Federal Funding Fosters Innovation

Cooperation is good—and when tech companies collaborate with government agencies, federal labs, and research universities, the results are the innovations that fuel U.S. economy. A report released yesterday by the Information Technology and Innovation Foundation analyzes the evolution of the innovation ecosystem in the United States over the last four decades and argues that in order to encourage innovation most effectively, policymakers must better understand where new ideas come from, especially if they want to address questions of international competitiveness.

The report examines a a 40-year sampling of the top 100 innovations annually recognized in R&D Magazine as the nation’s best. The authors, Fred Block and Matthew Keller, conclude that in the 1970s, most of those top 100 innovations came from single corporations working alone. But in recent years, “approximately two-thirds of the award-winning U.S. innovations involve some kind of interorganizational collaboration,” which includes “partnerships involving business and government, including federal labs and federally funded university research.” They conclude that, “In 2006, only 11 of the U.S. entities that produced award-winning innovations were not beneficiaries of federal funding.”

The result, they go on to report, may be due to two factors. First, in the 1970s, much of the American economy was dominated by a relatively small number of large firms. These large firms, because of their established control over the market, were willing and able to take risks. Some of these risks included investing in long-term, high-return technologies. Many of these endeavors were fruitful, and produced many of the most influential innovations. In order to explain why these big firms cut back on staff in the following years and therefore did not continue to wield such influence over the market, the report cites: increased international competition, such as in the car industry; government policies which disbanded monopolies; and a shift in consumer tastes away from standardized products; among other reasons.

Second, they argue that at present, most innovators do not keep their research inside one company or organization because of the growing complexity of scientific fields since the 1970s. “[S]uccessful technological innovation now requires the assembly and management of multidisciplinary teams that bring together different types of expertise,” they write.

They also note that, “during the three decades immediately following World War II, the federal government accounted for 2/3 of all R&D spending as contrasted to 1/3 in recent decades.” However, the federal government has continued to play a strong role in stimulating scientific research.  In the 1980s, Congress passed the Bayh-Dole Act, and created a series of initiatives that included the Manufacturing Extension Program and the Small Business Innovation Research Program, which extended the government’s scientific spending beyond the realms of space exploration and defense technologies, and fueled the rise of federally funded innovations and small businesses.

The report concludes that, “If one is looking for a golden age in which the private sector did most of the innovating on its own without federal help, one has to go back to the era before World War II.” They go on to suggest that:

[T]o succeed in the future, U.S. innovation policy must help support and reinforce our natural national advantage in collaboration. Thus, funding for the U.S. government’s technology initiatives should be expanded and made more secure, and the coordination of these technology initiatives across the federal government, particularly those that support partnerships between firms, universities, and federal laboratories, must be improved.

However, the writers decline to make further policy recommendations, instead stating that they “hope these findings spur a broad debate about the changing role of the federal government in our national innovation system.”

ITIF will hold a forum on July 15th at which Dr. Richard Lipsey, Professor Emeritus of Economics at Simon Fraser University, will discuss long-term economic growth, and argue that growth is driven principally by technological change.

Tags: funding, Innovation

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