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Lecture 22

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