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NIST
GCR 02841
Between Invention and Innovation
An Analysis of Funding for Early-Stage Technology Development
Prepared
for
Economic Assessment Office
Advanced Technology Program
National Institute of Standards and Technology
Gaithersburg, MD 20899-4710
By
Lewis M. Branscomb
Aetna Professor of Public Policy
and Corporate Management, emeritus
Kennedy School of Government, Harvard University
lewis_branscomb@harvard.edu
Philip E. Auerswald
Assistant Director, Science,
Technology, and Public Policy Program
Kennedy School of Government, Harvard University
philip_auerswald@harvard.edu
Grant
50BNB0C1060
November
2002 |
TABLE OF CONTENTS
Motivation
Objectives
Approach
Findings
- Sources of most funding
- Inefficiency of markets
- Institutional arrangements
for funding
- Conditions for success
- Corporate R&D
spending
Conclusion
- Motivation
- Project Objectives
- Approach
A. Workshops
B. Models for interpreting the data
C. Assumptions and limitations
- Project Outputs
- Team
- The economic nature
and value of technology-based innovations
A. Toward a project-level definition of technology-based innovation
B. Applied research? Seed investment? Defining early stage
- From invention to
innovation
A. Modeling the interval between invention and innovation
B. Three elements of Stage 3
C. Infrastructure requirements and complementary assets
D. Value capture
- Funding institutions
and their roles
A. Corporations
B. Venture Capital
C. Angel Investors
D. Universities
E. State Programs
F. Federal Funding
- Conclusion
- Overview
- Results
- Detailed assumptions
underlying the two models in Table 1
A. Corporations
B. Venture Capital
C. Angel Investors
D. Universities and Colleges
E. State Governments
F. Federal Government
- Introduction
- Trends
R&D Process Evolution: Increasing Complexity and Web-Like Process
Pressure for Measurable Results: Financial Return
Industry and Company Life-Cycle Influences
- Implications
Scale and Scope Changes for R&D
Bias Toward Product Development and Known Markets
- Emergent Responses
Portfolio Management Models
Alliances and Acquisitions and Venture Funds
Spin-Out of R&D Function: ESTD Engines for Hire
- Affymetrix
- Energy
Conversion Devices
- Marlow
Industries
- PolyStor
Corporation
Washington,
D.C. (Carnegie Endowment for International
Peace): January 25, 2001
Panel 1. Early-stage,
technology-based innovation: Overview of data and definitions
Panel 2. Technology focus: Amorphous silicon
Panel 3. Mapping corporate investments
Panel 4. Mapping venture capital and angel investments
Panel 5. Regional distribution of investments and state programs
Panel 6. Technology focus: Life sciences
Panel 7. Mapping federal government investments
Participant Biographies
Palo
Alto, CA (Xerox Palo Alto Research
Center): February 2, 2001
Panel 1. Early-stage,
technology-based innovation: Overview of data
and definitions
Panel 2. Technology cases (I)
Panel 3. Mapping venture capital and angel investments
Panel 4. Institutional innovations: Networks and incubators
Panel 5. Technology cases (II)
Panel 6. University-industry cooperation and regional innovation
Participant
Biographies
Cambridge,
Massachusetts (Kennedy School of Government,
Harvard University): May 1 and 2, 2001
Keynote Speaker (May 1) 128
Panel 1. Early-stage,
technology-based innovation: Introduction and presentation of initial results
Panel 2. Behavioral and institutional issues
Panel 3. Mapping the funding for early-stage innovation: The numbers and what
they might mean
Panel 4. Turning ideas into products: New perspectives on growth through innovation
Panel 5. Networks, social capital, and concentration by regions and sectors
Panel 6. Public and private complementarities
Participant Biographies
ILLUSTRATIONS
- Figure
1. Estimated distribution of funding sources for early-stage
technology development, based on restrictive and inclusive criteria
- Figure
2. Sequential model of development and funding
- Figure
3. The Valley of Death image
- Figure
4. An alternative metaphor for the invention-to-innovation
transition: the Darwinian Sea
- Figure
5. Typical corporate R&D spending profile
TABLES
- Table
1. Estimates of funding flows to early-stage technology development
(ESTD) from data on financial support for scientific and technological
innovation (1998 data)
- Table
2. Fraction of corporate R&D in central research laboratories,
selected companies, 1998
- Table
3. R&D Spending Profile by Industry
TEXT
BOXES
PROJECT
ADVISORY COMMITTEE
Arden L.
Bement
Basil S. Turner Distinguished Professor of Materials Engineering, Purdue
University*
William
Bonvillian
Office of Senator Joseph Lieberman
Christopher
M. Coburn
Executive Director, CCF Innovations, Cleveland Clinic Foundation
Wesley
Cohen
Professor, Department of Social and Decision Sciences, Carnegie Mellon University
Maryann
Feldman
The Jeffrey Skoll Professor of Innovation and Entrepreneurship, Rotman School
of Management, University of Toronto
Mark Myers
Xerox Corporation (ret.) and Wharton School, University of Pennsylvania
E. Rogers
Novak, Jr.
Founding Partner, Novak Biddle Venture Partners
Rosalie
Ruegg
President and Director of Economic Studies, TIA Consulting
Kenneth
D. Simonson
Senior Economic Advisor, Associated General Contractors of America
Jeffrey
E. Sohl
Director, Center for Venture Research, University of New Hampshire,
Whittemore School of Business and Economics
Charles
W. Wessner
Program Director, Board on Science, Technology and Economic Policy, National
Research Council
_____________________
*Position at the time of service on this committee. Dr. Bement is currently
Director
of the National Institute of Standards and Technology (NIST).
Return to Table
of Contents.
ABOUT
THE AUTHORS
Philip
E. Auerswald is Assistant Director of the Science, Technology,
and Public Policy Program and an Adjunct Lecturer at the Kennedy
School of Government, Harvard University. His research pertains to
science and technology policy, the economics of technological innovation,
and industrial organization. Auerswald holds a Ph.D. in Economics
from the University of Washington and a B.A. in Political Science
from Yale. With Lewis Branscomb, Auerswald is the co-author of Taking
Technical Risks: How Innovators, Executives and Investors Manage
High Tech Risks (MIT Press, 2001). He is a contributor to The
Emergence of Entrepreneurship Policy: Governance, Start-Ups, and
Growth in the Knowledge Economy (Cambridge University Press,
forthcoming) and the Santa Fe Institute Series in the Sciences
of Complexity (Addison Wesley). He has served as a consultant
to the Commonwealth of Massachusetts Department of Economic
Development; in the context of that work he is principal author of Competitive
Imperatives for the Commonwealth: A conceptual framework to guide
the design of state economic strategy. Additionally, Auerswald
has served as a research consultant to, and reviewer for, the National
Research Councils Board on Science, Technology, and Economic
Policy.
Lewis M. Branscomb is
Aetna Professor of Public Policy and Corporate Management (emeritus)
at Harvard University. He is emeritus director of Harvards Science
Technology and Public Policy Program in the Belfer Center for Science
and International Affairs, and a member of the Centers Board of
Directors. Branscomb received the BA in physics, summa cum laude,
from Duke University in 1945 and PhD in physics from Harvard in 1949,
when he was appointed Junior Fellow in the Harvard Society of Fellows.
He is a recipient of the Vannevar Bush Award of the National Science
Board, the Arthur Bueche Award of the National Academy of Engineering,
the Gold Medal of the U.S. Department of Commerce, and the Okawa Prize
in Communications and Informatics. He received the Centennial Medal of
the Harvard University Faculty of Arts and Sciences in 2002. He holds
honorary doctoral degrees from sixteen universities and is an honorary
associate of the Engineering Academy of Japan.
Branscomb pioneered the
study of atomic and molecular negative ions and their role in the atmospheres
of the earth and stars and was a co-founder of the Joint Institute for
Laboratory Astrophysics (JILA) at the University of Colorado. While there,
he was Editor of the Reviews of Modern Physics. After serving
as director of the U.S. National Bureau of Standards (now the National
Institute of Standards and Technology) from 1969 to 1972, he was named
vice president and chief scientist of IBM Corporation and a member of
the IBM Corporate Management Board. In 1980 President Carter appointed
him to the National Science Board and was elected chairman in the same
year, serving until May 1984.
Branscomb was appointed
by President Johnson to the Presidents Science Advisory Committee
(1964-1968) and by President Reagan to the National Productivity Advisory
Committee. He is a member of the National Academy of Engineering, the
National Academy of Sciences, the Institute of Medicine and the National
Academy of Public Administration. He is a director of the AAAS and a
director of the National Research Council. He is a former president of
the American Physical Society and a former president of Sigma Xi.
Branscomb is the co-chair,
with Richard Klausner, of the Academies study entitled Making
the Nation Safer: The Role of Science and Technology in Countering Terrorism,
released on June 25, 2002 and published by National Academy Press on
August 2, 2002. He has written extensively on information technology,
comparative science and technology policy, and management of innovation
and technology. In addition to more than 450 published papers, his recent
books are Taking Technical Risks: How Innovators, Executives, and
Investors Manage High Tech Risk, (with Philip Auerswald, 2000); Industrializing
Knowledge: University-Industry Linkages in Japan and the United States (edited
with Fumio Kodama and Richard Florida, 1999); Investing in Innovation:
A Research and Innovation Policy that Works (edited with James Keller,
1998); Korea at the Turning Point: Innovation-Based Strategies for
Development (with H.Y. Choi, 1996); Japanese Innovation Strategy:
Technical Support for Business Visions (with Fumio Kodama, 1993);
Empowering Technology: Implementing a U.S. Policy (1993); Converging
Infrastructures: Intelligent Transportation and the National Information
Infrastructure (with James Keller, 1996); Informed Legislatures:
Coping with Science in a Democracy (with Megan Jones and David Guston,
1996); Confessions of a Technophile (1994); and Beyond Spinoff:
Military and Commercial Technologies in a Changing World, (with J.
Alic, et.al., 1992).
Return to Table
of Contents.
ABSTRACT
The purpose
of the Between Invention and Innovation project is to support
informed design of public policies regarding technology entrepreneurship
and the transition from invention to innovation by providing a better
understanding of the sources of investments into early-stage technology
development projects. National investment into the conversion of inventions
into radically new goods and services, although small in absolute terms
when compared to total industrial R&D, significantly affects long-term
economic growth by converting the nations portfolio of science
and engineering knowledge into innovations generating new markets and
industries. Understanding early-stage technology development is important
because a national and global capacity to sustain long-term economic
growth is important.
The project
has sought to answer two sets of questions:
- What is the distribution
of funding for early-stage technology development across different
institutional categories? How do government programs compare with
private sources in terms of magnitude?
- What kinds of difficulties
do firms face when attempting to find funding for early-stage, high-risk
R&D projects? To what extent are such difficulties due to structural
barriers or market failures?
We have pursued
two approaches in parallel to arrive at a reasonable estimate of the
national investment in early-stage technology development: first, learning
from the observations of practitioners in the context of a series of
workshops held in the U.S., and second, collecting the data available
on early-stage technology development investments from other studies
and from public statistical sources. These approaches have been supplemented
by four case studies conducted by a team of Harvard researchers and a
set of forty-six in-depth interviews of corporate technology managers,
CEOs, and venture capitalists conducted on our behalf and with our direction
by Booz Allen & Hamilton.
We found that
most funding for technology development in the phase between invention
and innovation comes from individual private-equity angel investors,
corporations, and the federal government-not venture capitalists. Our
findings support the view that markets for allocating risk capital to
early-stage technology ventures are not efficient. Despite (or in response
to) market inefficiencies, many institutional arrangements have developed
for funding early-stage technology development. This suggests that funding
mechanisms evolve to match the incentives and motivations of entrepreneurs
and investors alike.
We also found
that the conditions for success in science-based, high-tech innovation
are strongly concentrated in a few geographical regions and industrial
sectors, indicating the importance in this process of innovator-investor
proximity and networks of supporting people and institutions. Among corporations,
the fraction of R&D spending that is dedicated to early-stage technology
development varies both among firms and within industries. The latter
variation may be related to industry life cycles. Overall, we found that
the federal role in early-stage technology development is far more significant
than would be suggested by an uncritical glance at aggregate R&D
statistics. Federal technology development funds complement, rather than
substitute for, private funds. Decisions made today regarding the nature
and magnitude of federal support for early-stage technology development
are likely to have an impact far into the future.
Return to Table
of Contents.
ACKNOWLEDGMENTS
We are particularly
grateful to the members of the advisory committee, as listed at the opening
of this report, and to participants in the three Between Invention and
Innovation workshops, as listed in Annex III. The collective observations
and perspectives of these individuals comprise the most valuable content
in this report. We owe special thanks to Ronald Cooper, Paul Reynolds,
Hans Severiens, and Jeffrey Sohl for consultations regarding the difficult
task of estimating investments by angel investors into early-stage
technology development. We additionally thank Cooper for providing us
with unpublished data relevant to our study. Ambuj Sagar contributed
to the report via numerous discussions throughout the process as well
as through the writing of the brief company narratives presented in Annex
II. Teresa Lawson of Lawson Associates Editorial Consulting ably edited
the entire report (including company narratives) and the separately published
case studies. Stephen Feinson assisted with workshop organization and
project administration.
We would also
like to thank Darin Boville, the original contracting officer, formerly
of the Advanced Technology Program, for his insights and guidance at
the initial stages of the project. Connie Chang, Senior Economist at
ATP and the contracting officer for the project, ably managed the work
to its conclusion. We benefited from additional comments by reviewers
at ATP, including Anya Frieman (Economist), John Hewes (Information Coordinator),
Omid Omidvar (Program Manager), and Stephanie Shipp (Director of the
Economic Assessment Office.)
Date created: February 14,
2003
Last updated:
August 2, 2005
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