University Times

Innovation is crucial to the nation’s economic growth and has become a major consideration in developing research and development (R&D) policies in the United States, said Patrick D. Gallagher, director of the National Institute of Science and Technology (NIST).

Gallagher, who earned his PhD in physics at Pitt in 1991, delivered the annual Provost Lecture Oct. 7 as part of Science 2010.

Economic growth is tied directly to productivity and almost all the nation’s growth in productivity is tied to new technology. “It drives our output growth and it drives high-quality jobs,” said Gallagher in his lecture, “Strengthening the Connections: Research, Innovation and Economic Growth.”

A 2007 report by the National Academies, “Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future,” has driven much of the recent legislation surrounding such economic development.

“This report basically identified that our economy is increasingly dependent on the ability to develop new products and services and our ability to discover new technology,” he said. “The report also pointed out that, as a society that has led technology-driven development for many years, the indicators are not good. Where we appear to be going is not positive.”

The report was “a call to action to address systematic issues in U.S. education, particularly in science, technology, engineering and math; in R&D investments by both the federal government and by industry, and in looking at a whole host of issues that seek to improve our position so we don’t fall behind,” Gallagher said.

An examination of total R&D as a function of the nation’s gross domestic product shows a shift occurring, Gallagher said. Since the late 1960s, the federal share of R&D funding has been steadily declining, while industry’s share has been rising.

“The composite basically leaves you with some oscillation, but a fairly constant level of R&D intensity as a country over a fairly long period of time,” he said. However, with 2.77 percent of the GDP linked to R&D, the U.S. isn’t the most R&D intensive nation in the world. Israel tops the list with 4.86 percent.

And R&D intensity trends show the U.S. with a relatively flat rate — up 10.4 percent between 1995 and 2008. During that same period China’s R&D intensity rose 170 percent.

“We’re not bad, but we’re not getting much better,” Gallagher said. “Other countries are aggressively [pursuing R&D], basically seeking the same policy solution we are. So the competitive advantage we seek to hold is not unique. It’s one that’s achievable for other countries.”

“I would say the innovation discussion has been amplified by the recent recession,” he said, noting that historic data show that post-recession job recovery is becoming progressively longer. Economists are focused on how long the job recovery in the current recession could take, “and it’s not good.”

Among the questions is whether there are structural, rather than strictly business cycle issues, behind the trend, Gallagher said. “We are seeing structural changes in the way our economy performs that impact our ability to create jobs. This type of discussion is impacting all of the discussions on innovation,” Gallagher said.

He cited National Science Foundation research that demonstrated the link between R&D activity and growth. Companies with high R&D investment show a “stunning difference in both new products and service generation” compared to those with low R&D activity, he said.

Understanding the importance of innovation isn’t the problem, Gallagher said. “The problem, I think, is understanding how that takes place.

“At one level, the innovation discussion is a bit of a correlation argument: What we’re saying is that very good economic outcomes, whether it’s economic growth or good jobs, are tied to the ability to innovate products. Therefore, for example, our research and development enterprise is critically important to us. What happens in the middle is something we don’t understand very well.”

Public funding

“We agree as a country to make deep investments in R&D because of the public good in the growth of economic activity, even though this activity is in the private sector,” he said.

Government programs tend to be based on a linear model of innovation that starts with basic research then moves into applied research and development, then on to production, sales and marketing.

“The gist of it from the policy world is that the federal government will support basic and a lot of applied research, then it expects industry to pick up the activity in development and production,” he said. The exception comes when overriding public needs warrant deeper government involvement, such as national defense, energy technology or space exploration.

“This leads to very poor optimization of our R&D investments if you look at it from a purely economic perspective.”

The “reinvestment” portion of the American Recovery and Reinvestment federal stimulus act, from which most ARRA science funding originates, adds several longer-term components aimed at investment in the country’s growth.

In addition to such traditional basic building blocks as workforce development, education reform, fundamental research and infrastructure, ARRA demonstrated “a real maturity in thinking” by looking further downstream “to the markets and really looking at promoting American exports; looking at the capital markets and how capitalization is flowing in the system; looking at entrepreneurship and encouraging risk in key sections of this process, and looking at public-private sector innovation,” Gallagher said.

Some high-tech areas in which the government has an overriding public policy interest today include energy (including the modernization of the electronic distribution system) and health care information technology to improve efficiency, cost-efficiency and quality of health care.

“What you see is a recognition that technology innovation is going to play a key role in these overriding national priorities and these become thrust areas,” he said.

The role of universities

The role of universities in innovation consists not only of preparing the workforce. “It’s the primary mission of universities to train and educate the next generation of leaders, technologists and scientists,” Gallagher said, “But they also play a key role in the performance of research and technology development itself — certainly in basic research — but they also play a role in commercialization.”

That, in turn, prompts deep questions about the role of the university in tech development, he said. “A lot of it, I think, stems from the indirect role of the universities as leaders in our communities. Universities feel great pressure to participate in the local economy. Very often they are the nucleus of technology-based economic development.”

The element of risk

The path from discovery-based science to commercialization is rocky. “Science is a high risk —that’s why the federal government invests in this,” Gallagher said.

Typically the so-called “valley of death” in the innovation process is considered to be at the venture capital stage. But Gallagher noted that comes from the perspective of business risk: “They’re looking at a potential technology and asking: How do we fund this? Does it have a market? Does it have a business plan? These are all business considerations.”

There is a technology valley of death as well, Gallagher said. “The basic output of R&D is science, the activity of discovery. It is not a potential commercial technology. And so there’s this gap. This double risk is there’s a technology risk: There’s this great scientific discovery and potential technology, and there’s also a business risk: Can you take the technology and turn it into a successful business enterprise?”

So how can potential commercialization of science research outcomes be encouraged?

Some impetus is through fostering university-based entrepreneurship — a model that focuses on getting faculty members interested in starting a business and licensing a technology.

Another is through open innovation, a model in which business draws potential ideas from outside sources.

A mixture of the two, Gallagher said, will continue to be important.

The role of manufacturing

Gallagher said manufacturing plays a unique role in the technological innovation process, in part because “that’s where a lot of capacity is.”

Seventy percent of the private sector R&D engine is in the manufacturing industry base. “It plays an enormous role in extracting the economic benefit out of this innovation process,” Gallagher said, adding, “If you just come up with the idea of off-shoring manufacturing too early, a lot of the value added is missed. … A lot of the value added is jobs. This is where the high-paying jobs are.”

Another aspect is the balance of trade. “From my perspective, manufacturing deserves special attention because it plays such a critical role in this process,” Gallagher said. He pointed out that until 2001 the U.S. had a trade surplus in high-tech manufacturing. Today, the negative balance is growing and China has become the largest exporter of high-tech products.

“This should be of great concern to all of us, because it has not just an impact on manufacturing jobs and trade, but I would argue it has a very strong impact on the process of innovation, when you have 70 percent of the R&D capacity sitting in manufacturing.”

Industry interest in R&D is declining, Gallagher said, citing a recent survey that asked companies whether they planned to invest in short-term business opportunities or make a longer-term investment into directed basic research. With the exception of 2008, each year since 1993 more companies said they planned to decrease their investment in directed basic research and increase their investment in short-term business opportunities.

“So the time horizon in the business community is getting shorter and shorter,” he said, reminding listeners that industry’s portion of the research investment pie is growing while government investment is declining. “And yet in that industry portfolio it’s become shorter and shorter time that’s the focus.”

Generic technologies

Another model for development in a technology-based economy combines entrepreneurial activity with policies aimed at lowering the risk of introducing technology to the market.

Technology often is viewed in terms of the intellectual property portion, but “it’s also equally important to have technology infrastructure, Gallagher said.

“Manufacturing process technology is vital to the productivity increases that are essential for this system to work and very often these proprietary technologies are built on underlying generic technology platforms.”

Among the ideas being explored at NIST for overcoming the technology valley of death involves development of a commons based on some generic technology.

While scientists can be encouraged to engage in entrepreneurial activity and industry can be encouraged through open innovation models, “The other thing we can do is define a goal that is not a proprietary technology where somebody’s going to win or lose,” he said. “We can define a goal that’s a generic technology, one that everyone can share. Then what can happen there is people can take that generic technology and commercialize offshoots of it.”

A classic example is Sematech, a consortium funded 50-50 by government and semiconductor manufacturers. The joint effort enabled companies to share the risk of developing new technology to enable their industry to move forward.

Gallagher said NIST initiated a similar pilot program in nanoelectronics research in 2007. Its investment of $2.75 million a year initially attracted an additional $20 million and led to four university-based research enterprises that are looking into promising nanotechnologies, he said.

Over two years, the consortium has pulled together 30 universities, more than 100 graduate students and yielded 13 patent applications and numerous publications, Gallagher said.

“The existence of this effort seeded the formation of over $110 million in funding that was ready to take the generic technology and commercialize it,” he said.

Whether this model can be generalized remains a question.

The answer will depend on whether the technology challenge is defined properly, he said. “You’ve got to create the commons. It’s got to be a big enough challenge that the companies see their future success in addressing it and yet it has to be a pre-competitive outcome, a generic technology, so that they’re willing to work together. I’m not sure it can be done in every case.”

The challenge

Gallagher noted that a recently released followup to the National Academies’ 2007 report reveals additional findings he characterized as “all pretty depressing.”

Among them, he said, the report finds that in 2009 the majority of U.S. patents went to non-U.S. companies for the first time; that 16 foreign energy companies now have more reserves than the largest U.S. energy companies, and that U.S. computer technology manufacturing is smaller today than in 1975.

In addition, surveys repeatedly indicate large companies’ preference for investing in China and India. “If you ask large U.S.-based multi-national corporations whether they’re increasing their R&D investments, most of them said yes. … But if you look at where they are investing in R&D, the greater growth in their investments in China and India is three times larger than their investment in the United States.”

The authors’ conclusion is that the nation’s outlook has worsened, Gallagher said, adding that the only promising solution is through innovation.

The challenge is bigger and more complicated than the scope of any one government agency. “It’s going to take a concerted effort over time. The only way to do that is to develop a political and policy consensus over what the right things to do are,” he said.

Gallagher said he views the updated report as a call to action. “I think that there is no more important work that we have in front of us. I think that the future of the country is truly at stake.”

—Kimberly K. Barlow