ``In 90 days, I want to
see how the entrepreneurial ecosystem responds. Here are
thousands and thousands of pieces of health data. Go help
people improve the quality of healthcare in their local
communities.'' And a dozen entrepreneurs showed up, 90 days
later, at the Institute of Medicine. They weren't paid, there
was no law; there was just a call for action. And literally
they demonstrated new and creative applications that would move
the needle.
So, in short, we are very focused on stopping policies that
are inhibiting innovation, getting the investment portfolio
right, and thinking about platform investments that have much
greater return if they were done in a more thoughtful and
collaborative way.
Senator Udall. Thank you very much for that answer. And I
think that's exactly the kind of thing we need to be doing with
innovation with broadband. And then I think you also mentioned,
in your testimony, about modernization of the Nation's electric
grid as----
Mr. Chopra. Yes, sir.
Senator Udall.--a vital component of efforts to build a
low-carbon economy. And so, we develop a comprehensive policy
framework for a Smart Grid--we need the same thing there, the
same kind of thinking. So, thank you.
Mr. Chopra. A brief answer: I announced on June 8, at
Brookings--that we're forming a National Science and Technology
Council Committee focused on the Smart Grid, led by myself and
Phil Weiser, who works in the National Economic Council. We're
holding a forum, a public forum, at Brookings, in mid-July, and
we're going to publish a strategy on this issue by the fall. We
believe, very emphatically, that the Smart Grid has tremendous
opportunities for both energy efficiency improvements as well
as economic growth from new entrepreneurial companies. In fact,
a Colorado-based company, Tendril, is actually our first
deployment of the Smart Grid in the NSTAR implementation in
Massachusetts. Three-thousand homes are going to get a little
widget that would allow them to track their real-time energy
consumption information and to build all these innovative
applications so they can be told when they might want to
consider reducing the temperature, and so forth, in their home.
Anyway----
Senator Udall. That's great.
Mr. Chopra.--thank you so much for the question.
Senator Udall. We look forward to seeing that strategy.
Mr. Chopra. Yes, sir.
Senator Udall. Thank you.
Senator Klobuchar. Very good.
I wanted to follow up. I know, in the President's State of
the Union Address, he focused--which I was glad that he did
this--on doubling the number of exports. Could you talk about
where that is right now? Senator LeMieux and I have a bill,
which I believe Secretary Locke supports, to help with the
Foreign Commercial Service, to make sure that the Commerce
Department and others are helping, in any way, our small and
medium-sized businesses.
We have some amazing success stories in my State--5
employees up to 55; 10 employees up to 77--because they simply
actually called the Federal Government--these are conservative
businessmen, who never believed it would be true, but said,
``We have this product.'' ``Can we sell it in Turkey? Can we
sell it in Morocco?'' And they actually got help, and help get
the customers vetted and their businesses ballooned, and in a
very good way.
What's being done right now with the export issue?
Mr. Chopra. This is one of Secretary Locke's top priorities
in his commitment to President Obama. We have a few key
strategies in motion. There's the blocking and tackling, as
you've said, getting the international trade team much more
focused, not just on promoting exports from our large
corporations, but to be very focused on the small business
owner. There are so many small business owners today who export
to one country. And, as Secretary Locke said to the President,
``If we just get them to export to a second or third, precisely
the kind of economics you're describing will take hold.'' So--
--
Senator Klobuchar. Yes, I think----
Mr. Chopra.--blocking and tackling----
Senator Klobuchar.--60 percent actually only----
Mr. Chopra. That's right.
Senator Klobuchar.--export to Mexico----
Mr. Chopra. To one.
Senator Klobuchar.--or Canada.
Mr. Chopra. You're absolutely right.
So, number one, blocking and tackling, get the agency
focused on providing those support services to all businesses.
There's obviously a great deal of work in transparency and
what we can do to bring more information to business owners.
And, last but not least, we're very much focused on
intellectual property enforcement, and a global strategy in
that regard. In fact, I believe, 3 hours ago, the Vice
President announced a strategy to promote intellectual property
enforcement. And an important component of that is our
commitment to promoting exports, precisely because of the fact
that we do believe that there needs to be much more aggressive
activity to support American business interests abroad, because
so much of our economy's growth has been built on the
foundation of intellectual property in this country.
So, on all fronts, we are making progress, Senator. And if
there are specific questions, I'd be happy, in the record, to
make sure I get them answered for you.
Senator Klobuchar. I had raised the issue of people coming
from other countries to study at our universities, and a number
of us have been working on at least this concept of allowing
people to stay, instead of putting up a ``Do Not Apply'' sign
after they graduate. Could you talk about the role that could
play in our competitiveness? And to what extent should we
examine our H-1B visa program for people? Again, I've just
heard many stories, from my State, of companies who try to
bring someone in. They can't. They don't meet the game of
Russian roulette over who gets in and who doesn't, and then
they end up contracting with them anyway. And then we don't get
the tax revenue. So, could you talk about how we could improve
that process?
Mr. Chopra. Well, as you know, this is an area where the
President has been pretty clear about his support to ensure
that we have a thriving innovation economy. And a great number
of our entrepreneurs and innovators, as research will show you,
do have their origins in other countries. It's actually a
personal issue for me, as well. My father holds three patents,
and he came to this country from India, and we're grateful for
the chance to have immigrated here.
This President is committed, as you know, to a
comprehensive approach on immigration reform. So, the strategy
has been very clear from the get-go. This issue is absolutely
important. And as he and the team work closely with you and
Congress on finding a strategy forward, we are very supportive
of ways in which this particular challenge can be addressed.
Now, in ways small and modest, we are making administrative
changes to make it easier. We've simplified scientists who are
visiting this country from overseas, for the visa application
process, so there's a collaboration, between our science team
and the State Department. It's not a significant victory, in
the sense that we haven't solved the immigration problem, but
we've made that a little bit easier.
Just this past month, the U.S. Citizenship and Immigration
Service, under Ali Mayorkas's leadership, has convened a
summit, had a public hearing, if you will, on the discussion of
the investor visa; that is, the EB-5 visa. He opened it up for
conversation, and a number of folks participated in that call,
calling for strategies to strengthen and improve the investor
visa to try to get to a place where more people might take
advantage of it.
So, your point is well taken. You may have seen, the
President had an Economic Recovery Board meeting that was
publicly aired via webcast, and you heard the President's key
economic advisors specifically say to him, ``We should be
stapling a green card to every graduate of our Nation's leading
research universities.'' The President acknowledged that
comment and, again, reiterated his support, as part of a
comprehensive approach on immigration reform.
Senator Klobuchar. Thank you.
Senator LeMieux.
Senator LeMieux. Thank you, Madam Chair.
I want to speak for a moment about exports, and follow
along the line of questioning that----
Mr. Chopra. Yes, sir.
Senator LeMieux.--Senator Klobuchar was on. And part of a
successful export strategy is to get these free trade
agreements passed. We have pending free trade agreements with
Colombia, South Korea, and Panama. I believe the Colombian
agreement was negotiated in 2006. And this is perhaps our
greatest ally in the Western Hemisphere, certainly in Latin
America. And our competitors--Canada and the European Union--
have already approved these agreements. So, where are we on
submitting those agreements to Congress and getting their
approval?
Mr. Chopra. I don't have any particular information on the
status of the free trade agreements, but for the President's
commitment as he said as part of his pronouncements on our
commitment to exports, that we will move forward on a number of
agreements. And I will defer to Ambassador Kirk to provide
specifics about where those agreements are, as I do not have
that information with me.
Senator LeMieux. I want to, if I may, Madam Chair, ask a
follow up question, or a following question, which is a little
bit off of our mission today. But, it occurs to me, as the
chief technology officer of the United States----
Mr. Chopra. Yes, sir.
Senator LeMieux.--that this is something that you might be
able to be helpful with. We talk a lot about measurement and
metrics. And certainly, technology has given us the ability to
that, internal to government. One----
Mr. Chopra. Yes.
Senator LeMieux.--thing that I have proposed--you were
talking about Secretary Sebelius making the call to action on--
--
Mr. Chopra. Health data.
Senator LeMieux.--health data, healthcare records--one
thing that I have proposed is using performance metrics to help
catch Medicare fraud. And there's an industry that has a very
low instance of fraud, which is about the same size as the
healthcare industry, and that's the credit card industry. They
use performance metrics, and they use predictive modeling.
Mr. Chopra. Analytics.
Senator LeMieux. So, when you use your credit card
someplace, you're out of town, you get a phone call from----
Mr. Chopra. Yes, sir.
Senator LeMieux.--your credit card company, saying, ``Is
that you? Did you really authorize that transaction?'' If you
don't tell them, ``Yes,'' they don't pay. And that's how they
stop fraud before it starts.
We've got a proposal, Senate bill 2128, that I'm currently
working on with some of my colleagues--Senator Baucus, Senator
Whitehouse--to try to get accomplished. But, is--the reason I
raise the question is, in your role, have you been asked to
look inward on the government----
Mr. Chopra. Absolutely.
Senator LeMieux.--to see that we can use technology to
create efficiencies and stop the waste, fraud, and abuse?
Mr. Chopra. Yes, sir. I work closely with the President's
Chief Performance Officer, who's the Deputy Director for
management in the Office of Management and Budget, and, the
Chief Information Officer, who's also in the Office of
Management and Budget. Together, the three of us meet weekly on
strategies to improve the performance of our Nation's agencies.
In this particular example, I am very focused on ways we
can bring emerging technologies and technologies from other
industries into the government itself. While not my
responsibility for monitoring the implementation of the
Recovery Act, which the inspector-general community, took
advantage of one of those emerging technologies that had been
in use in our intelligence communities, advanced analytics, the
predictive work that you're describing--to basically mash up as
much data as possible to look for patterns that aren't obvious
to an individual analyst. And I'm confident that the results
we're seeing, which are, at least to date, low rates of fraud
in the Recovery Act, in part are because we've got this very
sophisticated tool.
The President has been very clear that he wants the best
tools going after Medicare waste, fraud, and abuse. We are
going to--I don't know if we've announced it yet, or we soon
will be announcing--a similar commitment to bringing those
advanced tools, specifically going after Medicare waste, fraud,
and abuse.
There is no doubt that there are lessons to be learned from
how the private sector has adopted information technology and
how we can improve the government. One comment here. We held a
forum on modernizing government. We had 50 or so CEOs from
companies, big and small--Microsoft to startups--and the
overwhelming message that we heard is that we have a technology
gap between the way we live in our private lives and the way
our government uses technology in its professional setting. And
we are absolutely focused, like a hawk, on closing that
information technology gap. In fact, we've been beginning to
release strategies to that fact across this month. Peter Orszag
gave a speech on this issue--I think it was June 8--where he
announced this broader vision. And we'd be happy to make sure
that you're provided a copy of that document.
Senator LeMieux. I would appreciate that.
Mr. Chopra. Yes, sir.
[The information referred to follows:]
Remarks by Peter R. Orszag--Center for American Progress
June 8, 2010, Washington, D.C.--As Prepared for Delivery
Thank you, Tom, for that kind introduction. And let me thank John
Podesta and the Center for American Progress for inviting me to speak
here today.
Many of you may not know that my first experience working for the
Federal Government occurred when I was a senior in high school, when I
got an internship with a freshman Senator that I never heard of from a
state I had never been to.
I was fortunate that Spring because that office--Senator Daschle's
office--was very much like the man who stands before you today: open to
debate and good ideas, inclusive, and kind.
My workspace has since been upgraded from Tom Daschle's mailroom to
an office in the Eisenhower building. And when I moved into that
office, I must admit that I took down a picture of President Eisenhower
and replaced it with a portrait of Alexander Hamilton.
It's interesting that in the first line of the very first of the 85
Federalist Papers, Hamilton laid out why the United States needed a new
form of government. It wasn't because the Founders had second thoughts
about the basic idea of democracy. Instead, it was, as he put it,
because of the ``unequivocal experience of the inefficiency of the
subsisting Federal Government.''
There it is in the first line of our founding narrative: a
practical concern for the delivery and performance of the Federal
Government.
And it is that enduring struggle to create a Federal Government
that is of, by, and for the people--and that accomplishes those goals
in a way that is efficient and effective--that I want to discuss today.
Too often in Washington, we spend more time developing, debating,
and deciding which policies to pursue than we do actually figuring out
how to implement them.
But in reality, execution matters--and matters a lot.
Take the Recovery Act as an example. One of the largest pieces of
domestic legislation in recent memory, it was designed to jumpstart
economic activity and prevent another Great Depression, and it is as
complex as it is large in dollar amount.
The evidence strongly suggests that the Recovery Act has been
effective in reviving economic growth. We have seen, for example, a
swing from an average GDP decline of 5.9 percent on an annualized basis
at the end of 2008 and beginning of 2009 to an average growth rate of
4.3 percent a year later, the largest one-year swing in GDP growth in
three decades.
And what has been most striking is that for an initiative this
large, we have not seen any substantial incidences of fraud and abuse.
This, I believe, is to the credit of ``Sheriff Joe''--our Vice
President--who has made it his mission to make sure that the Recovery
Act is implemented swiftly and effectively.
Just as the dog that doesn't bark doesn't get any attention,
effective implementation does not garner the headlines. But it is
central to making government work better, reducing waste, and actually
delivering the services people want and need.
That is why from curbing the use of no-bid contracts to reducing
improper payments--from changing how we hire Federal workers to how we
purchase and use information technology, the President has undertaken a
far-reaching effort to modernize and reform government.
And we are lucky to have Jeff Zients serving as the Nation's first
Chief Performance Officer to oversee this initiative.
The effort is necessary for three reasons.
First, we have massive national challenges that require national
responses: laying the foundation for long-term economic growth,
bringing about a clean energy economy, improving the quality of and
reducing the costs of health care, reforming and improving our schools,
protecting our homeland, and the list goes on and on.
Second, just as the American people expect more to be done, they
are skeptical that it can be done.
According to the Pew Center, from 1987 to 2007--with one exception
immediately after the 9/11 attacks--about two-thirds of Americans
believe that ``when something is run by government it is usually
inefficient and wasteful.''
In effect, Americans have determined that their government cannot
deliver what they want, an unsustainable fact for the life of our
democracy.
Third and perhaps most importantly, as stewards of the American
public's tax dollars, we cannot afford to waste money on programs that
do not work, that are out-dated, or that are duplicative of one
another.
Right now, there are over 110 funded programs in Science,
Technology, Engineering and Mathematics education in 14 departments and
agencies across the Federal Government; over 100 programs that support
youth mentoring scattered across 13 agencies; and more than 40 programs
located in 11 departments with responsibility for employment and
training.
This redundancy wastes resources and makes it harder to act on each
of these worthy goals. That is one reason why the Administration
proposed approximately $20 billion of terminations, reductions, and
savings in both the FY 2010 and 2011 budgets.
And while recent administrations have seen between 15 to 20 percent
of their proposed discretionary cuts actually enacted, we worked with
Congress to enact 60 percent of proposed discretionary cuts for FY
2010.
This type of redundancy and waste is also why the President 2 weeks
ago asked Congress for expedited rescission authority so Congress can
act quickly and cleanly to remove unnecessary and wasteful programs.
To be sure, reducing this waste will not close the significant
budget gap we face. But that fact does not absolve us from the
obligation we have to use funds wisely.
What is driving these trends and the skepticism so many of us have
about government?
One important reason is that over the years, Americans have seen
huge advances in efficiency and technology both at work and in their
daily lives.
They have witnessed the movement from one-size-fits-all, mass
production and secretarial pools to the age of just-in-time, customized
manufacturing and instant communications. Organizations outside
government have experienced impressive advances in productivity and
have become more responsive to their customers.
The government, however, has not kept pace. Let's look at the
facts.
Public-sector productivity growth matched the private sector's
until about 1987. But something changed in the late 1980s. From 1987
until 1995, private-sector productivity rose by an average of 1.5
percent a year. Meanwhile, the public sector's productivity rose by
only 0.4 percent per year--or about one-third as much--over roughly the
same period.
At that point, reliable data on public-sector productivity are not
available because the Bureau of Labor Statistics--paradoxically, as
part of a cost-cutting effort--stopped collecting the numbers.
The best analysis we have, from the McKinsey Global Institute,
suggest that since 1995 it appears that the public sector continued to
fall behind the private sector which saw productivity surge during that
period.
Some of this increasing gap has to do with advances in management
techniques in the private sector. Some, undoubtedly, has to do with the
challenges the Federal Government has in attracting and hiring top
talent. Keep in mind that the average time it takes to hire a new
Federal employee is 140 days--and by that time, many of the best
candidates, understandably, have gone elsewhere.
But I believe that the biggest driver of this productivity divide
is the information technology gap.
At one time, a Federal worker went to the office and had access to
the most cutting-edge computer power and programs. Now, he often has
more of both in a device clipped to his belt.
Closing the IT gap is perhaps the single most important step we can
take in creating a more efficient and responsive government.
Indeed, the IT gap is the key differentiator between our effort to
modernize and reform government and those that have come before.
While it would be better if we did not find ourselves in this
position, note that because the gap is so big, the potential upside is
substantial. Our historical shortcomings in IT may ironically give us a
``late-mover advantage,'' by allowing us to leapfrog costly, less
developed technologies and go directly to the less expensive, more
powerful ones.
How big is this IT gap?
It is hard to quantify, but anecdotally the data are telling.
Let's consider the divergence in data center usage. In the private
sector, IBM has reduced the number of data centers it uses from 235 to
12. Hewlett-Packard has consolidated 14 data centers into one, reducing
energy usage by 40 percent.
What about the Federal Government?
Since 1998, we have gone from 432 data centers to more than 1,100.
Or look at how the Federal Government has tried to introduce
systemic technological improvements to its operations.
In the conversations we had with CEOs at our modernizing government
forum in January, most told us that they terminate a substantial number
of bad IT projects soon after they start. High-performing companies
kill roughly one out of every three IT projects in their first 6
months. The Federal Government, by and large, terminates almost none.
For example, the Census Bureau awarded in 2006, a $595 million
contract to develop a handheld computer for census workers to use this
year. Two years and $600 million later, the project was canceled with
nothing to show for it.
And census workers out there today still use pen and paper.
Or as the President pointed out before, the Patent Office receives
more than 80 percent of patent applications electronically. That's
great.
However, these applications are then manually printed out, re-
scanned, and entered into an outdated case management system. The
average processing time for a patent is roughly 3 years.
And this is the agency that interacts with the most creative and
innovative individuals and companies in our country.
Clearly, we have massive room for improvement. Pursuing that
improvement and closing the IT gap will help us create a government
that is more efficient and less wasteful, and that is more open and
more responsive to the American people.
So what are we doing?
First, we're using IT to identify and cut waste.
Take the dashboard concept--a graphically clear, data-rich web
portal that enables a manager, and actually any member of the general
public, to see how money is being spent.
Our IT Dashboard now provides a transparent look into the
approximately $80 billion a year the Federal Government spends on IT.
By using the dashboard, the VA has been able to identify 45 IT projects
that are at-risk, eventually terminating 12 of them.
This same concept is being used by the Centers for Medicare and
Medicaid Services with its dashboard to track inpatient hospital
spending and how much Medicare is spending on other payments to
providers for medical education, treating low-income patients, and
operating in a high-cost region--to name just a few.
We also are using IT to increase data-sharing among agencies to
reduce the $100 billion in improper payments--payments that go to the
wrong person, for the wrong amount, or at the wrong time--each year.
And we're doing that by expanding recapture payment audits,
bolstering internal control methods, and creating online dashboards of
key indicators and statistics about improper payments--so the public
can hold agencies accountable for how their money is being spent.
Similarly, as part of the Administration's effort to save $40
billion in contracting by 2011--a goal we are well on the way of
reaching--we have launched the so-called FAPIIS system, which takes
data from government contractors on things such as how they did their
job and if they were suspended or debarred--and combines them into one
database that contracting officers can access before making a decision.
This will dramatically reduce the chance that an under-performing
contractor with one agency will keep winning business from another.
Second, we are using IT in our efforts to boost the efficiency of
government operations.
I mentioned earlier the growth in the number of Federal data
centers, which runs counter to the movement in the private sector
toward reducing the number of data centers and moving to cloud
computing in which applications and data are centrally housed.
Through our Cloud Computing Initiative, we are just beginning to
take steps toward the cloud. And this holds substantial promise to save
money on IT infrastructure, increase collaboration, and boost
productivity.
Third, in addition to identifying and rooting out waste, we can use
information technology to make government more open and responsive--
delivering services in ways that are convenient and cost-effective.
In almost every facet of one's daily life, you can use online and
mobile devices--whether it's managing your money, paying a bill, buying
a birthday gift, or arranging your own travel.
We need to bring that kind of convenience to government services.
That's why the Department of Homeland Security added an online
tracking service for visa and citizenship applications--replacing the
letters mailed back and forth when people wanted an update on their
status.
And it's why the Social Security Administration is implementing an
idea that we got through our SAVE Award process from a front-line
worker in Alabama to allow people to make appointments online to see a
Social Security caseworker, freeing up this personnel to actually help
people.
Another way to deliver better services is to empower people
directly with the information they need to serve themselves.
As part of our Open Government Initiative, we have unlocked the
valuable Federal data that the government has--and put it out on
data.gov--so that it can be leveraged for wider and greater use.
In just one year, data.gov has grown from 47 datasets to more than
270,000. This information can be used by the American people directly
to learn about things such as the safety ratings of children's car
seats or the safety of different work places.
And the data are increasingly being used by developers to build new
tools to help Americans in their daily lives.
Let's take FlyOnTime.us, for example.
This application takes data from the Bureau of Transportation
combines them with weather information and user-generated content about
airline security lines--such as ``tweets'' from people waiting in those
lines--to give travelers an accurate look at travel conditions.
In the months ahead, we will be looking to unveil more of these
technology-driven solutions that bring the public sector more in line
with the private when it comes to customer service.
That is the promise of closing the IT gap: increasing productivity
and responsiveness; efficiency and customer service.
And that brings me to a final point: these improvements will help
agencies meet what are increasingly tight fiscal constraints.
As many of you know, in this year's Budget, the President proposed
a three-year freeze on non-security discretionary funding, saving $250
billion over the next decade.
This spending restraint complements other measures in the Budget
that, together, produce more deficit reduction over the next 10 years
than any Budget that has been proposed in over a decade.
In his State of the Union address, the President was abundantly
clear to Congress that he will use the veto pen to enforce this freeze.
And in the Budget guidance for Fiscal Year 2012 issued to agencies
this morning, that seriousness of purpose was underscored yet again.
We are asking each agency to develop a list of their bottom 5
percent performing discretionary programs, as measured by their impact
in furthering the agency's mission.
In addition, to ensure that we can meet the President's absolute
insistence on a freeze for non-security agencies while funding priority
areas, we are asking non-security agencies to specify how they would
reduce their budgets by 5 percent which will give us the ability to
achieve the overall non-security freeze even while meeting inevitable
new needs and priorities.
The reform efforts I outlined above should make it easier for
agencies to identify their laggard programs and live within the three-
year freeze.
Ultimately, our goal is not to cut for cutting's sake, but to
modernize and reform government, to empower people with the information
they require to make choices about what's best for them, to make their
voices heard by government officials, and to give the American people
the data they need to bring about change.
The bottom line is that IT can help us achieve this in a government
that is increasingly complex, serving a Nation of 300 million people.
As a professor of political science at my alma mater noted: ``There
is scarcely a single duty of government which was once simple which is
not now complex; government once had but a few masters; it now has
scores of masters.''
Those words were written by Professor Woodrow Wilson--in 1887,
before he was the President of Princeton, and well before he was
President of the United States. And they are no less true today than
they were more than a century ago.
The lesson is: implementation matters. And it is our duty to
continually strive to be prudent and productive stewards of tax
dollars, creating a government that is efficient and effective in
service of the American people.
Thank you, and I'd be delighted to take your questions.
Senator LeMieux. And I would commend you to look at this,
Senate bill 2128, which seeks to accomplish this for Medicare.
There's estimates that we could save $20 billion a year----
Mr. Chopra. Yes, sir.
Senator LeMieux.--by using predictive modeling.
Mr. Chopra. Absolutely. We'll look at it. Thank you----
Senator LeMieux. Thank you very much.
Mr. Chopra.--sir.
Senator LeMieux. Thank you, Madam Chair.
Senator Klobuchar. Senator Begich has arrived.
STATEMENT OF HON. MARK BEGICH,
U.S. SENATOR FROM ALASKA
Senator Begich. Thank you, Madam Chair. I'll just be brief.
You may not be able to answer these--but this is kind of a
broad question, which I think I know the answer to, but I
really want to hear you say it.
Mr. Chopra. Sure.
Senator Begich. With regards to patent protection for folks
that are creating and being innovative and so forth, we would
rate ourselves, in this country, where in the scale of patent
protection?
Mr. Chopra. Well, Can I give two grades? I would say that
the quality of our patent review process is pretty high. On a
scale of 1 to 10, maybe it's an 8 or a 9, in terms of the
competence of the agency to actually render judgment on high-
quality patents. But, the process and the performance of the
agency, in terms of its throughput, is far lower. To be kind,
maybe it's sub-5, maybe 4, maybe 3. The backlog today is well
over 3 years. We have circumstances where information comes
into the Patent Office; in some cases, it's in electronic
format, in other cases, it has to be converted from electronic
to be rekeyed in, because database A doesn't talk to database
B. So, to the extent with which you would like to see an
improvement--I believe Senator Warner made a comment earlier--
you guys are engaging on the discussion of patent reform, but I
believe there's bipartisan--and I don't want to speak for you--
--
Senator Begich. Right.
Mr. Chopra.--but I believe there's bipartisan commitment to
just cleaning up the operations themselves so that we can
strengthen and improve the capacity of the office.
Senator Begich. Let me ask----
Mr. Chopra. Yes, sir.
Senator Begich. That's part of the question, but the other
part is, If I create something--where would you want to patent
your product? What country?
Mr. Chopra. Boy, that's an interesting question. I haven't
given that much thought. I would still presume that patenting
in the United States is still a very powerful asset to--I mean,
so much of our economy is borne on patent-generating--patented
products and services. There are some case examples. I believe
the Chairwoman highlighted a few--where people are beginning to
take their innovations overseas. But, I would argue that it
still makes the most sense in the world to patent your
invention here in the United States, and that--we have pretty
good collaboration across the world's patenting regulatory
bodies, if you will, to work together on a streamlined approach
to making sure that that application actually can be filed
around the world.
Senator Begich. I appreciate that; I just wanted to get a
little discussion; I know it may be partially in your field--
but, here's my question----
Mr. Chopra. Please.
Senator Begich.--in the broader sense, and maybe more of a
comment. So, if you want to comment on it, that's great.
Mr. Chopra. Sure.
Senator Begich. Companies--and it goes to, I think, what
the Chairwoman was getting to, in a different way, or augmented
to what she was talking about; and that is, people patent here,
but they manufacture elsewhere.
Mr. Chopra. That's what she had made the----
Senator Begich. OK?
Mr. Chopra.--case for.
Senator Begich. Do you, or does someone in the Federal
Government, have some analysis that says, here, in the last--
pick a period of time--products that have been patented, that
have been developed--produced overseas, but, at times, those
same companies use our patent law to protect themselves for
those products they manufacture overseas----
Mr. Chopra. I haven't looked----
Senator Begich.--or----
Mr. Chopra.--at that particular metric.
Senator Begich. Because, I mean, that's part of it. I mean,
why people patent here--this is my assessment--is, we have some
of the best patent laws. But, they don't manufacture,
necessarily, always here, but they'll use the law to protect
their patent when it's produced elsewhere.
So, is there such a study that shows us--or some----
Mr. Chopra. I will check.
Senator Begich.--data?
Mr. Chopra. I'm not familiar with the particular study.
But, this cuts two ways, if I may, Senator. There are examples,
in this increasingly global economy, where we want, and wish to
encourage, U.S. innovation to solve global problems, often at
price points that are dramatically lower than what the domestic
U.S. market might otherwise seek.
I highlight, for example, an article written, in the
Harvard Business Review, by Jeff Immelt, the CEO of GE. And
forgive me for attempting to paraphrase his article; I may not
do it in--its justice. But, his highlighting of the strategy,
at GE, of reverse innovation--that is to say, they had
engineered, for example, an electrocardiogram machine in rural
China that, in order to be profitable, had to be 85 percent
cheaper than the products that they would sell domestically in
the U.S. This innovative company in the U.S. looked at that as
a growth opportunity. They were successful in building a
profitable product for the rural Chinese market, and not only
did they generate sales and profitability overseas, they
created innovations that, in the term that they used in the
article, ``reverse innovation'' brought those ideas back to
strengthen their innovation capacity in the domestic U.S.
economy.
So, I'm not trying to suggest that your premise is a good
one or a bad one; I'm just suggesting there's some nuance to
the notion that an entrepreneurial company in the U.S. solving
a global problem, at price points that are dramatically lower
than what need here, could still see economic value bringing
those innovations back and expanding.
So, I am--I will look into your question of the study, and
I will see if there's a way to think through the implications
of it.
Senator Begich. I'd appreciate it. And my time is up. But,
the discussion I like to work off of is--show me the data that
says--either way. Your description is a great example of a
reverse. But, the other flip side is, What are we doing? And if
people are developing here, in a sense of their idea--but then
producing elsewhere, and then using our patent laws to protect
what they produce elsewhere--we have to figure out the right
balance here, because the reason is that we, the Federal
Government, are allowing those opportunities of protection, but
if we don't reap the benefit in some form--maybe it's the
reverse, as you described, and/or the job creation--we have to
figure out the right balance here.
Mr. Chopra. I will certainly----
Senator Begich. Now, that's the question.
Mr. Chopra.--look into that and get back to you, Senator.
Senator Begich. Great.
Mr. Chopra. Thank you for that.
Senator Begich. Thank you, Madam Chair.
Senator Klobuchar. Well, thank you very much, Mr. Chopra. I
hope you see that everyone is really raring to go here. We are
impatient. We want to move forward. We know you get this. And
we hope that we'll be working you a lot. I would really hope
this would become a major focus of the administration policy in
the next year; and not just yours, but the entire
administration.
So, thank you----
Mr. Chopra. My honor.
Senator Klobuchar.--very much.
Mr. Chopra. Thank you for having me.
Senator Klobuchar. All right, very good.
And now we're turning to our second panel. And we're going
to be joined--I'll let them get up here, and we'll get them
some new name tags, here.
We appreciate the interest in this hearing.
[Pause.]
Senator Klobuchar. I see Mr. Chopra's fan club is leaving,
and now we have our second----
[Laughter.]
Senator Klobuchar.--panel.
All right. First of all, we have Andy Weiss. Mr. Andy Weiss
is President and CEO of CoAxia, which I mentioned before, a
small medical device business based out of Maple Grove,
Minnesota. CoAxia develops innovative new treatments for stroke
patients. He came to the company with 20 years of experience in
the medical device industry, having worked for GE Medical,
Vital Images, and Medtronic. He serves as an advisor to a
number of small medical device business and venture capital
firms, and is also the Director of Steady State Imaging, which
is a company that develops advanced MRI medical imaging
technologies.
We also have with us Dr. Robert Atkinson, who will be the
first to testify here. He is the Founder and President of the
Information Technology and Innovation Foundation, a nonpartisan
think tank with the mission of promoting policies to advance
technological innovation. He has an extensive background in
technology policy, and has conducted groundbreaking research
projects on technology and innovation.
Steve Ubl is President and Chief Executive Officer of the
Advanced Medical Technology Association, the world's largest
medical technology association. He previously ran his own
healthcare consulting firm, and has served in other leadership
roles with AdvaMed and the Federation of American Hospitals.
Rhys Williams, who Senator LeMieux already mentioned, is
the President of New World Angels, Inc., an angel investment
group in southeast Florida. He is also President of Tequesta
BioVentures, and has co-founded several early-stage biotech
companies. Prior to his current position, Mr. Williams worked
as a venture capitalist, as an executive for a biotech company,
and as an officer in the military, commanding an Army Special
Forces combat diver detachment.
So, our witnesses come from diverse backgrounds, but all
are focused on the same driving force, and that is innovation
in America.
We will start with Dr. Atkinson.
STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, INFORMATION
TECHNOLOGY AND INNOVATION FOUNDATION
Dr. Atkinson. Great, thank you, Madam Chairwoman and
Ranking Member LeMieux and Senator Begich. It's a pleasure to
be here on this critical issue of U.S. innovation and
technological commercialization and competitiveness.
I think, as Senator LeMieux alluded to, the U.S. was in the
lead for a long time, and, frankly, we're no longer in the lead
in global innovation and competitiveness. There are other
countries that have surpassed us, as we've documented in a
report that was mentioned earlier.
There are a lot of reasons why I think we've lost our lead,
but one of the key reasons is that a number of other nations
have developed national innovation and competitiveness
strategies, and, as part of those strategies, put in place
comprehensive policies, everything from cutting corporate tax
rates, creating generous incentives--tax incentives for R&D, to
expanding government support for R&D. In contrast, the U.S. has
really done very little in these areas.
In many ways--and, Senator LeMieux, you alluded to this--
we're like that old commercial. The other countries are Avis.
They're number two, and they try harder. And we're Hertz. We
think we're number one, and we don't try harder. The reality
is, we're not number one anymore, as I alluded to.
Ultimately, businesses are really going to have to drive
this, but there are a lot of things the Federal Government can
and should do to help play a more active role. And I allude to
some of those in my testimony: certainly, skills and
immigration policy; H-1B visas; increased funding for research,
including Federal agencies, like the PTO and the FDA, both of
which suffer from serious problems of review and backlog; a
more generous R&E tax credit; and certainly more aggressive
trade enforcement against what we would term ``technology
mercantilism,'' where other countries and systemically
targeting U.S. technology leadership through unfair and
oftentimes WTO-violating practices.
But, I want to just focus on two areas today, of how the
Federal Government could play a better and more effective role.
One is how we could reorganize some parts of the Federal
Government to better spur innovation; and, second, how Federal
policy could spur technology commercialization.
A first step--and, Senator Udall and Senator Warner alluded
to this--would be for Congress to charge the administration
with the creation of a national competitiveness and innovation
strategy. We did this in the Recovery Act; we charged the FCC
to create a broadband strategy. The FCC didn't simply just
draft a memo; they actually brought in some of the leading
thinkers and analysts in the country, from the private sector,
and they worked diligently to create a very comprehensive and
in-depth strategy, which I would argue is probably the best
document we've produced in a long time in this area. We need to
do the same thing in the area of competitiveness.
And I just mention, I really don't think this is about
picking winners, or more government. When you look at what
other countries have done with their strategies, they're really
about smarter government, smarter regulation, smarter public
investments, smarter tax policy. So, it's really looking at
what the government's already doing, how we can do it better,
what we can learn from our competitors.
Second, I think we could--and, by the way, I should add,
all of my recommendations in the report, I'm--recognizing the
fiscal constraint that we're under today, I'm trying to suggest
a lot of recommendations, frankly, that really don't cost any
money, or very little money, but would get a big bang for the
buck.
I think one of those in that category would be for Congress
to consider creating an Office of Innovation Review within OMB.
In OMB, there's OIRA, and it's basically focused on cost
benefit analysis. It really doesn't do anything about
innovation. This goes to Senator Klobuchar's point. One of the
things this group could do to essentially oversee what the FDA
is doing, and make sure they're really doing the kind of job
they need to do.
Second, we really need to push, much more, our science
agencies--and, in particular, NSF--to focus and encourage them
and incent them to drive industry/university partnerships. It's
striking that the last time we faced a big challenge in
competitiveness was in the 1980s. And one of the things we did,
with strong bipartisan support from the Democratic Congress and
the Reagan administration, was to really change a lot of the
programs. We passed Bayh-Dole, obviously a bipartisan act, and
we put in place a number of programs in the National Science
Foundation to encourage universities and industries to work
together to commercialize technologies, including the
Engineering Research Center Program, the IUCRC program, and
others.
I have to say, after two decades of looking at those
programs, the evidence is unbelievably crystal clear. These
programs are incredibly effective, they're largely underfunded.
And NSF, basically, looks at them as second- tier programs that
they ignore. The mission of NSF has basically morphed into one
of supporting scientists at universities, with almost no
attention to thinking about, how can we get those discoveries
out to entrepreneurs to build businesses? And I think there's a
lot the Federal Government could do. One of the things that we
suggest is, in reauthorizing COMPETES or any other vehicles
where there might be an increase at NSF or DOE Office of
Science, is specifically allocate more money, to those programs
that have been shown to work, that partner with industry.
Second, we could require NSF to--some of the programs that
they have, they'd give money directly to universities--for
example, some of the big equipment awards where they do that--
to tie one of their criteria for getting an NSF award to how
well the university actually works with industry. There is no
accountability in the system right now. If you work with
industry, you're graded the same as if you don't work with
industry and entrepreneurs.
Third, we need to do a better job of providing support to
universities and Federal laboratories for their technology
transfer efforts. They're largely underfunded. We've proposed a
very small levy on Federal research kind of like the SBIR, only
much, much smaller--and using some of those funds to support
that.
Finally, we should expand the regular R&E tax credit, but
also, there's a provision in the R&E tax credit that was in the
1996 energy bill, on collaborative research and development tax
credit, that gave companies a more generous tax credit to work
with universities and Federal labs. But, it only applies to
energy research. We think that word, ``energy,'' should just be
taken out.
I know I'm over my time. The last point I didn't put this
in my written testimony, but I thought about it here today. As
I think, Senator Klobuchar, you had mentioned, How do we get
more financing to small business? I think one of the things we
should consider is, How can we reform the SBIC program that SBA
runs? It really has morphed into a program to fund later- stage
large deals. That's not what the Federal Government should be
doing. The Federal Government, to the extent it's in that
space, should be helping venture firms go into earlier-stage
smaller deals, and I think SBIC could be reformed in that
direction.
Thank you very much.
[The prepared statement of Dr. Atkinson follows:]
Prepared Statement of Dr. Robert D. Atkinson, President,
Information Technology and Innovation Foundation
Madam Chair, Senator LeMieux, and members of the Committee, I
appreciate the opportunity to appear before you to discuss the critical
question of U.S. innovation and technology commercialization and what
the Federal Government can do improve it.
I am the President of the Information Technology and Innovation
Foundation. ITIF is a nonpartisan research and educational institute
whose mission is to formulate and promote public policies to advance
technological innovation and productivity. Recognizing the vital role
of technology in ensuring American prosperity, ITIF focuses on
innovation, productivity, and digital economy issues.
For over 50 years after WWII, the United States was the global
innovation leader. However, in the last decade we have lost that lead
and our rank appears to be 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.
There are two key kinds of activities the Federal Government can take
to spur innovation.
First, we need to better organize the Federal Government to support
innovation. A key first step would be for Congress to charge the
administration with the creation of a national competitiveness and
innovation strategy. In addition, Congress should consider creating an
Office of Innovation Review within OMB to review all proposed Federal
regulations for their impact on innovation. Finally, Congress should
consider creating a new National Innovation Foundation that would house
innovation-based programs now housed at agencies like NSF and NIST.
Second, it's time for Federal agencies, and particularly NSF, to
focus much more on commercialization and industry partnerships. NSF is
almost exclusively focused on providing funding for scientific research
to universities and makes little effort to ensure that these results
are commercialized and lead to jobs in the United States. Congress can
play a key role in spurring more industry partnerships and
commercialization at universities and Federal labs. First, as Congress
increases science agency budgets, ITIF recommends that programs that
focus specifically on industry partnerships and technology
commercialization should receive a large share of the increases.
Second, Congress should consider requiring NSF to tie funding to
universities to the extent the latter work closely with industry and
commercialize technology. Third, Congress should consider creating a
new program to support university, state, and Federal laboratory
technology commercialization initiatives, funded by a small ``tax''
levied on Federal research (the way SBIR and STTR are funded). Finally,
we encourage Congress to expand R&D tax credit generally and also the
scope of the current collaborative R&D credit.
We believe these steps would significantly increase technology
innovation and related jobs in the United States. Moreover, these steps
could be taken with almost no net negative budgetary impact.
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 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 Klenow 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).
---------------------------------------------------------------------------
\1\ Elhanan Helpman, The Mystery of Economic Growth (Cambridge,
Massachusetts: Belknap Press, 2004).
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Innovation is also essential if we are to create 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 higher wage jobs for workers in
manufacturing and ``low-tech'' services. Innovation 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. Low-wage nations can now
more easily perform labor-intensive, difficult-to-automate work.
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.
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.
The United States No Longer Leads the World 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 the world in innovation for the rest of the
century after WWII. However, changes at home and abroad have meant that
while the United States continues to have many strengths we no longer
lead the world in innovation. We see signs of this relative decline in
a wide array of indicators. The decline began at least in the 1980s,
with the United States' shares of worldwide R&D investment, U.S.
patents, scientific publications, researchers, and science and
engineering degrees falling from the mid-1980s to the beginning of this
century. But given our strong overall lead, the declines were not
enough to dethrone us from our number one position.
Yet, since then the U.S. has continued to lag on a number of key
factors, including growth in corporate and government R&D, scientific
and technical degrees and workers, venture capital, and creation of new
firms. As ITIF documented in its report The Atlantic Century, from 2000
to 2009, the United States slipped from number 1 to number 6 in global
innovation-based competitiveness, falling behind nations such as
Singapore, Denmark, Sweden, and South Korea on a per-GDP basis. The
reason is that all of the other 39 nations or region examined made
faster progress than we did on a collection of 16 innovation
competitiveness indicators.
We also see the evidence of our decline in our trade performance.
The trade deficit represents perhaps the most visible manifestation of
the global challenge. At 5 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.\2\ The traditional U.S. trade surplus in
agricultural products is nearing zero and in high-technology products
has turned negative. In fact, the United States has actually run a
negative trade balance in high-technology goods since October 1995.
Meanwhile, our surplus in services trade is small and only holding
relatively steady.
---------------------------------------------------------------------------
\2\ 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/transannual06_fax.pdf.
---------------------------------------------------------------------------
We also see it in the decline in U.S. manufacturing output as a
share of GDP. This has been 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.\3\ But drilling down to
more detail causes a different, and more troubling picture to emerge.
Over the last 25 years, the share of non-durable manufacturing output
(e.g., sectors such as chemicals, paper, and food products) declined
from around 7 percent of GDP in 1993 percent to 4.7 percent in 2008.
The share of durables (e.g., sectors such as motor vehicles, wood
products, and electronics), in contrast, increased to just over 9
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. But taking out
computers and electronic products (NA ICS code 334) shows a very
different picture, with durable goods output share declining from 7
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.
---------------------------------------------------------------------------
\3\ U.S. Bureau of Economic Analysis, ``Real Value-Added by
Industry.''
---------------------------------------------------------------------------
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. It also appears to understate the value of imports in this
sector, thus imputing more domestic output to the sector than is
warranted. 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
(and export) base, these statistics provide reassuring, if false,
comfort. In 2011, the United States is poised to cede its title as the
world's leading manufacturer--a position it has held for the last 110
years--to China.\4\
---------------------------------------------------------------------------
\4\ Peter Marsh, ``U.S. manufacturing crown slips,'' Financial
Times, June 20, 2010, http://www.ft.com/cms/s/0/af2219cc-7c86-11df-
8b74-00144feabdc0.html.
---------------------------------------------------------------------------
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. With the emergence of globalization and
relatively faster growth in income of many nations, one would expect to
see the global share of U.S. output fall. And it is certainly true that
as some advanced nations began to catch up (in part by emulating and
going beyond our policies) 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 innovation competitiveness 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 in our decline. There are a number of
non-policy factors that appear to be at work. One key factor is the
pressure from U.S. financial markets to prioritize increasing short-
term returns to shareholders over growth or investments with longer-
term payoffs, such as research and development and workforce training.
Financial pressures have forced many U.S. firms to not only cut back on
the growth of their research budgets, but to reallocate their research
portfolios more toward product development efforts and away from longer
term and more speculative basic and applied research. As Figure 1
shows, from 1991 to 2007, basic research as a share of 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 increased by 7.1 percentage
points. Moreover, corporate R&D as a share of GDP fell in the United
States by 5 percent from 1999 to 2006, while in Europe and Japan it
grew by 2 percent and 12 percent respectively. This has contributed to
the U.S. share of global R&D falling from 39 percent in 1999 to 33
percent in 2007, while China's share increased fourfold.\5\
---------------------------------------------------------------------------
\5\ Organization for Economic Co-operation and Development,
``Ministerial Report on the OECD Innovation Strategy,'' May 2010,
www.oecd.org/dataoecd/51/28/45326349.pdf.
---------------------------------------------------------------------------
Figure 1: Changes in the Shares of Corporate Basic and Applied Research
and Development Between 1991 and 2007 \6\
---------------------------------------------------------------------------
\6\ Source: Authors' analysis of National Science Foundation data.
It's not just corporations that are investing relatively less on
riskier R&D. So too are venture capital firms. Venture capital has been
a vital, and, at least initially, a distinctively American component of
our national innovation system. In 2008, venture capital-funded
companies accounted for 11 percent of private sector employment and
represented the equivalent of 21 percent of U.S. GDP.\7\ But venture
investments are moving downstream as VCs focus on the most attractive
later stage deals. In fact, while total venture capital funding for
zero and first stage deals increased from 1996-2008, the share of total
venture capital going to zero and first stage deals actually declined
from 35 to 24 percent in the same time period.\8\ This equals a market
failure around risk, leading to underinvestment in early stage start-up
deals, and also resulting in a gap between the completion of basic
research and applied R&D. In addition, more recently, the level of
venture capital activity has declined considerably in the current
recession. In the first quarter of 2009, total U.S. venture capital
investment plunged 60 percent as compared to the same period a year
earlier.
---------------------------------------------------------------------------
\7\ Global Insight, ``Venture Impact: The Economic Importance of
Venture Capital-Backed Companies to the U.S. Economy,'' 2009, 2.
\8\ While venture capital in the United States increased from $11.3
billion in 1996 to $28 billion in 2008, the amount invested in
startup--and seed-stage deals only increased from $1.3 billion to $1.6
billion, or by one-third. The amount invested in early-stage deals rose
from $2.8 billion to $5.3 billion between 1996 and 2008, but the early-
stage share of total venture funding fell from about 25 percent to
about 18 percent. Similarly the share of startup- and seed-stage
venture capital fell from 11.6 to 5.8. Authors' analysis of 2008 data
from PricewaterhouseCoopers/.
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Another concern is that U.S. firms are moving R&D offshore. R&D
expenditures from U.S.-based multinationals in emerging Asian markets
increased from 5 percent to 14 percent between 1995 and 2006.\9\ And
over 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 increased from 8 to 18 percent.\10\ Taken
together, it is clear that the U.S. private sector engine of innovation
is not working as well as it used to.
---------------------------------------------------------------------------
\9\ ``Science and Engineering Indicators: 2010,'' National Science
Foundation, 2010, http://www.nsf.gov/statistics/seind10/c0/c0s3.htm.
\10\ Booz Allen Hamilton and INSEAD, ``Innovation: Is Global the
Way Forward?'' (Booz Allen Hamilton, 2006), 3.
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One reason for these private sector challenges is that U.S. policy
has not kept up to provide the support and incentives needed for
private sector innovation. 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. Since the mid-1990s, total Federal R&D investment 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.\11\
To restore Federal R&D support as a share of GDP to its 1993 level, we
would have to increase Federal R&D investment by 50 percent, or over
$37 billion.
---------------------------------------------------------------------------
\11\ Titus Galama and James Hosek, U.S. Competitiveness in Science
and Technology (Santa Monica, California: RAND Corporation, 2008), 67.
---------------------------------------------------------------------------
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.\12\ Among OECD
countries, the United States now ranks seventh in total R&D intensity,
behind a list of countries including Japan, South Korea, Finland, and
Sweden.\13\ Moreover, the United States places only 22nd in the share
of government GDP devoted to non-defense research.\14\
---------------------------------------------------------------------------
\12\ Organization for Economic Co-operation and Development, OECD
Science Technology and Industry Scoreboard 2005, 2005.
\13\ Organization for Economic Co-operation and Development, OECD
Science, Technology, and Industry Scoreboard 2007, 2007, http://
oecd.p4.siteinternet.com/publications/doifiles/9220070
81PIG2.xls.
\14\ Norman Augustine, Is America Falling Off the Flat Earth?
(Washington: National Academies Press, 2006), 53.
---------------------------------------------------------------------------
Federal investment in most of the programs that focus most directly
on innovation promotion have also declined or grown more slowly than
GDP. Funding for NSF's Partnerships for Innovation program has grown
more slowly than GDP since the program began operating in 2000. NIST's
Manufacturing Extension Partnership (MEP) is scheduled to receive
$131.8 million in FY10, only 3 percent more (not adjusted for
inflation) than it did in 1999. The America COMPETES Act abolished ATP
and created a new Technology Innovation Program (TIP) with a
substantially broader scope than ATP. However, the legislation did not
match the broader scope with increased funding. TIP is slated to
receive $140.5 million in 2010, slightly more than ATP received in 2005
but less than ATP received in any year between 1998 and 2004. Funding
for NSF's Engineering Education Center programs, which includes NSF's
Engineering Research Centers (ERCs) have declined by 11 percent since
2004.\15\
---------------------------------------------------------------------------
\15\ FY 2005 and 2009 Budget Request to Congress, National Science
Foundation.
---------------------------------------------------------------------------
The Defense Advanced Research Projects Agency (DARPA) has played a
key role historically in driving innovation. The Internet grew out of a
DARPA initiative. However, over the last decade, DARPA funding as a
share of GDP has declined by over 20 percent. Moreover, in recent years
DARPA has shifted toward more short term, mission-oriented
development.\16\ Indeed, it is not an exaggeration to state that if
DARPA were making the kinds of investments it makes today 30 years ago,
the Internet never would have been developed.
---------------------------------------------------------------------------
\16\ Erica Fuchs, ``The Role of DARPA in Seeding and Encouraging
New Technology Trajectories: Pre- and Post-Tony Tether in the New
Innovation Ecosystem,'' Industry Studies Working Paper, (2009), http://
isapapers.pitt.edu/73/.
---------------------------------------------------------------------------
Lack of adequate funding has also severely impacted agencies like
the Patent and Trademark Office (PTO) and the Food and Drug
Administration that are critical to enabling inventions become
innovations in the marketplace. Both the PTO and the FDA used to be the
envy of other nations around the globe for their effectiveness and
efficiency. But the backlog at the PTO means that most patent
applicants will wait many years before finding out if their invention
is granted a patent. Likewise, there have been increases in delays at
the FDA for drug and device approval and difficulties in upgrading the
scientific expertise the FDA needs in order to expeditiously and
effectively evaluate new drugs and biological submissions.\17\
Likewise, the United States Office of the Trade Representative lacks
the resources it needs to adequately go after rampant high-technology
mercantilist practices other nations are engaged in to take market
share away from U.S. technology companies.
---------------------------------------------------------------------------
\17\ See Battelle Technology Partnership Practice, ``Gone Tomorrow?
A Call to Promote Medical Innovation, Create Jobs, and Find Cures in
America'' (Washington, D.C.: The Council for American Medical
Innovation, June, 2010).
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Finally, 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.\18\ And while
our research universities are still a key strength, their future is
uncertain given the large cuts in state higher education budgets and
slow growth in Federal support for university research.
---------------------------------------------------------------------------
\18\ James Adams, ``Is The U.S. Losing Its Preeminence in Higher
Education?'' NBER Working Paper 15233, (2009).
---------------------------------------------------------------------------
The declines have not just been in direct spending. Relative to
other nations our R&D tax credit has become significantly less
generous. In the early 1990s, the United States had the most generous
R&D tax credit among 30 OECD nations. Now, because other nations have
expanded their R&D incentives, U.S. rank has fallen to 18th.\19\ And
among 38 nations, it ranks 24th, now behind India, Brazil, and China
(India's R&D tax credit is now four times that of the United States).
The reason for this slippage is that the United States ranks just 21st
out of 24 OECD countries assessed in rate of change in tax credit
generosity between 1999 and 2008. Congress would need to increase the
Alternative Simplified Credit (ASC) from 14 to 20 percent to reach 10th
place and 47 percent to become the most generous of the OECD
nations.\20\
---------------------------------------------------------------------------
\19\ Organization for Economic Co-operation and Development , OECD
Science, Technology, and Industry Scoreboard 2009, 79, http://
dx.doi.org/10.1787/744214584778.
\20\ 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/files/WM-2009-03-
rd.pdf.
---------------------------------------------------------------------------
Weaknesses in the U.S. innovation system don't simply stem from
underfunding. The organization of efforts is often not optimal to
driving innovation. Perhaps the most striking weakness is the fact that
although there are a number of programs that help companies become more
innovative or productive, there is no agency that has firm-level
innovation as its sole mission. (In stark contrast to the litany of
nations listed below who do have such an agency.) With a few important
exceptions, U.S. innovation policy is at best a byproduct of Federal
programs whose main purpose lies elsewhere.
In addition, 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.\21\ 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.
---------------------------------------------------------------------------
\21\ Issues of the State Science and Technology Institute's Weekly
Digest provides examples (www.ssti.org).
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What Can We Learn from Other Nations?
Over the last 15 years, a large number of nations have woken up to
the fact that they need to compete for internationally mobile
innovation-based economic activities, and have put in place policies
that reflect that determination, such as more generous R&D tax
incentives 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. As a result, U.S. firms are now competing against firms in a
growing number of national economies in which their governments
actively help them compete.
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
productivity, and that losing the competition can result in a
relatively lower standard of living as economic resources shift to
lower-valueadded industries. These countries are implementing
coordinated national innovation agendas that boost R&D funding, have
introduced policy changes and government initiatives that more
effectively transfer technologies from universities and government
laboratories to the private sector for commercialization, and are
ensuring 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.
These innovation-support policies are crucial to national
innovation competitiveness, as Professors Furman and Richard found in a
study of the innovation capacity (an economy's potential for producing
a stream of commercially relevant innovations) of twenty-three
countries from 1978 to 1999.\22\ Starting with 1978, 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.
---------------------------------------------------------------------------
\22\ 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.
---------------------------------------------------------------------------
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, moving
to the world's technological frontier and overtaking the innovative
capacities of many mid- and third-tier countries, including France and
Italy, whose economic conditions started off much more favorably in the
early 1980s. Furman and Hayes conclude that the innovation leadership
these countries achieved was based not only on 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.
1. National Innovation Strategies
Part of the United States' leadership slippage is attributable to
the fact that over the past decade many of our competitors--from Great
Britain and Finland to Japan and South Korea--have created national
innovation and competitiveness strategies designed specifically to link
science, technology, and innovation with economic growth.\23\ As
Annabelle Malins, British Consul General for the Southern U.S.,
commented recently, ``The United Kingdom has made a conscientious
decision to place innovation at the center of our country's economic
growth strategy.'' \24\ Where these countries have coherent, strategic
game plans to compete and win in the highest value-added sectors of
economic activity, the U.S. relies more on one-off policies that, while
valuable and necessary, are all too often not tied to a coordinated
strategy.
---------------------------------------------------------------------------
\23\ Stephen Ezell, ``America and the World: We're Number 40!,''
Democracy Journal, Issue 14, Fall 2009, http://
www.democracyjournal.org/pdf/14/Ezell.pdf.
\24\ Annabelle Malins, ``Address to National Foreign Trade
Council,'' Raleigh, North Carolina, April 15, 2010.
---------------------------------------------------------------------------
These nations are not content to let their government policies and
actions influence innovation in a haphazard and uncoordinated way. They
seek to develop strategies to assess their nation's weaknesses and
strengths, examine the policies of other nations in order to learn from
them, and assess and revise their own national policies in a broad
array of areas that could influence innovation and competitiveness,
including tax policy, regulation, direct science and technology
programs and other areas (see Table 1).
It should be noted that these strategies seldom seek to ``pick
winners and losers'' in the sense of picking individual firms to favor.
Indeed, these strategies are a far cry from the strongly directive
Japanese efforts, for example, 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. And they seek to better align what government
already does to ensure that it best supports innovation and
competitiveness.
Table 1.--Selected Countries with a National Innovation Strategy and/or
Foundation
------------------------------------------------------------------------
National Innovation National Innovation
Country Strategy Agency
------------------------------------------------------------------------
Australia Yes Yes
Austria Yes Yes
Canada Yes No
China Yes No
Denmark Yes Yes
Finland Yes Yes
France Yes Yes
Germany Yes No (Yes at the
Bundeslander level)
India Yes Yes
Ireland Yes Yes
Japan Yes Yes
Malaysia Yes Yes
The Netherlands Yes Yes
Portugal Yes Yes
Norway Yes Yes
Rwanda Yes No
Singapore Yes Yes
South Korea Yes Yes
Spain Yes Yes
Sweden Yes Yes
Thailand Yes Yes
United Kingdom Yes Yes
United States Yes No
Uruguay Yes Yes
------------------------------------------------------------------------
2. Civilian Technology and Innovation Promotion Agencies
Many countries not only have innovation and competitiveness
strategies, but also agencies specifically charged with spurring
private sector 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 innovation
promotion agencies (see Table 1). Many countries have launched such
agencies only fairly recently. For example, India launched its National
Innovation Foundation in 2000, Sweden introduced Vinnova in 2001,
Thailand created a National Innovation Agency in 2003, the launched
Senter November in 2004, and the United Kingdom launched its Department
for Business, Innovation, and Skills in 2009.
All these countries have science- and university-support agencies
similar to America's National Science Foundation, which largely fund
basic research. 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.
These countries' innovation agencies perform roles such as
channeling R&D into specific technology or industry research areas;
surveying the world to identify nascent technologies; building
technology ``roadmaps''; creating new knowledge pertaining to the
methods, processes, and techniques of innovation; transferring
knowledge from academia and government to the private sector;
encouraging private-sector technology adoption; catalyzing industry-
university research partnerships; supporting regional industry
``technology clusters''; developing national innovation metrics; and
championing innovation in the public sector.
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.
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 3 years. Like Tekes, it is also responsible for more than 20
industry- and technology-based knowledge transfer networks, with more
being established.
In virtually all cases 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.
These nations also often invest considerable resources in these
efforts. 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. In fact, it invests around $3 billion per year,
or 0.02 percent of GDP. 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.\25\ 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.
---------------------------------------------------------------------------
\25\ 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.
---------------------------------------------------------------------------
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.'' \26\ It is funding Lithium-ion
battery research over the five-year period from October 2007 to October
2012 at $275 million (25 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 10 years to applied
research on automotive electronics, lithium ion batteries, lightweight
construction, and other automotive applications.\27\
---------------------------------------------------------------------------
\26\ 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.
\27\ Auto Industry U.K., ``Germany invests =420M in lithium-ion
battery development,'' May 13, 2008, http://www.autoindustry.co.uk/
news/13-05-08_2.
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3. Tax Incentives for Research and Development
As noted above, many other nations have much more generous tax
incentives for the private sector to invest in R&D. They do this not
only to encourage existing companies to expand R&D, but to attract
globally mobile R&D activity. But not only have these nations put in
place more generous research incentives they have been more innovative
in using incentives to spur research and innovation. For example, 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.
Other nations have more generous credits for companies investing in
national laboratories or universities. For example, in France,
companies funding research at national laboratories receive a 60
percent credit on every dollar invested. Denmark, Hungary, Norway,
Spain, and the U.K. provide firms more generous tax incentives for
collaborative R&D with public research institutions. Japan's R&D
incentive for research expenditures companies make with universities
and other research institutes is almost twice as generous as its
regular credit.
Other nations are increasingly providing tax incentives to treat
income received from patents more generously. For example, Belgium
taxes income received from patents at a rate of 0 to 6.8 percent and
Ireland at 0 percent. Switzerland has reduced corporate taxes on income
from all intellectual property to between 1 and 3 percent. Just this
year, the Netherlands expanded this incentive to include income derived
from patents or R&D which are taxed at just 5 percent.\28\
---------------------------------------------------------------------------
\28\ The Netherlands Ministry of Finance, ``Doing business in the
Netherlands,'' http://www.minfin.nl/english/Subjects/Taxation/
Doing_business_in_the_Netherlands/Innovation_box.
---------------------------------------------------------------------------
Steps Congress Can Take to Boost U.S. Innovation and Competitiveness
The government's role in addressing the innovation economy is not
to regulate business or to direct the path of technological
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 simply ``leaving it up
the market'' not only because the innovation economy is rife with
market failures but also because U.S. firms are now in global
competition with firms that have their government as an innovation
partner. In this sense, government should be a facilitator that spurs
firms to innovate in ways that serve the public interest. 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.
As a core of this strategy, the Federal Government needs to invest
significantly more in scientific research, commercialization, and
innovation, including funding entities like the PTO and FDA that help
support the innovation process. ITIF rejects the notion that in a time
of fiscal constraint innovation investments should take their share of
cuts, just like all other budget items. The reality is that investments
in innovation are not like all other areas of the budget, most of which
produce no or little additional economic activity and tax revenues. If
structured properly Federal investments in innovation (either through
direct spending or tax incentives), can more than pay for themselves,
not only in terms of jobs and economic growth, but also tax revenues.
However, given the current political climate that favors cutting
the deficit over investing in America's future, I will focus my
recommendations on activities that will have limited budgetary impact.
If policies are crafted carefully, achieving greater levels of
innovation and commercialization of R&D while recognizing budget
limitations need not be mutually exclusive. Even in a time of budget
constraints there are many pro-innovation policies Congress can pursue
that will add little to the Federal deficit (under its current static
and short-term budgetary scoring system).
With this in mind, I offer the following set of innovation-
enhancing policy proposals, each designed to be of low or no cost to
the Treasury, but whose impact on enhancing U.S. innovation and
competitiveness could be significant. These are organized into two
areas: (1) changes in the structure of the Federal Government to better
support innovation and (2) enacting policies to spur university-
industry partnerships and technology commercialization.
Before going into detail on these, let me make it clear that we
believe that there are a wide range of policies that can spur
innovation and should be the focus on national innovation policy. Three
in particular are worth mentioning here. First, high-skill immigration
reform to make it easier for the U.S. to attract and retain the best
and the brightest from around the world is a key step Congress could
take. As we recently noted, the old arguments that these highly-skilled
immigrants take jobs away from Americans or lower their wages are
simply not true.\29\ Second, Congress and the Administration need to do
more to fight foreign ``high-tech'' mercantilism. As ITIF has shown,
many nations are using an array of unfair trade practices, including
standards; government procurement; anti-trust; intellectual property
theft, including product counterfeiting; and other policies to
systematically disadvantage U.S. technology companies in the global
marketplace. U.S. trade policy needs to more aggressively go after
these violations of the spirit and often the letter of the WTO.\30\
Third, we need to expand our tax incentives for R&D. ITIF recently
calculated that expanding the Alternative Simplified Credit from 14
percent to 20 percent would after several years created 162,000 jobs
and actually lead to a net increase in Federal tax revenues of $9
billion annually.
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\29\ New academic research has found that H1-B visa workers do not
take jobs away from American workers, nor do they reduce their wages.
Cited in Robert D. Atkinson, ``H-1B Visa Workers: Lower-Wage
Substitute, or Higher-Wage Complement, (Washington, D.C.: ITIF, June,
2010), http://www.itif.org/publications/h-1b-visa-workers-lowerwage-
substitute-or-higher-wage-complement.
\30\ Julie Hedlund and Robert Atkinson, ``The Rise of the New
Mercantilists: Unfair Trade Practices in the Innovation Economy,
(Washington, D.C.: ITIF, June 2007), http://www.itif.org/issues/
15?page=2.
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I. Restructure the Federal Government to Better Support Innovation
The Federal Government plays a key role in innovation. To be most
effective, Federal policy should be aligned wherever possible to
proactively support innovation. President Obama took an important step
in this direction with the creation of the position of a Chief
Technology Officer in the White House. But more needs to be done. ITIF
suggests three key changes:
1. 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. As noted
above, we are one of the few nations without one. The last time the
United States did anything similar was President Carter's Domestic
Policy Review on Industrial Innovation in 1978 and President Reagan's
1984 Commission on Industrial Competitiveness. These efforts were
extremely important in setting the stage for a number of important
Congressional initiatives, including the R&D tax credit, the Bayh-Dole
Act, the National Cooperative R&D Act, the Stevenson-Wydler Technology
Innovation Act, and the Omnibus Trade and Competitiveness Act.
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 Administration 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. competitiveness. Legislation 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
competitiveness (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.
2. Form an Office of Innovation Review in OMB (i.e., an Office of
Information and Regulatory Affairs for Innovation). 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.
To remedy these problems, we recommend that Congress create a White
House Office of Innovation Review that would have the specific mission
of being the ``innovation champion'' within these processes. OIR 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. OIR 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 OIR would
not be designed to thwart Federal regulation; as a matter of fact, in
some cases, the existence of OIR 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 OIR a fairly small change to the system? Certainly adding OIR
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, OIR 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.
3. Establish a National Innovation Foundation. If Congress wanted
to more effectively organize Federal innovation implementation efforts,
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.\31\ A National
Innovation Foundation would:
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\31\ Robert Atkinson and Howard Wial, ``Boosting Productivity,
Innovation, and Growth Through a National Innovation Foundation,''
(Washington, D.C.: Information Technology and Innovation Foundation and
The Brookings Institution, April 2008), www.itif.org/publications/
boosting-productivity-innovation-and-growth-through-national-
innovation-foundation.
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 Federal innovation policy. Creating NIF could
be done in a budget neutral way by consolidating existing programs
(with around $350 million in annual support). Because of its strong
leveraging requirements from the private sector and state governments,
NIF would lead to an expansion of overall national efforts devoted to
innovation.
II. Spur University Industry Partnerships and Commercialization
As companies have reduced their relative investment in basic and
applied research, universities and Federal laboratories have become
more important to the U.S. innovation system. As Fred Bloch and Matthew
Keller documented in a recent ITIF report, Where Do Innovations Come
From? Transformations in the U.S. National Innovation System, 1970-
2006, in 2006 76 of the 88 companies that produced award-winning
innovations were beneficiaries of Federal funding.\32\ Today, the
private sector increasingly relies upon partners in universities and
Federal laboratories when developing innovations. Indeed, universities
are becoming more important players in the innovation process.
---------------------------------------------------------------------------
\32\ Fred Bloch and Matthew Keller, ``Where Do Innovations Come
From? Transformations in the U.S. National Innovation System, 1970-
2006,'' Information Technology and Innovation Foundation, July 2008,
http://www.itif.org/files/Where_do_innovations_come_from.pdf.
---------------------------------------------------------------------------
However, 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.
Not surprisingly, many universities and Federal labs underperform
when it comes to working with industry and commercializing
technologies. The major reason for this is that few universities and
Federal labs see commercialization and industry partnerships as a
central part of their mission. In this context, the Federal Government
can and should take a number of steps to support and incent
universities and labs to more effectively commercialize technology.
They can do this in a variety of ways.
4. Focus Increases in Science Agency Budgets on Programs That Focus
on Commercialization. The National Science Foundation is fundamentally
an agency which focuses on supporting university-based science, not on
the transfer of these results to the marketplace. And this is reflected
in part in the minimal levels of funding for NSF programs that seek to
create partnerships with industry, such as the Engineering Research
Center Program and other related programs. These partnership programs
receive less than 2 percent of the overall NSF budget.\33\ Unless
Congress specifically charges the NSF with focusing more on
commercialization and significantly increases funds for the programs
that have that as their mission, the NSF will continue to give these
programs short shrift.
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\33\ FY 2009 Budget Request to Congress, National Science
Foundation, http://www.nsf.gov/about/budget/fy2009/toc.jsp.
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As such, we recommend that Congress not just simply expand science
agency funding across the board within NSF, NIST, and DOE Office of
Science (as is contemplated in the reauthorization of the COMPETES
Act), but that Congress target a significant share of increased funding
to the programs more focused on commercialization activities. In
particular, COMPETES reauthorization should look to increase by a
factor of four (over a period of 3 years) funding for NSF's Engineering
Research Center program, the Industry/University Cooperative Research
Centers (I/UCRC), Partnerships for Innovation, Grant Opportunities for
Academic Liaison with Industry, and Advanced Technical Education (ATE)
Program. These programs not only effectively leverage non-Federal
dollars (for example, I/UCRCs leverage 10 to 15 times the NSF
investment), they effectively link universities and colleges to
industry.
Some will object to such targeting, arguing that the funds should
go to ``basic'' university research. But there is no reason why some
share of university 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).\34\ One
way to improve the link between economic goals and scientific research
is to fund more strategic research in partnership with industry and
universities.
---------------------------------------------------------------------------
\34\ Donald Stokes, ``Pasteur's Quadrant,'' Brookings Institution,
1997.
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5. Tie Federal Research Awards to University Commercialization
Results. Currently, NSF awards grants to universities solely on
technical merit, not on whether the university is effective on
transferring the results of that research into society and the economy.
ITIF recommends that America COMPETES legislation include incentives
for accountability. The legislation contemplates more dollars and more
grants for private investigator scientific research; but we need
greater accountability for results--a challenge we've had for more than
20 years. Many countries are experimenting with measures that would
bring greater accountability to show results from government-funded
scientific research. For example, in Sweden, 10 percent of regular
research funds allocated by the national government to universities are
distributed using performance indicators. Five percent of these funds
are allocated based on the amount of external funding the institutions
have been able to attract, with the other 5 percent based on the
quality of scientific articles published by each institution (as
determined through bibliometric measures such as the number of
citations).\35\ Finland has also started to base its university budgets
on performance--25 percent of Finnish universities' research and
research training budgets are based on ``quality and efficacy''
including the quality of scientific and international publications and
the universities' ability to attract research investment from
industry.\36\
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\35\ Swedish Ministry of Education and Research, ``Government Bill:
A Boost to Research and Innovation,'' November 17, 2008, http://
www.sweden.gov.se/sb/d/6949/a/115809.
\36\ Jukka Haapamaki and Ulla Makelainen, ``University Steering,''
Finnish Ministry of Education, June 17, 2009.
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One way to begin this process would be for Congress to charge NSF
with using the criteria of the share of the university's research
budget that is provided by industry when it makes awards to
institutions (as opposed to individual scientists). Programs using this
criteria might include the NSF Major Research Equipment and Facilities
Construction Funding program, the Major Research Instrumentation
program, and the Technology and Tools Funding program. If universities
understand that their likelihood of receiving NSF grants is increased
if they work more closely with industry, they will likely do so.
6. Create an SCNR (Spurring Commercialization of Our Nation's
Research) Program to Support University, State, and Federal Laboratory
Technology Commercialization Initiatives. In addition to using Federal
research funding as an incentive for universities to work more with
industry, ITIF believes that the Federal Government should also provide
funding to directly support commercialization activities. However, in
an era of fiscal constraint adequate new funding may be difficult to
obtain. As a result, Congress should consider establishing 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. If Congress allocated 0.15
percent of agency research budgets it would raise around $110 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.\37\ We would recommend that
half the funds would go to universities and Federal laboratories that
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 50 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, a fraction of what they spend on industrial
recruitment to convince firms to move from one state to another. States
are a key partner in the U.S. innovation system, and the Federal
Government needs to better support their technology commercialization
efforts.
---------------------------------------------------------------------------
\37\ U.S. Small Business Administration, ``Description of the Small
Business Technology Transfer Program,'' 15. http://www.sba.gov/
aboutsba/sbaprograms/sbir/sbirstir/SBIR_STTR_
DESCRIPTION.html.
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7. Expand the Scope of the Collaborative R&D Tax Credit.
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. Moreover, participation in research consortia has a
positive impact on firms' own R&D expenditures and research
productivity.\38\ And OECD analysis shows that firms that collaborate
on innovation spend more on innovation than those that do not, an
indication that collaboration is more a means to extend the scope of a
project or complement firms' competencies than simply a means to save
on costs.\39\
---------------------------------------------------------------------------
\38\ L. Branstetter and M. Sakakibara, ``Japanese Research
Consortia: A Microeconometric Analysis of Industrial Policy,'' 21,
Journal of Industrial Economics, 46 (1998): 207-233.
\39\ OECD, ``Science, Technology and Industry Scoreboard 2009,'' 6.
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Yet, 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 socially optimal levels.\40\ 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 declined over a 6-year period, from
2000 to 2006 (before experiencing a modest increase in 2007).\41\ 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.\42\
---------------------------------------------------------------------------
\40\ 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.
\41\ Raymond Wolfe, ``U.S. Business Report 2008 Worldwide R&D
Expense of $330 Billion: Findings from New NSF Survey,'' National
Science Foundation, 2008.
\42\ Barry Bozeman and Albert N. Link, ``Tax Incentives for R&D: A
Critical Evaluation,'' 24. Research Policy, 13, no. 1 (1984): 21-31.
---------------------------------------------------------------------------
ITIF urges Congress to 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. To spur more collaborative
research, Congress could allow firms to take a flat credit of 20
percent for all collaborative research conducted at universities,
Federal laboratories, and research consortia, not just that related to
energy.
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.
Senator Klobuchar. Those were great ideas. Thank you, Dr.
Atkinson.
Mr. Ubl.
STATEMENT OF STEPHEN J. UBL, PRESIDENT AND CEO, ADVANCED
MEDICAL TECHNOLOGY ASSOCIATION
Mr. Ubl. Thank you, Madam Chair, Ranking Member LeMieux,
Senator Begich, for the opportunity to testify today.
Senator Klobuchar failed to mention I'm also from
Minnesota, which is----
Senator Klobuchar. Well, I was trying to hide it, because--
--
Mr. Ubl. Yes.
Senator Klobuchar.--it meant we had two----
Mr. Ubl. Two proxies----
Senator Klobuchar.--Minnesotans on the panel. And so, I
was----
Mr. Ubl. All right.
Senator Klobuchar.--trying to--I was deep-sixing it. No,
it's fine; I'm kidding.
Mr. Ubl. We appreciate your strong leadership and support
of our industry, and look forward to continuing to work with
you.
This hearing is particularly timely. The Financial Times
reported, this weekend, that, after 110 years of world
manufacturing leadership, the United States is about to lose
first place to China. While manufacturing, generally, is
faltering, the U.S. medical technology industry still leads,
but our continued leadership cannot be taken for granted.
I'd like to make three points today, which are discussed in
greater detail in my written testimony.
First, the medical technology industry is an American
success story, both for patients and for our economy. And the
potential for this industry, going forward, is enormous. For
patients, medical progress has been remarkable. Between the
period of 1980 and 2000, life expectancy has increased by more
than 3 years. Deaths from heart disease have been cut in half.
Stroke has been reduced by 30 percent, and breast cancer
reduced by 20 percent.
For the economy, we are a true high point in the landscape
of American manufacturing. We create high-paying jobs; 38
percent higher pay, on average, than jobs in the economy as a
whole. As you mentioned, employment in our industry is growing,
up 20 percent between 2005 and 2007. And we are one of the few
manufacturing sectors that has consistently been a net
exporter. And the future opportunities are enormous. Advances
in the understanding of human biology open the door for
dramatic progress in new treatments and cures.
The aging of the world population will create steadily
increasing demand for medical progress, and the projected large
growth of middle-class populations demanding modern healthcare
in countries like China and India offer incredible
opportunities for growth and export expansion.
Second, while America is the world leader in medical
technology today, this leadership is by no means assured, and
the trends are not positive. Since 1998, the surplus of exports
over imports has been cut in half. Our member companies are
increasingly introducing breakthrough products abroad before
they're available to patients here at home. The proportion of
clinical research trials conducted abroad has also grown
dramatically.
Both FDA approval and Europe's CE Mark provide a gateway to
developing markets, such as China and India. Our concern is
that, over time, a more efficient European regulatory system
could make it more attractive to locate R&D and manufacturing
outside of the U.S. Venture capital investment in medical
technology, as has been referenced is increasing faster in
Europe today than it is in America.
At the same time these negative trends are occurring,
foreign governments are putting in place aggressive policies to
support their domestic industries and lure foreign investments,
including favorable tax treatment, direct subsidies, failure to
enforce IP protection for American firms, and manipulation of
regulatory and payment policies to favor domestic research and
production.
Finally, my third point is that we need to recognize that
government policies have a tremendous impact on whether or not
the United States retains its leadership in medical technology.
These include regulatory, reimbursement, tax, trade, research
and innovation policy. All are key factors in determining the
future success of our industry.
I would especially like to highlight the central role of
the FDA regulatory policies. FDA policies must protect the
public health, but they must also encourage the medical
innovation that is critical to patients and American industry.
One policy issue deserves special mention: FDA's
reexamination and potential reform of the 510(k) process. This
process fosters rapid incremental innovation for products with
a low to moderate level of risk. It has an excellent track
record in protecting public health. It would be a serious
mistake, in our view, to make radical changes in the process
that would undermine these strengths. Reform should be targeted
on product types where there are documented problems, and
should be reasonable and clearly designed to fix these problems
within the structure of the 510(k) process.
At the same time, there are changes that could be made that
would be clear improvements. FDA needs to provide greater
clarity and transparency in evidence requirements through more
guidance documents. This will help both manufacturers and
reviewers, and will increase public confidence in FDA
decisionmaking.
FDA also needs to work internally on increasing the
consistency of decisionmaking and training of its reviewers. I
know that the new team at FDA is committed to making the
process work better, and I am hopeful that they will listen to,
and respond to, industry concerns.
Madam Chair and all members of the Committee, thank you
again for the opportunity to testify this afternoon. For
America to lead in the 21st century, we must recognize that
success will not just happen; it requires the creation of a
positive ``innovation ecosystem'' that will capitalize on our
industry's strengths and create a level playing field with
foreign competitors. We believe the opportunity is great. The
time to act is now.
And thank you very much for your time and attention.
[The prepared statement of Mr. Ubl follows:]
Prepared Statement of Steven J. Ubl, President and CEO,
Advanced Medical Technology Association
Thank you, Chairwoman Klobuchar, for the opportunity to testify on
this important topic. My name is Steve Ubl, and I am the President and
CEO of the Advanced Medical Technology Association (AdvaMed). AdvaMed
is the world's leading trade association representing manufacturers of
medical devices and diagnostics. AdvaMed member companies produce the
medical devices, diagnostic products and health information systems
that are transforming health care through earlier disease detection,
less invasive procedures and more effective treatments. AdvaMed members
range from the largest to the smallest medical technology innovators
and companies.
We are very appreciative of this subcommittee's interest in the
issue of the competitiveness of the life sciences industries. While
today the U.S. is the recognized world leader in medical technology and
the other life sciences industries, its continued leadership is by no
means assured. A number of factors, including policies of foreign
governments designed to support medical technology, threaten to
undermine U.S. leadership and competitiveness. If America fails to lead
in medical technology in this century of the life sciences, America's
long-term future as the world's most powerful economy will be
jeopardized.
Several characteristics of our industry are especially relevant as
policies are considered to support the continued preeminence of the
American medical technology industry. It is important to recognize that
small firms are a key part of our industry. A 2007 study by the U.S.
International Trade Commission (USITC) found a total of 7,000 medical
technology firms in the U.S.\1\ The U.S. Department of Commerce
estimated that 62 percent of these firms had fewer than 20 employees
and only 2 percent had more than 500.\2\ Even large companies in the
medical technology space tend to be smaller than large companies in
many other sectors. There are only four pure device and diagnostic
companies in the Fortune 500 and none in the Fortune 100.
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\1\ United States International Trade Commission, ``Medical Devices
and Equipment: Competitive Conditions Affecting U.S. Trade in Japan and
Other Principal Foreign Markets,'' March, 2007.
\2\ U.S. Department of Commerce, unpublished data, 2002.
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Small, venture capital funded firms are particularly critical to
the future of U.S. scientific and technology leadership, because they
are the source of most of the breakthrough technologies that drive
medical practice and industry growth. The National Venture Capital
Association has developed an impressive list of breakthrough medical
devices and diagnostics that were initially developed by venture
capital funded start-ups, ranging from Doppler ultrasound to
implantable defibrillators to pulse oximeters.\3\
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\3\ Michaela Platzer, Patient Capital: How Venture Capital
Investment Drives Revolutionary Medical Innovation, 2007.
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Whether created by large or small firms, medical technologies are
characterized by a very rapid innovation cycle. The typical medical
device is replaced by an improved version every 18-24 months.
High levels of research and development (R&D) expenditures are
necessary to continue this virtuous cycle of innovation and maintain
U.S. competitiveness. As reported by the USITC, research and
development is one of the main reasons for the US's competitive
advantage. U.S. medical technology firms spent over twice the U.S.
average on R&D. The USITC found that high technology medical device
companies devote upwards of 20 percent of revenue on R&D.\4\ The
European Commission reported that U.S. medical technology firms' R&D
expenditures as a percentage of sales were, on average, roughly twice
as high as such expenditures in the EU and Japan as of 2005.\5\ There
are indications, however, that this differential is eroding.
---------------------------------------------------------------------------
\4\ USITC, ``Medical Devices and Equipment: Competitive Conditions
Affecting U.S. Trade in Japan and Other Principal Foreign Markets,''
March, 2007.
\5\ Ibid.
---------------------------------------------------------------------------
The device industry is highly competitive, and this helps moderate
U.S. healthcare costs. A study of medical device prices from 1989 to
2006 found that they increased, on average, only one-quarter as fast as
the MCPI and one-half as fast as the regular CPI. Because the highly
competitive market kept prices low, medical devices and diagnostics
accounted for a relatively constant 6 percent of national health
expenditures throughout the eighteen year period despite a flood of new
products that profoundly changed medical practice.\6\
---------------------------------------------------------------------------
\6\ Donahoe, Gerald and King, Guy. ``Estimates of Medical Device
Spending in the U.S.'' May, 2009. Available from: http://
www.advamed.org/NR/rdonlyres/6ADAAA5B-BA37-469E-817B-3D61DEC4E7C8/0/
King2009FINALREPORT52909.pdf.
---------------------------------------------------------------------------
A key feature distinguishing medical technology from many other
manufacturing sectors is the extraordinary impact of Federal policies.
All medical technology products sold domestically are regulated by the
Food and Drug Administration (FDA). Most must receive clearance or
approval before they can be marketed and all are subject to quality
systems and good manufacturing practices regulations. Further, products
are monitored for adverse events once marketed to the public and are
subject to recall authority. Accordingly, FDA policies are critical to
the health and growth of the industry.
Beneficiaries of government programs are important consumers of
medical technology. In 2008, Medicare and Medicaid together paid for
medical care that accounted for 48 percent of total domestic sales of
medical technology products. Patients in the VA and DOD care systems
are also major users of medical technology. Meeting the coverage rules
of these programs is critical for medical technology companies, given
the size of this market, and their reimbursement policies ultimately
affect a major share of company revenues. In addition, Medicare
coverage decisions and payment methodologies often spillover to the
private insurance market, expanding the impact of government decisions
significantly beyond the boundaries of the government programs.
The manufacture of medical technology is an American success story.
Our industry employs more than 400,000 workers, and, if indirect
employment is included, the employment impact is substantially
higher.\7\ Industry pay levels are 38 percent higher than average pay
for all U.S. employment and 22 percent higher than other manufacturing
employment.\8\ While the number of manufacturing jobs was plummeting
across the larger economy, even before the current recession,
employment in our industry was expanding. Between 2005 and 2007,
medical technology employment grew 20.4 percent, adding 73,000 jobs.\9\
During the recession, between 2007 and 2008, MedTech employment dropped
1.1 percent, compared to 4.4 percent for manufacturing as a whole.\10\
---------------------------------------------------------------------------
\7\ The Lewin Group, ``State Economic Impact of the Medical
Technology Industry,'' June 7, 2010.
\8\ Ibid.
\9\ Ibid.
\10\ Ibid.
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With $33 billion in total exports in 2008, medical technology ranks
eleventh among all manufacturing industries in gross exports.\11\
Notably, unlike virtually every other sector of U.S. manufacturing,
medical technology has consistently enjoyed a favorable balance of
trade. With the aging of both U.S. and foreign populations, the
projected explosive growth of large middle class populations demanding
modern health care in developing countries like China and India, and
the accelerating pace of biomedical discovery, the potential for growth
of our industry is great.
---------------------------------------------------------------------------
\11\ The Manufacturing Institute, ``The Facts about Modern
Manufacturing,'' 2009, p. 18; ITC data web.
---------------------------------------------------------------------------
The contribution of the life sciences to our economy goes beyond
conventional measures of employment, wages, and exports. By improving
the health of the population, progress in the life sciences is an
engine driving productivity and labor force participation, both
significant contributors to economic growth and GDP. Between 1980 and
2000, medical progress added more than 3 years to life expectancy. The
death rate from heart disease was cut in half; the death rate from
stroke was cut by one-third, and the death rate from breast cancer was
cut 20 percent.\12\
---------------------------------------------------------------------------
\12\ MEDTAP International, Inc.. The Value of Investment in Health
Care: Better care, better lives, 2004, Bethesda, MD: MEDTAP.
---------------------------------------------------------------------------
The Milken Institute has compared two alternative futures regarding
the growth in chronic disease. Under one path, the current trends in
growth in the incidence of chronic disease continue unchecked. Under
the other path, the growth is reduced significantly by a combination of
better prevention, better management, and continued technological
progress in treatment. The difference between the current trend path
and the more favorable path was estimated to be $1.1 trillion in GDP
annually by 2023.\13\ Similarly, the United BioSource Corporation
examined the literature on the economic burden of lost productivity due
to eleven chronic and two acute conditions. They concluded that the
total drain on the Nation's GDP in 2008 from lost productivity and
labor force participation due to these conditions was as much as $1.4
trillion annually in 2008.\14\
---------------------------------------------------------------------------
\13\ Ross DeVol and Armen Bedroussian, with Anita Charuworn,
Anusuya Chatterjee, In Kyu Kim, Soojung Kim and Kevin Klowden. An
Unhealthy America: The Economic Burden of Chronic Disease, the Milken
Institute, October, 2007.
\14\ United BioSource Corporation, The Economic Burden of Chronic
and Acute Conditions in the U.S., 2009. Available at http://
www.advamed.org/NR/rdonlyres/92EABCBA-4A06-4712-BFF0-1EE90C119876/0/
A28690BurdenofDiseaseReport_Final_81409_CLEAN_Rev1.pdf.
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While the medical technology industry is a genuine American success
story, our world leadership is not guaranteed to continue. Without
sound public policy, it is increasingly likely that the U.S. will fall
behind not only in medical devices and diagnostics but in other
industries based on the life sciences.
To quote Dr. Laurence Summers, Chairman of the National Economic
Council, ``The 20th century was an American century in no small part
because of American leadership in the application of the physical
sciences. While the foundational ideas of relativity and quantum
mechanics were developed in Europe, the practical application of these
ideas occurred in the US. If the 20th century was defined by
developments in the physical sciences, the 21st century will be defined
by developments in the life sciences. It is natural to ask whether the
U.S. will lead in the life sciences in this century as it did in the
physical sciences in the last. It is a profoundly important economic
question, but one whose implications go far beyond to embrace issues of
national security and moral leadership.'' \15\
---------------------------------------------------------------------------
\15\ Lawrence Summers, ``America Must Not Surrender Its Lead in
Life Sciences,'' Financial Times, January 28, 2007.
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There are a number of indicators that show that the gap between
America and foreign competitors in the medical technology industry is
narrowing. While the U.S. has maintained a favorable balance of trade,
the surplus of exports over imports has been narrowing both in absolute
terms and relative to the size of the export-import sector. In 1998,
imports and exports together totaled $24.6 billion and the trade
surplus was $6.6 billion--more than one-quarter of total trade. By
2009, total trade had almost tripled--to $63.5 billion, but the trade
surplus had shrunk by more than half--to $3 billion, and the surplus
was only 4.7 percent of total trade.
A troubling trend is the rapid movement of clinical research
abroad. In 2004, 78.7 percent of all clinical trials listed in
ClinicalTrials.gov were carried out in the U.S. By 2009, that
proportion had sunk to 45 percent. U.S. clinical trials that were
specifically for medical technology products started even higher and
finished even lower, dropping from 86.9 percent of the worldwide total
to 44.8 percent during this period. The cumulative annual growth rate
of U.S. clinical trials 2004-2009 was lower that of Brazil, China,
France, Germany, India, the U.K., Israel, and Japan.\16\
---------------------------------------------------------------------------
\16\ Clinicaltrials.gov. PwC analysis.
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Given the importance of startup firms in creating breakthrough
technologies and fueling the growth of the industry, America's strong
network of venture capital firms with an interest in investing in the
life science has been a key strength. Here, too, although the U.S.
maintains a strong lead in absolute terms, the lead is shrinking
relatively. Comparing 2000 and 2009, venture capital investment in
medical technology grew almost 60 percent in Europe and Israel and less
than 40 percent in the U.S.\17\
---------------------------------------------------------------------------
\17\ Data from Ernst & Young.
---------------------------------------------------------------------------
Not only is venture capital growth in the U.S. slower than abroad,
we are increasingly hearing that growing regulatory and payment
uncertainties in the U.S. are causing VC firms to rethink whether they
want to invest in the sector. Moreover, as they see longer time--and
thus greater cost--in getting products to market as the result of these
uncertainties, they are planning to invest the same amount of dollars
in fewer companies and shifting investments more to companies that are
further along in the development process.\18\ If these trends prove
durable, they would be very troubling for the future of medical
innovation and for the industry. Moreover, there are far more start-ups
seeking VC funds than there are funds available, suggesting that
significant innovation opportunities are being lost.
---------------------------------------------------------------------------
\18\ Ernst and Young, Pulse of the Industry: Medical Technology
Report 2009; Batelle Technology Partnership Practice, ``Gone Tomorrow?
A Call to Promote Medical Innovation, Create Jobs, and Find Cures in
America,'' report prepared for the Council for American Medical
Innovation, June 10, 2010.
---------------------------------------------------------------------------
Another troubling trend is that many AdvaMed members are
increasingly looking to Europe to launch their products, given the
longer regulatory process in the US. As the USITC reported ``*an
efficient regulatory approval system is an important factor favoring
the medical device industry in the EU.'' \19\ This observation applies
not just to medical technology designed to be used in the EU but
increasingly to third countries as well. For example, China now
requires approval in the country of origin. So, to the extent the EU
process is more efficient, medical technology approved in Europe has an
edge over the U.S. in China. Likewise, many other countries in Asia and
Latin America use approval in the EU or U.S. as the basis for market
access to their market, favoring the more efficient EU system.
Australia is another case in point, as its regulatory system is based
on the European system, thereby expediting approvals.
---------------------------------------------------------------------------
\19\ United States International Trade Commission, ``Medical
Devices and Equipment: Competitive Conditions Affecting U.S. Trade in
Japan and Other Principal Foreign Markets,'' March, 2007.
---------------------------------------------------------------------------
The fact that products are launched first abroad has several
negative consequences. From a human point of view, it means that
American patients may be denied timely access to the newest and best
treatments. From a commercial point of view, as more and more products
are launched first abroad, there is a real danger that R and D
establishments will follow, so that product development will be close
to the first users of the product.
Foreign countries are working to undercut America's leadership in a
number of ways that transcend the regulatory system. Many European
countries offer a wide range of incentives to attract job-creating
industries. For example, France dedicates funding equal to 2.2 percent
of its GDP to programs designed to foster innovation and R&D--such as
research tax credits, incentives for start-ups, Federal subsidies, as
well as an additional $50 billion grant program about 10 percent of
which is specifically dedicated to health and biotech research. Germany
has committed about $1.5 billion to life science research, as well as
special cash payments--some covering as much as 50 percent of costs--
and grants to attract investment. The U.K. offers a variety of R&D tax
credits, special schemes to support job-creating capital investment,
and a new Office of Life Sciences specifically designed to involve the
highest levels of government in cutting red tape, attracting clinical
research and expediting the use of innovative medical technology.
Ireland's multiple incentives have attracted over 90 separate medical
device companies (including 15 of the world's top medical device
firms), according to the USITC. Moreover, the European Commission
offers its member states additional incentives to help attract job-
creating industries as part of its ``Framework Programmes,'' in which
healthcare related industries are specifically identified.
Of course, Europe is not our only competitor, and other governments
are eyeing the medical technology industry to bring jobs to their
people. They are adopting policies to achieve this. For example, China
has implemented an Indigenous Innovation policy in its government
procurement--which could well include the vast public hospital sector--
that is intended to require purchases of products with ``domestic''
intellectual property and to force the transfer of technology to
domestic companies. Brazil's health minister has publicly proclaimed
that he will use Brazil's product approval regulatory agency to favor
domestic medical technology firms. India is building a series of
industrial parks expressing to attract medical technology investment
and the jobs that foreign companies will bring.
In the face of the negative trends noted above and the aggressive
policies undertaken by foreign governments to build domestic industries
and attract investment from multinationals, what should be the American
response? In my view, we need a proactive program to assure that the
U.S. retains its commanding lead in medical technology and all the life
sciences. We need a program that will allow America to take full
advantage of the enormous growth opportunities for medical technology
in the 21st century. We need a program that will maximize the
industry's contribution to the President's goal of doubling exports
within 5 years.
The comprehensive approach I believe is necessary will include
regulatory policy, reimbursement policy, trade policy, tax policy, and
policies to support research and development. AdvaMed will continue to
develop policy recommendations for the Committee. Today, I can share
with the Committee a few ideas for your consideration. I hope we can
work together over the coming months to positively shape the direction
of U.S. policy and assure America's continued leadership.
Regulatory Policy
The predictability and speed of FDA decision-making, as well as
reasonable, risk-based standards of evidence to show the safety and
effectiveness of medical technology products is essential to maintain
innovation and the long-term success of the medical device industry.
The FDA clears products for marketing by one of two routes--the 510(k)
process or the Pre-market Approval (PMA) process. The 510(k) process
clears products based on their similarity to products that are already
on the market and is not available to the highest risk products. To be
cleared under the 510(k) process, a product must be ``substantially
equivalent'' to a product already on the market, and manufacturers must
demonstrate that the product is as safe and effective as the marketed
product. If it has different technological characteristics or a
different intended use than the product already on the market, the
device manufacturer must present data to show that the product does not
``raise new questions of safety and effectiveness.'' The FDA has broad
discretion to require any data that it thinks necessary to assure the
safety and effectiveness of the device, including clinical data.
The 510(k) process is critical to a vibrant and successful device
industry and to the process of medical innovation that provides better
products for patients to address unmet clinical needs. In a typical
year, 3,600 new products will be cleared for marketing through the
510(k) process. This compares to 30-40 products annually approved
through the PMA process.
The FDA is currently conducting a thorough review of the 510(k)
process with a view to instituting internal reforms by early September.
The IOM has also been asked to review the process and will be making
recommendations next year as to any changes it thinks are necessary.
The device industry welcomes this review, because we believe the
process can be improved and that public confidence in it can be
increased. In this regard, we have contributed a number of ideas to the
FDA and are pleased that they are being given careful consideration by
the Agency leadership.
We also believe, however, that the 510(k) process has an excellent
record of protecting the public against unsafe or ineffective products
while providing a relatively speedy path to development and approval of
innovative products. It is very important to the future of the industry
and to continued medical progress that the 510(k) not be altered
radically in a way that would unnecessarily increase the time and cost
of developing new products.
The PMA process is reserved for products that are most innovative
and of highest risk. PMA products are typically required to provide
clinical data and often required to conduct a controlled trial of a new
product. Development and testing of a PMA product is inherently costly,
but the time it takes FDA to complete the review of a product is
troubling. According to FDA data, in 2007--the most recent data
available--the average time between a product's submission and a final
decision by the FDA was 446 days. The device industry entered into a
user fee agreement with FDA in 2002 in part to reduce the long time it
took to complete a PMA review. Between that time and 2007, however, the
average time in review actually increased by 2 months.
The figures cited above reflect total time between submission of a
product to FDA and an FDA final decision. This is the most important
metric for industry. As part of the user fee agreement, however, FDA
has committed to achieving review time goals based on time on the FDA
clock--that is time in which the FDA is actively reviewing a product.
This time clock stops whenever the FDA asks the company for more data
or clarifying information and restarts when it is supplied by the
company. We have relatively current data for time on the FDA clock, and
it shows that the FDA is not meeting its own review goals. We are
pleased that the FDA leadership has made correcting this problem a
priority and hope that the newest data will show an improvement.
Finally, the FDA recently put out draft recommendations to increase
transparency of its operations. Transparency is clearly a laudable
objective. FDA's recommendations are well-intentioned and, in some
cases, meritorious. We are very concerned, however, that some of the
recommendations dealing with release of information on products that
are in the review process and cannot be legally marketed will undermine
intellectual property and discourage investment in breakthrough
products while providing no significant public health benefits. We hope
that the final recommendations will address these concerns.
As I noted earlier, it is not a good omen for the future of the
U.S. device industry--or for American patients--that an increasing
proportion of complex products appear to be undergoing clinical trials
and entering the market abroad before they are introduced in the U.S.
The FDA leadership understands that promoting medical innovation is
part of its mission to protect and improve the public health, and I am
hopeful that FDA will find ways to speed up PMA reviews, maintain an
effective 510(k) process and increase the predictability and
consistency of reviews while maintaining its exemplary record of
protecting patients against unsafe or ineffective products.
Payment Policy/Health Reform
A reliable expectation of adequate payment for products offering
clinical benefit is a prerequisite for a healthy medical technology
industry and for stimulating investment in technological innovation.
The new health reform bill makes a number of changes in the way health
care is paid for under Medicare that will, over time, create a profound
shift in incentives throughout the health system. These changes are
generally positive. Most policy analysts agree that the key to reducing
growth in health costs and improving quality is to shift incentives in
the health care system toward rewarding value and away from simply
paying on the basis of volume and cost.
While these new payment paradigms offer the promise of a more
efficient and effective health care system, there are also some
potential pitfalls that could negatively affect innovation and medical
progress if the new systems are not carefully designed to encourage
innovation.
The widespread adoption of an improved treatment or cure generally
follows a typical path. The treatment is developed by a company or a
physician. Following FDA approval (in the case of a drug or device) the
new treatment is adopted by cutting-edge physicians and is recognized
by insurance companies and other payers. If the treatment proves
successful in practice, it gradually diffuses until it becomes the
standard of care.
Without special protections for innovation, the new changes in
health care delivery models and the application of quality standards to
reimbursement risks freezing medical practice in place. New delivery
models must ensure patient access to appropriate devices, diagnostics,
and other medical technologies and must not penalize early adopters of
new technology. The current quality standards are generally ``process''
standards--for example, for a given specific disease state, a certain
course of action should be followed. For example, patients presenting
with a heart attack are supposed to be treated with percutaneous
coronary intervention (PCI) within 90 minutes. The new payment
modalities embed these quality standards in the level of payment
physicians and other providers will receive. Without special provisions
in the reporting and payment system, providers who are early adopters
of a new, alternative treatment--a new drug or procedure to replace
PCI--will be penalized.
The same concern applies to adoption of new treatments that appear
to be more expensive than the existing standard of care. Not only does
the early adopter face a potential penalty on the quality side, but
they also could be treated as inefficient because they are generating
higher costs--even if the new treatment represents a significant
clinical advance.
Providers could be penalized even if the new treatment actually
lowers costs, if the savings appear outside the measurement window. For
example, under bundled payments--where all providers treating a patient
during an episode of care receive a single, lump sum payment--costs are
measured across the episode of care. A drug-eluting stent that reduces
costs over the long-term by reducing the need for repeat procedures
would appear more expensive than a bare metal stent. So would a heart
valve or a knee replacement that lasts for 20 years instead of 10 years
or other treatments that have better outcomes over a more extended
period than the immediate episode of care.\20\
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\20\ None of the payment schemes address economic benefits from
effective treatment that arise outside the health system, from reduced
disability, expanded productivity, and reduced dependency.
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These problems can be addressed without undercutting the central
goals of payment reform. Possible solutions could include:
Develop explicit design features to ensure Medicare health
care delivery demonstrations and pilots protect patient access
to appropriate devices, diagnostics, and other medical
technologies and must not penalize early adopters of new
technology.
Improving the existing new technology add-on payment that is
part of the current system by which hospitals are reimbursed
for treatment of each Medicare patient and applying a revised
version to the new payment modalities. Under the new technology
add-on payment provision, hospital reimbursement for patients
treated with a new technology that offers the promise of a
significant improvement in care and is more costly than current
treatments is increased to partially reflect the increased cost
of the new treatment. The increase is time-limited.
Allowing a grace period during which new treatments that are
alternatives to existing quality standards are pulled out of
both the numerator and denominator in judging providers'
performance.
Applying a modified version of the outlier policy in the
current hospital payment system to the new payment modalities,
so that providers are not penalized for providing appropriate
care to patients who need more expensive treatments than the
norm. Under the outlier policy, hospitals receive an increase
in payment for treatment of patients whose care is
substantially more costly than the average patient with that
diagnosis.
Building Innovation Into Government Policy
The discussion of the importance of considering the impact of
payment and regulatory policy on innovation suggests another approach
to stimulating the competitiveness of the life sciences sector. As
agencies carry out their individual missions, most do not consider the
impact of policies on medical innovation as part of their mission. As
discussed earlier, the new payment paradigms created by health reform
could have a profound and negative impact on medical innovation. These
negative impacts can be avoided without doing violence to the goals of
health reform. But to make sure the changes support rather than inhibit
innovation, someone has to be thinking about the issue and build
appropriate measures into implementation.
One option for assuring that innovation is considered as policies
are implemented across the government would be to create a dedicated,
adequately staffed office within the White House with the specific
mission of making sure that government policies are sensitive to
medical innovation and support the President's goals of assuring that
America leads the world in science and technology. The office's
activities would be complementary to the current work of OSTP and
PCAST. This office would act as an advocate for innovation, provide
review and input into policies of individual agencies, and serve as a
point of contact for industries, institutions and individuals with an
interest in medical, scientific and technological innovation. Such an
office could be located within PCAST, OSTP or the National Economic
Council, or could be a stand-alone office. This proposal has recently
been endorsed by the Council for American Medical Innovation, a
coalition of leaders and organizations from research, medicine,
academia, industry, and labor.
A related policy that could be considered is to require that each
major policy decision or regulation include an analysis of the impact
of the policy on medical, scientific and technological innovation. This
would be analogous to an environmental impact statement. Requiring that
a statement of this kind be included would assure that the issue of
innovation is at least considered as policies are developed.
Trade Policy
The opportunities for export growth by our industry and
corresponding job creation in the United States are very great. Rapid
economic growth in emerging markets is 2-3 times faster than in the
U.S., EU and Japan. China's middle class is projected to exceed the
entire U.S. population by 2015, and India's middle class could reach
600 million by 2025. These are just two of the largest expanding
markets, with smaller but also rapidly growing economies in Southeast
Asia, Latin America, and the Middle East. In each of these countries,
the emerging middle class is demanding first class medical care and
creating a very large potential market for advanced medical technology.
Even in Europe, the market for many advanced technologies is
historically under-penetrated.
The question is whether the U.S. medical technology industry will
retain its leadership position to take advantage of this growth
overseas and expand exports and create jobs for Americans. The future
seems far less secure in view of the increasing competition by foreign
companies and, perhaps more significantly, by foreign governments.
Overseas, we see government policies that are designed to encourage
domestic growth in, and attract foreign investment to, the medical
technology industry. In the U.S., we need a comparable response.
As I have mentioned, there are significant efforts by a number of
foreign governments to support a home-grown medical technology industry
or to encourage location of research or manufacturing facilities or
purchase of locally manufactured components by multinationals. Some of
these efforts are legitimate, but others represent abuse of government
power. Opening markets and ensuring a level playing field are essential
to the future growth of the U.S. medical technology industry.
Protection of American intellectual property is particularly vital. We
are pleased with the support our industry has received from U.S.
agencies involved in trade--the USTR, Commerce and State. The officials
in these agencies have worked hard to use the tools they currently have
to attack discriminatory practices in other countries.
But they need more firepower to match the efforts of other
countries. U.S. trade barriers are very low--virtually non-existent for
medical technology. Other countries, especially the fast growing
emerging markets, have much higher access hurdles. Unless the U.S.
becomes engaged in actively negotiating and implementing free trade
agreements (FTAs) that lower those barriers, U.S. exports will suffer.
The EU has many more FTAs around the world than the U.S. China is
pursuing FTAs with its Asian neighbors. The barriers that U.S.-made
medical technology must overcome drives up the cost of our products in
foreign markets compared to domestically made products and even medical
technology from their FTA partners.
The proposed Trans-Pacific Partnership (TPP) should be viewed as
one important component of the Administration's export promotion for
the medical device industry. Implementing the U.S.-Korea FTA should be
another, followed by launching many more FTA negotiations. In addition
to the direct benefits from the specific provisions of the agreements,
each FTA provides a valuable forum for governments to discuss and
resolve trade issues. In a highly competitive global market, the United
States cannot afford to disengage, as other nations conclude
preferential agreements that benefit their industries. U.S. leadership
in international trade is always necessary to maintain open markets; at
no time has this leadership been more critical than in today's
challenging economic environment.
In pursuing free trade agreements, it is important that the U.S.
demonstrate a commitment to the strongest possible FTA provisions. In
addition to advancing public health and patient access, these
agreements should: (1) address non-tariff barriers (NTBs) affecting our
industry, especially non-transparent or discriminatory regulatory
procedures; (2) include provisions that foster access of foreign
consumers to innovative products; (3) encourage harmonization among the
signatories of regulations that are necessary for determination of
safety and efficacy, consistent with international norms; (4) ensure
the strong protection of intellectual property (IP) rights; (5) secure
the most expeditious elimination of tariffs possible; (6) grant
efficient regulatory approvals, while ensuring product safety; and (7)
provide expeditious customs clearance. In addition, new FTAs, like the
TPP, should include specific provisions for sectors, like the medical
technology industry, to address our unique concerns regarding
regulatory approvals and government reimbursement.
We recognize that negotiating new free trade agreements is a long-
term process and can only focus on a limited set of countries. In the
meantime, the United States is facing ever-greater challenges to its
economic position in the world, and U.S. industry is experiencing
fiercer competition in the global market place. Companies can deal with
the challenges that come from the private sector and that are unaided
by foreign government support. However, as I have noted, foreign
governments are increasingly assisting their industries, sometimes
directly but more often indirectly--for example by championing certain
industries and adopting standards and regulations that favor domestic
firms--and that are not consistent with international norms. Such
actions that are used to protect the domestic market can have a
damaging effect on U.S. exports to those markets, diminishing the U.S.
manufacturing base. Therefore, we encourage the U.S. trade agencies to
address the goals described above through all means at their disposal.
In that regard, we have two additional suggestions. First, in
negotiations with foreign governments to preserve and expand export
opportunities for U.S. manufacturers, USTR must have sufficient
authority to lead negotiations involving these issues. U.S. agencies
with regulatory authority should not have the option of opting out or
adopting a posture of only protecting their authority within the U.S.
There should be creative ways to maintain and strengthen regulations
that protect the health and safety of Americans while improving the
U.S. economy.
Second, we believe that one of the goals of regulatory agencies
should be to improve U.S. international competitiveness. For example,
the primary role of FDA is, and should certainly remain, to protect the
health and safety of the American people. At the same time, consistent
with that role, FDA should also assist U.S. international commerce. As
it now stands, FDA's international mission is almost exclusively
focused on assisting other countries to meet U.S. regulatory
requirements--including by establishing offices in many of those
countries. This legitimate outreach has the effect of facilitating
access to the U.S. market in competition with U.S.-based firms. To
maintain balance and help assure reciprocity, those same FDA offices
should be staffed and have a mandate to work, in cooperation with the
U.S. embassy, with foreign governments to assist entry of safe and
effective American products into foreign markets.
Tax Policy
As is well recognized by authorities in the field, a number of
aspects of American tax policy are not conducive to maintaining
America's lead in science and technology or in encouraging medical
technology and other industries to locate manufacturing and research
and development in the United States. Issues that have been identified
include the relatively high American corporate tax rate; the failure to
make the R& D tax credit permanent and its lack of generosity relative
to competitor nations; and tax policy that makes it expensive to bring
profits earned abroad home for investment in America. All of these
policies deserve reconsideration.
The R&D tax credit deserves special mention. The U.S. was the first
country to establish such a credit, but today it ranks 17th out of 21
OECD companies in its generosity. It has been estimated that raising
the credit from 14 percent to 20 percent would increase economic output
by $90 billion and increase Federal tax revenues by $90 billion, more
than offsetting the $6 billion of additional Federal costs.\21\ The
failure to make the credit permanent undermines its ability to
stimulate research and development, as opposed to subsidizing research
and development that would occur anyway. For the start-up companies
creating the breakthrough products of tomorrow, the R&D tax credit has
limited utility, as described below, and could be much more effective
in encouraging innovation.
---------------------------------------------------------------------------
\21\ Robert D. Atkinson, ``Create Jobs by Expanding the R&D tax
credit,'' ITIF, January, 26, 2010, cited in Gone Tomorrow.
---------------------------------------------------------------------------
The newly enacted $20 billion excise tax on medical technology
products will inhibit investment and put U.S. domiciled companies and
especially small companies at an additional disadvantage relative to
foreign competitors. Of course, we want to express our deep
appreciation of your successful efforts, Senator Klobuchar, to reduce
the level of that tax.
Encouragement Of Small and Start-Up Companies
As discussed earlier, small and start-up companies are critical
engines of innovation for the medical technology industry. These
companies are extremely dependent on venture capital and angel
investors and sufficient venture capital is often not available to fund
many promising ideas, to provide support in the earliest stages of
product development, and to sustain development of innovative products
over an extended timeframe. There are several ideas that could be
considered to address this problem that could potentially have a
significant effect in driving scientific and technological innovation:
For companies with no profits, allow the R&D tax credit to
be taken against payroll taxes or received as a refundable tax
credit rather than held and used against future profits. This
could help provide critical capital during the time when the
company most needs a positive flow of funds, and could have a
major impact in encouraging private investment and bringing
more innovative therapies to fruition.
Expand the Small Business Innovation Research program at the
NIH and liberalize eligibility requirements. This program is
potentially extremely valuable in funding early-stage research
and development by start-up companies, but the maximum award
size and the requirement that applicants can not have majority
venture capital ownership are limiting. Since the program
precluded awards to majority venture capital owned firms,
applications for SBIR grants at the NIH have declined by almost
50 percent.\22\
---------------------------------------------------------------------------
\22\ Gone Tomorrow.
Expand support for regional or local innovation clusters and
incubators. Such clusters have been shown to spur development
of new technologies and products and additional support for
local efforts to establish them could be helpful.
Invest in America's Science Base
America's science base, including basic research, the supply of
scientists and engineers, and vitality of America's universities as
centers of basic and applied research, is critical to the medical
device industry, as it is to America's leadership in science and
technology more generally. A number of studies have documented the
relative decline of America's science base by such measures as R&D
investment as a share of GDP, new patents as a share of the global
total, global share of scientific researchers, and new doctorates in
science and engineering.\23\ The Administration's proposals, as
outlined in the President's address to the National Academy of Sciences
on April 27, 2009, will go a long way to rebuilding America's
scientific and technical strength and these policies should be
maintained.
---------------------------------------------------------------------------
\23\ Robert D. Atkinson, ``Role the U.S. Government can Play in
Restoring U.S. Innovation Leadership,'' testimony before the Committee
on Science and Technology, Subcommittee on Technology and Innovation,
U.S. House of Representatives, March 2.
---------------------------------------------------------------------------
Conclusion
Thank you again for your interest in this important issue. If I
could leave you with one message it is this: to maintain America's
world leadership in the life sciences generally and medical technology
specifically, we need good policy to support our strengths in this
increasingly competitive world.
Senator Klobuchar. Thank you very much.
Mr. Weiss.
STATEMENT OF ANDREW M. WEISS, PRESIDENT AND CEO, CoAxia, INC.
Mr. Weiss. Thank you very much, Senator Klobuchar, for
inviting me to be a witness at this hearing. Senator Begich,
Senator LeMieux, thanks very much for letting me come here and
testify and represent our industry.
As you heard, my name is Andrew Weiss. I'm the President
and CEO of a startup company named CoAxia. CoAxia is pioneering
an innovative therapy to treat ischemic strokes. Ischemic
strokes affect over half a million patients a year.
By way of background, I am an engineer. I did go to MIT. I
did get a business degree. And I've spent most of my
professional career working in, or guiding, medical device
companies.
Today, in addition to my role at CoAxia, I'm on the boards
of a couple of startup companies, and I advise others, and
medical venture device firms. So, I live, sleep, eat, and
breathe this every day.
I'm here to discuss my direct experience with what it takes
to develop and commercialize medical therapies. And, as we've
heard, you know, this industry, I think, is a shining star. I
like to say to my community, ``We're the good guys.'' We've
helped with a positive trade surplus. We help improve, extend,
and help people's lives. But, this industry's now at risk.
So, our community has developed pacemakers, implants,
neurostimulators, minimally invasive surgery techniques, et
cetera. All of these devices help people's lives. And many of
the jobs in our industry are highly paid and very, very highly
skilled. And, as you heard, in our hometown of Minneapolis
there are hundreds of medical device companies, thousands of
employees. We have a precious natural--national resource, where
we can develop, test, and manufacture medical therapies for
almost any disease state right here in Minnesota--or, right
there in Minnesota.
So, let me tell you a little bit about the CoAxia story.
CoAxia was started 10 years ago, by a brilliant neurologist at
Cornell Medical Center, named Denise Barbet. Denise had an idea
for increasing the blood flow into patients' brains after they
got an ischemic stroke. She had a concept for treating these
patients. She came to Minnesota, and she found guidance and
venture capital money.
Since that time, I've raised $60 million for the company.
We've conducted five clinical trials in over 10 countries, at
80 medical universities and research centers. We've employed
dozens of people. We've recruited the efforts of hundreds of
clinical researchers in these different institutions.
And we're not done. Although we finished enrollment in our
pivotal trial, after 5 years of work, we're calculating, we're
collecting lost data. We hope, if we're positive, to submit a
PMA to the FDA sometime later this year.
After this 10 years of work, if we're positive with our
PMA, we hope to then apply for coverage, coding, and
reimbursement from CMS and the insurance agencies, and conduct
a likewise process overseas, as well. So, you can see, from the
startup of an idea, to actually getting a device into clinical
use with reimbursement can take 10 to 12 years, $50- to $100
million.
As you can see, as a CEO of a startup, I'm at the
intersection of many of the members of this ecosystem, and
these members, in many cases, don't know that they act,
frankly, in partnership. So, my job is to coordinate them all.
And who are they? They're the patients, the physicians,
inventors, universities, hospitals, regulators, engineers,
clinical trialists, suppliers, and our investors, and lawyers.
If these members aren't aligned, then the innovation process
stops. So, fundamentally, our role is to make sure that the
entire innovation process works as efficiently as possible.
This ecosystem's in great risk right now. Despite the fact
that there's an unparalleled amount of new technology to apply
to medical therapies, this whole community is threatened. The
FDA regulatory environment is in flux. And this risk of
increasing uncertainty, time to market, et cetera, is reducing
venture investing in the community. Reimbursement paths are
complex and opaque. Physician consulting relationships and
access to university technologies are being restrained.
All of these factors, combined with the global financial
downturn, has led--have led to significant declines in venture
investing. The declines in venture investing are choking off
the formation of new medical device companies. If these factors
continue to trend negatively, our ability to innovate in this
field will cease.
Let me highlight a few areas of great concern.
First of all, as we discussed, the regulatory environment.
The FDA's mission is to establish reasonable safety and
efficacy of medical devices, and to promote innovation. Demands
for additional information, delays in reviews, questionable
experience of reviewers, inconsistency in the application of
FDA guidelines, and, as we've heard, the announcement of
upcoming changes in the 510(k) process, causing concern in the
medical innovation community. Dr. Shuren, the CDRH director,
deserves a lot of credit for being public about the need, and
for driving changes.
But, what's happened in the meantime is, venture investing
in this field has frozen, in anticipation of the possibility of
more restricted FDA guidelines, and they're causing U.S.
companies, many of my colleagues, to shift to an outside-of-
the-United-States strategy for both development, trialing, and
commercializing. This is real, and it's happening today.
A clear, efficient, predictable regulatory path, which
focuses on reasonable standards of safety and efficacy, will
promote innovation in the United States. The medical community
needs a champion to help with this effort, to make sure that
the FDA is serving the balance of public good, here.
With regard to the financial community--this is the other
major risk right now--in addition to the perceived regulatory
risk, the global financial decline has led to a reduction in
venture investing. And, as I mentioned earlier, this reduction
in venture investing is negatively impacting startups.
Intellectual property reform is the third area. As it
takes, often, more than 10 years to get a new invention out
into clinical use, patent protection is critical. If we can't
offer that to our investors, they won't invest in our
companies.
And physician availability. It is critical that we have
easy access to physicians to act as consultants to our
companies, and, in some case, in early stages, that we can use
stock to remunerate them. We need access to physicians.
So, our medical innovation model is based on a public/
private partnership. We look forward to your help. Thanks very,
very much for inviting me here.
[The prepared statement of Mr. Weiss follows:]
Prepared Statement of Andrew M. Weiss, President and CEO, CoAxia, Inc.
Introduction
My name is Andrew Weiss, and I am the President and CEO of CoAxia,
a medical device start-up company based in Minneapolis, MN. CoAxia is
pioneering an innovative medical therapy for ischemic stroke, a
condition that afflicts more that 500,000 Americans every year. By way
of background, I am a mechanical engineering graduate of MIT with an
MBA from Columbia University. I have spent the majority of my
professional life leading large and small medical device companies, or
participating on their Boards of Directors. I have run startups with no
revenue and a $600M division of Medtronic. I have worked with medical
capital equipment, diagnostic imaging, patient informatics, implantable
device therapies, and single use catheter systems, with companies and
investors in the U.S., Europe and Israel. Today, in addition to my role
at CoAxia, I am a Director of two early-stage medical companies and am
an informal advisor to others and to medical venture funds.
The U.S. medical device innovation engine--the medical device
startup community--is at great risk. Despite an unparalleled level of
new technology which is available to apply to medical therapy
innovation, there is great concern in the medical community that our
ability to pioneer new therapies is threatened. The regulatory
environment is in flux. The financial system of venture capital is in a
period of decline. Physician consulting relationships and our ability
to collaborate with university hospitals are being restrained.
Intellectual property laws are in review--possibly making it easier and
cheaper for patent infringers. If these factors trend negatively, then
our ability to fund, develop, evaluate and produce new medical
therapies will decline. We need visibility to the issues, and in a
number of areas, support from our legislatures.
Medical Device Industry Benefit
Let us remember for a moment the medical devices which save,
improve or extend lives today--which are the result of medical
innovation. Pacemakers. Hip implants. Stents. Angioplasty catheters.
Neurostimulators for pain management and movement disorders. Of course
the list goes on and on. They benefit patients. They are good for our
society.
In addition, as you all know, the companies which make these
devices employ hundreds of thousands of Americans. Many of these jobs
are highly skilled and highly paid. They are the sources of income,
taxes and community wealth across the U.S.. In my hometown of
Minneapolis, there are hundreds of medical innovation companies and the
entire business and clinical infrastructure to support them: suppliers,
lawyers, consultants, clinical experts, physicians. It is an intensely
valuable community of experts who can collaborate to develop new
medical therapies. This is, in my view, a precious national resource.
In addition, U.S. medical devices are heavily exported and generate
a $5B+ positive trade balance. Our technology and devices generate
income for American companies and positive good will around the world.
Some say that medical device innovation raises healthcare costs.
More tests, more scans, more procedures, yields more costs . . .
However, innovation in medical therapies also improves patient
outcomes, speeds their return to productive, healthy lives, reduces
hospital stays, increases physician productivity and can reduce
healthcare administrative expenses.
Lastly, some people have intimated that we have enough medical
devices--and that there is no more need for medical therapy innovation.
This is an absurd and dangerous point of view. There are many, many
untapped fields of innovation in medical treatment, and we should in
fact view this decade as having the possibility of a renaissance in
medical innovation: genomics, nanotechnologies, higher levels of
computing power, miniaturization, biotechnology, device combinations
and more. To even consider our work ``done'' is a terrible injustice to
citizens with illnesses and an unwise, cynical approach to innovation
and progress.
Trends and Pressures--Medical Device Innovation at Risk
Positive trends--There are many positive factors in medical device
innovation today--primarily due to technology: the explosion of new
materials, electronic, biotechnology, genomic and communications
technologies. As I mentioned earlier, the underlying development of new
technologies is creating major new opportunities to manage care,
provide treatment, and reduce costs. From simple technologies which
allow the elderly to be remotely monitored for their heart conditions,
to complex image-guided remote robotic surgery, to closed-loop methods
to control insulin for diabetes patients, there are thousands of new
devices and new therapies in development and ideas yet to come based on
new technology development. Other positive trends have been the
increasing use of information and computing technologies to speed and
reduce the cost of development.
Negative trends/Increasing Risks--On the negative side there are a
number of critical factors which deserve your attention. As one of my
medical community colleagues Dr. Josh Makower has put it, the medical
device community is facing ``the perfect storm'' of negative factors,
which indeed threaten medical device innovation. The key negative
trends are:
Regulatory environment--Within the FDA's mission are the
requirements to establish the ``reasonable safety and efficacy'' of
medical devices, and the ``promotion of innovation.'' The division
which regulates medical devices, the Center for Devices and
Radiological Health (CDRH), has the responsibility to clear or approve
all medical devices--an enormous task. Over the past 5 years thousands
of devices have been cleared to market by the 510(k) process and a few
hundred by the PMA process. A number of trends are causing concern
among medical device innovators, including demands for additional
information, delays in reviews, a perception of inconsistency, and
announcements of upcoming changes to the 510(k) process. Dr. Jeffrey
Shuren, CDRH Director, deserves credit for being very public in his
efforts to upgrade and reform FDA practices, but in the device
community, the anecdotes of delayed reviews, inconsistency, changing
requirements and upcoming changes have caused deliberate shifts of
venture funding away from medical devices. In my experience, this shift
is due to fear among the venture investors that the regulatory
requirements are unknown and increasing.
Financial community stability--At the same time, global financial
instability, starting with the derivative and mortgage-backed security
crises has forced significant reductions in funds going into the
medical device venture funds. The impact is that venture investing is
down \1/3\, and a much higher proportion of the remaining funds is
supporting existing companies, and moving away from early stage
startups. As you can imagine--no funding--no innovation.
Uncertainty and complexity in healthcare structure, coverage and
reimbursement--For years, the complexity of our healthcare insurance
environment has challenged device innovators. Whereas we can relatively
easily identify patient and clinical needs, determining insurance
coverage, physician, hospital and clinic reimbursement paths is a
constant challenge.
In summary, the medical device innovation community is threatened
by a combination of longer and more expensive development and clinical
requirements, increased regulatory burden and risk, uncertainty in the
health coverage and insurance fields and more restrictive policies
regarding hospital and physician collaboration. If we want a healthy
medical innovation community, we must address these issues.
What Support is Needed Now
I believe, and many of my colleagues in the startup medical device
industry believe, that we are in very challenging times for new medical
device innovation. The combined challenges of regulatory uncertainty
with threat of increasing data requirements, setbacks and uncertainty
in the venture community, a long, complex and uncertain environment for
medical device insurance coverage and payment and restrictions to
access University settings and physician advisors are crippling our
ability to fund, invent, develop, evaluate and bring innovations into
clinical practice.
Medical Device Regulations--The U.S. regulatory device approval
process is by definition complex and requires deep study for any true
assessment of recommendations. The medical community needs a champion
to assure that the FDA regulatory process becomes a clear, efficient
partner in the medical innovation process--ensuring reasonable safety
and efficacy and promoting innovation. The fundamentals are: a clear,
efficient, predictable regulatory path, focusing reasonable standards
for safety and efficacy, which align with the risk/benefit of medical
devices, will promote innovation. Speed, predictability, least-
burdensome principles and a partnering attitude with the ultimate goals
of safety and efficacy are needed to ensure that U.S. medical
innovations flourish here in the U.S.
A few basic principles are important:
Innovation in medical devices needs a competent, clear,
efficient and collaborative CDRH which partners with device
developers to reach consensus on a strategy for technical and
clinical data, which assures reasonable safety and efficacy of
treatments and promotes innovation.
The medical community needs the FDA, as its regulations and
policies create a baseline for device and treatment safety,
efficacy claims, reliability, and comparable clinical and
technical evidence. This allows physicians, payers and patients
to be able to compare, select, and have confidence in their
treatment selections.
Congress needs to provide guidance to the FDA on its
fundamental role: is it chartered to select treatments for
physicians, or to regulate approval of devices and treatments
for physicians to select. It is my view that the FDA should
clear/approve treatments, and then let the medical community
select treatments based on their assessments of relative
effectiveness and their patients' needs.
CDRH must have the skills, expertise, structure, and
guidelines, along with partnerships with the medical community
to help judge the safety/risk/benefit balance of any new
therapies.
CDRH should ensure that any requests for additional
information conform to the basic principle of being ``least
burdensome.'' CDRH's device evaluation information requirements
scale based on device risk. This is appropriate and should be a
basic principle for future assessments. Requests for additional
data, tests and studies should only be those which are required
to ``assure reasonable safety and efficacy.''
There are times when studies come close to meeting but do
not fully meet their trial objectives. The FDA should have the
flexibility, and the encouragement, to allow treatments and
devices to be approved for narrower claims based on these
trials, with requests for appropriate follow-on studies, so
that these devices can be put into clinical use without the
need for completely new studies.
CDRH needs to maintain, upgrade and streamline the 510(k)
clearance process so that incremental improvements in devices
can be moved quickly through the clearance process.
Financial community stability--The medical device industry needs
stability in the financial community, healthy employment and healthy
state and Federal Government budgets in order to have the private funds
needed to support medical innovations. The current financial
environment, combined with uncertainty about the FDA regulations has
choked off investments into medical venture funds, which is further
reducing medical device startups.
Coverage and Reimbursement--Medical devices innovators need a clear
path to insurance coverage for its devices and procedures. The U.S.
presents a complex patchwork of largely independent systems which
review new devices and treatments for insurance coverage, coding and
hospital, clinic and physician payment. The lack of efficiency,
consistency and clarity in coverage and reimbursement prevents new
therapies from clinical adoption.
Hospital/University partnerships--Medical innovators need access to
university labs, people and resources. Many universities are facing
conflicting pressures of intellectual property commercialization,
restrictions on innovators or physicians from owning their inventions,
or from being compensated as consultants to startups, and from academic
conflict of interest guidelines to ensure that their professors'
publications are deemed unbiased.
Physician availability--All medical innovators--and especially the
smaller companies--need inventions, advice, feedback from, and research
conducted by leading physicians in their fields. Without physician
invention, we will lose most new medical therapy ideas. Without
physician feedback, we will develop products which do not fit their
needs. Small companies often do not have cash to pay physicians, and
rely instead on stock or option grants as compensation. Physicians need
to be able to invent--and own stakes in their own companies--and to
consult--and be compensated for their work, without recrimination.
Summary
Medical device innovation is a positive, valuable resource for the
United States. It is threatened by the combined forces of financial
markets instability, lack of clarity and administrative burden from
existing regulations and uncertainty about regulatory reform, patent
reform, access to physicians and university resources and clarity and
speed in insurance coverage and reimbursement. The industry welcomes
congressional review and visibility into these diverse issues in order
to continue to prosper and to provide innovative medical therapies,
jobs and positive export trade balances for America.
Additional Background Information
Medical Device Innovation--Collaboration Requirements
Medical Device Innovation requires many collaborating partners. In
order for our system for medical device innovation to take place, key
partners must collaborate productively. The key partners are:
I. Inventors--There are thousands of inventors in the U.S. and
overseas. This vibrant community exists in companies,
universities, hospitals and garages. They are motivated to
invent, but require financial incentives and rewards to fund
their livelihoods and work.
II. Physicians--Physicians are fundamental to the medical
innovation process. They invent, guide, judge and adopt new
therapies. It is in the public's best interest to have
physicians intimately involved with, and incentivized to
participate in development of new therapies. If physicians are
restricted from participating in therapy innovation, then the
innovation process will stop.
III. Scientists and Engineers--It goes without saying that our
national competence in engineering and science is a basic
requirement for medical innovation. We need strong
universities, science and biomedical engineering scholarships
and internships, and immigration for key talents.
IV. Patients--Everything we do is patient-focused, however, we
also critically need patients to participate in clinical
studies. Without them, we cannot determine safety or efficacy
of new therapies.
V. Universities--Universities are key sites for labs and
research facilities, generators of new technologies, education
centers for future physicians and scientists, and magnets for
inventors. University relationships with their research and
teaching staffs should facilitate business formation and
collaboration with the startup community.
VI. Hospitals, Clinics, Physician Practices--Hospitals and the
related care providers offer the underlying resource to
evaluate and then adopt new therapies. Overly restrictive risk
profiles and intellectual property rules, or inadequate patient
data management stifles new therapy evaluation.
VII. The Financial Community--The vast majority of medical
device innovation is funded by private investors who take long
term risks on the development and commercialization of new
medical therapies. Whether they are private investors in large
public companies, ``angel'' investors who seed startups, or
venture funds who provide the core capital to prove out new
therapies, each of these investors plays a fundamental role in
medical innovation: they provide the capital which funds all
the work. And, without the promise of a reasonable return for
the risk taken and capital employed, then the financial
resources will cease, and the new technology will stay just
that: as new technology. It is important for the public good
for there to be sufficient stability in the financial markets,
clarity and transparency in medical venture investing, and a
reasonable regulatory and reimbursement environment, if we are
to continue to rely upon--and benefit from--private funding of
medical device development.
VIII. Regulatory Agencies--All medical device innovators have
the same underlying objective: to develop devices and therapies
which are safe and serve a medical need. Only when a device
meets these simple objectives is there any hope of medical
adoption, insurance coverage and use--resulting in sales and
profits. In the U.S., the FDA is responsible to regulating
medical devices and therapies, for setting the standards for
safety and efficacy, and for ensuring that medical devices meet
their stated and proven claims, so that physicians and patients
can make informed decisions about adoption. Medical device
manufacturers need a clear, predictable, efficient, and
appropriate regulatory path to clear and approve medical
devices in order to both create realistic and timely plans to
evaluate new devices, but also to minimize the time and cost to
develop, evaluate and place devices into clinical use.
Note that the FDA has been in the news often these recent
months, and the medical device community is very concerned
about the recent trends. The fundamental issue is that all
medical devices have some level of risk associated with them--
and this risk must be balanced against the potential benefit of
the therapy. If the risk-benefit balance is too lax, patients
may suffer--but with good disclosure physicians will stop using
the therapy. If the balance is too tight, no new therapies will
be approved and then all patients who could possibly benefit
will be denied their opportunity for treatment. This balance is
a ultimately a decision based on data and medical judgment,
which is guided by two key FDA guiding principles: ``reasonable
safety and efficacy,'' and ``least burdensome'' paths to
market. The concern in the innovation community is that
current--and possibly the new--FDA policies are too
restrictive, uncertain and unpredictable. In this case, we
cannot plan, investors cannot invest, and our innovation cycle
breaks down.
IX. Insurers and Payers--Without insurance coverage, coding,
and appropriate reimbursement for devices, institutions and
physicians, there will be no adoption of new medical therapies.
Clear benchmarks for reimbursement and coverage processes
provide innovators guidance for timing, pricing and costs.
How the Medical Innovation Collaboration Works
The medical innovation process is long, risky, and involves the
diverse community mentioned above. To understand how to facilitate the
process--to reduce risk, remove choke points, reduce time, and increase
output, while maintaining the underlying goals of safety and efficacy--
a quick review is valuable.
a. Invention--A new idea for a medical device or therapy is
invented and the inventor often seeks advice from physicians.
Some times the inventors are University employees. Often, the
inventors offer physicians stock in their new company for their
advice. The inventor will submit patent applications for their
invention.
b. Initial Funding/Prototyping/Animal Experiments--The inventor
and physician may raise some funds from local investor
``angels''--perhaps as much as a few hundred thousand dollars--
to develop prototypes and proof of principle of their therapy.
c. Feasibility Testing--After initial testing and prototyping--
often 1-2 years from invention--the inventor may seek venture
capital funding to build a team, conduct initial human
experiments. $3M-$10M is raised, 20-30 employees are employed,
more physician advisors are needed, University research
hospitals are involved and 1-2 years passes. FDA approval of
the studies--or work overseas--is required. Following the
initial feasibility work, the team will often conduct a second
set of feasibility trials, also under FDA approval, to refine
their therapy, and demonstrate some level of patient benefit
and safety. This second trial may also take 2-4 years and
require $10M-$20M. The team may grow to support the development
and manufacturing of devices and to conduct the trials--at
perhaps as many as 10-20 hospitals.
d. Pivotal Study--The team must then conduct a pivotal study,
which is also regulated with the FDA and establishes the
specific claim language and statistically valid outcomes for
the therapy. This pivotal study may involve hundreds of
patients, take 3-5 years and cost $50M-$100M. Dozens of
hospitals, hundreds of patients, and 50+ people are now engaged
in the development, manufacturing and clinical work for the new
therapy.
e. Regulatory Submissions--After the trial is completed, the
team then submits trial results to the U.S. FDA and overseas
regulatory/insurance groups. The FDA process involves FDA
reviews, often review by an FDA-selected panel of physicians
and then a final decision by the FDA. The entire time and cost
of data collection, review, FDA submission and FDA review may
take 2 years and $10M-$20M.
f. Coding, Coverage and Reimbursement--After FDA review and
approval, the Company may now initiate sales and marketing, but
must still secure insurance/CMMS coverage and reimbursement--
and include hospital payments, physician payments and device
payments--a 2-year process.
In the end, 10 years are likely to pass, 50-100 employees hired,
$50-$100M dollars raised, 50+ hospitals, 100+ physicians, often 200-
500-1,000 patients are studied, insurers and at numerous state and at
least 2 Federal agencies have been involved. The time, commitment,
development and investment in these new devices is extraordinary.
The process for new medical devices and therapies to be developed,
tested and approved is a complex, long and risky path. Medical
innovators--and the medical startup community have mastered this
process and the new medical therapies in use every day are the result.
This is good for America. And we can do better.
Senator Klobuchar. Thank you.
Mr. Williams.
STATEMENT OF RHYS L. WILLIAMS, PRESIDENT,
NEW WORLD ANGELS, INC.
Mr. Williams. Senator Klobuchar, thank you very much for
convening this subcommittee hearing. And I want to thank
Senator LeMieux, as well, for the invitation to speak as a
witness, and thank Mr. Begich for his consideration.
Senator Klobuchar. He's returning in a minute.
Mr. Williams. I believe you.
Senator Klobuchar. I'll fill him in on what you say.
Mr. Williams. He knows where I live. I know where he lives.
Members of the Committee are likely very aware of the
critical role that entrepreneurial management plays for one of
our--for our Nation's competitiveness, and quality and quantity
of innovative technologies, and the companies that our economy
produces.
You may be somewhat less aware of the role of so-called
``angel investors,'' who, in most years, either match or exceed
the total level of early venture finance funding provided by
institutional investors to early-stage ventures. These are the
same companies that create new jobs in entirely new
industries--high-wage jobs--for our economy, and assist our
competitiveness.
Angels invest as much money as VC firms do, but in smaller
amounts and spread over a greater number of companies, with--
and also with a greater geographic dispersion of those
companies. So, in that case, a very important source of
financing, nationwide.
Angels may invest individually, in small groups of two or
three fellow investors, or as part of structured angel groups,
whose numbers may range from 20 to 25, giving them real
critical mass, in terms of combining individual checks into
meaningful financing rounds.
The prototypical angel investor--angel group investor--has
been an angel for 9 years, has made an average of 10 angel
investments during that time. They, themselves, have founded
an--on average, 2.7 ventures over 14.5-year tenure as an
entrepreneur; is 57 years of age, and has earned a master's
degree; and commits fully 10 percent of their total net worth
to investments within this asset class of early-stage
investing. So, they're very familiar with the challenges and
the opportunities within this asset class of early-stage
capital.
Early-stage investment is critical to commercializing the
technological innovations and promoting our Nation's
competitiveness. And that should be obvious by now.
From both of these perspectives, that of entrepreneur and
that of other--of angels that back them, there are several
areas where the Federal Government can take positive action to
increase and accelerate the quality and rate of our innovation.
I'd like to hit a couple of them. And I've been fortunate,
most of the panelists have covered several of them, so I can,
kind of, be very specific in certain comments.
With regard to the FDA, I'd like to make a very--a somewhat
controversial suggestion that we might--the agency might shift
away from a zero-defect mentality. And there's probably not
enough time to fully go into that, but there are medications
that provide significant benefits to a very broad number of
patients, and yet there are certain profiles where they do
present a hazard. This can be diagnosed ahead of time. And with
patient--with careful decision and oversight with physicians,
there may be cases where we should look beyond just a zero-
defect mentality within that agency.
With regard to the U.S. Patent and Trademark Office, we
really need--there are very little incentives for our
entrepreneurs to file in foreign--certain strategic foreign
jurisdictions, because of the lack of enforcement and--or
quality of enforcement. And it's unfortunate, because we
thereby abandon any, really, economic value of the innovations
that we come up with here in our country. So, we really would
like the Federal Government to significantly push for
protection, and particularly in strategic jurisdictions--China,
India.
Federal tax policy is the one area I think where I can
speak best to and is, I think, critical. The incidence of low
capital gains rates over the past several years has definitely
led to an upsurge over the past 6 years in early-stage
investment. And so, low capital gains rates are very necessary
to support an investment class which is characterized by 5- to
15-year holding periods, illiquidity up--all the up to the time
of exit, categories of risk that are just not present in other
asset classes, such as regulatory risk: Will you actually be
able to sell the product that you have, and when? Technology
risk: Will the product ultimately work, once we get the
prototype developed and the product perfected? And financing
risk: Will there actually be another investor to pick up the
baton once we've done our part and handed it off? It's a very
unique asset class, and it requires special protections. And
among those protections, or promotions, is capital gains--a low
capital gains rate. With the absolute number of angel investors
able and willing to invest, and with--contracting on an
absolute and relative basis, it's critically important that
capital gains rates remain very low to extend investment in
this asset class.
Same is true with the number of--number and extent of
venture capital investments. The industry, as it normally does,
is going through a significant contraction. The boom-and-bust
cycle usually sees the ranks thin by two-thirds over the period
of a cycle. And so, that industry, as well, is very dependent
upon low capital gains for maximum returns.
I see my time is up. If I can take just one more minute?
Senator Klobuchar. Sure.
Mr. Williams. Thank you very much.
Serious consideration needs to be given to the--removing
the threat of taxation of carried interest. This is also--I
think, will thin the ranks of venture capitalists. People--it
will steer managerial talent out of the sector. Potential
venture capitalists will seek employment in other areas, where
compensation is much more lucrative. And current fund managers
will retire. They, essentially, won't want to raise another
fund. I have seen this firsthand. I've lived it through the--
during the dot-com era. And so, our venture industry is the
envy of the entire world. It is the goose that lays the golden
egg, and we would be ill-served by threatening one of its key
incentives, which is the carried interest, the taxation of
carried interest. So, we need to, I think, leave well enough
alone when it comes to taxation of that very important feature.
I went to thank you again for this opportunity.
Unfortunately, I didn't get a chance to talk with other--on my
other points, but they are in my remarks--my written remarks.
Thank you very much for this opportunity.
[The prepared statement of Mr. Williams follows:]
Prepared Statement of Rhys L. Williams, President, New World Angels,
Inc.
My name is Rhys Williams, and I would like to thank Sen. George
LeMieux (R.--Florida) and the other Honorable Members of the U.S.
Senate Subcommittee on Competitiveness, Innovation, and Export
Promotion for this opportunity to share ideas from the frontlines of
both entrepreneurship and early stage venture finance. I am a
businessman from southeast Florida, and I wear two closely-related
hats. My primary occupation is that of biotechnology entrepreneur; I am
President of an early stage R&D firm (iTherapeutics) developing
pharmaceutical drug candidates in partnership with academic researchers
from the region's leading academic institutions. Additionally, my all-
consuming avocation is serving as President of Florida's largest and
only state-wide angel investor group (New World Angels), whose
individual members invest collaboratively in what they hope will be the
region's next entrepreneurial business success stories.
Members of the Subcommittee are very aware of the critical role
that entrepreneurial management plays for our Nation's competitiveness
and the quantity and quality of innovative technologies and companies
our economy produces. They may be somewhat less aware of the role of
so-called ``angel investors,'' who, in most years, either match or
exceed the total level of early stage venture funding provided by
institutional investors such as venture capital funds. The Center for
Venture Research estimates that U.S. angel investors invested $19
billion in 55,000 deals (in about 35,000 small businesses) in 2008.
Figures for 2009 (same source) comparing the activity of angel
investors with that of institutional venture capital funds is highly
instructive. In that year, 259,500 individual angel investors invested
$17.6 billion as part of 57,000 deals, 47 percent of which were in
early stage ventures. By contrast in that same year, 794 institutional
venture capital funds invested the same amount ($17.69 billion) as part
of only 2,800 deals, only 9 percent of which were considered as
investments in early stage companies.
Angel investors may invest individually, in small groups of two or
three fellow investors, or as part of structured angel investor groups,
whose number may range from 25 to 100. The metrics furnished by the
Angel Capital Association regarding the profile of structured angel
groups are instructive (see www.angelcapital
association.org). The prototypical angel group investor has been an
angel investor for 9 years, has made an average of 10 angel investments
during that time, have themselves founded 2.7 new ventures during a
14.5 year tenure as an entrepreneur, is 57 years of age, has earned a
masters degree, and directs fully 10 percent of his/her net worth to
angel investments as an asset class. Such members are themselves either
current or former successful entrepreneurs, and they also place
investment bets on early stage companies run by other entrepreneurs,
since they are more familiar with the challenges and the opportunities
within the early stage ventures which comprise this asset class.
Early stage investment in high-growth, technology-based ventures is
critical to commercializing technological innovations, to promoting our
Nation's competitiveness, and to robust job creation. For the 25 year
period from 1980 to 2005, firms less than 5 years old accounted for all
net job growth in the U.S. (Business Dynamics Statistics Briefing:
``Jobs Created from Business Start-ups in the United States,'' Jan.
2009). A representative list of firms initially funded by angel
investors include Google, PayPal, Starbucks, BestBuy, Amazon,
Myspace.com, facebook, Costco.com, Yahoo!, Alcoa, and Cisco Systems.
From both perspectives (those of early-stage entrepreneurs, and the
angel investors who back them), there are several areas where the
Federal government can take positive action to increase and accelerate
both new business creation and private funding thereof. Equally
important, there are areas where the Federal Government's best policy
would be to take no action at all and let private matters remain
private.
I. Regulatory Arena (Food and Drug Administration)
In recent years, the Food and Drug Administration has gone through
extended periods without formal, resolute leadership. Political
considerations in the wake of high-profile drug safety incidents have
left regulators at all levels hamstrung, afraid to make any decision
whatsoever during the long drawn-out process of regulatory review of
new drug candidates, medical devices, and ``combination'' technologies.
In such an environment, entrepreneurs lose years in their product
development timelines and must spend additional capital in order to
pursue preliminary, and ultimately final, approvals of the technologies
they seek to bring to market. As a result, early stage investors
increasingly altogether avoid making investments in areas with greatest
technological promise, for the following reasons:
With extended (and some would say indeterminate) development
timelines, is it not possible to predict what the risk-adjusted
return on investment (ROI) might be for a given technology.
Investors believe that given the internal culture of the
FDA, regulators are incented not to make approvals in any case
(for fear they may get it wrong).
With the ``regulatory risk'' so great, angel investors are
incented to make investments in other equally promising sectors
and technologies which are not required to pass through
regulatory scrutiny at all (e.g., wireless, social media,
entertainment software, business process services, etc.). The
chilling effect of regulatory delay and/or indecision is
palpable from an investor standpoint.
Recommendations:
Fill critical vacancies at the FDA as quickly as possible.
Charge the FDA leadership to send clear, consistent policy
signals as part of its regulatory pronouncements, so that both
entrepreneurs and early stage investors will understand the
FDA's expectations, requirements, preferences, timelines, etc.,
within specific biotechnological/medical sub-sectors; enhance
the agency's communication function.
Speed up regulatory review at all stages of the FDA
application and regulatory process.
Perform a cost-benefit analysis to compare societal benefits
resulting from a ``calculated risk'' policy, vs. a ``zero-
defect'' policy as pertains to new drug reviews and approvals.
Common wisdom within the biotechnology and pharmaceutical
industries is that there is no such thing as a ``safe drug'';
there are drugs whose safety profiles offer substantial
benefits to the overwhelming majority of patients who
understand and personally accept the risks of a particular
drug, undertaken with the guidance of their physicians.
II. U.S. Patent and Trademark Office (USPTO)
Similar to characteristic delays resulting from FDA regulatory
review, the U.S. Patent and Trademark Office (USPTO) is significantly
backlogged in its patent application review and patent issuance
processes. It is a common thread of discussion within the
entrepreneurial community that the USPTO is facing up to a 3.5 year
backlog in processing applications. This delay not only adds to a
company's developmental timeline requirement, but increases the legal
costs that must be born by early stage ventures. Entrepreneurs and the
angel investors who back them require more timely information regarding
whether a particular venture's technologies will receive patent
protection; patents are often one of the few assets an early stage
venture can acquire. Relatedly, an early stage venture is required to
know whether it has ``freedom to operate'' within a particular
intellectual property landscape (i.e., a general analysis that it is
not likely violating other patent-holders' rights). Entrepreneurs are
often told by investors to ``call me when you have received your patent
allowance'' from the USPTO; however, the entrepreneur is not able to
keep the doors open until that time. Given the significant gating
factor that the patent application process represents, entrepreneurial
managers must make decisions regarding allocation of time, capital,
technology, and skilled labor, often under total uncertainty. To the
extent the time-frame of this uncertainty can be minimized, from a
patent perspective, the more efficient and efficacious the venture
creation economy will be.
Finally, U.S. ventures often perceive little value in filing
patents in strategic foreign jurisdictions, since there is little
guaranty that local enforcement mechanisms are available or effective.
Consequently, entrepreneurs often forego pursuing patent filings in
foreign jurisdictions with poor or questionable enforcement mechanisms.
Intellectual property is thereby abandoned for purposes of
commercialization within that foreign territory.
Recommendations:
Consider implementing a USPTO policy of ``expedited review''
for those technologies in strategic sectors of the U.S. and
international economies (e.g., biotechnologies, wireless
technologies, clean technologies, renewable energy, etc.).
Significantly expedite the review process and approval of
patent issuances, whether this might require re-allocating
existing resources or increasing staff levels to handle
workload, or outsourcing backlogged workflows to private
vendors at key thresholds.
Continue to push for reciprocity for and enforcement of
intellectual property rights within foreign jurisdictions.
Study potential changes to the U.S. patent regime, whereby
U.S. patent rights might begin from the time of award, not from
the time of filing or disclosure. This would ``toll'' the
patent application period and allow companies to exploit the
full potential 20 year life of a patent. It would also increase
the economic value of the patent for the firm and from the
perspective of early stage investors.
III. Federal Tax Policy
The 15 percent capital gains rate has been cited as one of the most
important reasons for the increase in angel investment levels in the
last six years. Any significant increase in capital gains rates will
significantly curtail the number of investments made in this high-risk
asset class. At a time when all other economic indicators point to less
available capital for small business at the same time that the sheer
number of potential investors has plummeted with the economic downturn,
it would be counterproductive to increase capital gains taxes for
individual investors who embrace great financial risk to directly
support innovative, start-up companies.
Additionally, Federal ordinary income tax credits for angel
investments in small business start-ups would also improve the flow of
angel capital to small businesses in communities throughout the
country. Twenty-plus states and several foreign countries have
instituted income tax credits over the last decade. These credits are
generally offsets against other investor tax liabilities and enhance
the attractiveness of early stage, high-risk investments in early stage
enterprises. A Federal tax credit could ensure that innovative small
businesses would benefit from such investor credits, irrespective of
state of domicile. A nationwide credit would enhance the benefits
offered by states that already have such programs as offsets to state
taxes (federal ordinary income tax obligations are greater than state
tax liabilities). In addition, a tax credit with a nationwide footprint
could help encourage more syndication among and between angel groups in
different states, which is increasingly the manner by which
entrepreneurs are able to raise larger rounds of financing. Several
state-level precedents are instructive. A 2008 study of Wisconsin's
angel tax credit program and related initiatives found that overall
investment in Wisconsin small businesses increased by 43 percent from
2006 to 2007. Wisconsin-based angel groups increased their investments
by 57 percent and more than doubled the number of small businesses that
benefited from Wisconsin's policy initiatives during the same period.
Beyond the realm of angel investors, recently proposed legislation
to tax ``carried interest'' earned by venture capital fund managers at
ordinary income tax rates rather than at capital gains rates will
significantly reduce the number of institutional venture capital funds
being raised and consequently the amount of capital deployed to the
most deserving entrepreneurs. In normal cyclical fashion, the venture
capital industry expands by two-thirds during ``boom'' times, and then
contracts by two-thirds during ``bust'' cycles. During bust cycles,
venture capitalists ``retreat upstream'' and pursue later-stage
companies whose risk/reward profile is lower than that of early stage
companies. Thus, there is already a strong cyclical contraction
underway; to reduce the compensation earned by venture capital fund
managers will substantially exacerbate this already challenging trend.
Venture capitalists will forego or abandon their involvement in the
discrete asset class of venture capital, and instead pursue other areas
within the investment professions, such as traditional mutual fund
management, asset management, commodities and/or currency trading &
arbitrage, where the risk/reward profile will appear more attractive.
The ``drying up'' of early stage venture capital sends an extremely
discouraging signal to early stage entrepreneurs (particularly within
the biotechnology arena), and it has the very tangible effect of
channeling both capital and managerial talent into other industries and
technology sectors which require less total capital, over fewer years,
and which do not include ``regulatory risk'' as part of their
investment profile. Unfortunately, such industries are of less
strategic importance to the Nation's competitive standing (e.g., niche
consumer products now receive investor capital vs. pharmaceutical
development; entertainment media deals are funded vs. clean energy
technologies).
Recommendations:
Encourage Congress to keep capital gains tax rates for angel
investments in truly early-stage businesses at 15 percent or
less when it renews tax legislation for long-term capital gains
this year.
Given current economic conditions, Congress should consider
complementing a lower capital gains rate for successful early-
stage investments with a tax credit for investments in
innovative small businesses. Federal ordinary income tax
credits for individual angel investors in small business start-
ups would also improve the flow of angel capital to small
businesses in communities throughout the country. The Angel
Capital Association could serve as a resource to advise
legislators and policy makers on best practices gleaned from
the twenty-plus states who have implemented state-level
individual tax credit programs to promote growth of small
businesses that create high-paying jobs.
Resist calls for changing the taxation of carried interest
for venture capital fund managers from capital gains to
ordinary income. Such a policy would greatly reduce the already
shrinking pool of available venture capital and result in a
significant drop-off in new venture funds being raised.
Beyond ordinary income tax credits for individuals,
corporate tax credits for small firms could be linked to levels
of outside capital investment attracted, employment gains made
by small firms, capital equipment purchased, or some
combination of these measures. There has been experimentation
in this area at the state level as well. The effectiveness of
this proposed policy however is admittedly lessened for those
early stage technology-based firms which operate for several
years without meaningful revenues (which is not uncommon).
IV. Federal and State Securities Regulations
Federal rules require individual investors who seek to invest in an
early stage company to meet certain threshold requirements of either
wealth or income level. As the economic downturn has decreased the
number of individuals able to meet these thresholds, consideration
should be given to lowering one or both the standards.
Additionally, the Federal Government should continue its beneficial
policy of permitting the exemption of early stage company stock from
the usual securities and exchange listing requirements under Regulation
D of the 1934 Act. This exemption saves early stage companies and their
investors significant time and money, which are at a premium for such
enterprises.
Recommendations:
Preserve, and potentially lower, the traditional definition
of ``accredited investor(s)'' for securities and tax law
purposes. Conversely, raising the threshold definitions will
vastly reduce the number of angel investors eligible to make
investments in early stage companies.
Continue to protect the ``Reg. D'' exemption under the `34
Act for the offering of stock in early stage ventures.
Study the potential benefits of simplifying the complex
patchwork of all Federal regulations within the area of
securities issuance exemptions.
Pursue harmonization of Federal laws with the patchwork
landscape of the states' own ``Blue Sky'' securities
regulations. This would provide regulatory and financial relief
to early stage firms, which often must incur onerous legal cost
to ensure compliance in numerous state jurisdictions.
V. Programs Promoting the Development and Integration of Local/Regional
Infrastructure and Critical Resources for the ``Entrepreneurial
Ecosystem''
Two programs showing early promise and worthy of promotion at the
Federal level are as follows:
A. The Florida Institute for the Commercialization of Public Research
(FICPR)
The Florida Institute for the Commercialization of Public Research
(FICPR) matches commercially-viable technologies originating from the
states' public and select private research institutions with: (i)
experienced start-up managers (entrepreneurs) and (ii) private investor
capital (angel investors, venture capitalists, and corporate
development partners). FICPR is an unprecedented collaborative effort
of the technology licensing and commercialization offices of Florida's
eleven state universities as well as those private research
institutions within the state that receive public funding. These
partners are the gatekeepers charged with licensing technologies to
startups for commercial product development leading to company growth
and job creation. A nonprofit organization formed by the Florida
Legislature in 2007, FICPR's mission is to create new, innovation-based
companies and jobs by supporting entrepreneurship and commercialization
of publicly-funded research in the life sciences, aviation/aerospace,
clean energy, homeland security, and information technology sectors.
In addition to the aforementioned ``matchmaking function,'' FICPR
expands access to early stage capital by administering Florida's newly
authorized Commercialization Matching Grant Program, which provides
matching state funds to qualified Phase I and Phase II SBIR Federal
grant and STTR Federal grant awardees. The multiplier effect of this
program significantly expands the initial award of Federal grant monies
with new sources of both state funding and private investor capital.
Finally, FICPR expands and strengthens the connectivity among the
state's technology business incubators, local innovation networks,
prototyping facilities, strategic workforce training agencies, angel
investor groups, and other entities through which additional training,
communication, financing, and relevant support services are provided to
early stage ventures. In this role, FICPR leverages existing assets and
infrastructure, connecting the dots in a state often characterized by
regional and institutional insularity.
In the near future, FICPR aspires to foster even greater
connectivity among the many separate elements of the entrepreneurial
ecosystem by leveraging requested Federal funding with other state and
locally-funded initiatives and programs. The collaborative model
implemented by FICPR represents a successful precedent that is worthy
of study and replication, both regionally and nationally.
B. Promote the Establishment and Growth of Private Angel Investor
Groups and
Networks
Since angel investors have most recently accounted for roughly half
of all early-stage funding last year (also consistent with the long-
term trend), entrepreneurs and the early stage businesses they start
would benefit from an expansion of organized angel investor activity.
One challenge facing policymakers is that angel investing is, by its
very nature, an inherently private sector matter. Providing private
investors with exposure to best practices and a roadmap for how they
may organize collaborative angel investment activity at local and
regional levels is perhaps the best manner of promoting private
investment activity in early stage companies. The Angel Capital
Education Foundation (ACEF), a national source of education and
research on angel investing, serves as a resource and repository
available to assist private investors, entrepreneurs, support
organizations, legislators, and policymakers who seek to understand,
pursue, access, and/or promote angel investment activity
(www.angelcapitaleducation.org).
Recommendations:
Federal agency heads and Federal legislators should become
familiar with the programmatic successes of both the Florida
Institute for the Commercialization of Public Research (FICPR)
and the Angel Capital Educational Foundation (ACEF). Where
possible, the programs and initiatives developed by both
entities should be supported, replicated, extended, and also
integrated into existing Federal programs (as relevant).
Specific consideration should be given to funding the
FICPR's upcoming grant application to the i6 Challenge Grant
program (sponsored by the U.S. Department of Commerce's
Economic Development Administration, in partnership with the
National Institutes of Health (NIH) and the National Science
Foundation (NSF).
VI. SBIR and STTR Programs.
The Federal Small Business Innovation Research (SBIR) and Small
Business Technology Transfer (STTR) Programs have been a staple of
early stage company formation and advancement for many years. While the
time and scope of this testimony do not permit a sufficient overview of
each program, the core takeaways are as follows:
SBIR and STTR grants provide key financing for early stage
companies seeking to bridge the ``Valley of Death'' between
initial seed capital (most often provided by entrepreneurs
themselves, their ``friends and family,'' and/or angel
investors), and later, larger financing rounds from
institutional investors (e.g., venture capital funds and large
pharmaceutical firms).
SBIR/STTR grants serve an important ``validating'' function
for later investors, signaling that the science supporting the
technology under development by an early stage firm has gone
through peer-review during the grant award selection process.
SBIR/STTR grants are often the sole source of funding for
``highest risk/highest reward'' projects which seek to
demonstrate the first ``proof of concept'' for a given
technology.
In recent years, funding for the SBIR and STTR programs has been
threatened by larger corporate and institutional investor interests,
who would prefer to see Federal funding steered toward later-stage,
larger enterprises. However, SBIR and STTR grants, primarily intended
for small and mid-size enterprises, are literally the ``seed corn'' for
much of this Nation's most innovative private research and development
efforts.
Recommendations:
Preserve Federal funding support for both the SBIR and STTR
programs.
Protect SBIR and STTR programs from encroachment by larger
firms which seek to displace earlier stage firms from grant
award funding, potentially by imposing ceilings on the size of
enterprise that may be eligible for grant funding.
VII. Conclusion
Again, I would like to thank Senator George LeMieux (R.--Florida)
for the opportunity to share these observations and recommendations
with the Honorable Members of this Senate Subcommittee. Federal
policies supporting: (i) entrepreneurs, (ii) the early stage ventures
they launch and grow, and (iii) the early stage investors who back
them, all contribute to an ecosystem that is part of a virtuous cycle
of high-wage job creation, increased tax revenue (over the long-term),
dynamic innovation, and robust competitiveness on the global stage. By
the same token, as suggested earlier, restraint at the Federal level is
often the best available policy option.
Senator Klobuchar. Well, I'm sure Senator LeMieux won't let
you go without some questions.
I, first, turn to you, Dr. Atkinson. Both Senator LeMieux
and I were interested--and I know Senator Warner and Begich
have raised this, as well--this idea of a competitiveness
policy. And I thought Mr. Chopra's analogy, with the broadband
policy, which actually had some meat on the bones when it was
put out there--how would you like this to look? Like, what
would it really be, this competitive policy?
Dr. Atkinson. Well, I think--it's interesting, in my
written testimony, I allude to how many other countries have
done this. Ghana just recently established a process to do
this. So, many countries are doing this. And it involves more
than just simply several people getting together in an
interagency process every few weeks and drafting up, you know,
a little white paper, as helpful as that may be.
I think what it requires is a very serious analytical
effort. And one of the things the broadband team did is, they
brought in people from groups like McKinsey and Boston
Consulting Group--real experts, real--people who do this for a
living--brought them in on detail, and spent 9 months going
deep into what the real challenges are. So, I think we need to
do that. We need to, for example, look at the medical device
industry, look at the IT industry, look at aeronautics, a whole
set of things: Where are we strong, where are we weak? What are
the challenges they face? Then look at a whole set of things
around what you call ``support factors.'' How is our regulatory
system working? How is our tax system, compared to other
countries? How are we doing on public investment and policies
to spur technology transfer and commercialization? What can we
learn from other countries? And then develop a whole list of
recommendations that both the Administration and Congress could
follow up on.
Senator Klobuchar. Has anything been done like this before?
Dr. Atkinson. We've done two things like this before in
this space. One was President Carter's 1978--I believe it was
1978--Domestic Policy Review on Innovation. And this was a very
serious, long-term, you know, 8 to months kind of effort,
looked across the board. And this actually stimulated a lot of
the follow-on activities in the 1980s--the Bayh-Dole Act, the
Collaborative Research and Development Act, a whole set of
other things.
And then again, in 1983 or 1984, President Reagan
established the Industrial Competitiveness Commission, and that
also did a lot of analysis and led to a whole set of other
acts, including helping shape the Omnibus Trade and
Competitiveness Act of 1989.
So, we have done these things before. And we did them, I
think, pointedly, when we thought we faced real challenges with
the Japanese and Europe, challenges in the 1970s and 1980s. And
then we sort of decided we didn't need to do this anymore, and
put it aside.
Senator Klobuchar. And I can look into this more, myself,
but do people point to it, then, sometimes? I feel, sometimes,
that people are just responding to various groups that are
coming in all the time--auto industry, this industry. And it
does seem to me that it would be incredibly helpful to--even
hearing Fred Hochberg, the head of the Export-Import Bank, list
some of our top export potential, and look at what those are,
and look at, How are we helping them? How are we hurting them?
And then, also, as you point out, bigger policies that would
help everyone so we could----
Dr. Atkinson. Could I make a----
Senator Klobuchar.--use it as a guidepost?
Dr. Atkinson. Could I just make----
Senator Klobuchar. Go ahead.
Dr. Atkinson.--one other point?
I think an interesting point--I--when I was Chief Advisor
to the Governor of Rhode Island, back in the 1990s, for the
Economic Policy Council there, we actually put in place a very
detailed strategy. We looked at nine key industries in the
state. We understood their competitive position. We then looked
at all these crosscutting things. We put in place a policy that
led to a whole--a plan and a strategy that led to a whole set
of policies. But, we weren't the only state that has done this.
I believe Minnesota has done this. Many states have put in
place competitiveness strategies. And it's just striking that
somehow states can do this, but we don't think the Federal
Government should.
Senator Klobuchar. Well, especially when we're competing in
a global economy.
You also mentioned OIRA, this whole idea--did I say that
right? It's Cass Sunstein's position.
Dr. Atkinson. Right.
Senator Klobuchar. And he was my law professor, and my law
review comment advisor, so I know him well and have a lot of
respect for him, including the work he's doing with the book,
``Nudge,'' and all of the other things he's done. Do you think
that--you mentioned it--could they play a bigger role in this,
as we look at how we deal, in a positive way, with the FDA, to
move them and work with them to see, not just one side, but
also understand this innovation side, that there are ways you
can ensure safety, but do this in a way that doesn't discourage
good investment?
Dr. Atkinson. Yes. This was a proposal that we actually
made from work that two of our colleagues did--Arti Rai and
Stuart Benjamin, who were both law professors at Duke
University, and proposed this idea and had it as a law review
journal and then an ITIF report. Both of them are in the
administration now. Stuart is at FCC, and Arti Rai is at the
Patent Office. And obviously they're big proponents of this
idea. And the point that they make in their report in--is that
OIRA, right now, is basically a cost-benefit agency, so it
looks at what agencies are doing from a very narrow
perspective--what economists would call ``static analysis.''
How is this going to affect just what's going on today? There's
very little capability or focus on how this might affect
things, 5 years down the line or 10 years down the line. How do
what agencies do and how do--what they perform--how do they----
Senator Klobuchar. When you listened to Mr. Weiss, it's 10
years for one product. But, go on, yes.
Dr. Atkinson. Well, you're--it's just this--there's nobody
in--at OMB standing over the shoulder of agencies, looking not
just at the rules that they propose, but their operations, and
saying, ``You know what, you're not structured to support
innovation as well as you could.''
So, our view is, a very small effort in OMB--it doesn't
need to be a lot of money, but just someplace in the Federal
Government where that's what they're doing every day, and
really urging agencies to take innovation more seriously.
Senator Klobuchar. Very good.
Mr. Ubl, you mentioned something--and maybe it was in your
written testimony, but maybe we just talked about it before--
that China is looking at this country-of-origin policy, in
terms of when they allow products in, that you have to have an
OK in your own country of origin. Well, it's pretty easy to put
the dots together. But, if it's taking us years longer than it
is, say, France or England, or just Europe as a whole, to OK a
product, if you're a businessman or -woman, and you want to get
something in China, what motivation is there to stay here, if
our policies take too long?
Mr. Ubl?
Mr. Ubl. I think that's a terrific point. I mean, if you
picture two gateways, the FDA review process, which is, at best
right now, unclear, and could potentially get more arduous for
companies, and you look at the European CE Marking process,
under which many medical technologies are on the market for
several years before they're available to U.S. patients, the
choice is pretty clear, that you're going to continue to pursue
the more efficient path.
And, as I mentioned, our concern is that that is going to
be the beachhead under which, if China and India are the target
markets, the whole industry is going over time to migrate
abroad not only manufacturing, but clinical trials, R&D, the
whole value chain.
Senator Klobuchar. Does China actually have that policy in
place right now?
Mr. Ubl. They do.
Senator Klobuchar. OK.
We all know that there are advantages of the U.S. I mean, I
don't think we have to go into it. You know that. You represent
the companies, with our long history here, and the people who
are trained, and the well-thought- of products. But, as Dr.
Atkinson said, looking 5 years down the line here, if we don't
respond to this quickly--because we live in a global world, and
it's going to make a difference.
Could I--just one more question--I know there's an
Institute of Medicine study coming out, on this 510(k) process.
Do you have any information about the study? Have they included
all interested parties in working on this study?
Mr. Ubl. The IOM has just recently begun its inquiry into
the 510(k) process, and they will report, Spring or Summer of
next year.
We do have some concerns that the IOM Review Committee does
not include a great number of people who have actually
developed products, and brought them through the
commercialization process, although they are opening their
process to outside comment.
I think, to understand the value of the 510(k) process, you
really have to appreciate the innovation model in medical
technology. I sort of liken the drug discovery model to the Big
Bang theory, where you test a compound for a number of years,
you find one that works, the compound doesn't change, going
forward. Medical technology, by contrast, is like the software
industry; it's rapid, incremental improvement, where you have
new products coming out every 18 to 24 months. And the way
those incremental improvements are brought through the
regulatory process is through the 510(k) process, which allows
you to make these modest incremental improvements that, when
you add them up, make a powerful impact on public health.
So, it's the main superhighway, if you will, where most
medical technologies are brought through the process.
Senator Klobuchar. And the concerns that I've heard is
that, you know, suddenly there has been--it's not that you
couldn't perfect the process and make it better and make some
changes, but there's--it's sort of sporadically happening right
now, without a lot of lead time, so that companies and
investors can adjust to that, so that you--instead of saying,
``This is how we're going to change it in 3 years,'' suddenly,
on the 89th day of a 90-day process, someone's suddenly asking
for a $40-million new study, is what I'm hearing. Could you
comment on that?
Mr. Ubl. I'm hearing a lot of that, as well. On the one
hand, there's a great fear of the unknown, where the agency is
looking at the process, and the IOM is looking at the process,
investors and companies don't know what's going to come out of
the other end. But, yes, an analogy I would use is, today it's
built like the ``Peanuts Cartoon,'' where you've got Charlie
Brown trying to kick the field goal, and Lucy, at the very last
minute, pulls it away. Many companies are very frustrated that
they'll go and make an agreement with the agency over the data
that's required, only to have a new reviewer put in place, or
new data requirements being requested. And that just throws the
entire process up in the air.
Senator Klobuchar. Mr. Weiss, do you want to comment a bit
more on this, in terms of the questions I was asking Mr. Ubl?
And how could we change this? While still understanding that
you can always make a better regulatory process, and there are
probably some changes that safety experts, consumer advocates,
patients groups, as well as medical device industry would
support--how do we do it in a way that makes it work, so you
don't unnecessarily limit investment and send it all over to
Europe?
Mr. Weiss. Well, I think Mr. Ubl put his finger right on
the issue. The fear of the unknown makes it very, very
difficult for companies like ours to plan. When we can't put a
plan together, then, fundamentally, we can't attract
investment. So, investors are looking at medical devices with
more uncertainty that they had before.
So, the first thing to do is to take uncertainty out of the
process. There's a number of ways to do that. One is to assure
that companies that are in the process today are grandfathered
to whatever the current system is. The second one is to involve
industry in the development of the new processes.
And what seems to have happened in the last few months--and
now, with the review process, led by Dr. Shuren--is that there
seems to be signaling by the FDA that they're going to change
something. And, whereas we have the right to provide comment,
the--there are a lot of questions as to whether or not that's
real input, and whether we can help shape the process.
That's why we--you know, we're so grateful for the
opportunity to speak here today, to see what kind of support
congressional support and visibility can provide.
Last, I think that the basic principle of harmonization
with the European system would be advantageous to everyone.
These same issues are dealt with in Europe with stratified
risk, risk-reward benefits, the different levels of risk that
devices have. And I think harmonization with the European
system is a positive idea.
Senator Klobuchar. Very good, thank you.
Mr. LeMieux has returned.
Senator LeMieux. Thank you, Madam Chair.
I wanted to, if I may, ask a question to you, Mr. Williams.
Something that you and I have talked about--in fact, we talked
about today, and it was mentioned earlier, and Senator Warner
and I were discussing it--is this Valley of Death challenge.
And maybe other folks on the panel will also speak to it.
Where we do a pretty good job in helping folks, in getting
investment to people when they're working in their garage, or
they're at a university and they're working in the lab, we do
very well once a product has been developed, sort of the end of
the spectrum, getting investment to folks. But, that middle
time seems to be a very challenging time for these folks to get
the money so they can continue developing their product and
getting it toward commercialization.
What can the government do, and what models might there be
out there that other States have tried successfully, that can
help bridge that gap so that we can bring more of these good
ideas to marketplace?
Mr. Williams. One idea comes to mind. And I've heard that
there may be three different proposals floating out there now
for a Federal angel investor tax credit. Fully 20 States and
some--three foreign jurisdictions--have already tried
experiments in this area. I know the State of Wisconsin is a
standout success in this area. In a 2-year period, where they
used a State angel investor tax credit, combined with their
other policies, they--there was a 57-percent increase in the
amount of funding given to small businesses. And I think an
increase in the absolute number of businesses receiving funding
jumped by 47 percent. An Angel Capital Association report,
dated April 16 of this year, indicated that there were three
proposals somewhere out there. And--I think, in the House. But,
that's something--I think, it's definitely--I believe the
Federal Government could look at those examples and maybe call
for best practices, and see which policies might make the most
sense.
Additionally, right now, the ecosystem is significantly
disrupted with the contraction of the venture capital industry.
Angels used to be able to take big, broad bets on the big
ideas, the big technologies--clean tech, pharmaceutical
therapeutics--and then trust that the better ones would
survive, perhaps then with Federal grant funding, and then be
picked up by the venture capital industry. That's no longer the
case. The venture capital industry has contracted. They're
feeding their own young. Their existing portfolio companies.
They're not making new bets.
And so, there's a Valley of Death within the Valley of
Death. And so, I think we really need to--as I said during my
primary comments, we really need to support the venture capital
industry, and look at specific comments, in tax policy and
other realms, to help establish it. It really is our--the pride
of our country. It's the envy of the world. And we need to do
what we can, I think, to foment additional, you know, robust
recovery of that industry.
And I'm kind of surprised to hear an angel wax so
positively about VCs, because frequently we are somewhat
competitive across the negotiating table. But, there is a very
important ecosystem there. So, I think that's very important.
Senator LeMieux. Mr. Weiss, do you want to tackle that?
Mr. Weiss. Yes, I appreciate the opportunity.
And I--and let me just reinforce what was just said. I
advise a number of very early-stage companies, and I also work
with a number of venture capitalists. There are a number
venture capital firms that have simply withdrawn from medical
device investing. They view that the uncertainty in the
regulatory environment, the complexity and challenges of
getting insurance coverage and reimbursement, and the--just
simply the time to get a trial done, as untenable. So, they
can't attract investment into their funds.
And the--exactly the issues with angels are compound by
this sort of, you could say, the second Valley of Death. I know
half a dozen venture funds that have either moved to much
later-stage or just completely withdrawn from startup venture
investing. And the impact of that, unfortunately, is--I've
spoken to a number of companies that I've advised, ``It's very,
very difficult for you to get any funding at all, so don't even
start.'' And it's really become a bigger and bigger problem.
And in the Twin Cities, a number of venture-backed
companies have simply shut down, because as venture funds have
contracted, they have had to pick and choose which of their
companies they continue to fund. And there are two or three,
just in our building, that have left recently.
Senator LeMieux. Mr. Ubl?
Mr. Ubl. Just briefly. I was in Israel last week, and I was
struck by two things. One is, they do have a comprehensive
innovation policy, of which medical technology is a key pillar.
The second thing I was struck by is that the government has
some fairly novel approaches to trying to cross the Valley of
Death. For example, if small companies are able to secure
private funding, the government will match that funding through
the life cycle of the technology.
So, I think that, if we can look at some novel ways of
strengthening the seed-funding aspect of this, and creating
incentives throughout the development process, that would be
one suggestion I would make.
Senator LeMieux. Dr. Atkinson?
Dr. Atkinson. My colleagues talked more on the venture side
or the angel side; let me talk about even prior to that. The
first step to even get into the Valley of Death is to get
something to take research and put it into a prototype or a
business plan. And we do that well in some places, but in a lot
of places, we don't. I would look, for example, to MIT, where
MIT has a whole ecosystem, where, if you're a faculty, or even
a student, with a good idea, you can get what are called these
$50,000 ignition grants. It's not a lot of money, but enough
money for a faculty member or a student to develop a plan, to
go out and start to talk to venture capitalists or angel
investors. We need to have all our universities doing things
like that.
The second thing related to that is, there are States now
that have very good public/private partnerships that work to
get technologies out of universities and to provide, sort of,
early-stage management help, sometimes with incubators, so they
can--and States, including Florida, Minnesota--a lot of States
have programs like that. Frankly, they're significantly
underfunded.
So, I think we need to think about--was that proposal that
I made in my written testimony, of what we call the SCNR, sort
of like an SBIR, but--again, taking a small amount of money,
and really spurring these kinds of efforts.
Related to this is what other countries are beginning to do
is actually tie university funding to their ability to
commercialize technology. In Finland, for example, 25 percent
of their higher-ed budget now is tied to performance. In
Sweden--they just started this last year--10 percent of their
higher-ed budget is tied to performance, with about half of
that performance metric being, Are you commercializing
technologies? Are you working with entrepreneurs? Are you, sort
of, getting out of your comfort zone?
We don't do anything like that here. We could start to take
very small steps in that direction, to begin to provide
incentives for real performance.
Senator LeMieux. Mr. Weiss, did you have another comment?
Mr. Weiss. No, thank you.
Senator LeMieux. OK.
Senator?
Senator Klobuchar. OK.
Well, I wanted to thank all of you. This has really been a
very good hearing.
Maybe Senator LeMieux has a few closing remarks, as well.
What I'll take away from this is, first of all, this--
several of Dr. Atkinson's ideas, and that were, I'd say, echoed
by Mr. Chopra, in terms of a competitiveness strategy for our
country. I think all of us share some frustration with the
regulatory system. We've certainly heard that from our very
successful medical device industry, and one that we want to
keep successful, as well as across the board with other
innovative businesses. And that's something we need to work on.
And I am very committed to doing that.
The patent issues that we talked about, and then, overall,
the need to focus on exports. I think you saw common ground
here, across party lines.
And if I left you with anything, it's what I'd leave with
Mr. Chopra, is that we have to act, here. We are competing in a
world against some incredibly vigorous competitors that aren't
going on listening tours. We need to do something, and get it
done now, in terms of making a better environment for
innovation in this country. And I know those of us up here on
this subcommittee are committed to doing that.
Thank you very much.
You want to add anything----
Senator LeMieux. I do.
Senator Klobuchar.--Senator LeMieux?
Senator LeMieux. I want to, first of all, thank Senator
Klobuchar for her leadership on this, as well as the leadership
on exports. These are such important issues for medium and
small businesses across the country.
And I want to thank you all for the work that you've done
and the testimony that you've given today. This is not a
partisan issue; this is about the competitiveness of this
country. And I think we identified, today, the components of
what this innovation plan needs to be focused on. It needs to
be focused on making sure that regulation is efficient and
effective in getting rid of the lag time, whether it's at the
FDA or the Patent Office. We need to make sure that the tax
environment is of the sort that's going to promote innovation.
We've got a focus on increasing exports, as well as a focus on
providing funding, where appropriate, to allow these companies
to be able to develop their ideas and bring them to the
marketplace.
So, you've given us a lot of great information, and we will
be back in touch with you, because I think this is something
that Senator Klobuchar and I are going to work on together.
Senator Klobuchar. Very good.
And, Senator LeMieux, I'm off to talk to some of our people
in Tourism--I think that's sort of important to Florida, isn't
it?
Senator LeMieux. Slightly, yes.
Senator Klobuchar. Yes. Which is another part of our
subcommittee.
So, thank you very much, everyone. And we look forward to
working with you in the future.
Thank you.
[Whereupon, at 4:30 p.m., the hearing was adjourned.]