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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
1
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
2
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
3
3. Incentives for innovation3.2 Public and private mechanisms
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
4
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
5
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
6
3. Incentives for innovation3.2 Public and private mechanisms
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 ,
(cc) Suzanne Scotchmer
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
7
3. Incentives for innovation3.2 Public and private mechanisms
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
8
3. Incentives for innovation3.2 Public and private mechanisms
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
9
3. Incentives for innovation3.2 Public and private mechanisms
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
10
3. Incentives for innovation3.2 Public and private mechanisms
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
(cc) Suzanne Scotchmer
ppor univerities.
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
11
3. Incentives for innovation3.2 Public and private mechanisms
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
(cc) Suzanne Scotchmer
Appendix Table 4 5
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
12
3. Incentives for innovation3.2 Public and private mechanisms
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
(cc) Suzanne Scotchmer
Top: US Funding to industry. Bottom: US Funding to universities
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
13
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
(cc) Suzanne Scotchmer
Source: NSF, Science and Engineering Indicators 2002, Table 4-25
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
14
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
15
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
16
3. Incentives for innovation3.2 Public and private mechanisms
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
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
17
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
18
3. Incentives for innovation3.2 Public and private mechanisms
vπT+s cost, funds,
T
profit
vπTs+ m
s
vm
valuev
s= governmental subsidy, m=firms matching requirement (invest.), v= social value,
value
(cc) Suzanne Scotchmer
g y, g q ( ), ,πvT=profit, π= firms’ share of v, T= patent length
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
19
3. Incentives for innovation3.2 Public and private mechanisms
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
(cc) Suzanne Scotchmer
λ r+= +1 )1(t r
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
20
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?”
(cc) Suzanne Scotchmer
University of ZurichISU – Institute for Strategy and Business EconomicsProf. Dr. Ulrich Kaiser
The Economics of InnovationSpring semester 2010
21