3. incentives for innovation

3. Incentives for innovation3.2 Public and private mechanismsSome slides adopted from Suzanne Scotchmer

Contents May Be Used Pursuant to Attribution‐Noncommercial‐No Derivative Works 1.0Generich // i /li /b d /1 0/http://creativecommons.org/licenses/by‐nd‐nc/1.0/

University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser

The Economics of InnovationSpring semester 2010

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3. Incentives for innovation3.2 Public and private mechanisms

Who Funds R&D? Is it the private sector that matters?

Which countries spend more on R&D?

How much money does the government give the private sector for R&D?Universities?

How much money does the private sector give to universities?

How much money goes for defense‐related R&D?

What is the funding for?What is the funding for?

(cc) Suzanne Scotchmer



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3. Incentives for innovation3.2 Public and private mechanismsBig difference between public and private R&D:

Private R&D appliedPublic R&D basicPublic R&D basic

Private R&Dmaximizes profitsPublic R&Dmaximizes welfare

(cc) Ulrich Kaiser



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Oddity of publicly financed R&D:Oddity of publicly financed R&D:Bayh‐Doyle act (1980) – patents are assigned to public researchinstitutions in the US

Europe followed suit

Technology transfer offices are all over the place (also at UZH)

In what way has the incentive system changed?In what way has the incentive system changed?

Why was the act installed in the first place?

(cc) Ulrich Kaiser



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N o n d e f e n s e G o v e r n m e n t S p e n d i n g o n R & D N o n d e f e n s e G o v e r n m e n t S p e n d i n g o n R & D

3

3 . 5

1 . 5

2

2 . 5

erce

ntag

e

0

0 . 5

1

Pe

0

Year

1981

1983

1985

1987

1989

1991

1993

1995

1997

I n d e c r e a s i n g o r d e r o f t e r m i n a l ( 1 9 9 8 ) v a l u e s : J a p a n ,


G e r m a n y , U . S . ( i n b o l d ) , F r a n c e , U . K . , C a n a d a , I t a l y



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8




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R&D spending, Percentages of total

0.7

0.8

0 4

0.5

0.6

enta

ge

0.2

0.3

0.4

Per

ce

0

0.1

1953 1958 1963 1968 1973 1978 1983 1988 1993 1998

(cc) Suzanne Scotchmer Dark blue = public, Light blue=private



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Federal Government 7%

Industry 75%

Federal Government 7%

Universities and Colleges 14%

Nonprofits and other government 4%government 4%

S

Source: National ScienceSource: National Science Foundation, Science and Engineering Indicators 2002 , Appendix Table 4-3.

Note: R&D performed by FFRDC's is included w here theFFRDC is located, either industry

i iti


ppor univerities.



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Federal Government FFRDC 3%

Federal Government 23%Industry 68%

Federal Government FFRDC 3%

Universities d C ll 2% p

Non profits and other government 3%

and Colleges 2%

Source: National Sciencegovernment 3% Source: National Science Foundation, Science and Engineering Indicators 2002 , Appendix Table 4-5


Appendix Table 4 5



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0 7

0 . 5

0 . 6

0 . 7

0 . 2

0 . 3

0 . 4

0

0 . 1

1 9 5 3 1 9 6 2 1 9 7 1 1 9 8 0 1 9 8 9 1 9 9 81 9 5 3 1 9 6 2 1 9 7 1 1 9 8 0 1 9 8 9 1 9 9 8

Y e a r

Top: US Funding to industry. Bottom: US Funding to universities


Top: US Funding to industry. Bottom: US Funding to universities



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3. Incentives for innovation3.2 Public and private mechanisms Federal Industrial Total Universities other State/Local

Intramural Firms FFRDC Colleges nonprofit Government Foreign Intramural Firms FFRDC Colleges nonprofit Government Foreign Total

$83,609 R&D Budget 23.67% 40.17% 8.88% 21.43% 5.01% 0.49% 0.34%

$36 462 Defense 23 66% 69 43% 2 06% 4 21% 0 42% 0 03% 0 18%$36,462 Defense 23.66% 69.43% 2.06% 4.21% 0.42% 0.03% 0.18%$19,463 HHS 19.90% 5.92% 1.32% 56.47% 15.40% 0.68% 0.31%$9,966 NASA 25.16% 48.67% 13.19% 7.90% 3.86% 0.11% 1.11%$7,656 Energy 11.38% 15.32% 63.05% 9.43% 0.78% 0.04% 0.01%$3 431 NSF 1 78% 3 91% 6 73% 81 26% 5 63% 0 20% 0 50%$3,431 NSF 1.78% 3.91% 6.73% 81.26% 5.63% 0.20% 0.50%$1,892 Agriculture 72.09% 0.58% 0.00% 26.48% 0.48% 0.16% 0.21%$1,163 Commerce 69.82% 16.08% 0.00% 10.92% 2.06% 1.03% 0.00%

$882 Interior 88.06% 3.06% 0.00% 7.74% 0.16% 0.81% 0.32%$672 DOT 32 77% 36 96% 0 68% 6 92% 2 04% 20 52% 0 11%$672 DOT 32.77% 36.96% 0.68% 6.92% 2.04% 20.52% 0.11%$620 EPA 18.60% 47.62% 0.00% 22.62% 9.38% 1.64% 0.30%

$1,401 Others 51.25% 7.07% 2.50% 14.78% 20.41% 2.50% 1.57%

S NSF S i d E i i I di t 2002 T bl 4 25


Source: NSF, Science and Engineering Indicators 2002, Table 4-25



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3. Incentives for innovation3.2 Public and private mechanismsExamples for public funds

Packet‐switching technology of the Internet ‐ US DOD

CERN ‐ European statesCERN European states

Biotech basis – UC Berkeley and San Franscico

Digital computer – U Pennsylvania

Laser – Columbia U

(cc) Ulrich Kaiser



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3. Incentives for innovation3.2 Public and private mechanismsResearch incentives

P bli bli h i j l ( i h) t ti d lPublic – publish in journals (or perish); reputation; nowadays alsoincentives to attract fundingPrivate – patent (or perish)

OutcomeAverage university licensing offices receives 69 invention disclosuresAverage university licensing offices receives 69 invention disclosuresApplies for ½ for a patentUniversities apply for four times more patents as private industryPressure from university leadership to go for profits instead ofdisseminationBig bang: Harvard/Hoechst USD70 mio. deal in 1984; idea: leverage ideas

(cc) Ulrich Kaiser

and expertise in return for funding



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Public/private/pGrantee may restrict communication between colleagues7% of university funding is privatePublic funds may subsidize private funds as funding goes to samePublic funds may subsidize private funds as funding goes to sameinstitution/even same labExample: Sandoz wanted to pay USD 300 mio. for 100% of ScrippsR h I tit t (S Di ) S i i NIH f d d hResearch Institute (San Diego); Scripps is an NIH funded researchorganization; government asked to scale back (what patents will Sandozpick?)

b b k fStart‐up activity by universities ‐ see UZH 175 years yearbook forexamples; more prominent examples are Genentech and Chiron (UC)Licensing offices provide IPR in return for fees

(cc) Ulrich Kaiser



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vπT+s cost, funds,

T

profit

vπTs+ m

s

vm

valuev

s= governmental subsidy, m=firms matching requirement (invest.), v= social value,

value


g y, g q ( ), ,πvT=profit, π= firms’ share of v, T= patent length



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The government grant process: funding Inventors instead of Inventions?Why might you expect it not to work? Free‐riding, etc. Why does no one cheat?Self‐selection and Funding; value of ideas in period t: )( c−ρλSelf selection and Funding; value of ideas in period t: Discounted value of future grants:

)()1(

cr t+

ρ

)()1(

1)()()1(

cr

ccr t t −=

+−=−

+ ∑∑∞

ρλρλρλ

Invest if the value of cheating, c, is less than value of future grants (self‐selection mechanism of the high‐fertility (the best) researchers)

)1()1( 11 rrr tt ++ ==

ρλλ

rc

+≤⇒∑ −

+≤ )(

)1( t cr

c ρλ


λ r+= +1 )1(t r



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3. Incentives for innovation3.2 Public and private mechanismsQuestions about grants:

What if you are a high‐cost researcher?

What if you are a low‐fertility (low‐λ)?

Will th t h t “ ?”Will the government have to “over pay?”




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3. incentives for innovation

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