The Innovation Economy: US bets the bank

In a series of six articles, Science|Business looks at how the G20’s $200 billion of innovation stimulus money will be spent. This week, the US.

The US isn’t mincing words about the role it expects innovation to take in fixing and growing the economy. The $787 billion American Recovery and Reinvestment Act 2009 (ARRA) stimulus package, approved by Congress in February 2009, includes $111 billion for science and infrastructure, including employing more scientists.

And so, the US package sets a high bar for other nations. At the same time, it sends the clear message that the country is hinging its future global competitiveness on science and technology innovation both through broad improvements in education and training ($53 billion) and by targeted investments in areas such as green technologies (about $94 billion), health information technology ($20 billion), and expanded broadband access ($7 billion) (see box, “US innovation stimulus at a glance”).

To what degree this pump-priming will succeed remains a topic for debate. Confidence about whether the stimulus would boost the overall economy slipped recently – barely half of Americans showed confidence in the plan, according to a Washington Post-ABC News poll in late June. Worries about the ballooning federal deficit also loom large in the minds of Americans. But many in the science and technology community have been heartened by recent news of stimulus award grants and the government’s indication of specific priorities and requirements for getting money. There is even a US government Web site to track stimulus fund outflows.

US government labs are gushing beneficiaries of the government’s largess. For example, there is $2.7 billion more from the ARRA for R&D at the National Science Foundation (NSF) and $10.3 billion more for R&D at the National Institutes of Health (NIH), according to figures from the American Association for the Advancement of Science. Looking at the impact of both federal budget increases and the added stimulus monies, the NSF will get $4.8 billion for R&D in FY2009, up 6.8 per cent, with a total of $7.5 billion for R&D including stimulus funds, up 66 per cent. The Department of Energy’s (DOE’s) Office of Science will get $4.3 billion for R&D in FY2009, up 17.3 per cent, to total $6.1 billion when stimulus funds are included, up 69 per cent. The National Institute of Standards and Technology will get $561 million for R&D in FY2009, up 7.5 per cent, and with stimulus funds that comes to $1.1 billion, up 115 per cent over 2008. The NIH has an R&D budget of $29.7 billion, up 3.7 per cent, and with stimulus funds its total is $40 billion (up 38.3 per cent).

ARRA monies are even going toward studying the results of the stimulus funding. The NSF in late June awarded $199,951 to researchers at the University of Virginia to study the impact of stimulus funding on employment in science and engineering fields, and $199,988 to the University of Michigan to develop a database of the investments in and outcomes of social science projects funded by the ARRA. More NSF awards to study aspects of the government’s economic stimulus plan are to be released shortly.

“This is a once-in-a-lifetime opportunity to study how funding changes affect economic, social, and scientific outcomes,” Julia Lane, a programme director at NSF, said when the awards were made. ARRA funds are expected to have substantial impacts on hiring and staffing for university science programmes. The Virginia researchers will collect data for two years, starting by the end of 2009, and look at whether the supply of science-oriented, US and foreign doctorates can keep up with the new demand for workers. The Michigan database will assess social science research investments.

“The novel thing about this research is that it follows social science projects from start to finish,” Lane said. “It will examine the full life cycle of an award through research publication, to citations by other researchers, to presentations to policymakers, using both surveys and bibliometric analysis to get at the multidimensional nature of research impact.” The proposed work also is aimed at helping funding agencies better understand how science investments work their way through the scientific enterprise.

In addition to the stimulus funds, the US has brought in soft measures, such as the Small Business Administration’s (SBA’s) deferred-payment loan programme to help struggling small businesses make payments on existing debt. The programme, called America’s Recovery Capital or the ARC Loan Program, was authorised under Section 506 of the ARRA. The loans are available through SBA-approved small business lenders and have been authorised up to September 30, 2010, or until the appropriated funds run out. An ARC loan is a deferred-payment loan of up to $35,000, and it will be used to make up to six months of principal and interest payments on qualifying loans. The disbursement period of up to six months is followed by 12 months with no repayment of the ARC loan principal, followed by a repayment period of five years. SBA pays monthly interest to the bank. Lenders benefit by reducing their risk.

A game changer

Some researchers see the stimulus monies as a game changer for both innovation and employment, allowing companies to explore areas they were either delaying or thought were too expensive to enter now. One example is Boston-Power Inc., a venture capital-backed, advanced lithium-ion battery maker in Westborough, Massachusetts. The company has been targeting consumer electronics goods like computers, and sought $86 million in stimulus funds under the DOE’s advanced battery and cell manufacturing grant, with $9 million more in matching funds from Massachusetts if its bid succeeds, to build a battery factory that also can address power for new energy cars ( “Navigating the stimulus”).

“The stimulus that is now offered by the US federal government is a game-changing event for anybody who has disruptive technology,” Christina Lampe-Onnerud, founder and CEO of Boston-Power, told ScienceBusiness. “It empowers all of us to both think about this in a much broader way, because access to capital is the No. 1 scaling parameter. In our car business paradigm, it made us ask, ‘If we had more money, what would we do?’ I’ve never experienced [a situation where] so many have the opportunity to apply for massive capital.” She said the ARRA also has caused companies of all sizes to talk about what the future should be. However, the funds are targeted at “shovel-ready” projects, she said, which might leave smaller companies still holding out their hands.

“I’m a little worried this money is not going to trickle down to where innovation is really happening,” Noubar Afeyan, managing partner and CEO of Flagship Ventures, a Cambridge, Massachusetts, venture capital fund, told the XSITE meeting of innovators and investors held in Boston in late June. “I’d like to believe that large companies are innovating. But I think the facts speak against that,” he added. “I don’t think the government is adequately prepared or oriented to provide that kind of risk funding to startups. I’m not a believer that this kind of stimulus money will make a difference to the companies I am backing.”

A concern of Afeyan and others is that federal funding agencies like NIH and DOE may not have the staff or experience to handle the glut of applications ignited by the stimulus.

For example, Michigan State University alone has 150 ARRA grant applications pending. Afeyan said NIH has probably received 100 times the number of proposals that it could fund, and its review mechanism will not allow it to make the kinds of decisions it needs to make to get the money out. The DOE also is scrambling to sort through applications and make awards, he said. “I see that favouring large companies over startups…it’s a safer bet.”

“I really wish the evaluators all the wisdom they can reach for,” said Boston-Power’s Lampe-Onnerud. “The decisions they make will very much determine what the US will do on the world stage. My only advice into this process is please consider the data, the diversity of projects, award different areas of our nation, and different teams, but look at the technology first and foremost.”

In a sense, the financial uncertainty in the market has essentially turned everyone into an innovator, said Afeyan. “We are all entrepreneurs now,” he said. “Most of the rest of the economy needs entrepreneurs to run it on an unprecedented scale. GM needs an entrepreneur.”

Universities get early money

US universities have been early recipients of ARRA funds. Two Michigan State University (MSU) professors in early June received grants of nearly $400,000 from the NIH via the stimulus act for their cardiovascular research projects as part of the first wave of stimulus funding from federal agencies. MSU assistant professor Narayanan Parameswaran received $375,141 for his research on the molecular aspects in the development of chronic diseases, particularly atherosclerosis, a major cause of heart attack and stroke.

The research focuses on how the GRK2 protein affects the development of atherosclerosis, and whether the protein can be targeted for drug development. “Understanding how atherosclerosis develops is an important question in cardiovascular medicine, because if we understand the ‘how,’ then we can eventually use that information to develop therapeutic drugs to prevent or treat the disease,” he said when the award was announced. Another MSU professor, Gregory Fink, received $17,632, which will be used to have a student work on a project looking at the causes of high blood pressure. The two awards are part of $2.7 million in NIH funding that went to six Michigan institutions in early June.

Not surprisingly, US states have been scrambling to get a piece of the goods. For example, as part of Governor Deval Patrick’s Massachusetts Recovery Plan, the state’s Department of Energy Resources solicited proposals from the public and private sectors for various innovative clean power and energy efficient projects that could be eligible for ARRA funding. The move is in response to a US DOE request for applications to tap approximately $156 million for up to 72 projects to deploy energy-efficient technologies nationwide. Under terms of the DOE’s programme, ARRA funding will pay up to 50 per cent of projects selected for funding.

New energy as economic fuel

Perhaps the most common technology element in stimulus packages across nations is the focus on environmental investments. In some cases that involves financial incentives to get rid of old cars, or to add insulation to homes. In others, it involves moving to less carbon-dependent technologies. In all, countries have put more than $430 billion of the total $2.8 trillion in tax cuts, credits and extra spending stimulus measures toward the broad area of climate change, with China and the US leading the pack in monetary terms, according to a 25 February 2009 report by HSBC Bank Plc. called, A Climate for Recovery: The Colour of Stimulus Goes Green.

About 75 per cent of green stimulus funds will be disbursed in 2009 and 2010, with the major impact on economies in 2010, according to HSBC estimates. China’s $221.3 billion green funding – the highest investment in monetary terms – stretches over 2009 and 2010 and composes 37.8 per cent of the country’s total $586.1 billion stimulus package. That includes monies for energy-efficient vehicles and infrastructure improvements. The US follows China in monetary stimulus value, with $94.1 billion, or 12 per cent of its total stimulus package, going to green technologies over a 10-year period. That includes $22.53 billion in low-carbon power renewables, $3.95 billion in carbon capture and storage/other, $27.4 billion to building energy efficiency, $4 billion to low-carbon vehicles, $9.59 billion to rail, $11 billion to grid, and another $15.58 billion to water/waste. Compared to other countries, the US green stimulus is spread across broader areas. The US plan gives the strongest boost to renewables, according to HSBC.

In early June, US Energy Secretary Steven Chu announced more than $300 million in investments to boost various clean energy technologies, including carbon capture from coal, solar power, as well as high-efficiency cars and trucks ($240 million alone, including $110 million from the ARRA and the rest from annual DOE appropriations). “As a scientist, I remain optimistic that these breakthroughs are within our reach, and investments like these are an important part of achieving them,” Chu said in announcing the awards.

Chu also announced 24 new solar projects to advance photovoltaic research, development, and design that are eligible for up to $22 million in ARRA funds and matched by $50 million-plus from private partners (see sidebar, “Dept. of Energy grants to photovoltaics”). The projects range from development of automated assembly processes to semiconductor fabrication. He also announced plans to invest up to $27 million to develop the nation’s solar installation training infrastructure. The funding will comprise $5 million from ARRA and $22 million from annual appropriations. In addition, Chu promised $11.3 million for nine projects to develop pre-combustion carbon capture technologies that can reduce CO2 emissions in future coal-based integrated gasification combined cycle power plants. The nine selected projects encompass three areas: high-temperature, high-pressure membranes; high-efficiency solvents; and solid sorbents.

Healthcare to reap benefits

Stimulus funds also are being targeted toward healthcare. Notably, the US has set aside almost $20 billion for health information technology, including turning paper records into electronic ones. While doctors and hospitals can qualify for incentive payments, the stimulus funds also could provide a bonanza for small technology companies selling products that help with the conversion and maintenance of electronic systems, according to market researchers and venture capitalists.

“It’s the only way out of the woods in healthcare,” Bob Higgins, co-founder and general partner of Highland Capital Partners in Lexington, Massachusetts, said of healthcare IT at the recent meeting of entrepreneurs and investors in Boston. For example, there were 10 genetic tests just a few years ago, but now there are more than 1,700, and it’s difficult for both doctors and payers to make sense of the charges. Highland has funded Generation Health, a company in the genetic management space. “It’s where pharmacy benefit management was in the 1980s,” he said, likening the expected rush of service businesses around the healthcare confusion to “selling shovels at the Gold Rush.”

The stimulus also allocates $1.1 billion to study comparative effectiveness research, (more usually termed Health Technology Assessment in Europe) which would help identify the best treatment options for a given medical condition. The Obama administration sees this type of research as key for reforming the US healthcare system, and the monies already have generated a lot of buzz.

However, Stanford University associate professor of medicine Randall Stafford warned that, “The discussion that has taken place has been quite superficial and hasn’t covered the range of changes that are needed for this type of research to be meaningful.” He and colleague Caleb Alexander outlined five ways to improve the discussions of comparative effectiveness research in a June 17 commentary in the Journal of the American Medical Association: generate data more rapidly, link evidence to strategies proven to modify how doctors practice medicine, broaden the agenda beyond drugs and devices, alter the regulatory environment, and consider the cost implications. According to Stafford, “Unless we start spending our resources more efficiently, our healthcare system won’t survive.”