EEP 143 Lecture 22 Institutions and Innovations <ul><li>Outline: </li></ul><ul><ul><li>First: a note on quiz Q4 </li></ul>...
Quiz Q4: Drastic process Innovation <ul><li>What are increases profits due to process innovation? </li></ul><ul><ul><li>If...
Quiz Q4: Drastic process Innovation D P Q MR c c' p' m Π ' p m Π <ul><li>What are increases profits due to process innovat...
Innovation:   The traditional Linear Model Simple Version <ul><li>Basic research </li></ul><ul><li>Applied research  </li>...
Innovation:   The traditional Linear Model:  More detail <ul><li>Science and technology base </li></ul><ul><li>Basic resea...
Example of  traditional Linear Model:  New Drug <ul><li>Science base: state of the art in chemistry, biology, etc. </li></...
Example of  traditional Linear Model:  New Drug <ul><li>Science base: state of the art in chemistry, biology, etc. </li></...
Example of  traditional Linear Model:  New Drug <ul><li>6.  Development </li></ul><ul><ul><li>Phase I clinical trials </li...
Example of  traditional Linear Model:  new software <ul><li>Basic research </li></ul><ul><ul><li>mathematics, queuing theo...
Caution: Traditional  Linear Model does not necessarily hold! <ul><li>Can you think of exceptions? </li></ul>
Caution: Traditional  Linear Model does not necessarily hold! <ul><li>Look up backward links to science progress from thes...
Caution: Traditional  Linear Model does not necessarily hold! <ul><li>But for now we assume it holds </li></ul><ul><li>Whe...
Why government funding of R&D? Economic arguments <ul><li>Pure public goods: </li></ul><ul><ul><li>Standards, national def...
For industry: Why gap between private and social return at given level of R&D? <ul><li>Knowledge spillovers </li></ul><ul>...
Why government funding of R&D? Economic arguments $ Social return Private return Marginal cost M. Soc Retn. M. Priv Retn. ...
Industry spillovers: Nature of gap between private and social return <ul><li>Less leakage in larger economies </li></ul><u...
Why government funding of R&D? Economic arguments $ Social return Private return Marginal cost M. Soc Retn. M. Priv Retn. ...
How can government move research to the optimal level? <ul><li>There are several ways: </li></ul><ul><ul><li>What are they...
How can government move research to the optimal level? <ul><li>There are several ways: </li></ul><ul><ul><li>Internalize e...
Federal R&D  <ul><li>In this case we should examine through the lens of political economy </li></ul><ul><li>Government is ...
Source: National Science Board 2006
Private R&D <ul><li>Private  sector accounts for most of the R&D: </li></ul><ul><ul><li>spends 63% of total R&D expenditur...
University R&D <ul><li>In contrast to the private sector universities have been relying more and more on federal funds </l...
Source: National Science Board 2006
Source: National Science Board 2006
University R&D <ul><li>Faculty are encouraged to engage in R&D and publish the results (tenure-track appointments) </li></...
University R&D <ul><li>An important effect of the act is that it led universities to pursue industry funds with the commit...
University R&D <ul><li>Start-up companies are the major means of technology transfer from universities to private sector <...
Federal R&D <ul><li>federal government </li></ul><ul><ul><li>accounts for  30% of total funds that go to R&D </li></ul></u...
Problem with collaborative R&D <ul><li>Privately-funded research may bias the research process in favor of the sponsor </l...
Happy Thanksgiving!
 
Benefits of the “Industry-University Complex” <ul><li>So far we have focused on the dangers of the university-industry coo...
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Lecture 22

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  • Heart surgery
  • Lecture 22

    1. 1. EEP 143 Lecture 22 Institutions and Innovations <ul><li>Outline: </li></ul><ul><ul><li>First: a note on quiz Q4 </li></ul></ul><ul><ul><li>Linear model of innovation </li></ul></ul><ul><ul><li>Federal R&D </li></ul></ul><ul><ul><li>University R&D </li></ul></ul><ul><ul><li>EBI Initiative </li></ul></ul><ul><ul><li>Benefits of the “Industry-University Complex” </li></ul></ul>
    2. 2. Quiz Q4: Drastic process Innovation <ul><li>What are increases profits due to process innovation? </li></ul><ul><ul><li>If inventor monopolized the production process? </li></ul></ul><ul><ul><li>If the pre-invention process is available at marginal cost c? </li></ul></ul>D P Q MR c c' p' m Π ' p m Π
    3. 3. Quiz Q4: Drastic process Innovation D P Q MR c c' p' m Π ' p m Π <ul><li>What are increases profits due to process innovation? </li></ul><ul><ul><li>If inventor monopolized the production process? Π ' – Π </li></ul></ul><ul><ul><li>If the pre-invention process is available at marginal cost c? Π ' </li></ul></ul>
    4. 4. Innovation: The traditional Linear Model Simple Version <ul><li>Basic research </li></ul><ul><li>Applied research </li></ul><ul><li>Invention </li></ul><ul><li>Development </li></ul><ul><li>Commercialization </li></ul>
    5. 5. Innovation: The traditional Linear Model: More detail <ul><li>Science and technology base </li></ul><ul><li>Basic research </li></ul><ul><li>Applied research </li></ul><ul><li>Invention </li></ul><ul><li>Prototype </li></ul><ul><li>Development </li></ul><ul><li>Commercialization </li></ul><ul><li>Diffusion </li></ul>
    6. 6. Example of traditional Linear Model: New Drug <ul><li>Science base: state of the art in chemistry, biology, etc. </li></ul><ul><li>Basic research: </li></ul><ul><ul><li>chemistry, microbiology, genetics </li></ul></ul><ul><li>Applied research: </li></ul><ul><ul><li>synthesize and screen compounds </li></ul></ul><ul><li>Invention </li></ul><ul><ul><li>Identify compound with desired effect in lab </li></ul></ul><ul><li>Prototype </li></ul><ul><ul><li>Compound formulated for lab testing </li></ul></ul><ul><li>Development </li></ul><ul><ul><li>Phase I clinical trials </li></ul></ul><ul><ul><li>Phase II clinical trials </li></ul></ul><ul><ul><li>Phase III clinical trials </li></ul></ul><ul><li>Commercialization </li></ul><ul><ul><li>Formulation, dosage choices, packaging, marketing </li></ul></ul><ul><li>Diffusion </li></ul><ul><ul><li>Sponsor trials, conferences, detailing MDs, consumer advertising </li></ul></ul>
    7. 7. Example of traditional Linear Model: New Drug <ul><li>Science base: state of the art in chemistry, biology, etc. </li></ul><ul><li>Basic research: </li></ul><ul><ul><li>chemistry, microbiology, genetics </li></ul></ul><ul><li>Applied research: </li></ul><ul><ul><li>synthesize and screen compounds </li></ul></ul><ul><li>Invention </li></ul><ul><ul><li>Identify compound with desired effect in lab </li></ul></ul><ul><li>Prototype </li></ul><ul><ul><li>Compound formulated for lab testing </li></ul></ul>
    8. 8. Example of traditional Linear Model: New Drug <ul><li>6. Development </li></ul><ul><ul><li>Phase I clinical trials </li></ul></ul><ul><ul><li>Phase II clinical trials </li></ul></ul><ul><ul><li>Phase III clinical trials </li></ul></ul><ul><li>7. Commercialization </li></ul><ul><ul><li>Formulation, dosage choices, packaging, marketing </li></ul></ul><ul><li>8. Diffusion </li></ul><ul><ul><li>Sponsor trials, conferences, detailing MDs, consumer advertising </li></ul></ul><ul><ul><li>Where are the largest expenses? </li></ul></ul>
    9. 9. Example of traditional Linear Model: new software <ul><li>Basic research </li></ul><ul><ul><li>mathematics, queuing theory </li></ul></ul><ul><li>Applied research </li></ul><ul><ul><li>Cryptography, data storage methods, sorting algorithms </li></ul></ul><ul><li>Invention </li></ul><ul><ul><li>Idea of program, design, basic features </li></ul></ul><ul><li>Development </li></ul><ul><ul><li>Programming, alpha testing </li></ul></ul><ul><li>Commercialization </li></ul><ul><ul><li>Beta testing, marketing </li></ul></ul><ul><li>Diffusion </li></ul><ul><ul><li>Advertising, other communication </li></ul></ul>
    10. 10. Caution: Traditional Linear Model does not necessarily hold! <ul><li>Can you think of exceptions? </li></ul>
    11. 11. Caution: Traditional Linear Model does not necessarily hold! <ul><li>Look up backward links to science progress from these applied technologies:: </li></ul><ul><ul><li>Pumping water from mines </li></ul></ul><ul><ul><li>Steam engines </li></ul></ul><ul><ul><li>Improved yeast for beer making </li></ul></ul><ul><ul><li>Search for a synthetic version of malarial drug quinine (careful, 2 steps here!) </li></ul></ul><ul><ul><li>Radio reception and radio noise (2 here too) </li></ul></ul><ul><ul><li>Transistor/semiconductor </li></ul></ul>
    12. 12. Caution: Traditional Linear Model does not necessarily hold! <ul><li>But for now we assume it holds </li></ul><ul><li>Where does government get involved, and why? </li></ul>
    13. 13. Why government funding of R&D? Economic arguments <ul><li>Pure public goods: </li></ul><ul><ul><li>Standards, national defense, national (global?) environment </li></ul></ul><ul><li>Externalities beyond scope of firm or consumer </li></ul><ul><ul><li>Public health, vaccinations </li></ul></ul><ul><ul><li>Agriculture (consumers gain from cheaper food, farmers too diffuse to fund research) </li></ul></ul><ul><ul><li>Local environmental externalities </li></ul></ul><ul><ul><li>Education (including mothers’ education) </li></ul></ul><ul><li>Encourage “strategic industries” (?) </li></ul>
    14. 14. For industry: Why gap between private and social return at given level of R&D? <ul><li>Knowledge spillovers </li></ul><ul><ul><li>Public goods: remember 2 characteristics? </li></ul></ul><ul><li>Market (“pecuniary”) spillovers </li></ul><ul><ul><li>Drastic innovations benefit users beyond cost </li></ul></ul><ul><li>Network spillovers </li></ul><ul><ul><li>Tech. or consumption externalities </li></ul></ul>
    15. 15. Why government funding of R&D? Economic arguments $ Social return Private return Marginal cost M. Soc Retn. M. Priv Retn. R c R s R&D spending How can government move research to the optimal level?
    16. 16. Industry spillovers: Nature of gap between private and social return <ul><li>Less leakage in larger economies </li></ul><ul><ul><li>Singapore v. China </li></ul></ul><ul><li>Differs by industry </li></ul><ul><ul><li>Car parts v. telecoms </li></ul></ul><ul><li>Differs by technology </li></ul><ul><ul><li>Basic v. applied research </li></ul></ul><ul><ul><li>Vaccines v. heart surgery </li></ul></ul><ul><li>Network spillovers </li></ul><ul><ul><li>Tech. or consumption externalities </li></ul></ul>
    17. 17. Why government funding of R&D? Economic arguments $ Social return Private return Marginal cost M. Soc Retn. M. Priv Retn. R c R s R&D spending How can government move research to the optimal level?
    18. 18. How can government move research to the optimal level? <ul><li>There are several ways: </li></ul><ul><ul><li>What are they? </li></ul></ul>
    19. 19. How can government move research to the optimal level? <ul><li>There are several ways: </li></ul><ul><ul><li>Internalize externality </li></ul></ul><ul><ul><ul><li>Merge firms </li></ul></ul></ul><ul><ul><ul><li>Patent system, other IPRs </li></ul></ul></ul><ul><ul><ul><li>Farmer co-ops for research (Hawaii pineapples, South American rice research) </li></ul></ul></ul><ul><ul><li>Subsidize research </li></ul></ul><ul><ul><ul><li>Australian market assessments for ag. research, matched by govt. </li></ul></ul></ul><ul><ul><ul><li>Tax deduction </li></ul></ul></ul><ul><ul><ul><li>Tax credit </li></ul></ul></ul><ul><ul><li>Public funding of research </li></ul></ul><ul><ul><li>Public provision of research </li></ul></ul><ul><ul><li>Can you see any problems with these solutions? </li></ul></ul>
    20. 20. Federal R&D <ul><li>In this case we should examine through the lens of political economy </li></ul><ul><li>Government is interested more in R&D that is </li></ul><ul><ul><li>directly beneficial to voters, and </li></ul></ul><ul><ul><li>attracts the imagination or attention of voters </li></ul></ul><ul><ul><li>For instance after Sputnik, the R&D was directed in aeronautics </li></ul></ul><ul><li>For the same reason as above the government doesn’t want to take projects that are risky and lengthy </li></ul><ul><ul><li>Also, there is a knowledge gap between policy makers and universities </li></ul></ul><ul><li>In addition, government is more likely to favor projects that are classic public goods </li></ul><ul><ul><li>e.g. military projects </li></ul></ul><ul><ul><li>Health research </li></ul></ul><ul><ul><li>Basic research </li></ul></ul>
    21. 21. Source: National Science Board 2006
    22. 22. Private R&D <ul><li>Private sector accounts for most of the R&D: </li></ul><ul><ul><li>spends 63% of total R&D expenditures </li></ul></ul><ul><ul><ul><li>Some of this is Federal tax credits and expenses </li></ul></ul></ul><ul><ul><li>produces 72% of total R&D </li></ul></ul>
    23. 23. University R&D <ul><li>In contrast to the private sector universities have been relying more and more on federal funds </li></ul>
    24. 24. Source: National Science Board 2006
    25. 25. Source: National Science Board 2006
    26. 26. University R&D <ul><li>Faculty are encouraged to engage in R&D and publish the results (tenure-track appointments) </li></ul><ul><li>Since 1980 (Bayh-Dole Act) the motives for for-profit R&D increased dramatically: </li></ul><ul><ul><li>The act allows universities to patent and license innovations produced with Federal funding </li></ul></ul><ul><ul><li>Even innovations that have been funded by the government </li></ul></ul>
    27. 27. University R&D <ul><li>An important effect of the act is that it led universities to pursue industry funds with the commitment that any potential innovation could be licensed exclusively by the sponsor </li></ul><ul><ul><li>Federal government keeps free option for license </li></ul></ul>
    28. 28. University R&D <ul><li>Start-up companies are the major means of technology transfer from universities to private sector </li></ul><ul><li>The university licensing offices don’t assign IPRs but they receive a royalty, or an equity share (MIT) </li></ul><ul><li>The main asset of the companies is the knowledge they have created </li></ul><ul><li>only 7% of university R&D is privately sponsored </li></ul><ul><li>National Labs (such as Lawrence Berkeley Lab) </li></ul><ul><ul><li>50% of projects have private partner </li></ul></ul><ul><ul><li>Royalties only 1%of ? </li></ul></ul>
    29. 29. Federal R&D <ul><li>federal government </li></ul><ul><ul><li>accounts for 30% of total funds that go to R&D </li></ul></ul><ul><ul><li>produces only 8% of R&D. </li></ul></ul><ul><ul><li>So it funds almost four times more R&D than it actually does </li></ul></ul><ul><li>Of course, private sector accounts for most of the R&D: </li></ul><ul><ul><li>It spends 63% of total R&D expenditures and engages in 72% of total R&D </li></ul></ul><ul><li>In contrast with the private sector universities have been relying more and more on federal funds </li></ul>
    30. 30. Problem with collaborative R&D <ul><li>Privately-funded research may bias the research process in favor of the sponsor </li></ul><ul><ul><li>For instance tobacco industry sponsors pressed scientists not to publish results that were against the tobacco industry </li></ul></ul><ul><ul><li>Canadian brewing industry capture government barley research by sharing 11% of the cost </li></ul></ul><ul><ul><ul><li>Diverted focus from feeding animals to beer production </li></ul></ul></ul><ul><ul><li>RA Fisher, statistics pioneer, claimed there was no proven link of smoking to cancer </li></ul></ul><ul><ul><li>Evidence on pharma-sponsored research </li></ul></ul>
    31. 31. Happy Thanksgiving!
    32. 33. Benefits of the “Industry-University Complex” <ul><li>So far we have focused on the dangers of the university-industry cooperation </li></ul><ul><li>However, it takes place because there are benefits for agents in both sides </li></ul><ul><li>Faculty: </li></ul><ul><ul><li>Funds for research is the primary benefit obviously which can be used for future agenda, support more students etc. </li></ul></ul><ul><ul><li>Also they are exposed in new areas of research and increase their human capital (they are in the cutting edge) </li></ul></ul><ul><li>Industry: </li></ul><ul><ul><li>They obtain access to new research </li></ul></ul><ul><ul><li>They have the opportunity to patent new research </li></ul></ul><ul><ul><li>They can maintain good relationships with universities </li></ul></ul><ul><ul><li>They can acquire knowledge to solve technical problems </li></ul></ul>
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