The Twenty-First Century University Innovation & the Commercialization of University Research  Knowledge Economy Forum IV Istanbul, Turkey March 23, 2005 Charles W. Wessner, Ph.D. Director, Technology and Innovation National Research Council © Charles W. Wessner PhD

Commercializing University Research is Important because it… Provides a Return to Public Investments in Research Ensures that new & promising ideas are not trapped in the University laboratory Justifies New Research Allocations Creates tangible outputs from public investments Provides a source of New Firms Needed for Economic renewal & competitiveness Provides Services to Firms within the Innovation Ecosystem Fosters skill pools needed for innovation clusters

US Universities & Regional Growth Overcoming Common Policy Myths Realizing the Potential for Regional Growth

The Myth of the Linear Model of Innovation Global Myth: Innovation is a Linear Process Basic Research Applied Research Development Commercialization Reality: Innovation is a Complex Process Major overlap between Basic and Applied Research, as well as between Development and Commercialization Principal Investigators and/or Patents and Processes are Mobile, i.e., not firm-dependent Many Unexpected Outcomes Technological breakthroughs may precede, as well as stem from, basic research The linear model creates the impression that increasing public and private investments in research will result in greater commercialization, strengthening, in turn, competitiveness in global markets. While useful in general discourse and elegant in exposition, it is easy to forget that this simple model severely understates the complex interactions that actually take place within the innovation process. I] In the real world, distinctions between basic and applied research are rarely clear cut; often it may simply depend on the researcher’s intent. Many discoveries have a serendipitous element. Much learning occurs by trial and error. Many good ideas simply do not make it to the market place. The process from discovery to innovation to commercialization involves consecutive challenges and market signals that can often be indistinct or even absent [i] Any model captures only a small window on reality. Models are useful devices in highlighting those aspects of the real world relevant to a given problem-solving exercise, but it is important not to confuse this representation with reality.

Myth of the “Ivory Tower” University Myth: Pure Research and Education are the central University Roles Reality: University Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lines Industry’s Needs and Questions can Drive University Research and be a Source of Relevant Publications

Pasteur’s Quadrant: Research can be Applied, Practical, and Basic at the Same Time Use-inspired research increases existing understanding and creates improved technology. can take existing technology to new levels but it can also improve understanding of fundamental principles Quadrant Model of Scientific Research Considerations of Use? No Yes Pure Basic Research (Bohr) Use-Inspired Research (Pasteur) Pure Applied Research (Edison) Yes Quest for Fundamental Understanding ? No From Donald Stokes, Pasteur’s Quadrant, 1997

Non-Linear Model of Innovation Quest for Basic Understanding New Knowledge Fundamental Ideas Basic Research Potential Use Application of Knowledge to a Specific Subject “Prototypicalization” New Unanticipated Applications Feedback: Basic Research needed for discovery Search for new ideas and solutions to solve longer-term issues Applied Research Feedback: Applied Research needed to design new product characteristics Development of Products Goods and Services Development Beyond Spin-off: Military and Commercial Technologies in a Changing World John A. Alic, Congressional Office of Technology Assessment Lewis M. Branscomb, Harvard University Harvey Brooks, Harvard University Ashton B. Carter, Harvard University Gerald L. Epstein, Harvard University Agency Program Cycle Budget Goals Few Successes Feedback: Market Signals/ Technical Challenge Desired Product Alterations or New Characteristics Cost/design trade-off Commercial- ization

Changing the Policy Framework What Works? What Does Not?

Bottom-Up vs. Top-Down Policies Policymakers in many countries have passed new rules intended to facilitate the commercialization of scientific research output Two types of approaches create contrasting incentive structures Bottom Up Structure: (The US Model) Creates economic incentives for universities to find commercial opportunities for their research output Allow universities to experiment to find the best means to do that— evolves from below Top Down Structure: (The Swedish Model) Intellectual Property Rights awarded directly to the Inventor Government directly creates mechanisms intended to facilitate commercialization— designed from above

What Works? What Does Not? Giving IP to the University positively changes the Incentive Environment for the Inventor University can reward commercialization activities of its faculty, who otherwise have to “publish or perish” University has access to a portfolio of opportunities among various technologies, hedging risks of the individual research outcomes, and covering costs of marketing and patenting Giving IP rights to the Inventor does not appear to work Puts her in a non-supportive, high risk environment Yields few incentives for universities or academics to pursue commercialization of ideas

Is the Bottom-Up Approach is more Effective in Facilitating Commercialization? Sweden is an academic powerhouse, but technology transfer performance is weak Top-down approach fails to create incentives for academic researchers to become involved in the commercialization of their ideas* What are the results of US incentives for university-industry collaboration? *Goldfarb & Henrekson, Research Policy 32 (2003)

Example from the US: Before the 1980s, Few Incentives for Collaboration Before 1980 the US System was like Europe Industry, Universities, and Federal laboratories researchers rarely collaborated Patents from Federally funded research were generally held by Government—and not used Presumptions about Antitrust Laws Limited Joint Research Industry Research based on Corporate Laboratories—e.g., Bell Labs Companies attracted University Graduates but did not fund much University Research

Policy Innovations of the 1980s Create Positive Incentives for Commercialization Bayh-Dole Act of 1980: Allows universities to patent the results of research that the federal government has funded Universities can earn royalties by licensing research innovations to private companies As a result, Research Universities have been actively involved in commercializing their proprietary technology Universities have opened and expanded Technology Transfer Offices

Policy Innovations of the 1980s Create Positive Incentives for Commercialization Effects of Bayh-Dole are Real Increase in Patents granted to Universities 375 in 19823450 in 2003 Total new patents filed=7203 Increase in University Royalties from Licensing $130 millionin 1991$1.033 billion in 2003 More Startup Companies formed with University Patents 175 in 1994348 in 2003, and growing Reforms take time to have an Impact, but with the Right Incentives, Behavior and Outcomes will Change

University Royalties from Licensing Royalties to Universities/Hospitals in Millions of Dollars Source: Bremer, 2001 speech (http://www.autm.net) - data from AUTM Licensing Survey

University startups initiated by technology transfer processes Source: Nature Biotechnology 22, 21 - 24 (2004) .

Benefits for University of Growth in University Research Commercialization Enhances local/regional economic development More rapid technological diffusion to the public Potential Source of University Revenue Positive Effect on the Curriculum Curriculum tuned to real world developments Students see value in coursework Marketing Tool to Attract Students, Faculty, Industrial Research Support

New Institutions May be Required to Foster Knowledge-Based Growth Policies that change Incentives will Modify Behavior, shifting focus to Innovation E.g.: Motivation for gain from Intellectual Property (stimulated by Bayh Dole) led to more commercialization of University Research Mere exhortations to change have limited impact Creating new Dynamic Organizations can help overcome Resistance to Change E.g. Troyes Technological University produces 14 times more patents than the average French University

The 21st Century University For the Knowledge Economy, the University needs to Teach the next generation With up to date laboratories on real market questions About the sciences needed to address current and future questions (e.g., nuclear waste, stem cell research, genetically modified food) Conduct Research “Curiosity-driven Research,” certainly but the University also needs to bring Science to bear on Social Problems and Industry Needs Commercialize New Science-led solutions to societal problems New Products, Processes, and Market-ready students

Concerns about the 21st Century University New Concerns that University-Industry Partnerships can Negatively impact a culture of “Open Science” Reduce the quantity and quality of basic research Lead academics to spend less time on teaching and service* Still, To suggest that, somehow, universities are not and should not be engines of economic growth is missing the central point of how our economy grows and how we create jobs. Robert Birgeneau, Chancellor, UC Berkeley Quoted on NPR Morning Edition, Date: 08-09-04 *See Richard Florida, Issues in S&T, Summer 1999

University-Industry Cooperation is Key Cooperative Research University research draws ideas from commercial trends more than ever before Feedback loops from industry to universities are important Major contribution to training for real jobs Regional Growth Regional economies need their research universities more than ever before Firm Formation University innovation + early government funding have been key to the growth of many successful technology companies Supportive University Culture & Incentives are crucial

The Small Business Innovation Research Program (SBIR) A Program to Change Incentives Now being Adopted in Europe

The SBIR Program Created in 1982, Renewed in 1992 & 2001 Participation by all federal agencies with an annual extramural R&D budget of greater than $100 million is mandatory Agencies must set aside 2.5% of their extramural R&D budgets for small business awards Currently a $2 billion per year program Largest U.S. Partnership Program

SBIR Incentives SBIR provides Competitive Awards that Change incentives for Academic Researchers Change incentives for Small Firms Encourage Commercialization of University Research Results

SBIR’s Attraction to New Entrepreneurs Attractive to University Professors and Graduate Students seeking to Commercialize their Research Having a company not required to apply for a grant—lowers risk of trying Companies and Researchers can apply to different agencies at the same time Agency outreach programs provide guidance and encouragement Entrepreneur can explore technical and commercial feasibility under Phase I before taking the full plunge Provides Useful Training & Motivates Students

SBIR Grants are Entrepreneur-Friendly Why do Entrepreneurs like it? No dilution of ownership No repayment required for grant Grant recipients retain rights to Intellectual Property developed using SBIR funds No royalties owed to government Certification effect of award attracts private capital

SBIR Primes the Pump of University Technology Transfer RESEARCH $$ INVESTMENT $$ SALES $$ UNIVERSITY COMMERCIAL COMPANY NEW PRODUCTS & PROCESSES INNOVATION License Agreement or Equity ROYALTIES or EQUITY PAYOUT SBIR Licensing to existing companies – brings royalty $ New company formation – brings royalties and/or equity Other, less direct, contributions to regional economic activity – 5,000 Good New Jobs in Pittsburgh Area Drawn from C. Gabriel, Carnegie Mellon University

The Benefits of University-Industry Cooperation: SBIR Role SBIR Innovation Awards Directly Cause Researchers to create New Firms Jobs and Regional Growth Cooperation creates High-Tech Jobs Universities help diversify and grow the job base Increasingly universities are the largest regional employer for all types of employment Cooperation validates Research Funding Returns to Society in Health, Wealth, & Taxes SBIR is a proven mechanism in an uncertain game

The 21st Century University Education § Research § Commercialization Concluding Points The 21st Century University Education § Research § Commercialization

Encouraging Universities to serve as a Nexus of Growth… …Requires Real Changes in Culture and Values: This requires new leadership and new incentives Status of Professors: permissive environment to encourage innovations, collaboration with industry, and pursuit of innovation awards and wealth Institutional Practices: Parallel research institutes with self-select mechanism Strong local Leadership & Local Autonomy are required National Programs like SBIR help shift the culture

Understanding Innovation Ecosystems National Innovation Systems are Different in Scale and Flexibility Flexibility is a differentiator It is less how much is spent but how well All Systems Have Common Challenges Need to justify R&D expenditures by creating new jobs & new wealth Need to reform institutions (or invent new ones) Need to recognize that project failure does not equal program failure Linkages strengthen Innovation Ecosystems E.g., SBIR draws together small businesses, universities, and government agencies

Thank You Charles W. Wessner, Ph.D. Board on Science, Technology, & Economic Policy National Research Council 500 Fifth Street NW Washington, D.C. 20001 cwessner@nas.edu Tel: 202 334 3801 http://www.nationalacademies.org/step

SBIR Model Recoupement through Tax System PHASE III Product Solicitations for Government Needs Private Sector Investment PHASE III Product Development for Gov’t or Commercial Market Company Proposal for PHASE I Feasibility Research Company Proposal for PHASE II Research towards Prototype R&D Investment $100K $750K Tax Revenue Recoupement through Tax System Federal Investment