When Successful Innovation and IP Go in a Different Direction from Increased Domestic Employment

Ever since the onset of the Great Recession, the primary concern of most governments has been to accelerate domestic growth in a way that will increase employment. For example, there is no more anticipated economic data point than the US unemployment rate, published on the first Friday of each month. For the general public, the success or failure of many governments is the extent to which they can generate jobs in a sustained and substantial way. The primacy of economic growth, and its by-product —increased employment — threaten to place public discussion about IP in an awkward position. The reason is that there may no clear connection between enhanced innovation and IP activity and improved employment data. Instead, the benefits of cutting-edge IP may well be redounding primarily to the benefit of the few who are able to capitalize on the commercial success of their innovations, with little or no benefit to the overall employment situation. To the extent that this is true, arguments in favour of public support of IP rest on uncertain policy grounds.

Take a country like Israel, which is seen as an example of the use of effective public moneys for innovative research and development. A primary vehicle for this funding is the so-called Office of the Chief Scientist (known as the OCS), which extends financial support for innovative activity by recipient companies, here. The problem is that OCS funding requires that the intangible “Knowledge” for which read IP, very broadly defined) that is generated from such funding may not be transferred out of the country until the grants have been repaid to the OCS from commercialization of the Knowledge, unless a waiver can be obtained. Underlying this prohibition is the view that OCS funding is, at the end of the day, first and foremost intended to enhance local employment, whereby the commercial success of the company, except to the extent that it contributes to local employment, is a secondary consideration. How strongly this underlying policy is viewed can be seen from the fact that, under the strict letter of the Encouragement of Industrial Research and Development Law, the transfer of Knowledge in an unauthorized fashion might theoretically attract criminal penalties (although this blogger is not aware of any instance in which the criminal sanction has actually been brought to bear).

Pushing against this clear nexus between the expenditure of public moneys, the creation of valuable IP/Knowledge, and increased domestic employment, as exemplified by OCS funding, is the exit ethos of the Israel start-up community. While it has become a bit hackneyed, the description of the country as “Start-Up Nation”, here, does capture the esteem in which is held a successful hi-tech exit (meaning that the company has been sold to a foreign purchaser or, less likely these days, has successfully floated its shares on a reputable stock exchange), replete with underlying IP and related innovative technology. However, from the point of view of government employment policy, a successful exit typically has, at best, only a modest effect on overall domestic employment. Even assuming that the company maintains an R&D facility in the country after the exit, the primary benefit of a successful exit are the millions, sometimes hundreds of millions of dollars, that go to the investors and founders. Thus, even if the likes of a Google maintains a local R&D facility as a result of the exit, the employment benefits redound to a select few, with the overall national employment situation being largely unaffected.

Israel is brought as an example because its circumstances so vividly underscore the proposition that the development of IP tends to go to the benefit of capital (read investors and founders) rather than labour. But it is hardly alone. Singapore is engaged in an impressive and aggressive push, supported by public funding, to strengthen the position of that island nation as a Global IP hub in Asia, here. As this blogger understands the initiative, underlying it is a concern for the overall employment position in the country. The experience in Israel should be a cautionary tale for Singapore.

Don’t get this blogger wrong: he is all in favour of IP, innovation and successful commercial exits based on them. To the extent that government funds can assist these developments, it is to be encouraged. However, there is palpable and increasing risk here. In an age where public budgets are increasingly scrutinized, a budget line for the support of innovation and R&D, where the benefit fails to redound to the public in the form of increased employment, carries with it a double risk. First, the decoupling of successful innovation and R&D from improved domestic employment threatens to decrease the amount of continued public funding of such activities. Even more ominously, this decoupling may threaten public support for robust IP protection, thereby throwing out the IP baby with the public funding bathwater in a way that this blogger would prefer not to contemplate.

President Obama’s Legacy: An “Innovation Deficit” or Greater Wealth (and wider distribution)?

When we look back at Obama’s presidency, my guess is that he will be known for several things.  He’ll be remembered for health care reform and as the President of “The Great Recession,” and maybe even the end of Osama Bin Laden (hopefully, also immigration reform).  I doubt that everyone will remember that he inherited the financial mess that was “The Great Recession.”  I also doubt he’ll be remembered for creating manufacturing hubs, the American Invents Act (except amongst patent lawyers), fighting “patent trolls,” and starting an initiative to research the human brain.  But, he could be remembered for creating the “Innovation Deficit.”  What is the “Innovation Deficit?”  Basically, it is low federal spending on education and specifically on research and development (R&D)  in light of increased spending on R&D by global competitors.

The U.S. budget for FY 2015 is being prepared and universities are worried (as we all should be).  Last week, 165 university presidents in the United States sent an open letter to President Obama and Congress urging continued strong funding for education, here.  The letter is part of an effort led by the Association of American Universities and the Association of Public and Land-Grant Universities, see www.innovationdeficit.org.  The website includes a fact sheet outlining the “Innovation Deficit.”  It states:

·         Over the last ten years, U.S. R&D expenditures as a share of economic output have remained nearly constant in the U.S., but have increased by nearly 50% in South Korea and nearly 90% in China. (Source: NSF S&E Indicators 2012, Figure O-3)

·         From 1996 to 2007, R&D expenditures in the U.S. grew by an average of 5.8% annually.  During the same time period, China’s average annual growth was 21.9%.  During the first year of the economic slowdown (2008-09), U.S. expenditures decreased slightly while China’s increased by 27%.  (Source: NSF Indicators Figure O-4 and Overview)

·         Between 2000 and 2008, the number of engineering doctorates awarded in China more than tripled to 15,000.  This compared to a total of 8,100 in the United States, of which only about 3,200 went to U.S. citizens and permanent residents.  (Source: NSF Indicators Figure O-10)

·         According to the OECD, government R&D spending between 2000 and 2009 increased by 250% in Korea and 330% in China; U.S. government R&D spending increased by about 45% during the same period.

·         From 1987 to 2008, federal R&D investment grew at just 0.3 percent per year in inflation-adjusted dollars—much lower than its 4.9-percent average annual growth rate from 1953 to 1987—and ten times lower than the rate of GDP growth over that period.  (Source: http://www2.itif.org/2012-leadership-in-decline.pdf)

·         The United States spent up to 17 percent of discretionary spending on R&D during the 1960’s, in part due to the space program, which resulted in a great deal of spinoff innovation; in recent years, outlays have fallen to around 9 percent of the federal discretionary budget. (Source: http://innovationtaskforce.org/docs/Benchmarks%20-%202012.pdf)

·         In 2008, China awarded 1 million first university degrees in natural sciences and engineering, up from 280,000 in 2000. That same year, the total number of first university degrees in natural sciences and engineering awarded in South Korea, Taiwan, and Japan (330,000) exceeded the 248,000 earned by U.S. students, despite the considerably larger U.S. population. (Source: NSF Indicators p. O-7)

·         The proportion of U.S. Patent and Trademark Office patent grants given to U.S. entities declined from 55% in 1995 to less than half in 2010. (Source: NSF S&E Indicators 2012, Appendix Table 6-45)

·         The percentage of U.S. gross domestic expenditures on R&D funded by the government declined from  47.1% in 1981 to 33.4% in 2011. The U.S. trails nine OECD nations in this percentage. (Source: OECD)

These statistics paint a disturbing picture—especially if this trend continues.  And, if you examine the preview document prepared by the Association of University TechnologyManagers (AUTM) titled, “American Universities: Unsung Heroes of the Economic Recovery” (August 5, 2013) that may provide a clue to the solution to a slow growing economy, you may become even more concerned.  The AUTM document provides a glimpse at the upcoming Annual Licensing Survey that will be released in full in December of 2013.  The preview document states that:

Institutions responding to the survey reported $36.8 billion in net product sales from licensed technologies in fiscal year 2012. In addition, startup companies formed by 70 institutions employed 15,741 full-time employees. This was the second year in which AUTM asked questions specifically targeted at ascertaining the economic impact of academic technology transfer. 

"When people think about job creation, they don't typically think about universities, but the data show that universities substantially contribute to the creation of new jobs in this country," adds Flanigan.  

Highlights of the AUTM U.S. Licensing Activity Survey:  FY2012 include: 

22,150 total U.S. patent applications filed (+11.3%)[;] 14,224 new patent applications filed (+7.2%)[;] 5,145 issued U.S. patents (+9.5%)[;] 5,130 licenses executed (+4.7%)[;] 1,242 options executed (+7%)[;] 483 executed licenses containing equity (+16.1%)[;] Total license income: $2.6 billion (+6.8%)[;] 705 startup companies formed (+5.1%)[; and] 4,002 startups still operating as of the end of FY2012 (+1.9%).

Back in 2001 when President George W. Bush first took office, I remember reading an article about how his administration planned to cut federal spending on R&D.  I remember thinking someone needs to get educated about what is happening with federal R&D funding because they are going to make a big mistake (for many reasons).  Within a few weeks, the Bush Administration announced that they were not going to cut spending in that area.  I hope we find the Obama Administration pushing hard for more spending on R&D.  We need to "feed that Pig." 

Let’s assume that we do the right thing and "feed the Pig." Could the Obama Administration do more than just provide federal funding for R&D?  One idea that has been floated has been the creation of a federal system of universities, “India’s Bold Solution to the US College Crisis: Federal Universities.”  This is an intriguing idea that may inject some needed “umpf” into the U.S. university system for R&D.  Perhaps the federal universities could be built around specific technologies—places where innovation could quickly take place in a system that quite rationally does not change quickly.  As I blogged about before, perhaps something like the Cornell project in NYC, but without a lot of baggage.  Greater wealth—and maybe some help for wider distribution of it.  Something to think about.