The Economics of Innovation00000000-72a3-b3b6-ffff-fffff5b8b555… · Small open economies like...

The Economics of Innovation

Prof. Dr. Ulrich Kaiser

Department of Business Administration

University of Zurich

Spring semester 2013

University of ZurichDepartment of Business AdministrationProf. Dr. Ulrich Kaiser

The Economics of InnovationSpring semester 2013

1

8. Innovation todayy1. Government R&D policy

Why do we have it?Why do we have it?How is it done?Some facts about US policyPolitics

2. University science and the public‐private interface3 R&D joint ventures antitrust licensing and competition policy3. R&D joint ventures, antitrust, licensing, and competition policy



2

Some slides borrowed/adapted from Bronwyn H. Hall.



3

8. Innovation todayyWhy do governments have innovation policies? Difficult to evaluate and fund some types of research in the private yp p

sector:obtaining external finance means revealing ideab fi diff id if i i il diffi lbenefit diffuse ‐ cannot identify recipients easily, so difficult to

collect payment (environment; defense)externalities are large, players are small (agriculture)g , p y ( g )risk and size of effort relative to size of market investors cannot evaluate projects very well due to extreme

iuncertaintyTo provide standards (public goods)



4

8. Innovation todayy

To encourage strategic industriesWhy do governments have innovation policies?

important for national security “ripe” for technical advancel l li k d h i d iclosely linked to other industries

technical advance facilitates progress in other industries Example ‐ the flat panel display initiativeExample the flat panel display initiative

To provide education and human capital imperfect capital markets imply that private sector will not supply

enough finance for higher educationSummary: social return to R&D > private return to R&D



5

Why do governments have innovation policies?



6

8. Innovation todayy

Returnor costof R&D

Social return

C

S

OptimalPrivate returnsubsidy

Level of R&D spendingRC RS spendingRC RS

Optimal competitivelevel of R

Optimal sociallevel of R



7

8. Innovation todayyWhy the gap between private and social return?Knowledge spillovers

knowledge created by one agent can be used by another without compensation, or with investment less than the cost of the knowledge creation

Market (pecuniary) spilloversSome of the benefits of the knowledge creation (new products/processes) flow to purchasers via the operation of market forces, reducing the pricep p , g p

Network spilloversValue of a new technology strongly dependent on development of related technologies (the hardware/software case)technologies (the hardware/software case)



8

8. Innovation todayyWhat’s wrong with this simple graph?

Magnitude of the spillover gap variesg p g pby countryby industryby technology type

Project ordering varies depending on whether you use social or private returns to orderprivate returns to order



9

8. Innovation todayySpillover gap varies by countrySmall open economies like those in Scandinavia, Netherlands, etc.

Most R&D benefits there may spill to other countriesVs. large semi‐open economies like the U.S.

less leakageless leakage



10

8. Innovation todayySpillover gap varies by industryConsumer electronics or autoparts/metal parts or airframes

Hi h i bilit ibl f illHigh appropriability, possibly fewer spilloversVs. pharmaceuticals for life‐threatening diseases, environmental and

pollution control Conventional as well as R&D externalities

Vs. telecommunications/ electronics/ semiconductors/IT appropriability may be low and there are many small firmsappropriability may be low and there are many small firms



11

8. Innovation todayySpillover gap varies by technology type

Large and diffuse (and possibly nonmarket motivated): “pure” science, Bohr: quantum mechanics; Einsteinbasic genome mapping

Smaller (appropriated): goal‐oriented applied research ( pp p ) g ppEdison: light bulb/phonographnew electric batteries

Large (not appropriated): scientific discoveries from solving practicalLarge (not appropriated): scientific discoveries from solving practical problemsPasteur: bacteriology via wine researchmathematics for encryptionmathematics for encryption



12

8. Innovation todayyProject ordering can differAccording to whether you use social or private returns to rank

projectsCures for developing country diseases vs developed country diseasesdiseases.

“Me too” drugsTargeted government policy that favors one industry orTargeted government policy that favors one industry or

technology over another changes orderingMore than one policy is useful, depending on the goal



13

8. Innovation todayyStandard policy instruments for market failure ‐ summary1. Internalize the externality

R&D joint ventures between firms in the same industryCreate a property right in the innovation (the patent system)

2. Subsidize or tax the activitywidely used policies

3 R l ti ? t lik l l3. Regulation? ‐ not likely or usualPrice controls Quotas mandating R&D performanceQuotas ‐mandating R&D performance



14

8. Innovation todayy1. Internalizing the externalityExempt R&D joint ventures from antitrust regulation

NCRA 1984NCRA 1984Sometimes with federal support, e.g., Sematech

Create a property right in the output of the innovativeCreate a property right in the output of the innovativeactivity (e.g., patent, trademark, copyright, etc.)Allows firms exclusive use of the innovation (monopoly)

ll d f d ll f lMay allow trading of ideas, promoting spillovers, facilitating cumulative and complex innovation

Both solutions have costsBoth solutions have costsDeadweight loss (creation of monopoly power)Projects chosen by industry (omits some with high social and l )low private returns)



15

8. Innovation todayy2. Subsidize or tax the activityDirect government subsidy ‐ where gap is large and beneficiaries

uncertain and diffuseuncertain and diffusescience/basic researchhigher educationdefense/space/health

Tax policy ‐ where gap is smaller; industrial R&DR&D is expensedR&D is expensedR&D tax credit (federal and state)Returns to foreign R&D repatriated at low tax rates

h d ff b di d i di fi iThe tradeoff between direct and indirect financing:Who chooses projects better?Who performs projects better?p p jPolitics and capture?



16

8. Innovation todayy2. Example – government subsidyNIST (National Institute of Science and Technology)/ATP

(Advanced Technology Program)(Advanced Technology Program) Example ‐ Joint venture of NCMS(ATT, TI, Dec, United Tech) to research aspects of printed wiring board interconnection systems$28.5 M for 5 years (ATP share $13.8M)

Only half of 62 projects studied would have been started without ATP funding



17

8. Innovation todayy2. R&D tax creditAlternative to R&D subsidiesLowers cost of doing R&D for firms Firm does project selection rather than the government

Ad t fi b b tt t h i j tAdvantage: firms may be better at choosing projectsDisadvantage: firms maximize private rather than social returns project ranking may differ using these two different criteriaproject ranking may differ using these two different criteria



18

8. Innovation todayy2. Who uses R&D tax credits?United States:

R&D di i 1981temporary R&D tax credit since 1981 renewed on and off to 1998made semi‐permanent (5 years) in November 1999

Other countries: Yes: Canada, France, Japan, Australia, Korea, Netherlands, No: Switzerland, Singapore, Taiwan, g p ,New: Norway (beg. 2003), UK (small firms in 1998; all firms beg 2003)

Tax subsidy to research equipment: Germany, Italy, UK, Belgium, Denmark, Mexico, Spain, SwedenGermany, Italy, UK, Belgium, Denmark, Mexico, Spain, Sweden



19

8. Innovation todayy2. Why incremental?Firm will do some R&D anyway

credit cheaper for the government if firm receives credit onlycredit cheaper for the government if firm receives credit only on spending in excess of what they would have done anyway

Problem: how to determine that figure?Often use a moving average of past spending rates, which can have perverse effects on the effective tax credit rate (because what you do this year affects the base next year)

Empirical research on effectiveness: Do tax credits have an impact? Usually yes, dollar for dollar.Do they cost more in tax revenue than the amount of

increased R&D? probably not.



20

8. Innovation todayyFederal Support for R&DComposition of federal support for R&D:

fundamental and basic scientific research of all types (NSF NIHfundamental and basic scientific research of all types (NSF, NIH, energy, and space science)research for military and space applications (NASA, Dept. of Defense) research in applied technology areas perceived to be of nationalresearch in applied technology areas perceived to be of national importance in health, energy, and agriculture (EPA, Dept. of Agriculture/ERS). commercialization and adoption programs/ demonstration programscommercialization and adoption programs/ demonstration programs like the clean coal demonstration (SBIR, ATP)cost‐sharing private R&D in commercial areas (Sematech and the flat panel display project ATP)p p y p j )



21

8. Innovation todayyProductivity of federal R&D

Generally lower compared to private R&DMuch of of government R&D is defense spendingMuch directed at unmeasured welfare improvements (health, environment, etc.) Measurement issues:

Productivity measures used are short term, basic science has long term payoffsLower short term “productivity” is not a bad thing if spillovers are large



22

8. Innovation todayyPolitical economy of federal R&D

Government spending on commercial innovation projects: underperformance and cost overruns.

Elected officials care about "saliency," that is, the few issues that attract voters’ interestR&D salient only when it is related to a national priority (e.g., post‐Sputnik space

research), associated with a scandal, or has a local interest factor (jobs) Saliency more likely if a few people care a lot, or are already organized (a union,

an industrial organization)Congress impatient and risk averseAgencies that implement projects have more information than congress, tend to ally

ith i d twith industry Political asymmetry

cheap to start a project hard to cancel if there is a large local job base associated even if technicallyhard to cancel if there is a large local job base associated, even if technically shown infeasible or worthless



23

8. Innovation todayyPolitical economic implicationsGovernment more likely to do programs oriented toward a concentrated

i d i i i h i l bli d liindustry; inconsistent with an optimal public goods policyProjects sometimes more attractive if they address a salient national issueMore attractive with a short time horizon, no radical change in the technical , g

base of the industry; inconsistent with the market failure arguments for policy

Net benefits are important early on in the decision, but their importance p y , pdeclines as stakeholders are created by the project

Programs that can be fragmented are more attractive politically ; keeps it below the relevant threshold for parliamentbelow the relevant threshold for parliament



24

8. Innovation todayyUniversity researchFunding: largely government but changingIncentive systems: “two worlds” viewEvolution of the university‐industry relationship

G h f h f ffiGrowth of tech transfer officesSome analysis of university‐industry RJVs



25

8. Innovation todayyExamples ‐ benefits of public R&D Directly valuable additions to the knowledge base, examples:

E i h dEncryption methods Internet communication protocols GPS ‐ global positioning system

Complementarity between public and private R&D Knowing where not to look Scientific knowledge to guide and inform applied R&Dg g pp

Research training benefits, not fully captured by R&D employees in their wages

Industrial affiliate programs p gFunding for graduate study Post‐doctoral circulation of researchers that embody and transfer tacit

knowledgeg



26

8. Innovation todayyThe “two worlds” of research

“Republic” of science Private sector (IP‐protected)

Incentives Returns to priority (being first)

Primarily financial (profits)

Dissemination Early publication encouraged; gives

priority

IP requires publication but strategic incentives to conceal some infopriority conceal some info

Use of others’ discoveries

At low cost (citation and reciprocity)

Requires payment or cross‐licensing agreementdiscoveries reciprocity) licensing agreement



27

8. Innovation todayyThe “two worlds” of research

Somewhat oversimplified viewpUniversity research output increasingly privatized via patenting and exclusive licensingS fi i i d i ll i h h i l i dSome firms in industry, especially in the pharmaceutical industry, encourage journal publication of results in order to encourage interaction between their researchers and the scientific communityNevertheless, a useful way to look at the arrangements



28

8. Innovation todayyBenefits to Industry (Lee 2000)

Access to new and complementary research; also found to be important by Cohen et al survey (1997)

Development of new productsDevelopment of new productsMaintaining a relationship with the universityObtaining new patentsSolving technical problemsLess important: improving products, recruiting students



29

8. Innovation todayyBenefits to Industry (Lee 2000)

Henderson and Cockburn (1996) – access to university research enhances sales, R&D productivity, and patenting (pharmaceutical industry)

Zucker Darby and Armstrong (2001) – collaborating (publishing) with “star”Zucker, Darby, and Armstrong (2001) collaborating (publishing) with star university scientists important for firm performance in biotechnology

Adams, Chiang, and Starkey (2001) – Ind‐Univ Cooperative Research Centers, especially those funded by NSF promote tech transfer and increaseespecially those funded by NSF, promote tech transfer and increase patenting rates at industrial labs

Rosenberg and Nelson (1994) – university research enhances and stimulates R&D in industry rather than substituting for itR&D in industry, rather than substituting for it.

Pavitt (1998) – augments capacity of business to solve complex problems.



30

8. Innovation todayyEvaluating the benefits

Industry motivation: universities become more important as technical change is closer to “science.”

Declines in direct industry spending on basic research following the waveDeclines in direct industry spending on basic research following the wave of corporate restructuring in the 1980s

Special basic research tax credit introduced in 1981 and strengthened in 19861986



31

8. Innovation todayyWhy has partnering increased?

University motivation – changes in government levels of supportReal growth in federal R&D funding:

16% between 1953 and 196816% between 1953 and 1968 1% between 1969 and 19835% between 1984 and 2000, but with substantial declines in non‐

biomedical areas As federal funding declined, universities used more of their own funds and more funds from industry

University administrators increasingly pressure faculty to engage in applied commercial research.



32

8. Innovation todayyHall Link & Scott 2000

How does the performance of RJVs with universities differ from those without?

Universities included in research projects involving “new” sciencep j gencounter more difficulty in assimilating knowledge and commercialization tends to be delayed

Problems with research time and financial resources is technology ifispecific

personnel problems in frontier technologies equipment problems fewer in info technologymore unproductive time/cost in electronics than in other fields



33

8. Innovation todayyBarriers that inhibit university‐industry partnerships – IP!Most significant barrier related to IP, specifically patenting rightsF i i iFrom university perspective:Want to patent research resulting from the partnering relationship, but found industry extremely difficult to deal with on this issue

P bli i i h d d l f h i f hPublication rights and delays were, for the most part, an non‐issue from the perspective of the university

From firm perspective:IP f bli bl k f ll b i b i i iIP often a stumbling block for collaborations because many universities want to publish results prior to IP protection, and sometimes will not grant exclusivity on results

Universities have an over inflated view of their intellectual property value andUniversities have an over‐inflated view of their intellectual property value, and university licensing officers have an over‐inflated view of the value they bring to the project

Small companies tend to subcontract with universities rather than include themSmall companies tend to subcontract with universities rather than include them as a research partner.

Higher false start rate with small companies primarily because they seemed less familiar with university bureaucracy. (less tolerant of?)University of ZurichDepartment of Business AdministrationProf. Dr. Ulrich Kaiser


34

y y ( )

The Economics of Innovation00000000-72a3-b3b6-ffff-fffff5b8b555… · Small open economies like...

Documents

Transcript of The Economics of Innovation00000000-72a3-b3b6-ffff-fffff5b8b555… · Small open economies like...