Monday, November 08, 2010

Government's Role in Innovation

I saw an article recently, highlighted by Richard Florida, that suggested that the incoming Republican-led House of Representatives will reduce spending on scientific research.  The natural conclusion from that assertion was that therefore, there would be less funding for "innovation".  It's interesting to consider how funding for basic R&D within government labs impacts innovation, and what role we want the Federal government to play in innovation.  Further, it's interesting to note that articles are being written which make assumptions about how funding will be allocated in the future, when we don't yet know the priorities of the incoming legislators.

First, let's put a few facts on the table.  The Federal government has invested a tremendous amount of money in basic research - much of that in several key areas:  health, space and defense.  In the 50s and 60s, at the height of the race for space, and in the 80s during the height of the cold war, the government was responsible for driving a significant amount of new research, which led to new products and services.  As a person who worked in the semiconductor industry, however, I can tell you that much changed in the late 80s and early 90s.  Once upon a time the government would do the research and ask private industry to fulfill the vision with new products.  Today, in many cases, private industry has far more capability than many in the research labs can conceive.  The government in many cases is just waking up to "packaged" software rather than commercially "off the shelf" software, or COTS, as an example.  In many areas the lead on innovation has shifted from the government to the private sector.

This shift coincided with a shift in budgetary priorities at the national level, beginning with a "peace dividend" in the Clinton administration.  We "downsized" our military and our military investment, and with growing demands from Medicare, Medicaid and Social Security, the investment in primary research as a percentage of the budget has fallen.  NASA has fallen on hard times and struggles to define its mission, leaving the US as a hitchhiker at best if we return to space.  What's more important now is that the government, once a funder of research and innovation, becomes the organization that defines the needs and establishes the environment for innovation, so that the private sector can respond.

The risk is that the opposite happens - that we follow Japan in a planned economy, with a federal bureaucracy picking industrial policy and technological winners and losers.  In the 80s Japan's famous MITI agency selected technologies and standards and directed innovation and research in key areas.  This allowed countries like South Korea to steal a march on Japan.  In this country, we run the same risk, with examples like the FCC picking and choosing frequencies and technologies.  The government - at all levels - has a role to play in innovation, but it's not the role they believe it is.

The role the government should play is to identify the big problems that must be solved, or the big opportunities that must be addressed, and create a playing field where anyone can respond.  Today, to work with a federal agency requires the services of contracting agencies which understand the forms, bureaucracy and minutiae that the machinery demands.  This is off-putting at best for innovators and blocks many individuals and firms from working on federal issues.  Further, the federal government could encourage innovation by changing the treatment on the valuation of intellectual property and intangible capital.  Today we have the ability to write off or depreciate physical assets, but lack the same clarity and rules about the value and timeliness of intellectual property.

While the government, whether that is the federal or state government, will continue to be a source of research dollars in many different fields, but the funds available will by definition dwindle as our governments tighten their belts and confront ever growing demands for services.  The governments will have to make a shift from being a prime funder of innovation to communicating the important problems to solve, and creating the environment for innovators and entrepreneurs to succeed.  This may mean freeing up the entrepreneur and changing the incentives and tax policies on smaller and larger firms, and creating different accounting methods to incentivize innovation.  But for us to sit around and hope that more money will be available to drive more primary research from the federal labs is risky at best, regardless of the administration.
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posted by Jeffrey Phillips at 5:48 AM


Anonymous Rich Antcliff said...

So one problem when talking about "the government" is that it is a large umbrella and generalized statements are always "wrong" in some segment. So let me say that I agree with the sentiments expressed in this article "in general" as long as we also embrace the exceptions that prove the rule.
NASA's predecessor NACA began initially to address the very issues addressed in this post. ie they worked on government policy issues that were standing in the way of a robust aeronautics industry. Their job was to help such an industry flourish, and they did their job well.
NASA's job was to do things that were to big or too risky for businesses to invest in - ie going to the moon.
I think both of these roles are still necessary today. The first role is highlighted in this post, but the second is left out. It may not be enough to just highlight the grand challenges ahead, we may need government to step up and help us get there (ala, cancer research, global environmental change, energy, etc.). Certainly industry must play a key part in this progress to be successful.

8:49 AM  
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