1. © Charles W. Wessner PhD. 1 Addressing the Innovation Imperative Collaboration, Institutions, and Incentives SDC Seminar in honor of H.E. Dr. Tobias Krantz Washington DC February 4, 2010 Charles W. Wessner, PhD. Director, Technology, Innovation, and Entrepreneurship The National Academies

2. © Charles W. Wessner PhD. 2 Current Global Mega-Challenges are Areas for Cooperation Fostering Economic Growth –Driving domestic Growth and Employment through Innovation Developing New Sources of Energy –Commercializing renewable alternatives to oil –Increasing the capacity to fuel growing global demand for electricity Addressing Global Warming –Growing a Green Economy; A major Growth opportunity Delivering Global Health –Transforming large investments in research to affordable and personalized treatment and care Improving Security –Through all of the above

3. © Charles W. Wessner PhD 3 How can we address these Global Challenges? Congress

4. © Charles W. Wessner PhD. 4 Innovation is Essential Leading nations are providing four pillars of support: –High-level Focus –Sustained Support for R&D: Leveraging Public and Private Funds –Support for Innovative SMEs –New Innovation Partnerships to bring new products and services to market Many countries are investing very substantial resources to create, attract and retain industries in a variety of sectors

5. © Charles W. Wessner PhD. 5 China’s Drive for Innovation Government with strong sense of national purpose –Strong investments in education and training –Strategy to move rapidly up value chain –Effective requirements for training and tech transfer –Critical mass in R&D is beginning to be deployed to generate autonomous sources of innovation & growth Government goal is to acquire technological capabilities both to grow and to maintain national autonomy. Focused, Committed, and Willing to Spend Modified from C. Dahlman, Georgetown University

6. © Charles W. Wessner PhD. 6 Changing Shares of Global R&D Spending 1999200820092010 United States 39%35.4%35.0%34.8% China6%9.1%11.1%12.2% Japan15%13.2%12.5%12.3% Europe26%24.9%24.0%23.2% Source: Battelle, R&D Magazine December 2009

7. © Charles W. Wessner, PhD 7 Singapore’s Innovation Strategy Total Focus, Commitment, and Long-Term Spending by the Government –Goal is to establish Singapore (population: 4.5 million) as Southeast Asia's preeminent financial and high-tech hub. A*STAR’s task, with $5 Billion in funding is to: –Invest in and attracting a skilled R&D workforce –Attract major investments in pharmaceuticals and medical technology production –Invest in Public Private Partnerships New S&T Parks—Biopolis & Fusionopolis –Develop new programs to address the early-stage funding challenge for innovative firms Generating local entrepreneurs and firm growth remain challenges

8. © Charles W. Wessner, PhD 8 What about Sweden? The Good News: Sweden tops the Innovation Capacity Index Rankings 2009-2010 (Innovation for Development Report)

9. © Charles W. Wessner, PhD 9 Characteristics of the Swedish Innovation System The economy is strongly internationally linked R&D-system dominated by big international companies Low investment by SMEs in R&D Universities dominate the public R&D-system Government invests very little R&D-money in companies outside the military sector Source: Olof Sandberg, Senior Adviser, Ministry of Enterprise, Energy and Communications (June 2008)

10. © Charles W. Wessner, PhD 10 Key Challenges for Sweden Encourage New Equity based Hi-tech Firms with Innovation, Jobs, and Growth –Few Major New Firms Created in Sweden Since 1970 ( 30 of top 50 created before 1914) Improve collaboration between universities and business* Improve the commercialization of research results* *Source: Sandberg, 2008

11. © Charles W. Wessner, PhD 11 Deciphering the Swedish Paradox The Lisbon Agenda is an input measure –Without institutional change, little discernable additionality will occur –What do you get for 0.2% more R&D? The Swedish Paradox is two-fold –On one hand, existing levels of R&D need to be augmented by new incentives to bring research across the Valley of Death –On the other hand, existing high levels of funding for research and certainly for commercialization may not be sufficient, given Sweden’s admirable tendency to “punch above its weight” in the global economy.

12. © Charles W. Wessner, PhD Innovation in the United States New Focus on Applied Research to address challenges in Energy, Health, and the Environment

13. © Charles W. Wessner, PhD. 13 Strengths of the American Model Sustained Growth: Despite the debt- fueled bubble, the U.S. economy grew by 63% between 1991 and 2009, –Compare with 35% for France, 22% for Germany, and 16% for Japan Stability: In 1975, the U.S. had 26.3% of world GDP; today it is 26.7% –We’re not going away Science and Innovation are key to our future, as is new leadership Source: New York Times, December 7, 2009

14. © Charles W. Wessner, PhD 14 A Renewed Focus on Innovation Science and innovation is "more essential for our prosperity, our security, our health, and our environment than it has ever been." President Obama at the National Academies—April 27, 2009

15. © Charles W. Wessner, PhD 15 Obama Pledges to Raise R&D and Create new Incentives for Innovation “We will devote more than 3 percent of our GDP to research and development.” –The U.S. joins the quest for the Lisbon Target “We will not just meet, but we will exceed the level achieved at the height of the space race, through policies that –invest in basic and applied research, –create new incentives for private innovation, –promote breakthroughs in energy and medicine, and –improve education in math and science.” Address to the National Academy of Sciences, April 27, 2009

16. © Charles W. Wessner, PhD 16 National Economic Council: “A Strategy for American Innovation” September 21, 2009 Invest in the Building Blocks of American Innovation –Investments in human, physical, and technological capital Promote Competitive Markets that Spur Productive Entrepreneurship Catalyze Breakthroughs for National Priorities –Develop alternative energy sources –Reduce costs and improve lives with health IT –Manufacture advanced vehicles

17. © Charles W. Wessner, PhD 17 New Commitments to Support Innovation Doubling of federal funding for basic research over 10 years at NSF, NIST, DOE (Office of Science) New Investments in S&T Infrastructure New Financing for S&T and Innovation Making the research and experimentation tax credit permanent

18. Increases are for Research, but not for Transition Myths about “Perfect Markets” mean insufficient focus on collaborations essential for transitioning new ideas to the market

19. ©Charles W. Wessner PhD19 The U.S. Myth of Perfect Markets Strong U.S. Myth: “If it is a good idea, the market will fund it.” Reality: –Potential Investors have less than perfect knowledge, especially about innovative new ideas –“Asymmetric Information” leads to suboptimal investments –George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information“

20. Charles W. Wessner PhD20 Federally Funded Research Creates New Ideas Product Development and Firm Growth Capital to Transform Ideas into Innovations No Capital Reality: The Early-Stage Funding Valley of Death Dead Ideas

21. Charles W. Wessner PhD21 The Myth of U.S. Venture Capital Markets Myth: “U.S. VC Markets are broad & deep, thus there is no role for government awards” –“If you have a good idea, a good team, and you sell it well, you will be funded” George Scalise, President SIA, 29 April, 2008 Reality: Venture Capitalists have –Limited information on new firms –Prone to herding tendencies –Focus on later stages of technology development –Most VC investors seek early exit

22. Charles W. Wessner PhD22 Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage Firms: Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2009 Seed Stage: $1.5 billion 440 Deals Early Stage: $5.3 billion 1,013 Deals Expansion Stage $10.6 billion 1,178 Deals Later Stage $10.8 billion 1,177 Deals Total: $28.2 Billion

23. ©Charles W. Wessner PhD23 U.S. Venture Investments Down 37% in 2009 Seed Stage: $1.7 billion 312 Deals Early Stage: $4.6 billion 883 Deals Later Stage $5.9 billion 799 Deals Expansion Stage $5.5 billion 801 Deals Total: 17.7 Billion, 2795 deals Source: PWC-MoneyTree Report, 2010

24. ©Charles W. Wessner PhD24 The Venture Capital Obsession Investment in Public VC Funds = Substantial Risk “Extraordinary skewness of returns” on VC Investments in the United States* –About 15 percent of investments fail completely –35 percent of returns are less than 100 percent –Only 15 percent of the firms that go public or are acquired give a return greater than 1,000 percent! Source: John H. Cochrane, “The Risk and Return of Venture Capital,” Journal of Financial Economics, 75(1):3-52, 2005. Many companies live and grow without Venture Funding –“Hardly ten percent of the serial entrepreneurs took venture money in their first startups” Source: Duke University Survey, October, 2009 by V. Wadhwa Where is the Deal Flow?

25. Crossing the Valley of Death is a Major Challenge There are many paths: The Small Business Innovation Research (SBIR) Program is a Proven Approach

26. © Charles W. Wessner PhD. 26 Oxygen for Innovation: What is SBIR? A Competitive Innovation Award Program that –Provides seed funding to worthy entrepreneurs –Signals that there are promising opportunities for private investors –Solves problems for government agencies and improve markets –Creates products to address social needs at the bottom of the Pyramid

27. ©Charles W. Wessner PhD27 The SBIR “Open Innovation” Model PHASE I Feasibility Research PHASE III Product Development for Gov’t or Commercial Market Private Sector Investment Tax Revenue Federal Investment PHASE II Research towards Prototype Social and Government Needs Drive the Program $750K$100K R&D Investment Non-SBIR Government Investment $151 billion Solicitation

28. ©Charles W. Wessner PhD28 Academies Research Reveals SBIR Impact on Firm Formation and Growth Company Creation: 20% of responding companies said they were founded as a result of a prospective SBIR award (25% at Defense) Research Initiation: SBIR awards played a key role in the decision to pursue a research project (70% claimed as cause) Company Growth: Significant part of firm growth resulted from award Partnering: SBIR funding is often used to bring in Academic Consultants & to partner with other firms

29. 29© Charles W. Wessner, PhD Universities play a Growing Role in Commercializing Knowledge Universities that are able to connect with Industry Drive Regional Development and are Assets for National Competitiveness

30. ©Charles W. Wessner PhD30 From the “Ivory Tower” to the Marketplace “Pure” Research is not the only University Role Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lives –(and the tax dollars for Research) Industry’s Needs and Questions can Drive Research and be a Source of Relevant Publications

31. ©Charles W. Wessner PhD31 Roles of the 21 st Century University Teach the next generation –With up-to-date laboratories on real market questions –Focus on science needed to address current and future questions (e.g., climate change, nuclear waste, stem cell research, genetically modified food) Conduct Research –“Curiosity-driven Research” –But also on Social Problems and Industry Needs Commercialize –New Science-led solutions to societal problems –New Products, Processes Generate Market-ready students –Create a cadre of creative and curious team players

32. ©Charles W. Wessner PhD32 Where are the 21 st Century Universities? In California: Stanford and CalTech In Massachusetts: MIT In Flanders: KU Leuven In Sweden: Chalmers and Jönköping University In Finland: the new Aalta University We need to build more 21 st Century Universities –Is Sweden replicating its successes?

33. ©Charles W. Wessner PhD33 Today, Industry (and Regions) Rely on University Research to Create Future Growth University research draws ideas from commercial trends—feedback loops from industry to universities are sources of Quality Research Regional economies rely on research universities for jobs, branding, growth, & entrepreneurship University innovation + early government funding are key to the growth of many successful technology companies A Supportive University Culture & Real Incentives are essential for the development of vibrant Innovation Clusters

34. ©Charles W. Wessner PhD34 New Focus in the U.S. on Innovation Clusters

35. ©Charles W. Wessner PhD35 Greater Federal Role Seen for Fostering Regional Innovation Clusters “Regional industry clusters represent a potent source of productivity at a moment of national vulnerability to global economic competition.” –Karen Mills, Clusters and Competitiveness, Brookings 2008 The U.S. can facilitate knowledge exchanges and provide additional funds to encourage regional cluster development President Obama has called for a new federal effort to support regional innovation clusters

36. ©Charles W. Wessner PhD36 S&T Parks can be a Catalyst for Cluster Development Well-conceived and well funded S&T Parks can –Build partnerships among researchers, small companies, and large companies –Help create companies –Advance university missions in education, research, and commercialization S&T Park Universities Large Companies Public Support Research Institutions University Researchers Small Companies

37. ©Charles W. Wessner PhD37 New National Academies Report on Research Parks Understanding Research, Science and Technology Parks: Global Best Practices (2009) Key Points –Research Parks stimulate and manage the flow of knowledge among universities, R&D institutions, firms and markets –They facilitate the creation and growth of innovation- based companies through spin-off and incubation –They provide value-added services together with high quality space and facilities –They help create a “Community of Innovation” or Cluster needed to transfer new ideas from universities and laboratories into the marketplace

38. ©Charles W. Wessner PhD38 Key Findings: Successful Research Parks Require… Critical Mass –Involvement of a Local Major Research Universities –Availability of Skilled Workers –Access to Finance –Good Park Infrastructure and Quality of Life Amenities Strong Leadership –Committed Political Champions –Strong and Committed Park Leadership –Attract Entrepreneurs and Skilled Managers Patient and Supportive Public Policies –Predictable, Substantial, and Sustained Funding –Complementary programs like SBIR

39. ©Charles W. Wessner PhD39 Parks are now a Worldwide Phenomenon Governments around the world are building research parks to –Facilitate the commercialization of new technologies –Attract leading technology companies from abroad –Benefit from and contribute to university research Significant financial and policy support from national & state governments drives park growth –Zhangjiang High Tech (ZHT) Park in Shanghai MNC R&D Centers encouraged to team up with Chinese research institutes Overseas Chinese scientists lured home with tax breaks and low rent—253 returnees for ZHT park alone in 2003 Shanghai New Pudong Area Venture Fund provided more than $25 billion in venture capital in 2006 for the ZHT Park

40. ©Charles W. Wessner PhD40 U.S. Proposals to Support Clusters 2009 Appropriations Act provides the Economic Development Administration (EDA) $4 million to begin a regional innovation clusters program 2010 Legislation provides Support for Research Parks –Senate: Building a Stronger America Act Provides $500 million grants and loan guarantees for the development and construction of science parks over 5 years –House: Science Parks Research and Innovative New Technologies (SPRINT) Act Authorizes $7.5 million for competitive grants for studies to develop new parks or expand existing research parks Guarantees up to 80 percent of loans for the construction of science parks Question of Critical Mass…

41. ©Charles W. Wessner PhD41 NAS Conference “Growing Innovation Clusters for American Prosperity” We are organizing a conference on February 25, 2010 to: –Review the government’s new initiatives in stimulating clusters –Explore role of universities and foundations in their development. –Study specific strategies in place around the country and around the world –Highlight institutions and programs that can be leveraged now to grow and sustain clusters

42. 42© Charles W. Wessner, PhD To Conclude Key Take Home Points Our Common Challenge

43. © Charles W. Wessner PhD. 43 The Global Innovation Imperative 3 Take Home Points –Innovation is Key to Growing and Maintaining a Country’s Competitive Position in the Global Economy and to address Global Challenges –Collaboration is Essential for Innovation as Small and Large Businesses, Universities, and Research Institutes Contribute to Regional Growth and Job Creation –New Institutions and New Incentives, are increasingly important to foster innovation and collaboration

44. ©Charles W. Wessner PhD44 Our Common Challenge: New Incentives Overcome Complacency: Sweden and the United States need to address the Global Innovation Imperative by initiating change: –Incentives for entrepreneurial activity for Small Firms, Large Firms, and Universities –New, better institutions that incentivize cooperation among all actors Mutual Learning and Cooperation are Essential for our Common Future

45. ©Charles W. Wessner PhD45 Thank You Charles W. Wessner, Ph.D. Director, Program on Technology, Innovation and Entrepreneurship The U.S. National Academies 500 Fifth Street NW Washington, D.C. 20001 cwessner@nas.edu Tel: 202 334 3801 http://www.nationalacademies.org/step