Corporations and governments spend globally about US$1.7 trillion a year (2016 UNESCO data) for research and development, of which the US spends the largest amount, $511 billion, followed by China with $452 billion. These are big numbers and represent for the US 2.7% of gross domestic product and for China 2.2%. The largest part of this investment falls in the category of development of commercial products or products that meet defense needs.
Realizing economic value from such investments is a continuing challenge because adequate resources must be available to move research results into products. Such follow-on investments are always much bigger than the earlier costs that create potentially valuable new products or services.
Corporations fund new product development to stay competitive, and such applied research is typically narrowly focused to meet corporate market needs. In the absence of the now- defunct big central corporate laboratories like Bell or RCA Laboratories, rarely does such research lead to advances in basic science or technology that could have revolutionary impact on unrelated fields. They are also expected to have rapid payback periods when the resultant new products are launched. The corporate efficiency in moving applied research results into products is then a big factor in creating value for such investments.
This leaves advanced research programs more broadly focused on advancing basic scientific and technological knowledge to being dependent on funding by government programs, typically conducted in academic institutions. Generally, these need long time periods for maturation. Their outcomes are hard to predict at the start since many are exploratory in nature. Yet such programs have led to great industrial innovations when properly commercialized. Note that the technological basis of the Cisco corporation is academic work that was government-funded.
Various government institutions fund advanced research targeted at different technologies. In the US, the Defense Advanced Research Projects Agency, DARPA ($3.4 billion budget), is famous for its support of leading-edge electronic research with defense applications, but commonly with important commercial spillovers. This has included funding early research on the Internet technology among many other new fields. My personal work at the RCA Laboratories that created commercial semiconductor lasers was partially funded by DARPA.
In the US, government-funded advanced research has been justified on the belief that the discovery of new scientific and technological knowledge is of general benefit in advancing the economic development of the country
In the US, government-funded advanced research has been justified on the belief that the discovery of new scientific and technological knowledge is of general benefit in advancing the economic development of the country. This requires long-term funding not provided in corporate programs. The ultimate objective is to promote economic growth through the creation of new industries, or the strengthening of defense-related technologies.
It is understood that commercializing such innovations may require massive amounts of risk capital to create new industrial capability. History in the US indicates that this belief is well founded. It was the combination of corporate- and government-funded research that enabled the modern industrial age since the 1950s because massive private capital became available to fund new companies and create new industries.
Is more such investment a powerful driver of increased economic growth?
The economic value of such work can only be realized by effective bridges to commercialization. Mining the industrial benefits of research is always difficult. As I discovered when I managed research at the RCA Laboratories, transferring research results into products took an enormous amount of effort and diplomacy.
As anyone responsible for research in corporate enterprises will tell you, operating businesspeople hate having to deal with the risks of new products, processes or markets. Hence any research results that promise great results but with risks (always) are reluctantly promoted while evolutionary developments are welcomed.
A recent report by the Semiconductor Industry Association recommends more government-funded research in the US to increase the competitive position of the industry. My opinion is that such funding will create industrial value only if efficient bridges to commercialization are in place.
Major technological innovations are not predictable either in their outcome or timing of emergence or even the breadth of applicability. However, when such opportunities emerge, they must be commercialized rapidly to gain a first-mover advantage. This requires the availability of risk capital and the right resources.
The need for large capital investments is commonly a big barrier. The biggest barrier to commercialize revolutionary new products in my work at RCA was when there was the need for massive capital investments to build new production plants. For example, our laboratory invented liquid-crystal flat-panel displays, but corporate management was not willing to invest the $500 million to build a production plant. Instead, the technology was licensed to the Sharp Corporation in Japan. As a result, the US was never a factor in the new flat-panel industry (today worth more than $100 billion a year) that is now the only display technology in general use, having displaced the vacuum-tube displays that previously dominated the field and in which RCA was a leader.
On the other hand, the production of new semiconductor lasers required much less expensive facilities, and these new lasers from my laboratory were promptly commercially introduced.
Effective transfer requires bridges – collaborative efforts and capital that move concepts to products by bringing together a variety of skills and resources. These bridges exist within corporations. How well this works determines the value created by corporate applied research investments.
Research outside of corporate institutions will continue to play a vital role in creating major innovations, but funding agencies must keep such transfer needs in mind and ensure that the right bridges to commercialization exist. However, with research work done in independent laboratories, such as government labs, translating discoveries into economic value is much more difficult than within a corporation because this translation requires independent organizations to collaborate closely.
Because capital equipment needs are usually modest, transfer of research results across organizations is easiest in fields like advanced software and applications around artificial intelligence. In the development of new AI software, there are notable examples of DARPA-funded work at various institutions including SRI International, an independent research organization. This program ultimately enabled the development of Siri, which was eventually acquired by Apple.
However, process research results are more difficult to transfer. Hence, once a new concept looks promising, the experimental work must be designed appropriately for ultimate transfer to commercial production. For example, semiconductor production process equipment in the early years was low-cost. Today, the equipment can run into the multimillion-dollar range – and results are not easily transferable to production unless the experimental work is done on similar equipment. Few academic institutions are equipped for such research.
Industry-academic collaboration can be valuable for small businesses. Here are two examples from my experience at Warburg Pincus where two startup portfolio companies greatly benefited from such an effort.
The first example was a startup aiming to produce a key detector device for fiber-optical communications. It was launched with one novel design but entered collaboration with an academic researcher lead who had a government contract to develop such a device. His device was greatly superior to the original product planned by our company – and anything in the market – and our company obtained the rights to the device and mass-produced it in record time. It became the world-leading device in its field. This rapid transfer to the market was only possible because the university-invented structure was modified by its inventor with the production process in mind so that moving into volume production was possible quickly. Our company became the leader in its market.
In the second example, a startup portfolio company was developing a new process for manufacturing an important chemical product. The management of the company established a close working collaboration with a university research team focused on studying high-temperature chemical reactions with government funding. The university team studied chemical reactions in a novel equipment of their design with unique instrumentation and also designed software for theoretical analysis of the ongoing process. This equipment was also flexible and allowed process conditions to be easily changed and the results measured. Because of this pioneering research work, it was possible to determine accurately the conditions necessary to produce the company’s products with predetermined parameters and predictable yields. This academic collaboration saved a great deal of costly process development in a production environment.