III. The Private Sector's Role in the Scientific Enterprise

Astrong, dynamic and sustainable basic research enterprise is but a foundation for progress. For the goals of our society (a vigorous economy, strong national defense and a healthy populace and environment) to be realized, a private sector capable of translating scientific discoveries into products, advances and other developments must be an active participant in the overall science and technology enterprise.

The U.S. has always been blessed with a vigorous industrial sector. Even before the end of WWII, when the federal government began funding basic research in the sciences and engineering on a grand scale, American corporations were successful in capturing both the fruits of the available intellectual capital in the world's universities, as well as the trademark ingenuity of the independent American inventor, and turning them into marketable products.

In doing so, these companies often engaged in substantial research efforts to develop fledgling technologies. For example, the Bell Laboratories of the middle of this century garnered a reputation as a corporate research facility that pursued truly ground-breaking research spanning the spectrum from basic to applied. In fact, the development of the transistor at Bell Labs, an invention that revolutionized the electronics industry and led to the development of radioastronomy, eventually led to the award of several Nobel Prizes.

Investment in basic research is always a bit of a gamble; not every research project will pay off. The rewards involved in taking a discovery and developing it can be enormous. But if the product is never realized, if its limitations cannot be overcome, or if it simply does not sell, the costs can be equally great.

For a technology-based company, the question is not really "Should the company do research?" but rather, "How much?" and "What kind of research should we focus on?" The needs of different companies vary greatly. Large, established companies often have greater resources available, but they may also have shareholders accustomed to regular dividends and unwilling to forgo them for the uncertain benefits of research that is more basic in nature, and therefore more risky. Such a company may decide to stick to exploration that is largely aimed at refining its existing products or increasing production.

For the small newcomer, pursuit of research that is far more risky may be the only way to break into a competitive market. Such young start-up companies must rely entirely on the initial capital provided by their investors to finance this research. Indeed, capitalization is the primary problem faced by many young companies. Some firms fold when the financial backing runs out with no product in sight. Others hit it big.

A company's size, however, is not necessarily an indicator of what type of research it will do. Certain big, highly successful companies maintain research divisions whose purpose is to push the boundaries of their research--and in doing so to risk more--to ensure the company stays ahead of, and innovates faster than, its competitors.

A. Stimulating Research in Industry

Today's technology-driven company must bridge the research gap between basic science and product development if it wants to remain on the cutting edge of the industry. This research, referred to as "mid-level" research by MIT President Charles Vest, is typically necessary to develop basic research results into an emerging technology and then into a marketable product.

Mid-level research has customarily been performed, and should continue to be done, in the private sector. The fruits of this research are proprietary; the company is the primary or even sole beneficiary of any new technologies. At the same time, the company must also bear the risk that the research project will not yield any profitable results. The heated competition generated by a global marketplace and shareholder emphasis on immediate returns have affected the ability of companies to engage in mid-level research, particularly that which leans more toward basic than applied.

Concern has been raised that companies are focusing their research efforts on technologies that are closest to being marketable--and hence are likely to be profitable sooner--instead of on projects which will require a more substantial research investment. This approach is of questionable long term sustainability. The deployment of industry scientists on research problems that address largely--or entirely--projects for which there are expected near-term payoffs suggests that these scientists will work on a series of short-term research projects and not be encouraged to take part in longer-term, more exploratory research. This would represent a clear loss for the overall research enterprise.

At the same time, the limited resources of the federal government, and thus the need for the government to focus on its irreplaceable role in funding basic research, has led to a widening gap between federally-funded basic research and industry-funded applied research and development. This gap, which has always existed but is becoming wider and deeper, has been referred to as the "Valley of Death." A number of mechanisms are needed to help to span this Valley and should be considered.

1. Capitalization of small companies

First, small "start-up" technology companies must be encouraged. These young companies often focus initially on a single, largely basic discovery as their ticket into a competitive market, frequently drawing directly from discoveries made in universities or national laboratories. While individually small, in the aggregate these companies provide one of the best hopes for bridging the research gap between the basic research funded by the government and the product development pursued by industry.

A large reservoir of funds is available for investing in promising young technology ventures.40 Private sector capitalization of these small, dynamic companies is a major factor in determining their survival, as often they must operate in the absence of any revenues for extended periods and so are dependent on their original capital to pursue the research they hope will eventually lead to profitability. Because initial capital is so important to the entry of new technology companies, tax policies that encourage capital formation are extremely important. Additionally, it must be remembered that unnecessarily burdensome regulatory policies are another inhibition to private sector research and should be alleviated wherever possible.

2. The Research and Experimentation Tax Credit

The Research and Experimentation tax credit 41 is an effective means by which the federal government stimulates private-sector research. However, the tax credit is not permanent and must be renewed on a yearly basis by Congress in order to take effect. This has reduced its effectiveness, because companies are not able to plan on the existence of the tax credit from year to year, even though potential research projects--especially those that involve more basic than applied research--may last many times longer than the fiscal year. Making the tax credit permanent would almost certainly make long term research projects more attractive to businesses.

3. Partnerships for technology development

I have come across several types of associations in America of which, I confess, I had not previously the slightest conception, and I have often admired the extreme skill they show in proposing a common object for the exertions of very many in inducing them voluntarily to pursue it.

Alexis De Tocqueville (1805-1859) Democracy in America                                 [1835-1840]

Partnerships meant to bring about technology development share many elements with partnerships aimed at deriving research results, and in many cases these goals may overlap. For example, in the university-industry partner relationship, universities may gain access to technology necessary for further advances in fundamental understanding, while industry may be able to improve a technology in preparation for eventual sale of products. This type of symbiotic relationship is at the heart of successful partnerships, and partnerships such as these hold great promise both in disseminating the results of basic research efficiently and in stimulating research that spans the Valley of Death.

3a. Informal partnerships

Many of the most successful partnerships are those that remain uncodified and are based on the free movement of people between the public and private sector. As Dr. Branscomb said in his testimony, "The most powerful tool for effective diffusion of knowledge we know [is] the movement of young scientists, engineers, and doctors from their university setting to the commercial world, taking their tacit and codified knowledge with them...The university diffusion mechanisms are numerous and efficient: students graduating and going to industry, professors serving as consultants one day a week..."

3b. State-based partnerships

State-based partnerships that tie together the efforts of state governments, industries, colleges, universities, and community colleges show great promise in bringing about significant stimulation of economic development and research within industry. State-based organizations have considerable advantages over the federal government in assisting in the commercial development of new technologies including their proximity to the firms that will actually employ new technologies, their close relationships with local university systems, and their ability to focus their efforts.

The most powerful tool for effective diffusion of knowledge we know [is] the movement of young scientists, engineers, and doctors from their university setting to the commercial world

To learn more about how a state-based organization can assist interactions between academia and industry, the Committee heard from Mr. William Todd. As President of the Georgia Research Alliance, a private sector organization dedicated to improving the industrial competitiveness of the state of Georgia through partnerships between business, academia and the state government, Mr. Todd emphasized the important role that the state can play in enhancing technology development. "In my judgment," he said "the federal government could not have accomplished what the Georgia Research Alliance has in the last eight years. The primary reason is the inherent advantage of a private, non-profit organization in being flexible and entrepreneurial...The federal government can play a unique and critical role in joining the partnership of states, universities, and business by investing in basic research rather than 'national competitiveness' programs...State government in Georgia has an excellent track record in economic development programs in collaboration with private sector partners, and our business leadership has created realistic expectations about technology-based development coming from university laboratories."42

The critical role that the federal government plays in encouraging economic development in states through funding of basic research was recently affirmed by 51 Governors of states and U.S. territories in a letter sent to Members of Congress. "As governors we realize the benefits [of basic research] extend far beyond quality of life issues. The product of this research is, and will continue to be, a driving force behind a strong American economy. It creates jobs, increases productivity in the workforce, and provides the training ground for our country's next generation of highly skilled workers," they wrote.

In bringing the benefits of research to the American people, it is important that the different core competencies of states and the federal government are recognized and that each is encouraged to focus on what it does best. The federal government has an irreplaceable role in funding basic research. States, on the other hand, are far better suited to stimulating economic development through technology-based industry within their borders.

3c. Distribution of funding

There exists a strong correlation between the presence of major research universities and a flourishing technology enterprise within a given geographical area. California's Silicon Valley, Massachusetts' Route 128 corridor and North Carolina's Research Triangle are three of the most well-known examples of regions with a high density of thriving technology companies, all of which are located near and arose from major universities.

However, the absence of strong research universities in a number of states with currently under-developed R&D enterprises increases the obstacles to enjoying a thriving technology-based industrial sector. Historically, the federal government's investment in basic research has been concentrated in a small number of states with major research universities. In fact, as recently as 1995, nearly two thirds of federal research and development funding went to just 10 states.43 All regions of the country ought to be able to share in the benefits of economic prosperity that flow from the fundamental research performed in universities.

To accomplish this goal, it is important that colleges and universities in those regions of the country that have traditionally received little federal research funding be able to compete effectively for peer-reviewed federal research grants. Two recent trends suggest that these less well-established research institutions will be increasingly well positioned to both compete for grants against, and collaborate with, researchers at more established research universities. First, modern communications technologies are making it easier for individual researchers to engage in collaborations, even across geographical boundaries. Furthermore, the oversupply, in some fields, of highly trained and motivated Ph.D.s seeking jobs in academia has resulted in the placement of extremely high-caliber faculty at less well-established research universities.

4. Efficient dissemination of results from federally funded research to the private sector

Companies rarely have the resources to engage in purely exploratory research. Instead, they rely largely on government-funded research to open up new opportunities. However, to capitalize on and exploit the advances made in government laboratories and universities, private sector organizations must remain informed of developments in the realm of federally funded research.

Diffused knowledge immortalizes itself.

Sir James Mackintosh (1765-1832)          [1791]

The widespread availability and use of the Internet provides a means to address this issue. Internet-accessible, searchable databases that contain information about federally-funded research could allow those in the private sector to keep abreast of federally funded scientific developments in a relatively time and cost-effective manner. The RAND Corp's RaDiUS database44 lists all research projects and programs underway in the federal government and thus provides a useful starting point for on-line dissemination of this information.

Most federally-funded university researchers--as well as many in the national laboratories and some in other government agencies or departments--already seek to publish their work in peer-reviewed, publicly available scientific journals. On-line databases that compile citations and abstracts from these journals--which provide a summary of the research results and conclusions--will allow interested parties to search published research papers by topic, author and other parameters to learn about new developments. The National Library of Medicine's PubMed database, 45 which was developed by the National Center for Biotechnology Information (NCBI) at the National Institutes of Health, serves this purpose for the biomedical sciences.

Consider expanding databases such as PubMed and RaDiUS to make them both comprehensive and as widely available as possible.

5. Intellectual property protections

Intellectual property protections are critical to stimulating the private sector to develop scientific and engineering discoveries for the market, as individuals or organizations must derive ownership of a scientific discovery--and thus be eligible for any future financial reward--in order to offset the risks involved in developing the discovery.

The patent system...thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.

Abraham Lincoln
(1809-1865)           [1859]

The Bayh-Dole Act of 1980, 46 which granted the licensing rights of new technologies to the researchers who discover them, has been the foundation of the government's role in intellectual property issues in science and technology. Universities have seen revenues rise due to technology licensing agreements made possible by Bayh-Dole, and this legislation has been critical in bringing about commercialization of technologies that would otherwise have remained undeveloped. Clearly, intellectual property protections and dissemination of scientific information are tightly linked, and the effect of one on the other must be carefully considered.

B. Implications for Industry

When the well's run dry, we know the worth of water.

Benjamin Franklin
(1706-17909)           [1749]

While the federal government may, in certain circumstances, fund research of a more applied nature, it is important that companies recognize the importance of the long-term investment that mid-level research--not simply product development--represents. When corporations post record profits in a robust overall economy, the resources necessary to make such investments are clearly available. Because periods of particularly strong economic growth do not last forever, it is imperative to seize the opportunity to invest in research that these periods of prosperity bring.

One strategy is to provide federal government assistance for commercialization of particular technologies. This idea is based on the belief that the government can correct the effects of market failures. This approach has been tried, usually unsuccessfully, in other countries. Ultimately, the market is the best selector of new technologies.

Beyond the risks of interfering in the market, there would also be potentially serious consequences for the scientific enterprise as a whole were the federal government to try to bridge the Valley of Death through direct federal funding. Not only would precious resources be taken away from basic research, creating a void no other entity could fill, but, given the magnitude of the Valley of Death, the federal government alone would not be able to provide enough funding to bridge this gap in any significant way.