Backstage from the media circus, the Obama administration and Senate Democrats have been quietly drumming up support for a new $90 million program to accelerate innovation in educational technology, or ed tech. Called the Advanced Research Projects Agency for Education, or ARPA-Ed, in the president’s 2012 budget, this lean, mean little research agency would create a platform for ed tech innovators to compete to develop cutting-edge learning tools.

On Wednesday, as the Senate Health, Education, Labor, and Pensions, or HELP, committee moves to overhaul No Child Left Behind, Senator Michael Bennet (D-CO) is expected to introduce an amendment that would bring ARPA-Ed to life. If enacted, ARPA-Ed would put competitive grants and contracts in the hands of innovators seeking to develop technologies to revolutionize the way students learn. Because it kindles competition, ARPA-Ed is an interesting Obama initiative that has the potential to reverse the sputtering trajectory of the U.S. education system.

Education challenges

As it stands, the situation in public education is precarious. In December 2010 the Program for International Student Assessment, or PISA, announced that the United States ranked 14th in reading, 17th in science, and 25th in math among 63 world nations in academic performance. Comparatively, Chinese students in Shanghai ranked first across the board, with Singapore, Korea, and Finland following close behind. This news has fueled concerns on both sides of the political spectrum that the United States is losing its competitive edge amid a crippling educational and economic malaise.

While our students are subject to global competition, U.S. schools are facing mounting pressure at home to conform to the standards set by the No Child Left Behind Act, or NCLB. Schools are scrambling to achieve proficiency in math and reading by 2014, lest they face fiscal penalties. The looming deadline for improved performance—and the fear that it will not be met—has prompted President Obama and his secretary of education, Arne Duncan, to look into restructuring NCLB in a way that will be more consistent with his vision for education. Central to this vision is ARPA-Ed. ARPA-Ed is built on the same model as DARPA, the defense research program responsible for technologies such as the Internet and GPS.

Proponents of ARPA-Ed aim to exploit cutting-edge technology and developmental psychology in education to create a more efficient, individualized, and engaging learning regimen for today’s students. ARPA-Ed would follow its predecessors in adopting a bottom-up, rather than top-down approach to nurturing innovation. Instead of attempting to dictate what the most effective means of instruction might be, ARPA-Ed will reward learning about learning, researching research, and thinking about thinking.

Until now, the strategy for using technology in education has been to bombard schools with gadgets, sometimes at the expense of teachers’ jobs and to the detriment of art and music programs. The Kyrene school district in Arizona, for instance, touts state-of-the-art classrooms, spending $33 million on student laptops, display screens, and accompanying software. Yet despite all its high-tech bells and whistles, Kyrene’s math and reading scores have stagnated since 2005, even as scores in the rest of the state have risen. Further, it is unclear whether some modest improvements can be attributed to better incorporating technology into classrooms or better teachers using said technology. Technology for technology’s sake, it seems, is not a successful approach.

In light of disappointing results, such as in the case of the Kyrene school system, it would appear that a shift in the way we equip our classrooms is in order. A quick survey of the current landscape of public education, with its socioeconomic performance gaps that could be better characterized as canyons, would suggest that our current system isn’t working.

Is technology part of the solution?

Yet there is hope in ARPA-Ed, which holds promise of funding many exciting innovations that could not only produce innovative educational technologies but also transform the way technology is used. Areas of research include:

• Interactive digital tutors that can guide students through curricula and provide constant feedback.
• Adaptive technology that adjusts to students’ learning styles and rates, and improves as the student uses it more.
• Making learning software function more like video games do.

ARPA-Ed would expand upon efforts initiated by the “Digital Promise Center,” which Congress authorized but didn’t fund in 2008. Education Secretary Arne Duncan unveiled the Center in September, acknowledging that the institution represented an “incredibly important turning point.” A major aspect of the so-called “digital promise” is research into digital tutors.

Digital tutors seek to marry the virtual age with psychological principles of learning. One such tenet of learning is that immediate feedback and reinforcement strengthens the association between stimuli. For instance, when an amateur is learning the violin and plays a wrong note, for best results, an instructor should correct the mistake immediately after it is made in order to give the musician the best odds for not repeating the mistake. Hence the revised maxim, “Practice doesn’t make perfect—perfect practice makes perfect.” Yet musical instruction usually only occurs once or twice a week, leaving novices to correct their own mistakes—a difficult feat when you don’t know what you’re doing wrong in the first place. This was exactly the problem researchers at the National University of Singapore confronted when they developed a virtual violin tutor to help kids practice more effectively.

The Navy has also implemented digital tutors to teach recruits to become IT specialist administrators in just seven weeks. A healthy, all-American suspicion of technology—complete with fantasies of a dystopian future where humans are oppressed by Skynet—may inform skepticism as to whether such a program really works, and whether machines are even capable of educating. But Navy researchers found that these computer-trained specialists outperformed their traditionally educated counterparts with up to three years of experience.

New tutoring software will capitalize not only on advantages in immediate feedback but also in the realm of individualizing education. Analytics are already widely used in business to customize the content you see on the Internet. Analyzing online habits is how Amazon manages to recommend merchandise that you really want or how Netflix seems to have a handle on your taste in movies. Companies like Amazon and Netflix collect data from users’ personal choices and incorporate them into algorithms that filter their databases to formulate suggestions for your next rental or purchase.

Research into education software will employ similar tactics to gather information about how a student learns. One test prep company, Knewton, is already leading the pack. In just a few hours, Knewton’s software can collect 150,000 data points on a student—data points like how long it takes a student to answer a question or to learn a lesson, which kinds of modules are mastered more quickly, and where the student is lagging. The highly sophisticated software aggregates this information, determines a student’s unique pattern of learning, and adjusts accordingly. This technique allows for remarkably personalized instruction. Four major universities have already purchased the product for catching up incoming students on college-level math.

Medical schools have also implemented programs for adapted learning, as reported by the NIH. These programs allow for student control of pace and media, though students are quick to maintain that they view the system as a complement to, rather than a replacement for, instructor-based learning.

If ARPA-Ed led to developments in personalized software for students in grade school, the benefits could be substantial, especially due to the plasticity of the young mind. Yet children, as opposed to GRE test takers and medical students, are slightly less inclined to sit in front of a boring slideshow and answer questions about it. That’s where the next ARPA-Ed research area would come in. The National STEM Video Game Challenge aims to make learning more like something kids actually want to do.

Much like sneaking broccoli into the mac n’ cheese, the National STEM Video Game Challenge seeks to trick kids into learning. The 2010 winners of the Developer Prize, Dan Morton and Dan White of Filament Games, created a game to teach kids about the structure and function of pathogens. The game “You Make Me Sick!” compels players to build a virus or bacteria and infect a host. You can play the prototype here.

Engaging and challenging educational games, coupled with personalized curricula, could afford all kids the opportunity to learn skills to prepare them for higher education. Furthermore, integrating computers and other gadgets into classrooms will free up teachers to have more one-on-one time with students and better control disciplinary problems when they arise. A school in South Carolina that implemented iPad technology for all its students reported a noticeable decline in class disruptions.

But the advantages extend beyond the scope of monitoring class behavior and individual children’s performance. Currently, the mainstream model of education—boasting short class periods delineated by bells that signal it is time to herd students to their next room for structured learning—seems ill-equipped to absorb change. Due to images evoked of children on a conveyor belt, scholars have deemed this educational structure the “factory model.” The factory model sets teachers at the center of children’s education, relying on educators to produce material for students to consume, rather than focusing on the needs of the individual learning.

Making the most of technology

Some, like Forbes’s Clayton Christensen, hold that technology in classrooms will be the vehicle by which America’s schools transition from what Christensen termed “teacher-centric” to “child-centric” education. Christensen wrote in 2008 that students suffer from rigidity in the curriculum, which is influenced by state mandates, district regulations, and the expectation that all students will master the same skills to the same proficiency level by the time teachers conclude covering the material. These problems, he argued, must be addressed by shifting the education paradigm to a modular one where learning can be self-directed and tailored to students’ learning styles and paces. In this sense, the new educational technology promised by ARPA-Ed will not simply be an accessory to learning but rather will be crucial to changing the system itself.

Consider, for instance, one contemporary school of thought: the “flip model” of education. Inspired by Salman Khan, founder of the Khan Academy, the central concept behind the flip model is that students listen to lectures for homework and come to class prepared to engage in deeper discussion and analytical activities. The Khan Academy provides clear, concise lectures on a wide breadth of subjects, complete with exercises to test students’ understanding—and most of it is free. All of it is online.

In Lawrenceville, Georgia, some teachers at the Gwinnett School of Mathematics, Science, and Technology have traded homework for lectures and use precious class time for dissecting difficult problems and engaging students in group activities like acting out the processes of a cell in a 10th-grade biology class. This line of thought is consistent with emerging research that suggests that even children who prefer to work alone do better when collaborating in groups. Critics of the system, however, are quick to point out that it is rendered useless in the absence of a basic technological framework for online instruction.

Even if ARPA-Ed fosters competition for the best, most exciting educational tools available, implementation in classrooms is another hurdle entirely. Said Bryan Goodwin, spokesman for Mid-continent Research for Education and Learning, “Good teachers can make good use of computers, while bad teachers won’t, and they and their students could wind up becoming distracted by the technology.”

The reality that those who don’t teach well won’t use technology well, either, exacerbates an underlying problem: Integrating technology into schools in such a way that decentralizes the classroom is incongruous with current pedagogical thinking. In fact, some studies suggest that even teachers who are well-versed in new technology tend not to use it in ways that encourage the aforementioned “student-centric” learning.

Like technology, however, the landscape of the teaching profession is evolving.  Programs like Teach for America are plucking talented college graduates from diverse backgrounds and honing their instructional skills in underserved communities. Notably, the Teacher Incentive Fund holds promise for attracting and retaining motivated young teachers in high-poverty schools by compensating better for better results—a concept not novel to most other professions in the United States. Having grown up, rather than having had to keep up, with technology endows this new generation of educators with an advantage.

Efforts on the Hill to close the comparability loophole, by which schools obtain federal funding by  over-representing teachers’ salaries in less affluent districts, should help alleviate the plague of low teachers’ salaries in schools that need good teachers the most. Finally, the age of teachers’ unions eschewing serious discussions about tenure and performance-based pay has come to a close, as leaders meaningfully engage opposition in the shared goal to protect teachers and secure the best opportunities for more students.

The outlook for ARPA-Ed

But ARPA-Ed still faces opposition from the right. Conservative pundits have called the initiative wasteful and “duplicative,” claiming that $90 million is too steep a price to pay, and that the Department of Education already spent $4 billion on teacher retraining. Advocates like Tom Schatz, president of Citizens Against Government Waste, would rather see that money funneled to the states than appropriated at the federal level. The assertion that ARPA-Ed is just another teacher retraining piggy bank, however, grossly misrepresents the multifaceted, innovative program.

ARPA-Ed breaks with existing programs in that it focuses on research into learning, not teaching. Moreover, $90 million seems like a steal for educational investments designed to yield breakthroughs that could have positive social returns for decades. To put the figure in perspective, the federal government spent $1.34 billion—15 times the price tag of ARPA-Ed—in 2010 on its “Race to the Top” program, in which states competed for funding by implementing the best reforms, like adopting performance-based pay and promoting charter schools. For six times the cost of ARPA-Ed, we fund adult education; still more money is doled out for federal student aid. As it is, the federal government only spends a fraction of its budget on education, and ARPA-Ed’s cost would be a tiny fraction of that.

America’s children deserve the best education science can bring them. Sen. Bennet’s amendment to create ARPA-Ed would be a step toward escaping our educational malaise and helping our students climb back to the top of the ranks. It is through implementing a program that emphasizes core American values like independent learning, creativity, and the individual work ethic, that we can regain our footing in the international sphere and return to doing what we do best: pushing the boundaries of innovation.

Lauren Simenauer is an intern with Science Progress and a senior at the University of Virginia. She is finishing her degrees in biology and psychology. Sean Pool is the Assistant Editor of Science Progress.

Myriad Genetics, Inc., the owner of the patents, brought the case to Federal Court of Appeals, which overturned the lower court’s decision on July 29 in a 2-1 ruling that has, at least for the time being, reaffirmed the patentability of human genes. Notably, the Obama Administrations Justice Department broke with the Patent and Trademark Office, a co-defendant in the case, in filing an amicus brief in support of the plaintiffs claim that the genes should not be patentable.

The Appeals Court also upheld Myriad’s patents on procedures for therapeutic research on BRCA 1 and 2, but agreed with the lower court that Myriad’s processes for “analyzing” and “comparing” the genes are not patentable. Despite this small concession, it does not seem likely that this will make it easier for scientists who are unaffiliated with Myriad to conduct significant research on BRCA 1 and 2.

“[Myriad’s] short sequence claims [on BRCA 1 and 2] will continue to pose problems,” said Arti Rai, the Elvin R. Latty Professor of Law at Duke Law School and an expert in patent law and innovation policy, in an interview with Science Progress. “I’m not sure that the plaintiffs at the end of the day are in a better position,” she said, noting that they will probably run into many of the same patent infringement issues that they have in the past.

Though the full effects of this ruling on the biotechnology industry and the cancer research community remain to be seen, it is by no means the last word on the issue of gene patents. The plaintiffs, a coalition of doctors, patients, breast cancer researchers, research institutions, and medical associations, are expected to ask for an en banc rehearing—in which all of the justices in the court of appeals would sit for the case, instead of a panel of only three—or appeal the case to the Supreme Court. The Supreme Court can let the appeals court decision stand, or take up the case and issue its own ruling.

Why were genes patentable in the first place?

Patents for biological materials have long been a contentious issue, and decades of Supreme Court cases have interpreted U.S. patent law, which was written over 200 years ago, to fit the complexities of property in modern biotechnology. Currently, the United States Patent and Trademark Office, or USPTO, can issue patents for genes, animals, bacteria, and plants—as long as they are, according to the Patent Act of 1790, “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.”

Patents for biological materials must also fit the “product of nature doctrine,” a standard that excludes entities that occur in nature from patent eligibility. The doctrine was first used in ex Parte Latimer (1889) when the U.S. Patent Commissioner rejected a patent application for isolated pine needle fibers. It was further developed in Funk Bros. Seed Company vs. Kalo Inoculant Co. (1948) when the Supreme Court ruled that natural phenomena and processes are “free to all men and reserved exclusively to none,” and rejected a patent application for a novel mixture of bacteria and soil.

Genes, bacteria, and animals seem like they should fall in the “product of nature” category, but later Supreme Court decisions have shown that sufficient modification of a naturally occurring entity can make it enough of a “new manufacture or composition of matter” to be eligible for a patent. In Diamond v. Chakrabarty (1980), the Supreme Court permitted a patent for a genetically engineered bacterium. In 1984, the USPTO granted a patent to the creators of the “oncomouse,” a mouse that was engineered to express cancer genes in every cell in its body.

Thanks to the precedents set by these and other cases, the USPTO has issued over 40,000 gene patents to date. Myriad Genetics justified their own gene patents via the argument that isolated forms of BRCA 1 and 2 do not occur in nature, and that such isolation results in the formation of different chemical bond structures within the molecules.

In 2010, the New York district court invalidated the BRCA 1 and 2 patents on the basis that the genes, even when isolated, have not acquired any changes to the fundamental nature of its DNA sequence or the genetic information they contain. The majority opinions of the recent federal appeals court ruling, on the contrary, agreed with Myriad Genetics’ original justification for the patent. They also noted that isolated BRCA 1 and 2 can be modified in the lab to form cDNAs, which can then be used to develop genetic probes and markers—a process for which BRCA 1 and 2 are only useful if they are isolated. The dissenting opinion by Justice William Bryson, however, held that the BRCA 1 and 2 genes on their own should not be patentable because Myriad did not discover the genes or use any novel techniques to isolate them. However, he held that the cDNAs, since they are modified by researchers, are patentable.

Gene patents and scientific progress

While the technicalities of what constitutes a “product of nature” or a “manufacture” seem to spark disagreement in the case of isolated genes, the stakes are high for a decision on gene patentability.  According to the U.S. Constitution, patents are supposed to “promote the Progress of Science and useful Arts” by giving inventors the exclusive right to exploit their inventions for a limited period of time.

This is true much of the time, as patents encourage innovation and scientific progress by ensuring that inventors can reap the benefits of their work. Plus, a ruling that would invalidate all existing gene patents could potentially have far-reaching negative effects on patent holders and the biotechnology industry in general.

But the plaintiffs in the Myriad case disagree, and argue that gene patents significantly impede, rather than promote, scientific progress. Researchers from Oncormed and the University of Pennsylvania Genetic Diagnostic Laboratory, or GDL, who are plaintiffs in the case, were already conducting research on and offering their own diagnostic genetic testing services for BRCA 1 and 2 when Myriad acquired its patents on the genes and associated research and testing processes. However, these researchers were forced to stop conducting diagnostic testing and therapeutic research in the late 1990s after Myriad sent them cease and desist orders for patent infringement.

Myriad’s vigorous enforcement of their BRCA patents has rendered them the sole provider of genetic testing for BRCA 1 and 2 in the United States. As a result, women who wish to learn of their genetic risk for breast and ovarian cancer cannot turn to other diagnostics providers for confirmatory tests. Nor can patients seek cheaper alternatives to Myriad’s services, whose BRCA tests cost between $250 and $4,000.

In addition to limiting the competition among diagnostic test providers, Myriad’s monopoly on BRCA also allows them to control the progress of BRCA research. Other scientists cannot research potential improvements for BRCA therapeutics or expand scientific understanding of high-risk BRCA gene mutations without infringing Myriad’s patents.

An issue of authority

The federal appeals court opinions acknowledge the question of whether gene patents promote or impede scientific progress, but instead of answering it outright, they defer it to Congress and do not deal with the case beyond the scope of patent law. “If the law is to be changed, and DNA inventions excluded from the broad scope of [patent law] contrary to the settled expectation of the inventing community, the decision must come not from the courts, but from Congress,” wrote Judge Lourie in the court opinion.

While Congress might be in a better position than the judicial system to consider social, economic, and scientific implications of gene patents, they have never been particularly successful in passing legislation concerning patentable subject matter. “These are policy issues to be decided by Congress, but the fact is that Congress is unlikely to act in this area,” said Rai.

If Congress doesn’t speak out on the issue, the Supreme Court has the authority to make its own decision on the patentability of genes. “For better or for worse,” said Rai, “a court decision in this area may end up being the final word.”

As such, the federal appeals court ruling is just another step in what has been, and what will continue to be, a long process of sorting out property in the genome. The final outcome for the genetic research community and gene patent holders remains to be seen.

Michelle Spektor recently completed her internship at Science Progress and will complete her bachelor’s degree at Cornell University this year.

While DARPA’s best known for its research on technologies with national security applications, the agency has a strong track record of producing innovations with transformative civilian applications as well. From the Internet, to GPS, to driverless cars and robotic limbs, DARPA-initiated research has often made big if not revolutionary splashes in the marketplace. To quote Jackson, “we [at DARPA] are that genie in a bottle that will make the impossible inevitable.”

In the fields of synbio and bioengineering, scientists introduce new genetic information into microorganisms to coax them into producing useful products. These fields have already made significant strides in the production of some pretty incredible chemicals and materials with applications in agriculture, industry, pharmaceuticals, and more. Recent accomplishments include using microorganisms to produce the anti-malarial drug artemisinin, renewable petroleum, steel-strong spider silk, and even whole battery electrodes and solar cells.

Research agencies across the federal government have shown increasing interest in funding synthetic biology research in recent years, including $700 million from the Department of Energy between 2006 and 2010, $40 million from the National Science Foundation in 2010, and at least $48 million from the National Institutes of Health between 2005 and 2010. Even the Department of Agriculture has put $2.3 million into synthetic biology research in recent years. DARPA’s past work in synthetic biology includes modifying the genome of the tobacco plant to produce vaccines as well as a program to engineer immortal microorganisms with genetically-coded kill switches.

Despite increasing attention to synthetic biology in federal agencies and the research community, research is “…limited to producing only a small fraction of the vast number of possible chemicals, materials, and living systems that would be enabled by the ability to truly engineer biology,” says the Living Foundries funding announcement. The Living Foundries program hopes to set itself apart from traditional synbio research projects and transcend the “ad hoc, laborious, trial-and-error” efforts of the past by investing in platform research that can support a broad range of applications, bring down cost, and increase scale. This approach to research on the process of biomanufacturing itself rather than on the production of specific and siloed chemical outputs DARPA dubs “engineering biology.”

DARPA’s vision for engineering biology is ambitious. The Living Foundries project proceeds from the assumption that modular genetic parts can be “mixed and matched on demand” to create a broader array of chemicals and materials more efficiently. This is perhaps conceptually similar to the introduction of interchangeable parts that transformed manufacturing in the late 18^th century, except on a genetic level. Lena Groeger of Wired.com likens the rearrangement of “modular genetic parts” at the core of the Living Foundries’ research to the way that children play with Legos.

Potential grant recipients, including 170 businesses and a number of academic and government research teams, attended a daylong event on June 28 where DARPA advertised its vision and goals for the program. Having received proposals from academic and corporate research groups, DARPA is now taking the next step of determining winners. Once funding decisions are made, DARPA plans to have projects running over the next three years and to see tangible results by the end.

At a time of sluggish economic recovery and stiff international competition, DARPA’s decision to invest in research with broad potential applications in medicine, energy, agriculture, and consumer products as well seems wise. The initial stage has been set, and the next few years will show whether the program’s goals come to fruition. If so, American manufacturing may witness a new milestone.

Gaurav Dhiman is a former intern with the Science Progress team and a rising senior majoring in biology and political science at the University of Miami.

But the very fact that American scientists feel the need to aggressively advocate for science conceal a bitter irony that the Times article failed to note: We once had a group of brilliant, influential and politically engaged leaders who were fascinated by science, wanted the country to be the world leader in the pursuit of new knowledge about the natural world, and in some cases even made original contributions.

They were called the founding fathers.

Consider, for example, Benjamin Franklin, after whom one political action group, Ben Franklin’s list, is named. One can draw a line of descent from Isaac Newton, the greatest scientist of his day, to Benjamin Franklin, the greatest scientist of his (and the founder of my university). The list goes on. Thomas Jefferson (founder of my previous employer, the University of Virginia), was famously preoccupied with both astronomy through Newton and political liberalism via John Locke. As a student at King’s College, now Columbia University, Alexander Hamilton was intent on a medical career and attended all the lectures on natural philosophy that he could.

John Adams, John Hancock and James Bowdoin founded the American Academy of Arts and Sciences in Boston. Jefferson and Hamilton, otherwise bitter rivals, made complementary contributions to the innovative foundations of the new country: Jefferson through the patent statute, Hamilton by laying the foundations for history’s most successful capitalist economy. By way of the wildly popular pamphlet Common Sense Thomas Paine was not only the most effective propagandist of the American Revolution, he also closely followed current scientific breakthroughs. In The Age of Reason he declaimed on the size of the earth, the nature of the planetary system, and the scale of the universe. Paine theorized that there must be millions of worlds like ours millions of miles apart.

President Lincoln chartered the National Academy of Sciences just as the modern meanings of the words “science” and “progress” were emerging. Especially in the industrial boom times after the Civil War, moral values were seen as a key consequence of scientific progress. Historian Charles Rosenberg has observed that “[t]he vast majority of nineteenth-century Americans never doubted that human beings had progressed and that this progress — inevitably — subsumed dimensions both moral and material. It was inconceivable to them that the steam engine and morality were not somehow interconnected.” Piety, productivity and, by the end of the nineteenth century, efficiency were all within the same universe of desirable values and consequences of science and progress.

Physics, engineering and chemistry were regnant, and biology was still largely observational rather than experimental, so the great debates about evolution and the origins of life were yet to come. Partly for this reason, conservative religious beliefs were quite compatible with a cohesive moral vision through the late 19th century. Ministers and naturalists could agree on their beliefs about nature. What has changed this American sensibility?

At the turn of the last century the atmosphere shifted due to misconceptions about Darwinism, debates about creationism and, in our time, the advent of experimental biology and modern genetics, which has stimulated political controversies like those over cloning and stem cells. Modern biology has become a cultural wedge. In popular culture, movies like Rise of the Planet the Apes continue a tradition of anxiety about the power of the life sciences that began with “Frankenstein,” with scientists the true villains who, in their fits of hubris, create innocent suffering and creatures who destroy themselves and their creators.

The United States is still by far the biggest producer of new knowledge, but China and other competitors are on the rise. In the 21st century leadership in science is not optional for a nation that proposes to remain a superpower. The new experimental biology will inevitably be part of that new foundation of power and prosperity, but the long-term investments involved require a deep and broad cultural commitment, the kind we’ve had since World War II and that fulfilled the founders’ vision. As I argue in my forthcoming book The Body Politic: The Battle Over Science in America, we need to find ways to include the new biology as part of the American narrative of the 21st century.

Ben would have been the first to sign up for his list. Let’s add all our names to his.

Jonathan D. Moreno is a professor at the University of Pennsylvania and a senior fellow at the Center for American Progress. This article was also published at the Huffington Post.

The top five ways companies are integrating renewables into the grid are:

1.  Intelligent Demand Response
2.  Microinverters and Maximum Power Point Trackers
3.  Wind Energy Management Tools
4.  The Virtual Power Plant
5.  The Hybrid Solar-Gas Power Plant

Explanations of each of these with videos are below.

Background

Intermittent renewables at high penetrations will bring new challenges for the grid. But how big will they be? And is it true that wind and solar will necessarily need storage or natural gas back-up at high levels?

The International Energy Agency wanted to know, so it modeled a variety of high-penetration scenarios in eight geographic regions around the world. Hugo Chandler, a senior policy analyst with the IEA explains the organization’s findings to Climate Progress:

Variability is not just some new phenomenon in grid management. What we found is that renewable energy is not fundamentally different. The criticisms of renewables often neglect the complementarities between different technologies and the way they can balance each other out if spread over certain regions and energy types.

Grid operators are constantly working to balance available supply with demand – it’s what they do. There are always natural variations that cause spikes in demand, reductions in supply or create disturbances in frequency and voltage. Once you see there are a variety of ways to properly manage that variability, you start whittling away at the argument that you always need storage or a megawatt of natural gas backup for every megawatt of renewable energy.

Theoretical modeling is important. But what companies are doing in reality?

Here’s five of the top methods for integrating renewable energy into the grid – proving that intermittency isn’t the show-stopper that critics make it out to be.

Intelligent Demand Response

Intelligent demand response is often called the “killer app” of the smart grid. Demand response is not a new concept – but the “intelligent” part is still somewhat new.

The demand-response leader, EnerNOC, is now applying this concept to renewable energy. The company announced earlier this year that it would work with a Northwestern transmission operator to help manage demand to meet the fluctuating output of wind electricity in the system. EnerNOC president David Brewster calls it “the perfect dancing partner for wind.” By ramping up demand at facilities during time of peak supply and lowering demand when supply drops off, the grid can respond to changing conditions in real time without the need for storage.

Microinverters and Maximum Power Point Trackers

Inverters are the gateway to the grid – turning Direct Current electricity from solar PV systems to grid-friendly Alternating Current. Over the past several years, there’s been a revolution in inverter technologies that allow project owners to more effectively regulate system performance. One technology, the microinverter, is installed on the back of individual panels, turning each module into its own unit and providing real-time data on how each is operating. Therefore, if clouds roll over a PV system, the “Christmas tree light effect” is avoided, and each panel still functions normally, maximizing the output of a system – sometimes by 20% or more.

Speaking of maximizing output, that’s where Maximum Power Point Trackers (MPPT) come in. These pieces of power electronics are also installed on the back of individual panels. But they’re not microinverters; instead, they boost voltage to an optimal range for a central inverter, thus allowing the device to run more efficiently. By allowing a system owner to control a PV plant at the module level, you can boost performance on the module level and regulate voltage even as weather patterns change.

Wind Energy Management Tools

SCADA systems that remotely monitor wind farm performance have been around for years – but there are a host of new applications being developed that allow grid operators and utilities monitor system-wide performance in an easier, more compelling way.

The Wind Energy Management System from the Portuguese company Logica is a great example. The company manages over 3 gigawatts of wind farms in the U.S. and Europe using its WEMS, which allows for real-time monitoring of a set of geographically dispersed wind plants – providing the tools to balance voltage, ramp wind farms up and down quickly, and plan for maintenance.

A company like EnerNOC provides the tools for better management on the demand side; a company like Logica provides the tools for better integration on the supply side.

The Virtual Power Plant

Virtual power plants combine intelligent demand response with supply-side management software, bringing distributed renewable energy plants together to form a “virtual” centralized resource.

We previously wrote about Germany’s Regenerative Combined Power Plant, a project that proved existing renewable energy technologies could provide 100% of the country’s electricity. The project blended three wind farms worth 12.6 MW, 20 solar PV plants totaling 5.5 MW, four biogas systems equaling 4 MW and a pumped storage system with 8.4 GWh of storage. By using geographically dispersed renewable resources that compliment one another, the plant operators were able to meet needs on the grid as supply and demand shifted. The project shows that with better information technologies and a balanced set of resources, the intermittency issue can be dealt with.

The Hybrid Power Plant

While innovative grid management tools will allow us to scale wind and solar without an equivalent MW to MW backup, there will definitely be a need to better integrate renewables and fossil energies to boost output and maximize current infrastructure.

Concentrating Solar Power can be a great way to increase efficiencies of newer fossil fuel-based infrastructure that may be around for a while. A number of companies are integrating direct-steam CSP technologies into coal or natural gas plants. FPL recently finished a 75 MW combined CSP/natural gas plant in Florida, with plans to add 500 more MW of hybrid plants in the coming years; Areva Solar is building a 44-MW plant at a coal facility in Australia; and GE, which recently invested in e-Solar, plans to integrate CSP technology into its natural gas plants, boosting power plant efficiencies substantially.

In an ideal world, CSP would be developed on its own to phase out fossil-based plants. And that is happening. But in order to scale these technologies, drop costs and better utilize power plants that are in operation (or switch from burning coal to far more efficient natural gas), the hybrid approach is a very attractive option. Here’s how one type of direct-steam CSP plant works:

To categorically claim that intermittent renewables can’t scale without hurting the grid ignores the very real innovations that are evolving today.

As the IEA’s Hugo Chandler explains: “We want to explode the myth that there’s a technological limit.”

Stephen Lacey is a reporter with Climate Progress, where this article is cross-posted.

The speakers agreed with Rep. Hoyer that manufacturing is essential to the American economy and that the United States needs a solid long term game-plan to keep manufacturing clean and in America.  The discussion echoed the main points of a CAP Paper “Low Carbon Innovation: A Uniquely American Strategy for Industrial Renewal” that was released at the event.  Below is a summary of the paper. You can also access the full report here, and the introduction and summary here.

Innovating for a Low Carbon Future

Our nation’s innovation and competitive drive in the 20th century powered the U.S. economy to global leadership, helped win two World Wars and one Cold War, created unprecedented and broad-based economic prosperity, and established the technology that enabled the conquest of the moon and today’s Information Age.  Today, this same engine of innovation is in serious jeopardy as we look across the competitive landscape of the 21st century.

There are a number of reasons for this.  First, in recent years the manufacturing sector, which for decades supplied millions of Americans with stable, well-paying jobs and sustained our country’s ability to innovate has shrunk. U.S. companies found many reasons to shift manufacturing overseas. This not only costs jobs but also, as the Harvard Business Review points out, it costs our economy’s ability to make high-tech products and invent new ones.

Compounding this threat to American competitiveness in coming years are the increasing risks that U.S. businesses will face from global warming. The consequences of global climate change will deliver real, and potentially very large, economic costs.  America also suffers from a confused planning environment for infrastructure and economic decision making, which makes it difficult to move forward on any comprehensive plan to bolster sustainable economic growth. Congressional inaction on climate legislation and policies to deploy clean and efficient energy technologies here at home are creating deep uncertainties for business planning.  Meanwhile, our competitors in other nations, are already retooling their industries and infrastructure for a clean energy future.

The U.S. needs clear long-term climate and clean energy policies, and a supporting low-carbon economic growth strategy to overcome the challenges above.  Accordingly, in a paper entitled “Low-carbon Innovation: A Uniquely American Strategy for Industrial Renewal,” the Center for American Progress is proposing a low-carbon economic growth strategy to keep America the innovative industrial leader of the world.   The strategy builds on our existing regional ecosystem of economic development policies and it aligns policies across different branches of government.  The purpose is to put forth smart incentives that engage private capital markets in deploying essential low-carbon technologies and reinvigorating investment in cutting-edge infrastructure.

The U.S. economy is an “innovation-driven” economy, according to the World Economic Forum. The United States became a global economic leader by building a diverse economy driven by a continuous innovation business model—one that values inventing, manufacturing, and continually reengineering value-added products and sophisticated technologies. Innovation is our area of expertise and it is at the center of our low-carbon industrial strategy.

Building innovation networks that are greater than the sum of their parts

In the paper we’ve identified five types of market actors whose participation is essential for low-carbon industrial renewal, and identified key policies for each to spur the innovation.  These include:

Coordinating policymakers and regulators

Policymakers, regulators, and program officers in federal and state agencies play an important role in  every stage of innovation and industrial development, whether by siting new transmission infrastructure,  permitting a new wind farm, providing programmatic support to help finance an advanced manufacturing facility, or coordinating public R&D research funds. Policymakers, regulators, and  government agencies can directly facilitate the growth of low-carbon markets and industries by aligning all efforts to build strong market demand, by influencing government procurement practices, and by offering clear frameworks for business planning within their rulemaking and legislating.

Empowering clean energy researchers

From advanced electric vehicle batteries to super-cheap solar panels to the manufacturing processes that produce them, research conducted in government, university, and corporate labs is critical to advancing innovation and the growth of low-carbon industries. Public policies provide important support for scientists and engineers as they work to create low-carbon solutions to industrial challenges, and ensure their discoveries can move quickly into the market.

Mobilizing clean energy manufacturers

Manufacturers who develop the supply chains, production processes, and marketing strategies to scale up the supply of American clean energy products, equipment, and technology play an important role in innovation and form the basis of industrial growth. Public policies play a critical role in helping America’s existing industrial base navigate the transition to a clean energy economy, supporting worker training and retooling manufacturing for low-carbon technologies.

Incentivizing clean energy investors

The task of innovating and scaling up a new technological foundation for U.S. industry based on clean energy requires harnessing flows of private capital. Clean energy and energy efficiency standards can send powerful signals to investors on the permanence of clean energy markets, while targeted financing assistance programs can help mitigate risks and unlock private capital for clean energy. These policies can leverage private capital more effectively within stalled capital markets and can improve incentives for private investment in clean energy research, commercialization, and deployment.

Engaging clean energy consumers

The consumers of clean energy products and technology provide the critical domestic market demand that makes industrial growth and innovation possible. Without consumers to purchase and use zero-emission vehicles, building owners and construction firms to use energy-efficient building materials, or utilities to invest in and operate renewable-energy-generating technologies, there is no revenue stream for the manufacturers of those goods, no reason for investors to provide capital, and no market application for clean energy research. Consumer-driven demand—from families to businesses to utility companies— is what makes clean energy innovation and industrial transformation possible.

Public policies can increase demand for clean energy goods and services by establishing meaningful incentives for utilities, building owners, and consumers to invest in clean energy technologies instead of fossil-fuel energy generation. Indeed, policy is essential to dramatically increase the predictability, transparency, and long-term certainty of clean energy markets to reach economies of scale and bring down cost.

The bottom line is that when these five groups work together by exchanging information, money, and risk, the network they form is more innovative than the sum of its parts. Together they can accomplish what none of them can do alone. With this understanding, we’ve organized our discussion of specific policies through the lens of how to engage each of these constituencies and encourage the formation of an informal national clean energy innovation network. In the paper we further lay out the principles for how policy can align the interests of each of these industrial and economic actors around shared efforts to drive low-carbon innovation in America’s economy.

Access the full report here.

Access the executive summary here.

Bracken Hendricks is a Senior Fellow at the Center for American Progress. Sean Pool is an Assistant Editor with the Center’s Science Progress project. Lisbeth Kaufman is a Special Assistant at the Center.

The antagonist de jour, of course, is China. Rapidly building advanced energy plant, grid, and end-use infrastructure that will outclass their creaky U.S. counterparts, the Asian giant, remarked Chu, is winning the “energy race.” Worse, more and more Americans worry that China is on the verge of surpassing the United States in science-and-technology innovation, even though the authoritarian nation faces a host of problems in its own innovation ecosystem.

Secretary Chu’s prescription? Increased federal investment in “scientific R&D.” In short: Remember the Sputnik moment.

Aerospace history has become a stock American folk syllogism recalling a fall from, and challenging a return to, grace. If we can put men on the moon, surely we can build a better mousetrap, or close the gap in the energy race. But is the problem really a crisis of American innovation?

If so, it does not stem from a lack of trying. Nuclear and photovoltaic power are American inventions, fuel cells were first made practicable in this country, and, for a time, electric cars and hydrogen power seemed just around the corner. The last 40 years have witnessed booms and busts in all of these systems. Yet American researchers do not appear to be running short of new ideas, as research in high-efficiency batteries, polymer photovoltaic systems, and artificial photosynthesis shows.

The issue instead seems to be the relationship between innovation and national industrial recovery and job creation. To the energy secretary, the broader federal science-and-technology policy establishment, and legions of private-sector R&D contractors, innovation policies and industrial policies are virtually one and the same. China, held Chu, had progressed industrially by taking a page from the U.S. playbook, using the state as a “slight rudder” to guide the private sector in taking the dominant role in R&D.

Actually, the Chinese government does quite a bit more to shape its energy economy than simply keeping a light hand on the tiller of national R&D. In fairness to Chu, he might have found those sorts of issues beyond his purview. Department of Energy Science Undersecretary Steven E. Koonin was a bit more forthcoming about the relationship between science, technology, and industry in an address at the University of California, Santa Barbara, in January 2010. He pointed out that change occurs much faster in IT than in the power source industry partly because it is physically less difficult to shift bytes than molecules, but also because in the United States there has been a disjunction between academic research and commercial manufacturing in the latter sector.

Koonin did not elaborate, but the reasons for this gap stem from the deep-seated belief of U.S. policymakers that government-supported science and technology can supplant regulation and planning in stimulating industrial growth. As it emerged after the Second World War, federal science-and-technology policy attempted to reconcile statism with free-market principles. This hybrid approach—call it American-style quasi-planning—assumed that the private sector and government had similar interests and, hence, that government-sponsored advanced science and technology could simply be injected into the economy much like a vaccine, with near-immediate salutary effects.

“Partners” in name only

This approach worked well in certain sectors, particularly in cases when the government was the sole or major customer for certain novel and otherwise unobtainable products that it asked industry to produce. In these cases it could bolster existing industries such as aviation and help incubate new ones such as electronics that readily spun off technologies into the civilian market without seriously disrupting existing interest groups. Business and state interests also meshed in the established fossil-fuel-based energy and ground transportation systems, with the federal government funding development of the interstate freeway system and prosecuting policies that secured plentiful supplies of cheap crude oil.

Where power sources were concerned, however, these interests frequently clashed for a mix of physical, political, and economic reasons. During the zenith of the Cold War, the federal government promoted work on photovoltaic cells, fuel cells, hydrogen, and nuclear power for special-purpose military and semimilitary roles. It also encouraged civilian applications of these technologies, largely, as in the case of nuclear power, for reasons of prestige and national security. But this was not easy and manufacturers had no strong incentive to try owing to the abundance of primary energy sources of various types in this period. They had to be plied with generous subsidies and even then they were not always enthusiastic.

Such conflicting imperatives were no better illustrated than in the Clinton administration’s Partnership for a New Generation of Vehicles, or PNGV. Styled by Vice President Al Gore as the automotive equivalent of the Apollo project, this cost-shared program in automobile R&D was initiated by the federal government on the false premise that automakers would welcome its efforts to encourage the modernization of the industrial base and increase fleet fuel efficiency through advanced systems like hybrid and fuel cell electric drive as politically acceptable alternatives to higher CAFE standards. The idea was to encourage voluntarism as an alternative to regulation, which Detroit regarded as forced technological change. But American manufacturers did not brook even this minimal interference in their affairs. They chose not to commercialize the supercar demonstrators they produced with government assistance and successfully resisted California’s efforts to legislate battery electric power.

Nor were American consumers then much interested in the new technologies, preferring massive, relatively unsophisticated gas guzzlers with improved safety features. But they changed their minds after Toyota and Honda introduced the hybrid electric passenger car in the early 2000s and the price of fuel skyrocketed around mid-decade. Belatedly, U.S. carmakers realized alterative products could be profitable, yet they lacked the capacity to produce them cost-effectively. The episode was something of a comedy of errors. In the 1990s Detroit spurned the mild medicine offered by the paternal hand of the state, only to collapse, atrophied, into the arms of government after a decade of brutal competition in the 2000s.

Nanotechnology: An energy revolution on the cheap?

So is nanotechnology the answer? A form of materials research emerging in the 1990s, nanotechnology was touted as another free-market solution to our energy problems. Its advocates believed that special nanoscale materials could make batteries, fuel cells, and photovoltaic cells cheaper, more durable, and more powerful by exploiting the high surface area and quantum properties of existing substances produced as nanoscale particulates and novel materials like carbon nanotubes and quantum dots.

Accordingly, an initial nudge by the federal government in the form of a relatively small R&D investment was expected to spawn a special materials industry that in turn would “self-assemble” (a favorite rhetorical flourish of nano-advocates drawn from utopian visions of molecular engineering) an industrial revolution on the cheap. Thus would the social and environmental collateral damage that had always attended such events in the past, and hence the need for government regulation, be obviated. The lobbying of nano-advocates prompted the Clinton administration to establish the National Nanotechnology Initiative, or NNI, in 2000.

Such assumptions cocked skeptical eyebrows in some parts of the science community but were generally tolerated, at least in quarters dependent on federal cash, if only because of worries of the effects of criticism on the money flow. Today there are a number of U.S. startup companies engaged in commercial development of nanomaterial-enabled power source technologies, including Konarka, a maker of organic photovoltaics, and battery component manufacturers Envia and Nanosys.

Probably the best known is Massachusetts-based A123. Its lithium-ion rechargeable battery uses nanostructured iron-phosphate electrodes to achieve what many observers regard as superior performance. Supported at every stage of its growth by the Department of Energy, A123 would, if successful, become the first American company to compete in the global market for rechargeable lithium-ion batteries, one U.S. battery makers dabbled in but then abandoned in the early 1990s, when it amounted to only a few hundred million dollars. Today it is worth anywhere from $10 billion to $14 billion.

In the mid-2000s A123 set its sights on electric automobility, potentially the richest market of all, collaborating with General Motors in developing the Chevrolet Volt plug-in hybrid. The denouement revealed the paradoxes and limits of nanotechnology. Ultimately, GM selected South Korea’s LG Chem Ltd. to supply the Volt battery for a number of reasons that probably boiled down to a belief that its lithium manganese spinel technology, parts of which contained materials developed by the DOE’s Argonne National Laboratory, posed fewer manufacturing and operating unknowns than A123’s more radical design.

The deal, which helped set up LG Chem in this emerging sector, will see batteries produced overseas until the firm opens a U.S. factory in 2012. Its manufacturing base hitherto located in Asia, A123 opened its first American plant in September 2010 using stimulus money intended to attract battery industry to the United States. For the time being, the company must make do servicing niche markets.

In essence, the various branches of the U.S. state worked at cross-purposes. With one hand, the DOE stood up a promising American company that was promptly punished for its inexperience by an auto company part-owned by the U.S. taxpayer; with the other, it indirectly helped a foreign company profit by the first American mass-produced hybrid electric passenger auto.

The battle of the electric automobile batteries is only the latest example of the hazards of quasi-planning. Tasked by the Obama administration to stimulate a job-rich sustainable energy industry, the DOE can conceive and gestate firms but is ill-equipped to bring them to maturity. It has virtually no power to alter industrial relations in the domestic market, much less in the global economy, especially the odd, asymmetrical system of codependency evolved by the United States and China that incentivizes American manufacturers to relocate abroad to exploit cheap labor in producing goods destined for the U.S. market but largely bars them from competing in the host country.

As A123 founder and MIT professor Yet-Ming Chiang explained to me at the Nanotechnology Innovation Summit last December, at a certain point in his company’s growth, the issue became one of industrial policy as much as research and development. Asian automakers, he remarked, would never dream of using batteries not produced in their home countries. An industrial pioneer brought to, but not yet quite over, the threshold of success, A123 faces challenging years ahead.

This tableau highlighted the complexities and contradictions of basing the revivification of one ailing heavy industry (automobile) on another (electrochemical energy storage) that was even more moribund. In a sense, given these complexities, the decisions of GM and the DOE were rational. The quickest way for American manufacturers to access advanced battery technology on an industrial scale was to ally with those foreign firms with advanced battery-manufacturing capabilities. If the objective of industrial rejuvenation is jobs, as U.S. politicians frequently claim, the strategic dependency that will result from such arrangements is less of a problem (where it involves staunch friends like South Korea and Japan) than the fact that much of the economic benefits are likely to remain abroad.

So while great strides have been made in nanotechnology, it is no free-market elixir. As a compound neologism, wrote former National Science Foundation chief Neal Lane in 2001, nanotechnology expressed, in a general sense, both current basic research (nano) and deep-future application (technology). But there has been a programmatic gulf between the two within the DOE. The third-most important federal sponsor of nanoscale science, engineering, and technology, or NSET, DOE has contributed $2.14 billion of the $12 billion spent thus far in the National Nanotechnology Initiative. Most of this has been spent through the DOE’s Office of Basic Energy Science, work conducted separately from the Office of Energy Efficiency and Renewable Energy and its Industrial Technologies Program. Here, far less—only about $7 million in 2009—has been devoted to nanomanufacturing, although this figure is set to triple by the end of fiscal year 2011.

To be sure, this cleavage will probably have little immediate effect on long-term projects like the DOE’s ambitious effort in artificial photosynthesis, which aims to develop cheap single-crystal silicon nanowire semiconductors coated with cheap earth-abundant nanoscale metal catalysts to produce hydrogen and oxygen from sunlight and water. Researchers hope such systems can meet an expected doubling of current annual global energy consumption of around 15 terawatts by midcentury.

Last July the DOE’s Office of Science launched the Joint Center for Artificial Photosynthesis, investing $122 million in a Caltech-led partnership under the banner of Secretary Chu’s new “Energy Innovation Hubs” initiative. Berkeley Lab Director Paul Alivisatos opined that such work requires sustained support rather than a “pulse of money” and then stepping back to see the results, as has happened in other science fields in the past. And there are serious engineering, organizational, and economic issues entailed in building the auxiliary systems of a hydrogen economy that go far beyond the scope of the DOE.

Conclusion

So what of the “Sputnik moment” and Chu’s formula for America’s energy calculus? This crisis is not a discrete, galvanizing event amenable to a quick fix, but part of a broader historical process of adapting an economy based largely on the technology and social relations of the previous century to rapidly changing circumstances in the new one. One can’t fault the secretary for demanding more money for “scientific R&D.” We expect him to do that as chief of an agency dedicated to such activities. But “scientific R&D” and the patents that are its proximate product cannot by themselves form the basis of national recovery because the great ideas that inform technological innovation and industrial manufacturing, like, say, giant magnetoresistance or lithium manganese spinel energy storage, can originate anywhere in the world (France, Germany, and South Africa, respectively). The historian David Edgerton has long argued this point, one recently illustrated by W. Patrick McCray in his history of the commercialization of giant magnetoresistance.

And so it is unrealistic to shoulder the DOE with the lion’s share of the burden of easing energy innovations into the marketplace. True, there is a long record of and justification for federal intervention in the American economy. But students of history might point out that if U.S. business and government leaders were serious about creating millions of new high-tech jobs in green energy, they would augment science and technology policies by protecting manufacturing. After all, they would only be playing by rules followed by all countries in achieving industrial liftoff, including Japan, China, and, back in the day, Britain and the United States of America.

There are, however, no easy answers. Up to 60 percent of Chinese exports to the United States are actually produced by American companies. Yet some form of protection combined with long-term federal countercyclical spending are likely the most effective ways to spur a national energy renaissance. Of course, such options aren’t likely to be pursued anytime soon. In the United States, the chief instrument of industrial policy appears to devolve from currency manipulation. Encouraged by the Obama administration, the Federal Reserve has maintained interest rates near zero and flooded the market with cheap credit, resulting in a decline in the value of the dollar that some believe will allow the United States to export its way out of the recession. Given the understandable reluctance of Asian governments to open their markets any more than necessary, this seems wishful thinking.

In America’s current political climate, boosting science spending will be far cheaper and simpler than dealing with such complexities. For that reason, it will likely be the default response in the energy race.

Matthew N. Eisler is a postdoctoral fellow at the Center for Nanotechnology in Society at the University of California, Santa Barbara.

This material is based upon work supported by the National Science Foundation under Grant Nos. SES 0531184 and SES 0938099. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation.

Further reading

Jay Inslee and Bracken Hendricks, Apollo’s Fire: Igniting America’s Clean-Energy Economy (Washington: Island Press, 2008).

David A. Kirsch, The Electric Vehicle and the Burden of History (New Brunswick, NJ: Rutgers University Press, 2000).

Neal Lane, “The Grand Challenges of Nanotechnology,” Journal of Nanoparticle Research 3 (2001): 95–103.

Gijs Mom, The Electric Vehicle: Technology and Expectations In the Automobile Age (Baltimore: The Johns Hopkins University Press, 2004).

Bruce Podobnik, Global Energy Shifts: Fostering Sustainability in a Turbulent Age (Philadelphia: Temple University Press, 2006).

Reuters, “LG Chem sees more battery orders for GM’s Volt in 2011,” November 13, 2010, available at http://www.reuters.com/article/idUSTRE6AD00220101114.

Joseph J. Romm, Hell and High Water: Global Warming – the Solution and the Politics – and What We Should Do (New York: William Morrow, 2007).

Richard H. Schallenberg, Bottled Energy: Electrical Engineering and the Evolution of Chemical Energy Storage (Philadelphia: American Philosophical Society, 1982).

Amid the bitter and protracted negotiations over this fiscal year’s federal budget, U.S. investments in science and innovation were largely spared from the deepest cuts some federal programs faced. But they may not be safe for long as Congress considers making further spending cuts in the fiscal year 2012 budget beginning in October against the backdrop of debate this summer over raising the national debt ceiling.

That’s why it is critically important that members of Congress on both sides of the aisle distinguish between federal “spending” and “investments.” What many fiscally conservative lawmakers omit in their zeal to slash spending is that many federal programs actually have positive rates of return, meaning they bring in more revenue—to the government, economy, or both—than they cost the taxpayer. To put it another way, some federal investments are profitable to the public balance sheet and save the taxpayers money in the long run.

Need proof? Look no farther than two reports released last week, which looked at the economic benefits and return on investment in the Human Genome Project, and the National Institutes of Health, respectively, and showed that both federal programs have had a tremendously positive economic impact. Let’s examine each in turn.

The National Institutes of Health and economic growth

The first report “An Economic Engine: NIH Research, Employment, and the Future of the Medical Innovation Sector,” published last week by a consortium of science and research medical organizations, looked at the consequences of the public investment in the NIH on employment and economic output. The study, authored by Dr. Everett Ehrlich, a leading business economist and former Clinton-era undersecretary of commerce, found that the NIH directly and indirectly supported nearly 488,000 public and private sector jobs, and generated $68 billion in new economic activity in 2010 alone. Meanwhile, NIH research grants in FY 2010 cost the taxpayers only $26.6 billion. This would represent a 150 percent single-year return on public investment, counting total economic output from the research as revenue.

The economic activity and jobs supported by the NIH are not limited just to the NIH’s Bethesda campus outside Washington, D.C. They are spread across every state and territory in the country. In 2010 NIH research awards supported 12,000 public and private sector jobs in Georgia, 5,300 in Iowa, 1,300 in Alaska, and 31,000 in Texas, just to name a few.

In California, a company called Syntouch LLC is developing synthetic tactile sensors for prosthetics thanks to NIH-funded research. In Alabama, a company called DiscoveryBioMed, Inc. is using principles discovered by NIH-funded research to identify new therapeutic compounds for respiratory, metabolic, inflammatory, and hyperinflammatory diseases. West Virginia-based Protea Bioscience, Inc. is developing technology based on NIH research that improves the quality, reproducibility, and speed of processing protein samples, a technique that will aide with drug development across the board. See the map below for the number of jobs supported in each state by NIH federal research awards.

Source: Map by Science Progress with data from United for Medical Research

Critics of federal investment in R&D programs often argue that public programs like the NIH crowd out private investment. But a recent study conducted by the National Bureau of Economic Research found that the opposite is in fact true for the NIH. Each dollar of federal investment leads to a 32-cent increase in private medical research investment as discoveries diffuse out of academia and filter into the market. Another study found that NIH-sponsored research was more likely to be considered “advanced,” “novel,” or be related to “orphan diseases” than entirely privately funded drug research. This means that the NIH not only supports an ecosystem of business and innovative companies, but the innovation that comes out of this research is more likely to be novel and substantial.

The evidence in this report contradicts an oft-repeated fiscal conservative argument that public investments cannot create jobs. To quote the report, “simply put, NIH—and the research, jobs, technology, and businesses surrounding it—is nothing less than…an economic engine.”

The Human Genome Projects’ incredible return on investment

The second report, published by the Battelle Memorial Institute, is even more stunning. The report looked specifically at the economic impact and return on the federal investment of the Human Genome Project, an iconic federal science research program begun in the late 1980s.

The findings of the study speak for themselves: the public investment of $3.8 billion spread between1988 and 2003 yielded $796 billion (three-quarters of a trillion dollars), in economic output, and created nearly 4 million job-years over the 23-year period between 1988 and 2010. In 2010 alone, while it costing the government nothing, this farsighted, bipartisan investment in genomics research added $67 billion to U.S. gross domestic product, created $20 billion in personal income for American families, and sustained 310,000 public and private sector jobs.

If looking at these public investments from the point of view of a business, these numbers would represent phenomenal growth and profitability. If the total public investment in the Human Genome Project were a private investment fund, and the total public benefits thought of as revenue, the investments made in it would be said to have a return on investment, or ROI, of 14,000 percent over the 23-year period. A return like that would be enough to make any investor drool. Or, to look at it another way, imagine a family that put just $1,000 of their savings into the Human Genome Project in 1988. Today, they would have $140,000.

These figures are remarkable in and of themselves, but they don’t even take into account the intangible fact that these investments lead to innovation in medical treatments, medicines, and technologies that save lives and improve our public health. NIH research made possible the implementation of the Human Genome Project and genetic sequencing. It has also led to new cardiovascular treatments, neurotransmitters, and monoclonal antibodies, which were a component in 5 of the top 20 best selling drugs in 2010, generating worldwide revenue of $35 billion.

The project also had a tremendous impact not just on economic growth and job creation, but on innovation that is helping save lives. This research has helped launch an entirely new industry around personalized medicine and direct-to-consumer genetic testing, both making it easier to target specific medicines and treatments to patients’ needs. A 2009 study showed that 15 percent of healthcare providers reported at least one patient brought them results from a direct-to-consumer genetic test in the previous year, and 75 percent said they changed some aspect of the patient’s care based on the information. This new technology and the fast-growing industry around it were made possible entirely thanks to the research directly funded and indirectly catalyzed by the federal investment in the Human Genome Project.

The takeaway is that while these public investments have led to jobs, growth, and new technologies, more important is that the product of all this is new medical knowledge that benefits the public good. In the words of Greg Lucier, the chief executive officer of Life Technologies, whose foundation sponsored the Battelle analysis:

“From a simple return on investment, the financial stake made in mapping the entire human genome is clearly one of the best uses of taxpayer dollars the U.S. government has ever made. This project has been, and will continue to be, the kind of investment the government should foster…one with tangible returns.

“The initial dollar investment has already been returned [12 times over] to the government via $49 billion paid in taxes. Now we sit at the dawn of the ‘Genomics Revolution’ and all humankind will reap the benefits as we transfer what we now know about the human genome into major breakthroughs including: new forms of ‘personalized medicine’ and genetics therapy better suited to solving the problems we all care so much about, such as cures for cancer, cardiovascular diseases, Alzheimer’s, HIV/AIDS, and many more terrifying diseases. These major advancements are rapidly creating multiple new industries and companies and those companies are creating quality jobs for thousands of people. Life will be even better for all of us thanks to the HGP.”

Conclusion

When times are tough and budgets are tight, everyone—families, businesses, and yes, even the government—must make difficult choices and prioritize the things they really need while giving up some of the things they don’t. This process of economic recalibration, while painful, is a necessary and healthy step in making our economy more efficient in the long run.

But advocating cuts to government investments that bring in more revenue throughout the economy than they cost to run is self-defeating in terms of both deficit reduction and job creation. Cuts to these high-performing programs would be like a business cutting its best-selling product lines in the name of cost reduction. McDonalds doesn’t cut french fries from its menu just to save a buck. They know their french fries are profitable and draw customers to their restaurants. Such cuts would make McDonalds’ balance sheet worse—not better.

Similarly, cutting programs such as the NIH that demonstrably create jobs, catalyze private investment, and drive economic growth in excess of their public cost is misguided. As we proceed in the discussion of how best to make our government more efficient, and reduce our mounting foreign debt, our lawmakers need to adopt the same mentality. Investments in innovation—fundamental science and the research, development, and commercialization of new technology—have long been shown to have not only a positive return on investment for the government, but also great spillover benefits for private enterprise, small businesses, consumers, and ultimately for American families. Congress can’t forget this as it debates government investment targets for FY 2012 this fall.

Sean Pool is the Assistant Editor for Science Progress.

In As Time Goes By: From the Industrial Revolutions to the Information Revolution, a seminal work in cliometrics—the study of economic history—Chris Freeman and Francisco Louçã use historical data on technological advances, economic structure, salaries, and political unrest to derive a clear pattern linking innovation to the performance of the economy. These generational cycles of invention, expansion, and depression are called “Kondratiev waves” in honor of Nikolai Kondratiev, the Russian economist who first postulated their existence.

Cliometrics was founded in 1960 as a response to the simplistic models of neoclassical economics. By combining historical facts and economic theories, cliometrics seeks to create a fuller picture of economic growth than either discipline alone can provide. Combining the quantitative field of economics with the qualitative study of history leads to conclusions that may not always fit squarely under the methods of either discipline, but nonetheless the exercise tosses up some intriguing conclusions. Here are several of them.

Kondratiev waves carry transformational technologies into the market and create new industries

When we think of the industrial revolution, we think of steam engines and factories, but in fact, this was only one of many industrial revolutions. Freemand and Louçã show the correlation between repeated technological revolutions and the waves of economic growth that carry them. Each of these Kondratiev waves is driven by a “carrier-branch technology,” defined as a new way of doing things so much more efficiently than the old ways that it reshapes every aspect of the economy. The five carrier-branch technologies that Freeman and Louçã identify are:

• Water-powered machinery
• Steam power
• Electrification
• The internal combustion engine
• Computerization

Carrier-branch technologies have a core input, for example coal, or iron, or oil, or computer chips, and give rise to a whole secondary economy of supporting industries and social institutions. And each Kondratiev wave follows a similar economic pattern—the initial invention creates a period of boom, with rising material wealth, but as the technology reaches a point of saturation, the economy enters a downswing or “crisis of structural readjustment.” These upswings and downswings in the past lasted from 20 years to 30 years each, leading to a total cycle time of around 50 years.

Let’s use the familiar example of steam power. Practical steam engines were invented in 1712 by the English engineer Thomas Newcomen, but it took nearly a century for this invention to find widespread adoption. Invention is just the first step in technology lifecycle that drives a Kondratiev wave. Newcomen’s early engine was heavy and inefficient, and was used only for pumping water out of mines.

By the early 1800s, advances in metallurgy and cylinder boring allowed the creation of efficient, high-pressure steam engines. In 1829, George Stephenson demonstrated the first practical steam locomotive, kicking off a two-decade long railroad-building boom. Better mining techniques lowered the cost of iron and coal, while railroad barons made immense fortunes and businessmen everywhere benefited from the lowered cost of transport. Tourism, hotels, restaurants, and national markets all owe their origins to the low cost and high speed of rail travel. The demands of financing and administering the new railroads led to new forms of social organization such as the joint stock corporation, dedicated administrators, and new educational institutions such as the Harvard Business School.

But nothing lasts forever, and by the 1870s, all the profitable rail lines had already been created. Competitive pressures and price wars between railroad companies, along with wartime inflation from the American Civil War and Franco-Prussian War, initiated a worldwide long depression. In the United States, prices of basic commodities like grain, cotton, and iron fell by over 50 percent, devastating the earnings of farmers and industrial laborers. Unemployment reached 25 percent in some states, while businesses defaulted on over a billion dollars of loans and multiple banks collapsed. Social unrest exploded with a wave of strikes, including the Great Railroad Strike of 1877. The corrupt machine politics of the time lead to a popular disenchantment with both major parties, laying the foundation for the first progressive movement. The world economy did not recover until well into the 1890s, buoyed by new industries based around electrical power.

Similar patterns can be seen with the other Kondratiev waves, but I would like to focus on the one that we are most familiar with, having lived through it. Computing and information technology have driven unprecedented productivity gains in the U.S. economy and underpinned much of recent growth. The dawn of the computer era can’t be precisely pinned down; good arguments can be made for the creation of ENIAC in 1946 or the integrated circuit in 1959.

But I prefer the mid-1960s, with the first standardized commercial computers, such as the IBM S/360 and DEC PDP-8. Like the steam engine it took a little while for society to recognize the value of a new transformational technology. The astounding growth in Silicon Valley since then has driven innovation around these machines, making them cheaper, more reliable, and more user friendly. The presence of computers, and especially networked computers, changed every aspect of business over the past 45 years, leading to whole new markets and products that could scarcely be dreamed of before, as well as socially transformative access to information and knowledge through computer networks.

The next Kondratiev wave?

Computers are rapidly approaching the point of saturation in many markets. Microprocessors are in every imaginable device, and there are over 4.6 billion cell phone users on the planet. Computer processor and memory manufacturing is a cut-throat business conducted on the slimmest of margins, and while technology keeps improving, at this point, much so-called “innovation” has become about advertising and sales, not fundamental technological breakthroughs. The dot-com bubble and recent financial crisis, which was made possible by complex computerized financial instruments, are two signs that the Kondratiev wave based off of computers may be reaching its peak, and we are now in a period of structural adjustment.

Kondratiev wave theory would posit that the Great Recession cannot be blamed only on complex derivatives, bad mortgages, or greedy bankers, or government deficits, although these are all contributing factors. Rather these are signs that we have reached the limits of our present technology. Escaping it will require a new carrier-branch technology, with all that that entails. I can’t tell you what that technology will be renewable energy, an industrial revolution founded on nanotechnology and synthetic biology, completely recyclable zero-waste products that turn trash into gold, or advances in robotics and artificial intelligence. What is certain, however, is that it will be based on a fundamental breakthrough in science and technology.

The federal government must play a crucial role in that breakthrough. Look to the historical record: The steam power revolution did not begin in England by accident; rather England held an advantage in the core inputs: iron and coal, stemming from the Crown’s casting of thousands of cannons for the Napoleonic Wars. With peace and the loss of their primary market, English ironmongers turned their ingenuity to new products and techniques. Early railroads required an Act of Parliament before they could be built, demanding the active involvement of government, and eventually changes in law that made it easy to incorporate.

In America, the Federal government played a central role in the computer revolution. The SAGE air defense network consumed approximately half of the nation’s programmers and computers in the 1950s, creating an immense base of institutional knowledge that kickstarted the computer revolution. The Internet began as a military project in the Defense Advanced Research Projects Agency, and only later found civilian applications. The Federal government has played a valuable role as the first customer for technologies too risky for industry to invest in.

Beyond the role of a customer, the Federal government can also build the foundations for the sixth Kondratiev wave, by supporting science and engineering and encouraging investment in new technologies. At the heart of America’s lead in science and technology is the human capital of its scientists and engineers. This human capital must be maintained and reinforced, through science, technology, engineering, and math, or STEM, education at the primary and secondary level, visas for skilled workers and innovators, and a world-class system of universities and research centers which can train the next generation of scientists, and attract them to interesting and useful projects. Because the next carrier branch technology is still unknown, and cannot be foreseen, all areas of science and technology should be supported robustly. Program like the Marine’s “Green Company” are a good start, but the government has to be both more creative and aggressive in finding ways to harness the power of the market.

The Federal government represents the interests of all Americans, not just for the next quarter or the next election cycle, but for the next century. Real job creation and prosperity depend on finding new carrier branch technologies to start the next Kondratiev wave sooner rather than later, and finding them in America, not overseas. But it won’t happen if we don’t invest in the building blocks of innovation here at home. With the active participation of the government in crafting forward-looking regulation and laws, funding fundamental research in our universities and national labs, helping innovative technologies navigate the commercialization “valley of death”, and supporting human capital through public science and technology education, the grand project of forging the next carrier branch technology for the 21^st century is within our reach.

Michael Burnam-Fink is a PhD student with the Consortium for Science, Policy and Outcomes at Arizona State University.

Vibrant entrepreneurial markets such as those in and around Boston and Silicon Valley are nationally recognized for their high-octane venture capital fuel. Perhaps less well known is the degree to which the federal government has served as something of a “venture catalyst” by providing nondilutive grants, equity, contracts, and resources to high-growth startups. Some examples include:

• The Department of Defense, which supports, with research contracts, important technologies that support military (and, subsequently, commercial) applications, particularly its legendary Defense Advanced Research Projects Agency, or DARPA
• The Small Business Investment Company program, or SBIC, a more-than-50-year-old program that complements private-sector capital in support of growth companies
• The Small Business Innovation Research, or SBIR, program, a nearly 30-year-old program that provides grants to small businesses in support of federal needs for research that also have commercial corollaries
• The Department of Energy, which most recently added a Defense Department-inspired energy-centric version of DARPA called the Advanced Research Projects Agency—Energy, or ARPA-E, to its private-sector support suite for energy innovation

For decades, the federal government has  partnered with the private market to advance public product or service innovation needs related to defense and energy security—and, of course, to serve its agenda for jobs, competitiveness, and economic growth. For the most part, programs from Small Business Administration (SBIR, SBIC) and defense technology spending have been well supported on both sides of the political aisle. Most of these programs are agnostic to the demographics of an applicant—whether location, gender, race, or income. Whether applying from VC-hub Boston, MA, or Biloxi, MS, individuals and companies of all variety have access to some form of federal grant, loan, or equity.

But during the last two decades, two of the past three presidents have focused particularly on underserved communities and people. The Clinton administration’s New Markets Tax Credit and New Markets Venture Capital programs (run by the Treasury and SBA, respectively) seek to fill the capital gap that exists and persists for these target places and people. The Obama administration has continued the tradition, adding new initiatives that focus on underserved people, regions, and sectors. These programs provide resources from multiple agencies to women, minorities, Native Americans, veterans, and low-income communities.

A few examples include the Small Business Administration, with both existing and new programs that support loans and mentoring for small businesses, and the Treasury’s Community Development Financial Institution, or CDFI, Fund, which supports loan and equity pools that focus on targeted rural and urban low-income communities. SBA recently announced a chair for its new Advisory Council for Underserved Communities. The Advisory Council was formed to look across SBA’s assets (and others of the government) to align similar initiatives that serve targeted low-income people and places. Even the Obama administration’s multiagency Regional Innovation Cluster push—covered in SP in February—includes specific callouts for addressing underserved in each of the SBA and EDA cluster funding initiatives.

Indeed, the Economic Development Administration by mandate has always been about addressing low-income, high-unemployment, and otherwise challenged communities in disaster zones, regions with substantial outmigration of population, or those suffering from the loss of industries. The EDA’s recently announced i6 Green competitive grant for innovative Proof of Concept Centers mirrors a number of similar Obama initiatives in that it seeks to drive the innovation ecosystem (in this case on the green economy) but does so with EDA’s emphasis on distressed regions. The program enables existing grantees from SBIR programs at the National Science Foundation, the U.S. Department of Agriculture, and the Environmental Protection Agency that are part of winning i6 Green consortia to share half of the $12 million program award. This unprecedented flexibility and multiagency approach—with a single agency leading and other agencies contributing—are emerging hallmarks of Obama’s efforts to reduce silos and to align resources at the federal level.

As I noted in February, two new $1 billion SBA capital access programs are intended to drive debenture-funded risk capital into underserved inner cities and into clean energy, respectively. While clean energy is a pretty hot area for VCs in their traditional hunting grounds of Silicon Valley and Massachusetts, it’s still very much an emerging sector in other communities. Driving more risk capital into this strategic sector will make a difference for U.S. competitiveness—especially with countries like China plowing far more government money into this strategic high-growth sector.

Providing incentives for venture capital and mezzanine investors to drive capital into underserved regions that don’t normally see private investment dollars, too, is smart strategy. Our tech-and-innovation economy cannot be just about the rich city centers like Boston or the Silicon Valley. Other metropolitan regions need to develop the patterns of innovation and entrepreneurship that drive long-term economic growth. Consistent with its democratic roots, the Obama administration attends—if not equally, then meaningfully and substantively—to the underserved rural regions of our country that need essential capital and innovation infrastructure as much or more so than their rich city brethren.

At risk of appearing self-serving, let me share with you one emerging success story that speaks to the importance and impact of public-private partnerships such as those described above. Since 2000, I have managed one of six Clinton-era venture capital funds—part of the so-called New Markets Venture Capital, or NMVC, funds licensed by SBA  in 2000-2001. The NMVC program is an SBA initiative that matches 1-to-1 venture capital raised in the private sector for the purpose of directing this innovation rocket fuel in regions that lack the kinds of assets one finds in Boston. The fund I’m involved in backed nine companies, eight of which saw their first professional capital from this specialized pool, and all of which leveraged each dollar from the fund 5-to-1 with private follow-on capital.

One of the fund’s two remaining investments is Nanocomp Technologies, an advanced nanomanufacturing  company that has subsequently received several DOD contracts, SBIR awards, and recently a special designation that is given to a handful of companies in the United States deemed “essential to national defense.” This designation comes with additional federal funding—which will leverage additional private capital to help get this technology to scale to solve real problems related to both national defense and  commercial customers.

The product is an advanced material with game-changing structural, thermal, and electrical properties that has applications in aviation, electrical transmission, thermoelectric power generation, and commercial electronics, among others. It is among the lightest, strongest, and most electrically and thermal conductive materials known to man, and was presented in 2010 by the Office of Science and Technology Policy to President Obama as one of the three most significant nanotechnology innovations of 2010. Since I led the company’s first professional round of capital in late 2006, the company has grown from 2 to 40 staff and looks to grow to a few hundred in the next five years. With the help of the NMVC program, the company was able to locate its headquarters and manufacturing facility in an economically distressed region in New Hampshire.

While it’s early to declare this investment a victory, this emerging company funded through a public-private partnership makes a hell of a case for specialized federal programs that support innovation and entrepreneurship in underserved regions. These kind of public-private partnerships catalyze private-sector innovation to develop game-changing technologies of national priority, move private investment dollars, and create jobs in underserved regions. That’s a good thing for future U.S. economic competitiveness and broad-based prosperity.

Michael Gurau is a venture capitalist with CEI Community Ventures and is also president of Clear Innovation Partners, a company formed to catalyze and accelerate regional innovation clusters.

Indeed, for the greater part of the last decade, legislative proposals for patent reform have languished as competing industry and trade group interests fought to a standstill. Meanwhile, the Supreme Court and the executive branch have taken up the mantle of reform, producing significant improvement in such areas as standards for evaluating patentability, remedies for patent infringement, and numerous administrative reforms to improve both the timeliness and quality of review.

Yet there is important patent reform that only the legislature can implement. Thus, last week’s 95-5 Senate vote in favor of the America Invents Act represents something of a watershed. Indeed, given the background history of fierce clashes between interest groups, and the everyday difficulties of achieving bipartisan agreement, the Senate action deserves commendation irrespective of what ultimately happens in the House.

There is no question that our patent system needs further improvement. It currently takes at least 34 months on average for the Patent and Trademark Office, or PTO, to finalize a patent application. The average wait is even greater (more than 40 months) if one counts the large number of applications that are resubmitted one or more times. As a consequence, a backlog of more than 700,000 patent applications currently awaits review. These long waits create uncertainty for inventors, investors, and entrepreneurs, dampening innovation. What’s more, although the PTO is entirely supported by applicant fees, it does not even possess fee-setting authority. No self-supporting institution that lacks the ability to charge for the costs it incurs can possibly perform efficiently.

The America Invents Act, if taken up by the House of Representatives and signed by the president, would address these problems in several ways. First and most significantly, it would confer fee-setting authority upon the Patent and Trademark Office. As I have discussed at length elsewhere, with fee-setting authority of the sort given in the Senate bill (and a related guarantee that fees won’t be diverted by Congress to other uses, as has happened repeatedly in the past), the PTO could much more readily work to create processing times that were suitable both for applicants and for potential competitors. The PTO could also, if it so desired, use this authority to create incentives for applicants to file well-drafted applications that could be processed in one cycle without having to be resubmitted, thereby further reducing administrative delays.

Another significant (though contested) feature of the legislation is its enactment of a first-to file system. Currently, unlike every other major global economy, the United States operates under a “first-to-invent” system. At least in theory, the U.S. approach therefore accords patent rights to whomever can prove they first invented a product or technology. The operative word is theory, however, as the actual impact of the first-to-invent system is far from clear. So-called interference disputes—that is, the length and expensive administrative proceedings in which first and second patent filers settle who was first to invent—account for only about .01 percent of cases. Meanwhile, the asymmetry between the U.S. system and that of other major economies creates problems both for applicants who file globally and for PTO efforts to reuse the work product of other patent offices.

In response to data regarding the negligible role of interferences, proponents of the status quo (typically small inventors) raise two reasonable points. First, ordinary patent prosecutions, not interferences, are the arena where a first-to-invent system matters. In the prosecution context, the U.S. system allows an applicant to argue that third-party disclosures of invention that arise after the date of invention, but before the date of filing, should not be used to reject the patent application. As a recent study by Dennis Crouch documents, however, attempts by applicants to assert a pre-filing invention date arise in only 0.1 percent of cases. Moreover, small inventors appear to assert pre-filing invention dates “less often and less successfully than large, publicly traded companies.” Thus, at least in the prosecution context, the first-to-invent system appears to disadvantage precisely those small inventors who are lobbying to keep it.

Second, some critics assert that empirical studies of current interference proceedings cannot necessarily predict what would happen in the counterfactual situation of a shift to a first-to-file system. Perhaps in that context, critics of reform argue, large firms that no longer feared an interference challenge would race to the patent office and file applications, including applications based on information appropriated from small inventors. That scenario seems unlikely, however. The current interference system would hardly seem to present much of a barrier to racing activity on the part of large firms. Additionally, the Senate bill bars those who appropriate information from others from using that information to file patents or even to create prior art.

In addition to fee-setting authority and first-to-file language, the Senate bill also contains improved administrative alternatives to costly and inefficient litigation over the validity of issued patents. Although these improvements may not go as far as one might like, they are certainly a step forward.

The incremental improvements driven by the judicial and executive branches in the last few years must be accompanied by legislation that addresses what only the legislature can do. The Senate bill is thus a worthy and necessary endeavor.

Arti K. Rai is the Elvin R. Latty Professor of Law at Duke Law School. From 2009–2010, she served as the administrator for external affairs at the USPTO. This article represents her views only.

At the forum, the president and his White House team engaged with small business owners and entrepreneurs to discuss how bottom-up, place-based innovation and small business development policies are helping to reinvent American industry. In particular, the president praised the Rust Belt for its emblematic endeavors to reinvent itself as the Tech Belt. “Each time I come here, you’ve done more to retool and reinvent yourself,” the president said. “And that is something [Cleveland] is doing right now. It’s reinventing itself.”

At the event, cabinet members hosted break-out sessions on the various building blocks of innovation-led economic growth, including entrepreneurship, access to capital, smart tax policy, workforce development, export assistance, and clean energy. The president also commented on how one of his new signature public-private partnerships, Startup America, is making job opportunities more accessible by helping bring together different types of public and private innovation participants to help cohere nascent networks of knowledge creation and technology commercialization. “[It] doesn’t cost the U.S. Treasury anything to set up but may make all the difference in terms of success,” the president said.

One of these innovation building blocks, as we’ve long argued at Science Progress, is a concerted federal investment in the formation of bottom-up, place-based innovation clusters. “We’re all familiar with clusters like Silicon Valley,” said the president.

When you get a group of people together, and industries together, and institutions like universities together around particular industries, then the synergies that develop from all those different facets coming together can make the whole greater than the sum of its parts.

Last year, Science Progress and the Center for American Progress published an in-depth case study that showed the real impact that federal investments have on crystallizing regional innovation clusters comprised of small business incubators, universities, suppliers, manufacturers, and other innovation participants. The report talks about the important role that federal programs have in facilitating collaboration and leveraging investment from both the public and private sectors to create jobs in emerging industries.

President Obama spoke about the need to forge better connections between businesses and colleges, and the importance of workforce development in ensuring our businesses remain cutting-edge and competitive.

When it comes to workforce development, one of the most important things that we’ve all learned is how important it is to get businesses in early with the universities and the community colleges—a hugely underutilized resource—to develop the actual training program so that young people have the confidence if they go through this training program, they’ve got a job; businesses have confidence that if they hire these young people who went through this training program, they are trained for those jobs.

The collaboration that takes place between researchers, manufacturers, and investors in these clusters, or “entrepreneurial ecosystems,” is a critical ingredient for technology development and commercialization. Using liquid crystal displays as an example, President Obama noted the importance of fostering collaboration between researchers in universities, and local investors and entrepreneurs who can help bring their research to market. The Liquid Crystal Institute at Kent State University was a critical source of basic and applied research which fed the creation of the Flex Matters cluster, a fast growing global epicenter for the research and manufacturing of flexible electronics.

But without help from a U.S. Small Business Administration contract, as well as assistance from a local innovation cluster development organization called NorTech, that research may never have made it into the hands of investors, entrepreneurs, and manufacturers who could use it to create new technologies, companies, and jobs. The president recognized Kent Displays, one of the first manufacturers to emerge from the nascent innovation cluster, as a pioneer in advanced manufacturing and as a kernel for the now growing technology cluster in the Midwestern Tech Belt.

At the core of the conference was a notion that intelligent investment will lead the United States out of the economic recession.  But the president made the distinction between vital investments in innovation that we need to win the future, and other spending that we must scale back.

We’ve also got to get our fiscal house in order,” the president said, “and that’s why I’ve put forth a budget that includes a five-year spending freeze that will help reduce the deficit by $400 billion and will get annual domestic spending down to the lowest levels since Dwight Eisenhower. I want to work with Democrats and Republicans to make even bigger dents in our deficits—find new savings, cut excessive spending wherever it exists. At the same time, we can’t sacrifice investments in our future.

Indeed, Science Progress has done a lot to show how federal investments in research, development, and commercialization of new technologies are critical for sustaining long-term economic growth and competitiveness. It has been clear since his State of the Union address that the president agrees. Investments in cutting-edge research, workforce training, and next-generation transportation and communication infrastructure are key components of his Strategy for American Innovation.

I was just with a group of young people, and one young man who is in the sciences pointed out that he’s concerned that his professors are having more and more trouble getting grants because our R&D budgets in this country have been declining as a relative share of GDP. We’ve decided we’ve got to increase that back up. And that’s part of our budget—investing in innovation.

And there’s reason to hope that the president will put his money where his mouth is when the budget debates between House and Senate get tough. President Obama has shown he’s hustling to make the lofty goals in his Strategy for American Innovation into political reality. In his speech at Cleveland State, he even added a new word to his oft-repeated recipe for winning the future: “If we want to win the future, we’re going to have to out-innovate, out-educate, out-build, and yes, we are going to have to out-hustle the rest of the world.”

Sean Pool is Assistant Editor for Science Progress. Elaine Sedenberg is an Intern at Science Progress and an undergraduate in honors biochemistry at the University of Texas at Austin.

The commission has moved quickly since its inception last July to produce a farsighted report on the opportunities and ethics of synthetic biology and emerging technologies in December. In forming the commission the president asked experts to:

• “Review the developing field of synthetic biology
• “Consider the potential medical, environmental, security, and other benefits as well as potential health, security, or other risks
• “Identify appropriate ethical boundaries to maximize public benefits and minimize risks”

Speakers were Nelson Michael, M.D., Ph.D., a member of the commission and director of the Division of Retrovirology at the Walter Reed Army Institute of Research; and Valerie Bonham, J.D., executive director of the commission.

Because of the still emerging nature of this technology, Dr. Michael said, the commission had the “rare and exceptional opportunity to be forward looking instead of reactive,” to “take a deep breath and have a public dialogue.” In other words, it is better to begin to identify where future opportunities and threats may lie as new industries develop rather than to try to address them once entrenched interests have taken root.

Synthetic biology is the application of engineering principles to organisms and biological systems. The president’s formation of the commission was in response to last year’s announcement that Craig C. Venter had rebooted a single celled organism with an entirely synthetic genome. Dr. Michael pointed out that this process cost roughly $40 million and occupied a whole research team, but the feat caught the world by surprise and triggered a national debate.

There is a debate about whether Venter’s achievement specifically—and synthetic biology more broadly—are revolutionary in science, or merely an evolutionary extension of molecular biology and genetic engineering. According to Dr. Michael, “molecular biology was intended to ask questions and interrogate biological systems, whereas synthetic biology takes a different approach…While [it] sits on the shoulders of those that came before,” what is unique about synthetic biology, he continued, is that “synthetic biology seeks to make useful things.”

What kinds of useful things? Some of most promising near-term applications of the technology include more effective and efficient production of vaccines, environmentally friendly biofuels, and improved pharmaceuticals. For example, the chemical Artemisinin is a powerful antimalarial that currently must be extracted laboriously and expensively from the sweet wormwood plant. The hope is that pharmaceutical companies could use synthetic biology to engineer microbes to produce large amounts of this chemical in a form that is easy to refine, leading to a more affordable production technique for the life-saving drug. Similarly, researchers working in energy are hoping to use synthetic biology to engineer fuels from sunlight at the Department of Energy’s energy innovation hub at Lawrence Livermore. Using synthetic biology, researchers are experimenting with the genomes of algae species to produce high quantities of lipids for easy conversion to fuel.

But these possibilities are just the beginning. As with any emerging field of technology, where it will lead is difficult to predict. In one famous example of innovators failing to see the long-term implications of their technologies, Thomas John Watson Sr., the president of IBM Corporation in the 1950s supposedly said he believed there would be a world market for “maybe five computers.” Today there are about a billion computers worldwide. While it is unclear whether Thomas John Watson Sr. ever actually uttered those words, we do know that IBM Corporation suffered for its myopic focus on hardware and for failing to predict the vast and growing market for software that their innovation would create. If there is anything we know about technological innovation, it is that it is unpredictable.

Nonetheless, there are some common questions that we should ask of any new field, even if we do not know what it will look like in five, 10, or 50 years. The commission members and staff at the event on Thursday also noted that the report has implications for assessment of all emerging technologies. The report advocates that for synthetic biology and any emergent field of technology, policy needs to be guided by the principles of public beneficence, responsible stewardship, intellectual freedom and responsibility, democratic deliberation, and justice and fairness.

In investigating these principles for policy on synthetic biology, the commission engaged with leaders from the science, faith-based, legal, and ethics communities to evaluate potential risks, and created 18 principles for maximizing the public good. They also took a number of public comments, according to the commission’s executive director, Valerie H. Bonham, to ensure that they gathered “opinions from broad swath of society, on both technical and scientific issues and ethical concerns.” The results are a sensible balance between the “let science rip” approach—for example, minimal regulation to allow maximum progress, but also maximum risks—and an extremely measured regulatory approach that minimizes risk but also slows progress.

The president’s commission’s active engagement with stakeholders should serve as a model for the assessment of risks and benefits of new technologies.

You can view the event video and summary here, and you can download the commission’s report here.

Jonathan Moreno, Ph.D., is the Editor-In-Chief of Science Progress and a Senior Fellow at the Center for American Progress. Sean Pool is the Assistant Editor of Science Progress.

Biological production of chemicals

Three biologically mediated methods of chemical production are currently under development. The first is “biocatalysis,” or the use of purified enzymes to catalyze, or accelerate, chemical reactions. This approach offers several benefits: enzymes make precise changes to target molecules and yield only biologically active products; they function optimally at body temperature and thus require less energy than standard catalysts; and they are environmentally friendly because they employ renewable starting materials and produce fewer toxic byproducts.  Given these advantages, the chemical and pharmaceutical industries will make greater use of biocatalysis in the coming years. When this technology becomes widespread, however, enzymes called halogenases might be misused to produce highly toxic chemicals containing chlorine or fluorine, including known chemical warfare agents.

A second biologically mediated production method involves inserting clusters of animal or plant genes into bacteria in order to coax them into producing medically useful compounds. This technique, known as “metabolic engineering,” or “synthetic biology,” has the potential to mass-produce molecules that are difficult and costly to extract from their natural sources and are too complex to synthesize chemically on an industrial scale. The antimalarial drug artemisinin, for example, is currently extracted from the sweet wormwood plant. But researchers at the University of California, Berkeley, have used the genes coding for the biosynthesis of a closely related compound to produce artemisinin in bacteria. Synthetic biology is also central to efforts to manufacture ethanol from cellulosic material such as cornstalks and to make diesel fuel from genetically modified algae.  Nevertheless, synthetic biology techniques might be misused to mass-produce highly poisonous natural products such as saxitoxin, which is made by a species of marine algae responsible for the toxic algal blooms called “red tides.” During the 1960s, the CIA sought a supply of saxitoxin to use in suicide pills for captured spies. In order to acquire the deadly poison, the agency secretly spent millions of dollars to harvest tons of clams contaminated by a red tide and process them to extract a few grams of pure saxitoxin. Using synthetic biology techniques, it might be possible to isolate the algal genes responsible for the biosynthesis of saxitoxin and transfer them to bacteria, which would then produce the toxin relatively cheaply. If this scenario were realized, saxitoxin might become a serious chemical warfare threat.

A third biologically mediated process, known as “biopharming,” involves the production of protein-based pharmaceuticals such as vaccines, microbicides, and therapeutic antibodies in transgenic plants and animals. Foreign genes coding for the therapeutic proteins are inserted into crops such as corn and tomatoes, which are then harvested and the desired proteins extracted. Biopharming has a potential dark side, however, because it might be used to mass-produce toxic proteins for hostile purposes.

Chemical production of biological molecules

In parallel with the use of biological processes to manufacture drugs and other chemicals, companies are using chemical methods to synthesize biological molecules such as DNA and proteins from scratch. The invention of advanced DNA synthesizers, for example, has made it possible to construct genes and even entire microbial genomes by stringing together the four chemical units of DNA in any desired sequence. Over the past decade, scientists have recreated several pathogenic viruses by chemical means, including poliovirus, a SARS-like virus, and the formerly extinct “Spanish” strain of influenza, which was responsible for a global pandemic in 1918-19 that killed as many as 50 million people worldwide.

The size and accuracy of the DNA molecules that be created with automated chemical synthesis is increasing and the cost is declining. Moreover, commercial suppliers around the world now produce custom DNA sequences to order. A customer simply enters the desired sequence on an Internet web site, provides a credit card number, and a few weeks later receives a vial in the mail containing the requested DNA molecules in a biologically usable form. The synthesized sequence can then be copied and used for various scientific or industrial purposes. In October 2010, the U.S. government, fearing that outlaw states or sophisticated terrorists might order DNA coding for dangerous viruses and protein toxins of bioterrorism concern, issued voluntary guidelines for the gene-synthesis industry that call for the screening of customers and DNA sequence orders.

Chemical methods are also being applied to produce biological molecules called  peptides: short protein chains made up of 20 possible amino-acid building blocks. Worldwide, pharmaceutical companies are marketing about 40 peptide-based drugs, including the anti-HIV therapeutic Fuzeon and the potent painkiller Prialt, and hundreds more are under development. The human body also produces myriad biologically active peptides called “bioregulators” that control temperature, blood pressure, sleep, immunity, and other vital physiological functions. Although at low concentrations bioregulators are essential for life, they can be toxic at higher levels or if their molecular structure is modified. For example, a bioactive peptide called Substance P, consisting of a chain of 11 amino acids, serves as a messenger chemical in the central and peripheral nervous systems. In 1999, scientists at the Swedish Defense Research Establishment administered low doses of Substance P to guinea pigs the form of an aerosol, an airborne suspension of microscopic particles that can be absorbed in the deep region of the lungs. Under these circumstances, the peptide was acutely toxic, leading the Swedish researchers to warn that Substance P was “a possible future warfare agent.”

Once a toxic peptide has been identified, it could be manufactured in large quantities by chemical means. Peptide synthesis is now a thriving commercial business involving some 80 companies worldwide. These firms produce peptides to order according to customer specifications and in quantities ranging from a few milligrams for research use to thousands of kilograms for the pharmaceutical industry. Although natural peptides are generally unstable in aerosol form and are rapidly broken down in the body, limiting their potential utility as lethal or incapacitating warfare agents, structural variants of these molecules might be developed that resist rapid degradation and can enter the brain from the bloodstream. In addition, engineered nanoparticles might be used to facilitate the delivery of bioactive peptides in aerosol form or to target specific body tissues or organs.

Gaps in the disarmament regime

In 1925, the League of Nations (the forerunner to the United Nations) negotiated the Geneva Protocol prohibiting the use in war of toxic chemicals and bacteriological agents, but not restricting their production and stockpiling. In 1971, seeking to extend the ban to cover development and production, the UN disarmament conference in Geneva agreed to separate biological from chemical weapons because the former had been used only rarely in warfare and were assessed to have little military utility, while the latter had been employed extensively in World War I and other conflicts. The culmination of this negotiating strategy was two separate treaties: the 1972 Biological and Toxin Weapons Convention (BWC) and, two decades later, the 1993 Chemical Weapons Convention (CWC).

Although the two accords each prohibit the development, production, and possession of an entire category of arms, they have distinct provisions and sets of member states. The CWC, for example, has extensive verification measures, whereas the BWC has none. Because both treaties ban the acquisition for hostile purposes of toxic chemicals of biological origin, such as natural toxins and bioregulators, one would expect that the controls in this area would be particularly effective. In practice, however, the overlap has allowed the members of each treaty to deemphasize this category of agents, in the expectation that the other treaty will cover them. As a result, as the British analyst Julian Perry Robinson has pointed out, the overlap between the BWC and the CWC with respect to toxins and bioregulators “risks becoming a gulf into which things disappear.”

Today convergence is creating three gaps in the biological and chemical disarmament regime. The first concerns the biological production of toxic chemicals. At present, the CWC verification system does not cover facilities that make treaty-relevant chemicals by biologically mediated processes, such as biocatalysis or synthetic biology. Although the use of such methods for the large-scale production of chemical warfare agents is not economically viable, that situation could well change as the techniques become cheaper and more widespread.

The second gap in the arms control regime concerns the chemical synthesis of pathogenic viruses from scratch. Although the BWC prohibits the production of viruses for hostile purposes, the treaty does not have any formal mechanisms to verify compliance. Conversely, the CWC has extensive verification measures but does not ban the chemical synthesis of viruses because they do not cause harm through “toxic effects on living systems.” As a result, there is no verification in this area.

The third gap in the regime concerns the synthesis of bioactive peptides like Substance P. Such production is not subject to routine verification under the CWC because no peptides are listed in the treaty’s Schedules of Chemicals, which determine which production facilities must be declared and opened for inspection. At the same time, bioactive peptides are manufactured in quantities too small to be covered by a second CWC verification mechanism covering “other chemical production facilities” (OCPFs) that do not currently produce scheduled chemicals but have the potential to do so. The OCPF regime is based on quantitative production thresholds rather than on specific chemicals.

If nothing is done to close these three gaps, it may become possible for countries to exploit convergent technologies to break out of the BWC and the CWC without risk of detection. In sum, as biological and chemical production methods continue to converge, the traditional strategy of pursuing biological and chemical arms control on separate tracks has become obsolete, and the two treaties will have to become better integrated.

Policy recommendations

Finding concrete ways to prevent the misuse of convergent biological and chemical technologies for weapons purposes will require innovative thinking and political will on the part of the United States and other like-minded countries. The following three steps would help to address the problem of convergence:

1. The international implementing body for the CWC, the Organization for the Prohibition of Chemical Weapons, or OPCW, in The Hague, should convene a panel of scientific and technical experts to assess the biologically mediated production of chemical warfare agents and their precursors, including its feasibility and likely timeframe, to help policymakers determine the level of attention this issue deserves.
2. The member states of the CWC should add a toxic peptide such as Substance P to the Schedules of Chemicals subject to routine verification, using the technical-change procedure provided in the treaty. At present, the CWC Schedules include only two toxins (ricin and saxitoxin) and no bioregulators. Because of its known toxicity, Substance P would be a good placeholder to represent the entire class of bioactive peptides.
3. To better coordinate the implementation of the two treaties in response to convergence, the member states of the CWC should establish a liaison position in the Verification Division of the OPCW for a representative from the BWC Implementation Support Unit, or ISU, in Geneva. Although the ISU currently has only three full-time staff members, the upcoming five-year review conference of the BWC in December 2011 is expected to expand the size of the unit, in which case it may be possible to send an ISU representative to The Hague.

In conclusion, the growing convergence of biological and chemical production methods is outstripping the ability of the CWC and the BWC to prevent the misuse of these technologies for hostile purposes. Although the risks have not yet fully materialized, the rapid pace of technological progress in the biological and chemical fields and the political hurdles facing efforts to strengthen the two treaties suggest that the time to begin is now.

Jonathan B. Tucker, Ph.D., is a policy analyst specializing in biological and chemical arms control and nonproliferation issues. He is the author of Scourge: The Once and Future Threat of Smallpox and War of Nerves: Chemical Warfare from World War I to Al-Qaeda, and the editor of Toxic Terror: Assessing Terrorist Use of Chemical and Biological Weapons. For a more technical discussion of this issue, see: Jonathan B. Tucker, “The convergence of biology and chemistry: implications for arms control verification,” Bulletin of the Atomic Scientists, vol. 66, no. 6 (November/December 2010), pp. 56-66.



But what is the correspondingly simple mantra for the progressive economic philosophy? That is a harder question to answer, even for progressives. But after last night’s address we now have a strong candidate: innovation and competitiveness.

The president mentioned innovation and competitiveness numerous times throughout his address Tuesday, and outlined with surprising clarity a strategy to invest in all of its building blocks: science, education, workforce training, infrastructure, manufacturing, small businesses, access to domestic and export markets, and incentives to spur private capital investment.

This is encouraging news for us at Science Progress, since we have been working to advance the notion of the innovation-driven economy for years. Our unpublished prospectus—the document that, like a constitution, launched our little program—begins with the statement, “An appreciation for the importance of innovation must be central to any progressive philosophy.” Our mission statement from 2007 talks about the important role that science (and by extension, innovation) has on driving economic growth [emphasis added]:

“Science Progress proceeds from the propositions that scientific inquiry is among the finest expressions of human excellence, that it is a crucial source of human flourishing, a critical engine of economic growth, and must be dedicated to the common good.”

In a more recent article, we pointed out the long-simmering but still rarely discussed consensus that innovation is what drives modern economic growth, and how the United States is falling behind in educating our students with the skills to succeed in the 21st century innovation economy. Obama echoed these words when he said,

“Maintaining our leadership in research and technology is crucial to America’s success. But if we want to win the future—if we want innovation to produce jobs in America and not overseas—then we also have to win the race to educate our kids.”

In another article, we talked about how innovation and competitiveness are inseparable. An economy that does not innovate cannot compete in the long run. We pointed out how technological innovation, broadly speaking, had been responsible for between half and three-quarters of all economic growth over the 20th century. To this, the president pointed out that,

“In America, innovation doesn’t just change our lives. It is how we make our living.”

In that article we also observed how the private sector alone tends to under-invest in innovation because of the positive externalities of knowledge spillover. Much of the benefit of innovation is invisible to the market because of the unexpected ways the inventions of today influence the development of the technologies of tomorrow. This necessitates the intervention of public policy.

Today, as in the past, public policy has a strong role to play in setting the course for innovation-driven economic growth, job creation, and competitiveness. The federal government must set goals that signal to investors that there are lucrative opportunities awaiting those who invent and commercialize technologies that help solve social, medical, and environmental problems. But at the same time, we should not pick winners, but must instead let businesses in the private sector compete to commercialize only the best and most cost-effective new technologies and production methods. Again, the president echoed these sentiments in his State of the Union speech:

“The first step in winning the future is encouraging American innovation. None of us can predict with certainty what the next big industry will be or where the new jobs will come from. Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution. What we can do—what America does better than anyone else—is spark the creativity and imagination of our people. We’re the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook…

Our free enterprise system is what drives innovation. But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That’s what planted the seeds for the Internet. That’s what helped make possible things like computer chips and GPS. Just think of all the good jobs—from manufacturing to retail—that have come from these breakthroughs.”

In our most recent report, “Rising to the Challenge: A Progressive U.S. Approach to China’s Innovation and Competitiveness Policies,” we noted how China’s growing prowess in science, education, research, information technology, and infrastructure are all contributing to the emergence of a Chinese innovation economy. “China,” the president said on Tuesday, is

“educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. Just recently, China became the home to the world’s largest private solar research facility, and the world’s fastest computer…[they are] building faster trains and newer airports.”

Indeed, China is also home to the world’s largest hydroelectric dam, and the world’s fastest bullet train. The number of published scientific articles in China recently surpassed that of Germany and Japan to take the number two spot behind the United States, and is on course to surpass even that within the decade.

“This is our generation’s Sputnik moment,” the president said, implicitly comparing our lack of investment in a space program, research, and education in an era of Soviet competition then to our lack of an innovation-driven competitiveness strategy in an era of global competition now.

On the whole, the president’s words on Tuesday very clearly pointed to one realization: we live in an innovation-driven global economy. The sooner our government becomes savvy to this reality, the sooner we can start to systemically accelerate our progress toward fulfilling our national priorities. Our nation needs a cross-cutting and comprehensive innovation agenda to shape federal policies toward maximizing the potential for innovation in all sectors.

And yes, the president pointed out in his address, a key part of achieving our goals will require us to rein in our deficits. But, as the president put it on Tuesday,

“Gutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact.”

The president has talked about Innovation before, noting that ”innovation is in our DNA.” But during Tuesday’s speech we glimpsed how innovation has the potential to become a new intellectual architecture underpinning progressive thought. Obama’s speech on Tuesday elevated innovation from just a nice sounding word that corporate CEO’s sometimes throw around, to a core element of the progressive strategy for winning the future.

Such a strategy rests on the idea that every dollar that improves a child’s abilities in math; or helps a worker obtain new skills in technology, science, engineering or business; or helps a small business find the capital to invest in new manufacturing equipment to make its product cheaper, faster, or more reliably; or connects a brilliant university researcher to an investor willing to support commercialization or his potential breakthrough; or helps a technology company market a new clean energy product overseas will pay us back down the road in innovation, job creation, tax revenue, and competitive economic growth.

“We know what it takes to compete for the jobs and industries of our time,” the president said. “We need to out-innovate, out-educate, and out-build the rest of the world.”

His words suggest that “innovation,” in its broad sense, has the potential to be as synonymous with progressivism as “tax cuts, less government” are with conservatism. After 30 years witnessing the shortcomings of trickle-down economics, it’s about time we shed those old ideas. After all, as the president said in his concluding remarks, “that’s what Americans have done for over 200 years: reinvented ourselves.”

Ed Paisley is the Vice President of Editorial at the Center for American Progress and Editorial Director for Science Progress, Sean Pool is the Assistant Editor for Science Progress.

The days of China as the low-cost, low-tech manufacturer of the rest of the world’s high-tech innovations may soon be coming to a close. China now leads in the production of not just low-end manufactured consumer goods but also some high-tech devices, many of which were developed in the United States. This is making it harder and harder for even our high-tech companies to create jobs and compete in lucrative export markets.

The goals President Barack Obama presented in last night’s State of the Union address for U.S. competitiveness vis-à-vis China are right on the mark. He acknowledged the fundamental role innovation plays in driving economic growth when he said, “In America, innovation doesn’t just change our lives. It is how we make our living. … maintaining our leadership in research and technology is crucial to America’s success.”

But the president also recognized the strides China has made in investing in their innovation-driven future. “China,” he said, is “educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. … and China is building faster trains and newer airports.”

These statements echo the findings of our recent report, “Rising to the Challenge: A Progressive U.S. Approach to China’s Innovation and Competitiveness Policies,” and so did his conclusion. “If we want to win the future,” he said, “if we want innovation to produce jobs in America and not overseas … we need to out-innovate, out-educate, and out-build the rest of the world.”

The president is right. Staying competitive means investing in the building blocks of an innovation-driven economy, from science and math education to university research, including partnerships with small businesses, investors, and manufacturers who create jobs by building markets for new technology. Accomplishing these goals, however, will require a well-crafted and comprehensive policy vision. As the president and the new Congress work together to build a new foundation for economic growth, here are the top 10 things they can do to ensure our world-class innovation engine continues to run smoothly.

Invest in future talent through strong science, technology, engineering, and math education programs and workforce training

Science and math expertise are critical to sustaining an innovative economy. But as the president said last night, “the quality of our math and science education lags behind many other nations.” Students in China consistently score higher on standardized math and science tests. Furthermore, 59 percent of Chinese students major in fields related to science or engineering, as opposed to only 32 percent in the United States. To remedy this disparity, we need to add 10,000 new STEM teachers each year and strengthen the skills of the 250,000 current STEM teachers by implementing the programs in the president’s Educate to Innovate agenda. The president also needs to ensure that reform of No Child Left Behind includes a strong emphasis on science and math training.

Create new opportunities and improve educational quality for working learners

Only 34 percent of working learners who return to college actually complete a degree after six years of study. Creating opportunities for working learners is critical to giving them the necessary skills to be competitive in emerging fields. To keep our workforce educated and competitive, we need to build bridges from STEM education programs and academia by revising and revitalizing the Workforce Investment Act of 1998, which is up for reauthorization.

Invest in seizing the clean energy opportunity

U.S. public investment in renewable energy has fallen from $9 billion in inflation-adjusted dollars in 1980 to $3.2 billion in 2006. Meanwhile, by some estimates, China spends as much as $12 billion monthly on new energy technologies and export expansion. Six of the top 10 global photovoltaic manufacturers are now located in China, accounting for roughly one-quarter of global production.

The United States needs to get back in the race to seize the vast economic opportunity embodied in clean energy. From cleaner air to increased energy security and price stability; to more job creation; to lower heating, lighting, and transportation bills; clean energy innovation is a win-win-win for those countries willing to invest in it.

To that end, we need to invest in a three-tiered approach of expanding markets, harnessing private financial capital, and building the infrastructure needed to seize the job-creating, economic benefits of clean energy. More concretely, we need to put a price on pollution to help clean energy become the profitable kind of energy; set a clean energy standard to signal long-term market stability to investors; and reform the outdated regulatory system that governs our aging national transmission grid so that a new and smarter grid can bring clean energy and efficiency savings to every household in the country.

Focus federal investments in technology innovation on the critical valley of death gap

Part of what China has done to help leapfrog the technological ladder is to double down in not just research and development but critical commercial activities where new technologies enter the market and wean themselves off of government funding. Programs funded by the Recovery Act of 2009, such as the Advanced Research Projects Agency-Energy, or ARPA-E, and the regional innovation cluster grant competition are already helping move technologies from the university to the assembly line. We need more federal attention for this kind of activity in the coming years.

Harness private capital flows toward innovative, job-creating small businesses

The pool of venture capital for innovative new technologies has decreased in recent years, making it difficult for small businesses with new technologies to grow and bring their products to market. In this financial environment, VC investors are choosing to take less and less risk in their investments, which deprives promising young technologies of the capital they need to get off the ground.

What’s more, programs such as the Small Business Innovation Research grants, Small Business Technology Transfer grants, Technology Innovation Program grants, and others are poorly coordinated to ensure maximum effectiveness of their already small program budgets. And for clean energy, we need a green bank to extend credit enhancements to financers for investments in clean energy and other technologies of national priority such as information technology and advanced manufacturing.

Policymakers need to turn their attention to how we can lure private capital toward the job-creating and innovative small businesses that drive technology commercialization and make up the backbone of our economy.

Increase our focus on domestic manufacturing capabilities

Manufacturing is an essential component of a successful innovation and competitiveness strategy. Not only do high-tech goods account for $231 billion in export earnings, or roughly a quarter of our overall manufactured exports, but manufacturing is a key element of successful technology innovation.

Unfortunately our balance of trade in high-tech manufactured goods has declined from a $60 billion surplus in 1990 to a deficit of $60 billion in recent years. To stay competitive with China we need to make the technologies we invent here, rather than letting China take all the benefits of incremental improvements and cost-reducing assembly line innovation.

As a nation, we need to commit to the manufacturing of high-end products in the United States, by strengthening federal investment in the Manufacturing Extension Partnership Program and by expanding and extending the 48C advanced energy manufacturing tax credit program to give it a long-lived lifespan and predictable sunset.

Reform immigration laws to encourage the immigration of skilled foreigners

Foreign nationals comprise two-thirds of Ph.D. students and are responsible for founding 50 percent of Silicon Valley startup companies. Yet our immigration laws make it difficult for immigrants to transition from education to work, and to move from job to job in the innovation economy, drastically reducing the potential that these skilled workers have to contribute to growth.

We need to streamline visa processing for international students, make it easier for students graduating with degrees in STEM fields to remain in the United States, make the cap on highly-skilled visas more flexible, and create easier paths to permanent residence for highly skilled workers with graduate-level degrees in these fields. We also need to ensure those undocumented immigrants raised in the United States and now in college get the chance to become citizens and contribute to the nation they call their own.

Invest in regional races to the top and clustered industry growth

Study after study shows that regional innovation clusters are an efficient means of facilitating industry collaboration and synergy. Chinese innovation and economic planners are also well aware of the importance of clustering by encouraging Chinese companies in similar industries to clump together to improve their access to incremental innovation, share supply chains, and boost the competitiveness of their workforces.

The America COMPETES Act signed by the president late last year unfortunately did not include language passed by the House of Representatives to support regional innovation cluster grant programs. We need to establish far-reaching programs like the Energy Efficiency Regional Innovation Cluster grant that align national innovation priorities with regional economic development plans. One way to do this would be for Congress to take back up the Energy Innovation Hubs Authorization Act of 2010, which would provide $860 million in grants over five years to encourage the R&D and commercialization of critical clean energy technologies.

Pass legislation to spur long-term innovation

While the America COMPETES Act is a solid stepping stone, the passage of three additional pieces of legislation is critical to bolstering the United States’ long-term innovation strategy. The Department of Energy Office of Science Authorization Act of 2010, the ARPA-E Reauthorization Act of 2010, and the Energy Innovation Hubs Authorization Act of 2010 would collectively work not only to fund additional groundbreaking research but also to find new commercial applications and help bring emerging technologies to market.

Establish metrics for competitiveness by which to measure progress, and create a coordinated interagency effort to address our innovation and competitiveness challenges

In “A Focus on Competitiveness,” CAP outlines a few mechanisms that should be put in place to help coordinate the kind of cross-cutting, multi-agency collaboration needed to implement a real innovation and competitiveness agenda. Metrics and oversight are needed to promote collaboration of otherwise uncoordinated activities across many federal agencies. To this end we suggest a Quadrennial Competitiveness Assessment, a Biannual Presidential Competitiveness Strategy report, and an Interagency Competitiveness Taskforce to point the United States in the right direction.

Conclusion

With a strong contingency of well-trained workers, the proper infrastructure for innovation, and a government dedicated to investing in research for the next great technological breakthroughs, the United States would be properly equipped to stay competitive in a future of booming growth in China and elsewhere. We can and must rethink, retool, and reinvest in our nation’s innovation potential if we are to succeed. As the president said last night, “that’s what Americans have done for over 200 years: reinvented ourselves.”

Sean Pool is a co-author (along with Kate Gordon, Susan Lyon, and Ed Paisley) of the recent report from the Center for American Progress titled “Rising to the Challenge: A Progressive U.S. Approach to China’s Innovation and Competitiveness Policies.” David Murdter is an Intern in the Online Communications department at the Center. This article is cross-posted on the Center for American Progress website.

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It’s hard to imagine a meaningful response to President Obama’s “Sputnik moment” that does not involve the nation’s research universities. With a history measured in centuries rather than years or decades, combined endowments in excess of $250 billion, Nobel prize-winning faculty, and a generation of students as intellectually curious and socially committed as any in history, research universities are among the crown jewels of our society. The demise of many leading private research facilities further underscores the importance of universities in igniting a national innovation agenda.  In the words of Stanford’s President John Hennessy, “If the universities don’t work on the world’s biggest problems, who will?”

Since the publication three months ago of our book Engines of Innovation—The Entrepreneurial University in the 21st Century, readers and reviewers have agreed that universities have no choice but to assume leadership in what some are calling a “national reset.” As is often the case, the real challenge is how to make it happen. Although one size never fits all, we want to suggest some basic principles and make some recommendations to make universities more innovative and as a result increase their impact on the world’s biggest problems.

First, we want to assert a core belief: Universities are about problem solving—the bigger, the better.  They encourage independent and unfettered thinking. They have stood the test of time because of the unique position they occupy somewhere between government, religion, and private enterprise. Increasing the impact of universities involves building on their unique culture, which is particularly well suited to foster innovation.

A corollary to this belief is that commercialization, in and of itself, is not central to the mission of most universities. Private corporations and NGO’s that respond quickly to markets, customers, and opportunities are much better suited to turn new knowledge into viable enterprises. Relationships between universities and the private and civic sector are important because they help academics determine what problems to work on, and they increase the impact of the work that is being done. The new companies, jobs, and wealth created by relationships between academia and the private sector are important by-products of the academic enterprise. If these relationships help universities become better problem solvers, the rest will take care of itself.

We are convinced that culture is more important than structure in encouraging innovation.  Encouraging problem-centered, multidisciplinary teams that can quickly come together and, as appropriate, come apart, is one important element of an innovation culture.  Tolerating, and even celebrating, failure is another. Examining the reward structure, especially as it applies to young professors, is also important. Welcoming innovators and entrepreneurs as speakers and teachers has an enormous and often unpredictable impact on university culture. Ultimately we are talking about an environment that gives permission and encouragement to innovate and then gets out of the way.

High-impact innovation requires that universities focus on big problems. This is what best furthers the university’s research and teaching mission and is most consistent with its core competencies. It is also what captures the imagination of students, faculty, and alumni and is the best use of its existing resources. Big problems, especially these days, are highly complex and require multiple perspectives and points of view. No other institution in our society can assemble teams of physicians, engineers, chemists, biologists, and computer scientists to attack a particular disease. We suggest that such teams are even more effective if they include an ethicist, an economist, and a historian.

Maximizing innovation at a research university also requires involving the entire campus, not just the sciences and engineering. This is a lesson that was hammered home on our own campus after the publication of our book. During a symposium led by the chairman of the history department, we discussed the need to accept failure as part of the innovation process. It was suggested that the history department could be renamed the Department of Ambiguity and Failure and, as such, had an important role to play in both encouraging risk taking and learning from mistakes. We also learned that when high-impact innovation is characterized as attacking the world’s biggest problems, humanists and social scientists are eager to join with scientists and engineers in the problem-solving process.  Soon after the symposium, a veteran faculty member stopped one of us on campus and said, “I have one piece of advice:  Get history and chemistry, and the hearts and minds will follow.”

We have found that to be the case not only in the traditional disciplines, but also in medicine, public health, education, law, journalism, and business.  No one wants to be left out of a great mission, and attacking big problems certainly qualifies.

Redefining who can belong to the academic community will also impact the volume and quality of innovation on a university campus. The arts long ago realized that practitioners were essential to the effective teaching of dance, music, writing, and filmmaking and welcomed nonacademics to join their departments. Such an approach can be applied throughout the university by enlisting practitioners as innovators and entrepreneurs in residence.  Adding practitioners to the multidisciplinary teams we have already described results in dramatic and often unexpected impact, and they often provide an important bridge between academia and the commercial world.  In response to a question from a delegation from Malaysia asking what was the single most important action that could be taken to develop a culture of innovation on a university campus, we answered, “Invite some entrepreneurs to join the faculty and then get out of the way.”

The last principle we want to emphasize is that creating an innovative environment within a university requires the support of the ecosystem that surrounds the university. By now it should be clear we believe a university cannot by itself maximize all of the new knowledge it creates. It requires a robust collection of entrepreneurs, financers, large corporations, and nongovernmental organizations to truly perform its function as an engine of innovation. In some cases, innovation hubs have naturally grown up around great universities, and in others, they have been purposefully created. Whatever the case, high-impact innovation will not happen without a supportive adjacent eco-system. Where such systems do not exist, public and private efforts should be focused on creating them.

The process of writing our book, the run-up to its publication and countless conversations, seminars, and a universitywide symposium have provided us with many ideas for maximizing innovation and impact at research universities. We begin with funders—government, foundations, and individual donors—because in the current environment of austerity, outside funding can have an extraordinary impact on university culture. Government and foundation grants that are problem based insist on measurable goals and require multidisciplinary cooperation and can contribute significantly to creating an on-campus culture of innovation. Grants that require partnerships with external companies or other entities and the participation of practitioners as well as academics are also a good idea. Employing competitions and prizes that require the kind of cooperation we have described will provide funding agencies with incredible leverage if such cooperation is a pre-condition for receiving funding. The recently passed America COMPETES Act explicitly authorizes the use of such competitions by federal agencies, and private foundations such as the Gates Foundation have demonstrated the impact of prizes and competitions as well.

Every university will approach differently the challenge of increasing impact by creating a more innovative environment.  A day-long symposium at our own university yielded a series of provocative suggestions, including the following:

1. Encourage multidisciplinary classes, preferably problem based, as a means of encouraging multidisciplinary research.
2. Consider establishing one campuswide initiative with a multiyear duration focused on a single problem as a way of marshalling resources and creating a unified mission.
3. Involve the humanities and social sciences in problem-based teams because they provide an important perspective that is often missed if only scientists and engineers participate.
4. Create physical environments that facilitate cross-disciplinary conversations.  We are absolutely convinced that space matters.
5. Establish clinical experiences because they ignite passion. Getting students, especially graduate students, in touch with real problems will “fire them up.”
6. Help younger faculty to negotiate the university bureaucracy so that they can maximize the impact of their work and succeed in their discipline.
7. Encourage collaboration with practitioners as a way of increasing impact.  Entrepreneurs in residence is a great model.

The president’s Sputnik moment should be a cause for celebration among those of us who work in higher education. It is an invitation to academics to do more.

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When Chinese president Hu Jintao alights in Washington, D.C. next week for a summit meeting with President Obama, he will learn firsthand that China is fast becoming the touchstone against which everything wrong with the U.S. economy is measured. In the run up to last year’s midterm congressional elections, candidates across the country accused one another of “sending jobs to China” instead of creating jobs at home. Members of Congress on both sides of the aisle regularly promise to seek trade sanctions against China for undervaluing its currency. The United States recently accepted a United Steelworkers petition accusing China of unfairly subsidizing its exports and hoarding raw materials essential for clean energy technology development. And U.S. companies across a range of industries are increasingly voicing their complaints about China’s theft of their intellectual property and the country’s forced transfer of cutting-edge U.S. technology in exchange for access to the nation’s vast and fast-growing domestic market.

The overarching message coming from the United States is this: If China would just stop cheating, the U.S. economy would rebound, helping both nations and the rest of the world recover more sustainably from the Great Recession and sparking broad-based economic growth on both sides of the Pacific. Equally forcibly (though in more diplomatic language), President Barack Obama is expected to deliver that same message.

What this view assumes is that if only China would stop cheating, the U.S. economy would do what it has done best for the last hundred years or so—lead the world based on our prowess at science, technology, and innovation. After all, our universities are the best in the world, or entrepreneurialism is world-renowned, and our ability to turn new ideas into new job-creating products and services is unsurpassed. But this interpretation is not entirely accurate.

China is now investing in many of the building blocks of innovation-driven economic growth that the United States has all but abandoned over the past several decades. Pick your sector and you’ll find China spends more on a per capita basis, and sometimes in total amounts, on public investments in basic science and education, research and development, or R&D, infrastructure development, and workforce training. What’s more, China’s leaders have crafted coherent policies and programs in support of domestic manufacturing and services for export abroad and to ensure Chinese companies have the prime positions in China’s rapidly growing domestic economy.

China, in short, is actively and methodically building up the basic foundations for future economic growth while also ensuring a market for its current and future products and services at home and abroad. The country’s leaders understand completely the message driven home by The World Economic Forum, in its monumental Global Competitiveness Report 2010-2011, which underscores the importance of innovation as the basis for long-term economic growth:

Although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, all these factors eventually seem to run into diminishing returns. The same is true for the efficiency of the labor, financial, and goods markets. In the long run, standards of living can be enhanced only by technological innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge and the possibility of integrating and adapting exogenous, [or imported,] technologies tends to disappear.

China and the United States have very different legal, political, and economic systems, but both are bound by the same reality that to be competitive in the 21st century global economy, they have to innovate. But unlike most political leaders in the United States, China’s leaders recognize that innovation is not created in a vacuum. Across the globe, developed and developing countries are realizing what economists have known for years—that technological innovation, more than any other factor, fuels long-term economic competitiveness and growth, and that innovation in turn requires a robust and well-integrated foundation of education, research, and infrastructure.

The widespread recognition of these principles has sparked a global race to the top in innovation, science, and technology policy. But judging from the state of our innovation policy, the United States seems to have missed the memo. Other nations see innovation and competitiveness as two sides of the same economic coin. And not surprisingly, as John Podesta, Sarah Wartell, and Jitinder Kohli point out in CAP’s recent report, “A Focus on Competitiveness,” “…other countries organize their economic policy apparatus more explicitly around the question of how to effectively compete.”

China in particular does this very well. In this paper, we examine the challenges posed to current and future innovation-led economic growth in the United States by China’s drive to boost innovation at home by any means available. As we will demonstrate, some of these challenges cut to the core of our nation’s own global economic and scientific strengths—even though some of China’s innovation policies and programs are plagued by inherent liabilities that are built into the country’s approach to innovation.

Some Chinese R&D spending, for example, ends up fueling academic fraud, a huge problem in China, where local scientists often try to lay claim to new discoveries that are bogus. But the spending levels are still impressive, as is the fact that China has taken pains to invest across the entire innovation chain from basic science, to R&D, to market creation for new technologies, to production and deployment of these technologies. This is paying innovation dividends in hybrid electric vehicles, advanced batteries, high-speed rail, and solar power systems, to name a few.

Indeed, one of China’s other innovation “assets” is its growing direct investment in basic research and development. In 2008, China’s gross national expenditure on research and development stood at roughly $66 billion, or about 1.5 percent of China’s gross domestic product. This is the highest investment level among developing economies as a percent of their domestic economy and ranks China fourth in the world in overall R&D spending behind the United States, Japan, and Germany.

Similarly, China’s massive domestic investments in global market-scale industries such as clean technology products, transportation, mobile telecommunications and aerospace are now enabling Chinese companies in these sectors to compete for business abroad and dominate their home market. Again, there are liabilities built into this strategy: Economists can point to costly misplaced investments in some of the infrastructure needed to get these industries off the ground—misinvestments that saddle the Chinese state-owned banking system with an entire new raft of non- performing loans and resulting in way too many empty science parks and regional industrial zones that are no more than property speculation gone awry.

This same strategy—key directed investments in science and innovation to spur rapid economic growth no matter the cost—is even evident in the Chinese government’s planning processes. China’s famous communist-era “five-year plans,” which often bore little relation to reality, are now precise blueprints for strategic market-oriented, innovation-led economic growth to spur job creation at home and exports abroad. Then as now, however, local political and business leaders in China’s provinces and cities, counties and townships continually go their own way in interpreting these plans and then spending the cash, often resulting in misleading statistical data flowing back to Beijing “proving” the metrics of the blueprint are being met while in fact the funds are being spent on a variety of other activities, including local property development and speculation.8

But these liabilities do not mean that U.S. policymakers can afford to be complacent. China’s so called “import/assimilate/re-innovate” model of technology development, for example, actively drives foreign companies to share their technologies with Chinese joint venture partners in exchange for access to the cheap Chinese workforce and burgeoning domestic marketplace. This strategy poses a direct challenge to U.S. competitiveness because it enables Chinese (often state-owned) companies to gain access to cutting-edge technologies but also build upon them incrementally to create a Chinese innovation ecosystem. Never mind that economists recognize that the downside to this model of economic development is that it delivers diminishing returns without genuine domestic innovation delivering world-class breakthroughs.

In the pages that follow we will examine China’s innovation assets and liabilities as the country races to build a globally competitive innovation-led economy, and then consider how the United States should react to these challenges. We then offer our recommendations to U.S. policymakers on steps our own government can take to ensure our nation rises to meet the challenges posed by China. Briefly, though, we will argue that the U.S. government needs to give our nation’s innovation engine a tuneup by:

• Modernizing our basic infrastructure to allow businesses to more effectively collaborate and compete in domestic and international markets
• Investing more in science and math education and workforce development to ensure we have workers able to participate in the technology-driven economy of the present and future
• Crafting finance policies to make more public and private capital available to innovators and bolster our culture of entrepreneurship by rewarding risk-taking and competitiveness
• Promoting international trade policies that ensure access to foreign markets, and the free flow of goods, services, knowledge, and capital across borders
• Honing our research and development policies so that we invest not just in basic research but also the full innovation lifecycle from invention, to development, to production and commercialization

These are progressive proposals that would boost our national competitiveness and jobs growth in the short run and ensure our once-dominant position in science and technology, innovation and entrepreneurship, and job creation is not eclipsed by China in the 21st century. On the eve of Chinese president Hu Jintao’s visit to Washington, these are progressive proposals that Congress and the Obama administration dearly need to take to heart.

Kate Gordon is the Vice President for Energy Policy, Susan Lyon is a Special Assistant for Energy Policy, Vice President for Editorial, and Sean Pool is the Assistant Editor for Science Progress.

Download the full report (pdf)

Download the executive summary (pdf)

View this post at the Center for American Progress Website.

On October 6, Spanish wind giant Gamesa Corp Technologica SA, a leading global designer and manufacturer of wind turbines, and Northrop Grumman Shipbuilding, America’s largest shipbuilder, signed a research and development agreement to jointly develop two prototypes of what will be the world’s largest offshore wind turbine, known as G11X -5.0 MW. The prototypes will be built piecemeal and then deployed and tested for kinks in U.S. waters, likely off the Virginia Coast.

At five megawatts each, just one of these turbines running at full speed could power nearly 4,000 homes. The turbine also builds off of Gamesa’s recent incremental innovations that have made its previous designs operate more efficiently and cost-effectively. These include:

• Innoblade: a blade that has been divided into sections allowing it to be easily transported. It also includes new aerodynamic features to minimize noise.
• Multismart: a turbine control system modulating the pitch of each blade, reducing vibration and lessening load.
• ConcreTower: a tower made of steel and concrete with the aim of reducing costs and facilitating transportation.
• Flexifit: a crane coupled to the nacelle (the main housing for a wind turbine) that can hoist or lower components such as the drive train or generator.
• GridMate: a permanent magnet synchronous generator using a full converter, “to guarantee the compliance with grid connection regulations.”

Once a final design for the turbine and marine stabilization platform are finalized, Gamesa will build a manufacturing facility to mass-produce the equipment, creating hundreds of jobs, according a spokesperson. Gamesa was the first foreign turbine manufacturer to come to the United States and since then has established two turbine manufacturing facilities in Pennsylvania that today sustain 800 permanent manufacturing jobs. Despite being a foreign-owned subsidiary, Gamesa’s U.S. operation has one of the highest domestic content rates (more than 50 percent) of any turbine maker in the country.

What’s more, on October 7, Interior Secretary Salazar finally approved the lease for the Cape Wind wind farm, bringing to a close the nine-year regulatory and political stalemate that had ensnared it. Cape Wind will deploy 130 turbines designed and built by Siemens Energy, and an agreement between Cape Wind Associates, LLC, Mass Tank Sales Corporation and EWW Group of Germany will result in the construction of first manufacturing facility for offshore wind foundations and other metalwork in the U.S., creating hundreds of jobs.  Cape Wind is the first of a handful of offshore wind projects currently winding their way through various local, state, and federal regulatory hurdles in search of approval. According to a third party analysis, the Cape Wind project will create between 600 and 1,000 construction and manufacturing jobs in the region while boosting labor income, state GDP, and increasing tax revenue by millions of dollars.

On October 12, Trans-Elect, a major transmission line developer, announced its intention to develop a subsea electrical transmission backbone that could one day connect and support the thousands of megawatts of offshore wind capacity being planned for development off the East Coast. This American Wind Connection would span 350 miles from northern New Jersey to the North Carolina/Virginia border and could support enough wind farms to power 1.9 million homes upon its completion in 2016. What is unique about this particular proposal is that its backers—Google; Marubeni Corp., a Japanese trading firm; and Good Energies LLC—have no plans to ask for a single federal dollar to finance the project. This indicates that offshore wind energy is approaching profitability and commercial readiness today.

At Science Progress we have written extensively about the formation of bottom-up innovation “clusters” or “ecosystems” around particular technologies in certain regions of the country. These networks are often anchored around a particular geographic location where shared infrastructure, favorable policy conditions, and a large pool of human talent can be leveraged by collaborating public and private entities. All of these recent announcements show the clear outlines of what could be the kernel of an offshore wind technology innovation cluster anchored in the Northeast and extending across the country.

The Northeast and Mid-Atlantic are particularly well-suited to serve as a cradle for a new offshore wind innovation ecosystem thanks to of a host of region-specific assets. These include:

• The availability of a vast amount of potential offshore wind resources (over 60,000 megawatts).
• A shallow coastal shelf that extends miles out to sea. These shallow waters make it cheaper and easier to install large turbines further out to sea where they can harness stronger and more consistent ocean winds while remaining virtually out of sight.
• Close proximity to large population centers where the power can be used, day or night.

Innovation networks form when different types of firms in an industry collaborate, create shared objectives, and exchange money, knowledge, and risk in the pursuit of those objectives. This can happen through a joint agreement for technical collaboration and development between companies with R&D operations, such as that of Gamesa and Northrop Grumman; through an economic exchange between buyer and seller, such as Siemen’s sale of 130 of its turbines to Cape Wind; or through advancing an investment in infrastructure, such as Google’s intention to take a stake in the development of the American Wind Connection.

All of these interactions exemplify the kind of collaboration among technology researchers, producers, users, and financiers that is so essential to the formation of a functional innovation ecosystem. New project finance expertise will be developed as Google, Good Energies, and Marubeni Corp. work with Trans-Elect to piece together the first-of-its-kind multijurisdictional offshore transmission system. The infrastructure created by this collaboration will make it easier for project developers to accelerate construction of planned and future offshore wind farms in the Northeast, which in turn will drive demand for turbines and equipment designed and produced by Siemens, Gamesa, Northrop Grumman, General Electric, and others.

All of these activities will help to increase scale and decrease cost while creating jobs in the Northeast and in turbine component manufacturing plants around the country. According to a recent report published by Oceana, the offshore wind industry in the United States has the potential to create and sustain as many as 212,000 permanent American jobs annually by 2030. This is more than three times as many jobs as the American Petroleum Institute predicts could be created by aggressive expansion of offshore oil and gas drilling. This finding is consistent with an analysis released by CAP and the Political Economy Research Institute last year that showed a similar figure.

The offshore wind innovation milestones reached this week stand as a testament to the innovative power of America’s entrepreneurs and businesses but much more could be accomplished if the government were to take an active partnership role in this nascent innovation network. Innovation ecosystems thrive when private sector producers, users, financers, and researchers can collaborate closely with public sector regulators, program administrators, and policymakers to address both market and regulatory barriers to technology development.

While the preliminary accomplishments of the American Wind Connection, Cape Wind, and the Gamesa-Northrop partnership demonstrate the potential of America’s private sector to innovate, so much more would be possible if the federal government could articulate a remotely coherent offshore wind energy strategy. The federal government needs to address regulatory hurdles like ones that ensnared Cape Wind for decades.

Some steps have been taken, such as the formation of the Atlantic Offshore Wind Energy Consortium among 10 Eastern states and the U.S. Department of the Interior, and the recent rulemaking by the Federal Energy Regulatory Commission, which will make it easier to site new clean energy transmission lines like the American Wind Connection. But much more is needed and our economic competitors are beating us to the punch.

Earlier this year China beat the United States to join the offshore wind club alongside Denmark, the United Kingdom, Ireland, Germany, the Netherlands, and Sweden. This puts China’s command-and-control economy fully two years ahead of the United States in offshore wind, since the first U.S. wind farm, Cape Wind, will not be complete until 2012 at the earliest. (see chart)

(Data from the National Renewable Energy Laboratory, p. 42.)

As technologies like offshore wind advance along the innovation lifecycle toward commercialization and maturity, mobilizing large amount of private capital becomes a paramount objective. But private capital won’t flow where there is no return, so besides collaborating to clear away regulatory hurdles, it must also sustain policies to keep demand for clean energy technologies strong.

Until now, the states have carried the burden of implementing demand-driving renewable energy standards in a piecemeal fashion, and these policies have been instrumental in helping the wind industry increase scale and reduce costs as much as it has. But in our current environment of political uncertainty and state budget shortfalls, this patchwork of policies is in jeopardy. The job then falls to the federal government to provide the regulatory clarity and long-term policy certainty needed to keep big investors at the table financing innovation.

There is a lot of work to do but the events of the past week have shown that the building blocks are there to develop a job-creating innovation ecosystem for offshore wind energy in the American East. With a little federal leadership, America’s private sector is ready to bring its capital and expertise to the table to build the factories, wind farms, and research centers that will drive energy innovation into the future.

Sean Pool is Assistant Editor at Science Progress.

In the midst of a difficult economic recovery, it is only natural that we are here today to discuss the best means to restore sustained economic growth and broadly shared prosperity.

And we are concentrating on an important strategy. We all know now that regional economies are fundamental—a key ingredient in national economic success.

We know that industries in a cluster register higher employment as well as higher growth of wages, more businesses, and more patents.[1]

Indeed, it is important to remember that clusters help create new sectors, rather than just strengthening old ones.[2] Recently, for example, I talked with a senior executive from a solar-panel company located in Denver. Why Denver? Because his CEO and important technological insights had been transferred from the aeronautics sector located in the same place.

So it’s no surprise that recent research indicates that productivity in regions with successful clusters is 12 percent greater than in other regions.[3]

We know all this through a combination of excellent academic work and careful analysis of case studies. Indeed, we are in a position to implement effective cluster strategies now in large part because of the substantial research efforts that have been conducted both in the United States and Europe.

In the United States, the work of Harvard University’s Michael Porter, of course, pioneered the way. And that work has been supported, and advanced, by scholars at The Brookings Institute, the Council of Competitiveness, the Center for American Progress, and Silicon Flatirons, the last two of which I work with now.[4]

In Europe, the work of the EU Clusters Observatory and the Directorates of Enterprise and Industry and Research, Innovation and Science have been—and remain—invaluable.[5] This work has significantly furthered both our theoretical and practical understanding of economic clusters, and will provide, I believe, a continuing benefit to European economic growth.

On this foundation of facts, we can build policy. You all may recall what Commissioner Maire Geoghan-Quinn said earlier this year: “It is the duty of politicians to be optimistic.”[6]

I think we should all strive to be politicians in that sense of the term today. We should all apply that spirit of optimism to the search for better solutions to our current economic challenges.

And in that spirit of optimism, I would like to offer a perspective from, and of, the United States.

Before we go forward, however, let’s talk about what we in the United States call these places. I like the phrase that the Obama administration is using—“regional innovation clusters.” I like it because it explains, piece by piece, the essential elements of smart clusters policy:

• Clusters are geographic places where the formula of economic growth is this: 1+1=3. Why? Because positive externalities and complementary forces attract businesses and help businesses located in the cluster to grow. That’s the kind of economic math we need.

• Innovation is the key driving force of economic growth, especially in developed economies. In encouraging innovation, we need to always remember that innovation is more than technology, and that it is not confined only to certain sectors, like computing and biotechnology. Perhaps it would be clearer if we called it “ingenuity”—the creation of additional economic value through the creation or recombination of knowledge in any sector, in any place.

• Regions explain the geography of economic activity—and thus where leadership needs to be located. In the United States, for example, most clusters cross state lines, not to mention municipal and other local borders. So the leadership can’t be defined by traditional political categories. Moreover, clusters can exist anywhere (urban, suburban, or rural) where competitive advantage exists. That means it is within these economic, not political, borders where economic strategies need to be created in the first instance.

I believe that the United States has evolved a distinct approach to the building of clusters—one that works from the ground up but enjoys strategic support of the federal government. The United States has long been a place where clusters have been studied and where they have prospered. Case in point: It’s hard to have a conversation about clusters that doesn’t mention Silicon Valley. But now, largely because of recent efforts by the Obama administration, the pieces of the American approach to clusters have truly come into place.

As you may know, the Obama administration is the first U.S. administration to expressly embrace the strategy of supporting what it calls “regional innovation clusters.”  Over the past two years, programs to support clusters have been launched at the Departments of Agriculture, Commerce and Energy, at the Small Business Administration, and in league with the National Science Foundation and the National Institutes of Health. Indeed, thus far in 2010, these departments and agencies have made 44 cluster-related grants, totaling about $150 million, to support efforts that range from the development of a regional food network in rural California to the commercialization of the next generation of medical device technology in the southeast United States.

The administration also recently formed an interagency task force to better coordinate the disparate federal efforts that are targeted to regional innovation clusters. And the administration has called on Congress to provide additional financial support for regional innovation clusters.

A clusters policy that is “Made in America” may not be suitable for any other part of the globe. But, in the spirit of transatlantic dialogue, I would like to talk this morning about this new American clusters policy and its capacity to stimulate economic growth. And I also would like to give a perspective on the next challenges that clusters policy will face, certainly in the United States and perhaps elsewhere as well.

We should be frank that clusters policy has not yet been embraced in the United States as widely as it should be. I first encountered the idea of clusters in the early 1990s when I worked in the U.S. Department of Commerce and Michael Porter came by to talk about his then-new idea. Although the practice of clusters seemed in the United States to be a naturally occurring phenomenon, and although state and local governments increasingly grasped the principles of building clusters, by the beginning of 2009, two big holes remained. First, the U.S. government had not adopted any explicit measures to support clusters. Second, mainstream economists still had not validated the critical tenets of what businesses and communities had already experienced.

We should also be frank that our knowledge of clusters is, in many respects, lacking. We do not know all that we could know or all that we would want to know about the economic impact of clusters. Nor do we know enough about the impact of governmental policies on cluster success. As a practical matter, it is difficult to run a “control” test of clusters policy—in these economic times we cannot withhold potential economic gain from a community for the sake of the scientific method. And, of course, the differences between clusters would make such tests difficult to assess.

And yet, despite these deficiencies, progress on clusters policy has been made, in the United States, in Europe, and around the world.

We now have an Obama administration policy in place, which is being implemented and expanded. And scholarship on clusters is moving forward, although not as quickly as one might wish. So, in the United States, the work of building support for the idea of clusters must proceed in parallel with the work of supporting clusters themselves.

In my view, the best way to build such support in the United States is to focus on three principles that I believe are critical to the next generation of clusters policy.

First, I believe that support for regional innovation clusters is more important in times of fiscal constraint, not less important. The politics of budget cutting is hard, but the consequences of getting those decisions wrong would be worse. This is a point that must become more broadly understood.

Second, I believe we must simultaneously lead and learn. We must build better policy now, because we cannot afford to wait, but we must simultaneously take steps to improve our understanding of clusters so that we can learn how to build better policy tomorrow. This is absolutely critical, particularly in a time when cluster policy is one among multiple economic-growth tools that must be tested. In a moment, I will briefly review the new initiatives implemented by the Obama administration, which I believe can teach us how to do both—to lead and to learn.

Third, we must reinforce the connection of clusters to a global economy. We are not playing the World Cup, with national challengers knocking each other off until a single champion is crowned. One way to think about clusters is as nodes connected to international networks. To achieve economic recovery, we will need both strong nodes and robust networks—of people, of commerce, and of places.

Let’s now address these three principles in more detail.

More innovation, little money

The truth is stark. The world’s real gross domestic product (after adjusting for inflation) dropped from a growth rate of 5.4 percent in 2006 to negative 0.6 percent in 2009.  We are recovering, however, with real GDP and private sector employment both growing in the United States. But growth remains too low and unemployment remains too high.

At the same time, there is a strong desire in Europe and the United States for an end to deficit spending. It seems safe to say that we are in for a prolonged period of tight budgets in order to ensure that we do not live above our means.

Most proposals to end deficit spending have focused on slashing government expenditures and cutting back on government programs. But, of course, there is another way to ensure that we do not live above our means: We can raise our means. We can grow our economies and create jobs.

Before we discuss the strategy of clusters specifically, it’s important to outline the key principles of innovation policy that should govern government in a world of tight budgets and tough economic conditions. That’s the context that will, I believe, help us to understand the critical role that a focus on regional economic policy can play (the glue, as it were, that holds together the other parts of a pro-innovation agenda).

I think it is axiomatic that fiscal responsibility, while necessary, is itself not sufficient. We cannot only cut our way to prosperity. We must take additional action to restore growth if we are to be able to return to full employment, to shoulder our social obligations, and to pass along real economic opportunity to our children and to theirs.

Recently, attention has turned to this issue. For example, the Information Technology & Innovation Foundation has just published an important paper entitled, “Innovation Policy on a Budget: Driving Innovation in a Time of Fiscal Constraint.”[7] In it, Rob Atkinson and his co-authors confront the challenge of designing innovation efforts to fit current budgetary and macroeconomic needs, and set out ten categories of action that the federal government can take which would increase support for innovation at little to no additional cost to the federal budget.

In this vein, let me offer a few, broad principles that I believe should guide innovation policy generally, and support for clusters, specifically.

First, we have to get the macroeconomics right. Fiscal and monetary policy must be pro-growth. There is, in the United States, a debate about whether we need to do more right now.

I’m of the view that we should ensure that demand does not collapse and that, over the next two fiscal years, the right policy is to ensure that we prevent the economy from stalling. It’s important to understand the divided nature of governmental spending in the United States to see why this is so important. The federal government’s stimulus package of 2009 totaled $787 billion, of which about $530 billion has now been spent.[8] But, at the same time, state spending has been dramatically curtailed.  And the cumulative effect of state cutbacks is significant. According to one analysis, state budget shortfalls from FY 2009 through FY 2012 will exceed a cumulative total of $600 billion dollars.[9]

And that is not all. Private expenditure is also at extremely low levels. It has been widely reported that nonfinancial U.S. companies have been holding as much as $1.845 trillion in cash and short-term assets that is available for capital investment.[10] As an aside, we need to create the conditions for investment, which goes hand in hand with innovation. But, as the OECD has explained, we also need to keep in mind the importance of public investment during times of crisis so as not to aggravate pro-cyclical behavior of firms who are themselves reducing investment.[11]

So, in the United States, we’ve been hitting the brake and the accelerator at the same time. With more state cutbacks on the way, it’s important that the federal government not allow the economy to stall. That’s why it’s so important that the Congress has just passed legislation providing additional incentives to small businesses, and why it is critical that other Obama administration economic initiatives be implemented, such as permanently extending the R & D tax credit, improving America’s infrastructure, and expensing capital investments made through the end of next year.

But the time will come, and soon, when budget-tightening will be paramount. One way to reconcile the two goals, by the way, is to employ an effective mechanism to assure markets that long-term structural deficit reduction will be governing federal policy in fiscal 2013 and beyond.

Second, we must provide the public goods—education, basic R&D, workforce development—that the markets will not provide in sufficient quantity on their own.

Third, the operations of government must be attuned to innovation as a core goal. Innovation-oriented spending is not only efficient but also can jumpstart markets and innovation that might otherwise not exist. Governmental procurement processes therefore should have innovation as a built-in objective.

Fourth, all forms of governmental regulation and oversight should have innovation as a very explicit goal. In the 1980s, the U.S. government adopted a requirement that all new federal regulations be subject to a cost-benefit analysis before promulgation. Today, we should mandate analysis of a proposed regulation’s impact on innovation as a part of every regulatory analysis. This includes tax codes, international trade, and all forms of domestic regulation.

Fifth, micro-economic strategies must be used that will promote broad economic growth in an efficient and inclusive way. They must support but not supplant business strategies. They must focus on positive-sum, not zero-sum, outcomes. And they must reform or even eliminate past programs that are not effective.

I should say that there isn’t a big constituency in the United States for things labeled “microeconomic.” If you had a choice between being a macroeconomist or a microeconomist, which would you choose?

But the very best tools for economic growth must be used, and cluster strategy is one of the very best tools.

How can this be done in a time of tough budgets? We really must be ruthless about asking whether dollars or euros spent in the past should be spent in the future.

Cutting budgets is tough. It is an inexorable law of politics that every program that has been funded for a while will tend to acquire both a champion and a constituency. The champion’s career is entangled with the program. The constituency relies on it. Both will tend to find reasons for its continuation.

Regional innovation clusters, however, represent the champions and the constituencies of the future.  These are businesses that can grow but have not; communities that can thrive but do not; people who will work but who cannot now find employment. As beneficiaries of cluster initiatives, these people, businesses, and communities are politically invisible. Indeed, they may not even yet know how thriving clusters will advantage them.  But it is the obligation of public-policy leaders to represent them in the here and now.

Innovation itself is like that—it’s imagination and commitment to a product or service or market that does not yet exist. It’s a look to the future. We can, here in the United States and around the world, fuse the two—innovative policy for an innovation economy.

There are important reasons why an innovation policy focused on regional innovation clusters is particularly critical in a time of tight government budgets. They all revolve around a single idea—more bang for less buck.

Cluster initiatives do not require substantial public sums to be successful. The focus of clusters policy is on encouraging private parties to collaborate and on leveraging nonpublic resources. Public funds frequently represent a relatively small proportion of a cluster’s collective budget.  The basic principle underlying cluster initiatives is leverage—by creating incentives for private parties to coordinate their activity and share resources, an initial public investment can be leveraged at a 4, 5, or even 10-1 ratio. And, by federal budget standards, the total amount of spending is very low, representing less than 1 percent of the federal innovation budget.[12]

Here’s a leading example of how public funds can be leveraged. Over the past 15 years, the Dan River region in Southside Virginia has developed a burgeoning technology cluster. This region, which previously had an economy centered on tobacco and the textile and furniture industries, now boasts a strong network of research institutions, a growing technology-oriented workforce, and a variety of high-tech companies in areas such as polymers.

And yet public funding for the Dan River region was largely limited to partial support of the regional institution that coordinates strategy and resources across the cluster, the Institute for Advanced Learning and Research.[13] But IALR only succeeds because it is able to marshal private and university resources to carry out its mission—public funding for IALR is dwarfed by the funds provided by private sources in connection with cluster activities.[14]

Other clusters have similar patterns. Although projects connected with the Albany nanotechnology cluster received more than $800 million in public funding, the cluster has attracted approximately $5 billion in private investment—a ratio of better than 5-to-1.[15] And a representative of the Artisanal Cheese cluster in Vermont recently reported that the cluster was able to leverage public funds on a ratio of 11-to-1.[16]

In addition, cluster initiatives rely on a bottom-up approach that improves the likelihood of success, and, therefore, the efficacy of public policies. In the United States, the focus has been on using competitive processes in which the local clusters present their own strategies, to be tested against each other. This, I believe, is very important. As a result, before any federal money is provided to a regional innovation cluster, regional leaders must design an innovation strategy, organize stakeholders, and otherwise lay the foundation for a successful innovation cluster. And because of the competitive process, the likelihood of eventual success is greatest.

Take, for example, several recent regional cluster innovation grants awarded by U.S. agencies.  On September 23, 2010, the Department of Commerce announced the six winners of the i6 Challenge, a $12 million innovation competition led by the Department’s Economic Development Administration with the assistance of the National Institutes of Health and the National Science Foundation.[17] The i6 Challenge divided the United States into six economic regions and invited the clusters from each region to compete over who had the strongest proposals for accelerating the commercialization of technology and expanding new venture formation.  Each of the six winners of the i6 Challenge, therefore, needed to provide a better proposal than every other applicant from their region. Unsurprisingly, the winners were clusters which were well-organized, with broad local coalitions and networks and with substantial private resources, and which possessed a comprehensive strategy for how to win the i6 Challenge money.

Case in point: The winner from the Denver Region was a St. Louis-based coalition comprised of three St. Louis-based research universities, including Washington University; the Donald Danforth Plant Science Center; the St. Louis County Economic Council; and the St. Louis Development Corporation, all of which teamed up to present a proposal to advance bioscience technology commercialization through, among other things, collaborative targeted pre-company translational research and the provision of incubation funding for new bioscience companies.[18]

Two weeks ago, the U.S. Small Business Administration announced an “Innovative Economies” grant program, under which it provides 10 clusters with $600,000 apiece to strengthen small business participation in their clusters.[19] The 10 “Innovative Economies” awardees were selected from 173 applicants and, as with the i6 Challenge, represented clusters that are already well-organized at the local level and that possess detailed innovation strategies. Awardees included the Illinois Smart Grid Regional Innovation Cluster, a collaboration of more than 100 entities including 70 businesses in the Chicago area focused on the acceleration of smart grid innovation, deployments, and new market developments, and the Upper Michigan Green Aviation Coalition, a public-private partnership with 41 active members that focuses on expansion of the green aviation industry.[20]

Similarly, in late August, the Department of Energy announced that the Greater Philadelphia Innovation Cluster was the winner of its $129 million Energy Regional Innovation Cluster, or E-RIC competition.[21] The Greater Philadelphia Innovation Cluster is a consortium of five industry participants; 11 academic institutions; two U.S. Department of Energy laboratories; and several economic development agencies, and the cluster’s winning proposal was to create an energy innovation hub centered on the Philadelphia Navy Yard, which has its own utility infrastructure and thus is well-suited to test out new energy-related technologies.[22] Participants in the competition, including the winner and many of the losing consortiums that bid for the grant, say the exercise led them to develop important new links within their regional innovation ecosystems—links they believe would only be further strengthened by such federal cluster catalyst programs.

And last month, the Department of Agriculture announced the 27 winners of its Regional Business Opportunity Grants, selected from more than 400 applicants.[23] As with the other cluster initiatives, the grantees were well-organized coalitions with comprehensive innovation strategies.  For instance, the California Association of Resource Conservation and Development Councils—an association that is composed of 11 councils that provide economic and natural resource conservation aid throughout California—received a Regional Business Opportunity Grant to develop a regional food system, add value to livestock processing and marketing, utilize biomass, and develop renewable energy and agricultural resources.[24]

These forms of competition offer another advantage. Federal support can address the impact of clusters on national priorities. That’s back to the need to fix market failures. If, for example, market forces would underinvest in important new technologies that would benefit the nation as a whole—say support for a new electrical “smart grid” or new healthcare technologies—then federal support can be magnified and enhanced by using a national framework as one portion of the competitive process. Thus, a national priority can be addressed in an effective manner that relies on local leadership and the involvement of business and community institutions, including research universities.

Finally, cluster initiatives can provide a substantial return on investment. The research that has been done on clusters shows that they lead to statistically significant increases in productivity, job growth, wage growth, new industry incubation, and patent development.[25] In fact, a recent Harvard Business School study found that regional innovation clusters not only enhance growth opportunities for the businesses that form the cluster itself, but also actually enhance growth opportunities and direct and indirect job creation in other industries.[26]

The success of individual clusters is striking. Over the past decade, for example, the Indiana Life Sciences Cluster has funded BioCrossroads, a cluster initiative that provides seed investments and business development assistance to over 250 start-up companies and nonprofit enterprises that address specific cluster needs. During that period, job growth in the cluster outpaced national life sciences growth 17.2 percent to 15.8 percent, and the cluster now supports over 52,800 workers.[27] In the case of the Puget Sound Video Game Industry Cluster, the region has leveraged off the Seattle area’s existing strength in software and design to create a cluster that generates $4.2 billion in annual output and has created more than 50,000 additional jobs for the Washington State economy.[28] And the biomedical cluster in Northeast Ohio, which is now made up of more than 600 firms, “grew at an annualized rate of 7.4 percent from 2003 to 2008 and in 2008 alone attracted $395 million in venture capital and National Institutes of Health funding.”[29]

Now is the time for the federal government to play a critical role in supporting regional efforts by framing, facilitating, and funding cluster strategies. By that, I mean that the federal government can identify the critical national goals, such as energy independence, that serve the national interests. The federal government can improve the efficiency of cluster strategies by improving the delivery of various forms of federal expertise to the clusters that need them and by increasing the ability of clusters to learn from each other. And, of course, in difficult fiscal times for states, the federal government can provide additional resources that can smartly leverage existing local and private funds. As Jason Furman, the deputy director of the White House National Economic Council, recently put it very succinctly: “In the face of fiscal constraints, the president is committed to spending federal resources responsibly, on programs that we know work…We know that this cluster strategy works.”[30]

Next steps in cluster-based public policy

Today’s conference will dig into great detail on the role of clusters in the creation of new economic growth. I will briefly review some of our current experiences, just to support my proposal that support for regional innovation clusters is particularly important now.

As I said earlier, clusters are geographic places where the formula of economic growth is this: 1+1=3. By this I mean, more formally, that a “cluster” is a geographic region that generates positive externalities that quicken or increase the ability of firms to create value through innovation. The positive externalities flow from the natural interchanges between businesses that come from proximity—say the ability of new businesses to connect with angel investors or venture capitalists—which creates an environment that is more conducive for the next business to connect with its own sources of capital. Positive externalities can, of course, be spurred by nonbusiness action, such as the ability of companies to access basic research being conducted by local universities.

The term “innovation” in the phrase “regional innovation clusters” is a term we should define very broadly in several important ways: First, by recognizing the broad sweep of innovation itself; second, by remembering that innovation is not linked only to specific sectors; and third, by reemphasizing the manner in which innovation can be forged by both collaboration and competition.

As to the definition of innovation, let’s think of it in this context as the use of the creation of additional economic value through the creation or recombination of knowledge. This is not the same as the invention of technology. This is an important point. We tend to think of innovation as if it were the province of information technology or biotechnology or nanotechnology. But innovation can come from better business practices, novel uses of resources, or smart design.

Of course, innovation is not limited to “innovation industries.” It would be a mistake for every place in the world to try to be the world’s leader in, say, information technology or biotechnology. But we need not believe that they are the only sources of innovation. Any industry can become more innovative as a result of employing technological advances in the way that it does business. Even more fundamentally, innovation, as we’ve defined it today, can be employed by any business.

Like cheese. One of the most successful clusters in the Northeast United States is the Artisanal Cheese cluster in Vermont, which over the past 20 years has developed from a handful of local cheesemakers to a cluster with nearly 50 members who produce more than 150 varieties of cheese.  Although cheesemaking is far from a new industry, the Vermont Cheese Council has taken advantage of new technologies and collaborative approach to marketing, distribution, and R & D to post double-digit annual growth in production since 2003. The cluster is now supported by the Institute for Artisanal Cheese at the University of Vermont, the nation’s only research institution devoted to the artisanal cheese industry.[31]

The “regional” in the phrase “regional innovation clusters” tells us where to look for leadership, as well as providing an understanding of the borders of innovation. In a paper I co-authored last year, we reproduced a map of the United States, identifying 11 high-tech clusters located across the country.[32] Only 1 of the 11 clusters was entirely contained within a single state. And then, even within a single state, clusters will cross municipal and county lines. This puts a very large premium on defining a cluster initiative by economic, not political, borders.

Thus, a regional innovation cluster should be viewed as an ensemble of various organizations and institutions that are defined geographically, interact formally and informally, and contribute collectively to the achievement of all kinds of innovations within a given industry.[33] And each will be different, a fact that has important implications for any federal or multistate program. As Mark Muro and Bruce Katz at Brookings explained recently, cluster thinking and cluster strategies “are more a paradigm than a single program.”[34]

Of course, we know quite a bit already about what makes a cluster strategy successful.[35]

First, place matters. It is important for regional economies to emphasize what they can do best, capitalizing on existing strengths or new strengths that spring naturally from existing advantages. Solar power is a good strategy for New Mexico; hydroelectric power is not. Existence of institutions of knowledge-creation, availability of capital, and the presence of high-skill labor with programs to spur talent generation will all be parts of a region’s assessment of its competitive strengths.

Second, connections are key. The economic theory of a cluster recognizes the importance of both competition, which makes businesses more successful and increases consumer welfare, and cooperation, to create an environment of mutual advantage. Universities and community colleges, for example, can add to the store of knowledge and help educate workers in a manner that advantages multiple, even competing, local businesses. But that is best done with explicit networks of collaboration and knowledge-sharing of the kind found, for example, connected to the Albany nanotechnology cluster.

Third, practice makes perfect. As demonstrated by North Carolina’s Research Triangle and the greater Phoenix cluster, it can take a long time, even decades, to build a new cluster from scratch. The observation reemphasizes our belief that short-term gains will come mainly from existing advantages that have yet to be fully realized. An analysis of Tennessee’s furniture cluster, for example, both identifies existing strengths, such as office furniture, and also areas in which the region can be potentially competitive, such as mattress manufacturing.[36] Areas of potential strength are likely to be areas that will result in quicker results.

Fourth, success depends on local leadership. There is no substitute for the ability of local businesses, governments, nonprofits, universities, and colleges to all work together. That has been demonstrated in areas and industries as diverse as San Diego’s CONNECT program, Toledo’s photovoltaic cluster, and Minneapolis’s medical devices cluster. Toledo is a particularly good example. The University of Toledo, recognizing its strong engineering and manufacturing science programs and the city’s highly skilled workforce and economic infrastructure, led a 20-year effort to create a new photovoltaics and clean-energy cluster. The university has assembled a team of world-class faculty in photovoltaics and has built laboratories and support centers that have spun off dozens of businesses and reinvigorated the city. In partnership, the state of Ohio committed $18.6 million to the university in 2007 to spur the continued development of the photovoltaics cluster, generate new high-tech jobs, and increase industry revenue. From this university and government leadership, the Wright Center for Photovoltaics Innovation and Commercializiation is now an internationally recognized photovoltaics research and development center with infrastructure attractive to companies incubating the future generations of photovoltaic technologies.[37]

But our work is scarcely done. Let me identify just two important areas which require further attention as we further develop clusters policy.

The first is to reform the idea of economic development itself in order to ensure that economic-development efforts are tightly aligned with regional economic strategies. And that is tightly connected to the second—to make sure that distinct economic-development efforts are just as tightly coordinated with each other—which itself will boost the efficiency and efficacy of governmental programs.

Let me give you an example.[38] The Midwest of the United States has had it especially tough in these difficult economic times—declining manufacturing, higher unemployment, and shattered communities. Plenty of existing federal programs can help this region rebound from the Great Recession and build new industries to compete anew in the 21st century. But do these programs work? And do they work together?

Well, at least in this part of the country, businesses say these federal programs are too small and too disconnected from each other to be as effective as they must be. That’s the conclusion of a new report by noted regional economist Maryann Feldman of the University of North Carolina, Chapel Hill, and her graduate assistant, Lauren Lanahan. They find that federal funding to help companies innovate and commercialize new products and services, “at less than 10 percent of the $150 billion a year that the federal government invests in basic scientific research, is ‘small beer’—a trivial amount given the challenges our nation faces from our global competitors.”[39]

This new report, published by the Center for American Progress, is based on a survey of more than 4,000 companies in the Pittsburgh-Cleveland region. Its purpose is to inform federal policymakers about the effectiveness of their innovation programs.

While doing their research, though, Feldman and Lanahan also discovered that two important state-based innovation programs—Ben Franklin Technology Partners in Pennsylvania and Ohio Third Frontier—are mostly providing the right mix of resources that companies need to compete.[40] Alas, businesses say the two programs aren’t providing enough of it due to limited state fiscal resources.

Feldman and Lanahan’s report also highlights another problem with current U.S. clusters policy—a lack of coordination among cluster initiatives. Feldman and Lanahan found that these effective but limited state programs do not match up well with the welter of existing federal innovation programs. And they also concluded that “federal programs designed to implement these policies are divided into a chaotic array of ‘silos’—policy-speak for mutually unconnected programs—that make it exceedingly hard for the federal government to act upon any strategy designed to overcome our nation’s economic policy limitations.”[41]

This lack of coordination among cluster programs is not a new problem. In 2008, a Brookings report by Karen Mills, Elizabeth Reynolds, and Andrew Reamer identified 250 separate federal programs with activities connected to economic development. They concluded that “the federal government’s current approach of a multitude of fixed silos has high transaction costs, low synergy, and, ultimately, insufficient return on taxpayer investment.”[42]

Fixing this problem is vital to the long-term success of U.S. clusters policy. Federal efforts should be tightly aligned with economic strategies of regional innovation clusters so as to avoid federal programs that duplicate each other or fail to coordinate their activities. That is why it is so encouraging that the Obama administration just announced the creation of the new Taskforce for the Advancement of Regional Innovation Clusters, which has been charged expressly with fostering collaboration among six agencies and departments in order to support the success of regional innovation clusters.[43]

It is important, in Europe and the United States, and around the globe, for us to continue to learn while we lead. One aspect of the Feldman-Lanahan report that deserves particular emphasis is, of course, that the study asks businesses themselves to evaluate governmental action. That is very important because business needs to be a part of the creation of regional innovation strategy, its implementation and, therefore, its evaluation.

As we evaluate cluster efforts, we need to measure the real impact of governmental actions on cluster success in order to further refine what works and what does not. Important work has begun, of course. The OECD, for example, has explored very specifically the question of how best to evaluate the effectiveness of cluster policies. [44] These lessons learned from the development of cluster policies are worthy of study. And the Center for American Progress report that I discussed a moment ago starts down the same path.[45]

This is again an area where the Obama administration is making progress. The Commerce Department recently announced a $1 million grant to the Institute for Strategy and Competitiveness at Harvard Business School, headed by Michael Porter, to develop a nationwide cluster map analyzing regional assets, which should assist in the development of comprehensive cluster strategies.[46]

Networks and nodes

Finally, I’d like to address the relationship of clusters to the global economy. One of the most common definitions of the Internet is this: A network of networks. But if you look at one of the original hand-written diagrams of the Internet drawn in the late 1960s, it looks different. It’s a sketch of networks and nodes—four places, each at a research university, all linked together. And that makes sense, networks connect; nodes supply and consume content.

The world of clusters is like that—networks and nodes. As a technical matter, when we discuss the economic impact of regional innovation clusters, we are actually discussing “traded services,” or those economic activities created in the clusters and consumed elsewhere.

Most of the scholarship is, not surprisingly, focused on very local analysis. How does a cluster form? How does it perform. How can it be strengthened?

Some recent analysis, however, has begun to examine the international relationships that bind clusters together. Note that the phrase “international relationships” is common parlance, but it suggests, of course, that the building blocks of economic relationships are nation-states.

A better phrase might be “intercluster relationships.” Because, for all of our emphasis on clusters as the building blocks of national economic success, we have yet to ask ourselves: What do trade issues look like from the perspective of a cluster? In other words, would a cluster-focused examination of current international trade issues lead us to any increased understanding of the global economy and the public-policy that should be applied to those jurisdictional entities—nations—that house regional innovation clusters?

Regional economies have never operated in isolation. Not only do they trade with other places, but the citizens and entities that make up regional economies are often international in character. Large corporations are located in multiple countries, and they expect their employees to work together. Value chains stretch across continents. The interaction of people, a critical ingredient of cluster success, is not limited to face-to-face contact. Put simply, communities are not only geographic. Communities are also communities of people inhabiting the same discipline, for example. Or people who share a common heritage and move back and forth from their home nation to their new homes.

A study of the biopharmaceutical sector, for example, demonstrates that Boston biotech firms develop strong relationships with companies located in other clusters, both within and beyond the borders of the United States.[47] Thus, “biopharmaceutical clusters tend to broaden their support. . . . through a broad range of interregional, national, international or global formal and/or informal relationships.”[48]

Even more to the point, leading sectors are simultaneously very local and very global. Take two sectors with which I myself work—the Internet ecosystem and agriculture. In both, the motto might be: “Act local. Act global.”

Analysis of Internet markets starts at a scale even smaller than the cluster, asking for example about the choices in a marketplace available to consumers in their homes. But in today’s world of mobile broadband, even that market definition may seem too big. We all carry the Internet with us—personalizing and shaping it as we go.

At the same time, the information and communications marketplace is global in its essence. Not only because value chains stretch across continents but because some products—say the semi-conductors that power computing devices—are actually the same the world over. The product market is, in some sense, the whole world. One apt description of the ICT industry in Ireland, for example, described it as “boundaryless,” not because the geographic location of Irish business was missing on a map but rather “in the sense that its global character defies traditional stereotypes of domestic rivalry and collaboration.”[49]

Agriculture has the same characteristic. My wife and I own a small farm near the Chesapeake Bay in Maryland, in the United States, where she’s set to grow vegetables for market next year. There is nothing much more local than the place where a seed is planted. And, of course, in the United States, local food harvests and distributions have been the basis for the growth of new regional innovation clusters themselves—in Northeast Ohio for instance.[50]

But the challenge of agriculture could not be more global. The United Nations estimates that agricultural production will just about have to double in the next forty years if we are going to be able to supply a global population that will reach nine billion people.[51] That is an innovation challenge of the first order.

So let’s think for a moment about how intercluster relationships might be studied.

Start with the biggest trade issue facing the United States right now—the economic relationship with China.

The tension is palpable. The Obama administration is pressing China to stop undervaluing its currency, which boosts China’s exports. Last week, the U.S. House of Representatives voted by a huge majority to give the Obama administration authority to impose tariffs on almost all Chinese imports to the United States, more than $300 billion worth, in retaliation for China’s failure to revalue its currency in the face of estimates that a fairly valued Chinese currency could add as much as a half-million jobs in America.[52] Then U.S. Treasury Secretary Timothy Geithner weighed in on the eve of the annual meetings of the International Monetary Fund and World Bank, calling for the two nations’ global trading partners to pressure China to revalue its currency. Meanwhile, tariff battles are escalating—most recently when China announced that it would impose big tariffs on American poultry, the latest skirmish in a contest over the application of antidumping rules.[53]

Currency and tariffs are, of course, classic instruments of national policy. But clusters are implicated as well.

Here are two views. One paper published earlier this year called expressly for a cluster-based approach to enhance US-China economic relationships, arguing that “China has the labor costs advantage, while America has technology and capital advantage. A comprehensive mutually beneficial merging of both advantages is certain to transform and enhance the Chinese industrial cluster.”[54]

From a very different perspective comes the recent petition filed by the United Steelworkers  union claiming that China “engages in illegal practices that stimulate and protect its domestic producers of green technology, ranging from wind and solar energy products to advanced batteries and energy-efficient vehicles.”[55] The trade union charges that China restricts access to critical raw materials, provides improper subsidies and export financing, discriminates against foreign firms and products, and improperly forces foreign firms to transfer intellectual property to China, all with adverse consequences to the U.S. economy.

This is not the place to decide the merits of the Steelworkers complaint. China has rejected it, saying that its actions are appropriate. The steelworkers, of course, plan to press on. But even without deciding the merits, it may be possible, nonetheless, to consider whether the theories advanced by the union offer a perspective on an interclusters trade policy. One could think of a similar set of allegations designed to draw the line between a permissible and impermissible support of clusters. Such an approach might argue that clusters are inherently local and global, so that their policies should not distinguish between foreign and domestic participants.

Such an approach would bring us back to the “boundaryless” cluster and the observation that markets are increasingly very local and supremely global. The node of a cluster may be in a particular place, but its network is not—it is network for capital, for supply, for collaborators, for the creation and sharing of intellectual property, for design, for manufacture and, of course, for customers. Moreover, participation in the cluster, by this token, is international as well—as firms congregate to find mutual advantage without regard to their nation of origin, as we have seen in leading clusters in both the United States and Europe. In other words, the node is local but the network is not.

From the perspective of a nation, this may be confusing. Foreign and domestic firms are labeled as such by reference to national borders, national origins, and national headquarters.

But from the perspective of a cluster, the picture may look simpler. Regional innovation clusters fuel local economic growth, without regard to the ostensible nationality of the participant firms.

Let’s ask ourselves, then, if the following statements are true and if they could contribute to our understanding.

Cluster-based policy does not ask, “Who are you?” It asks, “What is your contribution to economic growth in this place?”

Cluster-based policy does not ask, “Is your business domestic or foreign?” It asks, “What are the strongest ways you can build a network that fuels economic success and the creation of positive economic spillovers that make the cluster and its participants stronger?”

And cluster-based policy does not ask, “How do we artificially motivate businesses to move from one place to another?” It asks, “How do we encourage our regional innovation cluster to be as competitive as it can be?”

I do not mean to suggest that the principles of trade policy should be ignored. Issues of currency manipulation, for example, can only be analyzed at the national or supranational level. I only suggest that we might increase understanding of how commerce actually works—and how it should work—by devoting more attention to the relationships between clusters and asking ourselves, “What does intercluster trade policy look like?”

At the end of the day, the conclusion is simple—regional innovation clusters need international trade. And international trade is what moves information, goods, and services between clusters. In the future, I suggest that the relationship between these nodes and the global networks should gain additional emphasis. We need to empower the nodes and the networks and achieve a better policy understanding of how they may work together.

Conclusion

There’s a lot on the table as we begin our discussions today. Let me just briefly recap the important points that I have tried to emphasize.

First, clusters policy is more important, not less important, in tough times and tight budgets.

Second, we must simultaneously lead and learn, implementing better policies today, and learning from each other how to improve those policies even more in the future through the collection and analysis of data.

Third, we must reinforce the connection of clusters to a global economy and begin to ask, “How do regional innovation clusters view their relationship to that global economy?”

We have assembled the right people in the right place today.  We might consider ourselves a one-day cluster—global in composition, local in our discussions.  Ready to learn and, of course, to lead.

Acknowledgments

The author would like to thank Charles Borden for his substantial editorial assistance and the following individuals for their insightful comments: Brad Benthal, Peter Cowhey, Karen Maguire, Mark Muro, and Ed Paisley. The views expressed herein are those of the author’s alone and not necessarily shared by any of the institutions with which he is affiliated.

Endnotes

[1] Mercedes Delgado, Michael E. Porter, and Scott Stern, “Clusters, Convergence, and Economic Performance” (Cambridge: Institute for Strategy and Competitiveness, 2010), available at http://www.isc.hbs.edu/pdf/DPS_ClustersPerformance_08-20-10.pdf.

[2] Ibid.

[3] Michael Greenstone, Richard Hornbeck, and Enrico Moretti, “Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants,” Working Paper 07-31 (MIT Department of Economics, 2007).

[4] Mark Muro and Bruce Katz, “The New ‘Cluster Moment’: How Regional Innovation Clusters Can Foster the Next Economy,” (Washington: Metropolitan Policy Program at the Brookings Institute, 2010); Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” (Washington: Metropolitan Policy Program at the Brookings Institute, 2008); Council on Competitiveness, “Collaborate: Leading Regional Innovation Clusters” (2010); Maryann Feldman and Laura Lanahan, “Silos of Small Beer: A Case Study of the Efficacy of Federal Innovation Programs in a Key Midwest Regional Economy” (Washington: Science Progress, 2010); Jonathan Sallet, Ed Paisley, and Justin Masterman, “The Geography of Innovation: The Federal Government and the Growth of Regional Innovation Clusters” (Washington: Science Progress, 2009); “Entrepreneurship Initiatives,” available at http://www.silicon-flatirons.org/initiatives.php?id=entrepreneurship.

[5] “World Class Clusters at Your Fingertips,” available at http://www.clusterobservatory.eu; “European Commission: Enterprise and Industry,” available at http://ec.europa.eu/enterprise/index_en.htm; “European Commission: Research Directorate-General,” available at http://ec.europa.eu/dgs/research/index_en.html.

[6] “Máire Geoghean-Quinn, EU Commissioner for Research, Innovation and Science Interview,” available at   http://www.research-europe.com/index.php/2010/05/595.

[7] Robert D. Atkinson and others, “Innovation Policy on a Budget: Driving Innovation in a Time of Fiscal Constraint,” (Washington: The Information Technology and  Innovation Foundation, 2010), available at http://www.itif.org/files/2010-innovation-budget.pdf.

[8] “Overview of Funding,” available at http://www.recovery.gov/pages/textview.aspx?List=%7BEB595CCA%2DD93F%2D48F4%2DAF96%2D11E2D41DE73D%7D&xsl=Charts/FundingOverviewChartTextView.xsl.

[9] Elizabeth McNichol, Phil Oloff, and Nicholas Johnson, “State Continue to Feel Recessions, Impact,” (Washington: Center on Budget and Policy Priorities, 2010), available at http://www.cbpp.org/cms/?fa=view&id=711.

[10] Justin Lahart, “Companies Still Holding Lots of Cash,” The Wall Street Journal,September 17, 2010.

[11] Organisation for Economic Co-Operation and Development, “Policy Responses to the Economic Crisis: Investing in Innovation for Long-Term Growth” (2009), available at http://www.oecd.org/dataoecd/59/45/42983414.pdf.

[12] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[13] The IALR is central to the success of the Dan River Region; it “provide[s] research services to [the region’s] technology sector, use[s] distributed research in conjunction with Virginia Tech to stimulate start-up companies, incubate[s] early stage companies and provide[s] state-of-the-art learning facilities and services for the region’s educational system.”  See Council on Competitiveness, “Collaborate: Leading Regional Innovation Clusters”

[14] Ibid.

[15] Rick Moriarty, “New York State Plans to Spend $28 Million to Create Nanotechnology Lab in Salina,” Syracuse Post-Standard, September 9, 2010.

[16] Remarks of Allison Hooper, Founder of Vermont Butter and Cheese Creamery, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[17] U.S. Department of Commerce, “U.S. Commerce Secretary Gary Locke Announces Winners of i6 Challenge,” Press release, September 23, 2010.

[18] Ibid.

[19] U.S. Small Business Administration, “SBA Announces Support for 10 Regional ‘Innovative Economies’ Clusters, Local Job Creation,” Press release, September 20, 2010.

[20] Ibid.

[21] Muro and Katz, “The New ‘Cluster Moment’”

[22] Ibid.

[23] Closing Keynote Remarks of U.S. Secretary of Agriculture Thomas Vilsack, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010, available at http://www.usda.gov/wps/portal/usda/usdahome?contentidonly=true&contentid=2010/09/0488.xml.

[24]U.S. Department of Agriculture, “Secretary Vilsack Announces Awards to Support Regional Economic Development Strategies,” Press release,  September 23, 2010.

[25] Delgado, Porter, and Stern, “Clusters, Convergence, and Economic Performance”; Greenstone, Hornbeck, and Moretti, “Identifying Agglomeration Spillovers.”

[26] Delgado, Porter, and Stern, “Clusters, Convergence, and Economic Performance”

[27] Muro and Katz, “The New ‘Cluster Moment’”

[28] Ibid.

[29] Ibid.

[30] Remarks of Jason Furman, Deputy Director of the National Economic Council, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[31] Muro and Katz, “The New ‘Cluster Moment’”

[32] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[33] Abdelillah Hamdouch, “Conceptualizing Innovation Clusters and Networks” Working Paper 3 (Research Network on Innovation, University of Lille, 2008).

[34] Muro and Katz, “The New ‘Cluster Moment’”

[35] Sallet, Paisley, and Masterman, “The Geography of Innovation

[36] Ibid.

[37] Ibid.

[38] The following passage is adapted from Ed Paisley and Jonathan Sallet “Rebuilding Regional Economies,” Cleveland Plain Dealer, September 23, 2010.

[39] Feldman and Lanahan, “Silos of Small Beer”

[40] Ibid. at 29-31.

[41] Ibid.

[42] Mills, Reynolds, and Reamer, “Clusters and Competitiveness”

[43] Remarks of Jason Furman, Deputy Director of the National Economic Council, at Regional Innovation Clusters: Advancing the Next Economy, September 23, 2010.

[44] Organisation for Economic Co-operation and Development,  Reviews of Regional Innovation: Competitive Regional Clusters (2007).

[45] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[46] U.S. Department of Commerce, “U.S. Commerce Secretary Gary Locke Announces Winners of i6 Challenge”

[47] Hamdouch, “Conceptualizing Innovation Clusters and Networks.”

[48] Marc-Hubert Depret and Abdelillah  Hamdouch, “Multiscalar Clusters and Networks as the Foundations of Innovation Dynamics in the Biopharmaceutical Industry” (Regional Studies Association, 2010).

[49] Roy Green and others, “The Boundaryless Cluster: Information, Communications & Ireland” (2001).

[50] Sallet, Paisley, and Masterman, “The Geography of Innovation”

[51] United Nations Department of Public Information, “Food Production Must Double By 2050 To Meet Demand From World’s Growing Population,” Press release, October 9, 2009, available at http://www.un.org/News/Press/docs/2009/gaef3242.doc.htm.

[52] Sewall Chan, “The U.S.-China Exchange Rate Squeeze,” The New York Times, September 18, 2010.

[53] Keith Bradsher, “China Imposes a Steep Tariff on U.S. Poultry,” The New York Times, September 26, 2010.

[54] William Lawrence and Weidong Sun, “A Cluster Approach towards Enhancing Chinese-American Trade Opportunities” (2010).

[55] United Steelworkers, “United Steelworkers’ Section 301 Petition Demonstrates China’s Green Technology Practices Violate WTO Rules,” available at http://assets.usw.org/releases/misc/section-301.pdf.

Indeed, totally absent from the document are the words “education,” “science,” “research,” or “technology” (“new technologies” is used once, but only to describe the use of computers and the Internet in the development of the Pledge itself). “Innovation” appears only once, in a section about government red tape, while “skill(s),” “training,” “export,” and “infrastructure” are all totally absent. Despite repeated calls for increased American “competitiveness,” nowhere in the Pledge is “sustainable” or “long-term” growth mentioned.

The words tell the story. The omission of so many of the essential prerequisites for sustainable and long-term economic growth makes the Pledge’s repeated calls for increased American “competitiveness” ring hollow. An economy that does not invent and commercialize new ideas quickly falls behind in the 21st century global economy.

Economists have realized that technological innovation is an indispensable driver of economic growth and job creation, and that “governments have a key role to play.” Multiple independent studies, including one by Nobel Laureate Robert Solow, have shown that that the “traditional” inputs of capital and labor can only account for at most 15 percent of measured economic growth, whereas the remaining 85 percent is driven by technological innovation.

The World Economic Forum’s “Global Competitiveness Report for 2010” also categorizes the U.S. economy squarely within the “innovation-driven” category, meaning that its growth is driven by the practical application of new technical knowledge, in contrast with the “factor-driven” or “efficiency-driven” categories. The report also warns that the relatively high wages and the associated standard of living that we enjoy in our developed, innovation-driven economy can only be sustained if businesses are able to compete by innovating new and unique products.

But as we pointed out last week, technological innovation is increasingly dependent on a robust science system, which in turn requires talented scientists, mathematicians, and engineers to function. Unfortunately, the United States is falling behind in educating the innovators who will power the American economy of the future.

Our students rank 21st in science literacy among 30 developed countries and 25th in math literacy, according to the Organization for Economic Cooperation and Development. This puts American 15-year olds on par with those in the Slovak Republic, and far behind students in Canada, Germany, South Korea, and Japan. In 2010, only 43 percent of U.S. high school graduates in 2010 were ready for college work in math and 29 percent were ready in science, according to Change the Equation, a network of U.S. chief executive officers concerned enough about our national competitiveness to band together in support of better science, technology, engineering, and math teaching in our elementary and secondary schools.

Indeed, less than one-third of U.S. eighth graders show proficiency in mathematics and science, according to a report prepared by the President’s Council of Advisors on Science and Technology. And according to the World Economic Forum, the United States ranks only 48th in quality math and science education, far behind countries such as Canada, India, Poland—even Tunisia and Qatar. (see chart)

Figure: The United States balance of trade in advanced technology goods has been declining steadily. Data from the U.S. Census Bureau Foreign Trade Statistics, compiled by Science Progress.

As President Obama said in January, “Make no mistake: Our future is on the line. The nation that out-educates us today is going to out-compete us tomorrow.” Unlike the “Pledge to America,” President Obama has put his money where his mouth is. While the Pledge refers repeatedly to the need to help businesses and entrepreneurs invest and invent, one wonders whether its authors have ever asked the companies they claim to advocate for what they really need to stay competitive in the 21st century.

In stark contrast stands the Obama administration’s “Educate to Innovate” campaign, which has set an ambitious agenda and partnered with the private sector to “elevate STEM education as a national priority essential to meeting the economic challenges of this century.” As part of this campaign, the White House has helped to convene over 100 major U.S. companies to found a new 501(c)(3) nonprofit called Change the Equation, which is investing more than $700 million in overhauling STEM education in the United States (STEM education stands for Science, Technology, Engineering, and Math—four economically important skill sets where American students are falling behind).

These companies are supporting the president’s STEM education agenda and even putting millions of their own dollars into it because they know that without concerted action to keep America’s students competitive in math and science now, they will be unable to obtain quality employees to keep them competitive in the future. These investments will fund a growing array of public-private partnerships including:

• More than 350 science centers and science museums are pledging to offer 2 million hours of science enrichment to at least 25,000 youth in all 50 states.
• Intel Corp. has committed to a 10-year, $200 million campaign to support teaching in math and science.
• Raytheon Co. will leverage its unique expertise in modeling and simulation to expand its national “STEM Modeling Tool” to the state level, empowering policymakers to identify promising STEM education policies.
• In partnership with Lockheed Martin Corp. and Military Child Education Coalition, the National Math Science Initiative will announce a new effort to expand access to Advanced Placement classes in STEM subjects to public high schools that serve a large number of military families.
• A “Bridge to Science” Program with Nature Publishing will make a three-year, $5.5 million commitment to a series of programs to build stronger connections between parents, students, and scientists, including the creation of an online platform for parents and children to become “citizen scientists.”

Thanks in part to these public-private partnerships, President Obama announced this week the goal of recruiting 10,000 new STEM teachers in the next two years, a down payment towards the president’s goal of training 100,000 new STEM teachers by decade’s end.

These investments in science, technology, engineering, and math education are not only a good use of public resources, but they are essential elements driving of sustained growth in today’s global and innovation-driven economy. No pledge, plan, or platform for securing America’s long-term prosperity can possibly fulfill its goals without addressing these critical issues.

Sean Pool is Special Assistant for Energy, Science, and Technology Policy at the Center for American Progress. Austin Frerick, an intern with CAP’s Education Policy team, contributed invaluable research to this article.

First of all, science and technology are in the process of converging. Technology has been around since at least the beginning of agriculture, arguably in tools and weapons used by hunter-gatherers, but science in its modern form is a latecomer. One difference between science-based and non-science-based technology is that scientific theories often have surprising implications that even their pioneers don’t anticipate.

A classic example: Albert Einstein had to be persuaded by fellow physicist Leo Szilard that the atomic bomb was a practical possibility, partly in light of the Einstein’s own special theory of relativity, so that Einstein would lend his prestige to a letter alerting President Franklin D. Roosevelt of this potential.

Secondly, science-based technology development is remarkably recent, accelerating only toward the end of the 19^th century, with specific, crafted applications of ideas drawn from the emerging explanatory and demonstrable theories, especially in biology. Of course, it is still possible to engage in technical manipulations of the world without paying attention to any underlying theory, so science and technology will never be identical. But there is every reason to believe that the convergence will go on indefinitely, as science becomes an increasingly critical input to the process of technology innovation.

For a time the idea of starting with a scientific theory as a way to solve a practical problem was so novel that the term “applied science” was coined. But so much technology is now science-based, as in the development of new microprocessors, that applied science—particularly in the public policy arena where policymakers want to speed up commercialization of new technologies—is becoming virtually synonymous with technology.

To appreciate the traditional relationship between technology and invention, take the example of Thomas Edison. He was both a nonscience based technologist and an inventor. The incandescent light bulb was built on a diverse array of gradually improved materials and owed its origins only very indirectly to electrical theory (an early theorist of which was another great American inventor, Benjamin Franklin). Alexander Graham Bell was another to whom the term technologist/inventor applies. Both Edison and Bell were brilliant craftsmen who addressed a problem, but neither was an innovator.

Like science and technology, the relationship between invention and innovation is also evolving, but differently. While science becomes an increasingly critical component of innovation, the process of innovation in turn is becoming increasingly dependent on a wider array of activities than just invention.

Innovation, in the words of the historian Harold Evans, involves more than inventing a new technology, it involves “a universal application of the solution by whatever means…. Invention without innovation is a pastime.” Universal application is a matter of dissemination, sometimes called “diffusion,” or moving an ingenious solution out into the world. In that sense, the telephone as an innovation is owed to someone who is far less than a household name: Theodore Vail, the founder of AT&T. His vision and organizational genius turned Alexander Graham Bell’s technology into national telephone service through the merger of Western Union and the Bell Company.

As the technologies that power our lives become increasingly complex, each new useful innovation stands on the shoulders of an ever growing pyramid of previous inventions. The Pentagon’s invention of the Internet in the 1960s created the opportunities for innovators such as Tim Berners-Lee to develop the World Wide Web. Reminiscent of AT&T’s Theodore Vail, who married two entities to produce his communications system, Berners-Lee joined hypertext to the Internet to produce the Web.

What’s more, the diffusion of inexpensive Internet access into the majority of American homes and businesses, coupled with advanced telecommunications and satellite infrastructure, has made possible yet another innovation, the iPhone application, which can now be instantly disseminated through AT&T’s 3G network to handheld users across the globe.

None of these society-changing technological innovations could have come into being without the work of a diverse array of entrepreneurs and engineers in sectors from computing to telecommunications to infrastructure to marketing—all of whom figured out how to commercialize these inventions by making them useful, profitable, and affordable.

With little notice, these innovations in computing and information technology now shape the science of laboratory biology, as genetic sequences can now be emailed to labs around the world and chromosomes reconstructed from the biochemical data. In this sense, as well, ease and immediacy of scientific communication are giving the scientific community leverage as a new invisible college and also constituting it as a global force, a world polity of instantly shareable knowledge and innovation. The fact that innovations are shaping the way our society and economy function, and even shifting into the development of previously unrelated areas of science and technology are evidence that we have surpassed a factor-driven economy, and exist now in a truly innovation-driven one.

The important public policy lesson is that in the 21^st century technological innovation is not a zero-sum game. Progress in one field of technology or science often yields unpredictable benefits for others. While once an inventor might have relied on her own ingenuity and locked herself in her garage to keep her intellectual property, now the prize will go to those able to collaborate in local, regional, or even global alliances of researchers, technologists, and entrepreneurs. Innovation begins with invention, but success or failure of new technologies in shaping society and improving human lives ultimately hinges on whether there is a profitable business plan to be built around the production, sale, and use of that technology.

As the inherently cooperative and interconnected nature of science, technology, invention, and innovation becomes evermore manifest, public policy needs to reflect the emerging reality that these forces will continue to shape our economy and our society in profound ways we simply cannot predict. We need to ensure that our economy is supportive of the full spectrum of innovation activities beyond invention—from research and development, to demonstration, and on to commercialization. We also need a STEM education system that ensures our students are prepared to participate in these activities, and better work force training and higher educational opportunities to enable our students and workers to quickly shift into the manufacturing and services jobs that comprise the 21^st century innovation economy.

These are difficult policies to create and institute. But if public policy recognizes the inherent value of science as not just the pursuit of obscure truths, but as an irreplaceable input to the technology innovation process that sustains our modern economy then policymakers can begin the effort better positioned and better informed about the possible outcomes.

Jonathan D. Moreno is Editor-In-Chief, and Sean Pool is Managing Editor of Science Progress.

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Event: Regional Innovation Clusters: Advancing the Next Economy

Amid today’s stumbling economic recovery, policymakers are examining a variety of measures to help businesses compete and grow their workforces. As part of this effort, it is critical that they understand how regional economies across our country stitch themselves together from the bottom up—what makes them tick and what they need to grow and thrive in the 21st century. Alas, federal innovation policies aimed at boosting the competitiveness of our economy through investments in science and technology commercialization are often grounded in 20th-century economic development strategies that overlook the importance of regional economies and no longer match the needs of the 21st-century global economy.

Academics and policymakers alike understand the limitations of our current policies at the macroeconomic level. Federal funding for these commercialization programs, at less than 10 percent of the $150 billion a year we invest in basic scientific research, is “small beer”—a trivial amount given the challenges our nation faces from our global competitors. And federal programs designed to implement these policies are divided into a chaotic array of “silos”—policy speak for mutually unconnected programs— that make it exceedingly hard for the federal government to act upon any strategy designed to overcome our nation’s economic policy limitations.

At the regional level, however, many businesses and universities, state economic development agencies and community colleges, venture capitalists and commercial bankers all depend on current federal innovation policy funds to pay for or complement their own efforts to boost commercialization of game-changing discoveries, incremental manufacturing, and service innovation alike. Despite the clear limitations of existing federal innovation programs, they remain important to our national economic competitiveness. So understanding the efficacy of these federal innovation programs is the first step toward understanding how to improve them or replace them.

That is what we set out to do in this paper in one regional economy of our country—the eastern Midwest region that includes Pittsburgh in western Pennsylvania; and Cleveland, Akron, and Youngstown in northeast Ohio. The region, anchored by its major cities Pittsburgh and Cleveland, faces distinct challenges and opportunities. Regional economic growth, of course, is everywhere local and interconnected, but how much so depends on the vibrancy of each region’s innovative ecosystem. Silicon Valley in California, or the Route 128 corridor around Boston are famous “regional innovation clusters” in which businesses large and small, universities, federal labs, and financiers interact every day in a heady mix of creativity that powers our nation’s innovation economy. Places that have tried to copy their unique recipes, however, have not been very successful. And those places that succeeded at creating a high technology regional economy, such as North Carolina’s Research Triangle Park and San Diego’s Connect project, found that they needed to pave their own path.

In similar vein, Hollywood has a different mix of players who achieve the same thing in southern California for our entertainment industries. And Nashville serves the same purpose for country music. The upshot: Every successful regional innovation cluster defines itself idiosyncratically and specifically to its own context, depending on its own defining economic activity—be it entertainment, biotechnology, information technology, or advanced manufacturing.

But older industrial areas such as Pittsburgh, Cleveland, Akron, and Youngstown are places with substantial infrastructure and a proud industrial heritage that are struggling to redefine themselves in the global economy. The large corporations headquartered there that served as the backbone of the region’s 20th-century industrial economy are neither as numerous as they were 50 years ago nor as central to the region’s core economic competitiveness. In many different ways these companies have squandered their competitive advantages or watched as the forces of globalization overwhelmed those advantages.

This leaves entrepreneurship (defined as new firm formation and scale-up) and innovation (defined as the creation of value in an economy no matter the size of the company or the source of the idea) as the most viable strategies for the economic future of the region. Our study sought out these new players in this region’s innovation ecosystem to ask them not only about the efficacy of federal innovation programs but also about how they interact with each other—how much they felt they worked and lived in an emerging regional innovation cluster. Along the way, we also asked these players about the region in search of the strengths and weaknesses of this once-thriving, metal-bending region of our country in the 21st century.

Our survey of these firms and players on these subjects is the first one ever conducted. And our one-on-one interviews with dozens of key players in this new ecosystem only buttressed what we learned from our survey. We found in the eastern Midwest of our country an ecosystem of innovation and entrepreneurship that is emerging and vibrant, but also fragile, requiring the sustained efforts of local, state, and federal agencies working together to help firms survive and thrive. Problem is, we also found that local innovation programs that connect well with entrepreneurs are limited in scale, and the handoff with federal programs can be problematic at best because these programs are also limited as well as disconnected from each other.

Within this one region, we find examples of companies that have worked well with the limited resources available to them. But many others still have a ways to go. We also find universities and state economic development agencies that thoroughly understand the role they need to play in developing a thriving regional innovation cluster. But we also learn about the limitations these institutions face.

In the pages that follow, we will detail the results of our survey then present our overarching analysis of this seminal and difficult data-gathering effort accompanied by our on-the-ground interviews. The information we gleaned is admittedly difficult to assemble into succinct categories. The complexity of the region’s rolling transformation from industrial heartland to a new innovation-driven ecosystem for the 21st century is very hard to capture in clean “snapshots.” Briefly, however, we discovered that:

• Financing is lacking both for young innovative companies and for established medium-sized companies as they try to carry promising new or incremental technologies to market.
• Accessing federal innovation funds is exceedingly time consuming, often self-defeating, and in the end usually too small to be of enduring use.
• State and local innovation funds are pursued to a greater degree than federal programs but are too small for the needs of the region’s firms.
• Federal, state, and local funding programs nonetheless can be useful in attracting private financing even though these programs are not well-coordinated.

These findings are troubling for a variety of reasons. Many entrepreneurial business ventures depend on these government programs as they discover, develop, and begin to move innovation toward the market. Without critical public support, these entrepreneurs may not be able to survive. For a long time, economic development policymakers have recognized that the infamous “valleys of death,” where good ideas lack the financing to become companies that hire well-paid workers, seriously threaten the creation of new firms and the expansion of existing firms. This debilitating financing gap is compounded by current economic conditions and a banking crisis. The result: The entire spectrum of small- and medium-sized firms and even larger firms in the region face a crisis in securing expansion and working capital.

But our survey turned up some promising news, too. Specifically:

• Finding management, engineering talent, and well-trained workers in the region is not a significant challenge for companies.
• Startup companies and established small- and medium-sized firms are building on the region’s historical strength in industrial activity to create new products and services in emerging industry clusters within the region.
• These companies recognize they operate in clusters and would welcome a regional innovation cluster coordinator who could bring together private sector companies; nonprofit organizations such as universities; and federal, state, and local government officials to better align economic policy with the needs of companies in the region.

These core findings underscore the need for the federal government to overhaul its innovation policies and to work more closely with state and local leaders in the public and private sectors to sort out what works and what does not. Our study also points to the need to completely rethink how we go about encouraging regional economic development in the 21st century.

Proposing specific policy proposals based on one survey of one regional economy would not be wise, but there is enough academic research and policymaking experience about innovation to support a set of policy principles that are buttressed significantly by the research we have just completed. We will detail these, too, in the pages that follow, but briefly we believe that:

• Bottom-up, locally organized innovation programs that stitch together federal, state, and local economic development programs would serve our national economy best in the 21st century. This should be financed through public-private partnerships that include all the players in a given regional innovation cluster.
• The federal government has a major facilitating role to play in this process— one that includes significant increases in financing without monopolizing decision making.
• Each locally organized cluster will be different and thus will need region-specific support from federal, state, and local governments.

We believe our survey and our analysis demonstrates the need for the Obama administration and especially Congress to embrace these principles as they go about reforming our economic development programs to meet the needs of the 21st-century innovation economy. Pittsburgh, Cleveland, Akron, Youngstown, and their surrounding communities are changing rapidly because of globalization and in reaction to globalization. Our policymakers in Washington, in statehouses, and in municipal town halls need to give them the tools they need to succeed.

Maryann P. Feldman is the S.K. Heninger Distinguished Chair in Public Policy at the University of North Carolina, Chapel Hill, and Lauren Lanahan is a graduate student in the Department of Public Policy at the University of North Carolina, Chapel Hill.

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Event: Regional Innovation Clusters: Advancing the Next Economy

Small companies are the nation’s primary drivers of job creation. A few of today’s small companies will grow to become our next 21^st century Googles and Genentechs. These young companies could become the next big publicly traded companies on the cutting edge of innovation, and many more could become the not-as-big but just as prosperous companies with the ability to raise equity and debt capital to expand their businesses and job opportunities. This kind of “bottom-up” innovation and entrepreneurial company creation is what defines our unique U.S. venture capital-driven economy, the world’s top performer that over the past several decades produced tremendous results.

But something important has changed since then—the pool of venture capital is dramatically smaller today, crimping the creation of new ideas into new businesses ready to hire Americans by the score. The headline in a recent Wall Street Journal article tells the tale: “Venture Capital Could Shrivel Away” because “fund raising has now come to a near halt.”

Indeed, in a recent presentation in the National Venture Capital Association’s Venture Capital Industry Update, October 14, 2009, NVCA president Mark Heeson shows that the steady, though historically slow, growth in VC fundraising from 2002 to 2007 began a considerable decline in 2008 such that the VC industry is at a new and much lower level.

Why is venture capital fundraising important to jobs growth? Well, a recent NVCA report shows that:

“In 2008, venture capital-backed companies employed more than 12 million people and generated nearly $3 trillion in revenue. Respectively, these figures accounted for 11 percent of private sector employment and represented the equivalent of 21 percent of U.S. GDP during that same year. These findings extend trends regarding venture capital’s outsized impact – or “ripple effect” – on the U.S. economy that stretch back to the first edition of this report, published in 2001.”

The upshot: Our nation’s unique strength, its venture capital industry, is in danger of drying up just when we need it the most.

Yet equity capital for small business remains key to growing the competitive companies that can create the millions of jobs we need for broad-based economic prosperity. Without equity capital, jobs will lag and the jobless recovery will continue. America needs to focus on jobs-ready, entrepreneurial-driven companies by providing equity capital for their growth. And yes, the federal government can help.

Today there is a special opportunity for the federal government to have a significant impact on job creation by joining forces in a public-private venture capital partnership. Together, the private and public sectors can invest equity in competitive, jobs-ready businesses—equity that can also enable other private and public sector debt financing for small businesses to work more effectively.

Before detailing how this public-private partnership would work, let’s first listen to what the co-founder of one of the 20^th century’s most successful venture capital-backed companies sees as the key problem plaguing jobs growth in our nation today. Andy Groves, Intel Corp.’s co-founder, CEO and chairman, recently in Bloomberg Businessweek pinpointed the strategic decline in jobs creation in the United States. He says our economy is suffering from the ability to take technology “from prototype to mass production.” Grove rightly notes:

“This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter. The scaling process is no longer happening in the United States.”

He’s right, of course. Jobs and scaling are two sides of the same coin. And it’s the equity capital piece, the most powerful driver in jobs creation, that’s missing from public discussion about how to solve the problem of America’s severe jobs problem. America has hundreds of these companies, all now job ready. It is these companies that equity capital can help and the ones that are ready to be a part of an American jobs strategy.

Here’s how an “equity jobs” program would work. Public and private venture capital funds would go directly to companies at the top of the list as potential jobs producers.  They would only go to companies that are ready to hire new employees to support their growth, whether the company employs only a handful of workers but is poised to launch a groundbreaking new product or service that can be quickly scaled up, or employs 300 hundred or more workers but needs the equity investment to expand their operations across the country or overseas, mostly likely in tandem with public and private debt financing, too.

As an investor, the federal government would be a limited partner in these funds, so all public money would be returned to the U.S. Treasury along with dividends as companies went public on U.S. stock exchanges or were acquired by other companies looking to expand their operations or tap new technologies with homegrown production. This would be a positive “double bottom line” for America.

Making this program churn out jobs would require a rigorous selection of savvy fund managers with track records of strength and quality of work. They would need to boast a variety of company building skills alongside financial and entrepreneurial acumen, but also the basic skills metrics of a good VC such as speed of exits, cash-on-cash returns, investment volume, and ability to build “home run” potential in their portfolios.

To provide investment services in regions in all 50 states, the program would employ 25 fund managers. Each would be required to show that they possess operational experience in firms with top quartile internal rate of return performance, and cumulative experience of ten years or more as board members of invested companies. Further they would have to demonstrate the capability to commit to and provide both return on investment and jobs creation outcome metrics.

The successful applicants would select jobs-ready companies on two key criteria. The first would be according to highest levels of order backlogs and current demand, one way venture investors select their most promising investments in companies close to “break out.” Consider an Orange County, CA-based technology company that recently failed to qualify for either bank or Small Business Administration financing because of lack of sufficient equity capital. The company, Applied Cardiac Systems, in business for 30 years, makes in America and sells worldwide its wireless devices to monitor heart functioning. Recently a change in government requirements of devices of this kind opened up a market of nearly $500 million. The company is a very strong global competitor in this market, and with adequate funding to support expansion, the company could scale up and add new local jobs. But the recent economic downturn reduced the company’s cash flow, disqualifying it for a loan. Equity capital is the only source of funds that can jumpstart this company’s growth.

Why is equity financing as a public policy priority so important to debt financing? Because the federal government right now is making strenuous efforts to direct debt capital to small businesses, but in many cases it isn’t working. Banks are reluctant to lend after the U.S. housing and financial crises, and banks are facing more stringent regulatory requirements precisely because of the lending excesses of the past decade. Elizabeth Warren, who overseas the $700 billion Troubled Asset Relief Program, or TARP, for Congress says ”there’s no evidence that the $700 billion bailout boosted lending to small business.”

Warren is concerned that the market can’t find qualified companies and worries that the government incentives to lend are not strong enough. And in fact, banks are less willing to grant loans to small- and medium-sized companies. But with an infusion of equity capital these companies become much more promising credit risks. The key is equity capital, a way to address these issues and to provide growth capital to those companies that have a future potential and who have a strong backlog of business and need to hire.

The second investing criteria for these new public-private venture capital funds would be in market-ready products based on disruptive technologies that meet rapidly emerging global demand. Everyone in America knows the rags-to-riches stories of venture capital backed companies such as Google and Yahoo Inc., but there are many other companies like them who boost job growth every day in our country. Cases in point where equity has ignited world class companies:

• In 1987 Silicon Valley venture firm Sequoia Capital invested $2.5 million in data network gear maker, Cisco Systems Inc. for 30 percent ownership of the startup—within 10 years after going public Cisco employed 26,140 people.
• Ebay Inc. received $6.7 million from Benchmark Capital in 1997, which provided them the opportunity to go public in 1999, and then further expanded by purchasing Paypal, creating thousands of jobs.
• Intuit Inc. started with 2 guys working out of a modest apartment in Palo Alto, CA in 1983—venture backing helped it grow to $3.4 billion in revenues with approximately 7,800 employees today.

We need to support companies with disruptive technologies such as these—technologies that will define the 21^st century global economy—by ensuring adequate equity capital for entrepreneurs with breakthrough applications in alternative energy, clean energy technology, life science, medical technologies and personalized medicine, cybersecurity, and more. America has an abundant supply of these technologies just waiting to be commercialized at a scale that creates jobs upon jobs. We just need to find them, provide the capital they need, and help them grow and create those jobs.

Those who understand the direct connection between equity capital and jobs creation know they need to make it happen. In 2009 a House of Representatives’ committee passed the ‘‘Small Business Early-Stage Investment Act of 2009’’ (H.R. 3738) co-sponsored by Reps. Blaine Luetkemeyer (R-MO) and Glenn Nye (D-VA) by voice vote that would establish an equity investment program for small business. Later almost identical sections appeared in the‘‘Small Business Financing and Investment Act of 2009’’ (H.R. 3854, Title VII), sponsored by Rep. Kurt Schrader (D-OR), which built around the idea of serving certain small businesses needing equity investment because they had “attributes of being highly capital-intensive enterprises whose business models are generally not amenable to financing through lending programs.”

This bill passed the House of Representatives on October 29, 2009, by a vote of 389-32. Alas, the bill was sent to the Senate and referred to the Committee on Small Business and Entrepreneurship, and its status as reported by Govtrack.us is “would seem to be abandoned.”

This year, however, a new bill, Small Business Jobs and Credit Act of 2010

(HR 5297), sponsored by Rep. Barney Frank (D-MA) recently passed the House of Representatives with the main features of H.R. 3854, but with an increased equity funding level to $1 billion (HR 5297, Title III). A companion bill “The Small Business Jobs Act of 2010” (H.R. 5297), stripped, unfortunately, of any provisions for improving equity capital for small business, is now before the Senate.

All this legislative effort has been a step in the right direction, but all, alas, lack a direct focus on jobs creation. We need the new legislation to establish a program now that can create jobs through job-ready companies. We need to amend HR 5297 to include strong provisions for jobs creation. These provisions should establish our proposed public-private partnership venture capital program that will reflect a tested venture investment model that has been shown to be successful for decades.

The new program should learn best practices from successful state programs and also mirror federally implemented venture investment programs, and in particular, In-Q-Tel, the venture capital arm of the Central Intelligence Agency. Such a program would start the near-term creation of jobs now critically needed to bolster the U.S. economy.

And we can learn from the states. The Iowa Capital Investment Corporation, Utah Fund of Funds, Oregon Investment Fund, Invest Michigan, New Mexico Private Equity Program, and other state fund of funds initiatives show that equity capital attracts equity capital and accelerates company growth along with new jobs. Most funds are capitalized from $200 million to $400 million and target investment opportunities in venture capital and small buyout stage companies with growth characteristics across a range of sectors. The immediate effect of establishing the funds is to boost the amount of risk capital available to entrepreneurs.

Economics 101 defines capital formation as the creation of productive assets that expand an economy’s capacity to produce goods and services. In short, equity drives the economy. But it’s a paradox of sorts that though equity has mammoth power to drive the economy, the amount needed is relatively small. On the floor of the New York Stock Exchange in the first hour on the first trading day of a new year more money changes hands than VC’s invest in an entire year.

Now the nation is faced with a sea-change in the underlying structure of our economy and capital markets. Equity capital resources are shriveling at a time when more is needed. We need now to establish regional investment funds all across the United States with mandates to invest in jobs-ready companies. It would put funds to work immediately to help launch exciting new companies with disruptive technologies run by brilliant entrepreneurs, creating whole new industries. And it would enable older companies with high growth potential to work with banks to scale up and double and triple the number of their employees.

Today we must have access to and greater availability of equity financing because only a few hundred institutions and venture capital firms invest each year in the nation’s new companies, and that number is shrinking every year. We can make it happen with a national fund of funds that will serve every state and every region. Waiting in the wings for us to act are America’s best companies that will create 21^st century jobs and stop the jobless recovery.

Thomas Gephart is managing director of Catalyst Fund and founder and managing partner of Ventana Capital. As one of the first venture investors in San Diego and Orange County, he was a member of USC’s School of Engineering Board of Counselors for six years, working with new technologies and technology transfer. Currently, he advises multinational firms in search of innovative acquisitions.

Dan Loague is the Washington representative for Catalyst Funds. He is also a principal of Global Tech Exchange LLC, a company that provides technology commercialization consulting to venture capital and private equity investors, and executive director, Capital Formation Institute, Inc., a nonprofit organization serving a national network of leading seed and early stage investors, licensees, and commercialization professionals.

The study of innovation has often happened at two disconnected units of analysis. Economists, sociologists, and political scientists have generally seen innovation from a high altitude where it is removed from the small-scale processes that, for instance, move discoveries from the lab bench into the marketplace. These scholarly models hold that academic research has over time become more interdisciplinary, problem-oriented, and entrepreneurial. As John Ziman argued in his 2000 book Real Science, research after 1960 became a “wealth-creating technoscientific motor for the whole economy.”

But national R&D policy has always been heavily goal-oriented. New models (see sidebar at right) for knowledge-making better reflect the experiences of university-based scientists and engineers than those in the corporate world that employs most graduates. At the scholarly spectrum’s other end, historians who study innovation have produced detailed case studies that provide different perspectives than the broad models of innovation by looking at specific events, institutions, or individuals. Yet it is difficult to extrapolate a broader picture from these well-researched “trees” in order to understand how the whole “forest” works.

What is often lacking is a middle ground that makes extrapolation possible—the tools and analyses that can help connect specific empirical studies to more comprehensive models of innovation and technological change. Bridging this gap would complement recent innovation policies that aim to support regional technological innovation as a key link between specific locales and the “national system.” Understanding innovation is crucial as the U.S. government moves to renew its investment in the innovation infrastructure. This is especially important as Congressional wrangling last week delayed reauthorization of the America COMPETES Act, which would supply $86 billion for scientific research, innovation, and education.

Recently, Christopher J. Newfield, a researcher with the National Science Foundation-supported Center for Nanotechnology in Society organized a workshop in Lyon, France. Catalyzed by the tenth anniversary of the U.S. National Nanotechnology Initiative, the workshop brought together academics and policymakers from several countries to re-think how a decade’s worth of research on the social implications of nanotechnology might inform broader innovation policy and perhaps inform understanding of how innovation works. Attendees presented several new perspectives on innovation that spanned levels of analysis ranging from specific case studies to general theories of innovation and policy formulation.

The common message was that finding this middle ground is possible, but first we need to re-evaluate what we mean by innovation, how we understand it, and, perhaps, to consider some heretical thoughts about questioning it as a universal good and panacea. Let’s now consider each of these observations in turn.

The value of innovation

First, the heresy. Rarely does anyone question the value of innovation. But is it always beneficial? Good intentions aside, innovation as a historical force doesn’t always create jobs. It sometimes destroys them, as Amy Sue Bix argued in her book Inventing Ourselves Out of Jobs. Automation and innovation, from the 1920s through the 1950s, displaced tens of thousands of workers—think of the conflict between Spencer Tracy (a proponent of automation) and Katherine Hepburn (an anxious reference librarian) in the 1957 film Desk Set.

But what of broader societal benefits innovation brings? A recent book by Stanley Joel Reiser, Technological Medicine: The Changing World of Doctors and Patients, suggests that, at least in the world of healthcare, innovation is not always an unalloyed good. In his study of several medical innovations, Reiser concludes that it produces winners and losers—and the winners are not always the patients. Sometimes, instead, they are hospital administrators, physicians, or Big Pharma.

As Reiser argues in the case of some medical technologies, technology for its own sake can lead to unexpected outcomes and moral dilemmas. An especially compelling example he gives is the invention of the artificial respirator: while saving countless lives, this medical innovation also created ethical, legal, and policy debates over, literally, questions of life and death. Moreover, there is the broader ethical question of whether it is better to spend large amounts of money for medical technologies and treatments that will benefit future generations if this means less funding to address current medical needs.

At the CNS workshop in Lyon, economist Shyama Ramani raised similar issues with regard to how countries such as India were attempting to imitate U.S. nanotech policies. Her conclusion was that monies currently being spent for future nanotech innovation would be better spent on alleviating current environmental problems such as water remediation and agricultural productivity. The innovation needs of developing countries and emerging markets are not likely to map onto the priorities of countries such as the United States.

In other words, as Ramani argued, India’s proclivity to model its science, innovation, and intellectual property policies on those in countries like the United States—so as to compete in fields such as nanotechnology and biotechnology—may ultimately hinder India’s ability to serve the real needs of its people. Ramani also suggested that India not produce nanotech for the global market but rather for a global “technological commons,” which is more focused on the specific needs of emerging markets.

What is a “national innovation system”?

But these country-level priorities raise the question of a “national innovation system” making these sorts of decisions. Does such an entity exist—can it? Perhaps, as Berkeley economist David Mowery quipped, a “national innovation system” is a fiction like the Holy Roman Empire: not national, not about innovation, and not a system. This witticism is worth unpacking because it illuminates the components of innovation that we don’t fully understand.

First of all, are there really national innovation systems? Or is this a convenient way for academic and policymakers to parse something larger? Historians who have long studied the flow of technologies across borders and between nations would question that such a creature has rarely, if ever, existed. Andrew Jon Rotter makes this case, albeit with an extreme example, in Hiroshima: The World’s Bomb. Here we find that there are no national nuclear weapons programs—they have always been international in nature. The Manhattan Project, after all, was a multi-national undertaking by American scientists and engineers who were joined by their British and Canadian counterparts and dozens of high-profile refugee scientists from Germany, Italy, and Hungary. No nuclear weapons program then or since has been “home grown.”

The same could be said for “national” space programs, which also depend on much common engineering knowledge, and today’s “national” nanotech programs, which also build on shared engineering and scientific knowledge. The upshot: All innovation stems from a “transnational” network of knowledge circulation. A state that invests in R&D must, of course, have the capability to draw from this pool, but there is no guarantee that it will do that in ways that lead to economic growth and jobs. Simply put, too much focus on the “national” suggests a closed system that is ahistorical.

What happens if we de-center the nation from the narrative and think about innovation as a fully transnational phenomenon? This challenges the persistent inclination to frame innovation just a matter of national economic competitiveness. This would also entail reconsidering the metrics we use to evaluate success or failure in the innovation arena (patents, publications, numbers of engineers produced) by including ones that are more “purpose-driven.”

To use the case of nanotechnology, for example, the societal goals of investing in the NNI included more environmentally sustainable energy technologies and better healthcare technologies. How are we doing? The President’s Council of Advisors on Science and Technology recently completed its third review of the initiative. Beyond the traditional metrics cited above, PCAST concluded more attention was still needed to the “commercial deployment” of nanotech products and praised the idea of new “Signature Initiatives” to encourage application-specific R&D.

Innovation, however, means more than just bringing new products or market. If we are to think in terms of innovation systems, then this systemic view must be more wide-ranging. This means taking a view toward innovation that encompasses more than the traditional idea of introducing new “things” into the global marketplace. MIT economist Eric von Hippel notes that throughout history the use and re-use of existing technologies has been a powerful driver for innovation as well as the more traditional notion of supplier innovation. Von Hippel’s attention to the user complements British historian of science and technology David Edgerton’s argument that an over-commitment to “techno-nationalist” viewpoints obscures the reality of how innovation occurs.

Finally, in the United States, there is hardly an “innovation system” if one means a coherent set of policies, processes, and institutions working in concert. As historians know, metaphors and analogy have power to shape and frame debates and policy. Rather than thinking of an innovation system, with its flowcharts, performance metrics, and feedbacks, a more useful metaphor is that of an ecosystem. Complex and dynamic, ecosystems encompass the local, the regional, the national, and the global.

Such a metaphor also encourages us to think about the role played by niche and interstitial actors. For instance, in the 1980s and 1990s, futurists and visionaries played a powerful role in stimulating support for nanotechnology among the public and policymakers by generating ideas about what the field could be. In addition to the more familiar institutional actors, other components of the system that require additional consideration include visionary thinkers, long-term and sort-term goals, marketing, design, investors, entrepreneurs, popularizers, and skeptics.

Innovation in practice, scholarship, and policy

The power to shape the levers of innovation through such creative work is not new. Historically, artistic endeavor, broadly construed, has been a powerful driver of technological innovation. Advances in metalworking and ceramics traditionally originated in the workshops of artisans who produced objects valued more for their aesthetic quality than purely utilitarian ones. The feedback is powerful—in Renaissance Venice, improvements in glassmaking stimulated the production of more capable scientific instruments that played central roles in the Scientific Revolution.

At the CNS workshop, Roger Malina, a physicist and long-time editor of the art-and-technology journal Leonardo, proposed an idea for stimulating more of this creative “micro-innovation.” Similar in concept to micro-credit, a project would set aside small amounts of money to encourage innovation from unlikely quarters. Malina gave several examples of inexpensive products from the art-technology nexus that have produced interesting innovations such as smart textiles that change color in the presence of elevated CO₂ levels. The idea of micro-innovation complements the use of prizes to foster larger-scale technological innovation, as White House science policy advisor Tom Kalil has written about.

Initiatives that would fund and cultivate new models like Malina’s “micro-innovation” are the province of policymakers, but they present a challenge to academics who study innovation: they must question the basic models of innovation. For decades, the predominant model was linear. Based on Science: The Endless Frontier, Vannevar Bush’s 1945 social contract for science, the linear model posited that investments in basic science research would produce new technologies and societal benefits—meaning innovation. Rhetorically powerful as well as easy to understand and explain to policymakers, deployment of the linear model ignores the historical contingency of Bush’s report, which has, for better or worse, been the touchstone for much U.S. R&D policy.

Bush, director of the Office of Scientific Research and Development during World War II, was an anti-New Dealer who sought to justify continued federal investment in science. Along with Harvard President James Conant, Bush was also eager to deflect criticism of the scientists who had produced weapons of mass destruction, namely the atomic bomb.

And since 1945, scientists and policymakers have pointed to a select group of basic science discoveries that led to specific innovations—solid state physics research led to the transistor and the laser, the discovery of giant magneto-resistance led to the iPod. But what if these are extreme examples that don’t reflect the everyday nature of innovation?

This might be just an academic question, but given the heavy investment in research as a tool for economic recovery, the validity of the model itself needs scrutiny. The linear model holds that investment equals societal benefits, but Bush’s actual report said little specific about jobs.

In 1925, the English mathematician and philosopher Alfred North Whitehead wrote that the “greatest invention of the nineteenth century was the invention of the method of invention.” Innovation today, as in the past, demands much more than just invention. What the 21^st century needs is a better understanding not just of the method of innovation, but its goals, its transnational flows, its systemic nature, and the processes through which the “new” can become accepted, productive, responsive, and responsible.

W. Patrick McCray is a professor in the Department of History at the University of California, Santa Barbara and a researcher and former co-director of the Center for Nanotechnology in Society at UCSB. He is also a member of the Science Progress advisory board. This article is based upon research supported by the National Science Foundation under Grant No. SES 0531184. Any opinions, findings, and conclusions or recommendations are those of the author and do not necessarily reflect the views of the National Science Foundation.

Just imagine, materials with 10 times the strength of steel and only a fraction of the weight; shrinking all the information at the Library of Congress into a device the size of a sugar cube; detecting cancerous tumors that are only a few cells in size. Some of these research goals will take 20 or more years to achieve. But that is why…there is such a critical role for the federal government.

As the NNI enters its second decade, a broad appraisal of the federal investment in nanotechnology is called for. Rather than frame this is as a matter of success and failure, let’s consider the new issues and concerns that have arisen since 2000. The effects of large-scale R&D investment can unfold in surprising ways and the NNI is no different.

A few key lessons are clear. The NNI helped advance research on the process of innovation itself; it demonstrated the uncertain consequences of overselling the novelty of new technologies; and it expanded our understanding of the environmental consequences and social impacts of emerging technologies.

But first, some backstory. Original plans for the NNI aimed to direct some $495 million to expand research at the nanoscale. Eight agencies—the National Science Foundation, the National Institutes of Health, NASA, and the Departments of Commerce, Defense, Energy, Transportation, and Treasury—had representatives listed in early reports. The proposed return on this investment included broad areas of new research targeted for interagency funding and a national infrastructure with “centers of excellence” where nano-researchers would work with the stated goal of producing new discoveries to be “rapidly commercialized by industry.” The new initiative also aimed to “promote a new generation of skilled workers…necessary for rapid progress in nanotechnology.”

Clinton’s plan maintained broad bi-partisan support even after he left office. In 2003, Congress passed the 21^st Century Nanotechnology Research and Development Act, which authorized spending $3.7 billion over the next four years, $2.9 billion of which was actually appropriated. Overall, the U.S. investment in nanoscale R&D over the last decade is close to $12 billion (annual private sector investment worldwide is even greater, according to a 2008 Congressional Research Service report). A decade later, some 25 federal agencies are part of the NNI and 13 of these have their own nano R&D budgets. The President’s FY 2011 budget request for the NNI totals $1.76 billion spread across 14 agencies.

The NNI emerged at a salient point in United States history. In the late 1980s and throughout the 1990s, economic competitiveness replaced the twilight military struggle of the Cold War, and science advocates could no longer claim national defense as the prime rationale for funding basic research. Lawmakers were still struggling to adapt national policies to the new global environment and to the implications of the increasing commercialization of science. Advocates of the NNI proposed it at a propitious time—between the end of the Cold War and a renewed preoccupation with national security after September 11, 2001—when lawmakers were trying to reshape national science and technology policy. It exists now in an economic and political climate vastly different from that when President Clinton stood at that podium in Pasadena in 2000.

Against this backdrop, we can consider several important and unexpected lessons learned from ten years of policy supporting nanotech research—lessons that are not specific to the tiny particles under consideration, but are important for science policymaking going forward in many fields.

Appreciating Innovation

When policymakers proposed the NNI, politicians expressed enthusiasm that it would make the United States more economically competitive. Forecasts, not from intemperate prognosticators but sober-minded science managers, predicted that the international market for nano-goods would be $1 trillion by 2015. The production of these goods, supporters said, would require a new high-tech (and highly paid) workforce of some two million people, potentially leading to a major restructuring of the global workforce.[1]

In 2000, no one of course could have predicted a decade that included the debilitating effects of a massive domestic terrorism incident, two major overseas conflicts, and the worst economic downturn since 1929. With unemployment drifting just under 10 percent and the global economy still in disarray, it would be churlish to ask “where are all the nano jobs?” So let’s look at it another way. The NNI was never just about “technology.” It was also a form of industrial policy, forming part of a hidden developmental state in which federal investment helps underwrite new commercial technologies. The NNI has also created a vast national research infrastructure for nanoscale R&D. Some of this infrastructure was built on institutions, practices, and organizations that pre-dated the NNI. In 1985, for example, the NSF started establishing Engineering Research Centers to coordinate academic research and industrial needs. After 2000, the NNI created dozens of new research facilities out of whole cloth. The end result is that there are now 60 major centers and facilities across the United States. This is analogous to NASA’s creation of national R&D network in the United States during the 1960s to support space-related research, but more extensive in scope and aims.

Just as noteworthy is the fact that the number of federal agencies that have joined the NNI has grown significantly since 2000. Also worth noting— many “nano and society” researchers have focused on understanding how innovation happens and how it moves out into the public sector, resulting in jobs, new businesses, and so forth. Researchers at the Center for Nanotechnology in Society at University of California, Santa Barbara have considered both the historical and contemporary aspects of nanoscale innovation in both the U.S. and China. For example, in the 1990s, a basic physics discovery—giant magnetoresistance—made in European laboratories proved essential for American electronics firms such as IBM. Without this innovation, today’s ubiquitous memory-intensive devices such as iPods would not exist.[2]

Researchers have used a variety of means to understand this process. However, it is important not to focus simply on the numbers of patents, publications, or scientists trained, etc. While universities and funding agencies might like to think that innovation can be quantified so simply, focusing too much on one number can also have unintended (and undesirable) consequences. Innovation is an activity with historical, social, and economic dimensions and it must be studied in ways that reflect this so as to better understand and aid the process.

The Novelty of Nano?

The policymaker’s definition of nanotechnology—“understanding and control of matter at dimensions between approximately 1 and 100 nanometers, where unique phenomena enable novel applications…imaging, measuring, modeling, and manipulating matter at this length scale”—belies the fact that a great deal of R&D that might seem “nano” now, existed for years, if not, decades, before the NNI. It had its own research communities, professional groups, conferences, and so on. Moreover, the United States wasn’t the first nation to have a national nanoscale research program. Efforts, smaller in scale, funding, and ambition, existed in Japan and the U.K, for instance, in the 1980s. This does by no means devalue the NNI, but it’s important to realize that it is a continuation of older, more established R&D programs in disciplines like materials science, physics, and chemistry. This is analogous to the idea that the microelectronics R&D community was already three decades old when the SEMATECH consortium, a government-industry partnership formed to foster greater competiveness, was formed in the mid-1980s.

Given nanotech’s long history, it isn’t surprising that most of the past decade’s scientific and technical accomplishments have been incremental and evolutionary, rather than revolutionary. The focus on newness (which policymakers, scientists, and the media all contributed to) can also have blowback, creating a “novelty trap” (to use Steve Rayner’s term) of unrealistic expectations and heightened concerns on the public’s part.

The lesson here is three-fold. One is that the public has come to expect continuing technological “revolution,” an expectation that belies the actual nature of technological change, which is often incremental rather than revolutionary. Also, the dominant focus on newness elides the fact that a great deal of innovation doesn’t come from the realm of inventions and patents but from use (a point made in David Edgerton’s book The Shock of the Old). Finally, policymakers should be more wary of the “innovation trap” in which a new technology is promoted as a panacea for current problems (i.e. here, geoengineering or synthetic biology could join nanotechnology) without consideration of new problems or drawbacks that may accompany it.

Environmental Issues

When scientists and policymakers were building the foundation for the NNI in 1998 and 1999, they paid attention to the environmental issues involved. But the focus was primarily on how nanotechnology could help improve the environment with cleaner water and more efficient energy use. However, by the time the President’s Council of Advisers on Science and Technology did its first review of the NNI in 2005, new issues and concerns had cropped up.

Within a fairly short span of time, policymakers began to ask if the government was adequately addressing the potential environmental or health risks that might accompany the scientific advances the NNI was underwriting. Environmental groups issued a variety reports on nanotech expressing optimistic caution (Greenpeace) or proposing an outright moratorium on research (the ETC Group). In 2005, the Woodrow Wilson Center launched its Project on Emerging Nanotechnologies to “ensure that as nanotechnologies advance, possible risks are minimized” and national media coverage started to frame nanotech R&D as a matter of environmental risks versus economic benefits. Research dollars followed these concerns—in 2008, the NSF funded two major new national centers to consider the environmental implications of nanotechnologies.

Again, this is not a negative outcome—attention to potential implications reflects a positive example of trying to apply anticipatory governance to emerging technologies. But this was an unexpected change from what scientists and policymakers were most focused on a decade earlier. Moreover, scientific research on environmental and health issues has been more than simply “defensive” as one might have expected. Policymakers and scientists alike should be pleased that these studies have produced broader knowledge of the overall interactions between, for example, carbon nanotubes and biological systems. This new knowledge in turn could produce desired yet unexpected outcomes such as commercial innovations.

Studying (Nano)technology and Society

The NNI moved early to integrate the study of “ethical, legal…and other appropriate societal concerns” into its framework. The NSF funded two national centers to study these implications (one at the University of California at Santa Barbara and the another at Arizona State) and all of the NSF’s “Nanoscale Science and Engineering Centers” have some sort of “nano and society” component. Nano, of course, was not the first major national technology endeavor to propose studying societal, ethical, or legal implications.

In the 1960s, NASA spent millions to study the social and economic effects of the space program, giving rise to the agency’s “technological spinoff” reports. And, in the 1990s, the Human Genome Project established its Ethical, Legal, and Social Implications, or ELSI, program. The NNI’s approach to the question of social implications has been different and, I believe, more innovative. Rather than having researchers study societal questions from the margins, historians, sociologists, anthropologists, and economists were integrated into the nano-enterprise early on. In many cases, they have worked in close proximity with bench scientists and engineers, helping demonstrate to those groups to how “we” do our research. The idea of considering the societal implications in concert with the actual R&D is far-sighted and original. When successful, such efforts have encouraged scientists and engineers to consider the societal implications of their research from the outset.

At UC Santa Barbara, for example, we have a long-standing program that recruits graduate students from the sciences and engineering disciplines and engages them in actual social science research. As a result, they return to their labs with a sense that doing good research means not just good bench science but also taking into consideration the social, environmental, and economic implications of their work.

These interactions have the potential to change the ways in which these experts communicate with various publics about science and, at the same time, can help scientists formulate a better understanding of the ordinary citizen’s perception of risks and benefits. Another unexpected outcome is that a growing international and interdisciplinary community of experts has formed with its own conferences and other scholarly apparatuses. This body of experts, many of them starting their careers, will be primed to address the implications inherent in future new technologies.

W. Patrick McCray is a professor in the Department of History at the University of California, Santa Barbara and a researcher and former co-director of the Center for Nanotechnology in Society at UCSB. He is also a member of the Science Progress advisory board. This article is based upon research supported by the National Science Foundation under Grant No. SES 0531184. Any opinions, findings, and conclusions or recommendations are those of the author and do not necessarily reflect the views of the National Science Foundation.

Notes

[1] M.C. Roco, “International Strategy for Nanotechnology Research and Development,” Journal of Nanoparticle Research (2001) 3, 5-6: 353-60; “Will Small Be Beautiful? Making Policies for Our Nanotech Future,” History and Technology (2005) 21, 2: 177-203.

[2] W. Patrick McCray, “From Lab to iPod: A Story of Discovery and Commercialization in the Post-Cold War Era,” Technology and Culture (2009) 50, 1: 58-81.

The founders of the United States of America were all well acquainted with the experimental nature of science, and they applied the same methods to their new political enterprise. “They always described the formation of the country itself as an experiment,” says Timothy Ferris, “And what isn’t widely understood is that the way that democracies work is by constant experiment.” Each election, each passage of a new law is, after all, a procedure designed to test a hypothesis about how to make constant improvements to a government.

The Christian Science Monitor called Ferris “the best popular science writer in the English language today,” and his new book is The Science of Liberty. In it, he tells the story of the intimate connections between the scientific advances that expanded the frontiers of human knowledge and the democratic experiments that expanded the frontiers of human liberty. He recently joined Science Progress editor-in-chief Jonathan Moreno for a podcast interview to discuss how science rescued generations of humanity from subsistence living and brought freedom to nations around the world.

In the opening pages, Ferris lays down his bold claim: “The democratic revolution was sparked—caused is perhaps not too strong a word—by the scientific revolution, and that science continues to empower democratic freedom today.” Dissatisfied with existing histories of the Enlightenment, he set out to ascertain more specifically what exactly was new about the period bookended by the English Revolution of 1688 and the French Revolution of 1789. It wasn’t simply the embrace of reason, Ferris said, because after all, individuals can reason their way into all sorts of conclusions that don’t have anything to do with the nature of reality.

“Science was what was the new ingredient,” Ferris said, “And science isn’t just reason—it’s experimentation. The more I studied it, the more it seemed to me that this experimental approach is also the basis of liberal democracy.”

For this reason, Ferris likes to focus on a key event in the year preceding the 1688 installation of parliamentary rule in England. In 1687, Isaac Newton published his Principia, the foundational text for classical mechanics and the laws of motion familiar to high school physics students. From this difficult book describing universal gravitation, Ferris drew a vector to the nascent idea of liberal democracy. “That book really sealed the deal,” he said, as it established the “tremendous predictive power of science.”

“Here was this new way of studying nature that disproved ancient authorities. It didn’t matter how great the authorities were,” he explained, “Aristotle could have said it—but you could conduct experiments that showed that Aristotle was wrong. And from that, it’s not much of a leap to say that, well, other forms of authority may be illegitimate as well.” Authorities like kings, as Thomas Paine would later point out in the run up to the American Revolution. Citizens of nations around the world owe their freedom to these scientific ways of thinking, which helped erode the legitimacy of monarchies.

The way we live now is virtually indistinguishable from the way people lived prior to the scientific revolution—life was “nasty, brutish, and short,” as Moreno said, describing the philosopher Thomas Hobbes’s vision of the “state of nature” without government. He explained that people alive during the middle ages had no perception that living standards could get better, in part because there was no progress in technology. “People did not have the notion that there could be change and improvement,” Moreno said.

The difference between that world and our current one is immense, Ferris emphasized. Moreover, science has continued to accelerate improvements in standards of living.

“The United States, at the time of its founding, was what would be called a third world country today,” Ferris said. “When the United States first started being called an ‘affluent society’ in the 1950s, Americans had less than half the money that they have now.” In the larger scheme of human history, we’ve come a long way in a very short time.

But in spite of all the knowledge, wealth, and freedom that flows from science, critics remain.

“Dogma ruled the world before science came along and it is still the preference of the majority of people in almost every country, and certainly here in the United States,” said Ferris.

But democracy is not a dogma. It is a method. “It is the most successful method of governance ever hit upon by humans, just as science is the most effective method of learning that’s ever been found,” he said.

In their discussion, Moreno and Ferris also explored the postmodern intellectual movement of the 1980s and 90s, which engulfed humanities departments at many universities, but unfortunately misinterpreted science and the democratic systems it supported. At its root, postmodernism is a critique of capitalism and its related economic, political, and cultural systems.

Ferris traces this problem to the two World Wars and the Cold War that followed. The European thinkers emerging from that crucible, he argues, sometimes turned away from democracy and toward socialism and a skeptical view about the power of science.

“What it appears to have done to European intellectuals, by and large, is to have persuaded them that the scientific, democratic world that had seemed to being doing so well going into the 20^th century had been proved to be a failure and even a sham and led to this hideous violence,” he said. Ferris is quick to point out that this is not true: “Prior to the rise of liberal democracy, the average person was less safe at home in bed in his little village than was the average resident of Western Europe during World War II.”

Moreover, Ferris said, there is a common misperception embedded in many threads of academic education that totalitarian regimes like Nazi Germany and the Soviet Union were particularly good at science. “The widespread claim that socialist systems generally—and even their communist, fascist varieties—were more efficient than democracies is not true,” he emphasized—the evidence just doesn’t support the claim. A careful study of Italian train records, for instance, revealed that Mussolini did not, in fact, make them run on time.

Postmodern rhetoric can sound at times like the claims of the intelligent design movement, Moreno said, saying that each rejects scientific expertise.

“The anti-science movement in this country, which includes the religious right and the radical left and many other elements,” replied Ferris, “Its program is simply to seize on any weakness it can find in the interface between science and society.” The recent embrace of global warming skepticism by creationists fits this pattern, with its denial of “belief” in climate change.

But standing up for the simple facts of our own history as a great democratic experiment doesn’t require belief in anything, Ferris contends. “It just requires an acquaintance with the historical facts of how we got to where we are now.”

Interview by Jonathan Moreno; summary and production by Andrew Plemmons Pratt.

Granted, biomedical science is not the most obvious answer on most people’s minds when it comes to our economic woes. And certainly, it is not the only solution. But far too often, it is overlooked as a major source of American innovation, economic progress, and perhaps most importantly, better and longer lives for our fellow citizens.

NIH funding directly and indirectly contributes to good jobs and is a proven engine of economic growth. Each year, biomedical funding through the NIH directly supports 325,000 good-paying jobs in research institutions in all fifty states and the U.S. territories, with a positive economic impact rippling far beyond the labs themselves. The Recovery Act will have created or saved roughly 50,000 jobs, as well. But the impact of biomedical investment goes far beyond the lab.

Each research facility runs like a small business, hiring junior staff and purchasing space, supplies tools, and equipment—not to mention the communities they help support. This directly contributes to new business for the companies around the country that supply these resources. In fact, it has been estimated that every $1 of NIH funding results in more than $2 in additional business activity and economic output.

Some of the nation’s largest employers—companies in the biotech and pharmaceutical industries—also seize upon NIH-funded discoveries to produce the next generation of treatments and cures. A recent biotechnology industry poll of its members showed that 50 percent of respondents said their companies were founded on such licensed ideas and technologies.

All this adds up to a vibrant national bio-economic system that grows and flourishes with the right starter funding and seed money from NIH. We have only begun to tap the potential of NIH-funded research as an economic growth engine. It is a catalyst for even further growth that should not be overlooked.

But NIH funding is also at the center of a game-changing movement: the revolution in biomedical science that promises to transform the scale and scope of new treatments and cures in the decades ahead. Using newly gained knowledge about biological structures and functions, scientists now have the opportunity to combat disease in unimagined ways. They no longer have to be reactive—merely describing the symptoms of a disease, applying the treatments at their disposal and watching to see what works.

Instead, they are applying the knowledge gained through decades of arduous scientific study to zero in on a disease, its triggers, and crucial steps in its development. Using discoveries and new technologies made in just the last decade—like the mapping of the human genome—scientists can now understand the molecular drivers of disease and more importantly, how to affect them. As the president pointed out in his budget announcement earlier this month, that means there is potential for cancer treatments that target the disease while leaving healthy cells unharmed; or new treatments that rewire the brain after a stroke, allowing patients to reclaim their bodies.

Combined with the increasingly rapid evolution of sophisticated biotechnology and information technology tools, this revolution in biomedical science means there can be a much shorter distance and time between basic discovery and new treatments. And patients will be the greatest beneficiaries.

We will witness a transformational shift from one-size-fits all treatments that don’t always work to tailored treatments that meet the unique needs of very different patient populations, ensuring efficient and effective care. And that means higher quality health care, with less waste and at less cost—a win for all.

This week will mark the one-year anniversary of the 2009 Recovery Act, which infused more than $10 billion into the biomedical research community through the NIH. We applaud the president on continuing the consistency of his commitment after ARRA. The kind of transformations we’re talking about—in health and the economy—can only come to full fruition if funding remains relatively consistent.

Science cannot progress in cycles of boom or bust, but rather with predictable and robust financial commitments. The right choice is to make a wise, long-term investment in NIH research. It’s an investment with strong economic returns and priceless value: better health for our families, neighbors, and friends.

Clyde Yancy is President of the American Heart Association. Edward D. Miller is the Dean of the Medical Faculty and CEO, Johns Hopkins Medicine. Greg Lucier is the CEO of Life Technologies.

The American Heart Association, Johns Hopkins, and Life Technologies are all members of United for Medical Research.

The Chinese government has rapidly built up its scientific capacity in regenerative medicine, including stem cells, tissue engineering, and gene therapy. China’s success in this field is increasingly hard to deny—they are now the 5^th largest publisher of peer-reviewed papers on stem cells research in the international scientific literature, shooting from 37 publications in 2000 up to 1,116 in 2008. Although still short of the United States’s 6,008 stem cell publications in 2008, China’s publication levels nearly match those of the United Kingdom, Japan, and Germany.

But how has China built its regenerative medicine field so quickly? Our recent study published in the UK journal Regenerative Medicine highlights China’s successful approach to stem cell research, and the challenges they need to address to progress further in the field.[1] Conducted by members of the McLaughlin-Rotman Center for Global Health, this study is based on interviews in China with 47 experts on regenerative medicine from universities, research institutes, hospitals, firms, government agencies, and funding agencies. We found the Chinese government has employed a highly successful four-pronged approach to building up regenerative medicine, combining a powerful recruitment strategy for researchers, ample funding, permissive regulations, and a focus on rapidly deriving applications. Their success, however, has been checked by international push-back against clinics currently offering unproven stem cell therapies. China has made strides to reform their clinical regulation and the country’s star will undoubtedly continue to rise in the stem cell field. But the United States should not be complacent about China’s contribution to the field and should both keep a close eye on its development and possibly engage with the Chinese on stem cell science and regulation.

A four-pronged approach to building regenerative medicine

Regenerative medicine therapies are an attractive solution to an increasing burden of chronic disease faced by China’s large and aging population. Research in the field aspires to produce solutions to a number of chronic conditions, including cardiovascular disease, diabetes, and degenerative conditions associated with age. As a result, the Chinese government has identified it as a health research priority.

The government has employed four main strategies in this effort. The first focuses on people. China made recruiting Chinese researchers back to the country a specific strategy within their 11th Five Year Plan for 2006-2010, indicating that engaging “internationally published” returnees is of primary importance to the development of the science sector.[2] China has built a skilled labor force by using financial and research incentives to recruit scientists trained at eminent stem cell research centers in the United States and UK back to China. Called “sea turtles” because of the term’s resemblance to “overseas returnees” in Chinese, those returning from the diaspora make up the backbone of research being done in the country’s institutions of excellence. These labs in turn train a new generation of home-grown scientists from among China’s 400,000 annual graduates in science and medicine.[1, 3] According to one interviewee: “There is a younger generation of scientists being almost completely trained here, to become good professors, to become principal investigators.”

China’s second major strategy—generous financing—is a more common but still essential strategy for building the regenerative medicine sector. The Ministry of Science and Technology has made up to $293 million available for stem cell research alone between 2006-2010, with an additional $20 million per year coming from the Chinese Academy of Science. [4, 5] These funds have created top-notch research and animal testing facilities and extensive project grants that allow researchers to carry their ideas forward. Although paltry compared to American stem cell funding, this money is divided between comparatively few researchers in China. The cost of conducting research— including wages, physical overhead, and material costs—is much lower in China and researchers seldom complain that a lack of available funding holds their research back.

In addition to these inputs, two other factors have been key to China’s success in regenerative medicine: permissive regulations for stem cell research, and a clear focus of resources on applications of the science.

Rules on embryonic stem cell research in China are more permissive than those in many jurisdictions in the United States, and are similar in nature to what is allowed in the UK. These regulations permit therapeutic cloning, the use of surplus embryos or discarded fetal cells from abortions, and embryos created from somatic cell nuclear transfer or parthenogentic split blastocytes, and in some cases, the fusion of human genetic material with nonhuman oocytes. The embryo in Chinese religions is not typically perceived as having personhood, so embryonic stem cell research was neither as ethically contentious nor as hotly debated as it was in the United States and other parts of the world. One of our participants explained: “When we draft our guidelines, we always need to think about our culture as well. For the Chinese people, we have not so strong religious ideas about [the embryo]…This is not a person, we don’t think so… so we accept.” Chinese researchers and policymakers saw the limitations placed on their United States colleagues during the Bush administration and prior to the Obama administration’s support as a boon and opportunity to excel.

China has also strongly focused their research objectives towards generating therapeutic applications. Moreover, universities and hospitals have the tight relationships needed to understand patient needs and translate research from lab to clinic, making China a front-runner in the race to develop therapies. In the words of a Chinese researcher: “I trust on the R&D and the clinical applications, [that] we will become one of the leaders.” But this orientation towards applications comes at a cost to basic research, and interviewees indicated this may slow their ability to overcome future technical barriers to new therapies.

Overcoming a bad reputation

Up until now, limited regulation of clinical stem cell therapies in China has allowed some firms and hospitals to offer controversial stem cell therapies without requiring the scientific evidence to back them up. Over 200 hospitals are estimated to provide these therapies, and three of the main centers target foreign patients for their therapies—often patients desperate and with few or no treatment options available in their home countries. These clinics offer stem cell treatments as a panacea for currently untreatable medical problems, including ataxia, brain and spinal cord injury, diabetes, Parkinson’s, multiple sclerosis, autism, and cerebral palsy.

International critics of stem cell research in China have often erroneously lumped together stem cell research with these stem cell clinics, when they are in fact quite distinct. Top-quality research on regenerative medicine in China is mostly produced at academic institutions, national research centers, and by few small firms. Stem cell centers offering unproven therapies, on the other hand, do not publish in international scientific journals and are criticized by many Chinese researchers for offering treatments ahead of their time and for hurting the credibility of legitimate Chinese stem cell research.

In May of 2009, the Ministry of Health in China announced new regulations for the clinical application of stem cell therapies. These rules will require stem cell centers to provide evidence of the safety and efficacy of the therapies they offer. But these treatments are still available, as the government is working through the details of these regulations. Afterwards, the Ministry of Health will need to evaluate each available therapy according to the Ministry’s new criteria, so it will be some time before we know what impact these new regulations have on the stem cell landscape in China. Whether China succeeds in overcoming the controversy around its stem cell clinics will largely depend on its ability to regulate them. The government’s development of new clinical regulations show its commitment to changing the status quo of how these therapies are offered, but strict implementation of the new regulations will be required to quell international criticisms.

Key lessons and implications for the United States

It is time to start taking China seriously. China’s progress in regenerative medicine has gone largely unnoticed because of the Western media’s focus on stem cell tourism, but this progress is a source of national pride and shows no signs of slowing. As one Chinese interviewee stated: “We don’t want to just copy other research, we want to do something innovative. The leaders are first class researchers, they impact the field…we want to be first class, to have an impact.”

Our analysis shows the importance of supportive research policies, permissive research regulations, and consistent long-term financing for priority areas, as well the importance of developing a sustainable and highly skilled labor force dedicated to developing therapeutic applications to basic research. China’s struggle to overcome the negative image of its stem cell clinics shows how essential it is for regulations to be developed alongside, instead of in hindsight, of new emerging technologies. The Chinese regulatory struggle mirrors, to a degree, an ongoing discourse between North American researchers and regulatory agencies about what evidence and safeguards are required to pursue safe and effective translation of stem cell research. The difficulty of this process is reflected in the mixed response to the first embryonic stem cell trial in the United States, run by the California company Geron Corp. The trial is seen by some as an important step forward, but has been widely criticized by others as risky and based on insufficient evidence. Approved and twice halted by the FDA, the trial has yet to begin on patients but is expected to resume in late 2010.

In light of our findings, U.S. policymakers should consider actively promoting collaborations with top-notch Chinese scientists on research, development, and regulation.

China has had setbacks, but if they keep building on their strengths and overcoming their regulatory challenges, the country may stand at the forefront of the race to develop internationally recognized regenerative medicine treatments and therapies that patients desperately need everywhere around the global.

Dominique McMahon is a Doctoral candidate at the Institute of Medical Sciences, University of Toronto. Halla Thorsteinsdóttir is an Associate Professor in the Dalla Lana School of Public Health at the University of Toronto and a member of the McLaughlin-Rotman Centre for Global Health. Peter A. Singer is Professor of Medicine, Sun Life Financial Chair in Bioethics and Director at the McLaughlin- Rotman Centre for Global Health, University Health Network and University of Toronto. Abdallah S. Daar is Professor at the Dalla Lana School of Public Health, Professor of Surgery at the University of Toronto and is Director of Ethics and Commercialization at the McLaughlin-Rotman Centre for Global Health.

Notes

[1] McMahon DS, Thorsteinsdóttir H, Singer PA, Daar AS, “Cultivating regenerative medicine innovation in China,” Regen. Med. 5(1), 35–44 (2010).

[2] Wang Q, “What kinds of overseas talents does China need?” (2007).

[3] Ministry of Science and Technology, “China Science and Technology Statistics Data Book,” People’s Republic of China (2007).

[4] UK Stem Cell Initiative [UKSCI]: “Global positions on stem cell research.”

[5] International Stem cell Forum: About ISCF members, Chinese Academy of Sciences.

Yet while police forces around the country have been advancing technologically over the past three decades, we also know from rigorous scientific field research that the mainstays of American policing tactics and strategies remain fairly ineffective in reducing or preventing crime. These mainstays reflect the reactive nature of policing: rapid response to 911 calls, general beat patrols, case-by-case investigations, and reactive arrests. Technologies intended to improve efficiency in responsiveness, such as 911 and even investigative case management information systems, solidified a reactive organizational culture and ineffective approach by inherently emphasizing the importance of response over prevention. Proactive strategies that we know from field evaluations can reduce crime are not used regularly. Thus, while it may seem police have advanced because of improvements in technology, the reality in terms of crime control effectiveness is much less optimistic—hence there is a mythology of progress. Indeed, the notion that police work should be evidence-based, or use the best available scientific research about “what works” to guide decisions, is still a relatively innovative and radical concept.

How did this contradiction and mythology come about? Certainly, technological advancement in policing is real, and not simply the stuff of television drama. The last 30 years in policing has seen a move from call boxes and signaling to advanced radios, computer-aided dispatch systems, and the use of global positioning devices. Teletype was replaced by faxes, then by email, and now by texting, webcasting, and other communications innovations. Six-bullet revolvers with clumsy manual feeds have been traded in for semi-automatic weaponry with multiple rounds and easy-to-load magazines, coupled with advancements in body armor and other protective gear. And computerized records and powerful information systems and databases have replaced written reports and tape-based or mainframe record systems.

Of course, many technological adoptions have occurred only recently. At the time I was a patrol officer in the late 1990s, we were still using “look out lists” as our main approach to address car theft. These were lists of license plates of recently stolen automobiles on dittoed sheets of paper that patrol officers were charged with locating. A decade later, we saw police using license plate reader technology, which can continuously scan hundreds of plates in minutes, automatically checking them against a database of stolen automobiles. Additionally, the only crime map I ever saw while on patrol was a big push-pin paper map that was on display at the entrance of the station house. Now, in a few agencies, officers can do their own crime mapping from their mobile terminals.

Yet such technological advancements can be misleading indicators of progress. In some industries, efficiency and effectiveness are closely aligned. But with policing, improvements in efficiency through technology can create an illusion of advancement. This illusion can shroud the reality of a lack of progress in the actual ability of the police to prevent and reduce crime. Hence the contradictions created by this mythology of progress in policing: Technological advances increased efficiency, but did not necessarily improve crime control effectiveness, an important measure of progress. Either they are not used in ways that lead to crime prevention and reduction, or they have reinforced practices and cultures that contribute to ineffective crime control methods.

Computerized crime mapping is an excellent example. Despite its rapid and recent diffusion as a law enforcement innovation and despite the strong evidence that hot-spot policing using maps will reduce crime, the vast majority of American police agencies continue to deploy patrols in a manner less connected to the geographic concentration of crime than old political beat boundaries. Furthermore, despite technological advancements in information systems and other investigative technologies, rates of crime clearance, as measured by the percentage of offenses that result in arrest, have not much improved for many years.

The bottom line: Technological advances are only a small part of the measure of the progress in American policing. The core of this progress instead lies in the transformation of police organizational culture and infrastructures, in all of its manifestations (tactical, strategic, supervisory, administrative, and missions), into forms that can support the use of technology for evidence-based, proactive, and analytically based crime control effectiveness. Without such infrastructure, technology can reinforce—and even strengthen—the reactive nature of the police. Strengthening reactive efficiency is not progress, given that research has continuously shown that these reactive methods are much less effective in achieving measurable crime reductions than more proactive tactics and strategies, such as targeting police resources at well defined and analyzed community problems or hot spots patrol at geographic concentrations of crime. Furthermore, this mythology can mislead the police to believe they are advancing in their efforts, shield them from scrutiny, or distract them from pursuing other activities that might help them be more effective.

Of course, changing these cultural norms is an incredibly tall order in policing that is no doubt obfuscated by also having to learn how to use technology safely and wisely. Nor am I arguing that the police should pay less attention to new tools. On the contrary—the use of technology in policing is necessary to achieve many evidence-based strategies that research has proven effective. Technology is not the problem—but the context for these tools matters, as does their perceived purpose in the police mission. “Better,” “faster,” and “stronger” is no match for “smarter,” “effective,” and “evidence-based.” For police to wield technology to achieve the latter requires more than just new gadgets; it requires a new mindset, culture, and proactive and analytic approach.

Dr. Cynthia Lum is Deputy Director of the Center for Evidence-Based Crime Policy and Assistant Professor in the Department of Administration of Justice at George Mason University.

Fortunately, the budget request for fiscal year 2011 that the Obama administration released on Monday includes foundational investments that will help the United States remain the leader among innovative nations. Congressional leaders should support the president’s vision by adopting these investments in their budget later this year.

In keeping with the president’s pledge to freeze domestic discretionary spending, the overall increase in research and development is only a modest 0.2 percent increase over FY2010, but by trimming defense-related research, the budget requests a 5.9 percent boost for non-defense R&D for a total $147.7 billion for federal R&D. This is an important step toward investing 3 percent of the country’s gross domestic product in public and private R&D—a goal President Obama laid out in a speech last spring to the National Academy of Sciences.

This also continues the about-face in funding trends begun last year. The Bush administration allowed the federal R&D investment to decline in real dollars after FY2004. Some sectors were hit harder by this neglect than others. Flat funding for the National Institutes of Health from 2004 through 2008 led to a situation in which the purchasing power for the inflation-adjusted budget actually declined 13 percent over the course of those five years. In addition to the two-year, $10 billion boost the American Recovery and Reinvestment Act directed to NIH last year, the president’s budget calls for a $1 billion bump in annual funding, for a total of $32.1 billion.

The budget expands support for R&D over the next fiscal year, but it also continues laying the foundation for sustained advances in science and technology by moving along the path to double the budgets for the National Science Foundation, the Department of Energy’s Office of Science, and the Commerce Department’s National Institutes of Standards and Technology. The Center for American Progress advocated this doubling effort in the 2007 report, “A National Innovation Agenda.”

To that end, the request expands the DOE Office of Science budget by 4.6 percent to a total of $5.1 billion. The Advanced Research Projects Agency-Energy would receive $300 million to fund high-risk, high-return research. ARPA-E funds blue-sky projects in advanced energy technologies, and is modeled on the fabled Defense Advanced Research Projects Agency, where bold thinkers have the resources to “aim for the fences.” The DOE budget also includes $107 million for the three existing Energy Innovation Hubs, and adds a fourth Hub focused on batteries and energy storage.

Jonathan Sallet, Ed Paisley, and Justin Masterman noted in their Science Progress report, “The Geography of Innovation,” that the hubs will help “spur the development of the innovation clusters that will help solve our national energy challenges, create jobs, and promote widespread economic growth.” Targeted regional innovation support is also a focus of president’s budget for the Economic Development Agency, with $75 million to support innovation clusters that leverage local competitive strengths. The “Geography of Innovation” authors explain wisdom of this place-specific approach, writing that “regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations.”

“One of the changes that I would like to see,” the president told an audience at Georgetown University just a few months into his administration, “is once again seeing our best and our brightest commit themselves to making things—engineers, scientists, innovators.” This budget pours more resources into that goal, with $3.7 billion for science, technology, engineering, and math education. This builds on the administration’s public-private Educate to Innovate partnership that will enhance STEM education in schools across the country.

The NSF budget would also support the next generation of scientists by increasing the number of Graduate Research Fellowships. An 8 percent increase in the requested NSF budget, totaling $7.4 billion, maintains its doubling trajectory.

An 18.3 percent increase over FY2010 in NASA’s R&D portfolio would bring the total to $11 billion. Writing last year in Science Progress, former presidential science adviser Neal Lane and former Director of the NASA Johnson Space Center George Abbey advised reversing a trend of neglect for the agency’s scientific work. They recommended that scientific research, including earth observations, should be a top priority for NASA. This budget embraces the same priorities, reflecting the administration’s commitment to “to deploy a global climate change research and monitoring system.” As well, a 21 percent increase (for total of $2.6 billion) for U.S. Global Change Research Program, which spans 13 agencies, will advance our understanding of global warming and enhance our ability to adapt to a changing climate.

In short, as Science Progress editor-in-chief Jonathan D. Moreno points out today on the main website of the Center for American Progress, “We observed in Science Progress on several occasions that the founders of our country appreciated the new nation’s need for strength in science, oftentimes more than some of their benighted successors in government. That’s why it is encouraging that we have a president and an administration with a vision in the founders’ spirit. Now Congress needs to do its job to ensure that the United States of Science rescues America—and perhaps the assumptions behind the global stability on which we depend—from a decade of financial mismanagement.”

Andrew Plemmons Pratt is the managing editor for Science Progress.

The administration is asking for $75 million “to support the creation of regional innovation clusters that leverage regions’ competitive strengths to boost job creation and economic growth,” a goal Jonathan Sallet, Ed Paisley, and Justin Masterman championed in the Science Progress report, “The Geography of Innovation.” Part of the key to this approach is that is allows policymakers to pay close attention to regional strengths. As the report authors explain: “Geographic regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations.”

As well, the Department of Energy budget includes substantial investments in research and development to spur clean energy innovation. That includes $107 million for three existing and one proposed Energy Innovation Hub. The Hubs, as the full DOE request says, “establish larger, highly integrated teams working to solve priority technology challenges that span work from basic research to engineering development to commercialization readiness.” These hubs, write the “Geography of Innovation” authors, are forward-thinking centers that will “spur the development of the innovation clusters that will help solve our national energy challenges, create jobs, and promote widespread economic growth.”

Seizing on the moment for a light-hearted comment I said, “And perhaps we can get everyone here to come to America.”

Immediately the professor, sitting at the back of the room, raised his hand, smiled broadly and said, “But we’re going to bring them back!”

The point was not lost on anyone. That was 2005; even a few years before that his statement would not have been credible. I have been in China twice since then with the opportunity to see through a tiny window into the Chinese commitment to the life sciences. My impression is that their confidence has only increased.

The New Yorker‘s Evan Osnos has provided an excellent brief comment on the growth of science in China, including a fascinating note about Mao’s skepticism concerning the scientific elite. Congress in the early nineteenth century was also skeptical about supporting gentlemen inventors out of the federal purse. The main sticking point was a constitutional debate about the authority granted the federal government to engage in “internal improvements.” A proposal for a national university to be located in Washington, though apparently a dream of George Washington, was caught in this debate. When scientific work presented specific and tangible advantages for their constituents, congressmen were supportive, but there were few such projects or opportunities in those days. One exception was the coastal survey, which aided in safe navigation and therefore commerce. Politicians were both willing and eager to support a project that brought concrete benefits to their own states. Similarly, a perceived need for nuclear weapons in the 20^th century moved China to develop a sophisticated physics infrastructure.

Both the quality as well as the quantity of Chinese science is rapidly improving. Their system enables focused investment and rapid adjustment to new opportunities. Although I have written that America’s cultural advantages should keep us in the lead for a long time to come by most metrics (publications, patents, etc.), we need to consider whether we are doing enough to leverage the strengths that China can bring for our own benefit. Mostly we think in competitive terms, about the quality of our science and engineering preparation. But we should also be thinking in ways that account for the cooperative nature of science. For example, is our immigration policy keyed to the best and the brightest in emerging science and technology? Is our visa system as flexible as it could be? What about language instruction and cultural exchange? Although the international language of science is English, there are good interpersonal reasons for at least some of our young scientists to have incentives to learn Chinese. What reforms need to be made in our intellectual property regime or regulatory systems to ensure maximum flexibility and enhance the investment climate while also providing adequate protections here and abroad? What sorts of transparency should we insist upon with our Chinese partners to keep the playing field level and humane, especially in sensitive areas like human research protection?

There is no reason for us to fear for our scientific advantage, but we should be resolute. One Chinese university official told me he is disturbed that so many of their medical students are still lost the United States for the long term. The tide is rising but the geology is still in our favor if we have vision and wit to build upon in a sustainable way.

Jonathan D. Moreno, Ph.D., is the David and Lyn Silfen University Professor of Ethics and Professor of Medical Ethics and of the History and Sociology of Science at the University of Pennsylvania, and the Editor-in-Chief of Science Progress.

• “Applying science and technology strategies to drive economic recovery, job creation and economic growth”
• “Promoting innovative energy technologies”
• “Applying biomedical science and information technology to help Americans live longer, healthier lives, while reducing health care costs”
• “Assuring we have the technologies needed to protect our troops, citizens, and interests.”

These challenges focus on the knowledge flow, diffusion of information, and technology transfer required for effective application and commercialization of science and engineering advances. To exploit the competitive advantage that the United States has in basic R&D, we must make a major commitment to knowledge and technology transfer efforts, and support innovation in its fullest sense.

To be responsive, federal agencies need to prioritize a coherent strategy for knowledge transfer and application and address intermediate organizational structures that accelerate the transfer and application process. This is no easy task. Decades of focusing on research and the outputs it generates, such as journal articles, patents, and licenses, has not prepared the agencies to identify organizational structures that translate knowledge and measure impacts, such as jobs created or lives improved.

As a former research administrator in the National Science Foundation (Sociology) and at Cornell University and Washington State Universities, and as an agricultural experiment station director and then dean of agricultural, human, and natural resource sciences, I know the disciplinary mindset of research administrators as well as scientists and engineers. Within universities, we also must work to change this mindset.

Processes of knowledge translation, transfer, and communication are often unique to each agency or very specialized even within departments of each agency. Take the U.S. Department of Agriculture, with its Rural Development outreach programs, the Agricultural Research Service with its technology transfer function, and the National Institute of Food and Agriculture with its State Cooperative Extension programs. Coordination of strategy even within a single agency is exceedingly difficult.

One approach, however, is to strengthen the links, cooperation, and partnerships of the technology extension and outreach programs and functions of the federal government and universities around the country. USDA and state Cooperative Extension programs, the SBA Small Business Development Centers, and the Department of Commerce Manufacturing Extension Partnerships, administered by the National Institute of Standards and Technology, all need more professionals co-located in communities where they meet the four challenges set by OMB and OSTP every day. As place-based organizations, they would have a distinct competitive advantage to achieving the desired outcomes.

At the same time, the federal government needs to embrace the open innovation model as a way to accelerate the technology and knowledge transfer process from idea to execution, from laboratories to businesses and consumer use. The open innovation model assumes high levels of communication, careful listening, reciprocity among the parties, mutual commitment, and serious engagement to achieve the goals. It also requires proximity, as well as virtual connectivity, to accomplish place-based programming, as Orszag points out.

Innovation and knowledge transfer have a rich history in America. An early application was the state Cooperative Extension Services, which sent county agents into agricultural areas to demonstrate new methods to farmers, their families, and communities; to listen to farmers about local problems; and to link relevant university faculty and researchers, who provided research-based solutions. The goal was to provide educational and technical assistance about agriculture, natural resources, and nutrition and consumer economics, as well as community-building skills to rural residents who could not attend the university.

A similar philosophy created the Small Business Development Centers, often co-located in universities, community colleges, or nonprofit organizations, to provide technical assistance, access to capital, coaching, and counseling to strengthen local small businesses. In North Carolina, the governor’s office recently called on our Small Business and Technology Development Center to lead a statewide job retention and growth initiative which will help the state’s existing small-to-medium-sized businesses enhance their competitiveness.

A third example reflects the commitment to manufacturing from the National Institute of Standards and Technology, called the Manufacturing Extension Program, in which nonprofit organizations and universities provide engineering outreach and technical assistance, training, and educational support to the manufacturing sector. Professionals in this program reside within local communities and support economic growth.

Each of these organizations practices the translation of expert knowledge into usable knowledge for their constituencies.

The 21^st century goals of economic development, “green” energy lifestyles, improved health and well being, and better national security do not require new extension services. Rather, they require agencies to revisit organizational mechanisms already in place, to be creative in adopting what works, to fund, and to deliver needed programs.

The Department of Energy does not need to invent an Energy Extension Service to achieve energy conservation in homes, agricultural, commercial, and industrial sectors. The adoption of new technologies, the use of energy conservation practices, and the implementation of renewable energy strategies could benefit from added investments in Cooperative Extension, Small Business Development Centers, and the Manufacturing Extension Partnership to focus on these priorities. Inter-agency grants or cooperative agreements could provide funding. These well-established programs have already earned the trust of consumers, community leaders, business and industry leaders, non-profits, and governmental partners.

Universities also must reciprocate with innovative programs of their own. And they are. Witness the establishment of incubators for new startups, business accelerators, and joint venture efforts at commercializing inventions. The federal government provides much of the basic R&D money, to be sure, but universities and the private sector are now working more closely to commercialize the results.

Programs exist at many public universities to provide targeted educational programs. An example at North Carolina State University is the Small Business and Technology Development Center, which provides startups with training on “Becoming an Investor-ready Entrepreneur.” It also provides investors with a course called “The Power of Angel Investing.” Bringing these two sectors together can yield increased capital for new startups. Additionally, the SBTDC provided 48 workshops in 2009 on “Business Success in Tough Times” in which strategies for marketing, managing finances, and improved manufacturing processes are the focus.

With over 70 active startup companies and 110 commercialized products adding to the global economy, NC State, and its Centennial Campus, is among the nation’s most significant entrepreneurial universities. An example is the success of LaamScience, a startup company developing a textile coating that kills most viruses and bacteria when exposed to light. The technology, licensed from NC State University, has multiple markets—surgical and respirator masks, hospital disposables and supplies, and filters and air purifiers.

NC State’s Industrial Extension Service, which manages the Manufacturing Extension Partnership, provides training and technical assistance to increase the competitiveness of manufacturing firms, the health sector, and state agencies through Six Sigma, Lean Manufacturing, and the International Standards Organization, or ISO certification.

These organizations, as well as others within the university, can also provide consulting services, feasibility studies, market analysis, supply chain analysis, and access to student internships.

An integrative approach might establish a research collaborative in which private companies join and annually provide funds for pre-commercial research, advise the faculty and graduate students on industry priorities, and evaluate the results at annual reviews, for example, in the NC State’s Nonwovens Cooperative Research Center.

Evaluation is also useful for feedback to companies. The evaluation of company processes and continuous improvement can lead to greater efficiencies and awards of excellence such as the Shingo Prize in North Carolina and the National Baldridge Award.

Examples of impact from the Industrial Extension Service include the North Carolina Department of Environmental and Natural Resources, which implemented lean office processes and increased the number of air quality permits processed by 52 percent, and provided them 40 percent quicker, with no added staff. Another example is the nonprofit RLCB, formerly the Raleigh Lions Club for the Blind, which showed a $4 million increase in sales, gains in productivity, and new products as a result of IES services. RCLB also added 40 jobs in one year, including a full R&D department.

Demonstrations, educational efforts, and technical assistance have a long track record of generating successful diffusion and adoption of innovations. It is the practical application of science and technology via these knowledge transfer mechanisms and partnerships that builds on research and drives economic recovery, job creation, and economic growth.

These programs deserve high priority for continued and additional funding as agencies and universities prioritize their budget requests for 2011.

James J. Zuiches is Vice Chancellor of Extension, Engagement and Economic Development at North Carolina State University in Raleigh, NC.

Angel investors aren’t in this game to earn their wings, of course. Wealth is the goal, but so too is job creation for these mostly local serial entrepreneurs who thrive on the thrill of building companies that help their communities grow and prosper. Problem is, these and other very early-stage investors in innovation companies—including the inventors and founders of these new companies and their friends and family who put up their first rounds of cash—often don’t reap the rewards of their early risk taking. The reason: Once a young company reaches a certain point of success it usually stumbles as it tries to bring its new product or service to market—at the very time it needs lots more money to grow.

Enter the professional venture capitalists, who demand a big majority stake in the young company in exchange for the new cash, and then do the same again when the company needs a second and third round of venture capital. In fact, venture capitalists these days are by and large not doing what they once did for the U.S. economy—backing early stage innovation to create the Googles and Genentechs they once did. This job is falling more and more to angel investors.

According to the National Association of Seed and Venture Funds, “venture capital plays almost no role in funding basic innovation, and a relatively small role in funding true startups, with only about 3 percent of the $21 billion VCs invested in 2005 going to such firms.”[1] Long-time venture capital lawyer Joseph Bartlett, who also runs the website VCExperts.com, gives a great example of this problem in action in a forthcoming report:[2]

To illustrate, let me repeat an anecdote which I share with my classes at law and business schools, to wit: In real estate the three rules of successful investing are “location, location, location.” The gag is that they are all the same rule. Transposing that wisecrack to venture capital, I preach that the three rules are: “dilution, dilution, dilution.”[3] I draw an inverted bell shaped curve on the blackboard and show how the early capital, which is the highest risk and therefore should be entitled to the highest reward, can so often be burnt out or crammed down by subsequent rounds of financing, including (as the curve slopes downward to its nadir) the “down rounds” which dilute the founder and the angels to trivial interests in the company. Then, when the company, as companies often do, recovers and is sold or goes public, the result is all too familiar: The VCs who invested in the later rounds, having crammed down their fellow investors, wind up making out like bandits, but the earliest money is left bleeding on the shore.

Angel investors know this, as do the entrepreneurs they finance, and they all take their chances anyway. Such risk-taking is the lifeblood of U.S. economic competitiveness. But increasingly these angels are not stepping up, depriving the U.S. economy of the most critical stage of risk capital formation for the creation of globally competitive new companies and good paying new jobs for their employees. “The economic impact of the seed money gap is staggering,” says Bartlett:

At a conservative minimum, at least $4 billion is lost to the U.S. economy each year. More realistically, the economy losses closer to $100 billion per year because of the funding gap. Socially, the losses are just as great. Products and services that would improve the lives of our country’s people are either never developed, or significantly delayed.[4]

Here’s one way that Congress and the Obama administration could fix the problem, according to Bartlett in his forthcoming report. The United States, he says, needs a tax efficient structure by which angels and founders and other very early stage investors in young companies can mitigate the impact of dilution brought on by subsequent venture capital financings. His vehicle for doing this are what he calls “up-the-ladder” warrants,[5] which would enable early investors in young companies to participate fully when the company eventually goes public or is sold—because of the warrants that will make up for the dilution the angels and entrepreneurs encounter because of follow-on rounds of venture financing. Warrants are financial instruments that allow holders to purchase stock in a company when the shares reach a pre-determined price—stock that can then be sold or held onto for capital gains and wealth accumulation.

The exercise price—the price at which the holder of the warrant can purchase stock—would need to be set at a number that is well “out of the money,” says Bartlett, which in financial parlance means well above the current share price, hence the name “up the ladder.” This would keep the VCs content to leave the warrants in place when they invest. Assuming all goes well with the sale or public offering of a startup financed by angels and VCs, everyone can profit. Here’s how Bartlett thinks the structure would work:[6]

• Angels invest $1,000,000 for 100,000 common shares ($10 per share) at a pre-money valuation of $3 million, resulting in a post-money valuation of $4 million ($1 million going into the new company in the form of additional stock); the founder and key employees own 300,000 common shares.
• The package includes 100 percent warrant coverage, meaning there is also a “call” on the company to issue another 100,000 shares of the company’s stock at a pre-determined exercise price.
• This exercise price must be based on pre-money valuations that are relatively win-win for subsequent venture capital investors so that these later investors do not require the warrants be eliminated as a price for future investments. So, in our example here, the warrants will be based on pre-money valuations which are in fact win/win, say at $30, $40, and $50 a share (33,333 shares in each case).
• Since the angels have invested $1 million at a post-money valuation of $4 million, they therefore own 25 percent of the company—100,000 shares out of a total of 400,000 outstanding. The three warrants, as stated, are each a call on 33,333 shares.
• Subsequent “down rounds” of VC investment—a down round means an investment at a share price lower than prior to the investment—later raise $2 million and dilute the angels’ share of the company’s equity from 25 percent to 5 percent—their 100,000 shares now represent 5 percent of 2,000,000 shares (at a cost basis of $10 per share).
• The founder and key employees own 300,000 shares, or 15 percent and the VCs own the rest (1,600,000 shares at a cost basis of 80 cents a share due the down rounds).The company then climbs out of the cellar and a trade sale is scheduled for $100 million in cash, or $50 per outstanding share.

Absent “up-the-ladder” warrants, the proceeds to the angels would be $5 million. This is not a bad return (5 times their original investment) but nonetheless inconsistent with the fact that the angels provided the initial cash capital (the founder and employee contribution is largely sweat equity). The “up-the-ladder” warrants would add to the angels’ ultimate outcome as follows: 33,333 warrants at $30 per share are in the money by $666,660 and 33,333 warrants at $40 a share are in the money by $333,330. So the angels net an additional $999,999—call it $1 million—out of the purchase price.

The angels’ total gross returns have increased to 6 times their original investment while the returns to the VCs and the founder/employees have slid to $94 million. Even if the $1 million going to the angels comes entirely out of the VC’s share, that’s a relatively trivial result—a gross payback of 39.5 times their investment versus 40 times. If the company sells for just $30 a share, the angels get nothing because the exercise price is not above the actual share price, and the VCs still make out.

Now there needs to be a reason for venture capitalists to offer these warrants not just to angel investors but also to the founders, friends, and family invested in these new and innovative companies, and perhaps also to the employees in the company who are working so hard to make it a success. Bartlett argues that capital gains on the warrants should be treated as taxable under Internal Revenue Code Section 1202, which reduces by half the tax on the gain from the sale of securities issued by so called Qualified Small Businesses, assuming that the investment has been held for five years. And the capital gains would not to be subject to Alternate Maximum Tax.

For this to work, though, there need to be carrots and sticks to persuade venture capitalists to offer and then honor these warrants all the way to a profitable “exit.” One way would be to provide the same capital gains treatment to venture capital investors under IRS Code Section 1202—provided the venture investors offer these “up-the-ladder” warrants to the founders, the angels, and other early -stage investors in the company, and perhaps the company’s employees, too.

Remember, taxpayers will not be out any money if the company is not financially successful, as this tax break only applies after successful investing. And the tax break for venture capital investors would not apply unless they offered these up-the-ladder warrants to all early-stage investors in the company between the original rounds of investments and the final valuation of the stocks upon the sale of the company.

Broad-based wealth creation in the service of stronger job creation to boost U.S. economic competitiveness. Surely that’s a win-win-win.

Ed Paisley is the Editorial Director for Science Progress and the Vice President, Editorial at the Center for American Progress.

Endnotes

[1] NASF, “Fostering Innovation Capital,” Seed and Venture Capital State Experiences and Options, May 2006, p. 4.

[2] “The Great Debate: Half Full vs. Half Empty,” a forthcoming paper by Joseph Bartlett, to be published in early 2010, which will dissent from the idea there is too much investment in venture capital in today’s environment in the United States.

[3] See www.vcexperts.com, Buzz Archive: http://vcexperts.com/vce/news/buzz/archive_view.asp?print=true&id=78.

[4] Bartlett, Keller, Materfis, “An Initial Measurement of the Impact of the Seed Money Gap in the U.S. Economy,” Section 13.1.3, www.vcexperts.com.

[5] http://vcexperts.com/vce/news/buzz/archive_view.asp?print=true&id=109

[6] Summarized from the forthcoming paper, “The Great Debate: Half Full vs. Half Empty.”

Of course we’ve heard this before, especially with reference to Japan. As I’ve traveled around the country this past week many conversations have touched on two topics: the recent change in government and the efforts by the new, more liberal administration to confront the corruption and waste that are contributing to Japan’s version of our economic crisis. Then there are references to the “lost decade” that still shadows the diminished Japanese giant. Far fewer companies are paying for those infamous thousand dollar lunches in the Ginza, let alone financing leisurely chats at the disappearing geishas. The purchase of Rockefeller Center that so shook Americans seems as remote as the Shogun.

To be sure, China is not Japan, but it’s easy to get caught up in the criteria of the moment. Next month I will be in Beijing for the third time in four years, where the air is indeed thick with excitement about the next Shanghai tower and robust economic growth. But atmospheric Beijing restaurants frequented by Western expats and visiting scholars are also full of talk about continuing unrest in rural areas, environmental catastrophe, the lack of a leadership succession, and the Communist party’s anxiety about any incident that could trigger another Cultural Revolution, which still cannot be discussed in public.

Yet it is true that, for the moment at least, America’s self-confidence has been shaken. Worries that something is deeply wrong with the country were nearly universal in the late 1960s, and the 1930s, and so again in the early 2000s. Brooks is right that rekindling an innovation economy focused on regional clusters would go far to making Americans productive and optimistic again; that is exactly the cause we’ve championed at Science Progress. It’s also the orientation that can distinguish the American spirit from the Chinese system, which so far still lingers far behind as an innovation center.

One element of the American story that Brooks fails to mention that has been key to our success is immigration. Even the Japanese scientists I’ve spoken with agree that Chinese students are far more likely to spend virtually all their time at their work. A Japanese grad student told me that universities have had to remove makeshift beds from the labs so that Chinese students would stop sleeping there and stimulating rumors of sexual harassment. China has not shown that its system can unleash the combination of ambition and creativity that has long found such fertile soil in the United States—and in my view it never will. We should refocus our efforts on continuing to attract new waves of new Americans who can re-energize the American future and remind us why we came to America in the first place.

Jonathan D. Moreno is the Silfen University Professor of Medical Ethics at the University of Pennsylvania, a Senior Fellow at the Center for American Progress, and the Editor-in-Chief of Science Progress.

The President recognized that “When we fail to invest in research, we fail to invest in the future.” For decades, we have underinvested in our nation’s R&D infrastructure. The $22 billion in research funding I worked to include in the American Recovery and Reinvestment Act was a down payment on our economic future. I look forward to working with the administration and my colleagues in Congress to ensure that we meet the President’s commitments to doubling the R&D budgets of our basic science agencies and investing at least 3 percent of GDP in public and private research and development.

The President also said, “I firmly believe that the nation that leads the clean energy economy will be the nation that leads the global economy.” I could not agree more. As Congress continues to weigh a response to the challenges of climate change and energy security, we must make robust investments in the research and development that will transform our energy sector. We can and should be the nation that creates and produces the energy technologies that are necessary for a sustainable future.

The United States retains an unlimited potential for discovery, entrepreneurship, and prosperity. If we choose to unleash that talent, we can lead the world in innovation and dispel the uncertainty that has gripped us in recent years.

Rush Holt represents the 12th congressional district of New Jersey.

Innovation is the critical component of long-term economic prosperity, driving productivity growth and (if spread across key sectors of the economy) ensuring broad-based economic growth. Sparking innovation, however, requires capital (which is threatened by the current economic downturn), skilled-labor, scientific and technological advances, and creative collaboration between government and the private sector. Innovation cannot be dictated, but it can be cultivated.

In this paper, we focus on the importance of President Barack Obama’s call for a new federal effort to support regional innovation clusters. We know now—from a solid record of state and local achievements and academic research—that regional innovation clusters are a critical component of national competitiveness. Geographic regions that are bound together by a network of shared advantages create virtuous cycles of innovation that succeed by emphasizing the key strengths of the local businesses, universities and other research and development institutions, and non-profit organizations. Think information technology in Silicon Valley, music in Nashville, manufacturing in the Pacific Northwest, or life sciences in Massachusetts.

The United States, we argue in this paper, requires innovation policies for which responsibility is shared between regional leaders and the federal government. Leadership must begin in the clusters themselves—with local understanding of competitive strengths and strategies to increase the shared advantages that economists recognize as “positive externalities.” The federal government, however, can and should assume a vital role in which it frames critical national challenges, facilitates the flow of information and expertise to and between regions, and helps finance, in a competitive and leveraged fashion, valuable activities that clusters would otherwise be unable to undertake.

To that end, President Obama has requested that $100 million be appropriated in fiscal year 2010 for the Economic Development Administration of the Department of Commerce to support regional innovation clusters and associated business incubators.[1] That request is, by itself, a very small portion of the federal innovation budget. The U.S. government each year spends about $150 billion on basic scientific research and development. The EDA funding would help scientific breakthroughs resulting from this research find their way into new products and services that, in turn, could help foster broad-based economic growth.

We believe it is vitally important for Congress to appropriate this $100 million. After all, we devote less than 1 percent of our nation’s basic R&D budget to programs that support regional clusters, unlike our most aggressive international competitors (see box on page 2). As this paper will demonstrate, a relatively small federal initiative can be managed so that it yields significant economic advantages.

Such support could help create the next powerhouse information technology company like Google or the next pioneering biotechnology company like Genentech—and these are only two of the thousands of new companies, large and small, that spawned their groundbreaking technologies on university campuses in Silicon Valley before becoming Fortune 500 companies. New businesses, in turn, create new jobs, bolstering the overall economic well-being of the nation.

This $100 million would be money well spent. The reason: Never before has the U.S. government devoted a single penny to a comprehensive national program specifically dedicated to supporting regional innovation clusters and business incubators that fuse the geographically shared resources of universities and other research organizations, companies, research centers, governments, and workers.

Federal involvement is needed. Although the United States boasts a series of successful clusters, their true potential has not been fully realized. Cluster initiatives, according to a recent Brookings Institution report, are “too few” and they are “thin and uneven in levels of geographic and industry coverage, level and consistency of effort, and organizational capacity.”[6] Moreover, traditional clusters are under terrible stress. The automobile cluster in the Midwest is suffering not just from the perspective of the automobile manufacturers and their direct workers, but also with regard to the impact on the supply-chain, including specialized suppliers and local communities. Automobile parts manufacturers told the Treasury Department earlier this year that 130,000 jobs had been lost in eighteen months.[7]

Federal support to help innovation clusters improve their competitive strengths makes good economic sense. Begin by considering what regional economic clusters are and how they work. A simple, working definition is this: Clusters are geographic concentrations of companies, suppliers, support services, financiers, specialized infrastructure, producers of related products, and specialized institutions (such as training programs) whose competitive strengths are improved through the existence of shared advantages. So, for example, a successful cluster connects companies with academic institutions, research labs, and other nonprofit organizations in order to create the kind of virtuous cycle of competitiveness that creates jobs, stimulates business formation, and improves productivity.

What are the kinds of advantages shared by the participants in clusters? They could be a set of workers who boast particular skills, such as building boats in Maine. Or community colleges that offer training to manufacturing workers in places where advanced manufacturers are located. Or companies that decide to locate somewhere because of the presence of well-trained employees. Or research centers that conduct basic research into biotechnology close to start-up biotechnology companies. Anything, really, that creates what an economist would call a “positive externality,” a benefit that is captured not just by a single company, but by entire communities.

Positive externalities are nothing new. Nor are high-tech innovation clusters. Some, like Silicon Valley or the Route 128 corridor outside Boston, boast world-class universities and research institutions anchoring fervent communities of networked high-tech information technology and biotechnology companies served by a critical mass of commercial, legal, and financial talent. And some, like Akron, Ohio, have leveraged historical expertise; Akron’s rubber industry has spawned an innovation cluster anchored by companies committed to polymer science and advanced manufacturing innovation.

Here is what is new: The notion that regions can work closely with the federal government to consciously focus on the creation of shared advantages within clusters to create jobs, create businesses and, of course, stimulate long-term economic growth.

Job creation and business creation, the main economic benefits coming from innovative clusters, mostly spring from so called “high impact” companies (high-tech startups and established companies alike) that sell goods and services outside their clusters to both national and international markets, drawing revenue back into the cluster.[8] These “traded” services boost regional economic growth and national economic competitiveness. As measured by patent rates, productivity rates, and other innovation metrics, an innovation cluster creates new companies and new jobs in a helter-skelter but overall positive direction.

The federal government, of course, does spend money on a variety of innovation programs designed to help communities across our country create some of the ingredients necessary to replicate the success of thriving high-tech innovation clusters, such as the San Diego biotech cluster, the medical devices cluster around Minneapolis, and Research Triangle Park in North Carolina. These programs help fund the early commercialization of innovative products and services as well as regional workforce development and economic development efforts to provide the infrastructure necessary for innovative companies to flourish.

But these programs fall short of their true potential precisely because they are not organized in a systematic fashion to reap the advantages of an innovation cluster. The programs often fail to coordinate their work and leverage their unique strengths toward innovation cluster development as their central mission. That’s why a modest federal investment in a national cluster development program would multiply the benefits of our existing federal innovation programs, coordinate these efforts, and match federal expertise to the weaknesses and needs of regional clusters.

Policymakers must absolutely ensure they maintain the serendipity, competition, and ad hoc collaboration that have characterized successful clusters in the United States. The importance of regional clusters to competitiveness, however, raises three interrelated policy questions:

• Do federal programs that fail to focus on all of the ingredients needed to create a successful innovation cluster lack the direction and heft to make a difference?
• Can a government program dedicated specifically to the creation of new innovation clusters make a difference?
• And are there other factors that account for the unique innovative qualities that make Silicon Valley and Route 128 a success yet doom efforts in other regions of the country to failure?

The answer is “yes” on all three counts, which presents policymakers with a troubling dilemma: how best to invest limited federal resources?

This paper offers policymakers a guide through this dilemma. In the first part of the paper, we will explore briefly the lessons learned by those who have both led and researched innovation clusters over the past several decades. We will reconfirm the observation that, first and foremost, “place matters.”[9] Successful regional innovation clusters are not fungible—success rests upon differentiated competitive advantages that exist for different reasons in different parts of the country.

We will then demonstrate that access to finance matters, too. The greatest challenge that clusters need to bridge is the so-called “valley of death” financing gap that leaves young innovative companies with good ideas unable to fund the commercialization of those ideas due to the lack of seed-stage and early-stage financing. The current financial crisis has widened this valley, not just for young companies, but also for established companies that once could turn to more liquid debt and equity markets or to local or regional lenders and investors to fund their new ideas. Strategies to attract new private capital to regional innovation clusters are critically important.

There’s also a similar dearth of human capital—both managerial and workforce—in many regions of the country that wish to create or expand vibrant innovation clusters. American workers are very productive and much of our nation’s manufacturing sector could operate profitably in the United States if we took advantage of our global leadership in research and development, innovation, and process technologies to forge more competitive regional economies. The problem is we don’t do that today in any nationally systematic way involving clusters. The result is a growing structural unemployment problem with seemingly few solutions to match our productive workforce to the needs of innovative regional businesses.

Overcoming all of these connected hurdles requires us to rethink how we go about supporting clusters. So, also in the first part of this paper, we will examine how forward-thinking state and metropolitan governments have adopted practices that foster strong clusters, creating jobs, helping established companies grow and, of course, providing opportunities for new businesses. The key lesson for regional governments: Patience and leadership are necessary in the creation of all clusters.

Cases in point: North Carolina’s Research Triangle Park and San Diego’s CONNECT cluster—two regions that focused on all the ingredients needed for success, including federal funding—took several decades to reach their current prominence among U.S. clusters and were piloted there by a coterie of forward-thinking government, university, and business leaders. Newer clusters that recognize the importance of patience, such as those budding around the Arizona State University in Tempe, the Washington, D.C. metropolitan region’s many universities, and in rust belt cities in the Midwest such as Pittsburgh, are making headway.[10]

In the second part of the paper, we will discuss the reasons why Congress should support, and how the Obama administration should effectively implement, the president’s proposal that the Economic Development Administration be appropriated $100 million to support regional innovation clusters and associated business incubators. We will demonstrate that the Obama proposal is the answer to the failures of federal support identified in our earlier discussion of federal efforts. And we will show how this new effort—alongside dedicated White House leadership—can simultaneously increase the effectiveness of other federal programs, such as Small Business Innovation Research and Small Business Technology Transfer programs, which are administered by a variety of government agencies in coordination with the Small Business Administration, and the efforts of other Commerce programs, including those housed at the National Institute of Standards and Technology and the National Science Foundation. (See Appendix for a summary of the main federal programs that could measurably increase the impact of a clusters approach).

Support for clusters through the Department of Commerce’s EDA must be targeted at what matters most to innovation: The shared advantages that accrue to businesses, workers, and communities alike when the success of a cluster spawns a virtuous cycle of economic growth. Operating at the micro-economic level, the EDA must show a keen understanding of the ecosystem of innovation to ensure that its targeted innovation investments go where they can make a difference building cluster infrastructure and thereby do the most good for the longest time.

Specifically, we will explain how the Obama proposal provides the missing elements that are needed to support state and regional leadership. The federal government should leave leadership to the regional community, which knows best its own competitive advantages. But a bottom-up approach can reach the top level of government, with EDA supplying necessary funds to allow clusters to create shared resources, and with universities, community colleges, and research centers supplying a national framework against which the importance and success of clusters can be measured. Funding should be tightly connected to effective information exchanges, which will strengthen the ability of clusters to plot their own competitive strategy, and aligned with other federal programs through, for example, so-called “one-stop shops.”

We conclude this paper by sketching out the critical program-design elements that should be endorsed in the appropriations process for the proposed $100 million for EDA to implement a federal clusters strategy. Specifically, in this paper we propose that EDA should:

• Administer a competitive matching-grants program, with established criteria used to ensure the greatest impact of federal funding, among them an emphasis on local leadership from the private and public sectors, including universities and other research institutions.
• Align the cluster selection process with national priorities such as energy-efficiency, advanced manufacturing, and new technologies when administering this matching grants program.
• Assist economically distressed areas of the country by pooling regional resources from within and outside of distressed areas in order to bring together a critical mass of university savvy, business acumen, and productive workers.

No single grant application should have to meet all these criteria, but having these three principal guidelines in place will help ensure transparency and effectiveness. Funding should be focused on building the common infrastructure of innovation in a region, which effectively lowers the cost of business growth and creation. Examples include program development plans for business incubators and research centers, worker-training programs, and technology-transfer efforts focused on small- and medium-sized companies. Where regions have no effective clusters, smaller planning grants should also be available for the creation of strategies based on comparative advantages.

Time to act

Support for regional innovation clusters and business incubators is good public policy—and good political leadership. Successful cluster policies have been implemented at the regional level by both Republican and Democratic officials alike because clusters represent a pragmatic approach that requires collaboration with the business community and that, when successfully implemented, benefits communities as a whole.

Similarly, pioneering research into the role of clusters by policy advisors to both Democrats and Republicans has created a bipartisan foundation that increases the chances that, once initiated, federal cluster efforts will be supported for a long time by members of both parties. This is important because, as we have noted before, patience matters and, therefore, federal clusters efforts must be able to garner long-term political support.

Moreover, in a coming time of budget austerity, the regional cluster initiative does not require large sums of funding. That’s because federal support will be leveraged, providing resources that are not otherwise available but always contingent on regional governmental and private resources to amplify the impact of federal dollars. In fact, federal support in fiscal year 2010 budgets would come at an important time for state governments, which are under tremendous fiscal pressures. States including Ohio, Kansas, Connecticut, and Pennsylvania have either reduced economic development spending or encouraged large reorganizations of programs to control it.

Over time, the implementation of regional cluster strategies can increase the effectiveness of other federal spending. Just within the Department of Commerce itself, for example, export promotion and technology outreach programs at the International Trade Administration and NIST, respectively, would be strengthened by their links to effective cluster strategies, which in turn could supply valuable expertise to increase EDA’s own effectiveness. Even more importantly, federal support for regional innovation clusters presents an important opportunity for EDA to forge a close partnership with the Small Business Administration, whose own programs reach deep into local communities.

In the pages that follow we will present our analysis, conclusions, and recommendations in greater detail. In the end, we hope the case is made that Congress needs to appropriate that first $100 million toward a national program for regional innovation clusters. We are confident this step will help ensure that the $150 billion taxpayers invest annually in basic scientific research and development can better deliver on the promise of more and better jobs, new businesses, and transformative technologies across our nation.

Download this report (pdf)

Jonathan Sallet is a managing director of The Glover Park Group and a former director of the Department of Commerce’s Office of Policy and Strategic Planning under Secretary Ron Brown. (The views expressed herein represent only his views, and not those of his firm or any client thereof.)

Ed Paisley is Vice President for Editorial at the Center for American Progress and Editorial Director of Science Progress, A CAP project. He is a 20-year veteran of business and finance journalism who was previously responsible for award-winning coverage of technology finance and international finance at The Deal, a specialist Wall Street publication, and at Institutional Investor magazine.

Justin Masterman worked first as an Intern and then as a Special Assistant for Science Progress at the Center for American Progress. A recent graduate of the University of Pennsylvania, where he was a University Scholar, Justin wrote about innovation policy and economic development for Science Progress.

Notes

[1] Although the $50 million allocated for business incubators is not money explicitly dedicated to regional innovation clusters, business incubators perform a very important support function in innovation clusters. The business incubator programs accelerate the creation and development of successful businesses, an essential component of innovation clusters.

[2] Steven Ezell, “Benchmarking Foreign Innovation: The United States Needs to Learn from Other Industrialized Democracies” (Science Progress: January 12, 2009).

[3] Information gathered from program website available at http://www.competitivite.gouv.fr/index.php?&lang=en

[4] Karen G. Mills and others, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies.” (Washington: Brookings Institution) available at http://www.brookings.edu/reports/2008/04_competitiveness_mills.aspx.

[5] Michael E. Porter, “Why America Needs an Economic Strategy,” BusinessWeek , available at http://www.businessweek.com/magazine/content/08_45/b4107038217112_page_4.htm.

[6] Karen Mills, Elisabeth Reynolds, Andrew Reamer, and others, “Clusters and Competitiveness: A new federal role for stimulating regional economies.”,” (Washington: Brookings Institution, April 2008). Pgp. 6.

[7] The Economist, “The American Car Industry,” The Economist, February 19th, 2009, available at http://www.economist.com/business/displaystory.cfm?story_id=13145718.

[8] Zoltan J. Acs and others, “High-Impact Firms: Gazelles Revisited,” Small Business Administration, available at http://www.sba.gov/advo/research/rs328tot.pdf.

[9] Maryann Feldman, “Place Matters: Innovation Springs from Many Seeds, But Soil Is Equally Important.” (Washington: Science Progress, Center for American Progress, January 2009).

[10] http://www.scienceprogress.org/innovation-clusters/ provides some specific
regional examples.

But with crisis comes opportunity, which is why policymakers in Washington need to enact several key reforms to help capital market formation work more efficiently for startup companies looking for money to grow our nation’s stock of innovation and create new and more abundant jobs. Fortunately, President Obama agrees that the science-and-technology economy in our country is the foundation of our prosperity and deserves a good deal more nurturing than has been the case in the past.

Here’s one obvious example of the importance of fostering venture capital-backed company successes and the resulting impact on our economy: In 1990 Microsoft Corp., Dell Computers Inc., and Cisco Systems Inc. had combined sales of $2 billion, but ten years later their combined sales were $80 billion. These and other technology behemoths began as venture capital-backed startups, and the same is true today for the next generation of Microsofts, Dells, and Ciscos.

The tech economy is supported on the shoulders of the venture capital sector, which I have labeled, for purposes of abbreviation, the EVITA sector, or Entrepreneurial Venture-backed, Innovation-centric, Technology-flavored Activity, which provides critical sustenance for companies founded by gifted entrepreneurs and aimed at the financing journey from the “embryo to the IPO,” exploiting innovative intellectual property, including business methods, to change our lives for the better. I mention the “embryo to the IPO” because this is where capital markets regulatory reform comes into the picture. Reopening the IPO window is critical, in my view, to keeping the tech economy, and accordingly the economy of this country, on a solid and robust growth path.

Next, we need to unlock even more private capital to fund early-stage startups. Today we are leaving billions of dollars of potential gross domestic product growth stranded in the wilderness because seed money for promising EVITA companies sits on the sidelines. As a paper by two of my students at New York University notes:[1]

The economic impact of the seed money gap is staggering. At a conservative minimum, at least $4 billion is lost to the United States economy each year. More realistically, the economy losses closer to $100 billion per year because of the funding gap. Socially, the losses are just as great. Products and services that would improve the lives of countless people are either never developed, or significantly delayed.

The answer to our broken IPO financing pipeline and our moribund seed-stage venture financing landscape lies in a series of regulatory reforms that are admittedly arcane for non-financial types but nonetheless crucial to the future of our economy. Below are my (sometimes controversial) suggestions to rebuild our IPO markets and re-engage seed stage investors in the creation of new, competitive companies and industries across our country.

Sarbanes-Oxley Reform

This is perhaps the second-most controversial reform suggestion I will make. The costs of complying with the financial reporting requirements of the Sarbanes-Oxley Act by public companies are overblown by some critics, and the expenses of complying with these reporting requirements are slowly coming down. Nonetheless, to help young high-tech companies tap the public markets for new capital, policymakers need to undertake a bottom-up review of the regulatory burdens on both public and private business firms, including but by no means limited to Sarbanes-Oxley.

Given the way government works, mandates to the agencies themselves to reduce unnecessary paperwork, make-work tasks, unnecessary reviews and endless waiting periods is, typically, fruitless. The classic solution is an end run—an independent study group manned by the neutral and knowledgeable—to cut through the sludge, hold hearings, and render detailed recommendations for reducing wasted effort and pointless expense.

The core idea is to eliminate frictional costs without sacrificing hard-won transparency. Audit fees of $1 million are an enormous burden for a venture-backed IPO candidate to contemplate. In my view, a report by the knowledgeable commission I suggest, including representatives of emancipated audit firms that are already moving in the direction of lowering unnecessary costs, is a critical need.

IPO Market Reforms

The first element needed to bring back the IPO is a liberalization of the rules governing IPO market processes, entailing what I call the “long runway,” or a system for allowing the marketplace to review IPO candidates in a leisurely way.[2] We need to remove the hysteria, resembling nothing so much as the opening weekend of a Hollywood movie, from the current process. There has been a little progress in this regard, but much more needs to be done.

In addition, we need to restore, under the appropriate guidelines and rules, the role of the sell-side analysts who do the investor research on these small companies after they go public so that the shares of newly-listed small- and mid-cap companies can tell their story to institutional investors on an on-going basis. This is very hard today because institutional “buy side” interest in smaller public companies disappears when analytical coverage is AWOL.

In fact, for a public company, lack of research coverage by the major investment banks, including the members of the underwriting syndicate, means a berth in the so-called “orphanage,” with stock prices trailing off and liquidity diminished to the “trading by appointment” level. This lack of research coverage—the result, in my opinion, of over-reaction to the dotcom IPO scandals of the late 1990s—is now the reason startup companies face such long odds going public, and then surviving and growing as public entities the way Microsoft, Dell, and Cisco did two decades ago.

I agree with former investment banker (and poster child for the dotcom feeding frenzy) Frank Quattrone, who proposes that our federal regulatory agencies—prodded if necessary by a commission such as the one I have hypothesized—focus on and adopt tried-and-true steps to restore the integrity and objectivity of the sell-side analysts but allow them to be paid on the basis of merit. The core idea is to wall off the Goldman Sachs Group Inc. analysts from the Goldman investment bankers and salespeople, but to allow the analysts to be paid the going rate out of corporate finance revenues. This pay structure must insure that compensation is not tied to the amount of such revenues and that base pay and bonuses are administered by a compensation committee of independent directors, advised by independent counsel and consultants, who will make sure an analyst cannot be fired for trashing Goldman-backed IPOs and M&A valuations.

Executive Compensation

Tying the compensation of corporate managers to the performance of the company shares, thereby aligning management and ownership, was a 1980’s “reform” driven by investors activists and their media acolytes, but which was instituted only half way. To complete the process, I urge we introduce a tax efficient structure entailing a ten-year time horizon for judging the effectiveness of executive compensation alongside a clawback provision governing that compensation so that any bonuses judged unworthy over 10 years can be reclaimed by shareholders. This provision should mirror the compensation arrangements for company executives with compensation arrangements for the managers of private equity funds with investment time horizons of ten years.[3]

In fact, as far back as 2004, I suggested the clawback mechanism, in an interview with Broc Romanek in Corporate Executive’s online edition.[4] In the wake of today’s financial crisis, this kind of reform is more urgent than ever, and would benefit investors in high-flying IPO offerings that, over time, may come crashing back to earth—as happened at the end of the dotcom bubble. These kind of compensation rules would ensure that executives keep their eye on the long-run performance of their companies.

Tax Reform

One of the more troubling tax reforms proposed by the Obama administration is to tax the so called “carried interest,” or the percentage of the profits earned by the managers of private equity funds, hedge funds, and venture capital funds alike for investing in successful companies. Rewarding venture capitalists for taking investment risks alongside institutional investors in their funds is a critical element of a successful EVITA sector. Taxing the carried interest at ordinary income rates would be major step backwards for these venture firms, and will not raise significant revenue.

The real unjust enrichment problem is with management fees charged by the big hedge funds, private equity funds and a few large VC funds. These fees go way over-the-top and are tied only to the size of the fund and not to performance. Reintroducing the idea of budgeted management fees is the right reform in this regard.[5]

Conversely, the negative influence of fast buck artists—including hedge funds and other so called “activist investors”—on the fortunes of public companies is increasingly clear. The case against the activists, who are in my view the equivalent of casino capitalists, is eloquently expressed in a piece by Marty Lipton, who argues that the activists trumpeting “shareholder democracy” and their academic and media acolytes are making it difficult for corporate boards to function in the long-term best interests of the company, the employees, patient investors … and, in fact, the country.[6]

Marty’s concerns are spot on, in my view. Indeed, the latest meltdown is just the latest indication of what happens when the stewards of major public institutions are obsessed with instant gains that appear too good to be true and typically are too good to be true. Our financial system should be built to secure long-term, sustainable growth in the private sector. Accordingly, I suggest that taxes on securities transactions should be adjusted so that, if new capital-gains taxes are on the launching pad, then gains on long-term investments should be taxed at a significantly lower rate than short-term gains.

A lower tax on patient capital, say the sale of shares held for five years, is the way to go. We need to reward patient investors so that public companies can pursue long-term goals, including research and development and innovation. Our economy gets no positive impetus when S&P 500 companies must pander to day traders by buying back stock, dissipating working capital in the form of special dividends, eliminating critical long-term capital expenditures, and auctioning the company to a (seemingly) higher bidder.

Restoring Risk Capital to its Rightful Place in Venture Financing

Perhaps the largest need at the moment, assuming we can re-open the IPO window and make public company status again desirable and a realistic goal of venture capital activity, is to rehabilitate angel investor financing. As Silicon Valley entrepreneur Michael Malone and ABC.com columnist Tom Hayes put it recently in a Wall Street Journal column titled “Entrepreneurs Can Lead Us Out of the Crisis:”

The marquee venture capitalists have little time nor inclination anymore to invest seed capital in early stage companies. The real heroes these days are the nonprofessional investors, the “Angels.” These folks aren’t always the high-net-worth people we imagine, and often they aren’t as sophisticated as we think.

Angel investors, who put their own funds into early stage start-up ventures, have been badly burned in today’s financial markets (as has everybody else), which means the quest for risk capital among startup companies, regardless of how attractive the proposition, is becoming consuming to the point that the search is in many cases simply not realistic. We need to bring back the angels because, without them, the venture process never gets started.

One place to start is at the Small Business Administration. Thus we ought to take a look at the so-called preferred securities program, which authorized the SBA to fund venture capital partnerships which qualified as Small Business Investment Companies, or SBICs, by making equity capital (versus loans) available to those groups. This program tanked because the SBA’s participation was limited on the upside and unlimited on the downside, a “heads you win tails I lose” proposition which, after the dotcom meltdown, deserved to be thrown under the bus, as indeed it was.

That does not mean, however, that the program could not be brought back to life, but restructured so that the risk/reward formula for the SBA and the taxpayers is configured to give the government a level playing field with private capital. Furthermore, the benefits should accrue to venture capital funds focused on early stage ventures, funding the gap between the friends and family round and the late stage mezzanine round … and certainly not including buyout funds that dominated the earlier program.

The second project, which does not require the commitment of taxpayer capital, is to pull together, in one online data source, a directory of as many angel investor clubs as can be located—all for the convenience of entrepreneurs seeking angel capital. The list need not be confined to groups specifically labeling and identifying themselves as “angel clubs” or “groups” because there are a variety of entities that fulfill the same function, including online matching services such as

• SBA-sponsored Active Capital business plan competitions
• Venture capital clubs as they are often styled
• University-sponsored colloquia such as the MIT Enterprise Forum
• Events sponsored by investment banks and other commercial sponsors at which private companies present their business models.

To make such an information platform attractive and useful, however, one additional step could usefully be taken—a Zagat-type inquiry directed to each organization seeking critical information for both angels and other investors, including the “track record” of the organization. The information provided in the directory should include:

• How many investments has it made
• How many members does it have
• The total amount invested in companies presenting
• Average investment size
• Investments made as a percentage of investment proposals presented.

Further, the survey should collect the equivalent of restaurant reviews of the angel group from previous users (tossing out rants from the obviously disgruntled) so that applicants for capital can make up their own mind whether to zero in on that particular group.

And, on the tax front, we need a tax efficient structure by which angels and founders can mitigate the impact of dilution occasioned by subsequent venture capital financings, which is often very hard on the early money. I am plugging hard for what I call “up-the-ladder warrants,” which would enable early investors in young companies to participate fully when the company eventually goes public or is sold through warrants that will make up for the dilution the angels encounter in follow-on rounds of venture financing.[7]

The exercise price of the warrants would be set at a number that is well out of the money (hence the name “up the ladder”), keeping the VCs content to leave the warrants in place when they invest. Assuming all goes well with the sale or public offering of a startup invested in by angels and VCs, both types of investors can profit from their different types of investments in the startup company. To make this structure compelling for angels, I suggest the gain on the warrants should be treated as taxable under Internal Revenue Code Section 1202, which reduces by half the tax on the gain from the sale of securities issued by Qualified Small Businesses (as defined in the Code), assuming that the investment has been held for five years.

Specific Securities Law Changes

I suggest as well that the SEC finally get off the dime and expressly refashion the bar in the Securities and Exchange Commission’s Regulation D against “general solicitation” and “general advertising” in connection with the search for private capital so that it fits current, fully legitimate business practices in the private placement arena. The bar against soliciting or advertising for private capital is meant to separate private and public offerings in order to protect investors, but it is viewed in the industry as an anachronism and is seldom enforced.

An update is long overdue. The rules should be reconfigured so that whatever regulation is appropriate is in fact the regulation that exists on the books. Widespread (and unofficially countenanced) disregard of a major securities rule is not consistent with best practices or healthy for securities regulation generally.

The same holds true for the question of unregistered finders or those individuals and firms who limit their investment banking functions to helping startups (and other private firms) find private capital.[8] The passage of a so called “broker/dealer lite” amendment to Reg D is long overdue. We should legitimize “finders” who do not have any other attributes of investment banks or broker/dealers as they help entrepreneurs find capital, and regulate them at prices they can afford.

Finally, I would also like to see full legitimacy afforded, with the appropriate oversight, to private trading platforms such as SecondMarket, which will allow trading among sophisticated investors in private securities, thereby affording liquidity to investors in venture-backed companies when circumstances change and cash is needed, either by the limited partners in a venture fund or investors directly in a startup company. SEC regulation of the platform is, of course, desirable. (Full disclosure: SecondMarket has an alliance with VC Experts, of which I am a senior contributing editor.)

Capital Markets Reform is Key

Private capital formation in support of innovation is the province of the private sector, as it should be and should remain. But the federal government, as it goes about its vital financial regulatory work, fiscal responsibilities, and economic development efforts in support of broad-based economic growth and prosperity, needs to take into account how all of these efforts affect private capital formation. In my view, the regulatory reforms, market oversight reforms, executive compensation reforms and securities law reforms outlined in this column are the best places to start. Our nation’s capacity to innovate our way out of the current recession and boost our long-term global economic competitiveness hangs in the balance.

Joseph W. Bartlett, an advisory board member of Science Progress, is Of Counsel at Sullivan & Worcester LLP, a courtesy professor at the Johnson School of Business, Cornell University, and founder & chairman, VC Experts, Inc.

Endnotes

[1] www.vcexperts.com, “An Initial Measurement of the Impact of the Seed Money Gap on the U.S. Economy,” Section 13.1.3, The Encyclopedia of Private Equity and Venture Capital

[2] http://www.joebartlettvc.com/sites/default/files/Bartlett_Shulman.pdf

[3] http://www.joebartlettvc.com/sites/default/files/gzp4n01_.DOC_.pdf

[4] This interview originally appeared in the online version of The Corporate Counsel and the thoughts expressed therein repeated and re-emphasized in Bartlett & Lundburg, “A New Executive Compensation Model,” NYLJ, May 16, 2007.

[5] See e.g., Kreutzer, “Putting The ‘Partner’ Back in Limited Partner,” Private Equity Analyst Plus, 4/9/2009.

[6] http://blogs.law.harvard.edu/corpgov/files/2007/02/20070210%20Lipton%20Address.pdf

[7] http://vcexperts.com/vce/news/buzz/archive_view.asp?print=true&id=109

[8] http://www.joebartlettvc.com/sites/default/files/Document.pdf

This kind of adaptive intelligence has not been a strong point of the federal government, but it is essential to long-term economic growth and security. It will require infusing competence, innovation, and entrepreneurship into the government. Yet it also means recognizing that the capacity and role of government is limited, and that the functions of government are subject to high standards of transparency, accountability, and participation.

A national commitment to innovation requires not only remediation but exploiting our strengths and enhancing the fabric of innovation, especially in the social, commercial, and institutional applications of technology. Innovation policy as practiced to date tends to take a top-down macro-economic approach that views public research funding and tax credits as the primary policy tools. Those are important tools, but they are limited (and costly) and get caught up political processes that have become all too familiar.

Important as they are, they should not distract from a closer appreciation and understanding of the processes of innovation-processes that can be improved by a focused and coordinated approach to standards, infrastructure, enabling technology, clusters, and patents, an approach that takes into account evolving practices and models in the many contexts in which innovation takes place.

Promoting Innovation

It’s now clear: Innovation is the principal driver of productivity and economic growth. But what can and should the federal government do to promote innovation? The question is usually framed in terms of national competitiveness: How can we compete with the millions of scientists and engineers in China and India? The mainstream consensus, embodied in the America COMPETES Act of 2007, advocates more research in the physical sciences and more science, technology, engineering, and math education.

But despite bipartisan support for the COMPETES Act, its authorizations remained largely unfunded prior to the 2009 economic stimulus legislation. For example, the new Technology Innovation Program, which is run by the National Institute of Standards and Technology and which replaced the politically contentious Advanced Technology Program, received only $25 million for new projects. Other measures in the Act-a President’s Council on Innovation and Competitiveness, studies of service science and barriers to innovation, and an ARPA-styled agency at the Department of Energy-also remain unimplemented. Meanwhile, the Act quietly abolished the Technology Administration at the Department of Commerce, along with its tiny Office of Technology Policy, leaving nothing in place to support innovation policy.

The impetus for the America COMPETES Act was the National Academy of Sciences 2005 report, Rising Above the Gathering Storm. Like other National Academy reports, RAGS (as it is affectionately known) represents a consensus of a distinguished committee, a mainstream document inspiring mainstream legislation. RAGS is a common-denominator approach to innovation policy, and the work behind it is now five years old.

Intuitively, of course, more research funding going into the pipeline will produce more innovation at the far end. And more funding for education will eventually produce more scientists and engineers, which should also produce more innovation. But what real difference will adding thousands of presumably less motivated engineers make? Why not just hire engineers from China and India willing to work for one-fifth as much? Will more of today’s engineering education really help 20 years from now, or do we need something different?

More of what used to be our national advantage might be nice. But is it enough?

Like competitive advantage, innovation is a moving target. Just as businesses need to operate in a volatile global economy with knowledge and foresight, innovation policy must respond to challenges and opportunities. Occasional studies by the National Academy, the Council on Competitiveness, and others do not build capacity and sustained focus. Yet our long-term economic security depends on our ability to innovate. We need institutionalized capacity within the federal government, not only to support the vision of political leaders who care about innovation, but to endure beyond the next election.

We are already deeply invested in innovation. The federal government spends $150 billion a year on research that the private sector does not invest in. We have a patent system that dates back over 200 years but has grown complicated, costly, unpredictable, and controversial. We have a research-and-experimentation tax credit that keeps getting renewed and expanded but never made permanent, year after year.

There are a rich variety of agency-based programs and tools. NIST supports measurement infrastructure for industry. The Small Business Innovation Research Program cuts across all research agencies to ensure small business participation. NIST operates the Manufacturing Extension Partnership program and the Technology Innovation Program. The National Science Foundation funds programs to stimulate interdisciplinary research, support researchers early in their careers, promote collaboration between industry and academic researchers, and develop a scientific understanding of science and innovation policy.

Other tools for promoting innovation include visas for engineers and scientists, prizes, procurement, leadership by example, and legal and regulatory decision-making and workforce development programs. In short, there are many tools and vehicles for promoting innovation, but they are scattered and typically stovepiped, with little or no coordination and expertise at the top.

Understanding innovation

Can we at least agree on what we are talking about? The Commerce Department’s Advisory Committee on Measuring Innovation in the 21st Century Economy recently defined innovation as an activity rather than a specific result:

The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm.

Innovation does not necessarily involve research, although research is often a big part of the process. Innovation does not necessarily involve invention, although an innovation may include thousands of potentially patentable inventions. Innovation, in sum, means turning research, experimentation, inventions, raw materials, assembly processes, design, and testing into marketed products and services.

What’s more, innovation is of marginal use unless it is successfully adopted and used. Read literally, the advisory committee’s definition seems to exclude innovation by government agencies, nonprofit organizations, and users. But we want productive innovation wherever it can take place, and innovative producers need innovative users. The OECD definition is more expansive and lists four types of innovation: product, process, marketing, and organizational.
The term “open innovation” (as popularized by University of California, Berkeley Professor Henry Chesbrough) describes how innovation in manufacturing has moved from in-house research labs to become globalized and distributed. Following trends in manufacturing, research is increasingly outsourced, acquired from partners and collaborators, or bought on the open market, often by acquiring startup companies. Innovation is less directly controlled, less internal to individual companies, and more the combining of research, design, technology, and components from multiple sources.

Some U.S. companies, such as Cisco Systems and Dell, excel at pulling the pieces together. Apple Computer is uniquely capable of integrating invention, design, software, marketing, and customer skills in a coherent innovation-based product strategy. IBM, another microcomputer pioneer, has moved aggressively in the opposite direction, away from mass production to the design of integrated solutions and services that span business and technology.

In an article provocatively entitled “The Post-Scientific Society,” George Mason Professor Chris Hill makes the case that the most significant innovations now come from the novel organization of economic activity rather than the traditional R&D pipeline:

Companies based on radical innovations, exemplified by network firms such as Google, YouTube, eBay, and Yahoo, create billions in new wealth with only modest contributions from industrial research as it has traditionally been understood. Huge and successful firms like Wal-Mart, FedEx, Dell, Amazon.com, and Cisco have grown to be among the largest in the world, not as much by mastering the intricacies of physics, chemistry, or molecular biology as by structuring human work and organizational practices in radical new ways.

These new ways include crosscutting collaboration within companies as well as the varieties of “open innovation.” They include different strategies for engaging users, as well as upstream innovators and partners. This usually entails going beyond market transactions to long-term relationships based on trust and confidence. In other words, it’s not just finding and integrating component parts, but nurturing relationships that support the different processes of innovation. The ultimate advantage comes in managing these processes in support of a powerful (and preferably unique) business vision.

“Open innovation” in the original sense contemplates distributed sources of innovation, but with bilateral relationships between, say, a supplier and a buyer. Yet “open” can also refer to the actual process of innovation. An open innovation process generally involves multiple parties working together in common activity. It may be open only at the beginning or throughout the process.

The development of standards is a classic example. Standards accelerate market development and open up new opportunities for differentiation and proprietary advantage, but setting standards is a cooperative activity. It is not ordinarily a source of advantage-although it can be for companies whose technologies are chosen for the standard. Instead, it represents the kind of “coopetition” that has contributed greatly to the rapid innovation and productivity growth in information technology.

This kind of multilateral collaboration is especially suited to the collecting, organizing, and sharing of digital information-open source software development, open data initiatives in biotechnology, and the evolution of Wikipedia and other wikis. These new forms of innovation are typically enabled by software that supports process management by modularizing tasks, recording comments and interaction, and giving limited controls to a subset of the participants.

Missing: the process of innovation

Coming on the heels of the doubling of funding for the National Institutes of Health, RAGS was a reminder that physical science also matters, and that we need to pay attention to it. But the report is equally noteworthy for what it does not discuss. As Harvard University Professor Lewis Branscomb observes:

[T]he report claims to say how to make the U.S. economy more innovative, but it addresses only the vital necessity of improving public education, encouraging U.S. students to study science, and strengthening our research leadership. In this hugely influential report, the linkage between the generation of new ideas and the process of innovation is dealt with by an attention-grabbing list of ways in which our economy might fail to be internationally competitive. It leaves the role of enhancing the power to innovate to the private sector, except for one role for government: to revisit the world of intellectual property law.

In other words, RAGS gains political traction by focusing on basic necessities and statistical comparisons with ascendant economies—competitiveness rather than innovation. The report avoids controversy about the role of the government to embrace a common-denominator political perspective.

There are no recommendations, for example, on providing funding to bridge the “valley of death” between research and commercialization. And there is no discussion of NIST’s Advanced Technology Program, which was assessed favorably by economists but viewed as government intrusion in the market by conservatives in Congress.

RAGS also does not address extension services, innovation clusters, or state investments. It avoids discussing public support for generic, pre-competitive enabling technologies, a policy adopted by the George H. W. Bush administration. It argues for universal broadband, but otherwise it views information technology as one technology among many.

Then there’s the brief discussion of intellectual property in RAGS that reiterates three (out of seven) recommendations on patent reform from an earlier NAS study and adds a fourth:

Change intellectual-property laws that act as barriers to innovation in specific industries, such as those related to data exclusivity (in pharmaceuticals) and those which increase the volume and unpredictability of litigation (especially in information-technology industries).

Rather than come to grips with the one-size-fits-all problem of the patent system, the report spends a single paragraph acknowledging that “[p]atent issues are also particularly important to the information technology industry,” and concludes that “those issues are opportunities for Congress and other relevant federal entities to take productive actions.”

Yet in the same breath, the report expends two full pages saying why pharmaceutical manufacturers need to have double the current five years of test data exclusivity. So even this “consensus” report includes a special-interest recommendation in the one area where it acknowledges a government role-a recommendation that probably would not have made had there been a generic drug producer or consumer representative on the committee.

RAGS offers its recommendations with great confidence, while sprinkling its pages with boxes offering “another point of view.” It avoids controversy and does not acknowledge big unanswered questions or offer a research agenda. The America COMPETES Act at least mandates a study of barriers to innovation and a study of service science. (Services now constitute nearly 80 percent of the U.S. economy, yet the role of R&D in services is not well defined or understood.) The still-uninitiated studies could help balance RAGS‘s heavy emphasis on the physical sciences and focus attention on innovation as a process.

Technology enabling innovation

The process of innovation encompasses a large number of intermediate inputs: research tools, standards, product design, manufacturing processes, financing, even marketing. There is often little cause for government involvement and a danger that intervention will have unintended effects. Yet in some cases, special treatment of enabling technologies may be justified to ensure that benefits are widely shared. Case in point: National Institutes of Health guidelines encourage non-exclusive licensing of research tools developed with public funding.

Information technology is a powerful and pervasive general-purpose enabling technology, intimately tied to the fabric of innovation and the forces of specialization and globalization. It is the essential enabler for new services and for innovation in marketing and organizations, including the government. The IT sector is also extraordinarily innovative in its own right, with a history of double-digit productivity gains that far outstrips other sectors of the economy.

Indeed, with advances in performance, declining costs, new processes, products, and services, IT has become the primary factor in increasing productivity and enabling innovation across the economy. It has driven the post-creation costs of information to near zero-zero reproduction costs, zero distribution costs, zero degradation, and zero depletion-with dramatic effects on encyclopedias, newspapers, and the music business, as well as on personal, social, and political use of information.

IT’s dual role as an innovative technology and as a powerful enabling technology makes IT-related policies a de facto driver of innovation policy, especially in the absence of a well-defined approach to innovation policy. Critical IT policy domains include:

Broadband

The United States has fallen behind other leading economies in broadband penetration. Rising Above the Gathering Storm recommended support for universal broadband access as an essential platform for innovative applications and services. This year, Congress provided $7.2 billion in the $787 billion economic stimulus package.

Patents

Patents pose unique challenges in IT because of the complex, networked nature of IT-based products and services. The possibility of thousands of potentially patentable functions in a single product makes individual patents less valuable but increases the risk of inadvertent infringement. Judicial and administrative decisions making patents easy to get has led to massive portfolios-and to opportunities for arbitrage and extortion. The IT and financial services sectors have been the strongest advocates of patent reform.

Standards

Standards enable interoperation of components, products, and services. They are strategically important for innovation in IT because they assure that investments will not be stranded and help create markets for new technology. The need for rapid development of IT standards to support innovation has led to alliances and consortia, mostly based in the United States, as agile alternatives to formal standards development organizations. However, the increased scope and volume of patenting has led to increasing tension with collaborative standards development.

Research

Reflecting the crosscutting importance of IT, federal research agencies invest heavily in IT research. Their activities are coordinated through the Networking and Information Technology R&D Subcommittee of the National Science and Technology Council (supported by a National Coordination Office, which reports to the Office of Science and Technology Policy in the White House). The President’s Information Technology Advisory Committee provided outside oversight until it terminated in 2004.

Advanced cyberinfrastructure

The National Science Foundation supports the development of advanced user-centered, software-based cyberinfrastructure. Operating out of the NSF Director’s Office, the cyberinfrastructure program addresses the relationship between system design and social, economic, and legal institutions-all under the rubric of “virtual organizations.” Although funding is generally targeted to research and education, advanced cyberinfrastructure can support a wide range of applications, including process management and cross-sector collaboration.

Federal operations and infrastructure

The world’s largest user of information technology, the U.S. government is increasingly dependent on IT in its interaction with citizens, businesses, and state and local governments. Intentionally or otherwise, government use of IT helps set standards, diffuses new technologies and applications, and, when it contributes to the efficiency and effectiveness of public functions and services, can lead by example.

In fact, the public-facing use of IT has been a major initial focus of the Obama administration, building on the campaign’s achievements in using the Internet. With no need to go to Congress for new legislation, the administration is using IT to implement a commitment to competent, transparent, participatory, and collaborative government. And in doing so, it demonstrates that government itself has the capacity to learn, adapt, and innovate.

Knowledge infrastructure

President Obama’s memorandum issued the day after Inauguration speaks of “participatory” in terms of the need to access distributed knowledge:

Public engagement enhances the Government’s effectiveness and improves the quality of its decisions. Knowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge.

But while information has gone digital, free, fast, and global, knowledge remains sticky, local, complex, tacit, and context-dependent. Knowledge can’t simply be posted or pushed down a pipeline; it is hard to transmit, absorb, and apply. Whereas information is increasingly cheap and plentiful, knowledge is in short supply-and a growing source of advantage.

While the Web facilitates access to information, hyperlinks define relationships and give context to content, an important step toward representing and communicating knowledge. At the same time, the Web has democratized information technology. Authoring websites is not rocket science; it is designing soft-wired structures that require editorial judgment more than technical skills.

Before the Internet, infrastructure was conceived in simpler terms as networks of standardized modality-rails, roads, electricity, voice telephony, mail-in which there was no connection between the network and whatever it carried. The Internet combined two different models of infrastructure: the network, as in the phone system; and the platform, such as the personal computer, upon which a vast superstructure of applications could be developed.

Unlike the telephone system, the Internet carries multiple protocols performing different services. It supports email but it also supports the Web, file transfer, video conferencing, and Twitter. The Web allows unsophisticated users to construct networks out of information, specifically links that point from small objects (words, images) to web pages and other addressable objects.

Search engines go a step further by using algorithms to evaluate links and enabling users to create an ad hoc knowledge infrastructure out of keywords. Wikis enable collaborative processes for organizing large and complex knowledge bases. The most evolved and institutionalized wiki, Wikipedia, combines ongoing construction of linked content with a set of policies, rules, and a small number of individuals with the power to mediate and manage differences of fact and opinion.

The wiki is the closest model for the collaborative process of assembling knowledge-implicitly embraced by the Obama memo’s commitment to “collaborative government:”

Executive departments and agencies should use innovative tools, methods, and systems to cooperate among themselves, across all levels of Government, and with nonprofit organizations, businesses, and individuals in the private sector.

Unlike transparency and participation, collaboration is a relatively new principle that raises new and challenging questions. The president’s memorandum views collaboration as an IT challenge, which it assigns to the Chief Technology Officer in coordination with the Director of the Office of Management and Budget and the Administrator of General Services.

Boundary spanning and beyond

The prepositions in the memorandum’s description of collaboration (“among, across, with”) signal the critical importance of boundary spanning, both within government and between government and the private sector. The Internet famously enables boundary spanning at levels from undersea cables on up the stack to wikis.

But boundary spanning is not just a matter of technology. “Boundaries” take many different forms-from departmental boundaries to disciplinary boundaries to institutional and company boundaries to political and jurisdictional boundaries to boundaries between the academy, government, and industry. Barriers of time and space are, in effect, boundaries. Free trade, migration, study abroad, multidisciplinary programs, top-level decision-making, research consortia, patent pools, partnerships, and academic networks all involve boundary spanning.

However and wherever the spanning takes place, the boundaries do not dissolve or disappear. They are there for reasons. Free trade is promoted while political identity is preserved. The U.S. federal system has evolved under this principle, and Europe aspires to market integration while retaining national and regional identities.

But capabilities for boundary spanning are growing. International mail, telegraph, telephone, and fax provided thin, rudimentary forms of boundary spanning. The Web enabled information sharing on a large scale and gave us global electronic commerce. The richness of information sharing, combined with inexpensive travel, enables the management of R&D across boundaries-open innovation. Boundary-spanning infrastructure enables not only remote transactions, but continuing relationships-not only reliable suppliers and customers but real-time collaborators engaging in the complex and uncertain processes of innovation.

By connecting outlying buyers and sellers who would have a difficult time finding each other in physical space, eBay, Innocentive, and other new business intermediaries are able to expand markets to include the famous “long tail” of rare, nonstandard, and complex transactions. Similarly, the Web enables specialists to identify each other as sources of knowledge or as potential collaborators. These unformed relationships are hard to value, except after long experience or tangible outcomes, but the Web enables informal contacts to evolve organically through exchange of information and ideas with no formal investment or commitment.

The informality and ease of connection combined with basic Internet functionality gets beyond the conventional bilateral relationships that characterize marketplace transactions and analog forms of communications (letters, telephone). Bear in mind that the most revolutionary feature of email was not its speed or ease of use but multipoint-to-multipoint communications-the unprecedented ability to construct networks out of distribution lists.

The multilateral functionality that we now take for granted in email has radically changed the prospects for collaboration. For instance, consortia are not new, but they have suffered from a variety of institutional limitations: competing agendas, defensive conduct, opportunistic behavior, free rider problems, ineffective management, and so on. These problems do not go away, but IT provides tools and infrastructure for addressing them creatively, consistently, and in a structured, well-documented manner. IT supports new models of innovation-Internet standards, open source software, wikis-unburdened by the delays, negotiations, overhead, and direct costs of capitalizing the enterprise and providing fair and accurate compensation to contributors.

But the IT-enabled boundary spanning only goes so far. Ultimately, it can run up against laws, rules, policies, institutions, and practices established long ago under different circumstances for reasons that may or may not make much sense today. These limitations can be modified, and should be if we believe that our nation’s innovative capacity is at stake. Congress, for example, has encouraged standards development and cooperative R&D by limiting the application of antitrust law. But it is often difficult to draw lines between the old and new environments, as the struggle over patent reform has shown.

Less tangible factors may affect capacity for collaboration. Diversity teaches cooperation and promotes creativity. The United States has struggled with diversity in the context of federalism, immigration, the Civil War, and racism while ultimately benefiting culturally from its existence and enjoying both economic and political returns from overcoming old barriers. Most countries lack our diversity of make-up as well as the long experience in learning to accommodate differences. While experience with diversity may not seem to matter much for narrowly defined technology, it may help considerably where technology meets design, expressive content, management, and institutional innovation.

Other drivers in boundary-spanning innovation

If we recognize the interaction between knowledge infrastructure, boundary spanning, and innovation, we can see a number of drivers that put the United States at the epicenter of global innovation.

Language

For practical reasons, English has become the lingua franca of international commerce, research, higher education, political discourse, and management. It is not the number of native speakers that matters but the breadth and depth of use.

The dominance of the English version of Wikipedia can be seen in the number of articles, but even more in the scope of treatment and editorial intensity in each one. The European Union has 23 official languages, but English is the de facto common language, in part because it has been both a commercial and cultural bridge between the U.S. and Europe. Other languages once served to span linguistic boundaries in science (German) or diplomacy (French), but the broad role of English today is the result of network effects operating across all nations and all disciplines and professions.

Universities

As the name implies, universities aspire to address all areas of knowledge within their walls-and do so with increased attention to spanning disciplines and methodologies. American universities were the first to embrace the integration of research and graduate education and, more recently, to assume a role in innovation as a public service, through helping to commercialize research, collaborating with industry, disseminating research results, launching startups, and seeding regional clusters.

Standards

Unlike other governments, the U.S. government does not participate directly in traditional international standards development, but the United States was and remains the home of consortium-based global standards setting. The Internet itself was the product of a revolutionary open standards process that brought together experts from academia, national labs, and industry-predominately from the United States but not to the exclusion of researchers from other countries.

Cyberinfrastructure

NSF’s vision for highly integrated, standards-based, user-centered knowledge infrastructure is designed to support particular research communities while making use of common standards and services. The cyberinfrastructure agenda is not limited to classic research and education functions but includes workflow processes and the activities of virtual organizations. Meanwhile, different forms of advanced cyberinfrastructure (under a variety of names) are emerging in business applications, as well as in privately developed social networks, virtual worlds, and software as a service.

Virtual organizations

New forms of organization have been enabled by the Internet, including the Internet Engineering Task Force. The IETF had no formal membership but relied heavily on the Internet for organizing and managing its work. Different forms of virtual organization have since proliferated, such as open source software projects, collaborative content development such as wikis, and community-specific cyberinfrastructure. Virtual organizations may have legal and financial structures, but they are shaped by a common project or activity realized over the Internet.

Regional innovation clusters

Regional clusters have a long history as centers of specialized economic activity. The classic example is the apparel industry in northern Italy, which dates back over hundreds of years. Companies in clusters often compete with each other but benefit from being co-located where there is a substantial pool of skilled labor and a vigorous market for raw materials, equipment, and complementary products and services.

Innovation clusters add other elements to the mix: universities, venture capital, specialist start-up companies, and sometimes assistance from local or regional governments. Silicon Valley stands as the archetype by virtue of its long-established combination of leading research universities, availability of venture capital, and numerous innovative companies.

It may seem odd to include localized innovation clusters in a list of technological and institutional factors, but nothing connects like proximity. Just as universities benefit from combining knowledge, knowledge skills, and knowledge creation together in a single location, a regional cluster benefits from the proximity and interaction of skills and institutions (including universities). A common location offers the greatest opportunities for boundary spanning at the highest bandwidth. Spillovers, synergies, and community can be enjoyed without administrative or legal overhead. There are no walls or gates; participants may come and go as they wish.

Conventional thinking is that location matters less now, but this thinking again confuses information with knowledge. In a flat world where information flows easily and freely, virtual tools and virtual organizations are accessible to everyone. Advantage lies in the ability to generate and manage knowledge in all its recalcitrant complexity. The richness of colocation provides a competitive edge against the world by offering the nuance and rich interaction that physical presence makes possible. Where smart, ambitious, creative people get to know and trust each other, innovation is “in the air.”

Regional innovation clusters have not been supported by targeted federal funding in the past. Yet even very modest federal funding could stimulate and focus local and regional thinking so that it goes beyond bidding with tax breaks for particular companies and industries-a notorious zero-sum manifestation of the “more of the same” problem. The administration’s 2010 budget provides $50 million for regional innovation clusters.

Building capacity and engagement

Like innovation, innovation policy runs all the way from insight and invention to implementation and impact. Just asking the right questions requires intellectual bandwidth, always in short supply. The Office of Technology Assessment and Office of Technology Policy are gone. Congress has many issues demanding its attention.

Without concerted attention, it’s easy to remain stuck on old models. A pipeline running from funding to research to patents to products remains the dominant metaphor-a model of controlled exclusivity that still looks compelling enough in some circumstances to be dangerous in others. But in the sector most crucial to productivity-information technology-nonexclusivity and cross-licensing is the norm. In software, innovation is prolific and massively parallel.

Rather than focus on how our economy might fail to be internationally competitive, we should concentrate on building on our strengths. Like U.S. industry, we must recognize that more innovation is taking place beyond our boundaries and work to take advantage of it. Rather than just shoveling more into the front end of the pipeline, we should enhance processes, relationships, and networks that are the fabric of innovation. Rather than focusing exclusively on hard science, we should look at the soft-wired upper layers where economic, social, and cultural design make the difference-where context is king.

The upside to the elimination of the Technology Administration is that it leaves a clean slate for the Obama Administration to embrace innovation on its own terms. The authorized President’s Council on Innovation and Competitiveness should be properly chartered and constituted with committees working to ensure that all agencies are engaged and talking across departmental lines. Direction and inspiration must come from the White House, but operational support is needed.

For the present, NIST is uniquely suited to serve as the coordinating office by virtue of its spectrum of expertise and its experience in spanning academic, industry, and government interests and perspectives. While NIST’s budget goes primarily to fund its labs in Gaithersburg, Maryland, and Boulder, Colorado, it also houses the Technology Innovation Program, Manufacturing Extension Partnerships, and the Baldrige Quality Prize. The Director’s Office includes a Strategic Planning and Economic Analysis unit that performs economic impact assessments and policy analysis grounded in economics.

Some new directions

Innovation policy should be open to innovation. Evaluation of innovation programs and policies should be a top candidate for the Obama administration’s vision of participatory and collaborative government. The process should be objective, empirically grounded, and multidisciplinary. Self-assessment by agencies should still be encouraged but must be understood as only part of the picture. We must remember that innovation is not predictable, mistakes will be made, and failures must be expected and tolerated-although perhaps not as routinely as in Silicon Valley!

Innovation policy must span agency interests, insights, and policymaking. Duke University professors Arti Rai and Stuart Benjamin make a compelling case that innovation policy is made de facto by a wide range of regulatory agencies, but without due attention to effects on innovation. They recommend an Office of Innovation Policy within the White House Office of Management and Budget to address innovation-related decision making across regulatory agencies.

Patents remain the centerpiece of U.S. innovation policy, but the patent system starkly exemplifies the stovepiping and absence of leadership on innovation. The U.S. Patent and Trademark Office is chartered to conduct studies and provide policy advice, yet it lacks the capacity to analyze the effects of patents on business practice (including innovation) and remains captive to a one-size-fits-all legal culture.

Patent reform is long overdue, a consequence of a system grown complex and costly, with a proliferation of competing interests that makes consensus hard to come by. Despite five years of intensive debate following major Federal Trade Commission and National Academy studies, the U.S. Patent and Trademark Office has failed to provide leadership on reform, and Congress has been unable to pass legislation. The courts have made some progress on reform, although they are bound by statute and must decide between two parties without the benefit of a policy apparatus. We need innovative intellectual leadership for intellectual property-leadership that recognizes that patent policy should promote innovation, not just more patents.

Standards should also be a centerpiece of U.S. innovation because they have become essential to collaboration, interoperation, and the downstream path of innovation. Under well-established policy, government agencies do not dictate standards, but they should take an active role in advancing standards, including the semantic standards to carry innovation to higher levels on the Web.

Recent NIST initiatives on standards in manufacturing and health care should be strengthened and expanded in scope in partnership with industry and academic experts. Agencies should work with NIST to support standards for advancing knowledge infrastructure in their areas of expertise. This means promoting standards whose terminology and terms of use are consistent with the expectations of their respective constituencies and communities.

A genuine government-wide commitment to innovation means maintaining a focus on the short-term and the long-term-not just one or the other. The agenda for advanced cyberinfrastructure should not be limited to NSF but should engage all research agencies. Advanced cyberinfrastructure merits a presidential advisory committee on par with the old President’s Information Technology Advisory Committee as well as a more collaborative form of outside engagement.

In addition, federal agencies that are not involved with advanced cyberinfrastructure should at least be charged with developing a long-range vision in parallel with the near-term reengineering needed for transparent, participatory, and collaborative government. We need to know where to get to from here.

Conclusion

The digital age started out simple. Unlike analog, digital meant either yes or no, on or off. But in practice, digital technology has evolved to span what were once thought to be big bright lines, including barriers between countries, sectors, industries, technologies, and people. It allows us to construct and design relationships in new ways, mediated by shades of gray, informed by choices, and accommodating diverse talents and perspectives. The U.S. government, the world’s largest user of information technology, should embrace its potential-not only in practice but in a clearly articulated set of policies for promoting innovation and economic growth, now and in the future, across our entire economy.

While the government must play a key role, innovation depends on individuals. The United States in its entirety-government, academia, companies of every size and focus, and non-profit groups-needs innovators who can think, and operate, outside of the box. Some service science experts have argued for “T-shaped professionals” who have deep technical understanding of a disciplinary base but who also know how to apply this expertise in a wide variety of contexts. The real value of an education, including an engineering education, may be the ability to go broad and deep and versatile within a volatile ecosystem, making the best use of the tools as they become available.

Yes, we need adequate funding for physical sciences and STEM education. We should fund the Technology Innovation Program well enough to see what it can do. But we also need to capitalize on the changing fabric of knowledge and innovation by giving talented people the training and tools to make the best of it.

Brian Kahin is a senior fellow at the Computer & Communications Industry Association in Washington, DC. He is also a research investigator and adjunct professor at the University of Michigan School of Information.

When Real was 13, both his parents were incarcerated and his two older brothers had already dropped out of high school. By sophomore year, Real was so distracted by his torn family that he was sure he would repeat his brothers’ mistakes. However, when a health care teacher introduced him to technology and his school gave him a laptop, his life began to turn around. Even when “home life was a mess,” Real could instant message his classmates and teachers after school to work on projects and ask questions through his computer, he said. The laptop program was a “portal to a new life,” in his words.

He used the laptop to access information ranging from virtual university tours to career options to how to tie a necktie. Before his school system incorporated technology into classrooms, the average college attendance rate was 26 percent, but when Real graduated in 2008, 94 percent of his class moved on to college. “Technology is not a luxury in society; it is a necessity,” he said.

The other witnesses echoed Real’s testament to the power of classroom technology. Aneesh Chopra, Chief Technology Officer in the White House Office for Science and Technology Policy, called incorporating technology into American classrooms a “policy priority of the president.” Virginia, where Chopra recently served as secretary of technology, is already using web-based tools to lower textbook costs and cover “areas key to Virginia’s economic growth,” he said.

When Governor Tim Kaine challenged a panel of scientists and engineers to evaluate Virginia’s physics, chemistry, and engineering curriculum in 2007, they found that topics such as simulation and nuclear physics were missing from their textbooks. About a dozen authors subsequently volunteered to write ten chapters on the topics in an open-source wiki to supplement traditional textbooks. Albemarle County schools purchased the virtual chapters, bundled as a “FlexBook,” along with low cost “netbook” computers for each physics student, Chopra said. Pooling teachers’ knowledge in supplemental chapters is more cost effective than purchasing new, updated textbooks. The flexibility of the virtual books allows teachers to choose content based on experience. As long as states “rigorously review” the content in an objective way, the marketplace can determine the best way to select and distribute the material, Chopra said.

Lisa Short, a science teacher at Gaithersburg Middle School in Maryland, uses a different tool to engage her students. After using an interactive whiteboard for one year, Short can no longer imagine attempting to captivate her students with a plain blackboard. She demonstrated how the whiteboard incorporates various learning styles—visual, auditory, tactile, kinesthetic—in one lesson for the committee. The whiteboard allows Short to embed video and audio clips, build maps, and record notes without wasting paper. On top of that, every student wants to go up and participate at the board, she said.

Activote, a multiple-choice question feature, helps her anonymously survey her students’ knowledge from their seats. The program records individual answers so the instructor can determine if particular students are consistently missing questions and may need extra help, Short said. Committee members tried Activote themselves and voted on the correct answer to a question about the proportion of classrooms that use interactive whiteboards: it’s 16 percent. American schools need to secure more funding and train more teachers to reach the United Kingdom’s level of classroom technology, Short said, citing the fact that 70 percent of classrooms in the U.K. use digital whiteboards. Classroom technology has the ability to not only motivate students like Real, but also to “truly change the profession of teaching,” she said.

The Manufacturing Extension Partnership program is not very well known even among technology and innovation experts in the administration and on Capitol Hill. But MEP should be a more widely recognizable acronym, not only for what it does, but also for what those involved with it have learned over the past 20 years. Intriguingly, the program is a lesson in government discovering what small- and medium-sized businesses need and then delivering those services—actions most people rarely consider a government program capable of.

But first, what is MEP? The Manufacturing Extension Partnership is a program within the National Institute of Standards and Technology, or NIST, which is housed in the Department of Commerce. MEP was created by the Omnibus Foreign Trade and Competitiveness Act of 1988 “to enhance productivity and technological performance in United States manufacturing.”^[1]

Over the past 20 years, MEP developed from a small pilot program with three centers into a sprawling system of 59 centers in 393 locations in every state and in Puerto Rico, employing over 1,600 specialists in business and manufacturing. MEP provides small- to medium-sized manufacturing companies with a wide array of fundamental services, helping them to become more efficient, resilient, and strong in an increasingly competitive global market. With $125 million allocated to the MEP in the proposed fiscal 2010 budget, up about $15 million from fiscal 2009 levels, the program is on a strong financial footing and is poised to expand and improve its services.

After eight years of flat growth during the Bush administration, MEP is poised once again to play a small but vital role in helping America’s small manufacturers compete with international rivals in the increasingly global marketplace. The MEP’s work on process efficiency improvements as well as growth, technology, and innovation strategies is a smart allocation of finite government resources tailored to draw in matching funds from the private sector. As confirmed by dozens of case studies (some described below), the MEP program is often the difference between life and death for small- and medium-sized companies beset with difficult challenges, struggling to survive.

Our economic future depends on the success of these businesses as we move further into the 21^st century, which is why support for MEP and other initiatives that encourage innovation and technology acceleration is a smart choice. Above all, though, an examination of the program’s effectiveness over the past 20 years as it adjusted to new challenges while its leaders learned what worked and what didn’t provides good policy lessons for other Obama administration efforts to boost applied innovation in the coming years.

This essay will examine the history of the MEP program, particularly how it has adjusted to new realities, to understand why it is now poised to play a new role helping small- and medium-sized businesses grow and prosper by tapping new technologies at federal labs—the program’s initial, yet premature, mission 20 years ago but one well-suited to today’s challenges.

The Importance of Manufacturing

Before we examine the MEP program in depth, however, we need to set the macroeconomic stage. The U.S. manufacturing industry plays a key role in the American economy, accounting for 12 percent of gross domestic product as well as 10 percent of U.S. nonfarm employment.^[2] Companies large and small provide jobs for millions of Americans and spur technological innovation and regional development by competing hard in national and international markets.

The vast majority of these manufacturing companies are small- and medium-sized businesses that face the highest hurdles to remain competitive in a global economy. Companies with 500 employees or less account for 95 percent of all manufacturing establishments, half of all manufacturing employment, over half of total U.S. manufacturing value-added, and a wide distribution of high-wage jobs across the United States.^[3]According to the Department of Commerce, 350,000 of these types of companies operate in the United States, and a 2003 study conducted for the National Association of Manufacturers highlights the continued importance of small manufacturers to U.S. economic performance.^[4] The NAM study found that:

• Manufacturing growth spurs more additional economic activity and jobs than any other economic sector. Every $1 of final demand for manufactured goods generates an additional $0.67 in other manufactured products and $0.76 in products and services from non-manufacturing sectors.
• Manufacturing salaries and benefits average $54,000, compared to $45,600 for the private sector overall. The higher pay and benefits and opportunities for advanced education and training that are available in manufacturing are particularly attractive to potential employees.
• Manufacturers are responsible for almost two-thirds of all private sector research and development—$127 billion in 2002.
• Manufacturing productivity gains are historically higher than those of any other economic sector. Over the past two decades, manufacturing averaged twice the annual productivity gains of the rest of the private sector.

Unfortunately, small- and medium-sized manufacturing companies are too often the least able to quickly introduce new products and technology, reduce costs, and increase quality. Indeed, as globalization began to hammer U.S. manufacturers in earnest in the early 1990s many small- and medium-sized manufacturers were the least able to meet the challenge. According to a study conducted by the National Research Council of the National Academy of Sciences in 1993, small manufacturers were often unfamiliar with changing technology, new production techniques, and the latest business management practices. Yet, they were too isolated to learn from market competition to change their ways or seek out good advice, and too small to find the financing they needed to upgrade their operations even if they decided upon an innovative upgrade or shift in their operations.[5]

The Birth of the MEP

Enter the Manufacturing Extension Partnership. The Omnibus Trade and Competitiveness Act of 1988 directed the Secretary of Commerce via the Director of the National Institute of Standards and Technology to establish a manufacturing technology centers program, the precursor to MEP. The centers were to provide small manufacturers with technology developed in NIST labs as a way to improve manufacturing productivity. Labs were to license the NIST-developed technology to state-based centers, which would in turn charge fees to manufacturers who utilized the services provided by the centers.

Congress urged participation from universities, industry, state governments, and other federal agencies. Proposals to establish centers were solicited from qualified non-profit organizations and evaluated based on regional need, technology resources, technology delivery mechanisms, and management and financial plans. Applicants were required to contribute 50 percent or more of these centers’ proposed capital and maintenance costs for the first three years and an increasing share up to 80 percent in the sixth year.

Alas, it soon became clear there was a significant gap between the technology developed in federal labs and the capabilities of many small manufacturers to utilize the technology, even with the help of the manufacturing technology centers. In fact, most small manufacturing companies had more foundational needs—for things like management information technology, financial management systems, and fundamental business processes to improve cost efficiency and profitability. In response, tactical and strategic changes were made during the 1990’s, reorienting the services provided by the centers from technology transfer to more basic productivity improvement assistance, services not dissimilar from basic consulting.

This shift met with success as the number of centers grew from 7 in 1992 to 75 (with 400 satellite offices) in 1996, providing services to all 50 states and Puerto Rico. Helping drive the shift was funding from the Defense Advanced Research Projects Agency’s Technology Reinvestment Project, a $1 billion commercial investment program started in the 1992 fiscal year. One of the largest funding programs in the history of the Department of Defense, the TRP sponsored 133 projects that had military as well as commercial uses, referred to as “dual-use projects.” Small businesses were strongly represented in the projects receiving DARPA funding, with 58 percent of the approved proposals having a small business involved in the project.^[6] DARPA support was integral in the expansion of the manufacturing technology centers as funding for new projects spurred small businesses to seek assistance from the centers.

Additionally, the enactment of the Technology Administration Act of 1998, which eliminated the sunset provision in the initial 1988 legislation, allowed for ongoing federal funding of the centers. This reform was accompanied by the program name change to the Manufacturing Extension Partnership, and a new funding formula that mandated one third of funding would be provided by the MEP Program, one third would come from state, city/town, or nonprofit sources, and one third would be collected as fees from the small manufacturers helped by the program.

This public/private/nonprofit structure is vital to the success of the MEP program, a unique partnership in which each stakeholder contributes its singular resources. The partnerships are built differently from place to place. In some areas, states provide most of the local funding, while nonprofits and city/town governments do not significantly contribute. In other areas, nonprofit organizations such as economic development agencies or entrepreneurship advocacy groups, as well as universities, contribute most of the local funding.

Overall, federal funding (from the MEP) and private funding (from the manufacturers) is important to the overall success of the partnership. However, state, city/town, and nonprofit funding is integral as this funding secures local players as stakeholders in the program, and synergizes with the local economic development plans that are essential for comprehensive regional development.

The MEP Program Today

As mentioned above, the MEP program today consists of 59 manufacturing extension centers and 393 satellite locations throughout the United States and Puerto Rico. Each center works directly with local companies to provide expertise and services tailored to their most critical needs, including employee training, new business practices, the application of information technology, and basic process improvements. Services are delivered through direct assistance from center staff, outside consultants or some combination of both.

The MEP centers themselves are a diverse network of state-university-based, and freestanding nonprofit organizations. Each center’s size is based largely on an individual center’s ability to match federal funding at the time of the initial award. In fiscal year 2008, ending September 30, 2008, the last year in which complete data are available, MEP served 31,961 manufacturers.

The early shift in philosophy from technology transfer to consulting services, as well as the rapid expansion across the country, proved to be a winning strategy. An independent study of the efficacy of MEP centers in 2007 found that MEP services led to: Improved productivity among 8 in 10 MEP clients; 57,000 jobs created or retained; $10.5 billion in new or retained sales; $2.2 billion in new private investment, and cost savings of over $1.4 billion. The study also found that:

• 91 percent of clients were either satisfied or very satisfied with the quality of services received
• 89 percent of clients were more competitive as a result of services
• 86 percent of clients took actions more quickly with assistance of its local center
• 80 percent of clients improved employee skills
• 79 percent of clients took actions at a lower cost
• 76 percent of clients improved the work environment for employees. ^[7]

The MEP centers achieved this record of success for many different reasons, the study concluded. Predominantly, though, success came through a number of services that helped companies reduce costs to improve competitiveness.

A New Direction

Yet once these companies streamline their production processes, make their workforce and workplace more efficient, and reduce overall costs through business operations improvements, many still do not have the top line growth strategies in place to take their development to the next level. This realization has led to new MEP efforts to guide companies not only toward greater efficiency but also toward developing new products, entering new markets, and integrating innovative technologies. These new growth services are designed to give companies the tools they need to not just survive but thrive in the global marketplace

The core of these new growth programs is the development and implementation of a nationwide technology acceleration system. The acceleration program strives to catalyze manufacturing innovation in products, processes, services, and new business models, building on the increased efficiencies and lower costs cultivated by MEP’s bottom-line services.

These new growth programs, not dissimilar in philosophy from that of the MEP-precursor manufacturing technology centers, connect small manufacturers with sophisticated federal, state, or university R&D labs, with an eye toward boosting manufacturer capabilities and growth opportunities, as well as where manufacturer needs are connected with technology solutions developed at research laboratories.

Two examples highlight the success of these endeavors in helping companies first make important process improvements and then, eventually, helping them embrace technological innovation, grow into new markets, and develop new products.

Process Equipment & Service Company

The New Mexico MEP recently worked on bottom-line improvement strategies with PESCO, a manufacturer of oil and natural gas production equipment, to streamline its product development and general operations. Over the course of a year, PESCO production increased by 25 percent. Since 2002 the company has doubled production while reducing work hours and maintaining the same level of staff.

In addition, the New Mexico MEP helped PESCO reorganize its “cash-to-cash” process (the time from when an order is placed and materials procured to when it is invoiced and paid) and its accounts receivable (the amount of money owed by customers but as yet unpaid), two areas in which companies can easily lose significant sums of money. With the help of the local MEP, PESCO reduced its accounts receivable process to 35 days from 58 days and its “cash-to-cash” cycle to 95 days from 133 days.

Based on recommendations from the MEP, PESCO also developed a trailer system that more efficiently moved a product through the manufacturing process. These efficiency improvements modernized PESCO’s product line, turning it from a 200-hour process into a 150-hour process. With all of these improvements, profit margins increased, boosting wages and allowing for greater employee retention.^[8]

Questech Corporation

The Vermont MEP worked with Questech Corporation, a leading manufacturer of natural stone and metal tile, to discover, build, and develop new technology that would increase revenue and better meet customer demand. In response to internal surveys that showed maintenance as one of the primary problems customers had with Questech’s tile products, the company sought to develop a revolutionary product that addressed these concerns. Vermont MEP “coaches” met with the Questech team during the discovery process to provide general assistance, help with the cultivation of ideas, and keep the team on track.

Within six weeks of the initial MEP consulting session, Questech launched a test of their new tile maintenance product in a large showroom in Albany, New York. The new innovation carries an anticipated yearly revenue increase of $30,000, with the anticipated establishment of Q-Seal (the new product) in New England by spring 2008.^[9]

MEP Partner Programs within Government

MEP also works closely with other government programs and agencies to leverage different expertise, strengths, and resources. MEP has partnership programs with the Department of Labor’s Workforce Innovation in Regional Economic Development, or WIRED program, the Small Business Innovation Research grant program run by various government departments, the Environmental Protection Agency’s Green Supplier Network, National Institutes of Health, the Environmental Protection Agency, the Food and Drug Administration, and the National Science Foundation. These partnerships are integral to the work of the MEP, and to the greater project of building American economic competitiveness.

WIRED has a uniquely effective partnership with the MEP. The WIRED Initiative is a program intended to develop talented high-skill workers as a means of catalyzing U.S. economic growth. The initiative focuses on distressed regions of the country, areas recovering from natural disasters, highly dependent on a single industry, or significantly influenced by outsourcing. The program supports innovative approaches to education and workforce development, preparing workers to better compete both within the United States and globally.

MEP has run pilot programs for WIRED in eight distressed regions, developing best practices for technology transfer and innovation activities that WIRED has implemented across its network. This work has been closely aligned with the new MEP growth strategies focused on implementing innovation and technology in small manufacturers.

Additionally, the MEP works directly with the Small Business Administration’s Small Business Innovation Research and Small Business Technology Transfer programs, helping small manufacturers apply for funding from the SBA as well as assisting SBIR/STTR awardees maximize the money’s impact on operations and efficiency. With more than $2 billion available via the SBIR route yearly, small manufacturing companies are often transformed by the grants, making partnership with the MEP very attractive.

MEP and NIH also have developed a one-year SBIR pilot project in which NIH will provide $375,000 for MEP to work with a number of so-called NIH Phase II awardees, for-profit companies(with potentially commercializable ideas that have passed phase I feasibility studies to establish the scientific/technical merit of proposed research and development efforts. Phase II awardees cannot receive more than $750,000 total for a period not to exceed 2 years. Results of the MEP/NIH SBIR pilot are expected to be used in guiding a larger two-year funded partnership between MEP and NIH to improve the commercialization efforts of their Phase II awardees—a critical issue for NIH and other federal SBIR agencies.

Future Plans

The MEP stands a crossroads. With a wealth of historical wisdom on what works and what doesn’t with respect to small-and medium-sized business development, the MEP is poised to play an essential role in spurring a nationwide economic recovery and building the public-private partnerships that are vital to the stimulation of our nation’s latent innovation capabilities.

MEP’s strategy to tap private, university, and federal labs for new technology of use to small- and medium-sized manufacturers, especially via the government programs outlined above, is certainly timely today. This technology transfer activity was MEP’s original mandate, and while untenable twenty years ago, it is now widely considered a good template for how to boost American innovation and global competitiveness.

The key to the MEP’s success, however, is and will be its partnerships. Small- and medium-sized manufacturers are a lot more receptive today to these public-private partnership growth strategies than they used to be. Utilizing MEP as a conduit for the transfer of technology from R&D laboratories as well as a consultant on how to maximize the benefits of the technology on efficiency and cost is now less foreign to these manufacturers. Process improvement assistance, while still important, is not going to be as common a MEP strategy as working with their clients on developing new markets, new products, and innovative solutions to complex technology problems. This should help strengthen the small- and medium-sized manufacturers that are the backbone of our entrepreneurial economy and our source of global strength.

Justin Masterman is a Science Progress Intern who recently graduated from the University of Pennsylvania.

Endnotes

^[1] Omnibus Foreign Trade and Competitiveness Act of 1988, 15 U.S.C. § 278k (1988)

^[2] U.S Department of Commerce, Bureau of Economic Analysis. 2007.

[3] Defense Manufacturing in 2010 and Beyond: Meeting the Changing Needs of National Defense, Board on Manufacturing and Engineering Design, Commission on Engineering and Technical Systems (National Research Council, 1999).

^[4] “Securing America’s Future: The Case for a Strong Manufacturing Base,” Prepared for the NAM Council of Manufacturing Associations by Joel Popkin and Company (June 2003).

^[5] NRC Study, 1999.

[6] “A Review of the Technology Reinvestment Project,” Potomac Institute for Policy Studies (January 1999).

^[7] “Delivering Measurable Returns,” Fiscal Year 2007 Results of the MEP program, cited on MEP website: http://www.mep.nist.gov.

^[8] Information from MEP website: http://www.mep.nist.gov.

^[9] Information from MEP website: http://www.mep.nist.gov.

On campuses across the country one can hear a near-audible sigh of relief among academic faculty who hope the new funding boost will provide stability for ongoing research projects or the chance to pursue new ones. The National Science Foundation alone has received an extra $3 billion this year and is putting nearly $2 billion towards funding backlogged research proposals, with the other $1 billion divided among instrumentation, infrastructure, and educational programs.

Funding for the first round of proposals accepted by the NSF will expire in a staggered fashion starting in 2012. Although the 2010 budget has not been finalized, the Obama administration has asked for expanded science funding for several agencies including the National Science Foundation, the Department of Energy, the Department of Health and Human Services, and the Environmental Protection Agency—a signal that the administration will continue to support more federal research funding.

This is all to the good, of course, yet with social expectations high that these new funds will ensure our nation’s long-term scientific preeminence, now it is a good time to think about how to make the business of research sustainable in the long term, too. A good place to start may be an often-unacknowledged workforce that together contributes untold hours to U.S. research output.

Who are these Samaritans of science? They are U.S research technicians. This workforce provides long-term research continuity, stability, and expertise at our nation’s scientific institutes and universities. They train incoming students, manage and update extremely expensive and delicate equipment, and ensure that laboratories meet demanding health and safety regulations. Yet despite their importance, no formal training, career path, or job security exists for this crucial science-and-technology workforce.

Because of our nation’s grant-based culture of scientific funding, graduate assistants are preferred over professional research technicians because they are cheap and do not require health and retirement benefits. And even when research technicians are funded to manage and run new equipment and new technologies that underpin most basic research, they are frequently the first to be let go when soft money dries up.

Problem is, cutting-edge research requires increasingly state-of-the-art technologies that are exceedingly costly, requiring professional care and maintenance. Equipment such as scanning electron microscopes, which allow for the visualization of surface structures at the micro-scale, or automated crystallization robots (which perform reproducible solution set-up for protein crystallography), or Raman spectrometers (which are used across many fields to measure molecular vibrations) can be extremely pricey, often costing the equivalent of an entire budget for a principal investigator (the lead researcher) for a single instrument.

Unfortunately, because of our grant-based funding culture, high-tech instrumentation is often purchased with no thought toward the need for long-term professional personnel to operate and maintain this equipment. As a result, sophisticated equipment is abandoned and both principal investigators and other university researchers suffer the loss of technical know-how and support. Most importantly, this vicious cycle it is a colossal waste of money for our federal government.

In order to stay globally competitive, the federal government must invest in developing a sustainable and professional technical research workforce to supply research demands at both our nation’s institutes and universities. This could be undertaken by:

• Boosting job stability in this sector by increasing the number of state and federal positions for permanent university research staff
• Restructuring the grant process with an emphasis on personnel and service contracts in conjunction with new equipment
• Sponsoring the creation of university degree programs for technical training in the laboratory sciences.

What’s more, there’s an existing model for doing so that is common at many universities across the country—nursing programs. Nurse Practitioners, for example, have different degree certifications than Registered Nurses and Licensed Practical Nurses, and job responsibilities and salaries that reflect these differences. Nurses provide technical support to the medical field by performing routine procedures, managing patient records, and helping to educate medical staff and the public. Experienced nurses with advanced degrees are involved in hospital and clinical administration, which often involves dealing with insurance companies and supervising the training of new nurses.

In much the same way, a professional structure for U.S. research technicians would facilitate the sustained work of scientists by providing a workforce with the specific job of overseeing day-to-day research tasks, managing equipment, and training new students. Additionally, like nursing programs that benefit associated medical schools, degree programs for technical research training would also provide a readily accessible and qualified workforce for affiliated universities. Technical certifications and degree programs could be tailored for a wide variety of fields, including molecular biology, chemistry, polymer science, engineering, or agricultural technology. Similarly, career benefits, job titles, and pay scale could be determined to appropriately reflect training levels.

The American Recovery and Reinvestment Act takes an initial step in this direction. The new law authorizes the National Science Foundation to fund Professional Science Master’s degrees at 128 universities across the country. The PSM degree program targets students to work at the interface of science and business, industry, government, or communication. These degree programs are absolutely crucial for sustaining the profession of science and helping to translate research for broader social goals.

Yet, they must also address our national needs to create a knowledgeable and well-trained workforce that can provide both interdisciplinary and disciplinary research support in multiple fields. Perhaps the next step would be to use the PSM initiation to promote more technically focused masters programs. These masters programs could be tacked onto departments with existing doctoral degree programs. Senior faculty could translate their wisdom to the next generation by spearheading efforts to develop curricula with a focus on techniques, instrumentation, and research.

Support of these initiatives by senior academics would help change the perception that a masters program is a “consolation prize” in route to (or in lieu of) a doctorate degree. Additionally, new technical masters-level programs will attract students that have a passion and interest in research but may be dubious about pursuing a stressful career as an academic faculty member.

Major funding agencies such as the NSF, the Department of Energy, the National Institutes of Health, NASA and the National Oceanic and Atmospheric Administration could do their part by requiring proposals, particularly those involving new instrumentation, to include provisions for technical support. Instead of three-to-five year, project-oriented grants, these agencies could develop a special division designed to specifically support grants for technical personnel, and could apply these “special funds” for eight-to-nine year contracts to support technical staff for specific instrumentation or department goals.

The United States still leads the world in intellectual productivity and scientific achievements, but our position is by no means assured. Sustaining a viable workforce to support our “brain industry” is crucial for 21^st century innovation. Investing government funds in a technical research workforce will increase productivity, limit wasteful government spending, and provide alternatives to the standard academic career path for college students interested in advanced science and technology degrees. The skills, time, and focus of this workforce to see research implemented and carried out in a thoughtful manner would additionally bring practical know-how to many of the new funding initiatives that tend toward high-risk, high-reward, and interdisciplinary research.

Perhaps most importantly, a trained technical workforce would support primary research that will benefit universities, national laboratories, and the private sector. With the new infusion of cash from the federal government, U.S. research funding agencies have a real opportunity to influence the course of scientific research for decades to come. Instead of supporting the same grant-based system of research funding, it is time for the science community to think carefully and critically about the best ways to build research infrastructure to address crucial long-term innovation needs for national development.

Estella Raulfs is an NSF-IGERT graduate fellow and a Ph.D. candidate in Biochemistry at Virginia Tech.

Of particular significance was the opportunity for me to meet with staff at the Institute for the Promotion of Innovation by Science and Technology in Flanders (known by its Dutch abbreviation, IWT).^[2] Flanders is a region of northern Belgium with substantial autonomy within the Belgian federal state; this community has benefited from a series of constitutional reforms that have decentralized power to various parts of the country and made Flanders more prosperous.^[3] Many have recognized that a key component of this regional success has been their comprehensive model to innovation. In fact, the National Academy of Sciences recently undertook an international review of regional clustering efforts that foster innovation, and selected Flanders for a major symposium discussion and subsequent report.^[4]

Since the late 20^th century, Flanders has been at the crossroads of EU innovation, attracting foreign investment by multinationals to produce many of its technological exports, ranging from automaking to pharmaceuticals. Recently, business surveys indicate that Flanders is uniquely attractive to foreign direct investment in part because of well-targeted tax incentives, which make the region attractive to foreign investment in key growth areas such as services, logistics, nanotechnology, pharmaceuticals and communications.^[5]

Case in point: Swiss food giant Nestlé SA was the most recent beneficiary of these tax breaks; relocating to Flanders allowed Nestlé to restructure its pension plans to benefit from a more favorable regional tax rate. Flanders also offers tax allowances for R&D personnel, with a one-time tax exemption for companies hiring additional research or quality assurance personnel.^[6]Also, there are a set of other incentives, such as value-added tax, notional interest deductions and other incentives, which when taken together, a company can reduce considerably its taxable base.^[7]

Of course, tax breaks alone cannot guarantee corporate participation and cluster growth. Fortunately, Flanders already benefits from a set of attractive strengths that include a well-located infrastructure, strong universities, and an educated workforce, but the Flemish government has long recognized that government intervention is still needed to overcome key innovation challenges (see sidebar). That’s why in the early 1990s it formed IWT to stimulate economic growth and nurture cluster development.

IWT is a regional public institution that provides research-and-development and innovation support to newly formed high-tech startup companies as well as long established public companies. It has several financial tools and an annual budget of about $307 million.^[8] Any company that does business in Flanders can ask IWT for financial support for a technological project. Three types of technology projects qualify for support:

• Basic industrial research
• Prototype or development activities
• Mixed research that combines basic industrial research and prototype or development activities.^[9]

While direct funding of this kind of basic and applied research is always vital to seeding new innovation opportunities, IWT’s role does not end there. The institute also provides a suite of support mechanisms to local industry in the field of technology transfer, searches for equity investment or joint venture partners, and international subsidy options.^[10] Last but certainly not least, IWT has a coordination mission, which strives to create strong cooperation between all organizations in Flanders.^[11]

IWT promotes knowledge transfer via platforms that allow a cluster’s universities and businesses to meet and collaborate.^[12] It has set up the Flemish Innovation Network that allows companies, especially small- and medium-sized enterprises, to access the knowledge and expertise of about 250 advisors. So far, 1,100 small- and medium-sized enterprises and 250 large companies have benefited from this suite of services, including a number of successful university spin-off companies. One such startup from the Catholic University of Louvain, for example, developed its own microwave drying technology. It published a technology offer via IWT network services, which yielded several leads to possible applications for their technology, including an English company that supplies drying installations.

But not all IWT interventions have been successful. After all, like it or not, there are still strong market forces at work. One notable example is Flanders Language Valley, an innovation cluster in Ieper, a town situated in a rural part of Flanders. In recent years, the language cluster entered a crisis due to problems with its core corporation, Lernout & Hauspie Speech Products. At its peak, Lernout & Hauspie had a market capitalization of almost $10 billion, but financial fraud and mismanagement led the company to its demise, bankruptcy, and purchase by Nuance Communications.

Extracting lessons learned from cluster formation and failures is an important evaluative area for IWT. To better interface these regional efforts with larger Pan-European ones, IWT also serves as the key Flanders point of contact for the E.U. Seventh Framework Programme, FP7, the E.U.’s chief instrument for funding research, bundles all research-related EU initiatives together to achieve the community’s goals of growth, competitiveness, and employment. Case in point: FP7’s Innovation Relay Centre initiative, a key E.U. effort to provide integrated innovation and business support to small businesses across the European Union, is a core supporter of the Flemish Innovation Network.

In sum, IWT provides a comprehensive strategy by leveraging its three core tasks: Subsidies, Services, and Coordination (see figure below).^[13] The subsidies ensure basic research and development continues apace and leads to high-tech commercialization. The services help ensure commercialization succeeds. And the coordination provides the Flemish cluster with the links to other clusters and markets to create more innovation growth opportunities for Flemish institutions and companies.

(Figure reproduced with permission, Maarten Sileghem, IWT. Flanders, 2008).^[14]

One additional service area for IWT could soon be to provide program evaluation and monitoring for its participants, an idea that staff have started to look at more carefully. The reason: third-party evaluation can be expensive and complex, especially for small-and medium-sized enterprises, and outcomes can be measured more comprehensively.

Potential Lessons for the United States

Naturally, the United States and Flanders differ considerably in size and innovation capacities, but there are still important lessons we can learn from Flanders when considering how to implement a national strategy to energize U.S. regional innovation clusters. Here are four clear lessons for U.S. policymakers:

• It is best to have a dedicated organization designed to nurture regional innovation clusters. An organization that emulates the IWT, with its three core tasks, can enhance the environment and conditions that are necessary for economic growth through university-industry cooperation and innovation. Today, the United States lacks that national program to develop such dedicated regional innovation organizations, and states and municipalities boast too many that are ineffective because there is not enough regional coordination or federal direction. This is a critical gap in U.S. innovation policymaking.
• Business research-and-development tax breaks and tax credits alone may not be sufficient, but it sure helps. Corporations are always looking to reduce the costs of doing R&D. One key role that a new IWT-like organization in the United States could do is assist participants in maximizing these tax credits, and serve as a general clearinghouse for possible deductions.
• It is important to refrain from picking “winners or losers” when considering who to fund. IWT, for example, has no thematic priorities. When one considers the large variety of clusters in the United States with their unique comparative advantages, it is more sensible to focus on improving the general sustainability of the environment for each cluster rather than trying to pick one over the other.
• In the end, it is all about creating jobs. The top outcome metric for an IWT-like organization should be the number of new jobs produced. Usually the discussion about cluster development is expressed either by total dollar investments, products produced, new companies created or drawn to the cluster or scientific discoveries. While these are valid measures of innovation, the true confirmation of a thriving regional economy is its ability to create new technologically-based jobs.

The long Flemish experiment building a regional innovation cluster within the federal state of Belgium and within the even more complex political and economic environment of the European Union clearly offers the United States some key lessons. As the Obama administration fleshes out its early policy decision to help foster these kinds of innovation clusters in our country, they would be well served to explore the Flemish cluster in detail.

Elmer Yglesias is a researcher at the Science and Technology Policy Institute, where he specializes in the evaluation of federal science and technology programs and their impact on the public good. The opinions expressed herein are those of the author and not of the Institute or any other sponsors. The author thanks the European Union Visitors Program for their support and meeting coordination with staff at the IWT-Flanders.

Endnotes

[1] “Clusters and Competitiveness,” EDA America, US Dept of Commerce, Economic Development Administration. Fall 2008 Issue. “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies.” Brookings Institution:

http://www.brookings.edu/reports/2008/04_competitiveness_mills.aspx

[2] Institute for the Promotion of Innovation by Science and Technology in Flanders (IWT) website (including publications):

http://www.iwt.be

^[3] See “Belgium’s devolution conundrum”: http://news.bbc.co.uk/2/hi/europe/7640198.stm

[4] “Innovative Flanders: Innovation Policies for the 21st Century: Report of a Symposium.” Committee on Comparative Innovation Policy: Best Practice for the 21st Century, the National Academies. Washington, DC. 2008. ISBN-10: 0-309-11606-6. (Report available at http://www.nap.edu)

[5] “Heart of Europe.” World Finance. World News Media, London:

http://www.worldfinance.com/news/worldnews/europe/article201.html

[6] World Finance, ibid.

[7] See “Notional Interest Deduction”, Deloitte.
www.deloitte.com/dtt/cda/doc/content//Notional%20Interest%20Deduction.pdf

[8] Ibid, IWT, http://www.iwt.be

[9] World Finance, ibid; IWT Activity Report, 2007.

[10] Ibid, World Finance, ibid; IWT Activity Report, 2007.

[11] Ibid, World Finance, ibid; IWT Activity Report, 2007.

[12] IWT Activity Report, 2007, pg. 9

[13] Sileghem, ibid. pg. 4.

^[14] Sileghem, ibid. pg. 4.

The result? Our country is beginning to lose its innovation leadership and national competitive advantage because we do not coordinate innovation policy across federal, state, municipal, and university boundaries and do not adequately support high-growth entrepreneurial companies. The federal government pours approximately $150 billion annually into basic scientific research but then largely fails to ensure this money results in the kind of broad-based economic growth that makes our products and services the most competitive on the planet.[1] This is a travesty because it is innovative small businesses that have generated between 60 to 80 percent of net new jobs annually over the last decade as they grow and prosper, according to the U.S. Small Business Administration.[2] These same companies also employ 30 percent of high-tech workers such as scientists, engineers, and information technology workers.
Today’s economic crisis, however, is also an opportunity to restimulate our knowledge economy, if recent history is any guide. After both the 1990-91 and the 2000-01 recessions, small businesses of less than 20 employees were by far the dominant job creators in our country.[3] The Office of Small Business Advocacy in the Small Business Administration shows that during the three years after the 2000-01 recession, the smallest of our companies (one to four employees) provided 79 percent of the net new jobs in the subsequent three years. Similarly, after the recession of 1990-91, small businesses created 89 percent of net new jobs (see sidebar for case studies in Pennsylvania and Kansas).

Furthermore, small- and medium-sized enterprises produce between 14 times more patents per employee than large corporations, another key measure of innovation-led growth.[4] Indeed, small companies are a key source of innovation for themselves and for large companies in terms of fueling mergers and acquisitions as well as technology licensing activities. Many new commercially viable ideas for new products and services and other technological discoveries flow out of small start-up companies commercializing publicly funded research—companies that go on to become major players or are acquired by others to boost their own competitive advantage. Either way, our economy benefits enormously.

What worked after the last two recessions, however, may not work so well today given the fragile nature of our financial markets, which is why we need a national innovation framework to help ensure this commercialization process runs more smoothly and efficiently. In fact, the already massive funding gap for young innovative companies—the other Achilles’ heel of our innovation-led economy—has only grown wider over the past decade. The so-called “valley of death”—the early-stage funding gap for young entrepreneurial companies (see Figure 4)—has always existed for early-stage innovation and entrepreneurs, but it has widened because of the current national economic crisis.

Venture capitalists are husbanding their financial resources to keep their current portfolios of startup companies alive and have already moved further up the financial cycle. The average investment by venture firms last year was $8.3 million per investment and only about 4 percent of the capital went to early-stage companies.[5] Angel investors—individual investors with a keen eye for technology—who previously had filled the role of assisting some startups cross this valley of death reduced their investments by over 26 percent in 2008, and the availability of investment capital among angels decreased dramatically by 40 percent over the same period.[6]

To be sure, past federal efforts to coordinate the complex mix of policies and federal funding have resulted in significant new programs and much-needed investments that have clearly helped to grow technology companies in the United States. The passage of the Bayh-Dole Act in 1980—which allowed universities to patent innovations that grew out of government-funded basic research—is responsible for the continuing flood of new companies with new ideas (backed by private investment capital) into our economy. And the Small Business Innovation Development Act in 1982—which established the rule for federal agencies to commit 2.5 percent of their extramural research budgets to the Small Business Innovation Research program, or SBIR—continues to serve as key bridge financing for start-up companies working in areas to address unmet needs in public health, defense, energy, telecommunications, and aerospace—all science arenas that boast intensive research-and-development requirements.[7] The findings from the recent assessment of the SBIR program by the National Academies indicated that the program leads to significant new knowledge formation and intellectual property disclosure, and affects commercial outcomes.[8]

(There is currently an ongoing debate about the future of the SBIR program in Congress. The SBIR program is one of the most innovative public funding programs in the world, and it must be reauthorized on a longer-term basis of at least six to eight years with many of the suggested enhancements by the National Academies’ Assessment.)

Other government programs since then have also helped to boost our nation’s innovation-led economy. One is the Technology Innovation Program of the National Institute of Standards and Technology to accelerate innovations in areas of critical national need, which has produced significant results. Other efforts, however, were more scattershot and certainly less coordinated. We will detail these efforts in this paper before turning to our own set of recommendations to weld the successful innovation programs and funding mechanisms into a far more effective national innovation framework.

And what are those recommendations?

We argue in the pages that follow for a national effort to support innovation, entrepreneurship, and the advancement of both technologies and early-stage businesses. Specifically, we propose a new National Innovation Framework to structure and strengthen an integrated system for the strategic acceleration of the nation’s innovation economy. Most importantly, we propose through this framework to formulate widespread participation of multiple interests including federal and state government, the private sector, universities, foundations, and the investment community. Our National Innovation Framework contains three new structural elements for a widespread national innovation strategy:

1. The Federal Innovation Partnership and a National Innovation Advisor
   This new partnership program and new office would coordinate federal technology innovation programs through a Federal Innovation Partnership with a new high-level National Innovation Advisor who has access to the president.
2. The National Innovation Seed Fund and Technical Assistance Grant Fund
   This funding program would create a $2 billion National Innovation Seed Fund, or NISF, to invest in experienced early-stage capital providers, including venture capital and angel funds as well as other public and/or private funding authorities. The purpose of the NISF is to jumpstart new knowledge economy jobs that will shape America’s future alongside a Technical Assistance Grant Fund that would provide entrepreneurial support resources and services to portfolio companies and NISF fund managers.
3. The National Private-Public Partnership Innovation Program
   This new nonprofit program, modeled on the already up-and-running Innovation America public-private partnership program, would accelerate the growth of the entrepreneurial innovation economy in America and oversee the National Innovation Seed Fund by coordinating government, university and private-sector players in early-stage investment capital, commercialization, technical and entrepreneurial mentoring, and workforce development related to innovation development.

As we will demonstrate in this paper, the time is now to implement these three elements of a national innovation framework. Together, we believe these programs will again set our nation on the road to innovation-led economic prosperity in the 21st century that could well trump 20th-century successes.

Early efforts without a central model

Technology and innovation experts around the country came to recognize in the 1980s and 1990s that the United States was losing its cutting-edge competitiveness in science, technology, and innovation despite the vast amounts of federal funding for basic research and development. A consensus was growing that the federal, state, and municipal governments in league with universities and federal laboratories needed to work together more cooperatively to build our scientific estate and innovation leadership.

By the middle of the 1990s these grave concerns resulted in a series of early efforts to address the problems—efforts that in hindsight prepared the groundwork for what needs to be done today but alas were not followed up on at the end of the decade. Still, these early efforts need to be briefly explored for the early consensus they brought to U.S. innovation policy prescriptions.

In early 1995 these concerns first found collective voice when former Governors Richard Celeste of Ohio—a Democrat and creator of the Edison Programs in Ohio—and Dick Thornburgh of Pennsylvania—a Republican and creator of the Ben Franklin Technology Partners program—formed a bipartisan, 20-member State-Federal Technology Partnership Task Force consisting of national leaders including governors, state legislators, research-and-development leaders, and chief executives from business and academia.[9] These leaders worked in collaboration with the Carnegie Commission on Science, Technology and Government; the National Governor’s Association; the American Society of Mechanical Engineers; the White House Office of Science and Technology Policy; and the National Conference of State Legislatures to evaluate opportunities for collaboration between the state and federal technology programs.

The task force made recommendations on ways to redefine the state-federal science and technology relationships and generate enhanced innovation and commercialization—with the emphasis of the taskforce on greater cooperation. One of the major outcomes of the task force was the creation in late 1995 of a national nonprofit organization, the State Science and Technology Institute by the Battelle Memorial Institute, which has a mission to improve state and regional economies through science, technology, and innovation. SSTI exists today and continues to work to achieve this mission and became a free-standing organization in 2000.

That same year, John Gibbons, Assistant to the President for Science and Technology, announced the creation of an interagency review of science and technology programs to help foster better state and federal government cooperation to advance national goals. This review was initiated in response to growing state investments in science and technology and the need to enhance state-federal partnerships to realize greater national benefits. The interagency review was led by U.S. Department of Commerce Undersecretary for Technology Mary Good under the auspices of the National Science and Technology Council chaired by the president. The group had representatives from all federal science and technology agencies.

In 1997, President Bill Clinton created the U.S. Innovation Partnership to coordinate federal and state efforts to stimulate the development and use of new technologies that could help the United States meet the common goals of generating economic growth, improving our schools and health care, better protecting the environment at a lower cost, and reinventing government at all levels. USIP task forces were established around specific areas and some policy recommendations emerged. Alas, both the USIP and the undersecretary for technology in the U.S. Department of Commerce ceased to exist under the Bush administration.

Starting anew in 2005

Many of the recommendations offered by the State-Federal Technology Task Force in 1995-1996 and USIP in the late 1990s are relevant today. And they should be revisited under the Obama administration with the major difference being the role of innovation not just on technology. Indeed, after six years of neglect under the last administration, federal and state leaders on both sides of the political spectrum began to develop their own strategic approaches to innovation policies. Some of those efforts included:

• The National Innovation Act of 2005. The NIA, sponsored by Sen. John Ensign (R-NV) established a President’s Council on Innovation to develop a comprehensive agenda and coordinate federal effort to support innovation.9
• The National Competitiveness Investment Act of 2006. The NCIA, sponsored by Sens. Ensign and Joseph Lieberman (D-CT), established a President’s Council on Innovation to develop a comprehensive agenda and coordinate federal effort to support innovation.[10]
• The America Competes Act of 2007. The ACA, the work of a bipartisan group of lawmakers, built on the NCIA to increase research investment, strengthen science & technology educational opportunities, and develop an innovation infrastructure. Many of the recommendations from ACA have gone unimplemented.[11]
• The National Governor’s Association initiative of 2007. This effort created the Innovation America Partnership, which established a public-private partnership to coordinate innovation efforts with outlined roles for state, federal, and private jurisdiction. Governor Janet Napolitano of Arizona—now Homeland Security Secretary—led this effort. Gov. Napolitano also created the Innovation America Foundation.[12]

In addition, last year two important new efforts to create a nationwide innovation policy body were launched: one in the Senate and one from a leading nonprofit technology policy group. In Congress, the National Innovation and Job Creation Act of 2008 was introduced by Senators Susan Collins (R-ME) and Hillary Clinton (D-NY), which sought to establish a National Innovation Council to improve the coordination of innovation activities. And later that year the widely discussed proposal to create a National Innovation Foundation—which would coordinate technology and innovation policy under one roof and then pool and leverage investments—was proposed by Robert Atkinson of the Information Technology and Innovation Foundation.[13]

Many different elements of these programs are a part of our proposed National Innovation Framework, but we would argue that they have not been adequately networked together to achieve the sustainable collective outcomes the United States needs today to create an integrated national innovation strategy. Our goal is to establish that integrated operating model so that the United States can construct a fully networked and optimized infrastructure for the greater coordination and success of overall U.S. innovation strategy—an integrated network that leverages the best that the federal government and state governments, universities and nonprofit groups, and the private sector can bring to the table.

We believe it is important for existing state and federal agencies to retain their current funding and implementation roles so that they can maintain their mission-oriented goals and not lose time sparking a new, innovation-led economic recovery. But we recognize that better coordination is absolutely imperative.

That’s why our National Innovation Advisor and federal innovation partnership program would convene to evaluate effectiveness, return on investment, and redundancy in programming in order to reduce any unnecessary overhead and maximize the amounts of funding invested in outcome-driven research and commercialization. Further, this new coordinating effort will identify gaps that exist in federal technology innovation programs and respond better to the current economic environment. This effort will enable our National Innovation Seed Fund to fill a major early-stage funding gap for innovative entrepreneurs in the United States. We now turn to this National Innovation Framework.

The Need for A National Innovation Framework

According to the recent Global Innovation Index study completed by the Boston Consulting Group, the National Association of Manufacturers, and the Manufacturing Institute, innovation leadership has shifted to more nimble emerging and developed economies, where their governments are investing heavily in science and technology and innovative approaches to increase their respective market shares of the global knowledge economy.[14] Foreign counterparts have successfully plucked best-practice strategies and approaches in supporting entrepreneurship and early-stage business development. Combined with the primary competitive advantage of cheaper labor costs, these efforts are now paying big dividends for these societies.

Analytical chemistry in China, clinical trials in India, biomedical engineering in Singapore, and a number of back-office and other outsourced industries have gained strong footing abroad and have effectively cut into America’s competitive share in high technology. The study ranked the United States eighth in innovation leadership behind Singapore, South Korea, Switzerland, Iceland, Ireland, Hong Kong, and Finland. The study evaluated both innovation inputs, such as fiscal and education policies, and outputs such as patents, technology transfer from basic university research, research and development, and business performance (see Table 1).

The Global Innovation Index also called for a bold national innovation strategy to encompass their recommendations, but they did not propose a central operating model for widespread implementation. What our nation needs is a National Innovation Framework—an operating model that offers less complexity, more accountability, and more cooperation among businesses, technology organizations, innovators, investors, entrepreneurs, policymakers, and university leaders. We use the term “operating model” because the provision of any service—and we consider innovation policy implementation a service that involves the interaction of multiple actors from both the public and private sectors alongside appropriate government involvement—requires implementation beyond the control of any one governmental agency.

The better designed and anticipatory this operating model is, the better it will be in delivering and implementing innovation policy that boosts our country’s economic competitiveness and job creation in a timely fashion and at the most efficient cost to taxpayers. Today’s leading high-tech and innovative businesses and industries that are the quickest to identify, carve, and sustain their business models are the most successful. They may not be the fastest to discover something innovative, but they are the fastest to piece together all the necessary components to become exceedingly profitable.

Yet at the same time we must help mobilize those that are quick to discover. Any single discovery can be an innovation that forms the basis for a new company or business opportunity for the inventor who improves the chances for success of another company but lacks the keen business knowledge to accelerate these discoveries. Many discoveries today are sitting on the shelves of universities, research laboratories, and corporations and go undeveloped for widespread public benefit due to the lack of know-how and underavailability of early-stage capital (see Figure 5 for a diagram of this technology lifecycle).

The upshot? The formation of a comprehensive innovation lifecycle business model—from discovery to product development to rapid distribution to end-user satisfaction—that delivers success through wealth creation, sustainability, and consumer trust is sorely lacking. To be sure, technology transfer offices at some universities, astute venture capitalists, and corporate research directors on the prowl bring all these elements together to create incredibly competitive and growing companies (think Google Inc). Yet a comprehensive national innovation framework to make this happen more consistently still eludes us. That’s why we believe a shared National Innovation Framework—a prioritized operating model that structures a collective national response for the strategic acceleration of the country’s entrepreneurial innovation economy—is now sorely needed.

Our National Innovation Framework would provide the best networked approach, leverage our innovation resources, and provide assistance to the growth of high-tech companies that are continuously changing the shape of our world. In turn, the growth of these very companies fuels our economic and job growth and serves as a considerable national competitive advantage to retain the highest skilled national talent and compete with the rest of the world on science and technology.

At the center of the framework sits a National Private-Public Partnership Innovation Program, which is a nonprofit organization composed of leading public- and private-sector innovation players. The organization would draw on the expertise of its partners to administer a $2 billion National Innovation Seed Fund and advise a collaborate effort with a federal National Innovation Advisor in the White House on how to tailor national innovation strategy to best meet the needs of newly emerging technologies and services (see Figure 6).

As our chart illustrates, key private and non-profit technology organizations, such as SSTI, National Association of Seed and Venture Funds, American Society of Mechanical Engineers, the Association of University Technology Managers, the Community Development Venture Capital Alliance and the Angel Capital Association, would work with federal agencies and their technology program managers. These efforts would be reported to a new National Innovation Advisor and the investment managers of an experienced public-private innovation seed-stage fund—through the National Public-Private Partnership Innovation Program, or NPPPIP. In this way, the best innovation strategy, advice and policy execution would be coordinated through a single organization with a direct link to the president and key private-sector and non-profit leaders. We now will present the individual components of our National Innovation Framework to demonstrate how these three programs would work in tandem.

Federal Innovation Partnership and National Innovation Advisor

Leading programs for a national innovation and competitiveness agenda

The keys to the success of this national innovation framework are the partnerships and federal leadership created in this operating model. Over the past 25 years, a new global innovation system has evolved in the United States, with support from government and industry for basic research in universities, nurtured by rapid growth in venture capital and implemented by industrial and services companies through strong investments in research and development, capital equipment, and information technology. This highly complex system of innovation, however, requires much closer collaborations and more alliances among federal funding agencies and private investors, industries, universities and government labs.

More than simply utilizing technology, innovation is the ability to take new ideas and translate them into commercial outcomes by using new processes, products or services in a way that is better and faster than the competition. The ability to do this requires an inclusive process among individuals, institutions, and organizations that results in new business models, new forms of engagement and, ultimately, new companies. Today, new companies create a greater portion of job growth than do established larger companies. In the new economy, innovation and productivity are the cornerstone of competitiveness and prosperity.

Our Federal Innovation Partnership program would address the lack of government coordination around national innovation and competitiveness. There has never been one federal agency or cabinet-level position responsible and accountable for overseeing the total federal technology investment portfolio. Nor is there one federal agency or advisor overseeing the balance of investment and technology research, which should be managed in innovation portfolio. The major objective of our federal innovation partnership program would:

• Align investments in programs strategically
• Access bridges into the commercial marketplace faster
• Eliminate redundancy
• Identify gaps in our nation’s technology portfolio
• Decrease administrative costs
• Measure outcomes to align performance of the programs.
• Serve as a clearinghouse of information and resources
• Require federal agencies to communicate and collaborate with one another to galvanize the country around a strategic innovation and competitiveness agenda
• Catalyze cooperation among the federal agencies on a shared innovation agenda

It is important, however, to form the Federal Innovation Partnership around the existing programs that the nation is using to support technology development and transfer, education, workforce and economic development, and industry-university collaborations. Initial programs identified that form the basis of this partnership boast about $3 billion in federal funding and include but are not limited to the following programs:

Federal Technology Innovation Programs

• Small Business Innovation Research grants program
• Small Business Technology Transfer Research grants program
• Technology Innovation Program
• Manufacturing Extension Partnership
• Workforce Innovation in Regional Economic
• Development program
• Federal Laboratory Consortium
• Experimental Program to Stimulate Competitive Technology
• Experimental Program to Stimulate Competitive Research
• Industrial Technology Program
• Partnership for Innovation
• Engineering Resource Center
• Industry-University Cooperative Research Centers

Federal Innovation Capital Programs

• Small Business Innovation Research grants program
• Technology Innovation Program
• Community Reinvestment Act
• Community Development Financial Institutions
• New Market Tax Credits

Such an array of programs perfectly illustrates why these programs are not widely understood or recognizable in the world of innovation and need to be administered through a Federal Innovation Partnership program. But at the same time, the wealth of program expertise in all of these programs should not be lost in the name of consolidation. For this reason, the federal innovation partnership program would include federal-level program administrators of the listed programs and other federal representatives deemed appropriate by the National Innovation Advisor and the Obama administration.

We believe outstanding amounts of knowledge exist in the federal agencies through managing these programs and it’s important to retain some level of independence in program administration. The Federal Innovation Partnership would add a level of oversight and ability to leverage resources and the strategic updating of programs to respond to the current global innovation environment. The chairman of the Federal Innovation Partnership would be the National Innovation Advisor, who will be an advisor to the President on strategic issues related to national innovation and competitiveness.

No cabinet level position in the Administration currently exists for maintaining America’s position as the global innovation leader, as well as making sure that federal agencies collaborate with each other and leverage resources effectively. The national innovation advisor in tandem with the Federal Innovation Partnership program would ensure consistency in the way the programs are administered and made accountable and they will work to update and enhance programs to meet the changing nature of what it takes to stay competitive globally.

Currently the federal budget for the listed Federal Technology Innovation Programs is approximately $3 billion. These programs effectively launch new technologies from the federal laboratories, small businesses, nonprofit research organizations, universities, and other centers of excellence in the United States. It will be important for the National Innovation Advisor to monitor the balance of the federal investment portfolio between basic, applied, advanced, and mature technologies and industries to improve our competitive position globally and recommend new programs, investments, and initiatives where needed.

The other programs represented in the Federal Innovation Partnership are existing Federal Innovation Capital Programs, which provide financial incentives for innovation-based development. Very few of these programs have been structured to support the rapidly growing entrepreneurial innovation economy of the United States. This needs to change. Our policy framework would enable this reform to happen at a federal level coordinated through the White House to ensure effectiveness.

As our National Innovation Framework chart on page 7 illustrates, the Federal Innovation Partnership program would work through the National Public Private Partnership Innovation Program to coordinate investments from the public-private National Innovation Seed Fund to direct innovation investment capital efficiently but opportunistically around the country. This public-private partnership of existing innovation associations and networks would provide outreach and investment-intelligence roles between the states and regions, and allow the federal government to align technology innovation investment programs with federal, state, regional and university programs.

National Innovation Seed Fund

A collective response to financing innovation-based businesses

The United States is currently losing is its innovation leadership and national competitive advantage by not supporting high-growth entrepreneurial companies. According to the U.S. Small Business Administration, innovative small businesses have generated between 60 to 80 percent of net new jobs annually over the last decade. These young companies employ 30 percent of high-tech workers such as scientists, engineers, and information technology workers.

Furthermore, small-and medium-sized enterprises produce between 14 times more patents per employee than large patenting companies. In short, small companies are a key source of innovation for themselves and for large companies in terms of fueling mergers, acquisitions, and licensing activities. See the diagram in Figure 7 for a quick understanding of the financing lifecycle that creates this innovation.

The current seed-stage and early-stage funding gap, which has always existed for early innovation and entrepreneurs, has widened recently because of the current national economic crisis. Banks and hedge funds are failing, and loans and lines of credit for working capital are at extremely low levels and unavailable for some. Venture capital has moved “upstream” to where the average investment by firms last year was $8.3 million per investment. Only about 4 percent of the capital went to early-stage companies, with all other investment activity occurring in later stage deals. Private and angel investors who once attempted to fill most of this gap reduced their investments by more than 26 percent in 2008, and the availability of investment capital among this category has decreased dramatically by 40 percent.

Over the past decade, state governments have led the charge in their own jurisdictions to address this early-stage financing gap or what has come to be known as “The Valley of Death” in the world of entrepreneurship. But now state budgets are also in crisis mode and have less money to invest in technology-based economic development initiatives. Recently Ohio, Kansas, Connecticut, and Pennsylvania, just to name a few, have all either reduced economic development spending or suggested wide consolidations to control it.

In April 2009, the National Association of Seed and Ventures Fund, at the request of the Small Business Administration, surveyed seed- and early-stage venture funds as well as entrepreneurial support professionals to find out the state of seed- and early-stage funding for innovative-based entrepreneurial companies. The survey found that 70 percent of seed/early stage venture investment funds are having a difficult time raising capital from private investors, pension funds, local, county and state authorities. The most startling finding was that nearly 90 percent of the already-funded companies surveyed are currently unable to attract follow-on capital, and that 70 percent of these companies need less than a million dollars to continue their business and product development (see Table 2).[16]

Creating a National Innovation Seed Fund

We believe the federal government can play a role in funding these entrepreneurial companies, thereby stimulating innovative job and small business growth. Neither traditional financial institutions nor venture capitalists are providing the gap funding of $500,000 to $2 million that seed-stage and early-stage companies need to grow. Our solution is to create a National Innovation Seed Fund sparked by a U.S. federal government investment. This fund would make venture investments in that key financing range to structurally address the “Valley of Death” funding needs of small companies, and would be invested equitably and equally throughout the innovative regions of the United States.

This new fund would be structured as a public-private partnership and would enlist experienced early-stage investors to manage the fund. The National Seed Stage Fund managers would work with the NPPPIP to engage the rest of the innovation ecosystem in the United States to ensure strategic oversight and success. The NPPPIP would determine the most experienced early-stage funds that would then invest in innovative companies in their regions. It would collaborate with state technology-based economic development organizations, national seed, angel, and other innovation-based associations and networks to leverage resources and create a connected national community of innovation.

Examples of organizations are the Ben Franklin Technology Partnership in Pennsylvania and the National Association of Seed and Venture Funds. The consortium of partnership organizations would guarantee the effectiveness of the National Innovation Seed Fund by creating quality investment opportunities with the investments and participation of the Federal Innovation Partnership program and the National Innovation Advisor. The overall purpose of the fund is to stimulate rapid knowledge-economy job creation as demonstrated can be done from the data from the Small Business Administration.

Federal money for the new seed fund would be appropriated through an agency such as the Small Business Administration or U.S. Department of Commerce’s Economic Development Administration or National Institute of Standards and Technology, and would be managed through the National Public-Private Partnership Innovation Program. The federal agency would manage the contractual relationship with the NPPPIP and maintain administration, audit, and financial reporting functions.

The investments would at some point generate a financial return on investment for the federal government, though for budget purposes those returns would have to be anticipated over the course of 10 years—like any venture capital firm would do—which means funds must be allocated until investment maturity can be realized five or more years into the future. More immediately, however, the $2 billion would be invested in new companies creating new high-skilled, high-paying jobs, thereby adding to immediate post-recession economic stimulation.

These types of seed fund investments would be made right before most venture capital firms would look at investing, which is risky but also rewarding. Many venture-backed companies are or quickly become the most innovative and prosperous companies in the world. A Global Insight report in 2007 found that venture capital-backed companies were directly responsible for just over 10 million jobs and $2.1 trillion in sales in 2005, which represents 9 percent of total private sector employment and 7 percent in total sales.[17] Furthermore, venture capital-backed companies created jobs three times faster and pay significantly more than the average private-sector jobs.

We have studied other sources to gauge the impact of a National Innovation Seed Fund and found that for each $1 billion invested in innovative small businesses a minimum of 100,000 high-skilled, high-wage jobs would be created. The Commonwealth of Pennsylvania’s Department of Community and Economic Development, the longest existing organization investing early-stage capital, in 2008 created or retained 8,150 jobs based on a total of $90.7 million in investments or $11,130 per job.[18] If you applied Pennsylvania’s $11,130 in seed dollars invested per job to the $2 billion of potential funding for the national innovation seed fund, 180,000 new jobs would be approximately created with the opportunity to retain many of the high-skill and high-paying jobs into the future. This same result was confirmed in a study completed by the Community Development Venture Capital Alliance of more than 50 providers of community development venture funds that make equity capital and grant investments to build entrepreneurial capacity and community wealth.

A National Public-Private Partnership Innovation Program

National innovation intermediary to implement different program elements

Our chart on page 7 illustrates that a non-profit National Public-Private Partnership Innovation Program sits at the center of our national innovation framework. This NPPPIP would administer unique innovation programs to fill the innovation life cycle gaps that exist in America today, including support in the areas of intellectual property and technology transfer, early-stage business and product development, early-stage financing, commercialization, technical assistance and mentoring and the implementation of other programs to address key issues. This program would also oversee the national innovation seed fund investments in tandem with the Federal Innovation Partnership program and the National Innovation Advisor.

Above all, though, this non-profit, public-private organization would act as a strategic mechanism to engage the innovation ecosystem like any strong outreach and implementation-driven organization. Its effectiveness would be supported by the consortium of partnership organizations, in which it will lead and also its partnership with the new Federal Innovation Partnership program and the National Innovation Advisor. The proposed partners in this organization would include but not be limited to the following organizations, which together represent significant sectors that support the acceleration of the nation’s innovation economy:

• American Society of Mechanical Engineers
• Angel Capital Association
• Association of Public and Land-grant Universities
• Association of University Research Parks
• Association of University Technology Managers
• Community Development Venture Capital Alliance
• National Association of Seed and Venture Funds
• National Business Incubation Association
• State Science and Technology Institute

The unique partnership of national organizations and associations practicing innovation-based economic development would provide a point of cross linkage for both practitioners and constituents, enabling it to implement significant programs with the buy-in of a variety of stakeholders including venture and angel networks, business incubators, research parks, university technology managers, and the nation’s largest network of engineers. This network will prove to be critical to launch a strategic innovation-based implementation agenda for our country.

Furthermore, this partnership will be able to elevate efforts and directly link with intermediaries and other bodies in states and localities throughout the United States, which is not currently a shared agenda by the federal government. Regional intermediaries have been effective in operating in states and localities to accomplish strategic agendas with multiple partners and many stakeholders.

These organizations can successfully launch a paradigm shift to transition and position places, people, and organizations to nurture innovation-based economies. Our approach introduces the concept of a comprehensive national broad-based innovation intermediary that would fulfill this role. And the ability of the organization to operate outside the realm of the federal government would help ensure swifter implementation and leadership on strategic agendas while receiving input from a National Innovation Advisor with access to the President and Federal Innovation Partnership of government agencies.

A further function of this organization would be to operate programs and serve as an accelerator that advances technologies into the marketplace for the increased stimulation of innovation in the national economy. The partners’ deep experience in this organization in early-stage investing would be instrumental in the deployment of the National Innovation Seed Fund as well as our proposed Technical Assistance Grant Fund, which would be administered by this non-profit organization. Support for this fund will come from the same originating agency of the NISF and remain a constant percentage of the overall investment pool.

The proposed Technical Assistance Grant Fund would serve as a support fund for early-stage investing, similar to the technical assistance fund currently affiliated with the New Markets Tax Credit program. The public-private partnership organization would select the best programs for business mentoring practices and due diligence support, and would provide funding for business incubation and acceleration models that incorporate virtual models, including the iBridge Network of the Kauffman Foundation and the National Innovation Marketplace currently supported by the U.S. Department of Commerce.

As project manager of the National Innovation Seed Fund and Technical Assistance Grant Fund, our public-private partnership organization would lead the charge in bridging problems in early-stage financing and commercialization of innovation-based enterprises. It would also operate other programs that are critical to building national innovation capacity, including those engaged in:

• Direct investment
• Commercialization
• Technical assistance, education, and mentoring
• Technology, economic and workforce development
• Networking, strategic planning, marketing, and branding

In short, the core competency of this organization will be the conception and formation of key innovation-based products and services that will assist the networks and leverage resources to the support networks working with individual entrepreneurs and others working to accelerate innovation on a national level.

Conclusion

Our National Innovation Framework boasts three core components: a National Public Private Partnership Innovation Program that sits astride a National Innovation Seed Fund and Federal Innovation Partnership Program, and collaborates with a new National Innovation Advisor. Together, the leaders of these components would deliver a central focus and create an optimized and integrated national network of many players that is essential to a national innovation strategy. We believe this structure is the best way not just to implement as well as enact a national innovation strategy.

The United States does not need a top-down innovation strategy that resembles government-led industrial policy, nor would such a proposal survive long in Congress or the halls of the Obama administration. Similarly, the United States simply cannot continue to run the current overlapping but uncoordinated sets of innovation programs that are failing to deliver the common national strategy our country needs to compete successfully in the 21st-century global innovation economy.

Instead, our country needs an innovation program that leverages the best talent from the public and private sector. It is the best policy solution. And it’s the best political solution on Capitol Hill. For this reason, we believe a national public-private partnership innovation program is what Congress and the Obama administration should pursue immediately due to our current window of opportunity and the risk of losing ground to competing nations daily.

About the authors

Richard Bendis

Mr. Bendis has distinguished himself as a successful entrepreneur, corporate executive, venture capitalist, investment banker, innovation and technology based economic development leader, international speaker and consultant in the technology and healthcare industries. He currently serves as the founding President and CEO of Innovation America, a national 501c3 not for profit, private/public partnership focused on accelerating the growth of the entrepreneurial innovation economy in America.

Mr. Bendis has been appointed to selected national innovation related organizations and committees that include the White House U.S. Innovation Partnership Advisory Task Force and Co-Chair of the Small Business Innovation Research Committee; the National Governor’s Association, Science and Technology Council of the State’s Executive Committee, the State Federal Technology Task Force, the National Academies committee on “Competing in the 21st Century: Best Practices in State and Regional Innovation Initiatives”; National Academies National Research Review of an Assessment of the SBIR Program; National Institute of Standards and Technology Manufacturing Extension Partnership National Advisory Board; U.S. Small Business Administration’s Angel Capital Electronic Network Board of Directors; American Academy for the Advancement of Science—Nominating Committee and the American Association Research Competitiveness Program Advisory Committee; Council on Competitiveness—Clusters of Innovation Committee.

Mr. Bendis has also served as a board member and representative to the National Association of State Venture Funds—Founding Board member and Executive Committee member; American Society of Mechanical Engineers—Strategic Innovations and Initiatives Committee; State Science and Technology Institute—Founding Board member and Executive Committee member; Eisenhower Fellowships Nominating Committee and the Ernst and Young Entrepreneurial Institute as a national/regional Judge.

Mr. Bendis continues to provide global consulting services to several international organizations including the International Science Parks and Innovation Expert Group, the United Nations, NATO, UK Trade and Industry, European Commission, French Embassy, the German Marshall Fund, and others global ventures.

Mr. Bendis also founded and served as the founding President and CEO of Innovation Philadelphia, a 3 state regional public/private partnership dedicated to growing the wealth and workforce of the Greater Philadelphia Region. Innovation Philadelphia managed a portfolio of programs in four distinct areas: Direct Equity Investment/Financing Assistance; Technology Commercialization; Global/Regional Economic and Workforce Development; and Market Research and Branding. Mr. Bendis is on the IP Board of Directors.

Previously, Mr. Bendis successfully leveraged a career in the private sector (with Quaker Oats, Polaroid, Texas Instruments, Marion Laboratories and Kimberly Services) and the venture capital industry (RAB Ventures) to lead the Kansas Technology Enterprise Corporation. As its president and CEO, he developed KTEC into a globally recognized model for technology-based economic development. Mr. Bendis also successfully built an Inc. 500 healthcare software company, Continental Healthcare Systems, Inc., which he took public on NASDAQ and later sold to an international conglomerate. In addition, Mr. Bendis manages his own angel investment fund.

Ethan Byler

Ethan Byler is Keystone Innovation Zone Coordinator at the Pennsylvania Biotechnology Center in Doylestown, PA. The Pennsylvania Biotechnology Center is a business incubator focused on translational research and business development with specializations in diagnostics and therapeutics for infectious diseases, hepatitis, and cancer. The Keystone Innovation Zone is designed to harness the knowledge of partnering institutions of higher education, private industry, and government resources to nurture and assist early-stage technology companies. Ethan’s responsibilities with the Zone include business development, technology transfer, and working with the Regional Biotechnology Council.

Mr. Byler formerly worked for a consulting company focused on technology-based economic development in Washington, DC, New Economy Strategies LLC. His work there included management of regional innovation and growth projects, initiatives focusing on capital formation and entrepreneurship, rural economic development and the design of government led interventions in technology and innovation-based economic development. He has worked on strategies in Pennsylvania, New Jersey, New Mexico, Alabama, Kentucky, Connecticut, Utah, North Carolina, Michigan and Colorado.

Prior to joining NES, Mr. Byler was an Analyst with the Federal Funding Programs at Innovation Philadelphia where he provided technical support on grant applications, business plans, and the presentation materials of early-stage companies attempting to secure financing through private investment or Small Business Innovation Research grant.

Mr. Byler holds a Masters Degree in Government Administration from the Fels Institute of Government at the University of Pennsylvania and a BA from the University of Charleston.

Please direct any comments or questions related to the contents of this paper to:

Richard A. Bendis
President & CEO
Innovation America
Phone: 215-496-8102
Cell: 215-593-3333
E-mail: rbendis@bendisig.com
web:www.innovationamerica.us

Ethan J. Byler
Keystone Innovation Zone Coordinator
Pennsylvania Biotechnology Center
Phone: 215-589-6426
E-mail: Ethan.Byler@ihvr.org

Acknowledgements

We would like to acknowledge those who have assisted in the development of the principles of the National Innovation Framework concept that we now present.

Jim Jaffe, President and Chief Executive of the National Association of Seed and Venture Funds and Founding Supporter of Innovation America.

Reese Meisinger, American Society of Mechanical Engineers.

Ed Paisley, Science Progress and Center for American Progress.

Jim Turner, Association of Public and Land-grant Universities.

Charles Wessner, Ph.D., Director of Technology, Innovation, & Entrepreneurship, The National Academies

We extend a special thanks to those who initially presented this concept at the meeting with the Obama Transition Team on December 17, 2008.

Rebecca Bagley, Deputy Secretary of Technology Investment, Pennsylvania Department of Community and Economic Development; National Association of Seed and Venture Fund Board Member; State Science and Technology Institute Board Member.

Rich Bendis, President and Chief Executive of Innovation America; NASVF Board Member; SSTI Board Member.

Dan Berglund, President and Chief Executive, State Science and Technology Institute.
Jim Jaffe, NASVF.

David Wilhelm, Founder and President, Woodland Venture Management; NASVF Board Member.

Endnotes

[1] American Association for the Advancement of Science, http://www.aaas.org/ (last accessed March 31, 2009).

[2] U.S. Dept. of Commerce, Bureau of the Census and International Trade Administration, “Advocacy-funded research by Kathryn Kobe,” 2007, available at http://www.sba.gov/advo/research/rs299tot.pdf.

[3] Source: Office of Advocacy, US Small Business Administration; Small Business Profiles for the States and Territories; published November 2008; Prepared Jan 9, 2009 for SBTC by Terry Bibbens.

[4] CHI Research, 2003, available at http://www.sba.gov/advo/research/rs225tot.pdf.

[5] Price Waterhouse Coopers, NVCA Money Tree Survey, Full-Year 2008.

[6] Jeffrey Sohl, “The Angel Investor Market in 2008: A Down Year In Investment Dollars But Not In Deals,” Center for Venture Research, March 26, 2008.

[7] The National Academies, “An Assessment of the Small Business Innovation Research Program,” 2007.

[8] State Federal Technology Partnership Task Force, Final Report, September 5, 2005.

[9] National Innovation Act of 2005.

[10] The National Competitiveness Investment Act of 2006.

[11] The America Competes Act of 2007.

[12] Innovation America Partnership of 2007.

[13] ITIF National Innovation Foundation.

[14] Boston Consulting Group and The Manufacturing Institute of the National Association of Manufacturers, “The Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge,” Available at http://www.bcg.com/impact_expertise/publications/files/Innovation_Imperative_in_Manufacturing_March_2009.pdf.

[15] Rich Bendis and others. “Presentation to an interagency working group of the Obama Administration Transition Team,” December 17, 2009.

[16] NASVF Survey Results, “Ninety Percent of Young Entreprenurial Companies Can’t Find Follow-On Funding,” April 8, 2009.

[17] Global Insight, Venture Impact, “The Economic Importance of Venture-Backed Companies to the U.S. Economy,” Third Edition, 2007.

[18] Pennsylvania Economy League. “The Economic Impact of the Ben Franklin Technology Partners, 2002-2006,” January 2009.

[19] Community Development Venture Capital,” A Report on the Industry Julia Sass Rubin, available at http://www.community-wealth.org/_pdfs/articles-publications/cdfis/report-rubin.pdf.

According to the American Academy of Pediatrics, American youth spend more time watching television than they spend in school. Jeffrey Immelt, chairman of General Electric, once described the problem this way: “If you want good manufacturing jobs, one thing you could do is graduate more engineers. We had more sports exercise majors graduate than electrical engineering grads last year.” The number of American-born engineers continues to precipitously decline.

Fortunately, there are effective ways of getting high school students excited about technology and engineering early, and one of them will be on display in full force later this week in Atlanta, Georgia. The FIRST Robotics Championship will bring together thousands of teens from around the world to compete in a series of contests that emphasize ingenuity and teamwork. And these kids, many of who will go on to pursue engineering in college, will have a grand stage on the floor of the Georgia Dome.

The nations’ top scientists and educators reported in “Rising Above The Gathering Storm” that a host of countries were ferociously investing in scientific research and development and are catching up with the United States. This landmark report concludes:

For a century, many in the United States took for granted that most great inventions would be homegrown—such as electric power, the telephone, the automobile, and the airplane—and would be commercialized here as well. But we are less certain today who will create the next generation of innovations, or even what they will be. We know that we need a more secure Internet, more-efficient transportation, new cures for disease, and clean, affordable, and reliable sources of energy. But who will dream them up, who will get the jobs they create, and who will profit from them?

Well, it’s true: factories have moved to countries far away. Do students in America really need to know how to use a lathe or a milling machine? Why make a chisel by hand if you can buy one in a store for $1.50? Soldering irons can burn you. Spot welders, you betcha. You can take an eye out with this thing or that. Protect our children from themselves!

But what we’ve actually done is create an entire generation of young adults who don’t know how to weld, solder, fabricate, design, measure, create, tinker, or play. They don’t know what the inside of a radio looks like because it’s just cheaper to buy another imported one than to fix the old one. How can you design the products of tomorrow, create the innovations that will keep the country advancing, if you don’t learn how to make anything? I’m also suggesting that our litigious, liability-adverse nation has hobbled our children’s ability to learn how to innovate.

Central to the “American Idea” is our burning desire to innovate. Yet America no longer knows how to celebrate inventors or give “invention licenses” to the new crop of teenagers coming up. But instead of preserving the old economy, we must prepare our kids to lead this new economy. The solution is not to wall ourselves off but to insure that our teens have the tools, the training, to be the innovators to make and sell the new stuff to these new markets.

For several years I mentored high school robotics teams, working with the FIRST organization. In fact, the brilliant and relentless inventor Dean Kamen, founder of FIRST, talked me into it (like he has with literally thousands of volunteers.) Happily, I then talked my family and friends into mentoring teams as well, and my converts have been far more successful than I have been in guiding kids to build robots. A few weeks ago, at New York’s Jacob Javits Convention Center, dozens of high schools competed with a field of ball-gathering and ball-tossing robots…and the competition captivated thousands of students in attendance. Today, more than a thousand high schools around the world have robotics teams, and FIRST continues to grow.

Building robots is fun but it is hardly the point. Robots are just a fascinating focal point for learning science and engineering skills: robots must be designed, fabricated, programmed, coordinated, and collaborated upon. There is brilliant strategy involved in these team competitions, and students learn from mentors about tools, design programs, project management, and especially, gracious professionalism and cooperation.

Yet working with FIRST teams has given me some troubling insights as well. In New York City schools, and in schools across the country, machine shops, metal and wood-working shops, continue to disappear. Precious tools and expertise are still denied to students. “We figured we’d put in computers, instead,” one principal told me.

Scared of lawsuits and liability, many educators contend that manufacturing skills are no longer needed. In one school I worked with, an enormous milling machine was actually stolen and not reported missing for about three years. Five years later, it still has not been replaced.

I don’t think “doom and gloom” is an accurate prediction of the future of American technology: optimism is at the soul of American innovation. Nearly a dozen successful television shows that cater to the “How It’s Made” crowd signal a resurgence of public interest in science and technology. President Obama is significantly reinvesting in basic science research and plans to rejuvenate our frail technology infrastructure. Unleashing the power of America’s research and development potential has increasingly become a popular and unifying cause in Congress and even in some corporate boardrooms.

Despite tough economic times and cutbacks, Google still seems committed to stimulate innovation by allowing select employees to devote 20 percent of their work time to undirected research. Many at Google believe this freedom to explore directly results in the most exciting and profitable innovation emerging from their Mountain View campus. Beyond Google, American corporations need to figure out how to replicate this excitement and openness in stimulating creativity.

Risky? Sure. There is no reward without risk and innovation abhors complacency. But we have become worse than complacent: we have removed springboards for our next generation of engineers, chemists, and inventors to jump into the game and lead America and the world.

So here are some ideas that may ensure our teens will be the innovators of tomorrow:

• Grow talent: have your high-tech company mentor a FIRST Robotics team, for example.
• Reward innovation: As a nation we must celebrate inventors.
• Inspire innovation with challenges (like the DARPA Grand Challenge) and access to technology.
• Keep America a friendly place for foreign scientists and researchers to study and innovate so they’ll stay and grow our innovative infrastructure.
• Give innovators more time to play and focus on their own quests (i.e., the Google model).

Like it or not, welcome to the new environment: adapt or die. Technology is cycling so quickly, expertise will be redefined: not by what you know but how fast you think; how quickly you can process data; to find broad connections then turn it into something that you can market the hell out of. Learning how to build a robot with your classmates is a solid head start.

Dan Dubno is an Emmy-award winning TV producer, broadcaster, technologist, presenter, inventor, and “connector.” He is founder of Blowing Things Up (BTU) LLC., an international consultancy that brings innovative technology companies together to reach new markets and applications.

A version of this column originally appeared on The Huffington Post.

The importance that the Obama administration places on strong government support of these efforts is clear, and reflects an encouraging change from the Bush administration. According to the proposed budget, the Department of Commerce is to receive $295 million for programs that invest in America’s competitiveness and promote innovation, in addition to the hundreds of millions of dollars allocated for similar purposes in the stimulus legislation passed last month.

The budget calls for:

• “$70 million for the Technology Innovation Program, which invests in high-impact research that will address critical national needs and advance innovation”

• “$125 million [to the Hollings Manufacturing Extension Partnership] to enhance the competitiveness of the Nation’s manufacturers by facilitating the adoption of more efficient manufacturing processes”

• “$50 million in regional planning and matching grants within the Economic Development Administration (EDA) to support the creation of regional innovation clusters that leverage regions’ existing competitive strengths to boost job creation and economic growth”

• “$50 million [to launch an] initiative in EDA that will create a nationwide network of public-private business incubators to encourage entrepreneurial activity in economically distressed areas”

Congress should not reduce or eliminate these commitments. Investment in our young businesses and the local and regional innovation structure that supports their creation and development is essential to the short-term as well as long-term health of America. These investments will provide the capital that young companies need in these times of anemic support from institutional investors reeling from losses in the capital markets. The proposed support of innovation clusters across the country will build long-lasting tech-based economies in these regions that can generate new growth and provide jobs to local residents.

American economic geography is changing: to read about how innovation clusters will spur economic development across the new landscape, see our “Regional Centers of Innovation 101.” For more on why business incubator support is a good idea: Incubators Boost Job Creation.

We need to encourage growth in the regions and cities that are best positioned to compete in the coming decades: the great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them—places like Silicon Valley, Boulder, Austin, and the North Carolina Research Triangle. Whatever our government policies, the coming decades will likely see a further clustering of output, jobs, and innovation in a smaller number of bigger cities and city-regions. But properly shaping that growth will be one of the government’s biggest challenges. In part, we need to ensure that key cities and regions continue to circulate people, goods, and ideas quickly and efficiently.

An interesting graphic included with the article documents the changing patent geography in the country since 1975, providing a glimpse at the regional clusters of innovation that power American economic competitiveness. As the country has progressed from a manufacturing economy to one based on scientific and technological products, patent activity has been increasingly focused in a handful of innovation centers, such as Silicon Valley, Boston, and Raleigh-Durham. Additionally, most of the innovation clusters have sprouted up around major research universities, indicating the essential role that educational institutions play in spurring innovation.

The Obama administration would be wise to take Richard Florida’s message to heart. The current economic crisis has sparked a fundamental shift in the economic geography of the United States, a geography that is more than ever reliant on the collaborative networks between universities, companies, and financiers that are the foundation of our most innovative cities and regions. Supporting the development of these networks and the cities that grow along with them should be a top priority for our new government.

For more on why place matters, see Maryann Feldman’s recent article for Science Progress. For a comprehensive discussion of innovation clusters: Regional Centers of Innovation 101.