Post on 27-Mar-2015
transcript
© Charles W. Wessner, PhD1
Innovation, Security & Growth
Perspectives from the U.S. Innovation SystemMyths, Realities & Opportunities
Six Countries Programme Workshop Defense & Security R&D
Brussels, BelgiumNovember 19, 2004
Charles W. Wessner, Ph.D.Director, Technology and Innovation
National Research Council
© Charles W. Wessner, PhD2
The Role of the National Research Council
• The NRC Mission is the Advise the Government on Science, Engineering, and Medicine– Studies for federal agencies, Congress, and
some self-initiated; 270 Reports Issued Each Year
– Nearly 1,300 staff and 10,000 volunteers annually involved in NRC/IOM studies
– Budget of some $160 million: 85% from government agencies and 15% private
• Great Prestige. High Quality Analysis with Direct Impact on U.S. Policymaking
© Charles W. Wessner, PhD3
Presentation• Question: Is military R&D a source of
Commercial Advantage in the U.S. Innovation System?
• Myths and Realities about the U.S. Innovation System
• The Limits of Spinoff
• The Need for a Broader Technology and Security Policy
• A Better Model: The Potential for Innovation Awards in Europe
© Charles W. Wessner, PhD4
Related Questions for Today(From our Swedish Friends)
• How can public investments in security research generate maximum impact on innovation and growth?
• How to find forms (or mechanisms) to strengthen the innovation systems?
• How to increase the efficiency in public and private procurement of military products?
• How to increase innovation by encouraging the participation of small companies?
An Overview of the US R&D Portfolio
Dramatic Increases in the US Budget for Defense & Homeland Security R&D
© Charles W. Wessner, PhD6
R&D in FY 2005 Budget• Federal R&D expected to rise to $132 billion in
FY’05, up from $126 in FY’04
• Most funding increases over past few years have gone to Defense Weapons development and Homeland Security R&D (including bio-defense)
• FY’05 R&D budget continues this trend
• All other R&D agencies have seen flat or declining R&D budgets (with modest increases in some programs offset by cuts in others)
© Charles W. Wessner, PhD7
U.S. Defense R&D is High
© Charles W. Wessner, PhD8
…But Focus is on Development
Is U.S. R&D Leadership Therefore a Myth?The focus on weapons development and testing overstates the R&D element of the budget.
It is often not basic or even applied research but rather testing and certification.
© Charles W. Wessner, PhD9
Security Related R&D in Other Agencies• NIH (NIAID) is the lead agency for Bio-
Defense– Bio-defense research at NIH to be
$1.8Billion in FY2005– Most of money to go for NIH Research
Grants• NSF to fund basic research in areas related
to Homeland Security• USDA involved in food security & animal
health• Each Agency wants its Share of “Security”Source: AAAS, 2004
© Charles W. Wessner, PhD10
Post 9-11 Increase in Bio-defense R&D
NIH is the Lead Agency in Bio-defense ResearchDHS Portfolio Heavily Development and Labs Oriented
Opportunities for Security Cooperation with Europe
NIH Budget is $1.8 Billion
© Charles W. Wessner, PhD11
Current Trends are Troubling:
President’s Proposed Cuts in the R&D Budget for FY2005
• $660M cut from Basic and Applied Research at DoD
• $68M cut from DoE Office of Science• $63M cut from Energy Conservation R&D at
DoE• $183M cut from Agriculture Research• $24M cut from Transportation Research• Advanced Technology Program to be Ended• Manufacturing Extension Program: Proposed
budget down 63% from 2003 level
© Charles W. Wessner, PhD12
What are the Implications for Europe?
• Concern in Europe on impact of increased US Defense and Security R&D budgets on– European Defense and Commercial Industries– European Science Base in Trans-Atlantic
Cooperation & Competition– European Policy Aspirations
• To help address these concerns, EURAB commissioned PREST to undertake an analysis of the impacts of US Defense R&D spending– Andrew D. James, US Defence R&D Spending:
An Analysis of the Impacts, January 2004
© Charles W. Wessner, PhD13
PREST Report Findings• Defense & Homeland Security missions are driving
increases in US Defense R&D budgets• Impact of New Expenditures:
– Spin-off products & technologies from Defense R&D is a Reality
– Defense R&D Spending Impacts University Science Base and Training of Graduate Scientists & Engineers
– Defense R&D Spending Creates New Markets and is a Source of Early-Stage Seed Funding
– Leveraging Civilian Technologies (like IT) for Defense & Security Missions Improves International Competitiveness of US Firms
• Begins & Ends with the Claim that “synergies between defence and civil research are far ahead of the situation in Europe.”
Is Military R&D a Source of Commercial Advantage in
the U.S. Innovation System?
Myths about theU.S. Innovation System
© Charles W. Wessner, PhD15
Central Myth about the U.S. Innovation System
• It is a Well-oiled, Centrally Controlled, Innovation Machine
• There is a Broad Consensus on How the System Works and what Opportunities and Problems need to be Addressed
• “Military R&D is the U.S. Secret Weapon in Competitiveness Wars”
© Charles W. Wessner, PhD16
The Myth of the Rational Policy Framework
• Euro Myth: U.S. Innovation Policy is based on a coherent National Innovation Agenda
• Reality: There is no U.S. Ministry of Science Multiple sources of policy making
• Congressional Committees, • Federal Agencies—NSF, NIH, others• State Governments
+ Positive: Multiple sources of experimentation means that the system can be more adaptive; responsive to new challenges
– Negative: Lack of coherence can lead to de facto outcomes that can hurt innovation
• Example: Post Cold War Falloff in U.S. investments in Science & Engineering Education was not a product of rational U.S. policymaking.
© Charles W. Wessner, PhD17
The Myth of the Rational Policy Framework
Euro Myth: U.S. Innovation Policy is based on a coherent National Innovation AgendaReality: Architect of U.S. Innovation Policy
© Charles W. Wessner, PhD18
The Myth of Perfect Markets
• Strong U.S. Myth: “If it is a good idea, the market will fund it.”
• Reality: Potential Investors have less than perfect knowledge, especially about innovative new ideas– “Asymmetric Information” leads to
suboptimal investments– This means that it is hard for small firms
to obtain funding for new ideas
© Charles W. Wessner, PhD19
Federally Funded
Research Creates
New Ideas
Product Development
&
Innovation
Capital to Develop Ideas to Innovation
No Capital
The Reality: The Valley of Death Early-Stage Funding Gap
© Charles W. Wessner, PhD20
The Cash Flow Valley of Death
Technology Creation
Technology Development
Early Commercialization
Cash Flow
Federal Agencies, Universities, States,
Companies
Entrepreneur & Seed/Angel Investors
IPO
Time
Cash Flow Valley of
Death
Successful
Moderately Successful
Unsuccessful
Unsuccessful
Typical Primary Investors
Venture Capitalists
SBIR & ATP
Adapted from: L.M. Murphy & P. L. Edwards, Bridging the Valley of Death—Transitioning from Public to Private Sector Financing, Golden CO: National Renewable Energy Laboratory, May 2003
© Charles W. Wessner, PhD21
The Myth of U.S.Venture Capital Markets
• Myth: “U.S. VC Markets are broad & deep, thus there is no role for government awards”
• Reality: Venture Capitalists have– Limited information on new firms– Prone to herding tendencies– Focus on later stages of technology
development– Most VC investors seek early exit
• Large U.S. Venture Capital Market is Not Focused on Early-Stage Firms
The Military R&D Myth
© Charles W. Wessner, PhD23
The Myth of Military Spin-Offs• Euro Myth: “U.S. Defense
Research/Procurement Directly Funds Civilian Technologies”
• Reality: “Very few technologies proceeded effortlessly from defense conception to commercial application.” – Secrecy, military specs, and long lead times slow
diffusion of new defense technologies– Even efforts to use low-cost civilian technologies
for defense use, i.e., “spin-ins,” are often blocked by complicated military procurement system
Beyond Spin-off, John Alic, Lewis Branscomb, et al.
© Charles W. Wessner, PhD24
Main Role for Military R&D is Defense
• U.S. Military Expenditures from 1947 to the end of the Cold War were designed to protect the U.S., its NATO allies, and other countries around the world from Soviet Expansion
• Vast sums were deployed to this end– Hot wars were fought in Korea, Vietnam– Proxy wars in Greece, Afghanistan, many
parts of Africa– Later interventions in Bosnia, Kosovo,
Kuwait were undertaken to secure human rights and international stability
© Charles W. Wessner, PhD25
Purpose of U.S. Military Expenditure
• U.S. Military Expenditures were first and foremost designed to provide the equipment, maintenance and training to provide credible capacity to deliver armed support to U.S. allies
• Additional vast sums were (and are) spent on the U.S. nuclear deterrent
• The Goal of U.S. military expenditure is Security for the U.S. and its allies and the ability to influence events– U.S. Power Projection is Unique (though constrained)
© Charles W. Wessner, PhD26
Difference in Scale of Military Expenditure
• The United States, for better or for worse, expends over $400B per year (2004) on the military
• The UK is next at $40B followed by France at $30B and Germany at $25B (approximate figures)
• R&D represents a small portion of these amounts – usually 3% in the U.S.
• Commercial benefits are small, given the level of expenditure
© Charles W. Wessner, PhD27
Difference in Scale of Military R&D
• Within NATO, only the Defense budgets of the UK, France, Germany, and Italy exceed the R&D budgets of the U.S. military– All other NATO nations combined invest some
$3B in research and technology investment
• Why? France, Germany, Italy, Greece, Poland, and Spain spend 60% or more of Defense Budgets on Personnel
• U.S. Defense Budget Expenditures: – 35% on Personnel– 30% on Equipment (including R&D)
© Charles W. Wessner, PhD28
Positive Impacts of Military Expenditure
• Air power: The U.S. has the only significant capabilities in– Strategic Transport– Refueling– Theatre Surveillance, and – Precision Bomber capabilities among NATO nations
• Navy Carrier Groups and Submarine Fleets• These capabilities are needed to meet out of area
commitments– Advanced attack aircraft on the way: F/A 22, as are
advanced unmanned vehicles• But these New dedicated weapons systems have
limited foreseeable spin-offs
© Charles W. Wessner, PhD29
Positive Impacts of Defense Expenditures
on Civilian Economy• U.S. military expenditures did result in
substantial growth in important sectors of the U.S. economy – World War II saw the growth of the U.S.
automotive, shipping, aircraft, electronics, aluminum and steel industries
– Cold War expenditures provided support for computers, semiconductors, jet engines, and rockets
• Famous case of Boeing 707 derived from bids on Air Force Tanker contracts
© Charles W. Wessner, PhD30
But these Broader Impacts are Limited
• Few Spin-offs: Military R&D often has no civilian application and is inefficient in terms of the economy as a whole– Cases do exist, e.g., cost plus contracts for
semiconductors, but the 1950-60s model no longer applies
– Major Spin-offs, e.g., the Internet and GPS have occurred, but they are widely diffused
• GPS was for missile targeting (not for tracking kids)
– U.S. Expenditures, e.g., Stealth technologies, are often high cost efforts with no foreseeable civilian spin-off
© Charles W. Wessner, PhD31
The Demise of the Defense-Based R&D Model
• The role of the military shifted in the 1970’s and ’80s as a proportion of civilian high-tech markets– Private market for semiconductors grew rapidly,
dwarfing U.S. military needs• DoD specifications, secrecy, & long
procurement cycles vitiated potential to fund cutting-edge commercial technologies– Commercial IT far outstrips Military Development
• Some ground-breaking innovation continues to occur (e.g., the Internet) but applications are pervasive and highly beneficial for new entrants, e.g., Taiwan, India
© Charles W. Wessner, PhD32
The Productive role of U.S. Military R&D Expenditure is
Overstated• Scale: The military sector is now much smaller than
during the Cold War and has fewer linkages to the economy – Top 4 Defense firms (Boeing, Lockheed, Northrop,
& General Dynamics) have a combined market cap of $102 billion
– Intel alone has a market cap of $140 billion• Caveat: Defense sector is Employment Intensive
– Defense firms: 477,200 employees – Intel: 80,500 employees
(All data as of 11 August 04)
© Charles W. Wessner, PhD33
Military R&D Allocations Sap Funds from more
Productive Uses• Are increases in US Defense R&D spending the
most efficient approach to stimulating commercial activity?
• Is the US investing in the right kinds of R&D to enhance economic competitiveness?
• Concentration of R&D Funds on Small numbers of Engineers Working on Military applications is Inefficient
• Reduces R&D Funding for Other Sectors of the Economy
© Charles W. Wessner, PhD34
Belief in Military Based R&D Model Undercut by
Practice• Much discussion of the Military R&D
Model in the 1980s & Resulting U.S. Commercial Advantage
• The fact that there was virtually no increase in Defense Expenditures among NATO allies Undercuts the Conviction of the Argument– The ’80s did see an increase in targeted
commercial technologies
© Charles W. Wessner, PhD35
U.S. Military R&D: An Appropriate Model?
• U.S. Military R&D is– Inefficient– Overcommitted– Later-Stage
• Development Focus on Testing & Certification
– Occasionally has Major Impact• GPS• Internet
– Often Widely Shared with Others
© Charles W. Wessner, PhD36
Myths and Limitations of Spin-off
© Charles W. Wessner, PhD37
Spin-Off as a Non-Targeted Economic Benefit
• Why do U.S. policymakers like spin-off as a concept?– Because spin-off appears to cost nothing
(assuming the defense expenditure is useful)– Spin-offs help justify high defense expenditures– Spin-off appears to need no government
management or targeting, thus eliminating any interference in the marketplace
– Is this true in practice?
© Charles W. Wessner, PhD38
The Limits of Spin-Off
• The substantial separation of the defense and commercial sectors of U.S. industry limits opportunities and raises costs
• Adaptation of defense innovation to commercial use is not cost free
• Focus on defense means technologies with high commercial potential are ignored– DARPA focus in on Long-term and Military
Applications, not Civilian Uses
© Charles W. Wessner, PhD39
The Limits of Spin-Off• Compared to what?• The efficiency of investments resulting
in spin-offs to meet commercial technology needs must be compared to alternatives– Comparable private sector R&D vs..
government defense R&D? – No research at all – yes, spin-off compares
favorably to not doing R&D at all
© Charles W. Wessner, PhD40
The Limits of Spin-Off• Compared to alternative institutions
– R&D at other federal agencies• Federally-funded civilian technology initiatives,
e.g. , the ATP at NIST
– Basic Research Support at NSF or NIH• These comparisons are hard to make and
therefore rarely made• Claims for spin-off benefits tend to be
comparison free – policies focused on military R&D should be grounded in the present, not just focused on isolated success cases from 40 or 50 years ago
© Charles W. Wessner, PhD41
Spin-Off: A Success Story• Direct product conversion of a product
developed at government expense is rare but does occur
• A good case is Raytheon’s microwave oven – a classic sequential spin-off within a single firm
• The conditions for success included:– A complete redesign of the magnetron microwave
power source for ease of manufacture– A five-fold reduction in magnetron cost through
learning and scale– Development of a patented safety seal to prevent
the escape of microwave radiation– Corporate acquisition of the distribution channel
© Charles W. Wessner, PhD42
Spin-Off: 2 Failures & 1 Success
• C-5 Military Transport Aircraft Competition led to Lockheed’s victory with:– Contracts for the C-5 military transport– Concurrent development of the L-1011
commercial transport• Lockheed never made a profit on the L-1011
& later withdrew from commercial air transport
• Boeing lost the competition for the C-5 with the federal support that entailed
© Charles W. Wessner, PhD43
Spin-Off: 2 Failures & 1 Success• Having lost the C-5 competition, Boeing
then “bet the company” on the 747 – C-5 design work aided development of the 747– Timing helped: The OPEC embargo ran up
aviation fuel prices, thereby helping the more fuel efficient 747 gain market share
– The focus on the commercial market helped Boeing
• Lockheed and McDonnell-Douglas had major military business – both failed in civilian aircraft production
• Conclusion: Military support works???
© Charles W. Wessner, PhD44
Some Civil-Military Cooperation Leads to Positive
“Spin-offs”• Concurrent Development of Civil & Military Applications of a Common Technology– Nuclear reactors for submarine propulsion and then
electric power production set dominant points of the technology in the United States
– GE and Pratt/Whitney design and build jet engines for related families of civilian and military aircraft
– KC135 Stratotanker & Boeing 707 had a common origin but very different design features (375 flight hours per year vs. 3000 for the 707
• Development of Engineering Techniques & Tools to Meet Government Needs– E.g., Software for computer based design and analysis
from NASA sponsored research
© Charles W. Wessner, PhD45
Various Forms of Civil-Military
Cooperation leading to “Spin-offs”
• Dual-Use Technology Developed from Defense Agency Research Support– Defense support for University research
(e.g., Artificial Intelligence) that may be valuable to civilian industry
• Reverse Spin-off or ‘Spin-on’ to Military is increasingly common– E.g., CMOS semiconductor chip technology
was perfected in Japan for use in electronic wristwatches
© Charles W. Wessner, PhD46
What Could More European Military R&D Accomplish?
• More European Military R&D Could– Enhance some European Military
Capabilities• From a few large firms?
– Encourage Rationalization• Is this good for all countries, e.g., Sweden
and France?
– Stimulate Dual-Use, High Technology• But is this likely?
© Charles W. Wessner, PhD47
Policy Issue: Allowable vs.. Effective
• Is the push for European Defense R&D like the Push for R&D Tax Credits?– Tax Credits are Expensive and Blunt, but
they are Allowed by State Aid Rules, so…– Military R&D may be Ineffective for New
Technology, but it is Exempt from State Aid Rules, so…
• Is it a case of Efficiency vs.. the Rules – Would it be better to change the Rules?
© Charles W. Wessner, PhD48
The U.S. Critique: “Spinoff cannot serve as a realistic basis
for technology policy”--Alic, Branscomb, et al (1992)
• Defense R&D does not cover gaps in nation’s technology policies– Defense contributions are growing smaller &
more specialized– Many industries benefit little from Defense
R&D• Spin-offs offer only indirect, inadvertent
contributions– Focus on spin-offs denies more direct role for
government in technology policy
© Charles W. Wessner, PhD49
Is a French-style Model Right for Europe?
• Large State selected & supported projects, insulated from rapidly changing market forces by National Procurement -- National Champion Based– Nuclear Energy– Aerospace
• Airbus, Ariane and ESA Program– Large Scale Transportation--TGV Trains – Water and Electricity Champions
• A Strategy Not well suited for rapidly changing technologies and markets, e.g., semiconductors & computers
• Is Spinoff Really the Current U.S. Model? – Is it Effective? Compared to What?
A Better Model:
Public Private Partnerships offer more Potential for Innovation in
Europe
© Charles W. Wessner, PhD51
Important to Consider Alternatives to Military R&D: Public-Private Partnerships
• Need to focus on other policies that could more effectively support nation’s Commercial Sector, such as Public-Private Partnerships– Public-Private Partnerships focus on the
hurdles between basic research & product development
– Need to adopt policies to bridge traditional government roles and traditional private sector roles
© Charles W. Wessner, PhD52
A Program “Like an SBIR” May Offer Europe Higher Returns
than “More R&D”• No New Funds Required for SBIR
– Capitalizes on Existing R&D Investments and Procurement Funds
• Focus on Valley of Death—Key Point of Vulnerability for Firms and Products
• National Program to Meet National Needs with National Firms
• Bottom-up Approach to Security– Contributes to Innovative Solutions as well
as Growth and Job Creation
© Charles W. Wessner, PhD53
The Small Business Innovation Research (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
R&D budgets for small business awards• To be a $2 billion per year program in 2004
– Largest U.S. Partnership Program
© Charles W. Wessner, PhD54
The SBIR Model
PHASE IFeasibilityResearch
PHASE IIIProduct
Developmentfor Gov’t orCommercial
Market
Private Sector Investment
Tax Revenue
Federal Investment
PHASE IIResearchtowards
Prototype
Socialand
Government Needs
$750K$100K
R&
D
Investm
en
t
© Charles W. Wessner, PhD55
SBIR is a Bridge in the Innovation System
• Provides a Bridge between Small Companies and the Agencies, especially for Procurement
• Provides a Bridge between Universities and the Marketplace
• Encourages Local and Regional Growth, increasingly through the University connection
• Creates jobs and justifies R&D investments to the general public
© Charles W. Wessner, PhD56
The Key Question: Would SBIR Work in
Europe?• Some Believe it Would:
– “SBIR is one of the few American Technology Programmes that can be
‘Cut and Pasted’ into European Innovation Systems”• Participant at Commission Workshop,
Brussels, June 2004
– EURAB has Recommended an “SBIR type” Program
© Charles W. Wessner, PhD57
Competitive Awards to Support SME Innovation are
Needed• SBIR is a Powerful Model– U.S. National Academy of Sciences research
shows model is flexible and effective• Recent National Initiatives & Proposal by the
Commission to Permit SBIR-Type Proposals– Investing in research: an action plan for Europe,
[COM(2003) 226 final/2 – See Section 5.3, p. 19]
– TEKES has adopted a Phase I approach– VINNOVA is initiating an SBIR Program– France is exploring an SBIR-type program
© Charles W. Wessner, PhD58
An Innovation Systems Perspective on Security
• National Security is founded on a Robust Innovation System– Need to Address Linkages among many
Facets of the Innovation System• Universities, Businesses, Government
– A Robust Innovation System will help make the Nation Militarily and Economically Secure
– Robust Defense Spending alone will not make the Nation more Innovative, thus, ultimately Less Secure
• Lesson of the Cold War
© Charles W. Wessner, PhD59
The Transatlantic Cooperation Option
• The U.S. is devoting Substantial Funds to New Technologies to Meet the Terrorist Security Threat– U.S. Capacity constraints are real– Research cooperation is historically
broad and rich– Procurement is increasingly open, and
the U.S. market is large
© Charles W. Wessner, PhD60
Conclusion
© Charles W. Wessner, PhD61
Spinoff is a Popular Concept but an Inefficient Policy at
Best• Spinoff has never been a
consistently effective approach to enriching commercial technology
• At best it is a weak and expensive substitute for more direct support of the commercial technology base– Alic, Branscomb, et al.
© Charles W. Wessner, PhD62
Benefits of the SBIR & ATP Model for Defense and
Security• Small Business can bring New Ideas and New Products to address Security Needs
• SBIR provides a Proven Pathway for Small Businesses to Help the Government Meet Defense and Security Needs
• SBIR represents a Low-Cost, High-Leverage Opportunity for National Policymakers to Meet Multiple Goals at Constant Cost—No New Funds
• SBIR & ATP address the key Issues of Firm Formation, Entrepreneurship, Employment, and Growth and is therefore of Central Policy Interest
© Charles W. Wessner, PhD63
Designing More Realistic Policies for European
Innovation
• To Lead in the Knowledge Economy– Understand innovation ecosystem
•How can innovation in commercial and defense sectors draw on & support each other?
– Provide Incentives rather than Targets selected by Consensus
© Charles W. Wessner, PhD64
A Modified European Innovation Strategy
• Create New Public Private Partnerships– Involve Large & Small Firms– Encourage National Experimentation– Involve Universities in Innovation
• Focus on 3 Interrelated Elements:– Platform Technologies:
•Respect Political Commitment– Competitive Awards to Large & Small Firm
Joint Ventures [The Advanced Technology Program (or ATP) Model]
– Competitive Awards to SMEs & Start-ups (SBIR Type Program)
© Charles W. Wessner, PhD65
Keeping Europe Secure• Keeping Europe Secure requires,
– Economic growth to safeguard the Social Compact
– New Technologies to provide Cheaper and Better Social Services, Health Care, Environmental Protection, and National Defense
• Partnerships are one way to do this
• SBIR Breaks Through the Oligopoly Supply Base for government agencies– Provides new technologies and new solutions
© Charles W. Wessner, PhD66
Common Challenges• Learning from Each Other is a Key
to Better Innovation Policy– Learning from failures (and
distortions) can be as valuable as learning best practice
• Sorting Myths from Reality is a First Step Towards More Growth and More Security
© Charles W. Wessner, PhD67
Thank You
Charles W. Wessner, Ph.D.Director, Technology and Innovation
The National Academies500 Fifth Street NW
Washington, D.C. 20001cwessner@nas.eduTel: 202 334 3801
http://www.nationalacademies.org/step