Consumers and innovation, Stateside

Where consumer and R&D meet? House in Sunnyvale, Silicon Valley, California

In the 1980s, for example, Japan couldn’t seem to go wrong with its automobiles, electronics and consumer products. But it lost that edge in the 1990s when it seemed to miss opportunities with customers. Now, along with European nations, it is trying to figure out how to implement policies that will promote a match between consumer demand and laboratory research.

Nations around the world are looking studiously and with envy at the innovation pods in California’s Silicon Valley and Massachusetts’ Boston area, where scientists, companies, consumers, universities and financiers flow together in a synergistic mix that promotes innovation and a frontier spirit in forming new ideas, companies and products.

But can that special formula be replicated in Europe, Asia and elsewhere? And how closely should they follow the US model?

SBIR, Bayh–Dole spur innovation

Two US initiatives begun in the 1980s are under particular study outside the United States because of their apparent successes. One is the Small Business Innovation Research (SBIR) programme, started in 1982, which allocates about 2.5 per cent of federal research funding to small businesses, particularly start-ups and has been credited with giving failure-prone small businesses a better chance of success. The second is the 1980 Bayh–Dole Act, which gives US universities, small businesses and non-profit organisations intellectual property control over many inventions that result from research funded by the federal government. That act has been seen as a boon for US university technology licensing offices seeking to partner with those who want to develop and commercialise the research.

“The SBIR has been very effective,” says David Audretsch, director of the Institute for Development Strategies at Indiana University in Bloomington, Indiana. “Studies show that firms that get the grants perform better.” And even though most start-ups do fail, what is important is that some succeed, enough to form an entrepreneurial cluster. “That is why the SBIR is very positive. It creates an entrepreneurial culture where there was a deficiency.”

Audretsch points to a colleague at his university who started a company only because he received SBIR funding. “His colleagues saw what he was doing, so they’re starting companies, too.” This “spillover effect” creates centres of creativity, says Audretsch, and is critical to the success of the US entrepreneurial model.

While European nations have been carefully studying the SBIR model and suggesting versions of their own, others are moving to mimic the Bayh–Dole Act. Japan and France already have versions of the act to stimulate technology transfer out of universities. But Richard Lester, founding director of the Industrial Performance Center at the Massachusetts Institute of Technology, cautions that the Bayh–Dole Act remains the subject of debate in the scholarly community. “Its authors and supporters say this has had a huge impact on spin-outs and licensing. But some argue that this would have happened anyway because the rate of university patenting and licensing was on the uptake anyway.”

Europe in the rear-view mirror

So how soon will the United States have to check its rear-view mirror for competition in demand-side innovation? US analysts and academics say Europe, especially the United Kingdom and Germany, may be the first to try to pull into the passing lane. But those countries will need a system of innovation that goes beyond allocating more government funds: it has to include government regulations that foster entrepreneurship and collaboration. “Innovation is a system with many components,” says Audretsch. “If there is a deficiency, you have to address it to get a balance.”

“It’s not enough to have technology or capital,” says Howard Anderson, senior lecturer at the Massachusetts Institute of Technology’s Sloan School of Management, and a venture capitalist. “You need a breed of samurai who are entrepreneurial to pull it together.”

Audretsch sees innovation as three main concentric circles, each of which must interact with the others. At the core are universities conducting fundamental research. The next ring is applied research such as business schools and bioinformatics. The third ring is what he calls the “spillover mechanisms”, such as technology licensing offices and research parks that get science out of the university and commercialised. There’s also a more recent outside ring, the “absorptive capacity mechanisms” that actively pull research and knowledge out of the university. This involves companies such as Intel and other large corporations locating sites near universities to tap into the innovations they believe their customers will want. These centres of innovation excellence, starting with basic university research at their heart, have drawn in government, venture capital and corporate money.

One example of linkages across all the circles is Stanford University’s Biodesign Network, which focuses on technology transfer by providing education, advocacy and mentoring to students and faculty who want to commercialise their healthcare innovations. The network also provides connections to biomedical professionals such as investors, equipment makers and attorneys who specialise in new venture formation.

Lester agrees with Audretsch in saying innovation is part of a system. “Money is a necessary condition, but you can’t do it all with money,” he says. “The government is funding one-third of the total R&D in the United States, but the rest is from the private sector. So this [innovation] is not a problem to be solved by government funding alone.”

He adds, “There is an effort to include within government resource-allocation decisions more consideration of demand-side factors that may affect the rate and direction of innovation. Probably the first thing to be said when it comes to government policy is the Hippocratic Oath – first, ‘Do no harm.’”

Is SBIR enough?

Even the SBIR has its limits. While California and Massachusetts enjoy the most money and grants from the programme, other US states fall woefully short of the funds they need to create the symbiotic relationships among universities, corporations and customers.

For example, in fiscal 2004, 6,348 awards totalling $2 billion were granted to all 50 US states by 11 government agencies, including the Department of Defense, the National Aeronautics and Space Administration, and the National Science Foundation. That year, California ranked tops in money and awards, with 1,328 awards totalling $415.7 million, with Massachusetts second with 840 awards pulling in $277.6 million. But the money and awards quickly drop off for the remaining states. Indiana, for example, ranks 27th: its 35 awards brought in just $12.6 million. That means the United States just can’t rely on SBIR grants; states need to step up to the plate to spread innovation centres nationwide.

That has caused the states to encourage their own incentive programmes to amass funds that at least can pay to prepare a proposal for an SBIR grant. One example is the 21st Century Fund, an award set up by Indiana to stimulate diversification of the state’s economy by developing and commercialising advanced technologies in Indiana.

Private funds have sprung up as well, for example, the non-profit Indiana Venture Center Inc. “The state doesn’t care if a bunch of firms fail; it cares that some succeed,” Audretsch says. “That way you can create an entrepreneurial culture where there was a deficiency. In an entrepreneurial economy most attempts do not succeed, but they create value that is actualised elsewhere. Once you create a cluster of small entrepreneurial firms, they create demand and opportunity for themselves.”

The aversion to risk

Entrepreneurship led to a boom in US jobs in the 1990s, while jobs in Europe stalled, Audretsch says. “That led to the Lisbon Agenda. Europe needs to concentrate on knowledge and entrepreneurship.” He adds that the spillover effect United States gets from its universities is a gusher compared with the trickle in Europe. “Because universities in Europe are primarily public, the government needs to impose changes to the university system,” he says, to get knowledge spillover. In public universities researchers may be subject to civil service regulations, and more sensitive about taking a risk.

Audretsch says that European universities are strong in their core basic research, but both the applied research and spillover mechanisms are weak. One reason is a type of risk aversion: more is at stake if a person starts a company that fails. “In Silicon Valley people respect you if you try and fail,” he says. “But in Germany, for example, if you fail three times, you can’t start again.” He says Europeans aren’t necessarily more risk adverse than Americans, but the consequences of failure are much greater. “Policy needs to be set to try to change that aversion,” he says. “If it’s tough to get a job, you’re less likely to start a company that might fail.”

That’s one reason, he says, that throngs of Europeans who studied in the United States stay to start companies. “It’s not just the people around you,” he says. “It’s the laws and regulations as well. Policy can change that.”

Germany already is questioning the ideals set by Alexander von Humboldt, who provided a model whereby universities have been free from control of the church and state, says Audretsch. In the 15 and 26 November issues of the Frankfurter Allgemeine Zeitung, the newspaper talks about the turnaround of Humboldt’s ideals in the face of today’s innovation challenges, including funding and university collaborations. “Universities on both sides of the Atlantic have been protecting this [freedom] with a big wall, but now they want to open up,” Audretsch says. “There is a trend toward interaction of scientists and companies.”

Using policy to change universities

MIT’s Lester says there is a trend to overstate the role of universities in innovation. “When Europe and other countries look to the United States for insight into how to make innovation work better in society, they typically look at the role universities have played and at how their own universities have performed,” he said. But sometimes the role universities have played here in the United States in the innovation story is overstated.” He said some Europeans come to the States and get the wrong impression if they just look at MIT, Stanford and Berkeley. “They see some great stories and tend to generalise them to a bigger story that isn’t necessarily accurate.”

There is a difference in the contributions European universities make versus their US counterparts. “It’s not about government spending or acquiring knowledge of the marketplace,” Lester says. “It has more to do with the mundane construction of what the faculty can do in terms of things like leaves of absences and openness of the university to entrepreneurial activity. The United States encourages entrepreneurship. Governments can address these things.”

In Europe and Japan public university researchers have been subject in many cases to civil service regulations, and the government can change that. “In Japan there has been a move to privatise universities,” Lester says. “This has meant faculty researchers are not subject to the same civil service restrictions and are freer to entertain entrepreneurial possibilities.”

So while the United States, the first country to shift from an old economy to an entrepreneurial economy, remains the leader and sets the standard for innovation, Audretsch says it can’t get lazy or sloppy, because Japan and Europe will move ahead. And new economies like India and China aren’t far behind.