Transcript Lecture ()

Entrepreneurship and Public Policy
Lecture 10: Fostering Innovation
A Framework For Thinking About the Role of
Innovation in Entrepreneurship
Public R&D
Public R&D
investment
investment
Existing Firms
Patents
Basic Science
Research
Applied
Research
Commercialization
Anti-trust
Private R&D
Private R&D
investment
investment
New Firms
EPP_Lecture 6-2 Spring 2009
Lecture Overview
• Public policy to foster basic and applied science
research
• Public policy to encourage the commercialization of
basic and applied research
EPP_Lecture 6-3 Spring 2009
Government Involvement in Basic Research is Often
Justified on the Grounds of “Market Failure”
• Basic argument is that private firms under-invest
in basic research
• Many reasons for this are put forth
– Social returns to private R&D are often higher
than the private returns
– Economies of scale in R&D
– Focus on short-term profit objectives
EPP_Lecture 6-4 Spring 2009
Federal Government has Several Policy
Instruments To Promote R&D
• Federal R&D grants to universities and private
sectors
– Often through programs offered by the National
Science Foundation, the National Institute of
Health and the Department of Defense
• A variety of tax and subsidy measures
– Encouraging private firms to undertake R&D
projects at their own expense
• Government procurement and contracts
– Directing private firm to undertake R&D they
would not otherwise take
– Small business set-asides exist
EPP_Lecture 6-5 Spring 2009
Federal Government has Several Policy
Instruments To Promote R&D
• Federal R&D grants to universities and private
sectors
– Often through programs offered by the National
Science Foundation, the National Institute of
Health and the Department of Defense
• A variety of tax and subsidy measures
– Encouraging private firms to undertake R&D
projects at their own expense
• Government procurement and contracts
– Directing private firm to undertake R&D they
would not otherwise take
– Small business set-asides exist
EPP_Lecture 6-6 Spring 2009
Tax Incentives vs. Direct Subsidies and Contracts
• Tax incentives reduce the marginal cost of R&D
– Take government out of the decision process
and let the market to choose projects
– Do not have a “crowding out” effect
– Do affect the composition of R&D activities
• Subsidy incentives raise the marginal rate of return
of R&D
– Allow public resources to be targeted toward
preferred areas and projects
– May lead to “crowding out” effect
EPP_Lecture 6-7 Spring 2009
Where Is U.S. R&D Occurring? (2004)
11%
16%
Industry
10%
8%
Federal
Government
Colleges &
Universities
All FFRDCs
Other Non-profis
55%
National R&D expenditures in 2004 were approximately $313 billion
Source: National Science Foundation, 2006
EPP_Lecture 6-8 Spring 2009
The Effect of Federal R&D Spending on Private
R&D Spending is Debated
• It is theoretically ambiguous whether public and
private investment are substitutes or complements
– Public R&D may crowd out private R&D
– Public R&D may also support private R&D
directly or indirectly through knowledge
spillovers
• Many empirical studies show a positive correlation
between public and private R&D investment at the
firm level
EPP_Lecture 6-9 Spring 2009
Existing Studies Are Subject to Biases
• Hall et at. (1999) warn that existing research
handicapped by data and research design problems
– Most research are ex-post statistical studies
that are subject to selection biases
– It cannot determine whether public investment
cause the private firms to do more R&D or
whether firms that do more R&D receive more
investment
EPP_Lecture 6-10 Spring 2009
Programs to Promote Innovative Small
Businesses in the Department of Defense
• Small Business Innovation Research Program
– In DoD, SBIR budget was $1.7 billion in FY2007
– Phase I Awards (merit/feasibility): up to
$100,000
– Phase II Contracts (prototyping/demonstraion):
up to $750,000
– Phase III: product development, funded outside
the SBIR program
• Mentor-protegee program
• Information on program effectiveness is limited
EPP_Lecture 6-11 Spring 2009
Programs to Promote Innovative Small
Businesses in the Department of Defense
• Small Business Innovation Research Program
– In DoD, SBIR budget was $1.7 billion in FY2007
– Phase I Awards (merit/feasibility): up to
$100,000
– Phase II Contracts (prototyping/demonstraion):
up to $750,000
– Phase III: product development, funded outside
the SBIR program
• Mentor-protegee program
• Information on program effectiveness is limited
EPP_Lecture 6-12 Spring 2009
Lecture Overview
• Public policy to foster basic and applied science
research
Public policy to encourage the commercialization of
basic and applied research
EPP_Lecture 6-13 Spring 2009
A Framework For Thinking About the Role of
Innovation in Entrepreneurship
Public R&D
Public R&D
investment
investment
Existing Firms
Patents
Basic Science
Research
Applied
Research
Commercialization
Anti-trust
Private R&D
Private R&D
investment
investment
New Firms
EPP_Lecture 6-14 Spring 2009
Public Policy to Facilitate the Commercialization of
Applied Research
• Patent law and policy
– Providing economic incentives to innovation
• Policy designed to encourage the
commercialization of university-based research
– Realizing economic potential of universitybased research
• Anti-trust law
– Preventing monopoly while acknowledging the
proper role of cooperation
EPP_Lecture 6-15 Spring 2009
Goal of the Patent System is to Encourage Innovation
• Patent system is designed to provide economic incentives for
innovation that increases societal welfare
– Innovators are granted temporary monopoly to reap the
economic benefits of their innovation
• It is well known that monopoly can reduce social welfare
– Monopoly distorts price thus reduces consumer welfare
– Monopoly discourages further innovation
• Patent system therefore aims to strike a reasonable balance
between incentives for innovation and consumer welfare
EPP_Lecture 6-16 Spring 2009
Policy Levers of a Patent System
• Ease of patenting
– Criteria for determining what is patentable
• Novel
• Non-Obvious
– Required disclosures, procedures and
examination
– Turnaround time – PTO employee incentives
• Patent enforcement
– Ruling standards adopted by the patent
granting agency
– Dispute resolution mechanisms
– Court system
EPP_Lecture 6-17 Spring 2009
Policy Levers of a Patent System
• Ease of patenting
– Criteria for determining what is patentable
• Novel
• Non-Obvious
– Required disclosures, procedures and examination
– Turnaround time – PTO employee incentives
• Patent enforcement
– Ruling standards adopted by the patent granting agency
– Dispute resolution mechanisms
– Court system
EPP_Lecture 6-18 Spring 2009
Some Point to Critical Flaws in the Current U.S.
Patent System
• System is too generous in granting patents (Jaffe & Lerner,
the National Research Council and the FTC , 2006)
– The U.S grants a significantly larger fraction of the
applications it receives than Europe and Japan
– Concern about patenting of research tools and life
forms
• Specialized federal appeals court for patent cases (created in
1982) is believed to favor patent holders
– Patentee win rate has increased after 1982
EPP_Lecture 6-19 Spring 2009
Some Argue that These Flaws Lead to Inefficient
Outcomes
• The “accidental” combination of greater legal value
of patents and less rigorous patent examination
has damaged the system
– Encouraging frivolous applications
– Encouraging excessive patent litigation
• Patent system is being used in an opportunistic
(unproductive) way, thereby increasing the cost and
risk of innovation
EPP_Lecture 6-20 Spring 2009
Policy Proposals to Reform the Patent System
• Reducing the likelihood that undeserving applications will be
approved
– Improve information sharing between parties and the PTO so
that undeserving applications are less likely to be approved
– Implementing multiple levels of review of patent applications
• Providing better protection to worthy innovation
– Improve the patent court system to protect patent holders with
legitimate patents and allow parties threatened by invalid
patents to have a reasonable opportunity to make their case
• Learning from the Japanese experience of encouraging crosslicensing
•
Source: Jaffe and Lerner (2006)
EPP_Lecture 6-21 Spring 2009
Reducing the Likelihood that Undeserving
Applications Will Be Approved
• PTO could create a system of escalating
examinations
– Most patents would receive only the basic
review
– For those patents that matter, interested
parties would have both the incentive and the
opportunity to bring information forward
• Introducing third party, pre-grant opposition
• Giving stronger teeth to any post-grant
administrative review
• Need to limit firms’ ability to use this process
strategically
EPP_Lecture 6-22 Spring 2009
Reducing the Likelihood that Undeserving
Applications Will Be Approved
• PTO could create a system of escalating
examinations
– Most patents would receive only the basic
review
– For those patents that matter, interested
parties would have both the incentive and the
opportunity to bring information forward
• Introducing third party, pre-grant opposition
• Giving stronger teeth to any post-grant
administrative review
• Need to limit firms’ ability to use this process
strategically
EPP_Lecture 6-23 Spring 2009
Providing Better Protection to Worthy Innovation
• Improve patent quality
– Conducting more rigorous examination
• Reduce uncertainty
– Granting patents to real innovative inventions
and discoveries
• Enhancing the ability of judges or special masters
(rather than lay person juries) to decide technical
issues in patent disputes
• Allow all evidence in patent suit disputes
EPP_Lecture 6-24 Spring 2009
Encourage Cross-Licensing
• Increases cooperation among competitors which
may improve innovations
– Collusion and anti-trust implications as well
• Potential to reduce excessive patent infringement
litigation
EPP_Lecture 6-25 Spring 2009
Public Policy to Facilitate the Commercialization of
Applied Research
• Patent law and policy
– Providing economic incentives to innovation
• Policy designed to encourage the
commercialization of university-based research
– Realizing economic potential of universitybased research
• Anti-trust law
– Preventing monopoly while acknowledging the
proper role of cooperation
EPP_Lecture 6-26 Spring 2009
The Commercialization of University-based Research:
Policy Background
•
Policy seeks to balance two objectives
– Ensuring that large firms have broad access to
university-based research
–
Encouraging entrepreneurs start new businesses out of
university-based research
•
The 1980 Bayh-Dole Act of 1980 sought to promote
commercialization of Federal-funded R&D
– Allowed universities to claim legal rights to innovations
by their faculty using federal funding
– Focus on patents, not copyrights
•
Many universities have focused on creating a centralized
Technology Trade Office (TTO) as a gateway to facilitate the
flow of innovation
EPP_Lecture 6-27 Spring 2009
Some Observers Argue that TTOs are Inefficient
• Many believe TTOs have become gatekeepers
rather than gateways
• Universities structure their TTO operations only to
maximize revenues in the short term
• TTO officers focus their limited time and resources
on the technologies that appear to promise the
biggest and fastest payback
EPP_Lecture 6-28 Spring 2009
Policy Proposals to Revise the Role of University
Technology Trade Offices (TTO)
• Change the objective of technology transfers from
•
•
•
•
maximizing profits to maximizing volume
Standardize licensing agreements by including
royalty applied to sales
Experiment with giving faculty the choice of going
through TTOs or acting on their own
Combine resources to share a single technology
trade office among universities in the same region
Abandon TTOs and rely on innovators’ give-back
for financial support
EPP_Lecture 6-29 Spring 2009
The Role of Federal Government in Encouraging the
Commercialization of University-based Research
• The federal government could play a constructive
role by encouraging the leadership of universities
to pay more attention to commercialization of
innovations
– Making commercialization performance one
criterion for granting further federal funding
– Educating universities regarding the
importance of commercialization
EPP_Lecture 6-30 Spring 2009
Public Policy to Facilitate the Commercialization of
Applied Research
• Policy designed to encourage the
commercialization of university-based research
– Realizing economic potential of universitybased research
• Patent law and policy
– Providing economic incentives to innovation
• Anti-trust law
– Preventing monopoly while acknowledging the
proper role of cooperation
EPP_Lecture 6-31 Spring 2009
Anti-trust Law and Innovation
• The goal of anti-trust law is to prevent monopolies
and improve economic welfare
• There are benefits to cooperation which must be
weighed in
– Cross-licensing
– Commercialization
EPP_Lecture 6-32 Spring 2009
Discussion Questions
• In this lecture, we discussed some of the criticisms
with the current patent system. Do you think these
issues affect new businesses differently from
established businesses?
– Ease of getting a patent => race to file
– Ease of defending a patent of questionable
merit
• What are the potential implications for VC funding?
For IPO investment?
• How would you study this issue?
EPP_Lecture 6-33 Spring 2009