Best Practice in State and Regional Innovation Systems

1. Best Practice in State and Regional Innovation Systems  Supporting Regional Innovation Systems Morgantown, West Virginia October 21, 2009 McAlister Clabaugh The National Academies

2. The Program on Technology, Innovation and Entrepreneurship (TIE) The TIE program evaluates innovation initiatives: • In the rest of the world: • Comparative Innovation Policy • China, India, Taiwan, Japan, Sweden, Finland, Poland, • In the US, at the federal, state, regional, and foundation level: • State and Regional Innovation Policy • Assessing the SBIR Program • Provide recommendations on how to convert R&D into successful firms and stimulate innovation-led economic development through innovation awards, institutional incentives, and infrastructure development

3. The Global Innovation Imperative • 4 Key Points • Innovation is Widely Recognized as Key to Growing and Maintaining a Country’s Competitive Position in the Global Economy • Collaboration is Essential for Innovation as Small Businesses and Universities Play a Growing Role in the Innovation Process • Institutional Change is Necessary to Compete Successfully • New Incentives are Required for Change

4. Global Competition is Increasing in Scale and Effectiveness • China brings scale advantages, national focus and resources • National Goal to become a Global Manufacturing & Leading Edge R&D Center • Intense Focus on Innovation & Institutional Change • Major Investments: over 100 S&T parks • India’s Policy Liberalization is unleashing growth • Emerging as a center for high-end R&D • Japan is Restructuring its Innovation System • High level policy focus and major investments • The UK, France, Netherlands, and Germany are renewing & funding up tech programs The Pace of Competition is Accelerating

5. China’s Remarkable R&D Growth 1999 6% 2007 15.5%

6. What is a Region To Do? • All Economic Growth is Local & Grounded • Place Matters • Complex, self-organizing systems • Healthy ecology of actors & institutions • Appropriate Incentives • Black Swans • Can we really anticipate new technology? • Or future Economic change • Government’s Objective Function • More complex when compared to firms • Maximize residents’ income and wealth • Designing economic development strategy may be the ultimate local innovation • Innovation is needed to address 21st Century Challenges in Growth, Energy, Climate, Health, and Security

7. Key Challenges for the United States • How do we transform investments in R&D into competitive new products for the market? • How can we encourage collaboration among innovative small and large companies, universities, and national laboratories to stimulate growth and employment? • How do we meet the locational competition for investment in the industries of today, as well as the industries of tomorrow?

8. Myths that Obstruct Policy Solutions • Capital Markets: “If it is a good idea, the market will fund it” & “U.S. VC Markets are broad & deep, thus there is no role for government awards” • Reality: Potential Investors have less than perfect knowledge, especially about innovative new ideas, which leads t0 suboptimal investments • Limited information on new firms • Prone to herding tendencies and trends • Focus on later stages of technology development • Seek early exits • Linear vs Non-Linear Innovation Models: 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

9. The Result: A Widening Valley of Death Capital to Transform Ideas into Innovations Federally Funded Research Creates New Ideas Innovation Product Development Firm Growth No Capital Dead Ideas

10. Large U.S. Venture Capital Market is Not Focused on Seed/Early-Stage Firms: Aggregate Amounts are Falling Later Stage $10.8 billion 1,177 Deals Total: $28.2 Billion Expansion Stage $10.6 billion 1,178 Deals Early Stage: $5.3 billion 1,013 Deals Seed Stage: $1.5 billion 440 Deals Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2009

11. The Early Stage “Valley of Death” Pre-Seed Seed/Start-Up Early Later Founders, Friends, Family & Fools Federal SBIR Grants/Angel Investors/ Angel Groups Venture Funds* $25,000 $100,000 $1 to 2 million $5 million VALLEY OF DEATH Funding Gap Adapted from: Richard Bendis and Ethan Blyer, “Creating a National Innovation Framework, Science Progress, 2009 * NB: Average Venture Investment is $8.3 million

12. Where Should Innovation Policy Focus? • Private activity is the Tip of the Iceberg • Government and Universities play major roles in innovation and economic development • What enables innovation? • Capacity • Incentives • Institutions • New Quasi-Governmental Entities • Public-Private Partnerships • Non-profits & Foundations

13. Opportunities for Policy Initiatives • Capacity, Incentives, and Institutions: How do we improve these to encourage growth? • Greater role for Small Businesses in Innovation • Focus on University-Industry Collaboration • More encouragement and collaboration among SMEs, MNCs and Universities • Better Commercialization of Research • Closer ties, with less overhead in University-Industry relations • More Intermediating Institutions • Science Parks can serve as catalysts to bring actors together • Public-private partnerships like Sematech, SRC and Semi offer a proven path forward for technologies like semiconductors and photovoltaics

14. The Small Business Innovation Research Program • Long-lived: In place for 25 years • Created by the Small Business Innovation Act of 1982 & renewed in 1992 & 2001. Currently up for reauthorization. • Decentralized: Each Agency uses its funds to support research by small companies to meet its mission needs • No New Money: 2.5% of Agency R&D budgets set-aside for small business awards • This provides budget stability and growth • Large Scale: Largest U.S. Innovation Partnership Program • Currently a $2.3 billion per year • Focus: Funds Proof of Concept and Prototype • Helps firms across the Valley of Death and attract private capital or public contracts

15. The SBIR “Open Innovation” Model $151 billion Social and Government Needs Private Sector Investment PHASE III Product Development for Gov’t or Commercial Market PHASE I Feasibility Research PHASE II Research towards Prototype R&D Investment Non-SBIR Government Investment $100K $750K Tax Revenue Federal Investment

16. Academies Research Reveals SBIR Impact on Firm Formation and Growth • Company Creation: 20% of responding companies said they were founded as a result of a prospective SBIR award (25% at Defense) • Research Initiation: SBIR awards played a key role in the decision to pursue a research project (70% claimed as cause) • Company Growth: Significant part of firm growth resulted from award • Partnering: SBIR funding is often used to bring in academic consultants & to partner with other firms

17. SALES $$ COMMERCIAL COMPANY NEW PRODUCTS & PROCESSES UNIVERSITY INNOVATION License Agreement or Equity INVESTMENT $$ RESEARCH $$ Transferring University Technology to Firms 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 Drawn from C. Gabriel, Carnegie Mellon University

18. NRC Survey: SBIR Awardees Come From & Work Closely with Universities • Over a third of the respondents in the NRC survey Phase II Survey of 4000 firms reported university involvement in their SBIR project. Of these: • More than 80% of NIH respondent companies had at least one founder from academia • About 1/3rd of founders were most recently employed as academics before founding the company • About 1/3rd of projects had university faculty as contractors on the project and 1/4th used universities themselves as subcontractors • 15% of SBIR awards involved graduate students.

19. From the “Ivory Tower” to the Marketplace • “Pure” Research is not the only University Role • Research Related to Industry Helps Generate Training and Skills Necessary for Productive Lives • (and the tax dollars for Research) • Industry’s Needs and Questions can Drive Research and be a Source of Relevant Publications

20. Roles of the 21st Century University • 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 • Generate Market-ready students • Create a cadre of creative and curious team players

21. Commercializing University Research is Politically 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 & Jobs • Needed for Economic renewal & competitiveness • Provides Services to Firms within the Innovation Ecosystem • Fosters skill pools needed for innovation clusters

22. S&T Parks Stimulate Regional Economic Development • Parks provide short term stimulus from construction jobs, and long term benefit from research activities, firm creation, and growth • Well-conceived and regularly assessed S&T Parks can • Facilitate Firm Creation • Generate Critical Mass for a Regional Economy • Encourage New and Existing Firms and the New Jobs and Growth they bring • Have concrete impacts on jobs and growth that build support in the Community and the State • S&T Parks are a Valuable Part of the Innovation Ecosystem and need to be reinforced with federal incentives

23. Research Parks are a Part of the Answer • Research Parks stimulate and manage the flow of knowledge among universities, R&D institutions, firms and markets • They facilitate the creation and growth of innovation based companies through incubation and spin-off • They provide value-added services together with high quality space and facilities • They help create a “Community of Innovation” needed to transfer new ideas from universities and laboratories into the marketplace • They build partnerships among researchers, small companies, and large companies

24. Key Factors for Successful Research Parks • Critical Mass • Presence of a Strong Science and Industry Base • Involvement of a Local Major Research Universities • Availability of Skilled Workers • Access to Finance • Good Park Infrastructure and Quality of Life Amenities • Leadership • Committed Champions • Strong and Committed Park Leadership • Presence of Entrepreneurs and Skilled Managers • Patient and Supportive Public Policies • Predictable, Substantial, and Sustained Funding • Bridging Institutions to sustain vision over the long term

25. Universities are Getting the Message • The are integrating more with S&T parks • University faculty increasingly work with private firms and firms rent laboratories and incubator space in universities. • Beyond research universities, community colleges and regional technical schools are increasingly participating in research parks • … often with substantial state support • Most research parks outside the U.S. are planned as part of a national strategy for industrial competitiveness. • S&T Parks can be found in more than 60 countries at all stages of development. Source: Luger and Goldstein, 2006

26. Next Steps: Regional Innovation Workshops & Cluster Development • Planning a series of workshops focusing on: • Current strengths, challenges, and opportunities • Capacity building: Industry, universities, local government • Aligning incentives and stakeholders for regional development • Ohio: Solar, polymers • Michigan: Electric vehicles and batteries • Hawaii: Solar, wind power

27. Thank You McAlister Clabaugh Program Officer The National Academies 500 Fifth Street NW Washington, D.C. 20001 mclabaugh@nas.edu Tel: 202 334 3019 http://www.nationalacademies.org/step