Innovation and Commercialization of

Emerging Technologies

September 1995

OTA-BP-ITC-165

GPO stock #052-003-01455-6
Recommended Citation: U.S. Congress, Office of Technology Assessment, Innovation

and Commercialization of Emerging Technology, OTA-BP-ITC-165 (Washington, DC:

U.S. Government Printing Office, September 1995).
iii

oreword

echnological innovation is essential to the future well-being of the United

States. The ability of the nation to sustain economic growth, increase its

standard of living, and improve human health and the environment depends, in many ways, on its success in developing and commercializing

new products, processes, and services. The growing capabilities of competitors in

Europe, Asia, and elsewhere around the world increasingly challenge the ability

of U.S. firms to convert the nation’s science and technology base into a competitive advantage. Such concerns have prompted much debate about the proper role

of government in encouraging innovation and the commercialization of new

technologies. To date, however, the debate has been hampered by an incomplete

understanding of the ways in which firms develop and market new products, processes, and services and the barriers they must overcome in the process.

This background paper examines the complexities of innovation and commercialization in an attempt to demonstrate the linkages between science, technology, and innovation, and to highlight the growing importance of factors other than

basic research in commercial success. As shown, innovation is a complicated

process in which markets often stimulate development of new technologies and

product or process development stimulates scientific and technical research.

Many factors influence commercial success, including the nature and composition of markets; competition from older technologies; choices of design and implementation; the availability of financing, standards, and complementary assets

or infrastructure; and the ability to link with strategic partners. Government exerts

significant influence on the innovation process, both intentionally and unintentionally. Research conducted for government missions can benefit commercial

industry; federal procurement can jump-start nascent industries; environmental

regulations can create markets for new technical approaches; government-sponsored technology demonstrations can provide useful information about new products, processes, and services to both users and developers; and laws in the areas of

tax, investment, intellectual property, and antitrust shape the environment in

which firms compete for resources and market share.

This background paper was prepared in response to requests from the House

Science Committee (formerly the Science, Space, and Technology Committee)

and the Senate Commerce, Science, and Transportation Committee. Throughout

the course of this study, OTA received valuable assistance from its advisory panel,

contractors, and reviewers, who both provided information for the report and ensured its accuracy and balance. The background paper is, however, solely the responsibility of OTA.

ROGER C. HERDMAN

Director
iv

dvisory Panel

Avtar S. Oberai

Chairman

Consultant

Paul Brickmeier

Vice President of Advanced

Development

SVG Lithography Systems, Inc.

Linda A. Capuano

Vice President

Conductus, Inc.

Sidney C. Chao

Hughes Environmental Systems,

Inc.

Robert Cook-Deegan

Director, Division of Behavorial

Sciences and Mental Disorders

Institute of Medicine

National Academy of Sciences

Mark Cunningham

Oppenheimer and Co.

Mark Eaton

President

JMC Ventures

Robert T. Fraley

Group Vice President and General

Manager

New Products Division

Monsanto Co.

Charles E. Harris

Chairman and CEO

Harris & Harris Group, Inc.

Maryellen R. Kelley

Visiting Professor

Industrial Performance Center

Massachusetts Institute of

Technology

Ken Kennedy

Director

Center for Research in Parallel

Computation

Rice University

William G. Morin

Director, Technology Policy

National Association of

Manufacturers

Mark Myers

Senior Vice President

Xerox Corp.

Walter H. Plosila

Executive Director

North Carolina Alliance for

Competitive Technologies

John T. Preston

Director of Technology

Development

Massachusetts Institute of

Technology

Michael A. Rappa

Associate Professor

Sloan School of Management

Massachusetts Institute of

Technology

Richard S. Rosenbloom

David Sarnoff Professor of

Business Administration

Harvard Business School

Maxine L. Savitz

Garrett Processing Division

Allied-Signal Aerospace

Louis Tornatzky

Director, Southern Technology

Council

Southern Growth Policies Board

Stephen Turner

CEO/President

Oncor Inc.

Les Vadasz

Senior Vice President

Intel Corp.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report

and the accuracy of its contents.
v

roject Staff

Peter D. Blair

Assistant Director, OTA

Industry, Commerce, and

International Security Division

Audrey B. Buyrn

Program Director1

Industry, Technology, and

Commerce Program

Andrew W. Wyckoff

Program Director2

Industry, Telecommunications,

and Commerce Program

Julie Fox Gorte

Project Director3

Robert C. Weissler

Project Director4

Jerry R. Sheehan

Analyst

Rodney Sobin

Analyst

Paul N. Doremus

Analyst

Paul D. Semenza

Analyst

David J. Eichberg

Research Analyst

Jean E. Smith

Editor

OTA REVIEWERS

James W. Curlin

Gerald Epstein

Greg Eyring

Linda Garcia

Tom Hausken

Mike Phillips

Steve Plotkin

Judith Wagner

ADMINISTRATIVE STAFF

Liz Emanuel

Office Administrator

Karry Fornshill

Secretary

Diane Jackson

Administrative Secretary

Karolyn St. Clair

PC Specialist

CONTRACTORS

Kevin D. Beaty

Consultant

Donn Forbes

Consultant

Center for Global Change

University of Maryland

________________

1Until September 1994.

2Starting November 1994.

3Until April 1995.

4Deputy Project Director until April 1995.
vi

eviewers

Chris Aldridge

Technology Competitiveness Staff

U. S. Department of Commerce

F. Ronald Bailey

Consulting Professor

Stanford University

Lester A. Davis

Senior International Economist

U.S. Department of Commerce

David Kahaner

Director, Asian Technology

Information Program

National Institute for Standards

and Technology

Brian Kahin

Director, Information

Infrastructure Project

Harvard University

Joshua Lerner

Assistant Professor of Business

Administration

Harvard University

Alan Miller

Director, Center for Global

Change

University of Maryland

Stephen M. Millett

Managing Principal

Technology Management Group

Battelle Memorial Institute

Jeffrey Mohr

Chief Scientist

Information Technology

Solutions, Inc.

Carl G. Murphy

Chief Scientist

RCI, Ltd.

Lawrence M. Rausch

National Science Foundation

J. Richard Sherman

President

RCI, Ltd.
vii

1 Summary and Introduction 1

Principal Findings 3

National Interest in Innovation 4

The Changing Environment for Innovation 5

The Policy Debate 16

Understanding Innovation and Commercialization 20

Elements of Innovation Systems 26

2 Innovation and Commercialization 31

The Process of Innovation 31

Commercialization 49

3 Elements of Innovation Systems 61

Governance 62

Legitimation 63

Technology Standards 68

Scientific Research 71

Financing 74

Human Resources 80

Technology Development 82

Networks and Linkages 83

Markets 85

Conclusion 95

ontents
Summary

and

Introduction

he United States has long been considered

a leader in technological innovation.

Many of the most significant innovations

of the past several decades, including integrated circuits, digital computers, nylon, bioengineered medicines, and xerography, trace their

origins to U.S. companies and inventors. These

achievements reflect the efficacy of the U.S. national system of innovation, with its strong science base, its entrepreneurial spirit, a financial

system that supports a large venture capital market

unparalleled elsewhere in the world, and sophisticated consumers who demand new products and

processes and whose tastes signal future changes

in world demand.1 Together, these factors create

the capabilities U.S. innovators need to successfully develop new products, processes, and services.

Over the last two decades, U.S. firms have

faced increasing competition in developing and

commercializing new inventions (see box 1-1 for

a definition of terms). Other industrialized nations

have developed robust research and development

(R&D) systems that rival those of the United

States in their ability to generate new scientific

and technological discoveries and drive innovation. Many other nations with limited R&D capabilities have become proficient at adopting

technologies developed elsewhere and incorporating them into new or improved products, processes, and services. As a result, U.S. firms cannot

rely on scientific leadership alone to maintain

their competitive advantage in the marketplace.

Despite the large number of Nobel Prizes won by

U.S. scientists and the large number of patents

awarded to American inventors, foreign firms

have been able to outperform U.S. firms in some

markets and have entirely overtaken some industries by aggressively developing and commercializing new technologies, many of which were

invented in U.S. laboratories by U.S. scientists.2

1 For a discussion of the factors that determine a nation’s competitive advantage, see Michael E. Porter, The Competitive Advantage of Nations (New York, NY: The Free Press, 1990), pp. 69-175.

2 Several reports note growing competition in the commercialization of emerging technologies. See Competitiveness Policy Council, A

Competitiveness Strategy for America, Reports of the Subcouncils (Washington, DC: Competitiveness Policy Council, March 1993); Council

on Competitiveness, Picking Up the Pace: The Commercial Challenge to American Innovation (Washington, DC: Council on Competitiveness,

1988); Report of the President’s Commission on Industrial Competitiveness, Global Competition: The New Reality (Washington, DC: U.S.

Government Printing Office, January 1985).
2 Innovation and Commercialization of Emerging Technology

The terms invention, innovation, and commercialization are commonly used in a number of overlapping ways to refer to the process of developing new technology and incorporating it into new products,

processes, and services. Confusion often results from the close ties between invention, Innovation, and

commercialization and from subtle differences in meaning of each term. For the purposes of this report,

the three terms will be used as defined below:

Invention refers to the act of devising or fabricating a novel device, process, or service. Invention

describes the initial conception of a new product, process, or service, but not the act of putting it to

use Inventions can be protected by patents, though many inventions are not patented, and most patents are never exploited commercially.

Innovation encompasses both the development and application of a new product, process, or service. It assumes novelty in the device, the application, or both. Thus, innovation can Include the use of

an existing type of product in a new application or the development of a new device for an existing

application. Innovation encompasses many activities, including scientific, technical, and market research; product, process, or service development; and manufacturing and marketing to the extent they

support dissemination and application of the invention.

Commercialization refers to the attempt to profit from innovation through the sale or use of new products, processes, and services. The term is usually used with regard to a specific technology (e g

“commercializing high-temperature superconductivity”) to denote the process of incorporating the

technology into a particular product, process, or service to be offered in the marketplace The term

commercialization therefore emphasizes such activities as product/process development, manufacturing, and marketing, as well as the research that supports them, More than invention or Innovation, commercialization is driven by firms’ expectations that they can gain a competitive advantage in the marketplace for a particular product, process, or service.

SOURCE Office of Technology Assessment, 1995

In this more competitive environment, the ability of U.S. firms to innovate and commercialize

new technologies depends on many factors. While

basic research is still critical, it is only one element

of a national system of innovation that includes

systems of finance and education, facilities and

know-how for manufacturing products and providing services, organizations for developing and

promulgating standards, institutions for testing

and approving new products, and mechanisms for

creating markets. All elements of this system must

act in concert to bring new innovations to the market. Although this system relies heavily on the initiative and ingenuity of private-sector actors,

government actions influence the process in many

ways, both directly (e.g., through funding of basic

research and promulgation of product and process

regulations) and indirectly (e.g., through financial

and tax regulations, the fulfillment of government

missions, and procurement for its own needs).

This report examines the processes of innovation and commercialization with an eye toward

developing a more complete understanding of the

multiple pathways linking new science and

technology to new products, processes, and services. In doing so, it highlights the difficulties

firms face in financing new technology ventures,

settling on product architectures or standards,

scaling up for manufacturing, and creating markets for innovations. Finally, the report traces government influence-both direct and indirect-on

innovation and commercialization of emerging

technologies. While stopping short of delineating

specific policy options for improving U.S. efforts

in these areas, the discussion illustrates that federal policies regarding R&D funding, environmen-
Chapter 1 Summary and Introduction | 3

tal and other regulations, intellectual property,

taxation, and procurement have a significant cumulative effect on the success of U.S. firms in the

global marketplace. They help create the environment in which firms attempt to commercialize

new technologies and form an integral part of the

innovation systems that develop in different industries.

PRINCIPAL FINDINGS

❚ Linkages Between Science,

Technology, and Innovation

 The linear model of innovation—which implies

that innovation proceeds sequentially from new

scientific discoveries to new products, processes, and services—is limited in its descriptive

and predictive powers. Innovation can assume

many forms, including incremental improvements to existing products, applications of existing technology to new markets, and uses of

new technology to serve an existing market.

Though typically less revolutionary, these other forms of innovation are equally

important to the U.S. economy and national

well-being in terms of the performance improvements and cost reductions they produce.

 Science plays a critical role in innovation, but

is not necessarily the driver of new products,

processes, and services. New ideas for innovation can stem from many sources, including

new manufacturing capabilities and recognition of new market needs, as well as scientific

and technological discoveries. Innovation and

commercialization require considerable feedback between science, engineering, product development, manufacturing, and marketing.

 The nature of innovation changes over time as

product lines and industries mature. Whereas

the early stages of an industry are characterized

by radical innovations that create wholly new

products, processes, or services and are often

based on new science or technology, later

stages are characterized by incremental innovation, which builds upon existing products,

processes, and services and derives more from

advances in manufacturing capability, product

design, and component technologies.

 Successful commercialization is not simply a

matter of developing technology first or getting

to market first. While being first can bestow advantages on an innovating firm, firms must

create and maintain a competitive advantage in

the marketplace by staking out and protecting

a proprietary position through patents, trade secrets, or market barriers, and by securing the

complementary assets and skills needed to ensure proper manufacturing, marketing, and

support.

❚ Elements of Innovation Systems

 Successful commercialization requires an environment conducive to innovation and requisite

industrial infrastructure. Institutional arrangements are needed to establish standards, regulations, and rules governing areas such as

intellectual property and antitrust. Human, financial, and scientific resources are required as

the basic inputs to the innovation process.

Complementary assets—both related technologies and necessary skills in manufacturing

and distribution—are often needed to ensure

that companies can succeed in the marketplace.

Potential customers frequently need additional

assurances and warranties that new products,

processes, and services will work as advertised.

Policymakers cannot assume that investments

in the science base alone will ensure economic

success.

 Government and industry both play a role in establishing the environment and infrastructure

necessary to support innovation and commercialization. Government influences innovation

and commercialization through tax and financial policies and through the patent system.

Furthermore, in fulfilling its public missions,

government affects technology development

and market acceptance through procurement,

regulations to protect human health and the environment, development of technologies, and

funding of basic research. The unintentional effects of government actions on the innovation
4 | Innovation and Commercialization of Emerging Technology

and commercialization process must be understood in order to maintain a healthy economy.

❚ Increasing Competition

 U.S. firms face an increasingly competitive environment for developing new science and

technology. The United States continues to garner a disproportionate share of Nobel Prizes

and to patent a growing number of inventions.

However, the proportion of foreign patenting in

the United States has grown, and Japanese and

European firms lead U.S. inventors in some

critical technologies. The Newly Industrialized

Countries (NICs) of Asia (Hong Kong, Singapore, South Korea, and Taiwan) are also increasing their technological capabilities in such

areas as telecommunications and semiconductors.

 International competition in developing and

marketing new products, processes, and services has reduced U.S. market shares slightly in

most high-technology industries, demonstrating the ability of foreign-based companies to

successfully convert new technology into marketable products. Competitors from Europe,

Japan, and elsewhere in Asia have penetrated

markets in the United States and abroad for aircraft, computers, and semiconductors, in particular. Nevertheless, the United States

maintains a trade surplus in the most advanced

technology products.

 As a percentage of gross domestic product, total U.S. expenditures on nonmilitary R&D lag

those of Japan and Germany by a wide margin

and are more comparable with those of France

and the United Kingdom. Continued reductions in federal R&D expenditures and increasing budgetary concerns are likely to further

reduce overall R&D spending and place a

greater burden on the private sector for maintaining the nation’s R&D investment.

 Private-sector funding for R&D has stagnated

since 1991 as U.S. firms have attempted to respond to new competitive challenges. Greater

attention to short-term projects has limited support for long-term R&D, and many corporate

laboratories have been scaled back or shifted to

more product-oriented work. These changes

have likely aided the recent resurgence of U.S.

manufacturing industries, but raise questions

about U.S. competitiveness in the long term.

NATIONAL INTEREST IN INNOVATION

The United States has many reasons to maintain

strong capabilities in innovation and the commercialization of emerging technologies. These activities confer numerous benefits on the nation.

Novel technologies spur the development of new

industries and help existing industries remain

competitive by enabling improvements that lower

costs or enhance performance. Today’s semiconductor and biotechnology industries both grew

out of recent technological advances and now

employ hundreds of thousands of workers in the

United States alone, ranging from scientists, engineers, and managers to administrators, production

line workers, and technicians. Continuous improvement in the styling, performance, and fuel

economy of American cars has allowed the U.S.

auto industry to repel some of the advances made

by rivals in Japan, Europe, and Korea during the

1980s.

Much of the nation’s growth in jobs and productivity can be traced to technological innovation. Economic studies estimate that technological

change has contributed over half of the growth in

economic output since the Great Depression and

17 percent or more of the growth in productivity
Chapter 1 Summary and Introduction | 5

since 1973.3 Increased productivity, in turn, is a

primary driver of rising wages and standards of

living, and is one of the nation’s most effective

means to compete against low-wage nations such

as Mexico, Taiwan, and Malaysia. High-technology industries characterized by high levels of R&D

spending, such as pharmaceuticals, electronics,

aircraft, and professional equipment, comprise a

growing portion of the national economy. Together, these industries represented 20 percent of U.S.

manufacturing output and 38 percent of U.S.

manufacturing exports in 1991, up from 16 and 29

percent, respectively, a decade earlier.4 More importantly, the output of some of these industries

allows improvements in other portions of the

economy, as demonstrated by the widespread use

of information technologies in service sector jobs.

Innovation contributes to other national goals

as well. New medical devices improve human

health through better diagnostic and therapeutic

procedures; cleaner-burning automobile engines

and more efficient wind turbines meet transportation and energy needs, while limiting damage to

the environment; advances in electronics and information technology allow new forms of entertainment and improvements in education; and

new fighter aircraft and radar systems enhance national security. Ironically, technology has also

contributed to many of the problems or situations

that innovation must now attempt to remedy, such

as environmental degradation (including threats

to public safety), depletion of energy and natural

resources, and the greater destructive potential of

warfare.

To capture the full benefit of innovation, the

United States must actively commercialize new

technologies. Only through commercialization

can the nation enjoy the benefits of job and wealth

creation. Invention alone is not sufficient. Some

of the advantages of innovation can be acquired by

purchasing new products developed by foreign

firms, but neither the economic or social benefits

will be as great as if commercialization occurs at

home. Licensing technology to foreign producers

does not generate the revenues or the jobs created

by a domestic industry; nor do products, processes, and services developed by foreign countries

necessarily match the requirements of the U.S.

market. U.S. semiconductor manufacturers, for

example, complained throughout the 1980s that

they could not fully benefit from new semiconductor manufacturing equipment produced by

leading Japanese suppliers because it was tailored

to the needs of the Japanese industry.

THE CHANGING ENVIRONMENT FOR

INNOVATION

The United States remains a strong innovator. The

nation as a whole continues to spend more on research and development than any other nation,

and patent statistics suggest that the rate of U.S.

invention accelerated over the last decade. U.S.

firms perform well at turning new technologies

into successful products, processes, and services

and dominate most markets for high-technology

goods such as aircraft, computers, and pharmaceuticals, turning out new innovations at a staggering rate.

In the past, much of this success rested on the

nation’s strong science base. With little competition in the postwar period, U.S. firms could easily

translate new scientific and technological break3 Jan Fagerberg, “Technology and International Differences in Growth Rates,” Journal of Economic Literature, September 1994, pp.

1147-1175. See also Edward Mansfield, “Contribution of Research and Development to Economic Growth of the United States,” Papers and

Proceedings of a Colloquium on Research and Development and Economic Growth Productivity, National Science Foundation, Washington,

DC, 1972; M. Ishaq Nadiri, “Contributions and Determinants of Research and Development Expenditures in the U.S. Manufacturing Industries,” Capital, Efficiency and Growth, George M. von Furstenberg (ed.) (Cambridge, MA: Ballinger, 1980); Zvi Griliches, “The Search for

R&D Spillovers,” National Bureau of Economic Research, Working Paper #3768, 1991; and M. Ishaq Nadiri, Innovations and Technological

Spillovers, Economic Research Report # 93-31, C.V. Starr Center for Applied Economics (New York, NY: New York University Press, August

1993).

4 Organisation for Economic Cooperation and Development, Economic Analysis and Statistics Division, Structural Analysis Industrial

Database, No. 1, May 1994. Hereafter referred to as OECD, STAN (1), May 1994.
6 | Innovation and Commercialization of Emerging Technology

throughs into market successes. Increasingly,

however, firms based in Japan, Europe, and elsewhere in Asia are creating a new challenge for

U.S. firms. By concentrating on rapid product design and manufacturing, these nations have entered into markets long considered the sole

province of U.S. firms. Japanese companies have

been first to commercialize some new products—

such as liquid crystal displays—based on U.S. inventions. In industries with rapid product

development cycles, newly industrialized countries (NICs) such as Hong Kong, Singapore,

South Korea, and Taiwan have at times been first

to market new generations of existing product

types, such as 16-megabyte DRAMs5 (dynamic

random access memories), or have followed

closely on the heels of the original innovator. As

continued globalization of manufacturing networks and advances in telecommunications

technologies accelerate the diffusion of technology around the world, such competition will likely

become more fierce, and U.S. firms will have

more difficulty maintaining market leadership in

fields they have pioneered.

Good standard indicators do not exist with

which to gauge the effects of these changes on

U.S. firms. It is difficult to measure the ability of a

nation’s firms to devise new products, processes,

and services and bring them successfully to market. The three indicators most commonly used to

measure innovation—patent statistics, trade statistics, and R&D spending—each capture only

one small element of the innovation and commercialization processes and suffer from numerous

drawbacks. Patent statistics, for example, register

new inventions that meet certain criteria for novelty and utility, but provide no information about

their economic value. Moreover, many innovations are not patented. In some cases, inventors

decide that secrecy is better protection against

imitation than a patent. Also, technological progress often emerges from incremental innovation,

learning-by-doing, and the adaptation of existing

technologies—activities that may not be patentable. Nevertheless, patents can be used to help

gauge the comparative inventiveness of nations

and identify particular technological strengths

and weaknesses.

Trade statistics provide some indication of the

commercial success of products, processes, and

services. The degree to which consumers prefer

the output of one nation’s firms to that of another

results in part from the ability of those firms to

successfully design, develop, manufacture, and

market innovations that meet market demand. In

high-technology industries such as aerospace,

electronics, and pharmaceuticals, customer preferences are strongly influenced by the technological sophistication of new products, processes, and

services. Yet, trade performance is strongly influenced by factors other than effective innovation

and commercialization. Macroeconomic factors

such as interest rates and currency fluctuations influence the cost of products, processes, and services, and the ability of customers to afford them.

Trade barriers, whether explicit tariffs and quotas

or more subtle differences in national regulations

and customs, can affect a firm’s ability to penetrate export markets. Despite these limitations,

trade data provide one of the few output measures

of innovation and commercialization. When combined with patent information, trade data can help

trace the linkages between the invention of a new

product, process, or service and its subsequent

commercialization.

R&D spending is also used to measure a nation’s innovative abilities because statistics are

widely available, and because R&D is one of the

central activities of innovation. But R&D spending is an input to the innovation process, not a result of innovation. R&D statistics measure the

amount of resources a firm or a nation dedicates to

innovation, but not their effectiveness in converting that effort into successful products, processes,

and services. While some correlation does exist

between R&D spending and innovative success,

the relationship between the two is not always di5 IBM was the first to produce 16-Mbit DRAMs, but for internal consumption only.
Chapter 1 Summary and Introduction 7

Patents 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Total 65.8 57.9 56.9 67.2 71,6 70.8 82.9 77.8 95.3 90.3 96,5 97.4

Resident 39.2 33.9 32.9 38.4 39.6 38.1 43.5 40.4 50.1 47.4 51.2 52.3

Foreign 26.5 24.0 24.0 28,8 32.1 32.7 39.4 37.4 45.3 42.9 45.3 45.1

% foreign 40.4 41,4 42.2 42.9 44.8 46.2 47.5 48.1

/10,000a

47.5 47.5 47.0 46.3

2.7 2.7 2,5 2.6 2.7 2,7 2.8 3.1 3.3 3.6 3.5 3.6

aResident patent applications per 10,000 population,

SOURCE: Office of Technology Assessment, 1995; based on data from the National Science Foundation, Science and Engineering Indicators--1993,

NSB93-1 (Washington, DC: U S. Government Printing Office 1993), appendix table 6-12, p. 456; U.S. Patent and Trademark Office, Patenting Trends

in the United States, report to the National Science Foundation, September 1994; and Organisation for Economic Cooperation and Development,

Main Science and Technology Indicators, No 2, table 77, December 1994

rect. Nations or firms with extremely efficient innovation systems can outperform those that use

greater R&D resources less wisely. Comparisons

of national R&D spending are therefore better

used to measure a nation’s commitment to innovation and to provide clues to its future technological capabilities, rather than to measure innovative

abilities directly.

❚ Generating New Inventions—Patent

Statistics

The United States continues to be a significant

source of new inventions and technologies. Between 1981 and 1992, the number of U.S. patents

awarded annually grew 48 percent, from 65,800 to

97,400 (see table l-l). U.S. patent intensity, expressed as patent applications per 10,000 population, climbed 33 percent from 2.7 to 3.5 during

this same time period. Most other countries in the

Organisation for Economic Cooperation and Development (OECD) experienced no growth or a

decline in patent intensity during this period--except for Japan. Per capita patenting rates for Japan

increased 67 percent between 1981 and 1992,

from 16.3 per 10,000 in 1981 to 27.2 by 1992.6

The larger rate of patenting does not imply that the

Japanese population is more inventive than that of

the United States. Patents granted in Japan typically have a narrow scope, which encourages multiple filings to cover permutations of an invention

that in most industrialized nations would be covered by a single patent. Nevertheless, growth in

Japanese patenting has outpaced that of the United

States, and the United States continues to lead all

industrial countries except Japan in the number of

patents filed by residents in their home countries.

U.S. inventors also file more foreign patent applications than residents of any other country. Between 1981 and 1992, the number of foreign

patent applications filed by U.S. inventors

climbed from 127,000 to 413,000, while Japan’s

increased from 49,000 to 129,000, and Germany’s

rose from 83,000 to 163,000. Because of the additional cost and complexity involved in filing foreign patents, firms tend to reserve foreign

patenting for those inventions they believe have

high commercial value. Despite large growth in

foreign patenting in the United States, foreign inventors still hold a smaller percentage of patents

in the United States than they do in other industrialized nations except Japan and Russia.

The United States is a net exporter of technology. International sales of U.S. intellectual property (licenses and royalties) rose from $8 billion in

1986 to $20.4 billion in 1993, while U.S. purchases of foreign intellectual property grew from

just $1.4 billion to $4.8 billion, pushing the

technology trade surplus up from $6.6 billion to

$15.6 billion (in current dollars). This large trade

surplus in intellectual property is unmatched by

6 Per capita patenting rates data from the Organisation for Economic Cooperation and Development, Economic Analysis and Statistics Division, Main Science and Technology Indicators database, No. 2, table 77, December 1994. Hereafter referred to as OECD, MSTI (2), table number. December 1994.
8 I Innovation and Commercialization of Emerging Technology

Robotics Genetic Engineering Optical Fibers

Country 1980 1985 1990 1980 1985 1990 1980 1985 1990

United States 18% 25% 24% 72% 62% 60% 38% 24% 33%

Japan 44 35 44 12 22 18 23 37 33

Great Britain 3 7 4 16 7 8 8 11 7

France 12 14 13 0 2 5 15 5 10

Germany 22 18 14 0 7 9 16 23 17

NOTE A patent family consists of all patent applications filed in different countries to protect a single invention

SOURCE. National Science Board, Science and Engineering Indicators--1993, NSB-93-1 (Washington, DC: US Government Printing Office, 1993),

pp. 178-184

any other OECD nation, most of which export

about the same amount of technology as they import. High levels of technology exports could reflect the inability of U.S. companies to

successfully commercialize their own inventions,

but most of the international licensing of U.S. patents—and the bulk of the trade surplus-results

from transfers of technology between affiliates of

multinational enterprises (MNEs). Between 1986

and 1993, trade between affiliated firms accounted for 79 percent of all technology exports

and 68 percent of all technology imports.7 International technology trade between unaffiliated firms

generates a smaller surplus for the United States,

totaling $3.1 billion in 1993.

Despite these positive indicators, the United

States faces increasing competition in invention

and technology development. Much of the growth

in U.S. patenting over the past decade resulted

from an increase in patenting by foreign inventors,

suggesting that foreign nations are increasing

their innovative capabilities relative to the United

States, or that they are increasing their access to

the U.S. market. In 1992, foreign inventors accounted for over half of all U.S. patent applications and 46 percent of U.S. patent awards, up

from 43 percent of applications and 40 percent of

awards in 1981. In total, the number of U.S. patents granted to nonresidents increased 70 percent

between 1981 and 1992. Japanese inventors account for the largest share of nonresident U.S. patents, holding 46 percent of the U.S. patents issued

to foreign inventors in 1991, up from 28 percent a

decade earlier. Germany is second with 17 percent, followed by France with 7 percent.

Furthermore, Japanese and European inventors

lead the United States, or are strong contenders, in

patenting many advanced technologies. U.S. inventors owned one-fourth of the patent families8

in robotics technology in 1990—up from just 18

percent in 1980, but substantially below Japan’s

44 percent share (table 1-2). In genetic engineering, U.S. inventors owned some 60 percent of the

patent families in 1990, far outstripping Japan, but

down from 1980 when they owned 72 percent of

the patent families. The United States’ position

has also slipped in optical fibers. The United States

held the lead with 38 percent of patent families in

7 Approximately 97 percent of these exports were sold by U.S. multinational enterprises (MNEs) to their foreign affiliates, while 91 percent

of MNE imports were purchased by U.S. affiliates of foreign firms. U.S. Department of Commerce, Survey of Current Business, September

1994, p. 101. See also U.S. Congress, Office of Technology Assessment, Multinationals and the U.S. Technology Base, OTA-ITE-612 (Washington, DC: U.S. Government Printing Office, September 1994).

8 A patent family consists of all the patent documents filed in different countries that are associated with a single invention. Essentially, this

statistic counts as one unit all international patents held on the same invention. The size of the family refers to the number of distinct patents held.

Comparisons of patent families avoid multiple counting of a single invention that is patented in several countries. See Mary Ellen Mogee, “International Patent Analysis as a Tool for Corporate Technology Analysis and Planning,” Technology Analysis and Strategic Management, vol.

6, No. 4, 1994, pp. 487-488.
Chapter 1 Summary and Introduction 19

3 -

2 -

 1

0

 -1-

■ United States

- 2 - ▲ Japa n

 ● Germany

-3

◆ Total U.S. manufacturing

-4 I I I I I I I I [ I I I I I I I I I I I {

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

NOTE: High-technology trade balances encompass trade in six industries with the highest ratios of R&D expenditures to sales on a global basis

drugs and medicines, office and computing equipment, electrical machinery, electronic components and equipment, aerospace, and scientific and

professional equipment.

SOURCE: Organisation for Economic Cooperation and Development, Scoreboard Indicators, No 2, tables 9, 14, 25,29, December 1994

1980, but Japan achieved parity by 1990 when

each nation held 33 percent of the patent families.

Newly industrialized countries of Hong Kong,

Singapore, South Korea, and Taiwan have also increased their patenting activity. Between 1985 and

1990, the total number of patents awarded by

these nations more than doubled from 13,100 to

32,500—more than one-third the number of patents awarded by the United States. Awards to residents and nonresidents are relatively balanced,

with nonresident awards outnumbering resident

awards by a factor of 1.37. Among the most active

patent classes are amplifiers, telecommunications, semiconductor manufacturing processes,

and dynamic magnetic information storage or retrieval. 9

❚ Trade Performance

The effects of this growing technological capability are becoming evident in trade statistics. U.S.

firms remain competitive inmost high technology

industries, but have greater difficulty maintaining

market share in more mature product lines.

Though the United States recovered from a sixyear deficit to post a surplus in high-technology

trade 10 between 1990 and 1992, the surplus—

which stood at 0.05 percent of GDP in 1992—has

declined since 1990 and was significantly smaller

than the surpluses generated during the 1970s and

early 1980s, which reached 0.72 percent of GDP

(figure l-l). Over the last two decades, the U.S.

high-technology trade balance has consistently

9 National Science Foundation, Asia’s New High-Tech Competitors, NSF 95-309 (Arlington, VA: 1995), appendix tables 3, 6-9.

10 As defined by the OECD, high technology industries include six industries with the highest ratio of R&D expenditures to sales on a global

basis: 1) drugs and medicines, 2) office and computing equipment, 3) electrical machinery, 4) electronic components and equipment, 5) aerospace, and 6) scientific and professional instruments. See Organisation for Economic Cooperation and Development, Scoreboard Indicators

’94 (Paris: Organisation for Economic Cooperation and Development, December 1994), p. 11.
10 I Innovation and Commercialization of Emerging ‘Technology

Imports Exports Balancea

——— —.. —

Computer Equipment

Central processing units $5,4 $94 $40

Peripherals 24.6 8.3 (16 .4)

Parts and accessories 16. 1 11. 4 (4.7)

Total $46.2 $291 ($1 71)

Telecommunications

Network and transmission $1,0 3.4 2 4

Customer premises equipment 6 2 1.4 (48)

Parts and other equipment 4 . 2 7 , 5

Total $11.3 $123 -- $0.9

aParentheses denote negative balance (imports greater than exports).

NOTE: Totals may not add because of rounding.

SOURCE: C. Woods, Office of Computers and Business Equipment, U.S. Department of Commerce, Washington, DC, personal communication, Aug.

15, 1995; L. Gossack, Office of Telecommunications, U.S. Department of Commerce, Washington, DC, fax to D. Eichberg, Office of Technology Assessment, U S Congress, Aug. 16, 1995.

fared worse than those of Japan and Germany

(though Germany’s balance plummeted shortly

after reunification and sank below the U.S. balance in 1991), but it has outperformed the U.S.

trade balance for all manufactured products.

U.S. trade performance has deteriorated across

many segments of high-technology industry.

While aerospace trade has posted a slight gain as a

percentage of GDP since 1970 and pharmaceuticals has remained essentially flat, trade in computers and office equipment has dropped from a

surplus of 0.20 percent of GDP in 1980 to a deficit

of 0.14 percent of GDP in 1992. The remainder of

the electronics industry, while having improved

since the late 1980s, is still below its performance

in the 1970s, relative to GDP, and the surplus in

professional instruments was less than half as

large in 1992 as in 1970.

This decline reflects both a drop in U.S. export

performance and a much larger increase in import

consumption. Between 1972 and 1992, imports

grew from just 6 percent to 22 percent of the U.S.

market for high technology goods, while U.S. exports declined moderately from 25 percent to 23

percent of total OECD exports of high-technology

goods. Import penetration has occurred across

nearly all high-technology industries, though

most notably in computers and electronics. Imports now account for some 45 percent of the U.S.

market for computing and office equipment, 34

percent of electronic equipment and components,

and 24 percent of electrical equipment. Exports

have declined most notably in computing and

aerospace, which declined from peaks of 39 percent and 65 percent of total OECD exports, respectively, to just 26 percent and 44 percent by

1992. Much of this decline is due to the rapid

growth of foreign production capacity in these industries. U.S. production of computers and office

equipment accounted for over half of total OECD

production in 1980, but for only one-third of total

production in 1992. Similarly, Europe’s Airbus

Industry, a relative newcomer to the aerospace industry, now holds nearly 30 percent of the global

market for aircraft.

Most competition in high-technology industries comes from less sophisticated products such

as telephone handsets and computer peripherals.

In computing equipment, for example, the U.S.

deficit results almost wholly from imports of peripheral devices such as disk drives, monitors, and

keyboards; trade in central processing units

posted a surplus of $4 billion in 1994 (see table

1-3). Similarly, in telecommunications, the

United States runs a deficit in customer premises

equipment such as telephones, fax machines, and

answering machines, but posted a surplus of $2.4

billion in network and transmission equipment

and $3.3 billion in parts and other equipment in

1994. The semiconductor industry follows a
Chapter 1 Summary and Introduction 11

Field Exports Imports Balance a

Advanced materials

Aerospace

Biotechnology

Electronics

Flexible manufacturing

Information and communications

Life science

Nuclear technology

Optoelectronics

Weapons

Total

$0.9

35.0

1,0

25.8

5.2

42,9

6.8

1.6

0.9

0.7

$120.8

$06

11,4

01

259

2 9

49,9

4.8

0

2,5

0.1

$98.4

$02

236

1 0

(o 1)

2 3

(7 o)

2 0

1,5

(1 6)

0 6

$224

aParentheses denote negative balance (Imports greater than exports)

NOTE: Totals may not add because of rounding

SOURCE: Nick Orsini, Foreign Trade Division, Bureau of the Census, U.S. Department of Commerce, Washington, DC, fax to J Sheehan, Off Ice of

Technology Assessment, U S Congress, Washington, DC, Mar 8, 1995

similar pattern. While U.S. semiconductor

manufacturers lagged far beyond Japan in 1992

with an 18.2-percent share of the world market for

dynamic random access memories, a commodity

memory chip for computers, they dominated the

market for microprocessors with a 69-percent

market share. 11

U.S. firms perform better in products that incorporate leading-edge technology. Trade in advanced technology products, as defined by the

U.S. Bureau of the Census,12 posted a surplus of

$22.4 billion in 1994; however, the surplus has declined 46 percent in real terms since its peak in

1991. Advanced technology products comprise a

growing portion of U.S. trade. The total volume of

trade (imports plus exports) accounted for by advanced technology products grew from 12 percent

of total U.S. merchandise trade in 1982 to 18.7

percent in 1994. At the same time, advanced

technology trade grew from 1.7 percent to 3.3 percent of U.S. GDP, demonstrating the growing importance of these products to the U.S. economy.

Most of the current surplus is generated by trade in

aerospace, which includes exports of U.S. military—as well as civilian—aircraft; in other areas

of great importance to the economy, such as information and communications technology and

optoelectronics, the United States runs a deficit

(see table 1-4).

❚ Research and Development Spending

Trends in research and development spending also

indicate growing competition. In absolute terms,

the United States remains the world leader in

R&D spending. Private and public expenditures

on R&D totaled almost $173 billion in 1994. On

average, between 1981 and 1992, U.S. R&D

spending, measured in terms of purchasing power

parity, was six times higher than that of Germany

and 1.5 times higher than that of Japan. ] 3 In

11 Daraquest, “Final 1992 Worldwide Market Share,” 1993.

12Trade statistics for advanced technology products are collected and published by the U.S. Bureau of the Census. The measure attempts to

account for the mix of high- and low-technology products contained within industrial trade data by including only those products that incorporate significant amounts of one or more leading-edge technologies, as determined by bureau analysts. The product mix changes annually, reflecting new technological developments. While it excludes some products manufactured by high-technology industries (such as telephone

answering machines), it includes products such as advanced materials and nuclear technology that are not reflected in the OECD trade data.

13 Data from OECD, MSTI (2), table 2, December 1994.
12 Innovation and Commercialization of Emerging Technology

2.8

2.6

2.4

1.6

1.4

1.2

1

1

● ●

■ United States

▲ Japa n

● Germany

◆ Franc e

● United Kingdom

I 1 I I 1 I

I

b

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

— .

NOTE: Data for Germany Include the former East Germany after 1990

SOURCE: National Science Foundation, National Patterns of R&D Resources 1994 (Arlington, VA 1995), table B-20, p 77

proportion to the size of the overall economy, Furthermore, the United States directs far more

however, U.S. expenditures on R&D are less of its R&D spending toward defense technologies

impressive (see figure 1-2). 14 Whereas the United than does Germany or Japan, limiting its potential

States and Germany had previously maintained effect on economic competitiveness. When dethe highest levels of R&D intensity in the indus- fense-related expenditures are removed from

trialized world, Japan’s increased dramatically af- R&D figures, U.S. R&D spending drops to 2.1

ter 1970 to surpass the United States in 1989 and percent of GDP, considerably below that of GerGermany in 1990. ’5 As of 1992, U.S. expendi- many or Japan (see figure 1-3). Although past detures on R&D stood at 2.77 percent of GDP, fense R&D and procurement enriched the

compared to 2.80 percent of GDP for Japan. Ger- technological growth and capacity of some U.S.

many’s expenditures, largely as a result of reuni- industrial sectors—particularly aerospace and

fication, had fallen to 2.53 percent of GDP. electronics--eurrent defense R&D has less direct

14 R&D as a percentage of GDP (also referred to as R&D intensity) is widely considered superior to absolute spending on R&D as a means of

making cross-national comparisons of innovative capacity because it is scaled to the size of the national economy.

15 U.S. Congress, Office of Technology Assessment, Multinationals and the U.S. Technology Base, OTA-ITE-612 (Washington, DC: U.S.

Government Printing Office. September 1994), pp. 65-66.
Chapter 1 Summary and Introduction 13

3

2.8

2.6

1.4

■ United States ◆ Franc e

▲ Japan ● United Kingdom

● German y

1 . 2

1 I I I I

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

NOTE: Data for Germany includes the former East Germany after 1990

SOURCE: National Science Foundation, National Patterns of R&D Resources 1994 (Arlington, VA 1995), table B-20, p 77

benefits for the U.S. industrial technology base.l6 long-standing legal, institutional, and administraMost of the U.S. defense R&D budget is devoted tive barriers restrict technology transfer between 18 Spin-off from mili- to military activities that have few implications the defense and civil sectors.

for the commercial technology base. 17 Though at- tary R&D to commercial projects that in the past

tempts are under way to promote greater cross- contributed to civilian technology development

fertilization in the military and civilian markets, (such as in semiconductors, computers, jet engines,

16 Numerous studies have analyzed the impact of the U.S. innovation system’s orientation toward defense technologies on the nation's

relative technological position and international competitiveness. See U.S. Congress, Office of Technology Assessment, Defense Conversion..

Redirecting R&D, OTA-ITE-552 (Washington, DC: U.S. Government Printing Office, May 1993); National Science Board, The Competitive

Strength of U.S. Industrial Science and Technology: Strategic Issues (Washington, DC: National Science Foundation, 1992); David C. Mowery

and Nathan Rosenberg, “The U.S. National Innovation System,” National Innovation Systems: A Comparative Analysis, Richard R. Nelson

(cd.) (New York, NY: Oxford University Press. 1993).

17 Of the pentagon’s research, development, test, and evaluation (RDT&E) budget, the science and technology portion—arguably the area

with the greatest potential for spinoff effects-totaled less than 50 percent throughout the 1980s. In recent years, the science and technology

portion of the RDT&E budget has varied from 20 to 25 percent. U.S. Congress, Office of Technology Assessment, Multinationals and the U.S.

Technology Base (Washington, DC: U.S. Government Printing Office, September 1994), pp. 67-69. See also U.S. Congress, Office of Technology Assessment, Defense Technology Base: Introduction and Overview), ISC-309 (Washington, DC: U.S. Government Printing Office, June

1987), p. 34.

18U.S. Congress, Office of Technology Assessment, Holding the Edge: Maintaining the Defense Technology Base, OTA-ISC-420 (Washington, DC: U.S. Government Printing Office, 1989), p. 176.
14 I Innovation and Commercialization of Emerging Technology

80 I I 60%

72 74 76 78 80 82 84 86

1

■

90 92 94

❏ Federal R&D ■ Federal R&D as a percent of total R&D

NOTE Data for Germany include the former East Germany after 1990

SOURCE National Science Foundation, National Patterns of R&D Resources’ 1994 (Arlington, VA: 1995), tables B-1, B-3, pp. 53, 57

and airframes) has declined substantially in recent

years, and in some technologies the flow has reversed. 19

Current trends point toward a further erosion of

U.S. standing in R&D funding. Real U.S. expenditures on R&D stagnated between 1991 and

1994, averaging annual growth of just 0.15 percent. Part of the reason is a reduction in federal

R&D spending resulting from the end of the Cold

War and growing concern over the federal deficit.

Between 1987 and 1994, federal funding for R&D

declined from a peak of $73 billion to $62 billion

in constant 1994 dollars (see figure 1-4). The

percentage of national R&D funding provided by

the government declined accordingly from 46 percent to 36 percent of the total; this trend has reinforced the role of business as the dominant source

of R&D funds in the United States. Industry spent

$102 billion on R&Din 1994, contributing nearly

60 percent of all such funding for that year.20

Industry expenditures on R&D have also stagnated in recent years. In real terms, total U.S. business expenditures on R&D slowed to an average

annual growth rate of less than one percent between 1991 and 1994, after averaging real growth

rates of approximately 7.5 percent during the late

1970s and early 1980s. Moreover, this small rise

is attributable entirely to growth in nonmanufac19 J. Alic et al., Beyond Spinoff: Military and Commercial Technologies in a Changing World (Boston, MA: Harvard Business School Press,

1992). See also D.C. Mowery, "The Challenges of International Trade to U.S. Technology Policy,” Linking Trade and Technology Policies: An

International Comparison of the Policies of Industrialized Nations, M.C. Harris and G.E. Moore (eds.) (Washington, DC: National Academy

Press, 1992), p. 125.

20 Academia and other sources account for only 3 and 2 percent, respectively, of all R&D funding in the United States. National Science

Foundation, National Patterns of R&D Resources: 1994 (Arlington, VA: 1995).
Chapter 1 Summary and Introduction | 15

turing industries, which posted real annual growth

rates of 26 percent from 1987 to 1992.21 Real rates

of R&D spending in manufacturing industries declined an average of 2 percent per year throughout

most of this period, due primarily to cutbacks in

transportation equipment, electronic and other

electric equipment, petroleum refining and extraction, and industrial machinery and equipment.

Despite the current economic expansion, real

R&D spending declined 0.2 percent in 1994, and

recent surveys predict only a modest increase in

1995.22

As a result of such cutbacks, the U.S. share of

OECD expenditures on R&D in high technology

industries declined from 63 percent in 1973 to 50

percent in 1992, driven by substantial declines in

all high-technology sectors except pharmaceuticals and instruments. Similarly, in medium

technology industries23 the U.S. share decreased

from 48 to 37 percent, with long-term declines in

all sectors except industrial chemicals and transportation equipment (excluding motor vehicles).

In many high-technology industries, such as aerospace, electronic equipment and components, and

to a lesser extent pharmaceuticals, U.S. R&D

spending has not kept pace with value added. Average U.S. R&D intensity levels in high technology industries were substantially above most other

major industrial nations for most of the 1970s and

1980s, but they declined from 0.28 in 1985 to 0.22

in 1992, to approximately the level of France and

the United Kingdom, though they still exceed

those of Japan and Germany.24

❚ Changing R&D Priorities

In response to increasing competitive pressures,

U.S. firms have begun to alter their R&D patterns.

Firms have shifted a greater portion of their R&D

resources away from long-term investments and

toward shorter term projects. Recent evidence indicates that U.S. companies now allocate only 22

percent of their R&D spending to long-term projects, compared with their Japanese counterparts

who devote 50 percent.25 Increasingly, firms are

emphasizing short-term R&D for immediate

problem-solving or near-term development over

basic research; and basic research is being directed

toward the needs of product development and

manufacturing teams.26 Many central research

laboratories at large companies—such as AT&T,

IBM, General Electric, Kodak, and Xerox—have

been downsized and work more closely with prod21 There is considerable uncertainty associated with R&D figures for the nonmanufacturing sector. Such data have only recently been collected and as a result may overestimate growth rates. Nevertheless, nonmanufacturing R&D comprises about one-fourth of total U.S. R&D

expenditures. These figures include R&D expenditures in communications, utility, engineering, architectural, research, development, testing,

computer programming, and data processing service industries, as well as hospitals and medical labs. National Science Foundation, National

Patterns of R&D Resources: 1994 (Arlington, VA: 1995).

22 See Industrial Research Institute, Annual R&D Trends Forecast (Washington, DC: Industrial Research Institute, November 1994); Jules

Duga, Steve Millett, and Tim Studt, “Battelle-R&D Magazine 1995 R&D Forecast,” Battelle Today, April 1995, pp. 4-7.

23 OECD defines medium technology industries to include nonpharmaceutical chemicals, rubber and plastics, nonferrous metals, nonelectrical machinery, motor vehicles and other transportation equipment, and other manufacturing.

24 OECD, MSTI (2), December 1994, op. cit., footnote 6; sectoral R&D intensities expressed as R&D divided by value added.

25 Erich Bloch and Mark S. Mahaney, “U.S. Research Effort Steers New Course,” Forum for Applied Research and Public Policy, spring

1995, p. 124.

26 Duga et al., op. cit., footnote 22, p. 7. A recent survey by the Industrial Research Institute also demonstrates cutbacks in basic research

amid overall increases in R&D. See Industrial Research Institute, Annual R&D Trends Forecast (Washington, DC: IRI, November 1994); see

also M.F. Wolff, “U.S. Industry Spent $124B on R&D Last Year, as Real-Dollar Decline Appears to Level Off,” Research-Technology Management, vol. 38, number 3, May-June 1995, pp. 2-3.
16 | Innovation and Commercialization of Emerging Technology

uct development divisions.27 They now receive a

larger share of their operating funds from individual business units rather than general corporate

funds.28 Even in strongly science-based industries, such as chemicals and pharmaceuticals, basic research declined from 1988 to 1993.29

Collaboration between firms—through joint

ventures, consortia, and outsourcing—is on the

rise as firms attempt to distribute risk, pool resources, and tap into necessary sources of expertise required to design and manufacture

increasingly complex products.30 Alliance strategies have become particularly common in biotechnology, as large pharmaceutical firms with

diverse product portfolios and powerful testing

and marketing resources combine with smaller

biotechnology firms with leading-edge, niche

technologies. Alliance strategies are also being

used heavily in information, communication, and

advanced electronics industries, in which firms

need to maintain access to a rapidly changing and

expanding set of product and process technologies. The magnitude of alliance formation is difficult to gauge, as are the implications for

innovation and commercialization of new technologies in the United States; however, these

alliances are likely to quicken the rate of technology diffusion across firms, industries, and nations.31

Firms have also increased their reliance on basic research performed at universities and federal

laboratories. Both the percentage of university

funding provided by industry and the number of

cooperative research and development agreements (CRADAs) signed between industry and

federal laboratories have climbed in recent

years.32 Such restructuring seems to have paid off

for firms in terms of increased competitiveness

and shortened production cycles (see table 1-5).

Yet reductions in basic and long-term research

could threaten the ability of U.S. firms to generate

future high-payoff products and processes. As

pressures mount to reduce the federal budget deficit, and government expenditures for R&D continue to decline, funding for basic research at

universities and federal laboratories is likely to

drop. This change could potentially reduce the

amount of basic research results available to U.S.

firms.

THE POLICY DEBATE

These changes in the competitive environment

have triggered renewed debate over the proper

role of the federal government in innovation and

27 See, for instance, Malcolm W. Browne, “Prized Lab Shifts to More Mundane Tasks,” New York Times, June 20, 1995, p. C12; Gautam

Naik, “Top Labs Shift Research Goals to Fast Payoffs,” Wall Street Journal, May 22, 1995, p. B1; Vanessa Houlder, “R&D Placed Under the

Microscope,” Financial Times, May 22, 1995; Vanessa Houlder, “Revolution in Outsourcing,” Financial Times, Jan. 6, 1995, p. 10; “Could

America Afford the Transistor Today?” Business Week, Mar. 7, 1994, p. 80.

28 For example, corporate support for R&D at General Electric has declined from about 75 percent of its total R&D budget to about 25

percent since 1985. At Kodak, corporate support for R&D has dropped from 85 percent to just 5 percent of the R&D budget. See Charles F.

Larson, “Research/Development in the Private Sector,” Forum for Applied Research and Public Policy, spring 1995, p. 130.

29 ISI/CSIM preliminary survey results. By this estimate, chemical firms now spend about 3 percent of their R&D on basic research.

30 A recent survey by the Industrial Research Institute indicates that the percentage of corporate R&D managers expecting an increase in

alliances and joint ventures rose from 33 percent to 49 percent between 1989 and 1993. The number of respondents expecting to license technology from or to other firms also increased from 14 percent to 22 percent and from 19 percent to 34 percent, respectively, during the same time

period. Industrial Research Institute, Annual R&D Trends Forecast (Washington, DC: Industrial Research Institute, November 1994).

31 The extent of international R&D spillovers has been a matter of debate. Some studies indicate that R&D spillovers remain relatively

localized; see Adam B. Jaffe, Manuel Trajtenberg, and Rebecca Henderson, “Geographic Localization of Knowledge Spillovers as Evidenced

by Patent Citations,” Quarterly Journal of Economics, August 1993, p. 577. Others indicate that international spillovers are much more significant for small countries than for large ones; see David T. Coe and Elhanan Helpman, “International R&D Spillovers,” National Bureau of Economic Research Working Paper No. 4444 (Cambridge, MA: National Bureau of Economic Research, 1993).

32 CRADAs do not typically support basic research, but they do allow companies to access basic research results derived from previous

laboratory work.
Chapter 1 Summary and Introduction 17

Industry Company Announcement

Aircraft Boeing Established goal to cut time to complete new plane from 12

months to 6

Apparel Berghaus Cut delivery time from 6 to 12 weeks in 1980 to 1 week by

early 1990s

Autos Chrysler/Ford Reduced time for new model introduction from 5 years to 3

Computers Compaq Introduced notebook computers in 8 months

Construction Equipment Caterpillar Since late 1980s, reduced time to build new tractor from 25

days to 6

Electric Equipment ABB Reduced time-to-market for high voltage transmitters/switching gears by 21 percent

Off Ice Products Rubbermaid Shortened time to enter new market from 18 to 24 months to

12 to 18.

Pharmaceuticals Zeneca Reduced time from drug synthesis to first testing on human

volunteers from 30 months to 14

Semiconductor Texas Instruments Cut time to market from 24 to 36 months to 12 to 18

Telecommunications AT&T Reduced design-to-delwery time for custom power supplies

from 53 days to 5.

SOURCE Institute for the Future, The Future of America's Research Intensive Industries, Report R-97 (Menlo Park, CA Institute for the Future, May

1995), p 50

commercialization (state and local governments

also play a role in technology development—see

box 1-2). Traditionally, the government has

played a limited role in innovation. It has funded

basic research to advance scientific knowledge

and has implemented policies regarding finance,

taxation, science education, antitrust, and intellectual property to create an environment conducive to innovation and commercialization.

Otherwise, government usually has left to the private sector the act of translating new scientific

knowledge into new products, processes, and services. This division of labor reflected broad consensus that while private industry has a strong

disincentive to invest sufficiently in basic research, which tends to produce more benefits than

any individual firm can hope to capture, it is better

equipped than government to interpret market signals and allocate innovative resources efficiently.

Government policy, therefore, concentrated on

factors that address the economy as a whole, rather

than focusing on individual industries.

Nevertheless, government has also influenced

commercial innovation by developing and procuring technology for public missions, such as defense, space, energy, and agriculture. Development

of the Minuteman missile system and procurement for the National Aeronautics and Space Administration’s (NASA’s) Apollo program

generated most of the early demand for integrated

circuits and jump-started the nation’s semiconductor industry. Defense R&D also laid the

groundwork for today’s telecommunications and

computing industries, though such spin-offs have

declined in recent years as commercial industries

have matured.33 Concerns over energy costs and

availability in the 1970s led to expanded energy

research, technology development, and demonstration projects, which produced more efficient

lighting technologies and renewable energy

sources. Support for agriculture has taken on

many forms, from basic and applied research to

extension activities. Such activities have led to the

development and use of new strains of crops, as

33 See John Alice et al., op. cit., footnote 19.
18 I Innovation and Commercialization of Emerging Technology

Over the past 15 years, the number of states funding and operating programs to promote technological innovation and commercialization has grown from nine to 50. These programs complement the

states’ longstanding interest in recruiting and retaining business and in funding higher education and

infrastructure development. Like these other policies, state-supported technology programs aim to leverage existing industry, universities, human resources, and services to promote economic growth. In

fiscal year 1994, states spent nearly $385 million on some 390 distinct technology programs. Although

programs vary considerably in structure, focus, and services offered, they generally fall into five categories: technology development, technology financing, industrial problem-solving, startup assistance, and

teaming.

Technology development programs received $131 million in 1994 to support research and application of technology for new and enhanced products and processes. These programs assume several

forms. University-industry technology centers (UITCs) are the most common. They exist in nearly half

the states and received $105 million in 1994. UITCs concentrate on interdisciplinary and applied research in specific technologies and industries, typically those most important to the regional economy.

Organized so that several companies work with one university, these centers seek to develop ongoing

relationships between the university and local businesses. An alternative type of arrangement, the university-industry research partnership (UIRP), exists in 12 states and received $12 million in funding in

1994. UIRPs usually involve just two partners and are organized around a specific project with a timetable for developing a technology and bringing a new product to market. States also supported 10 equipment and facility access programs, which provide small businesses with low-cost access to expensive

equipment and facilities, such as supercomputers and clean rooms. These programs received about $6

million in funding in 1994.

Technology financing programs received over $100 million in state funding in 1994 to help small

technology firms raise capital Two-thirds of this total supported specific R&D projects and local, nonprofit economic development programs, such as incubators. The remainder took the form of grants,

low-interest loans, or equity investments directly financed by state governments or accredited financial

institutions. Most states also assist companies applying for funding from federal technology programs,

such as the Small Business Innovative Research (SBIR) program and the Technology Reinvestment

Project (TRP).

Industrial problem-solving programs help firms improve production, management, and technical capabilities. Such programs received over $55 million in 1994. The most prominent form of industry problem-solving program is technology extension and development (TED), currently under way in 40 states.

TED programs teach firms about new manufacturing technologies and best-practice manufacturing

techniques to enhance their efficiency and productivity. Several states enjoy federal support from, and

play host to, federal manufacturing extension programs such as the Manufacturing Extension Partnership (MEP).1

Startup assistance programs encourage entrepreneurship, commercialization of new technologies,

and the expansion of regional businesses. With $8 million in funding in 1994, these programs supported business incubators, small-business development centers, and research parks that, in turn, provide business, technical, and often financial assistance to new technology-based firms

(continued)

1 The National Institute for Standards and Technology’s (NIST’s) Manufacturing Extension Partnerships are made up of Manufacturing Technology Centers (seven have been established, 28 are planned) and the State Technology Extension Program, which

awards competitive grants to state-government or state-affiliated manufacturing extension programs
Chapter 1 Summary and Introduction 19

Teaming programs encourage collaboration among companies as a means of sharing technical information and facilitating business development, These programs develop industrial networks and interactive

databases to match up business interests and develop communication within and across industries. Teaming programs received just under $8 million in 1994,

By bringing together a diverse set of players—venture capitalists and bankers, entrepreneurs and established businesses, and university scientists and engineers—state technology programs encourage synergy between traditional state-sponsored activities and local and regional economies. Although many

states support only local firms or require project work to be carried out within the state, membership and

participation in state initiatives, especially UITCs, is not always limited to local or regional companies,

State programs are not substitutes for federal programs. Rather, state and federal technology initiatives

complement each another, though, to date, there has been Iittle coordination or cooperation between state

and federal efforts. State programs operate closer to immediate local needs and show preference for state

enterprises and interests, Federal programs, in contrast, address industrywide and regional problems, advancing innovation and commercialization through federal missions, regulatory bodies, and economic policies, Federal programs are also far larger than state-led efforts, Total federal funding for technology programs, excluding basic research, was seven times larger than state funding in 1994,

SOURCES: Robert D Atkinson, “New Partnerships in Technology Policy, ” Forum for Applied Research and Public Policy, fall 1992,

pp. 21-26, Christopher Coburn (ed.) and Dan Bergland, Partnerships: A Compendium of State and Federal Cooperative Technology

Programs (Columbus, OH: Battelle Press, 1995)

well as new methods of planting, growing, and

harvesting them.

Starting in the 1980s, Congress and the executive branch began to supplement this approach

with a series of programmatic efforts aimed at

helping specific industries or correcting perceived

market failures in the innovation process. In SEMATECH (the Semiconductor Manufacturing

Technology consortium), the government and industry share the costs of strengthening the supplier base for the U.S. semiconductor industry.34 In

the Advanced Technology Program (ATP), government shares with industry the cost of precompetitive research projects—projects with an

applied focus, but in which the research results

may be useful to many companies developing

similar products.35 Manufacturing Technology

Centers (MTCs) help disseminate best-practice

manufacturing methods to the nation’s small

manufacturing firms, many of which are unfamiliar with the most advanced manufacturing

technologies and practices. Legislation was also

enacted to encourage greater transfer of technology from federal laboratories to the private sector. 36

34 The industrial members of SEMATECH have decided not to request federal funding after FY 1996.

35 Technological uncertainties often go unresolved and hinder the commercialization of such research results because (as with basic research) individual firms cannot easily appropriate the benefits of their efforts.

36 The Stevenson-Wydler Technology Innovation Act of 1980 (P.L. 96-480) established Offices of Research and Technology Applications

at federal labs and requires laboratory directors to allocate 0.5 percent of the R&D budget for their funding; the Federal Technology Transfer

Act of 1986 gave directors of government-owned and -operated laboratories the authority to enter into cooperative research and development

agreements (CRADAs) with industry and established the Federal Laboratory Consortium for Technology Transfer (FLC) to match inquiries

from firms to appropriate lab researchers; the National Competitiveness Technology Transfer Act of 1989 (P.L. 101- 189) granted directors of

government-owned, contractor-operated laboratories authority to sign CRADAs with industry.
20 | Innovation and Commercialization of Emerging Technology

This more programmatic approach to innovation expanded the government’s role into downstream elements of the innovation process,

including product development and manufacturing, in which Japanese competitors, in particular,

were believed to hold an edge over U.S. firms. It

did not, however, replace policies aimed at maintaining an economic environment conducive to innovation. Continued revisions and extensions to

the research and experimentation (R&E) tax credit, for example, allowed firms to write off part of

their R&D investments against tax liabilities. The

National Cooperative Research Act of 1984 clarified antitrust laws related to cooperative R&D

ventures and removed the threat of treble damages

in some cases, thereby encouraging the creation of

several hundred consortia in its first few years.

Amendments in 1993 extended these provisions

to joint manufacturing efforts. Similarly, the consolidation of patent-related appeals into the U.S.

Court of Appeals for the Federal Circuit in 1982

strengthened and clarified patent law, tilting the

law in favor of patent owners.37

Many in the 104th Congress have begun to

question the programmatic efforts of the past decade and, more generally, the optimal scope and

character of the government’s role in the national

innovation system. Though proponents of costshared partnerships have assembled a mass of data

to demonstrate the success of their programs, critics contend that the programs interfere with market forces for allocating R&D resources (i.e., they

pick winners and losers) and crowd out privatesector investment. The new congressional leadership has proposed a reversion to more traditional

forms of stimulating innovation through continued support for basic research, revision and extension of the R&E tax credit, and removal of

regulatory barriers to innovation. The first of these

proposals is seen as a way of creating the knowledge base necessary for innovation; the second, as

a means of stimulating industry investment in

R&D to bring new technologies to market; and the

third, as a means of removing government interference from the marketplace. Evaluation of these

alternative approaches to stimulating innovation

should take into account the complexity of innovation and commercialization and the inadequacy of the much-used linear model of

innovation.

UNDERSTANDING INNOVATION AND

COMMERCIALIZATION

Debate over the government’s role in innovation

hinges implicitly on the conceptual models used

to describe innovation and commercialization.

Traditional views of innovation have been strongly influenced by the linear model of innovation,

which, in its simplest form, posits that innovation

proceeds sequentially through stages of basic research, applied research, development, manufacturing, and marketing. This model assumes that

basic research serves as the source of innovation,

and that new scientific knowledge initiates a chain

of events culminating in the development and sale

of a new product, process or service. In this view,

basic research is the major source of uncertainty;

once basic research is conducted, innovation and

commercialization can proceed apace. Firms with

the best technology, or that are first to market, win

the lion’s share of profits. Combined with arguments about the difficulties firms face in capturing

the returns from investments in basic research, the

linear model reinforces the view that government

should restrict its role to support of basic research,

letting market forces control the rest of the innovation process.

❚ Models of Innovation

The linear model is an inadequate description of

the innovation process because it describes only

one pathway to innovation, that of reducing new

scientific discoveries to practice. Innovation is a

much broader process of developing and putting

37 See U.S. Congress, Office of Technology Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443 (Washington,

DC: U.S. Government Printing Office, February 1990), pp. 211-229.
Chapter 1 Summary and Introduction | 21

into use new and improved products, processes,

and services. As such, it takes on many forms, including: 1) incremental extensions of existing

product lines to provide new or enhanced features;

2) development of entirely new products that

combine existing technologies in novel ways to

serve new market needs; 3) applications of existing products and processes to new market needs—

much as manufacturers of flat panel displays have

adapted semiconductor manufacturing equipment

to their needs; and 4) use of new technology to

serve an existing market need, much as transistors, and later integrated circuits, replaced vacuum tubes in electronic devices. Though

incremental innovation and adaptations of exiting

technology to new markets may seem mundane,

they account for most innovative activity and, in

aggregate, generate returns equal to those created

by less frequent radical innovations.

In many cases, science is not the genesis of innovation. Ideas for new inventions more often

arise from recognition of new market opportunities, advancing manufacturing capabilities, or advances in technology that proceed apart from

advances in the underlying science. The Wright

brothers, for example, developed the first airplane

without an understanding of aerodynamic theory;

Chester Carlson developed the first xerographic

copier without a thorough understanding of photoconductive materials; and many drugs have

been developed with little or no understanding of

the molecular basis for their effects. These inventions, in turn, have triggered considerable research into aerodynamics theory, materials

science, and molecular biology, respectively, as

scientists and engineers attempted to improve

upon the basic invention.

Nevertheless, science plays a vital role

throughout the innovation process. Many of the

most radical innovations stem from scientific

breakthroughs, whether in solid state physics (the

basis of today’s semiconductor industry) or molecular biology (the source of many biotechnologies). More frequently, knowledge gained from

scientific research (basic or applied) provides

valuable information for solving problems encountered throughout the innovation process.

During the product development phase, research

is often needed to understand and analyze the

ways in which components of the product interact

or operate under different circumstances. In the

production stage, research is often needed to improve yields, raise product quality, or lower

manufacturing costs. Much of the progress in integrated circuits, for example, derives from research

into ways of making electronic devices smaller,

which involves investigations into fields such as

optics, materials science, and quantum physics.

As this discussion suggests, innovation rarely

proceeds sequentially from one stage to the next.

It is more often an iterative process in which

scientists, design engineers, production engineers, and marketing experts share information as

they design and test new products, processes, and

services. Many firms have attempted to institutionalize this type of process by reorganizing their

operations into project teams with multidisciplinary membership, rather than maintaining a linear

progression from research lab, to product development teams, to production, to marketing. This

older model often produced mismatches between

the output of the research labs, the needs of the

product designers, and the capabilities of the

manufacturing process, resulting in wasted effort,

high costs, and low quality. Insight from marketing divisions and customers often failed to adequately influence decisionmakers in R&D,

design, and manufacturing, resulting in products

ill-suited to the marketplace.

The nature of innovation changes as industries

and product lines mature. In most industries, innovation proceeds in an evolutionary fashion

through long periods of cumulative incremental

innovation punctuated by moments of radical in-
22 | Innovation and Commercialization of Emerging Technology

novation.38 An industry’s early stages typically

show a high degree of product innovation as firms

develop new means of satisfying a previously unmet demand. Designs are fluid as firms search for

the combination of features and performance that

meets market demand and gains market acceptance; competition is based primarily on product

differentiation. Over time, a dominant design

often emerges that encapsulates a set of performance features that best matches market demand,

and competition shifts away from performance toward cost. The rate of product innovation tends to

slow and become more incremental, but the rate of

process innovation tends to rise. In many hightechnology industries, innovation may shift toward improved cost/performance combinations

as firms develop new product generations with

noticeable improvements in performance (as with

the shift from 386 to 486 processors).

Such changes have strong implications for the

nature of competition in an industry and the position of entrenched competitors. While incremental innovation tends to reinforce the capabilities of

entrenched market leaders, radical innovation

often demands competencies that incumbent

firms lack. In this way, radical innovations can undermine the strengths of established competitors

and allow new firms to gain a foothold in the industry.39 Sometimes entrenched firms lack the

technical capability to develop or manufacture the

new technology: manufacturers of television

screens based on cathode ray tubes, for example,

generally lack the skills required to develop flat

panel displays based on liquid crystal technology.

At other times, competitors have a disincentive to

abandon their existing product lines and markets.

Despite inventing reduced instruction set computing (RISC), IBM was slow to introduce computers

based on the new technology, in part because it

feared the new machines would detract from sales

of its existing product lines. Commercialization

of RISC awaited new entrants, such as SUN Microsystems and Apollo Computer Systems, who

had no stake in the existing complex instruction

set computing (CISC) technology. There are also

cases in which entrenched firms fail to see the

market applications of a new technology. In the

disk drive industry, market leadership has passed

to a new group of firms with each major generational change, not because entrenched firms

lacked the technical skills to adopt the new

technology, but because the technology did not

seem to serve the needs of their established customers, and manufacturers failed to perceive the

value of the technology to a new group of customers.40

❚ Commercialization

Commercialization is an attempt by a firm to profit from innovation by incorporating new technology into products, processes, and services used or

sold in the marketplace. Successful commercialization hinges on many factors. Firms must be

able to: 1) finance new technology ventures; 2)

hire and train skilled scientists, engineers, managers, and production workers; 3) protect their innovation from imitators; 4) acquire or access

complementary skills and technologies required

to make an innovation useful; and 5) gain market

acceptance. The availability of standards, existence of regulatory approval bodies, and the relative ease of new business formation and interfirm

collaboration influence the ability of firms to

commercialize new technologies.

38 James M. Utterback, Mastering the Dynamics of Innovation (Boston, MA: Harvard Business School Press, 1994), p. xix. See also Michael

Tushman and Philip Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly, vol. 31,

1986, pp. 439-465.

39 For a more detailed discussion of this phenomenon, see Utterback, op. cit., footnote 38.

40 Richard S. Rosenbloom and Clayton M. Christensen, “Technological Discontinuities, Organizational Capabilities, and Strategic Commitments,” forthcoming.
Chapter 1 Summary and Introduction | 23

Firms must anticipate future profits in order to

commit to commercializing a new technology.

They must therefore be convinced that markets

exist for their innovation; that they will be able to

appropriate an acceptable share of the total available profits; and that they will be able to develop

or acquire the skills and assets needed to bring the

innovation to market. Estimates of overall profitability hinge on the size of the potential market,

production costs, and the price consumers are

willing to pay for the innovation. These factors

are, in turn, influenced by the availability of complementary assets that make them useful. New

computers, for example, have little utility unless

accompanied by software to run on them; electric

cars are of little interest without recharging stations. Unless these assets are developed and

deployed, a new product or service is unlikely to

be profitable. Competition from alternative

technologies can also limit markets for innovations, as consumers have several means of satisfying a particular need (see box 1-3).

In order to capture a share of the profits generated by innovation, firms must be able to protect

their proprietary position from imitators. In the

pharmaceuticals industry, firms tend to protect

their innovations through patents, which grant the

owners exclusive rights to their invention for 20

years from the date on which an application is

filed. In most other industries, including electronics, autos, and aircraft, patents do not offer sufficient protection because imitators can more easily

find alternative ways of providing the same capability without violating the patent. Therefore,

firms in these industries attempt to keep the workings of their innovations secret (a difficult task for

product innovations) or erect strong barriers to

entry by investing in production capacity to reduce production costs or by rapidly introducing

improved products.

Before they can do so, firms must develop or

acquire the skills to design, manufacture, and market the innovation. Firms that can better harness

these capabilities and orchestrate the contributions of the various actors responsible for bringing

a new technology to market have the best chance

of succeeding in commercialization.41 Japan’s

success in the global marketplace has often been

attributed to its ability to harness or develop complementary assets, such as the manufacturing capabilities that allowed it to introduce new

products faster than U.S. firms. Japanese firms

boasted faster product development cycle times

than U.S. firms and often achieved higher quality

in the process. As a result, they were able to bring

new and improved products to market faster than

U.S. firms and win large portions of the market.

Large investments in process technology rather

than product technology increased this advantage,

as U.S. firms continued to pour greater resources

into product innovation.42

Small U.S. firms are often at a disadvantage in

competition against large, vertically integrated

firms, whether in Japan or the United States, that

have access to necessary complementary assets

and skills internally. Without their own manufacturing facilities or marketing and distribution

channels, small firms are often forced to align

with larger firms or to license their technology to

the owners of such assets. This process not only

can result in the transfer of technology to rival

companies and nations, but can take longer to

complete than if conducted internally, thereby

slowing the commercialization process in the

United States. Conversely, the flexibility afforded

small firms by their limited capital investments

contributes to the dynamism of U.S. industry.

They are less bound to existing investments and

technological pursuits than large firms like DuPont and IBM.

41 For a more complete discussion of this topic, see David J. Teece, “Profiting from Technological Innovation: Implications for Integration,

Collaboration, Licensing and Public Policy,” The Competitive Challenge: Strategies for Industrial Innovation and Renewal, David J. Teece

(ed.) (New York, NY: Ballinger Publishing Company, 1987).

42 Edwin Mansfield, “Industrial R&D in Japan and the United States: A Comparative Study,” American Economic Review, vol. 78, No. 2,

May 1988.
24 Innovation and Commercialization of Emerging Technology

Since 1950, almost all computers—including desktop personal computers—have followed the socalled von Neumann design, in which a single processor performs calculations and a single memory

stores both the program and the data. Increasing numbers of computers are being built with multiple

processors—from a few to thousands—that for some applications can work together on the same problem, The term “scalable parallel computer” denotes a computer in which the number of installed processors can be scaled up—for example, from one to 32, from eight to several hundred, or from 16 to a

few thousand. The United States is the clear leader in the development and commercialization of scalable parallel computing technology.

For some important applications, scalable parallel computers provide the fastest computing available. They can often provide the most cost-effective computing in terms of hardware cost, although

high software development costs often more than outweigh the hardware savings Worldwide sales of

supercomputers in 1993 totaled $1 7 billion. Of that total, about $300 million was for scalable parallel

computers, 1 and the proportion is expected to grow. Today, every major supercomputer manufacturer

sells scalable parallel computers as part of its product line. High performance computing is revolutionizing the way R&D is performed and businesses are run by enabling calculations and analysis that were

not possible before. Leading-edge computers have fundamentally changed the way that quantum

physicists test theories, scientists investigate the risk of global climate change, pharmaceutical companies discover new drugs, and engineers design automobiles and airplanes. They have also changed

how Wal-Mart manages inventory, American Express uses customer data, and Amtrak manages its fleet

of trains.

Scalable parallel computing has not followed the linear model of innovation. Its commercial development in the 1980s was triggered not by new science, but by the demand for increased computing power and the widespread availability of microprocessors. Commercial development preceded a good

theoretical understanding of how multiple processors can work efficiently together, and spurred advances in that theory. Several factors other than scientific understanding have determined the pace of

commercialization: complementary assets, market development, design and standards issues, and finance.

Complementary Assets—The lack of adequate, affordable software is the main impediment to

commercialization. Writing software that lets many processors work efficiently together is inherently

more difficult than writing efficient software for just one processor, and also requires the retraining of

programmers. Until more software is available, scalable parallel computers remain relatively unattractive for most users, compared with more traditional machines with huge software libraries As long as

the number of scalable parallel computers in use remains low, software vendors have limited incentive

to develop software for these computers.

Government software development has facilitated commercialization of scalable parallel computing,

just as it helped Cray commercialize the first supercomputers in the late 1970s. Government laboratories have written software for scalable parallel computers in order to perform government missions.

Some of this software has been used by others; some has also been further developed into commercial

products by firms. Some private sector software development has received direct government funding

(continued)

1U.S. Department of Commerce, U.S. Industrial Outlook 1994, pp. 26-8 through 26-9. This estimate excludes approximately $300

million in specialized computers for database processing manufactured by Teradata (now part of AT&T), as reported by International

Data Corp. (Some do not consider those machines to be scalable parallel computers.)
Chapter 1 Summary and Introduction 125

Market Development— Expansion of markets for scalable parallel computers has been paced by

the ability of firms to better understand user needs and to establish proper distribution channels Early

users of scalable parallel computers needed the fastest possible computing and were willing, for example, to write application software and endure frequent system crashes, Early use included scientific applications (e.g., nuclear weapons design and weather forecasting), and businesses analyzing very

large amounts of data, Teradata (now part of AT&T) held half of the 1992 world market for scalable

parallel computers with specialized machines to analyze data from IBM mainframes.2 In 1992, Federal

Express bought a Thinking Machines computer to analyze customer data—for example, to determine

which customer-recruiting methods yielded the best types of customers and to target mailings to consumers interested in particular products and services. Federal Express viewed such analyses as an

important business management tool, but could not perform them effectively on its IBM mainframes.

Some manufacturers have formed alliances to gain access to, and credibility with, customers, and to

better understand their needs. Intel has teamed up with Unisys to sell to banks and with Honeywell to

serve the military market, Hewlett-Packard (HP) is marketing Convex’s machines to HP’s more extensive

customer base (and is also providing Convex with equity capital, microprocessors, and software), IBM

IS using its established mainframe marketing channels to sell scalable parallel computers, just as decades ago it used its established business machine marketing channels to sell mainframe computers

Design and Standards lssues—Lack of a dominant design has also slowed commercialization

Scalable parallel computers have many different designs, representing different approaches to sharing

data. When one processor is working with a particular data item, other processors that need that item

must often wait until the first IS done, Some designs include expensive hardware to reduce these delays; others do not, and can run efficiently only if the processors rarely need to share data For some

applications, this condition is easy to achieve; for others, it is achievable, if at all, only through great

programming efforts, Physically, designs differ in how the processors are connected to memory. Variations include: 1 ) using a shared central memory (shared memory); 2) giving each processor its own

local memory, but letting other processors access that memory through a multistage switching network

(shared virtual memory or logically shared memory); and 3) giving each processor a purely private

memory, but letting processors send each other messages through an Internal communications network

(distributed memory). An extreme version of distributed memory, made more attractive by advances in

digital communications, involves the use of software that enables desktop computers connected by a

local or wide area network to work together on the same problem, This approach can take advantage of

the time that desktop machines would otherwise be idle.3

The proliferation of designs and vendors exacerbates the software shortage because different types

of computers normally require different software. Some industry standards efforts, facilitated by government, are making it possible in some cases to write software that will run efficiently on different types of

machines (see chapter 3), In addition, the many choices probably have made customers cautious in

terms of which firms will survive to provide support and upgrades

(continued)

2Debra Goldfarb, Director, High-performance Research, International Data Corp., presentation to Office of Technology Assessment, Aug. 26, 1993.

3Another variant of the distributed memory approach is to have stripped-down processors that all execute the same instruction at

once (but on different data).
26 I Innovation and Commercialization of Emerging Technology

Finance-- In the 1980s, most firms trying to commercialize scalable parallel computing had no other

business, and financing was often difficult to obtain. In the 1990s, many established computer

manufacturers—such as IBM, Silicon Graphics, Convex, DEC, Cray Research, and the Japanese supercomputer manufacturers—have entered the market. These firms can finance the development of

scalable parallel computing from other corporate profits. Similarly, some Important independent vendors of software for traditional supercomputers have used revenues from that business to adapt their

software for scalable parallel computers.

Government has been an important source of funds, for both R&D and machine purchases Under

the umbrella High Performance Computing and Communications (HPCC) program, government has

spent roughly $1 billion per year since 1992, of which a substantial portion has been for scalable parallel computing. HPCC has emphasized the development of hardware to perform scientific calculations

very quickly for applications such as weather forecasting and airplane design. This orientation has recently lessened somewhat, however, with increased emphasis on software to make the computers easier to use and on handling very large amounts of data for applications such as electronic libraries and

telemedicine. 4

Some government R&D support has found direct commercial application. The Defense Department’s

Advanced Research Projects Agency (ARPA) funded Cal-Tech in the early 1980s to build the Cosmic

Cube prototype, which inspired the distributed memory machines marketed by Intel and Thinking Machines. After ARPA funded two professors in the late 1980s to write software to handle large databases

on scalable parallel computers, their students took jobs commercializing that approach in several firms.

ARPA has purchased many scalable parallel machines for use in universities and government laboratories, In the early 1990s, ARPA’s procurement heavily favored Intel and Thinking Machines, and thus favored the distributed memory design. This procurement pattern may have contributed to the failure of

some other firms such as Kendall Square Research that built machines based on other designs.5

SOURCE Office of Technology Assessment, 1995

4See Executive Office of the President, Office of Science and Technology PoIicy, National Coordination Office for HPCC, High

Performance Computing and Communications FY 1996 Implementation Plan (May 1995), and prior annual reports.

5U.S. Congress, General Accounting Office, High Performance Computing: Advanced Research Projects Agency Should Do

More To foster Program Goals, GAO/lMTEC-93-24 (Washington, DC May 17, 1993)

ELEMENTS OF INNOVATION SYSTEMS

Though decisions to pursue particular areas of innovation or to commercialize particular technologies are made by individual firms, these decisions

are influenced by factors external to the company

that are often beyond their control. Innovation is

rarely the result of individual genius or the actions

of individual firms. Successful innovation requires the coordinated action of numerous actors

who play vastly different roles, from creating new

science, to financing startup firms, to developing

standards and regulatory regimes. Taken together,

these actors constitute an innovation system, each

component of which is essential to the overarching act of bringing new products, processes, and

services to the market. Though innovation systems span the borders of individual nations, the

ability of a nation to capitalize on new technology

development is largely dependent on its particular

system of innovation.
Chapter 1 Summary and Introduction | 27

❚ The Framework

Innovation systems generally comprise three

main elements:43

1. institutional arrangements that establish the

general environment for innovation;

2. resource endowments that provide the basic

feedstock of innovation; and

3. proprietary functions, typically performed by

private industry, that harness resources and

combine them into new products, processes,

and services.

Responsibility for building and maintaining these

elements falls to both private- and public-sector

actors. While, on the surface, creation of institutional arrangements and resource endowments

might appear to be public responsibilities and proprietary functions may seem like private-sector

functions, all three major elements are influenced

by both industry and government. Hence, both

government and industry have roles to play in

launching new technologies and new industries.

Institutional arrangements are mostly the responsibility of government. Federal agencies promulgate and enforce rules that establish norms for

corporate behavior. These include antitrust policies to limit collusion, and patenting policies to

protect inventors’ rights and promote disclosure

of inventions. Federal agencies also build consumer trust in new products, processes, and services by verifying or warranting their safety and

efficacy; and they participate in standards-setting

activities. Industry also plays a role by individually or collectively attempting to influence the legal

framework to support its needs. Firms conduct legitimation activities by testing and providing warranties for their products. Many standards-setting

bodies are industry-led; and firms often establish

de facto standards by winning broad consumer acceptance of their designs. 

Resource endowments such as financial, scientific, and human resources also have both public

and private components. The federal government

has been the major supporter of basic research in

the United States since World War II, providing

nearly half of the nation’s basic research funding

in 1994.44 It also funds applied research and

technology development, both in support of its

own missions and through initiatives like the

Small Business Innovative Research program and

the Advanced Technology Program. Along with

state and local governments, the federal government provides support for public education from

kindergarten through graduate school. Private

firms also have a role in resource creation. Though

the returns are difficult to appropriate, companies

do fund basic research to promote their own business agendas and to maintain their ability to evaluate and acquire outside research. Private investors

put money into the stock market, venture capital

funds, or directly into startup companies. In addition, private-sector actors contribute to the development of human resources. On-the-job training,

conferences, and employee turnover tend to create

and disseminate human resources throughout an

industry.

Even the functions normally considered proprietary—technology and product development, creation of interfirm linkages and supply chains, and

market creation—are influenced by government

activities. As government attempts to develop

technology for its own missions, whether defense,

health, or energy, spin-offs to the commercial sector are inevitable. Jet aircraft engines and supercomputers are just two examples. Similarly,

government purchases have provided early markets for many new technologies, encouraging producers to invest in manufacturing capacity and

giving them an opportunity to demonstrate their

products in an operational environment. Aircraft,

43 This framework derives from Andrew Van de Ven and Raghu Garud, “A Framework for Understanding the Emergence of New Industries,” Research on Technological Innovation, Management, and Policy, Volume 4, R. S. Rosenbloom and R. A. Burgelman (eds.) (Greenwich,

CT: JAI Press, 1989), pp. 195-225.

44 National Science Foundation, National Patterns of R&D Resources: 1994, NSF 95-304 (Arlington, VA, 1995), table B-2, pp. 54-55.
28 | Innovation and Commercialization of Emerging Technology

integrated circuits, satellites, some energy

technologies, and biotechnology products all received significant early boosts from government

procurement. Recent efforts to stimulate cooperative research between federal laboratories and private industry intend to more fully exploit the

compatibility between government and commercial markets.

❚ Implications

These observations suggest that government may

have a valuable role to play in helping firms overcome the barriers they face in bringing new

technologies to market. To many, barriers to innovation simply represent the market at work,

producing efficient outcomes. If a firm cannot

find financing, it is because financiers have determined that the technology is not worth developing

or that the firm does not have an acceptable business plan. If customers will not purchase a new

product, it is because they have decided the product is too difficult to use, does not meet their

requirements, or may have undesirable side-effects. Not all inventions merit being put to actual

use; not all innovations merit being sold. The market provides an essential discipline as investors

and, ultimately, customers decide which new

products and processes are worth paying for. In

this view, government has little or no role to play

in assisting innovation and commercialization of

particular technologies.

This view, while correctly stressing the central

role that market discipline plays in channeling innovation and commercialization in profitable

directions, appears too simple. As shown in the

body of this paper, many factors can impede commercialization of a technology that producers can

supply and potential customers want. Often economic actors do not have enough information: investors are not aware of investment opportunities,

banks do not understand a firm’s business, producers have a hard time assessing potential customers’ needs, and potential customers cannot

easily determine whether a product will work as

claimed. Without such information, markets cannot operate efficiently, and commercialization

prospects for new technologies can be greatly diminished.

Government already participates in and shapes

markets for new technologies in many ways. It

supports R&D related to government missions;

buys a great deal of goods and services; regulates

financial markets; provides a multitude of incentives and disincentives through its tax laws; has

various programs to help small business; controls

exports of many high-technology goods; and enforces extensive regulations to protect health,

safety, and the environment. Thus, the issue is

often not whether the government has a role in the

commercialization process, but rather how the interaction between government and industry can

best be structured to accommodate technological

innovation and commercialization. Often both industry and government can help firms overcome

the barriers to commercialization, in whatever

forms they may appear (see box 1-4).

The proper role for government can often be determined only on a sector-by-sector basis. Economy-wide measures, while often helpful in

changing general incentives for innovation and

commercialization, cannot always address the

barriers identified in this report. As the innovation

process itself differs across industries, so do the

barriers to successful innovation and commercialization, and so, too, does the proper role of government. In many cases, government has already

found its niche in the commercialization process.

In pharmaceuticals, government funding of basic

research has enabled commercial enterprises to

develop new diagnostic and therapeutic products

and treatments. In electronics, government support for basic research and the development of

technologies for its own (typically defense) missions has accelerated commercial development of

computers, telecommunications, and semiconductors. Changes in the competitive environment

affect these industries differently, requiring different responses from government. New forms of

cooperation will need to be developed and tested.
Chapter 1 Summary and Introduction 29

Firms can encounter difficulties bringing new technology to market at any of several points in the

commercialization process. Often the most difficult stage is that of converting a prototype into a salable

product. In pharmaceuticals, for example, new drugs must undergo clinical trials, which can be both

costly and time-consuming, with no guarantee of a successful outcome, In electronics, scaling up production is often the bottleneck, as state-of-the-art manufacturing facilities can cost several hundred milIion dollars or more (a semiconductor facility can easily cost over a billion dollars) and there IS great

uncertainty over the amount of time required to bring the plant up to full-scale production with acceptable yields. Small firms, in particular, face significant financial constraints in these stages of commercialization, Venture capital and contributions from wealthy individuals (often called angels) are rarely sufficient to meet such costs,

To overcome these barriers, firms frequently ally with partners that provide the necessary working

capital in exchange for patent licenses, equity or some other form of compensation. Such arrangements appear to work best in cases in which both the capital providers and the recipients are in the

same line of business, Several large pharmaceutical companies, for instance, have provided support to

small biotechnology firms in return for a license to the new drug. The large company can manufacture

and market the product through existing distribution channels. In other cases, however, firms cannot

attract funding from other organizations. U.S. flat panel display companies, for example, have been unable to win much support from large electronics firms, many of whom decided against investing in the

technology a decade ago or more. Part of the reason for this difficulty is that large firms view themselves not as potential manufacturers of flat panel displays, but as users of the displays Gwen the

availability of displays from Japanese producers, these large users have little incentive to support small

U.S. firms.1

Government can sometimes assist companies facing such difficulties, In the case of flat panel displays, it is trying several different approaches. First, government IS providing some funding for the U S

Display Consortium (USDC), a group of display manufacturers, suppliers, and users attempting to develop the infrastructure required for a domestic display industry, USDC has helped to interest large potential users in investing in display manufacturing firms, though no such transactions have yet occurred

In addition, through the National Flat Panel Display Initiative (NFPDI), the federal government IS attempting to use its purchasing power to provide market assurances to firms willing to scale up to volume

manufacture. By tying some portion of federal R&D funding to commitments from firms to invest in production capacity, the government is also trying to reduce the financial risks associated with scale-up It

is unclear whether such measures will be effective, but they demonstrate the variety of roles government can play in helping industry overcome obstacles to commercialization,

SOURCE: Office of Technology Assessment, 1995,

1 For a more thorough discussion of the difficulties facing the U.S. flat panel display industry, see U S Congress, Office of Technology Assessment, Flat Panel Displays In Perspective, forthcoming,
Innovation

and

Commercialization

nnovation does not necessarily proceed linearly from basic scientific research to product development; it is an iterative process of

both matching market needs to technological

capabilities and conducting research to fill gaps in

knowledge, whether during product conception,

product design, manufacturing, marketing, or other phases of the innovation process. Commercial

success depends as much on the ability of firms to

establish and protect a proprietary advantage in

the marketplace as it does on their ability to generate new scientific and technical advances.

The process of innovation varies dramatically

across industries and product lines. In some industries, like pharmaceuticals, innovation depends

heavily on scientific breakthroughs; in others, like

electronics, it derives more from product and

process design. In addition, innovation takes on

different characteristics throughout product and

industry life cycles. Nascent industries exhibit

high levels of product innovation as firms attempt

to settle on the primary characteristics and architectures of their new offerings; later phases are

characterized more by process innovation, as

firms attempt to improve their means of manufacturing existing product lines. Government policies to facilitate innovation and commercialization

can be more effective if they recognize the varying

conditions leading to success in different industries and address the many barriers firms face in all

stages of innovation, from emergence to maturity.

THE PROCESS OF INNOVATION

Technological innovation is the act of developing

and putting to use new products and processes. It

demands novelty in either the product/process/

service, the application, or both. Innovation therefore includes not only the development of entirely

new products, processes, and services that create

new applications, but also the development of

new products, processes, and services for use in

existing applications (e.g., integrated circuits replacing vacuum tubes in electronic applications),

or the use of an existing product, process, or service in a new application (e.g., manufacturers of

flat panel displays adapted semiconductor

manufacturing equipment to their needs). Innovation is more than just invention, which is the act of

devising new products, processes, and services

that are not obvious to someone skilled in the field
32 | Innovation and Commercialization of Emerging Technology

and that represent clear departures from prior art.1

Innovation requires that inventions be reduced to

practice; that new products, processes, and services be designed, manufactured, and adopted by

users. Many inventions are never put into practice—some because they cannot meet users’ cost

and performance requirements, others because

they are technologically infeasible.

No single model accurately depicts the process

of innovation; innovation occurs differently in

different industries and product lines as firms attempt to develop products and processes that meet

market needs. In the pharmaceutical industry, for

example, innovation is closely coupled to scientific discoveries and follows a fairly linear pathway

through manufacturing and marketing, although

firms often begin constructing manufacturing facilities while the drug is undergoing clinical trials.

Few other obstacles impede the innovation process in pharmaceuticals: new products can often be

protected from imitation by strong patent protection, markets are quite easily identified and quantified, and third-party payment systems (i.e.,

insurance companies and Health Maintenance Organizations (HMOs)) relax some of the cost

constraints on new products.2 In contrast, innovation in the semiconductor industry derives more

from new product design and improvements in

manufacturing technology than from advances in

basic science; product life cycles tend to be short

(not longer than 3 years in most cases) and consumers are highly sensitive to cost, making commercial success more uncertain. In the

commercial aircraft industry, innovation is highly

centralized in a few producers who act as integrators of components from a broad range of suppliers, product cycles are several decades long, and

manufacturers work closely with users to define

product specifications and costs.

As these limited examples suggest, innovators

face different obstacles in developing and marketing new products, processes, and services, and

must proceed through a different set of steps to

successfully bring a new invention to market. Not

only do differences in industry structure and the

nature of markets impose different constraints on

the innovation process, but science, technology,

and innovation are linked in different ways in different industries. These observations suggest that

innovators follow many different pathways

through the innovation process, and that attempts

to facilitate innovation and the commercialization

of emerging technologies must take different

forms.

❚ The Linear Model

Public policymaking regarding innovation has

long been based on the linear model of innovation.

In its simplest form, this model postulates that innovation begins with new scientific research, proceeds sequentially through stages of product

development, production, and marketing, and terminates with the successful sale of new products,

processes, and services (see figure 2-1). As such,

the linear model implies that the way to maintain

leadership in markets for high-technology goods

is to maintain leadership in basic scientific research. Though the model recognizes that development, production, and marketing activities lie

between research and product sales, it views these

processes more as part of the innovation pipeline

than as major obstacles to commercial success.

The linear model gained considerable support

after World War II, in part because it explained the

1 In order to be considered for a patent, new products, processes, and services must be both novel and nonobvious to someone experienced

in the field. Many inventions are never patented, either because of the time and effort required to acquire a patent, or because inventors do not

wish to publicly disclose the operation of their new product or process.

2 Recent changes in the health care industry, including the rapid growth of health maintenance organizations (HMOs) and the frequent mergers between hospitals and medical practices, are altering the process of innovation in medical technology by placing a greater premium on costeffective treatments and diagnostics. See Gerald D. Laubach and Annetine C. Gelijns, “Medical Innovation at the Crossroads,” Issues in Science

and Technology, spring 1995, pp. 33-40.
Chapter 2 Innovation and Commercialization 33

Research ------> Developmen t

SOURCE: Office of Technology Assessment 1995

genesis of important new military capabilities.

The atomic bomb derived almost directly from

fundamental research in elementary physics; radar derived from research into microwave radiation. The Department of Defense (DOD) further

embedded the linear model into federal policymaking by instituting accounting categories for

research and development (R&D) that corresponded to individual cells in the linear model. In

its current form (revised slightly in FY 1995), the

DOD model breaks the innovation process (referred to as research, development, test, and evaluation, or RDT&E) into seven stages. numbered

6.1 through 6.7 (see box 2-1 ). Projects move sequentially through the categories, from basic research through development and manufacturing,

as the technology matures and is applied to new

military systems. Because DOD funding dominated federal R&D expenditures throughout the

postwar period and drove much of the U.S. research agenda, these categories permeated the

thinking about innovation in the United States.

The linear model was further legitimated by

Vannevar Bush, science advisor to Franklin Roosevelt, whose treatise, Science, The Endless Frontier, became the template for postwar technology

policy in the United States. This document stated

that funding of basic research would fuel development of technologies that could help advance

many social goals, including national defense.

health care, and industrial competitiveness. Bush

saw funding of basic research as a fundamental

mission of the federal government, noting that industry had several disincentives to adequately

support long-term fundamental research. He believed, however, that further development and application of new technologies was the sole

province of industry, which was better suited to interpreting market needs and identifying lucrative

investments.

Effects on Policy

Government policy toward commercial innovation has followed the linear model to a large

degree. Support provided specifically for commercial innovation has traditionally been limited

to funding of basic scientific research. Institutions

such as the National Science Foundation (NSF)

and the National Institutes of Health (NIH) provide support for basic research, much of it conducted in U.S. universities. Other policies attempt

to create an environment conducive to innovation

through legal mechanisms such as tax codes, patent law, and antitrust regulations. Such tools tend

to operate on an economy-wide level, making no

distinctions between industries, though the effects

often vary considerably across different industries. For example, changes in the tax code to allow faster depreciation of capital equipment

would likely have a greater effect on the semiconductor industry than on pharmaceuticals because

of the high cost of semiconductor manufacturing

equipment and the large contribution capital expenditures make to semiconductor production

costs. Changes in patent law, on the other hand,

would likely affect the pharmaceutical industry

more than semiconductors because patents are

used more frequently in the pharmaceutical industry to protect against imitation.

3 Vannevar Bush, Science, The Endless Frontier: A Report to the President (Washington, DC: U.S. Government Printing Office, 1945).
34 I Innovation and Commercialization of Emerging Technology

6.1 Research: New concepts are developed through laboratory research.

6.2 Exploratory development: Promising research results are applied to preliminary laboratory devices,

6.3 Advanced development: Technologies are demonstrated in representative systems through Advanced Concepts Technology Demonstrations, and prototypes are developed

6.4 Demonstration and validation: Technologies that meet an articulated operational need are demonstrated and validated.

6.5 Engineering and manufacturing development: The product/system incorporating the new

technology is redesigned for manufacturing.

6.6 RDT&E management support: Provides overhead and management funds for all RDT&E activities.

6.7 Operational system support: Systems in production or already fielded are improved and upgraded through the incorporation of new technology.

SOURCE: Richard M Nunno, “Defense R&D in the 1990s,” IB-93096 (Washington, DC Congressional Research Service, July 18,

1994), p. 1.

Other support for innovation has come from

mission agencies of the federal government, such

as DOD, the Department of Energy (DOE), and

the National Aeronautics and Space Administration (NASA). Much of the $71 billion in federal

R&D spending in 1994 (see table 2-1) promoted

initiatives of interest to the federal government

that are typically not addressed independently by

the private sector. Though mission-oriented R&D

does not attempt to directly influence commercial

applications of technology, it can have an indirect

effect by strengthening the science and technology base from which commercial firms can draw

and through more explicit attempts to spin off or

transfer government technologies to the commercial marketplace.4

Pursuit of government missions has often exerted a strong influence on commercialization of

civilian technologies. Decisions by DOD to use

integrated circuits (ICs) in the Minuteman missile

systems and by NASA to use ICs in the Apollo

program provided the first markets for the new

technology, and coaxed firms to invest in

manufacturing capacity. Commercial firms such

as IBM had decided against using ICs in their latest products because of the uncertainty over the

reliability of the new technology. Other research

funded by DOD generated technologies that were

quickly adopted for commercial applications.

Today’s Internet traces its history to the ARPANET, a computer network established by the

DOD’s Advanced Research Projects Agency

(ARPA) around 1970. ARPA-funded research on

gallium arsenide for millimeter wave communications systems and on high performance computing has found its way into wireless

communications systems and parallel computers

sold in the commercial marketplace.

At times, the federal government has explicitly

moved beyond a strict interpretation of the linear

model in order to facilitate the development of

particular innovations or industries. Since 1987,

the federal government, acting through the DOD,

has provided funding of $90 million to $100 million annually to support the efforts of SEMATECH, a consortium of major U.S. semiconductor

4 John Alic et al., Beyond Spinoff: Military and Commercial Technologies in a Changing World (Boston, MA: Harvard Business School

Press, 1992).
Chapter 2 Innovation and Commercialization I 35

Department/Agency R&D Fundingc

Agriculture

Commerce a

Defense

Energy

Health and Human Servicesb

Interior

Transportation

Environmental Protection Agency

National Aeronautics and Space Administration

National Science Foundation

Other

Total

$1,364

897

37,523

6,582

10,723

589

688

656

8,637

2,217

1,368

71,244

a

lncludes $382 million in funding for the National Institute of Standards and Technology and $504 million for the

National Oceanic and Atmospheric Administration. b

lncludes $10.1 billion in funding for the National Institutes of Health

cEstimated obligations for 1994

SOURCE: National Science Foundation, National Patterns of R&D Resources: 1994, NSF 95-304 (Arlington, VA:

1995), pp. 79-80

manufacturers. Although the rationale for the program was based on national security grounds,

federal participation in SEMATECH has strengthened the U.S. supplier base for semiconductor

manufacturing equipment and contributed to the

subsequent resurgence of the U.S. civilian semiconductor industry. While SEMATECH is frequently viewed as a success, government

sponsorship of other technology programs, such

as shale oil and the supersonic transport (SST),

have been widely criticized.5

Limitations of the Linear Model

Despite its pervasive use, the linear model suffers

from several drawbacks that limit its applicability.

Many innovations derive not from advances in

science, but from exploiting existing scientific

knowledge and from recognizing potential new

markets for certain types of products, processes,

or services. Science nevertheless plays an important role throughout the innovation process by

providing information with which to solve problems identified in design, manufacturing, or other

stages of the innovation process. In addition, innovation does not always follow a linear pathway

from research to marketing. Often, technological

developments precede scientific research, and lessons learned from manufacturing and marketing

operations can feed back into the product development process. Innovation is usually an iterative

process in which designs must be continually

tested, evaluated, and reworked before an invention achieves market success.

Science and the sources of innovation

Basic research, while an important part of the innovation process, is not the source of all technological innovation. Ideas for new products and

processes derive from many sources: new science,

new technological breakthroughs, new perceptions of market demand, or customers themselves.

U.S. firms indicate that just 58 percent of their

new R&D projects derive from ideas generated by

their scientific and technical staff; the remaining

42 percent derive from marketing and production

departments or from customers, although considerable variation exists across industries (see table

2-2). Japanese firms demonstrate an even greater

5 See, for example, Linda R. Cohen and Roger G. Nell, The Technology Porkbarrel (Washington, DC: The Brookings Institution, 1991).
36 I Innovation and Commercialization of Emerging Technology

R&D Marketing Production Customers

Industry Us. Japan U.S. Japan U.S. Japan U.S. Japan

Chemicals 45% 49% 25% 23% 14% 15% 8% 3%

Electrical 90 47 7 21 1 5 1 27

Machinery 56 44 21 22 4 11 18 20

Autos, instruments, and metals 51 48 25 8 12 26 11 13

Average, all respondents 58% 47% –- 21%— 18% 9% 15% 9% 15%

SOURCE: Edwin Mansfield, ‘ Industrial R&D in Japan and the United States: A Comparative Study, ” The American Economic Review

—

May 1988, p 227

reliance on ideas generated outside their R&D de- ucts likely to yield a financial return, as well as the

partments. This even applies in industries such as cost and performance attributes required; the latter

electronics, in which U.S. firms report that 90 per- provides insight into viable means of serving the

cent of R&D projects are suggested by their R&D market need. Many attempts have been made to

departments. determine the relative contributions of these two

Development of new products, processes, and forces-often referred to as market pull and

services is guided by a knowledge of both market technology push—in eliciting innovation, but

needs and scientific and technological capabili- such analyses suggest that innovation is strongly

ties. The former helps determine the types of prod- influenced by both (see box 2-2). Innovation is a

New innovations are both pushed along by new scientific and technological discoveries and pulled

along by market forces. Several studies have attempted to discern the relative Importance of technology push and demand pull in stimulating innovation, but the results are Inconclusive,

One set of studies traces the histories of particular innovations in particular firms in an attempt to

discern whether critical events during the innovation process were motivated by new science and

technology or better perceptions of market need. 1 These studies tend to conclude that market pull

dominates the Innovation process. One representative study finds that market needs motivated research in 45 percent of the innovations studied; potential gains in manufacturing—which the authors

consider a type of market-driven Innovation—accounted for another 30 percent. In only 21 percent of

the 567 innovations examined in five Industries was technology considered the driving force 2 Such

studies, however, tend to suffer from imprecise definitions of market need and view innovation from the

perspective of the innovating firm, whose motivations in innovation should be market-oriented Studies

such as the Department of Defense’s HINDSIGHT,3 which examined successful military development

programs but considered only critical events that occurred 20 years or less before commercialization

tend to ignore most of the long-term influence of basic research because of their short time horizons

(continued)

1 R. Rothwell et al., “SAPPHO Updated Project SAPPHO Phase 11, ” Research Policy November 1974; J. Langrish et al. , Wealth

from Knowledge: A Study of Innovation in Industry (New York, NY: Halsted/John Wiley, 1972), S Meyers and D G Marquis, Successful Industrial Innovation (Washington, DC National Science Foundation, 1969), J M Utterback, “lnnovation in Industry and the Diffusion of Technology, ” Science, Feb. 15, 1974.

2 S Meyers and D G Marquis, Successful Industrial Innovation (Washington, DC National Science Foundation, 1969)

3 Office of the Director of Defense Research and Engineering, Project HINDSIGHT (Washington, DC U S Department of Defense

1969)
Chapter 2 Innovation and Commercialization 37

Another set of studies looks more broadly across companies, industries, or economies in an attempt

to Iink economic growth or competitive success to R&D and market demand.4 These analyses demonstrate a much greater dependence on technology push as the dominating factor in innovation. The evidence cited in such works suggests a weak relationship between the size and sophistication of national

markets and the performance in technological Innovation. Much higher correlations are found between

national Innovative performance and supply side factors such as the number of large firms, levels of

R&D, and capabilities in fundamental research.5 This observation applies equally well to comparisons

of the innovative performance of Industries within a national unit. Differences in rates of Innovation

across Industries are more closely related to factors such as producer concentration and technological

opportunity than to market factors.6 Demand theories do not easily explain the wide variations in performance of Individual industries with respect to technological innovation and productivity growth.

Together, these studies demonstrate that both market pull and technology push play a role in initiating Innovative activities. Few Innovations can be categorized as examples of technology push or demand pull in a clear and unambiguous manner, and few can be described as a linear sequence with a

clearly defined starting point.7 Innovation is an iterative process that responds to both demand and

supply side forces. Successful innovations tend to undergo extensive modification during development.

This IS due to changes in perceptions of user requirements and of producers’ abilities to offer the product, process, or service with the necessary features at an acceptable cost.

Technology push does appear to play a larger role than demand pull in major, revolutionary innovations. One study notes that recognition of a discovery’s potential usefulness served as the impetus for

Innovation in over 14 percent of the major innovations (which, themselves, represented 13 percent of

their total sample), while identification of a particular market need served as the impetus in just 6 percent of the cases. g For minor Innovations, the study finds that technology push was important in just 5

percent of the cases, while need identification was important in more than 18 percent. The study also

finds that the most Important factor delaying successful innovation—occurring in 32.5 percent of the

cases—is Insufficient development of a complementary technology. In 22.5 percent of the cases, there

existed at first no market or need; and management failed to recognize the need for the innovation in

76 percent of the cases. For major innovations, the lack of market and lack of complementary technology factors were of equal Importance, while for minor innovations, the lack of complementary technology

was more Important than lack of market.

SOURCE Off Ice of Technology Assessment, 1995

4 C Freeman, The Economics of Industrial Innovation (Cambridge, MA MIT Press, 1982), K Pavitt, The Conditions for Success in

Technological Innovation (Paris: Organisation for Economic Cooperation and Development, 1971)

5 Pavitt, Ibid , p 53

6 David Mowery and Nathan Rosenberg, “The Influence of Market Demand Upon Innovation A Critical Review of Some Recent

Empirical Studies, ” Research Policy. voI. 8, 1979, p 144

7 J. Langrish et al., Wealth from Knowledge: A Study of Innovation in Industry (New York, NY: Halsted/John Wiley, 1972)

8 Ibid.
38 | Innovation and Commercialization of Emerging Technology

process of trial and error, of finding workable

solutions to known or perceived market needs. Innovators continually try to find new applications

for science and technology and ways of satisfying

market demands, but not until technology push

and market pull are combined do innovations find

market success.

Though not unique in its ability to initiate innovation, science nevertheless plays a critical role

throughout the process. Scientific discoveries can

pave the way for numerous innovations—and industries—as the linear model suggests. Today’s

semiconductor technology derives from scientific

research into solid state physics; the biotechnology industry derives from recent advances in molecular biology. In these cases, long-range

theoretical investigations into the nature of the

physical universe provided new knowledge that,

in turn, opened entirely new avenues for approaching particular problems. Such science is

typically pure, long-range science, needed to test

predictions of existing theory or to more fully develop that theory. Because it helps construct the

theoretical framework describing natural processes, such research often takes many years—

even decades—to translate into practical

applications.

Science and scientific research also contribute

to other stages of innovation. Product developers

often conduct scientific research to solve technical

problems that arise during the design of a product,

process, or service. Manufacturing engineers also

rely on scientific research to overcome manufacturing problems. In chemicals, better understanding of catalyst and chemical reactions can lead to

improved yields or lower production costs. In

semiconductors, improvements in the capability

of microprocessors or the storage capacity of

memory chips rely on research into manufacturing techniques that allow more devices to be

packed onto an individual integrated circuit. Research performed to support development activities is often geared toward understanding the ways

in which the components of a complex system interact and the properties of the overall system

created by multiple interactions. Research in the

production stage is often conducted to investigate

ways of manufacturing particular components of a

system and to find ways of reducing costs through

the use of special equipment or less expensive materials. In products developed for the commercial

marketplace, systems and process research are not

only necessary to the proper functioning of the innovation, but are often more important than basic

science in reducing costs and improving performance.

Many firms distinguish between research activities undertaken to explore and develop a new

body of knowledge and those pursued to solve

particular problems in the development process.

In the former case, the goals of the research are

often diffuse and the benefits are difficult for any

one company or institution to monopolize. In the

latter case, research results are more targeted and

the results easier to appropriate. Researchers,

therefore, tend to collaborate more widely on the

former type of R&D and to share information

more freely. In the latter case, researchers will usually try to solve the R&D problem with internal resources or with limited use of outside capabilities.

Science feeds into the innovation process in

other ways as well. Scientific researchers often develop analytical tools that engineers later use in

designing product, processes, and services. Scientists also create instrumentation, lab techniques,

and analytical methods that eventually find their

way into industrial process controls. Examples include electron diffraction, the scanning electron

microscope, ion implantation, synchrotron radiation sources, phase-shifted lithography, and superconducting magnets. Such instrumentation is

often developed in pursuit of basic research, but is

later adapted for manufacturing purposes.

The pathway through innovation

Innovation rarely proceeds in a linear fashion

from one well-defined stage to the next. Most innovations take a much more complicated route

from invention to marketplace. Often, market perceptions generate ideas for new products that, in

turn, stimulate scientific research. In addition, advances in technology can precede advances in the

science base (see box 2-3). The Wright brothers,

for example, knew little, if anything, about formal
Chapter 2 Innovation and Commercialization 39

Technology IS often considered the practical application of science. As such, it is commonly thought

to depend on and follow behind advances in the underlying science. This progression IS certainly true

in some cases. The discovery of radio waves—a result of Hertz’s attempt to follow up on predictions

made by Maxwell several years earner-clearly paved the way for technological advances in such

areas as radio, television, and communications. The discovery of superconductivity has paved the way

for magnetic resonance imaging and high-strength industrial magnets.

Such an understanding of technology is limited, however. Technology is not merely the application of

knowledge generated by scientific activity; it is a body of knowledge about certain classes of events

and activities. It is a knowledge of techniques, methods, and designs that work, and that work in certain

ways and with certain consequences, even when one cannot explain exactly why. Science and technology are best thought of as two parallel streams of cumulative knowledge that have many interdependencies and cross relations, but whose internal connections are much stronger than their cross connections. As a result, technological progress is not necessarily dependent on scientific progress.

Technology itself often dictates its own path of development along what have been referred to as

technological trajectories. Just as science is often considered to operate under distinct paradigms that

determine relevant problems and approaches for solving them, so, too, does technology operate under

particular paradigms that consist of sets of procedures, definitions of the relevant problems, and details

of the specific knowledge related to their solution. Each technological paradigm defines its own concept of progress based on its specific technological and economic tradeoffs. A technological trajectory

IS the direction of advance within a technological paradigm.

Technological knowledge often precedes scientific knowledge and signals lucrative areas for scientific research. Torricelli’s demonstration of the weight of air in the atmosphere was an outgrowth of his

attempt to design an improved pump. Carnot’s creation of thermodynamics was an attempt to understand the efficiency of steam engines some 50 years after Watt introduced the invention itself. Joule’s

discovery of the law of conservation of energy derived from an interest in alternative sources of power

generation in his father’s brewery; and Pasteur’s development of bacteriology emerged from his attempt

to deal with problems of fermentation and putrefaction in the French wine industry. These Iimited examples show that basic science can—and often does—arise out of an attempt to understand a narrow

technical problem. 1

Technology also drives science by providing a huge repository of raw data for scientists to scrutinize

in developing better scientific theories. Successful development of a new device often stimulates scientific research to better understand its operation and improve its performance. The natural trajectory of

certain technological improvements identifies and defines the Iimits of further improvement, which in

turn focuses subsequent scientific research. In some cases, the advance of knowledge occurs only by

actual experience with a new technology in its operating environment, as has occurred in aviation, for

example. One of the central features of high-technology industries is that technological progress identifies the directions of new scientific research offering a high potential payoff. In telecommunications,

transmission over longer distances, and the introduction of new modes of transmission, have generated

basic research into the interactions of electromagnetic radiation with weather and atmospheric conditions.

SOURCE: Nathan Rosenberg, Inside the Black Box: Technology and Economics (New York, NY: Cambridge University Press, 1982)

pp. 141-159; Harvey Brooks, “The Relationship Between Science and Technology, ” Research Policy, voI. 23,1994, p 479, Giovanni

DOSi, “Technological Paradigms and Technological Trajectories, ” Research Policy, vol. 11, 1982, pp. 147-162

1 Giovanni Dosi, “Technological Paradigms and Technological Trajectories, ” Research Policy, vol. 11, 1982, pp. 147-162 Examples are from R R Whyte (ed.), Engmeermgf’regress Through Trouble (London: The Institution of Mechanical Engineers, 1975)
40 | Innovation and Commercialization of Emerging Technology

aerodynamics theory; yet, through consistent refining of designs, they successfully developed the

first airplane. Development of the microprocessor

also derived more from advances in technology

than in science, as improvements in semiconductor manufacturing techniques reduced the size of

devices that could be fabricated on an integrated

circuit (IC) and allowed the multiple component

parts of a microprocessor to be fabricated on a

single IC.

Parallel computing is a more recent example of

a major innovation that derived from advances in

technology that preceded the underlying scientific

theory. Parallel computers use multiple processing units simultaneously to conduct data- or computation-intensive calculations. Parallel computers

did not derive from basic research into the nature

of algorithms for parallel computation, but from

an attempt to overcome the bottleneck on processing speed imposed by reliance on a single processor. Initial activities centered around the design

and construction of prototype machines with different internal architectures for linking multiple

processors (which in some designs number more

than 1,000) and memory. These activities fall into

the category of engineering design and development, not scientific research.

Of course, the availability of parallel computers has stimulated basic research on algorithms for

parallel computation, which will enable these

computers to be used more efficiently. As with all

electronics technology, parallel computing builds

on a base of fundamental scientific knowledge

about solid state physics. The components that

comprise the processors and memory chips used

in parallel computers could not have been made

without that understanding. Several versions of

parallel computers incorporate gallium arsenide

processing units in an attempt to increase processing speed. But such research, in itself, did not trigger the development of parallel computers.

A further blurring of the lines between stages in

the innovation process has resulted from deliberate attempts by firms to revamp their product development processes. In the past, large companies

with corporate research laboratories, such as

AT&T, DuPont, IBM, and Xerox, organized their

product development activities as a linear progression from research lab to marketing. Corporate laboratories independently generated new

science and technology and transferred their results to the product development divisions. They,

in turn, designed new products, constructed prototypes, and passed the designs to the manufacturing divisions for production. This model often

caused mismatches between the output of the research labs, the needs of the product designers,

and the capabilities of the manufacturing process,

resulting in wasted effort, high costs, and low

quality.6

This model has been replaced, to a large degree,

by concurrent forms of product development in

which responsibility for new product development is given to a project team consisting of representatives from the research, development, manufacturing, and marketing divisions. Such organization reflects the desire to incorporate insights

from each of these areas of expertise into the original conception of the innovation, making it simpler to target corporate research toward commercial

goals and eliminate downstream problems that

often hampered manufacturing and marketing.

Furthermore, innovation is a highly iterative

process, characterized by constant feedback from

markets. The personal computer, for example,

went through several iterations by SRI, Inc. and

Xerox Corp., among others, before the Apple II

became a success. The automobile and airplane

went through similar periods of refinement. This

process allows experience gained in later stages of

innovation, such as manufacturing and marketing,

to feed back into earlier stages, such as basic re6 Council on Competitiveness, Picking Up the Pace (Washington, DC: Council on Competitiveness, 1988); David A. Hounshell and John

Kenly Smith, Jr., Science and Corporate Strategy: DuPont R&D, 1902-1980 (New York, NY: Cambridge University Press, 1988); and OTA

interviews.
Chapter 2 Innovation and Commercialization | 41

search and product design. As new products and

processes are tested in the marketplace, firms

learn first-hand about the performance and cost attributes demanded by consumers, and use that information to develop improved versions of the

product, process, or service. In this way, the development and adoption of innovations are closely

interrelated. Adoption, rather than representing

the end point of the development process, constitutes the beginning of an often longer process of

redesign whereby the design can be iterated, research can be conducted to identify means of improving performance or reducing cost, and

manufacturing problems can be resolved.7

❚ Alternative Views of Innovation

As these observations suggest, technological innovation is more that the direct translation of new

scientific knowledge into marketable products;

rather, it is a more complex process of developing

and putting to use new products, processes, and

services. This process can take many forms: 1) development and application of new products, processes, and services to satisfy previously unmet

market needs, as the linear model implies; 2) development and application of new products, processes, and services—usually based on new

science and technology—to existing market

needs; 3) use of existing products, processes, and

services in new applications; and 4) incremental

improvements to existing products, processes,

and services for their existing applications. Each

type of innovation presents different challenges to

innovators. Impediments to progress can range

from a limited science and technology base, to

competition from existing technologies, to unreceptive markets.

One attempt to model the complex interactions

between science, technology, and innovation is

the Chain-Link Model of innovation.8 In contrast

to the linear model, the chain-link model allows

for feedback between stages of the development

process, and separates science from the development process to highlight the multiple roles science plays in innovation. The chain-link model

breaks down the process of developing new products, processes, and services into five stages: 1)

recognition of a potential market; 2) invention or

the production of an analytical design for a new

product; 3) detailed design, test, and redesign; 4)

production; and 5) distribution and marketing (see

figure 2-2). The process typically proceeds linearly, but is supplemented by feedback between adjacent stages that iterates each step as necessary

(arrows marked ‘f’ in figure 2-2). In this way, a

problem identified in the design and test phase, for

instance, forces innovators to attempt a new design. Additional feedback from users in the marketplace is also incorporated into each stage of the

process (along the pathways marked ‘F’) to help

ensure that the design of a new product—and the

technological capabilities incorporated into it—

matches the demands of the marketplace.

This model allows for several different types of

innovation. First, new scientific discoveries can

create new opportunities for novel products and

processes, much as advances in physics laid the

groundwork for development of the integrated circuit. New science and technology often provided

new means of serving existing markets, displacing existing technologies in the process. Integrated circuits, for example, provided a new

means of modifying electronic signals, and

eventually replaced vacuum tubes in most applications. Second, newly recognized market

needs can stimulate the development of new products and processes that are based on existing

technologies, though some additional R&D may

be needed. IBM’s PC and Sony’s first portable

transistor radio, although based on existing

7 Annetine Gelijns and Nathan Rosenberg, “The Dynamics of Technological Change in Medicine,” Health Affairs, summer 1994, pp. 30-31.

8 This description of the product/process development model is based on a model developed by Stephen Kline at Stanford University. See

Stephen J. Kline and Nathan Rosenberg, “An Overview of Innovation,” in Ralph Landau and Nathan Rosenberg (eds.), The Positive Sum Strategy (Washington, DC: National Academy Press, 1986), pp. 275-305.
42 Innovation and Commercialization of Emerging Technology

Research

R R

D I

c ---> c —

Invent

Potential and/or

market produce

analytic

design

---> c —

Detailed

design

and test

---> c ---->I

Redesign Distribute

and and

produce market

I I I I I

f f

F

KEY: C = central pathway of innovation; D = scientific discoveries that generate radical innovations, F = market feedback, f = iterative feedback between stages; I = innovations that contribute directly to scientific research, such as the

microscope and telescope; K = contributions of existing knowledge to the renovation process, R = research used to

solve problems encountered throughout different stages of innovation.

SOURCE: Stephen J Kline and Nathan Rosenberg, “An Overview of Innovation,” The Positive Sum Strategy: Harnessing Technology for Economic Growth, Ralph Landau and Nathan Rosenberg (eds.) (Washington, DC National Academy Press, 1986), p 290

technology, opened vast new markets. Third, innovation can be incremental. Existing products

can be enhanced to improve performance or lower

costs, or they can be modified slightly to be used

in new markets. New software development has

enabled personal computers to expand into a wide

variety of applications, such as word processing,

database management, and electronic communications. These types of innovation differ in the

ways they incorporate R&D, in the barriers they

face, and in the types of innovations they generate.

Science- or Technology-Driven Innovation

Science usually plays a subservient role in innovation, providing answers to questions posed at different points in the innovation process. However,

scientific or technological discoveries do, at

times, act as the genesis of new innovations by

creating entirely new ways of serving existing or

new markets. This often occurs in industries such

as pharmaceuticals, chemicals, and materials—

that are characterized more by discovery of new

products than by their design—but scientific and
Chapter 2 Innovation and Commercialization 43

Material Invented Commercialized

Vulcanized rubber 1839 late 1850s

Low-cost aluminum 1886 early 1900s

Teflon 1938 early 1960s

Titanium mid-1940s mid-1960s

Velcro early 1950s early 1970s

Polycarbonate (bullet-proof glass) 1953 1970

Gallium arsenide (semiconductor) mid-1960s

Diamond-like thin films

mid-1980s

early 1970s early 1990s

Amorphous soft magnetic materials (for transformers) early 1970s early 1990s

SOURCE: Thomas W. Eagar, “Bringing New Materials to Market"

technological advances are responsible for creating major changes in other industries as well.

Scientific and technological research has generated new products such as lasers, liquid crystal

displays, and integrated circuits, each finding its

way into myriad products, serving different markets.

Translating new science into new products is

typically a slow, laborious process. New materials

typically experience a 20-year lag between invention and widespread adoption (see table 2-3); lasers took decades to advance from a laboratory

curiosity to an integral component of communications systems, medical devices, and consumer

electronics. Much of the difficulty in commercializing scientific breakthroughs is in determining

suitable applications and understanding the engineering limitations of new devices. In many cases,

the science is still not sufficiently understood for

scientists and engineers to select the application

with the highest probability of successor the most

favorable financial return.

New technology often finds its greatest success

in products that were not even conceived of at the

time of discovery. Low-temperature superconductors, for example, found their greatest application in medical magnetic resonance imaging

(MRI) devices, which were not conceived of until

six or more decades after the discovery of superconductivity. In this case, as in many others, addiTechnology Review, February/March 1995, pp. 42-49.

tional pieces of information were needed before

the innovation could be realized. MRI technology

depended not only on the availability of high-field

superconducting magnets, but of nuclear magnetic resonance spectroscopy, computer imaging,

and fast signal processing technologies as well.

None of these was available when superconductivity was first discovered in 1911, or when the

first practical superconducting materials were

found in the 1960s.9 Similarly, the applications of

lasers to communications systems had to await the

development of fiber optics with low loss at laser

wavelengths of light, over which optical pulses

could be routed.

Considerable time and effort must be allocated

to applied research in which the capabilities of the

new technology in different applications are evaluated. This process often requires considerable

trial and error because performance cannot be

predicted with accurate models. For example, the

recent discovery of buckeyballs—spherical ensembles of carbon atoms whose bonds mimic the

stitching on a soccer ball—touched off a flurry of

speculation regarding possible applications, including: Teflon-like ball bearings; cage-like structures for transporting atoms (especially

radioactive ones) inside the human body; sieves

for filtering nitrogen out of natural gas; or protecting transplanted organs by allowing sugars and

amino acids, but not viruses and antibodies, to

9 See U.S. Congress, Office of Technology Assessment, High-Temperature Superconductivity in Perspective, OTA-E-44 (Washington,

DC: U.S. Government Printing Office, April 1990).
44 | Innovation and Commercialization of Emerging Technology

pass.10 Development of any of these applications

is years away as researchers attempt to further examine their feasibility and limits to their use.

High-temperature superconductors (HTS) provide another example of this phenomenon. Superconductors present no resistance to the flow of

electrons below a certain critical temperature.

High-temperature superconductors, typically ceramics, have critical temperatures above 35

degrees Kelvin (35° K). The more recently discovered HTS materials, based on compounds of

yttrium, barium, copper, and oxygen (YBaCuO)

or mercury, barium, calcium, copper, and oxygen

(HgBaCaCuO), have critical temperatures well

above 75° K (about 90° K and 140° K, respectively). This allows them to be cooled with liquid nitrogen, which is much cheaper and easier to

handle than the liquid helium used to cool lowtemperature superconductors (LTS).

Since the discovery of HTS in 1986 by researchers in IBM’s Zurich research laboratory,

scientists and engineers have attempted to exploit

the technology in a number applications: large

magnets for the Superconducting Supercollider or

for separating metallic impurities from industrial

powders; electric power transmission; electronic

computers; filters for wireless communications

systems; and sensors for detecting magnetic

fields.11 Each of these applications has presented

developers with numerous engineering challenges that slowed progress in many areas. Because they are ceramics, most HTS materials are

brittle, making them difficult to use in applications such as flexible wires. Engineers attempting

to develop superconducting wires for use in magnets or power distribution have had to find ways of

handling the material without breaking it or cracking it, which interferes with its superconducting

capabilities. They have also had to design cooling

systems for different applications, whether underground power transmission wires or base stations

for cellular telephony. Use of HTS in computers is

currently limited by the manufacturers’ ability to

create arrays of electronic switches called Josephson junctions with features as small as 100 angstroms—the length of about 30 atoms and 35

times smaller than the smallest features found in

state-of-the-art production semiconductor circuits. While HTS could reach the marketplace as

early as 1996 in the form of filters for wireless

communications systems, large market growth is

unlikely to occur until after the year 2000.12

Innovations based on new scientific or technological developments often have difficulty gaining initial market acceptance. Sometimes this

happens because the new product is introduced

before the market has had time to develop—or has

expressed demand for the product. Innovations

that follow the linear model are particularly prone

to such problems because they are often pursued

in response to newly derived technical capabilities, rather than newly recognized market needs.

Considerable changes in the market environment

may be necessary to induce sales of the new

technology.

Market-Driven Innovation

Most new product and process development is not

initiated by new science, but instead is an attempt

to meet perceived market needs by drawing on existing technology and on the pool of scientific

knowledge. This process has been described as

demand articulation, a process whereby firms use

market data to translate vague notions of market

demand into a product concept and then decompose the product into a set of development

10 Hugh Aldersey-Williams, “The Third Coming of Carbon,” Technology Review, January 1994, pp. 54-62.

11 This last application uses another characteristic of superconductors, the so-called Meissner effect, whereby superconductors expel magnetic fields from their interior by generating electrical currents on their surface.

12 See Donn Forbes, “Commercialization of High-Temperature Superconductivity,” unpublished contractor report prepared for the Office

of Technology Assessment, June 1995.
Chapter 2 Innovation and Commercialization 45

The initial development of xerography, the means for copying documents using a dry, photoelectric

effect, highlights the market-driven model of innovation. The impetus for xerography stemmed not from

the discovery of photoconductive materials—materials that change their conductive properties when

exposed to light and formed the heart of early xerographic processes—but awaited the recognition of a

need for a new copying process. This happened in 1935 when Chester F. Carlson, a patent attorney,

realized that he needed a better way to copy paper documents. The constant need for multiple copies

of patent specifications to be sent to inventors, associates in foreign countries, and others demanded a

process faster than carbon copying, which required documents to be retyped or errors to be corrected

on multiple copies.

Carlson examined many alternative methods for reproducing documents. He determined that chemical processes would not suffice because of the variation in inks used on originals (some were typewritten, others used India ink, pencil lead, or ink), and began looking for photographic mechanisms that

made use of the only feature common to all documents: the high contrast in the light-reflecting characteristics between the paper and the markings. He began reviewing literature on the ways in which light

interacted with matter—photoelectric effects and photoconductivity in particular—and found a paper

describing a method for facsimile transmission in which gas ions were deposited onto a drum made of

electrostatic materials to create an electronic image of the original document. The document could be

made visible by dusting a fine powder onto the drum,

Carlson developed a similar process for copying paper documents. He used high-voltage ions to

precharge an insulating material that would become conductive when exposed to light (a photoconductor). He then projected the image of a document onto the photoconductor to create a photostatic image

and covered it with a fine powder to make it visible. The image could then be transferred to a sheet of

paper. Carlson patented his invention in 1937. Though photoconductive materials had been discovered

as early as 1873, their application to document reproduction had not previously been considered, Carlson’s invention of xerography, in turn, stimulated considerable research into photoconductive materials

and the theory of their operation, as Carlson, and later other researchers, attempted to Improve on the

basic invention.

SOURCE: Battelle Columbus Laboratories, Interactions of Science and Technology in the Innovative Process: Some Case Studies,

final report prepared under contract for the National Science Foundation, Mar 19, 1973, chapter 7, Joseph Mort, “Xerography A

Study in Innovation and Economic Competitiveness,” Physics Today, April 1994, pp. 32-38.

projects. 13 Through this process, the need ‘or aexisting within the organization) and modified for

specific technology or set of technologies is expressed and R&D efforts can be targeted toward

developing them.

In the market-driven paradigm, innovative activity takes the form of a search for the best

technology or product to meet the anticipated or

expressed need. Often, the technology already exists and only needs to be acquired (if not currently

anew application. At other times, additional R&D

is necessary to develop the technology, but the

type of research performed will be much more applied than in the early stages of a science-driven

innovation, searching for a technology that performs a specific function within a well-defined set

of parameters (see box 2-4). In attempting to develop a VCR for home use, for example, Sony

13Fumio Kodama, Emerging Patterns of Innovation: Sources of Japan’s Technological Edge (Boston, MA: Harvard Business School Press,

1 995), p. 8.
46 | Innovation and Commercialization of Emerging Technology

realized that it would need to find a way of recording video information onto a narrower tape than

the one used by the broadcast industry, and it

adopted the helical scan technology developed by

a researcher at Toshiba several decades earlier.

Sony also recognized that the electronic circuitry

used to correct fluctuations in color in industrial

VCRs was too bulky for a home device, and developed a way to eliminate the problem by reducing

the carrier frequency used in the device.

Like science-based innovations, demand articulation can be a slow process as developers address the many technical problems confronting

them. The VCR took 20 years to develop from an

expensive, closet-sized device into a consumer

product; xerography took nearly four decades. In

addition, demand articulation requires that firms

maintain a broad base of technological competence so they can absorb and adapt technologies

from related industries. The success of Apple in

commercializing the personal computer, for example, was aided in large part by its ability to identify competent producers of the key components

of its device: microprocessors, displays, and storage devices. Demand articulation also thrives on

brisk competition between companies that must

maintain a tight focus on consumer demand and

may be more willing to experiment with alternative solutions.14

Incremental Innovation

While science-enabled and market-driven innovation generate radically new inventions that transform markets, most innovation takes the form of

incremental changes to existing products and

processes. Incremental innovation improves both

product features and manufacturing processes,

and is an important part of a company’s competitive standing. Once a new concept has been proven in the marketplace, competition quickly shifts

to quality, price, and performance, with less competitive emphasis on fundamental changes in

product or service characteristics.15

Incremental innovation differs fundamentally

from both science-driven and demand-articulated

innovation, in which new, fundamental knowledge is used to create new types of products. Incremental advances occur cyclically and, despite

proceeding in an evolutionary fashion, can produce sizable cumulative effects. Incremental innovation has yielded continuous improvements in

computer memory, the speed of microprocessors,

and the thrust-to-weight ratio of jet engines.

Greater increases in performance often are derived

from continual improvements in existing product

technologies, rather than from the introduction of

radical new technologies.16

Incremental innovation places different requirements on science and technology than does

the science-driven model of innovation. With incremental innovation, new ideas can be incorporated into the product only during a limited

window of opportunity at the beginning of the

product development cycle, before the design has

been firmly established. New ideas introduced at a

later date will often require redesign of the product

and delay market introduction. In addition, new

ideas need to be reasonably well developed, understood, and tested to avoid unforeseen problems

that could delay the delivery schedule. To be successful, incremental innovation requires small,

evolutionary advances instead of larger, more revolutionary ones, so that product performance and

manufacturing techniques can be well understood. New technology-based products and the

processes used to manufacture them are rapidly

becoming so complex that producers do not completely understand them. Manufacturers of integrated circuits, for example, cannot completely

characterize the processes used to inject or diffuse

14 Ibid., p. 151.

15 Ralph E. Gomory and Roland W. Schmitt, “Step-by-Step Innovation,” Across the Board, November 1988, pp. 52-56.

16 Ibid., p. 53.
Chapter 2 Innovation and Commercialization 47

Chemicals 096 104

Rubber 1,10 1,16

Machinery 1,23 1 17

Metals 118 0.99

Electrical 1.42 103

Instruments 138 1.00

All industries 1.18 106

aBased on data provided by 50 Japanese and 75 American firms U.S. firms’ cycle time divided by Japanese firms’ cycle time

SOURCE Edwin Mansfield. “The Speed and Cost of Industrial Innovation in Japan and the United States External

vs. Internal Technology, ” Management Science, October

ions or chemical dopant into a semiconductor wafer.

Time to market is critical in incremental innovation, so firms must attempt to reduce development times. Companies with shorter product

development cycles can bring new technology

quickly to market and benefit from more frequent

feedback from consumers. During the mid 1980s,

U.S. firms lagged their Japanese competitors in

cycle times in a number of industries (see table

2-4), hurting their competitiveness. Fast cycle

time requires close ties between development and

manufacturing so products can be designed for

easy manufacturing and technical problems can be

identified early in the process. As a result, successful incremental innovation requires that firms

become efficient at all the functions of innovation:

research, design, development, manufacturing,

1988, p 1158 ‘

and marketing. Having access to complementary

assets, such as distribution or service networks, is

often a critical element in competitive success. 17

The relative decline in U.S. industrial competitiveness during the 1980s has often been attributed to the nation’s inability to master incremental

innovation. As foreign nations have improved

their technological capabilities, relative to the

United States, they have improved their ability to

rapidly adapt U.S. technologies and improve on

them. 18 U.S. companies responded by devoting

more of their resources to the development of new

products, processes, and services, rather than improving on existing ones (see table 2-5). U.S.

firms have increased their efforts in the area of

product/process improvement in the last decade,

and improved their competitive performance as a

result.

R&D expenditures devoted to United States Japan

Basic research 8% 10%

Applied research 23 27

Products (versus processes) 68 36

Entirely new products and processes 47 32

Projects with less than O 5 estimated chance of success 28 26

Projects expected to last more than 5 years 38 38

NOTE: Columns do not add to 100 percent because the categories are not mutually exclusive

SOURCE Edwin Mansfield, “lndustrial R&D in Japan and the United States: A Comparative Study, ’’American Economic Review, vol. 78, No 2, May 1988.

17 Alic et al., op. cit., footnote 4, p. 20.

18 Raymond Vernon, “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics, May 1966,

pp. 190-207.
48 I Innovation and Commercialization of Emerging Technology

Stage of Development

Characteristics Introductory Growth

Predominant type of

Innovation

Competitive emphasis

Stimulus for innovation

Product line

Production processes

Equipment

Materials

Plant

Frequent major changes in

products.

Functional product

performance.

Information on users’ needs

and users’ technical inputs.

Diverse, often including

custom designs

Flexible and inefficient; major

changes easily accommodated

General-purpose, requiring

highly skilled labor

Inputs limited to generally

available materials

Small-scale, located near user

or source of technology.

Major process changes

required by rising volume

Product variation

Opportunities created by

expanding internal technical

capability

Includes at least one product

design stable enough to

have significant production

volume,

Becoming more rigid, with

changes occurring in major

steps.

Some subprocesses automated, creating “islands of

automation. ”

Specialized materials may be

demanded from some suppliers

General-purpose with

specialized sections

Mature

Incremental for product

and process, with cumuIative improvement in productivity and quality

Cost reduction

Pressure to reduce cost

and improve quality

Mostly undifferentiated,

standard parts.

Efficient, capital-lntenswe,

and rigid, cost of change

is high.

Special-purpose, mostly

automatic with labor tasks

mainly monitoring and

controlling

Specialized materials wiII

be demanded; if not available, vertical Integration

wiII be extensive

Large-scale, highly

specific to particular

products

SOURCE: William J. Abernathy and James M Utterback, “Patterns of Industrial Innovation, ” Technology Review, June/July 1978

Innovation Cycles distinctions correspond to three distinct phases in

Radical science-enabled and market-driven in- the product life cycle: an introductory or emergent

novation and incremental innovation represent phase, a growth phase, and a period of maturity

different stages in the life cycle of a particular in- (see table 2-6).19

dustry or product line. Most innovation tends to The introductory phase is characterized by conproceed in characteristic cycles with long periods siderable experimentation with fundamentally

of incremental innovation punctuated with mo- different designs for a particular product or proc -

ments of radical change. New products, processes, ess. In the early days of the automobile, for examand industries emerge from radical innovation, pie, manufacturers experimented with cars

then improve, diversify, and specialize until they powered by gasoline, electric, and steam engines.

are displaced by another radical innovation. These Today, manufacturers of electronic displays are

19 See, for example, G. Dosi, ”Technological Paradigms and Technological Trajectories, “Research Policy, vol. 11, 1982, pp. 147- 162; M.

Utterback and W. Abernathy, “A Dynamic Model of Process and Product Innovation,” Omega, vol. 3, No. 6, 1975, pp. 639-656; W. Abernathy

and K. Clark, “Innovation: Mapping the Winds of Creative Destruction,” Research Policy, vol. 14, No. 1, February 1985. pp. 3-22: T. Durand,

“Dual Technological Trees: Assessing the Intensity and Strategic Significance of Technological Change,” Research Policy, vol. 21, No. 4, August 1992, pp. 361-380.
Chapter 2 Innovation and Commercialization | 49

working with liquid crystals, plasma cells, electroluminescent, and field emission devices. During this stage of development, competition is

based largely on product characteristics rather

than price, as firms attempt to provide superior

functionality. New firms enter the market with

new designs and functions; startup firms often

play a dominant role. Production methods remain

flexible to compensate for changes in design, and

investment in production equipment and facilities

is modest.

During the growth phase, markets expand rapidly as industry settles on a set of offerings that is

more or less standard, and product variation decreases. Competition begins to shift from product

differentiation to cost reduction, and profit margins often decline. Innovation shifts toward cyclical improvement of existing products through the

incorporation of new features and components,

and toward process improvements to drive

manufacturing costs down. Production processes

become more stable, stimulating development of

improved manufacturing equipment and capital

investments. Product stability can encourage the

innovating firm or others to develop complementary assets needed to further expand markets.

As the product matures, product and process innovations slow, and further improvements in performance or costs become evasive. Additional

expenditures on R&D are unlikely to yield significant improvements in performance or cost. Firms

must decide whether to proceed with existing

product lines or develop new ones. Because of the

large investments in production capability and

complementary assets, mature products and processes can often resist challenges from alternative

technologies—even those that offer significant

technical, financial, or societal advantages. The

nation’s existing investment in volume production plants, refueling infrastructure, and repair facilities, for example, make it difficult for

alternative-fuel vehicles to challenge gasolinepowered automobiles. Yet, continued improvement of alternative technologies often results in

development of new products and processes that

replace mature ones.

A critical element in the transition from an

emergent industry to a growth industry is the determination of a dominant design. This design—

or set of designs—is the one that emerges as most

promising in the marketplace. It does not necessarily outperform all others on any particular functional attribute, but overall it meets the desires of

the market. Examples of such dominant designs

include: the IBM PC, which set the standard for

most personal computers over the past decade, but

incorporated no leading-edge technologies; and

the DC-3, which became the standard for commercial aircraft, but lagged behind several competing designs in terms of range and payload.

Designs that prove successful early in the development cycle can gain momentum quickly and

become established dominant designs. Once a

successful design is demonstrated, others will

likely copy it rather than risk a new approach.

Economies of scale in production and learningcurve effects also tend to instantiate a dominant

design by making it more cost competitive. Development of complementary assets can further

tip the scales by making the design more compatible with existing infrastructure. An example is

sequential software for single-processor computers, which makes the transition to multiple-processor machines less attractive to users. Similarly,

in the home VCR market, the greater availability

of VHS-format prerecorded tapes in the early

1980s accelerated the triumph of VHS players

over the alternative Beta format machines.

COMMERCIALIZATION

Commercialization is an attempt to profit from innovation by incorporating new technologies into

products, processes, and services and selling them

in the marketplace. For many new technologies,

commercialization implies scaling up from prototype to volume manufacturing and committing

greater resources to marketing and sales activities.

In industries such as pharmaceuticals and aircraft,

commercialization is also contingent on receiving

product approval from relevant organizations.

Typically, the cost of commercialization activities
50I Innovation and Commercialization of Emerging Technology

Phase of Development United States Japan

Applied research 18% 4%

Preparation of product specifications 8 7

Prototype or pilot plant 17 16

Tooling and equipment 23 44

Manufacturing startup 17 1 0

Marketing startup 17 8

aSurvey figures for new products introduced in 1985 by 100 U S and Japanese firms in the chemicals, machinery, electrical and electronics, and rubber and metals industries.

NOTE: Totals may not add up to 100 percent because of rounding

SOURCE: Edwin Mansfield, “lndustrial Innovation in Japan and the United States, ” Science, Sept. 30, 1988, p 1770

far exceeds that of R&D (see table 2-7). R&D and

product design comprise approximately onequarter of the cost to introduce a new product to

market.20 Invention—defined as the conception

of a new product, including some basic and applied research—represents only 5 to 10 percent of

the total effort.21 Thus, scale-up activities act as a

filter for selecting inventions to commercialize.

Many innovations are developed to the prototype

stage or are produced in small volumes, but are not

fully commercialized because the financial and

managerial resources required are too great. Such

innovations are often licensed to another firm,

sold off in the form of a divestiture, or simply

passed over.

Decisions to commercialize new technology

are made by individual firms, but are closely

linked to characteristics of the innovation system

in which the firm operates. Manufacturers must

assess the likelihood of securing funding from internal and external sources, their ability to develop

or gain access to manufacturing equipment and

supplies, and the size of potential markets. Without the proper infrastructure to support their efforts, firms cannot be assured of winning returns

from their investment, and competitors with abetter support infrastructure may be able to capture

the market. Pioneers in a new market often lose

out to imitators with better financing, infrastructure, and strategy. Examples include EMI, Ltd. ’s

loss of the market for computer axial tomography

(CAT) scanners to General Electric Co.; MITS’s

loss of the personal computer market to Apple and

IBM; and U.S. firms’ loss of much of the flat panel

display industry to Japanese firms such as Sharp

and Toshiba.

Many factors enter into a firm’s decision to

commercialize an innovation. Companies must

try to assess the profitability of a new venture, taking into account its ability to protect intellectual

property, the degree of existing or anticipated

competition, the size and profitability of possible

markets, and the cost of manufacturing and marketing activities. They must also assess their ability to harness necessary complementary assets—

such as other technologies needed to make their

innovation more useful, or capabilities in

manufacturing, marketing, and distribution need20This figure has remained remarkably constant over the past few decades, despite the apparent changes in industry structure, globalization, and product mix. One report released in 1967 and relying on 10-year-old data found that product conception and design accounted for 15 to

30 percent of the cost of new product introduction; manufacturing preparation, manufacturing startup, and marketing startup comprised the

balance. See U.S. Department of Commerce, Teckdogica/innovation: Its Environment and Management, report of the Panel on Invention and

Innovation (Washington, DC: U.S. Government Printing Office, January 1967), p. 8.

21 R&D is actually a greater percentage of total innovative activity than these figures indicate because many projects never make it out of

R&D and because there is a certain amount of background research that is carried out without any specific project in mind. Furthermore, all of

the activities listed in table 2-7 involve some technical work that is not classified as formal R&D.
Chapter 2 Innovation and Commercialization | 51

ed for business success—and the degree to which

the technology fits in with the company’s general

business plans.

❚ Potential Markets

The overall profitability of an innovation is largely determined by the size and nature of potential

markets. Market segments differ considerably

along both these dimensions. At the one extreme

lie large markets for undifferentiated commodity

goods that maintain small profit margins. Many

product lines in high-technology industries match

this description: computer memory chips, consumer electronics, and low-end telecommunications equipment such as telephones and answering

machines—even low-end personal computers. In

order to generate suitable profits in industries with

low profit margins, firms must attempt to sell

large volumes of goods. Competition in these

markets is therefore driven by steep learning

curves (in which the cost of production drops precipitously as workers gain experience with the

manufacturing process) and economies of scale

that tend to concentrate market power in the hands

of a limited number of firms. 

At the other extreme are markets in which product differentiation and customization are the most

important aspect of the product. These markets are

typically small, and competition is often based on

performance rather than price. Hence, they can

be lucrative areas for innovative firms that have

well-developed design skills. Customers in such

markets are often discriminating purchasers. Examples include government programs in military

or space applications, and industrial, medical, or

other customers that demand high performance

and are less cost sensitive than customers in consumer product markets. While these market segments are often smaller than high volume markets

in consumer or commodity products, the profit

margins can be higher. In semiconductor devices,

market segments such as application-specific integrated circuits and static random access memories allow for product diversification at lower

volumes. These areas can have lower entry barriers to manufacturing than high volume, standardized devices.

Between these two extremes lies a wide variety

of markets that offer different combinations of

size and profitability. The market for microprocessors for personal computers, for example, is

large and boasts high profit margins—but only for

leading-edge processors. Older generation processors have smaller markets and lower profit

margins. In pharmaceuticals, too, new drugs can

both offer high profit margins and serve large markets. The primary driver of the high profit margins

in both leading-edge microprocessors and pharmaceuticals is the ability of firms to control and

protect their intellectual property.

Firms must assess potential markets in relation

to their proprietary advantages and capabilities.

Firms tend to succeed in markets that best match

their strengths, whether in developing leadingedge technology, providing high quality at low

cost, or meeting rapid product development

cycles. Small startup firms typically lack the marketing and manufacturing capabilities to compete

in large, commodity markets, but perform admirably in many smaller niche markets. They also

play an important role in commercializing emerging technologies that compete against entrenched

technologies produced by existing competitors.

Larger firms often lack the flexibility and desire to

pursue smaller niche markets, but can dominate

large markets. They also have more resources to

expend on R&D to develop immature technologies.

❚ Competition from Other Technologies

Competition from existing or alternative new

technologies can shrink markets for a given innovation. Emerging technologies in their nascent

stages rarely offer sufficient advantages over existing technologies in all aspects of performance,

including compatibility with existing ways of doing things. As a result, their emergence often stimulates improvements in the existing technology,

touching off a period of intense competition before a winner emerges. Such competition is seen
52 Innovation and Commercialization of Emerging Technology

Advances in the capabilities of integrated circuits (ICs), such as those used in personal computers,

are determined in large part by reductions in the size of the electronic components that can be patterned onto a silicon wafer. By reducing the size or minimum Iinewidth of these devices, circuit designers can fit more components onto a given IC, thereby increasing the capacity of a memory chip or adding additional power to a microprocessor.

The size of the smallest feature that can be created on an IC is determined by the resolution of the

lithography system used to project patterns onto the substrate. Traditionally, IC manufacturers have produced devices by using lithography systems based on optical and ultraviolet wavelengths of Iight. Such

systems shine light through glass masks containing an image of the desired circuit and pass the Iight

through a series of optical lenses that reduce the size of the pattern on the mask by a factor of five and

focus it onto a silicon wafer. The resolution of such systems is limited by the wavelength of Iight used,

with shorter wavelengths yielding smaller resolution. Since 1970, advances in Iight sources, optics, and

machine design have reduced the minimum resolution of optical lithography systems from about 7 0

microns to around 0,35 microns (a micron is one thousandth of a millimeter, or approximately one fiftieth

the width of a human hair).

Semiconductor manufacturers and their equipment suppliers have long been predicting that optical

lithography wiII soon reach its theoretical Iimit of resolution. As the wavelength of Iight is reduced, building suitable Iight sources becomes more difficult, and the optics become less effective at creating a

tight focus. Hence, developers have investigated numerous alternates to optical lithography systems,

incorporating x-rays, electron beams, and ion beams into their designs. Each of these techniques offers

Improved theoretical resolution over optical systems; yet each possesses significant drawbacks as well

in order to generate x-rays of the intensity needed for lithography, the system needs a large synchrotrons

costing approximately $35 million, masks for such systems cannot be made of glass; and the pattern

on the mask must be made as small as the desired feature size because optical lenses cannot be used

to reduce the size of the pattern. Laser-generated x-rays have also been explored as an

(continued)

in many areas of emerging technology examined

by OTA: 1) in high-performance computing, massively parallel computers compete against traditional supercomputers; 2) in computer displays,

flat panel technologies—whether liquid crystal,

plasma, electroluminescent, or field emission—

compete against an existing base of cathode ray

tubes (CRTs); and 3) in lithography—a critical

step in the manufacture of integrated circuits—xray, ion beam, and electron beam technologies

compete against entrenched optical steppers (see

box 2-5). Continued improvement of the existing

technology often slows adoption of the new

technology until one or other exhibits a distinct

advantage.

New technologies often have difficulty dislodging an entrenched technology because of resistance from potential users of the new product.

Customers must be convinced that the new

technology offers superior performance in their

particular application and is reliable-characteristics a new technology cannot always achieve at

first. IBM, for example, opted against using integrated circuits in its System 360 series computer.

The company chose hybrid transistors instead because it was not sure the new technology would
Chapter 2 Innovation and Commercialization 53

alternative to expensive synchrotrons, but such systems require a series of mirrors to focus the radiation

onto the wafer. The mirrors must be polished smooth to a tolerance well beyond current Industrial practices.

Ion beam and electron beam systems overcome most of these problems; in their simplest configurations, they use narrow beams of particles to produce images rather than a broad beam of light. In this

form, they cannot be used with masks and, instead, must physically draw each circuit element onto the

IC—a procedure far too slow for industrial processes. Considerable work is under way to develop ion

and electron beam techniques that employ either multiple beams or a broad beam of particles, but

such projects are still in their infancy.

None of these alternatives has yet found use in Industrial practice, despite the fact that some systems—those based on x-rays—have been under development for 20 years. While part of the reason IS

the immature state of alternate technologies, the principal reason IS that designers have continued to

Improve the installed base of optical steppers. Advances in Iight sources and adoption of techniques,

such as phase shift masks and off-axis illumination, have enabled continued improvements in the resolution of optical systems. New techniques for scanning the optical beam across the wafer (such as

“step and scan”) have simultaneously boosted resolution and maintained high operating speeds, or

throughput, Whereas practical Iimitations were once expected to preclude the use of optical lithography

below Iinewidths of 0.5 microns, current estimates indicate that optical lithography wiII probably remain

the technology of choice for another decade, until resolutions drop below 0,1 microns,

Eventually, optical Iithography will reach its theoretical, if not practical, Iimit and alternative technologies will need to be Introduced into semiconductor manufacturing, At that point, semiconductor

manufacturers may have to sacrifice cost or throughput in order to achieve better resolution, unless

Improvements in alternative technologies can compensate for their current deficiencies, In the meantime, competition between the old and new technology will continue.

SOURCE Off Ice of Technology Assessment, 1995

perform reliably over the computer’s lifetime.22 new design rules for creating electronic devices:

IBM could not afford to field a general purpose

business computer that might have a high rate of

failure and require constant servicing. Instead, the

first large-scale use of integrated circuitry was in

DOD’s Minuteman missile system and NASA’s

Apollo program, both of which placed a high premium on small size and low power consumption.

Many new technologies are not compatible

with existing ways of doing things and require

some changes in the ways customers perform certain tasks. Users of integrated circuits had to learn

users of electric vehicles have to learn to plan their

trips to compensate for the shorter range of their

cars. Such considerations can slow diffusion of

new technologies to a crawl, and typically require

that developers target their marketing efforts toward users who highly value a critical dimension

of the new technology (such as small size in the

case of integrated circuits) or can easily tolerate its

disadvantages. Local delivery services (such as

the postal service), for example, might be able to

tolerate the short driving range of an electric ve22 Charles H. Ferguson and Charles R. Morris, Computer Wars: How the West Can Win in a Post-IBM World (New York, NY: Times Books,

1993), pp. 8-9; and Arthur J. Alexander, The Problem of Declining Defense R&D Expenditures, JEI-14A (Washington, DC: Japan Economic

Institute. Apr. 16, 1993), p. 11.
54 | Innovation and Commercialization of Emerging Technology

hicle and be able to recharge the batteries overnight at a central facility. As users and developers

gain experience with the new technology and performance increases, markets can begin to expand.

Similarly, manufacturers of the existing

technology often have a strong disincentive to invest in new technologies. By their very nature,

new technologies tend to destroy the competencies that firms have developed in certain technical

areas; they often require capabilities and skills different from those used in manufacturing the entrenched technology. For example, manufacturing

computer displays using traditional cathode ray

tube (CRT) technology is highly dependent on

skills in forming picture tubes out of glass, aligning shadow masks, depositing phosphors on

glass, and controlling the scanning of an electron

gun using magnetic fields. In contrast, the

manufacture of flat panel displays requires expertise in depositing thin film transistors on a glass

substrate and minimizing contamination across an

area the size of the display. Because flat panel displays require knowledge of new technologies and

new manufacturing skills, manufacturers of CRTs

have not, by and large, shifted into production of

flat panels. They have responded to the challenge

instead by improving their existing technology.

Zenith has developed its flat tension mask

technology, which eliminates the curvature of the

CRT screen, making it more readable, and several

companies have introduced CRTs that are not as

deep as conventional models. For the most part,

flat panel technology has been developed by entrants new to the field of displays.

❚ Cost

The profitability of innovation depends on the

costs of commercialization. In some industries or

technologies, the sheer size of the investment required is the largest single hurdle to commercialization. This is particularly true in segments of the

electronics industry, such as semiconductors, in

which efficient-sized plants frequently cost over

$1 billion to build and equip. Smaller plants cannot compete in the volume segments of such markets because they cannot spread their fixed costs

over a large enough production run. Only in niche

markets, with less competition and consideration

of costs, can small plants compete successfully in

these industries. In other industries, however, capital costs do not present as great a barrier to commercialization. Efficient consumer electronics or

chemical plants can often be set up for $100 million, or can be expanded slowly over time to meet

growing demand.

Uncertainties regarding cost also enter the decisionmaking process. Especially in new industries

that are expected to demonstrate strong learningcurve effects, decisionmakers often cannot determine how quickly production costs will drop to a

desired level. For first movers, rapid cost reduction is important to building barriers to entry and

to expanding markets. For imitators trying to

catch up with a market leader, uncertainties over

cost make it difficult to determine the period of

time required to become a competitive player in a

market. U.S. manufacturers of flat panel displays,

for example, are currently stymied by this second

type of uncertainty. They cannot predict how long

it will take them to match the manufacturing costs

Japanese firms are currently achieving. As a result, they are experiencing difficulty securing financing for scaling up their manufacturing efforts.

❚ Ability To Capture Market Share

Innovating firms must assess the degree to which

competitors may capture, or appropriate, some of

the returns from their innovation. Often, the company that is first to introduce a new product loses

the market to followers who either improve on the

original innovation in a timely manner or market

the innovation better. Only rarely is a company the

lone pioneer in a new technical area or does it possess truly unique capabilities that would preclude

competition. In emerging areas of technology,

such as high-temperature superconductivity

(HTS) and scalable parallel computing, competition abounds and the industry is fluid. Over 20

American companies, large and small, have active
Chapter 2 Innovation and Commercialization | 55

research programs in HTS;23 a similar number

compete in the market for scalable parallel computers. Research suggests that firms that run in

packs, rather than going it alone, are more successful in the long run because competitors can

collectively contribute the research base and develop markets.24

In addition to direct competitors, suppliers of

critical components or capabilities may also be

able to extract profits from an innovation. In the

market for personal computers, for example, Intel

Corp., the supplier of microprocessors to most

IBM-compatible machines, has benefited more

than the innovator, IBM, or most other manufacturers of compatible machines. Microsoft Corp.,

too, by providing the operating system for IBMcompatible computers, has reaped benefits far in

excess of many computer manufacturers.

Innovators have several mechanisms for protecting their innovations from competitors. They

can use patents and software copyrights to legally

bar other firms from copying their invention without an explicit license; they can keep their innovation secret from potential imitators; or they can

take advantage of other barriers to market entry.

The choice of method is, in many ways, determined by the nature of the technology itself.

Patents arguably offer the strongest form of

protection, but are highly effective for only a limited number of product types, in a limited number

of industries. Patents allow innovators the rights

to their inventions for 20 years after the patent application is filed, allowing them a period of exclusivity during which they can attempt to earn

monopolistic returns on their innovation. Patenting requires innovators to publicly disclose the details of their innovation; in some fields,

competitors can then invent around the patent by

devising a somewhat different way to provide the

same functionality. Surveys have found that patents generally raise imitation costs 30 to 40 percent for drugs and 20 to 25 percent for chemicals,

but only 7 to 15 percent in electronics (including

semiconductors, computers, and communications

equipment).25 In chemicals, for instance, competitors cannot easily find an alternative compound

with characteristics similar or identical to the patented substance, making imitation difficult. But in

electronics and other areas, it is easier to invent

around patents. The elements of a product’s design and manufacture can be gleaned through

careful analysis, and similar products can be

manufactured that perform almost identically.

This capability makes it more difficult for innovators to capture or appropriate the returns from a

new innovation because they cannot maintain

their monopoly positions for long.

In cases in which patent protection is not effective, innovators may instead opt to keep the workings of their inventions secret, to the extent

possible. The law provides only partial protection

for trade secrets. Firms can attempt to restrain former employees from competing with them by using knowledge gained during their employment.

Similarly, they can sue firms that illegally gain access to trade secrets. But the law normally permits

competitors to analyze products, figure out how

they work, and find ways to produce similar products. AMD Corp., for example, has been highly

successful in reverse-engineering microprocessors manufactured by Intel Corp. and selling a

nearly identical product. As a result, trade secret

protection is most useful for innovations whose

workings can be hidden from the eyes of skilled

analysts. Process innovations can often be kept secret because they can be hidden behind factory

23 Forbes, op. cit., footnote 12, pp. 70-104.

24 Andrew Van de Ven, “A Community Perspective on the Emergence of Innovation,” Journal of Engineering and Technology Management, vol. 10, 1993, pp. 41-42.

25 Richard Levin et al., “Appropriating the Returns from Industrial Research and Development,” Brookings Papers on Economic Activity,

No. 3, 1987, pp. 783-831; Edwin Mansfield et al., “Imitation Costs and Patents: An Empirical Study,” Economic Journal, vol. 91, December

1981, pp. 907-918.
56 Innovation and Commercialization of Emerging Technology

Overall Mean Range of Industry Meansa

Means of Protection Process Product Process Product

Patents to prevent duplication 3.52 4,33 2,6- 4,0 30-5 0

Patents to secure royalty income 3.31 3.75 2.3 -4.0 27-4 8

Secrecy 4,31 3.57 3.3- 5.0 27-4 1

Lead time 5.11 5.41 4,3 -5.9 4.8-6 0

Learning curves 5.02 5.09 4,5 -5,7 44-5 8

Sales or service 4,55 5.59 3.7 -5.5 50-6 1

aMeasured from the 20th to 80th percentiles of 130 separate Industry means

NOTE: Rankings based on a survey of 650 Industry executives in 130 Iines of business using a 7-point scale with 1 as least effective and 7 as

most effective.

SOURCE: Richard Levin et al., “Appropriating the Returns from Industrial Research and Development, ’’Brookings Papers on Econornic Activity, voI. 3,

1987, p 794.

walls, but even they can eventually leak out. Secrets involving products are harder to maintain.

Many firms must, therefore, rely on other barriers to entry to protect their innovations. In industries characterized by significant economies of

scale or steep learning curves, innovators can

often gain protection by being first to market and

rapidly expanding production. Although this

strategy may often require large up-front investments in plant and equipment, it can enable companies to rapidly reduce their production costs by

spreading the capital investment over a larger

number of products and by allowing them to rapidly gain experience with the manufacturing process. Such experience frequently translates into

lower manufacturing costs over time, as workers

and managers begin to understand the subtle interactions between components of a system or the effects of changes in manufacturing conditions on

product performance. Experiential knowledge of

this sort, often referred to as tacit knowledge, is

not easily codified and conveyed; therefore, it

cannot easily be acquired by a competitor who

does not make a similar investment in production.

Firms can also erect barriers to entry through

superior strategies for product development,

sales, or service. Rapid product development, for

example, can allow an innovator to put new, improved products on the market more quickly than

its competitors, thereby incorporating newer

technology and responding to more recent

changes in market demand. Such a strategy was

particularly helpful in enabling Japanese auto and

consumer electronics manufacturers to enter the

U.S. market. Alternatively, innovators can attempt to dominate marketing channels or bundle

new products with goods in high demand to increase their rate of penetration into the marketplace. Software companies, such as Microsoft

Corp., have been particularly successful in bundling together new products and linking them

closely to specific changes in hardware to increase

their hold on particular market segments.26

In general, neither patents nor trade secrets are

as effective as lead time, learning curves, or attention to sales and service in protecting innovations

(see table 2-8). Hence, appropriability by the innovator is difficult to ensure through formal

means in most industries. Industries that rate patenting most highly include portions of the chemicals industry (inorganic, organics, drugs, and

plastics) and petroleum refining; but only the

pharmaceuticals industry considers patents more

effective than other means of protecting new products and processes. Industries such as food products and metal-working rate no mechanisms

26 Some bundling strategies run afoul of antitrust considerations. Some of Microsoft’s strategies have been investigated by the Justice Department for possible antitrust violations.
Chapter 2 Innovation and Commercialization | 57

highly effective (greater than five on a seven-point

scale) for protecting product innovations, and

about one-third of the 130 industries represented

in the sample—including food products, metalworking, fabricated metals, and machinery—

rated no mechanisms highly effective for

protecting process innovations. The remaining industries, including electronics, motor vehicles,

aircraft, and instruments, rated nonpatent mechanisms as most effective.27

❚ Complementary Assets

The ability to capture market share and profit from

innovation is also dependent on the ability of

firms to develop or acquire complementary assets—other technologies needed to make the innovation useful, and the capabilities necessary to

manufacture and market the innovation. An innovation cannot be successfully commercialized

without adequate manufacturing capacity and

skill, suitable marketing and distribution channels, and after-sales support. Nor can innovations

succeed without other technologies that interact

with the new innovation. Users of new computer

hardware often need specialized operating systems and applications software. Drivers of electric

vehicles need a network of convenient recharging

stations.

The lack of such complementary assets can retard the diffusion of new technologies—especially the more radical ones. Radical technologies

almost always require new infrastructure, new

suppliers, and often new distribution channels.

During the early stages of an innovation, firms

will often integrate these capabilities into their

own corporate structure because they often do not

exist elsewhere in the economy. As the industry

grows, specialized firms tend to develop to fill

these roles and companies will purchase goods

from specialized suppliers.

Firms that are better able to harness these capabilities and orchestrate the contributions of the

various actors responsible for creating the industry infrastructure have the best chance of succeeding in commercialization (see box 2-6).28 Japan’s

success in the global marketplace has often been

attributed to its ability to harness or develop complementary assets, such as manufacturing capability, that allowed it to develop new products faster

than U.S. firms. Japanese firms boasted faster

product development cycle times than U.S. firms

and often achieved higher quality in the process.

As a result, they were able to bring new and improved products to market faster than U.S. firms

and win large portions of the market. Large investments in process technology rather than product

technology served only to perpetuate this advantage, as U.S. firms continued to pour greater resources into product innovation.29

The need for complementary assets often puts

small U.S. firms at a disadvantage in competing

with large, vertically integrated firms, whether in

Japan or the United States, that have access to

complementary assets in-house. Without their

own manufacturing facilities or marketing and

distribution channels, small firms are often forced

to align with larger firms or to license their

technology to the owners of such assets. This

process not only can result in the transfer of

technology to rival companies and nations, but

also can take longer to complete than if conducted

in-house, thereby slowing the commercialization

process in the United States.

27 Levin et al., op. cit., footnote 25, pp. 795-798.

28 For a more complete discussion of this topic, see David J. Teece, “Profiting from Technological Innovation: Implications for Integration,

Collaboration, Licensing and Public Policy,” in David J. Teece (ed.), The Competitive Challenge: Strategies for Industrial Innovation and Renewal (New York, NY: Ballinger Publishing Co., 1987).

29 Edwin Mansfield, “Industrial R&D in Japan and the United States: A Comparative Study,” American Economic Review, vol. 78, No. 2,

May 1988.
58 Innovation and Commercialization of Emerging Technology

Early competition in the videocassette recorder(VCR) industry demonstrates the importance of design, manufacturing, marketing, and experience in the successful development and commercialization

of new technologies, Ampex Corp., located in Redwood City, California, gave the first public demonstration of a video tape recorder (VTR) in 1956. Ampex sold its machines to television broadcasters for

$50,000. Ampex had a patent for its “transverse scanner, ” in which four recording heads on a

rapidly rotating drum scanned across a two-inch-wide tape. Ampex licensed RCA in exchange for licenses

under RCA’s color television patents, in order to be able to produce color VTRs. Ampex also entered a joint

venture with Toshiba to produce VTRs. Ampex remained dominant, but all three firms made money selling

VTRs for commercial use. However, none of these firms pursued a long-term strategy to create a smaller,

much cheaper product for home use, with easy-to-use cassettes—a videocassette recorder, or VCR.

Sony, Matsushita, and the Victor Co. of Japan (JVC, 50 percent owned by Matsushita) all pursued such

a strategy, and gained a substantial share of the household market in the late 1970s and early 1980s. Many

factors contributed to this success, In 1958, Japan’s National Broadcasting Corp. (NHK) imported an Ampex VTR and invited Japanese firms to examine it. The three firms built on prior technical achievements,

such as magnetic audio recording television receivers and semiconductors, Perhaps most Importantly, the

firms consistently followed the vision of a VCR, guided by stable management with sound technical knowledge, They built several generations of machines that did not succeed as consumer products, and learned

by this what was needed, All three firms developed a two-headed helical scanner, which they believed

necessary to build a household product; that scanner also got around Ampex’s patent,

Two leading machines emerged the Beta format, designed by Sony, first sold in 1975, and JVC’s VHS

format, first sold in 1976. Though second to market, the VHS format overtook Beta in 1978 and pulled farther ahead each year until the end of the 1980s, when the Beta format machines were no longer produced.

JVC achieved this reversal by superior strategy in winning other firms over to its format. Sony committed to

its format and then asked other companies to adopt it; JVC courted other firms before finalizing its format,

and showed a willingness to listen to their ideas. Matsushita, in particular, provided valuable technical

feedback. Sony was not willing to manufacture VCRs for other firms; JVC was. JVC provided considerable

assistance in manufacturing and marketing. JVC pursued the European market much more aggressively,

(continued)

❚ Fit with Corporate Goals

Firms must also decide whether a new technology

fits in with their broader corporate goals. While it

may seem that any innovation developed by a corporation would, by definition, be connected to the

markets and technologies that the company wants

to pursue, this is not always the case. Often researchers will—by following their own interests

or instincts, or through pure serendipity-develop

a new product or process at the level of a prototype. Once the researcher has an understanding of

the innovation, he or she can then try to convince

corporate management of its potential, and present a case for manufacturing. At this point, the

company must decide if the innovation fits in with

its corporate goals.

Companies often define their business and

technology goals along three dimensions (though

most strategies are a combination of all three):

technology focus, product focus, and market focus.

30 New products must fit in with this strategy

or vision. A technology-focused company uses

30 Lewis M. Branscomb and Fumio Kodama, Japanese Innovation Strategy: Technical Support for Business Visions, Harvard University,

Center for Science and International Affairs, Occasional Paper No. 10 (Lanham, MD: University Press of America, Inc., 1993), chapter 3.
Chapter 2 Innovation and Commercialization 59

and worked with its Japanese partners to define technical standards for a VCR suited to Europe’s color

television standard. JVC was also helped a great deal by Matsushita, which supplied the market with VHS

machines faster than Sony could supply it with Beta machines. Matsushita also approached RCA to be a

VCR supplier and worked quickly to satisfy (in October 1977) RCA’s request for a machine that “could

record a football game” (at least 3 hours). U.S. distributors believed that the format that RCA supported

would probably become dominant in the U.S. market; that belief, plus the longer playing time that Matsushita offered, led U.S. distributors to favor VHS.

The VCR Installed base increased dramatically in the first half of the 1980s, triggering a dramatic increase in production, sale, and rental of prerecorded tapes. The VCR and prerecorded tape markets took

off in Europe before the United States, apparently because Europe’s relative scarcity of broadcast channels

made watching prerecorded tapes on VCRs more attractive. European producers and distributors of prerecorded tape tended to favor VHS over Beta because VHS already had a much larger installed base of

machines there, In the U.S. market, VHS did not overtake Beta decisively until the mid-1980s. However,

RCA set out early on to make VHS dominate the prerecorded tape market. Starting in 1978, RCA encouraged Magnetic Video Corp. of America (MV) to produce prerecorded VHS tapes by developing equipment

for high-speed fast duplication and providing cheap blank tapes, Sony similarly tried to induce Video Corp.

of America to produce prerecorded Beta tapes, but was less successful. By 1980, according to one estimate, VHS made up 70 to 90 percent of U.S. cassette dealers’ revenues. In both Europe and the United

States, the greater availability of VHS over Beta prerecorded tapes accelerated the decline in the Beta

format’s percentage of VCRs produced.

SOURCE: R. Rosenbloom and M. Cusumano, “Technological Pioneering and Competitive Advantage: The Birth of the VCR Industry, ”

California Management Review, vol. 29, No 4, summer 1987, pp. 51-76; M. Cusumano, Y. Mylonadis, and R. Rosenbloom, “Strategic

Maneuvering and Mass-Market Dynamics The Triumph of VHS over Beta, ” Business History Review, spring 1992, pp. 51-94.

technology to achieve a competitive edge in the

marketplace, and will enter markets that draw

from a limited set of core technologies. Many

small firms in the high-temperature superconductivity field fit this description, since they plan to

serve a variety of markets with an array of products that incorporate HTS technology. They

would likely opt against developing products or

processes that do not contain HTS. Other firms,

such as Chrysler, Ford, and GM, have a product

focus. Their goal is to design and sell automobiles, developing or adopting whatever technologies are necessary to the success of this venture.

They would likely opt against commercializing

innovations that do not contribute to automotive

technology. Finally, firms with a market focus attempt to serve a broadly defined set of customers,

such as the military. Large firms, such as Northrop/Grumman and Lockheed/Martin, sell a number of products—tanks, aircraft, and missiles—

incorporating a wide variety of underlying

technologies, to a specific set of customers. At

times, they have attempted to diversify into new

(i.e., commercial) markets, but such attempts

have often met with failure.31

Firms sometimes decide against commercializing innovations that could cannibalize existing

product lines that have not yet reached maturity.

For example, although IBM pioneered the field of

reduced instruction set computing (RISC) in the

31 See U.S. Congress, Office of Technology Assessment, After the Cold War: Living with Lower Defense Spending, OTA-ITE-524 (Washington, DC: U.S. Government Printing Office, February 1992), chapter 7.
60 | Innovation and Commercialization of Emerging Technology

late 1970s and early 1980s, the company failed to

commercialize the technology because it feared it

would steal market share from its own line of Series 370 computers.32 Instead, RISC was commercialized by a startup firm, Sun Microsystems,

with no existing sales to cannibalize.

❚ Concluding Remarks

The concepts developed in this chapter help explain the complex dynamics of innovation and

commercialization. As shown, successful R&D

alone cannot assure commercial success in areas

of advanced technology. Firms must also develop

or acquire the capabilities to design, manufacture,

and market new products, processes, and services.

They must develop complementary technologies

needed to make their innovation more useful, and

find financing to support their efforts. Numerous

barriers can impede the progress of even the most

capable firms as they try to introduce new inventions to the marketplace, and numerous firms fail

in their attempts.

From a national perspective, these lessons are

equally valid. While construction of a strong science and technology base is essential to innovation and commercialization, it is not sufficient.

Firms must be able to find—within their national

innovation systems or abroad—the resources

needed to convert new science and technology

into a proprietary advantage they can defend in the

marketplace. While firms can develop many of the

requisite tools themselves, others often lie beyond

their control. These needs can often be met

through cooperative actions between firms, or between industry and government.

32 Ferguson and Morris, op. cit., footnote 22, pp. 37-45.
| 61

Elements of

Innovation

Systems

nnovation rarely results from the actions of a

single individual or firm; rather, it is the result of numerous interactions by a community of actors that is often widely dispersed

both geographically and temporally. Scientists

discover new facts and develop new theories

about the workings of nature; engineers design and

develop new technologies and products; financiers—both public and private—fund research,

development, and manufacturing; skilled laborers

manufacture new products and implement new

processes; and public and private institutions educate and train these different types of workers.

This community often extends beyond the boundaries of any particular firm or nation. For example,

continued development of high-temperature superconductivity, though discovered by IBM researchers in Switzerland, will depend on scientific

and technological advances in the United States,

Japan, and Europe. It will also depend on the

availability of financing—whether public or private—in each of these nations and regions.

Although influenced by the strength of the international community as a whole, the ability of

any particular nation to capitalize on new technological developments depends heavily on its system of innovation. Nations vary considerably in

the ways innovation occurs within their borders

and in the relationships among industry, government, and academia.1 In Japan and Europe, industry and government are more closely linked than

in the United States, and universities play a smaller role in industrial research. Japanese corporations also have a stronger history of collaboration

than U.S. firms, due in part to encouragement by

their government. Differences in the structure of

national innovation systems are partially responsible for differences in competitive performance.

Because of the myriad factors influencing innovation, policymakers interested in facilitating

the commercialization of emerging technologies

must consider not only the means by which firms

develop particular products, processes, or services, but also the need for creating and supporting the necessary institutions and institutional

relationships. While many innovations are largely

compatible with existing infrastructure, radical

innovations often require an entirely new set of

relationships and institutions. The required infrastructure consists of nine basic elements that can

1 For an international comparison of innovation systems, see Richard R. Nelson (ed.), National Innovation Systems: A Comparative Analysis (New York, NY: Oxford University Press, 1993).
62 I Innovation and Commercialization of Emerging Technology

Institutional arrangements

Governance (norms, rules, regulations, laws)

Legitimation (creation of trust)

Technology standards

Resource endowments

Scientific/technological research

Financing and insurance arrangements

Human resources

Proprietary functions

Technology/product development

Networking and development of vendor/distributor channels

Market creation and consumer demand

SOURCE Andrew H Van de Ven, “A Community Perspective on the Emergence of Innovations, ” Journal of Engineering

and Technology Management, vol. 10, No 1, June 1993, p 26

be grouped into three general categories (see table

3-1). 2 The lack of any one of these elements can

cripple attempts to innovate and launch new industries. While creation of these elements is the

task primarily of the private sector in the United

States, government either directly or indirectly influences aspects of nearly all of them.

This chapter analyzes the nine elements of innovation systems to demonstrate their significance in the innovation process and to highlight

the contribution of government to each. As shown

through both historical and contemporary examples, industry and government have forged a complex set of relationships in different industries to

support the tasks of innovation and commercialization. Government influences both the development of new technology and the creation of

markets by funding research and development

(R&D); procuring goods and services for public

missions; providing regulatory approvals; helping set technical standards; issuing regulations on

human health and the environment; sponsoring

technology demonstrations; and enforcing tax,

antitrust, and patent laws. Government contributes to innovation and commercialization by: being an early or important user; providing

information that informs the decisions of the private sector; and supporting private-sector efforts,

rather than dictating how they should proceed.

As industries develop, firms determine which

parts of the infrastructure they will develop: 1) individually, 2) in collaboration with other firms,

and 3) with the support of government. The resulting linkages are often numerous and overlapping,

and change over time as the industry evolves.

GOVERNANCE

Government rules, regulations, and laws affect the

ability of firms to innovate, and can either facilitate or inhibit the emergence of new industries.

Particular aspects of governance affecting innovation include patent policy, antitrust provisions,

and regulations in areas such as environmental

protection and human health. Patent policy, for

example, gives firms an incentive to innovate by

granting them exclusive rights to their inventions

and by protecting these rights against infringe2 This framework derives from the work of Andrew H. Van de Ven, “A Community Perspective on the Emergence of Innovations,” Journal

of Engineering and Technology Management, vol. 10, 1993, pp. 23-51; and Andrew H. Van de Ven and Raghu Garud, “A Framework for Understanding the Emergence of New Industries,“in Research on Technological Innovation, Management, and Policy, vol. 4, Richard S. Rosenbloom

(cd.) (Greenwich, CT: JAI Press Inc., 1989), pp. 195-225.
Chapter 3 Elements of Innovation Systems | 63

ment. By requiring public disclosure of new inventions, the patent process also encourages

dissemination of new technical information.

Changes in enforcement of patent law also influence the ability of firms to innovate. Commercialization of microelectronics and biotechnology

was aided, in part, by a permissive patenting regime that reduced the threat of litigation against

newer firms that adapted innovations originally

developed within established firms or research

institutions.3

Similarly, antitrust law governs the types of activities, such as research or production, that firms

may jointly undertake in developing new technologies. U.S. antitrust provisions are generally more

stringent than those of the nation’s primary industrial competitors. Strict enforcement of antitrust

provisions in the postwar era has been cited as one

of the factors that led to the creation of large integrated research firms in the United States.4 Conversely, investigations of alleged antitrust

activities by two of the largest electronics corporations, AT&T and IBM, ended in consent decrees

(both issued in 1956) that required widespread licensing of inventions in microelectronics and

computers, respectively, fostering competition

and aiding entry by new firms. Clarifications of

antitrust law have also served to encourage innovation. The National Cooperative Research and

Development Act of 1984 allows companies to

collaborate on R&D—through the prototype

stage—without being presumed to violate antitrust laws, and, in some cases, removes the treble

damages penalty against firms found in violation

of the law. The 1984 act had a liberating effect on

consortia, encouraging several hundred to form

within the first few years. As amended in 1993,

the act now extends such protections to firms collaborating in production as well as R&D.

LEGITIMATION

Legitimation is the attempt to reduce customer uncertainty about new products, processes, and services in order to promote development of new

markets. Lack of trust can be a significant barrier

to the successful commercialization of innovations that are costly, technologically sophisticated, or potentially harmful to human health and

the environment. With emerging technologies, in

particular, performance often is difficult to guarantee because the properties of the technology are

not fully understood, the underlying science is not

yet fully developed, and the functioning has not

been fully tested during years of use and modification. Risks and costs are difficult to quantify, and

the objectivity of information provided by the producer is suspect.

Both the private and public sectors play a role

in legitimizing new technologies. Private organizations such as the Consumers’ Union provide

independent evaluations of consumer products,

engineering consultants help evaluate and approve larger scale projects, and private standards

organizations may certify performance of equipment. In the public realm, policies governing

product liability suits and the size of possible

awards (compensatory and punitive) affect the incentives for companies to thoroughly test their

products and seek approvals. The threat of medical malpractice suits, for instance, is an incentive

for practitioners to adopt medical services and

devices that they might not otherwise use if only

price and performance were considered.5 Government approval of new technologies can help reduce customer uncertainty. Many regulatory

approval programs in the Food and Drug Administration (FDA) and the Federal Aviation Administration (FAA) play this role by enforcing

3 David Mowery and Nathan Rosenberg, “The U.S. National Innovation System,” in National Innovation Systems, Richard Nelson (ed.)

(New York, NY: Oxford University Press, 1993), p. 49.

4 Ibid.

5 Annetine Gelijns and Nathan Rosenberg, “The Dynamics of Technological Change in Medicine,” Health Affairs, summer 1994, p. 29.
64 | Innovation and Commercialization of Emerging Technology

standards for safety. Government-sponsored demonstrations of new technology also can provide

potential customers with valuable information on

which to base purchasing decisions.

❚ Regulatory Approvals

Regulatory approvals are an inherent part of the

commercialization process for many innovations

in pharmaceuticals, aerospace, and other industries. Approvals help ensure the safety of innovations that, through their manufacture or use, could

adversely affect human health and the environment. Failures can be costly for customers; damages can far exceed the cost of the product itself.

Unsafe drugs can have health effects far more severe than the conditions they are supposed to ameliorate, and failed aircraft engines can result in the

loss of the aircraft, passengers, and cargo.6

The lack of an effective regulatory approval

process can be debilitating to sales of such products because consumers often have limited alternatives for independently evaluating safety and

efficacy on their own. Moreover, lack of an appropriate regulatory structure can prevent emerging technologies from being evaluated on their

own merits. Commercialization of cochlear implants for the hearing impaired, for example, was

aided by the formation of a separate panel within

the FDA to evaluate cochlear devices on terms and

standards more appropriate to the technology than

those developed for existing alternatives, such as

vibrotactile and hearing aid devices. The establishment of a special committee within the American Speech and Hearing Association to evaluate

safety and efficacy of cochlear implants helped

further distance the new technology from the old.7

Clearly, regulatory approvals can burden innovators by adding time and uncertainty to the commercialization process. Biotechnology companies

view the FDA requirement that companies simultaneously submit applications for both drugs8

(Product License Applications) and their

manufacturing facility (Establishment License

Applications) as particularly burdensome because

they require the firm to invest in full-scale production facilities before knowing whether the drug

will be approved. Biotechnology industry executives also complain about unclear FDA review requirements and inadequate communications

between the agency and industry.9 Tensions exist

between the desire to rapidly bring new products

to market, and the need to protect the public from

potentially deleterious effects of new technologies. While weaker approval standards for medical products and pesticides could speed

commercialization, they could also come at the

cost of human health and undermine consumer

confidence, thereby slowing adoption and diffusion. Looser permitting requirements could allow

industry to install new process technologies more

quickly, but might create loopholes that allow

firms to pollute the environment more and endanger the safety of workers and nearby communities.

Increased cooperation among federal, state,

and local regulatory agencies may make regulatory approvals more conducive to innovation without compromising health, safety, and the

environment. Such actions could broaden markets

by lowering the expenses and uncertainties innovators and their potential customers face when implementing new technologies in different

jurisdictions. Unlike national regulatory approvals granted in the pharmaceutical and aerospace

industries, regulators in environmental and other

areas usually have separate procedures and requirements for permitting new facilities in differ6 Such high costs are one of the reasons the aircraft industry, in particular, is often slow to adopt radically new technologies that have not

been rigorously analyzed and tested.

7 See Van de Ven and Garud, op. cit., footnote 2, p. 204.

8 Actually biologics in this case. Biologics, which include vaccines, blood products, and other products derived from living tissues, are

regulated somewhat differently from drugs made through chemical synthesis.

9 Kenneth B. Lee, Jr. and G. Steven Burrill, Biotech 95: Reform, Restructure, Renewal (Palo Alto, CA: Ernst & Young LLP, 1994), p. 25.
Chapter 3 Elements of Innovation Systems | 65

ent states. The Western Governors Association

has an initiative under way to encourage states to

recognize data submitted to other states for permitting,10 and California initiated an environmental technology certification program that might

give potential customers and regulators confidence in innovative compliance technologies. In

the health care industry, too, differing state requirements hamper streamlining of health administration records.11

In addition, approval processes can often be

streamlined. In 1988, in response to the AIDS epidemic, FDA issued “Subpart E” regulations to expedite approvals for drugs to treat life-threatening

and severely debilitating conditions.12 However,

expediting approval for particular types of products may both delay and raise the cost of approvals

for other products. In the late 1980’s, FDA reviewed some of its drug approval regulations and

implemented a number of changes. These changes

simplify or reduce some regulatory requirements,

increase and improve communications between

the agency and applicants, and alter contents and

formats on applications to facilitate review,

among other actions.13 Such activities may be

continued as other regulations are due to be rewritten. FDA has also proposed streamlining approvals for certain drugs and devices. This proposal

includes a pilot program to allow manufacturers to

hire private reviewers for certain devices, although final approval would still be given by the

FDA.14,15 Computerization of applications, data

submittal, and regulatory review—as well as better training of regulatory agency reviewers—may

also help speed the approval process for FDA, the

Environmental Protection Agency (EPA), and

other agencies.

❚ Technology Demonstration and

Performance Verification

Testing, evaluation, and demonstration outside of

the regulatory context provide an alternative

means of building consumer confidence in new

products, processes, and services. Developers

commonly build prototypes, bench-scale models,

and pilot plant facilities before adopting new

technologies or offering them in the marketplace.

Firms also test-market new offerings before committing to full-scale production, or seek certification from private standards organizations. For

pharmaceuticals, demonstration of efficacy and

safety is a condition for regulatory approval. Collective industry action—coordinated through industry councils, technical committees, and trade

associations—can assist in the promulgation of

industry regulations and safety standards, and can

help overcome concerns about the viability of new

technology. For instance, SEMATECH—a consortium of 11 large semiconductor manufacturers—tests and qualifies new and improved

semiconductor manufacturing equipment.16 The

results are shared with member firms who can use

the results in their purchasing decisions; equipment suppliers also use the test results to gain

feedback on their products.

10 U.S. Environmental Protection Agency, “Technology Innovation Strategy of the U.S. EPA,” external discussion draft, Washington, DC,

January 1994.

11 See U.S. Congress, Office of Technology Assessment, Bringing Health Care Online: The Role of Information Technologies, OTAITC-624 (Washington, DC: U.S. Government Printing Office, September 1995), ch. 3.

12 U.S. Congress, Office of Technology Assessment, Pharmaceutical R&D: Costs, Risks and Rewards, OTA-H-522 (Washington, DC: U.S.

Government Printing Office, February 1993), p. 155.

13 Ibid., pp. 151-158.

14 Philip J. Hilts, “F.D.A. Moves To Hasten Marketing of New Devices,” New York Times, Apr. 7, 1995, p. A22.

15 “FDA Plans To Speed Approvals,” Financial Times, Mar. 17, 1995, p. 6.

16 Peter Grindley, David C. Mowery, and Brian Silverman, “SEMATECH and Collaborative Research: Lessons in the Design of HighTechnology Consortia,” Journal of Policy Analysis, vol. 13, No. 4, 1994, pp. 723-758.
66 | Innovation and Commercialization of Emerging Technology

While demonstrations occur largely in the private sector, government, too, has a useful role to

play, especially in providing unbiased information to developers and users (see box 3-1 for a description of government demonstration programs

for scalable parallel computers). Government

demonstrations and evaluations are often most effective when the government, federal laboratories, and government-supported entities (such as

universities) possess specialized or unique facilities or expertise useful for testing and evaluation.

For instance, the National Aeronautics and Space

Administration’s (NASA’s) wind tunnels, computational models, and flight-testing capabilities

are useful for demonstrating and validating new

civil aviation technologies.17

Government capabilities are also useful in evaluating technologies developed to meet regulatory

requirements. For example, the Superfund Innovative Technology Evaluation (SITE) program,

sponsored by EPA, helps speed the development

and diffusion of new environmental remediation

technologies by allowing vendors to test new

technologies at contaminated sites.18 A number of

federal, state, and university-associated facilities

also provide some testing and evaluation services

for environmental technologies, although difficulties and uncertainties in permitting fixed test

facilities and onsite demonstrations limit their effectiveness.19 The largest federally supported

demonstration program is the Clean Coal

Technology Demonstration Program (CCT),

which received $2.4 billion from the Department

of Energy (DOE) and $4.6 billion in nonfederal

contributions.20 Because many CCT projects are

still under way, it is too early to ascertain the final

results of the program. However, a number of

commercial sales of clean coal technologies have

followed the demonstration.

Federal support of technology demonstrations

appears to yield poor commercial dividends if: 1)

demonstrations are conducted before major research uncertainties are resolved, 2) government

technology push overwhelms market pull, or 3)

there is low industry commitment to demonstration through cost-sharing. Government-supported

development and demonstration of ceramic engine components, the supersonic transport (SST),

the space shuttle, synthetic fuels, the Clinch River

breeder reactor, and a variety of renewable energy

projects have failed largely for these reasons.21 In

a number of these cases, the federal government

continued to fund projects even as technical and

economic milestones were not achieved, cost

overruns accrued, and industry support weakened.

To ensure greater success, government must win

strong industry interest and financial commitment, avoid hasty leaps toward demonstration

when important research problems remain unresolved, and maintain managerial and political dis17 National Research Council, The Competitive Status of the U.S. Civil Aviation Manufacturing Industry: A Study of the Influences of

Technology in Determining Competitive Advantage (Washington, DC: National Academy Press, 1985), cited in John A. Alic et al., Beyond

Spinoff: Military and Commercial Technologies in a Changing World (Boston, MA: Harvard Business School Press, 1992), p. 403, fn. 20.

18 U.S. Environmental Protection Agency, “Innovative Hazardous Waste Treatment Technologies: A Developer’s Guide to Support Services,” 2nd edition, EPA 540/2-91/012, June 1992. SITE’s 1995 budget was $16 million; EPA evaluation programs for waste reduction and

municipal waste technology evaluation were much smaller; see U.S. Congress, Office of Technology Assessment, Industry, Technology, and

the Environment: Competitive Challenges and Business Opportunities, OTA-ISC-586 (Washington, DC: U.S. Government Printing Office,

January 1994).

19 U.S. Environmental Protection Agency, National Advisory Council for Environmental Policy and Technology, Report and Recommendations of the Technology Innovation and Economics Committee: Permitting and Compliance Policy: Barriers to U.S. Environmental Technology Innovation, EPA 101/N-91/001, January 1991; U.S. Congress, Office of Technology Assessment, ibid.

20 U.S. Department of Energy, Clean Coal Technology Demonstration Program: Program Update 1993, DOE/FE-0299P, March 1994.

21 U.S. Congress, Office of Technology Assessment, Commercializing High-Temperature Superconductivity, OTA-ITE-388 (Washington,

DC: U.S. Government Printing Office, June 1988), pp. 44-45; Linda R. Cohen and Roger G. Noll, The Technology Pork Barrel (Washington,

DC: The Brookings Institution, 1991); Alic et al., op. cit., footnote 17, pp. 369-370.
Chapter 3 Elements of lnnovation Systems 67

Scalable parallel computers (defined in box 1-3) can sometimes provide the performance of a conventional supercomputer at a much lower price. Many designs of scalable parallel computers compete

in the market, and potential users often have difficulty determining which design best suits their particular needs, Because the machines are still quite expensive and writing software for them is difficult, users incur substantial costs if they buy machines just to try them out or make an incorrect choice in their

purchase. The limited penetration of scalable parallel computers into the marketplace Iimits the ability

of potential buyers to learn from other users about the strengths and weaknesses of particular designs

in different applications.

As a large user of high performance computing, the federal government has long been interested in

evaluating supercomputer performance and learning to use supercomputers efficiently. Through its own

efforts, the government has been in a good position to help inform other potential users.

One example is benchmarking, which is measuring the speed with which computers perform certain

standard calculations. These benchmark calculations are not whole applications programs, rather, they

are one or more isolated calculations (such as matrix inversion) chosen to represent the types of computation the user expects to encounter. Different benchmark tests involve calculations typical of different types of applications. Researchers at the Department of Energy’s Oak Ridge National Laboratory

(ORNL) first conducted benchmark evaluations m 1979. Since then, researchers at ORNL and at the

National Aeronautics and Space Administration’s (NASA’s) Ames Laboratory have run a variety of

benchmark tests on a range of different supercomputers and made the results available to industry. The

benchmark reports have helped potential users, many of whom have difficulty evaluating manufacturers’ performance claims. 1 Government benchmark results do not usually provide enough information to

make a purchasing decision, but they help in choosing machines for further evaluation, The results also

provide valuable feedback to manufacturers.

The Joint National Science Foundation (NSF) -NASA Initiative on Evaluation (JNNIE) is studying the

performance of numerous scalable parallel computers on a wide variety of computations. As well as

measuring performance, the project seeks to understand why the machines perform as they do, including the effect of different computer design features. The project will also evaluate the ease of use of

different machines. This project could provide valuable information to users as well as to manufacturers

designing next-generation computers.

The federal government has also made it easier for firms to try out these computers for themselves.

NSF funds a high performance computing Metacenter, which includes five national computation laboratories the Cornell Theory Center, the National Center for Atmospheric Research, the University of Illinois’ National Center for Supercomputing Applications, the Pittsburgh Supercomputing Center, and the

San Diego Supercomputer Center. While these labs primarily serve government and academic missions, in some cases, firms have used the labs’ computers, software packages, and consulting services

for their own purposes. Private firms must pay the centers for work that is kept proprietary, for results

that become publicly available, grants are available on a competitive basis to defray costs. In 1994, to

increase access to industry and academia, NSF expanded its Metacenter to include six Regional Alliances,2

SOURCE: Office of Technology Assessment, 1995.

1 D. Bailey “Twelve Ways To Fool the Masses When Giving Performance Results on Parallel Computers, ” Supercomputing Revlew,

August 1991, pp. 54-55

2 "NSF Establishes Six Supercomputing Subcenters with $6 Million in Awards, ” High Performance Computing and Communications Week, voI. 3, No 44, Nov. 10, 1994, p. 3.
68 | Innovation and Commercialization of Emerging Technology

cipline to terminate programs when project failure

is apparent.

TECHNOLOGY STANDARDS

Standards are defined as acknowledged measures

of comparison for quantitative or qualitative values, or norms.22 Thus, standards can be virtually

any characteristic by which a class of objects is

compared. For example, pistols can be compared

by the size of bullet they use; and automobiles can

be compared by how many miles they can travel

per gallon of fuel. The term standard can refer to

both the characteristic being measured (bullet size

or miles per gallon) and to a specific required value for that characteristic (0.22 caliber, 30 miles per

gallon).

Technical standards are particularly important

in the development of new technologies because

they help channel resources toward a limited number of designs. Standards also provide a basis for

products to interact compatibly. For example, two

fax machines that use the same standard for encoding transmitted data can communicate with

each other, even if they work very differently internally. Similarly, a touch typist trained on one

typewriter can readily switch to another one because virtually all English-language typewriters

in use today arrange the letters in a standard pattern, starting with QWERTY at the left side of the

upper row.

Standards can be established in several ways.

Industry may agree on standards; government

may impose them; or the market may determine

them. Often a standard is established by the dominant producer of a new technology, but such de

facto standards can take considerable time to

emerge if several competitors offer different designs. Major consumers can also create de facto

standards, as in the case of military standards and

specifications on certain electronic assemblies.

Numerous committees have been established,

with and without the help of government, to facilitate standards-setting. While technical considerations are important in standards-setting, social

and political considerations often overwhelm

them as companies attempt to impose the standards that best suit their own interests.

The governments of Japan and many European

countries provide a great deal of support to the private sector’s standards activities and view standards as a strategic tool to enhance markets for

domestic industries. The U.S. government provides much more modest support and a less strategic view.23 It has taken an active role in cases in

which the government is a large user of a technology, as with software (see box 3-2), or has an accepted regulatory role, as with broadcasting. In

high definition television (HDTV), for example,

the Federal Communications Commission (FCC)

encouraged firms to develop digital—as opposed

to analog—systems for transmission and display

of HDTV broadcasts. After evaluating four proposed systems—none of which was clearly superior—the federal government encouraged

competing teams to arrive at a consensus on a digital standard.24 The shift to a digital standard may

have put U.S. firms back in the running against

Japanese firms, which had staked out an early lead

in HDTV with its analog MUSE standard. Digital

systems offer many performance advantages over

analog systems, most notably in signal processing

and compression capabilities, and allow greater

synergy with U.S. strengths in computer technology. Though Japanese manufacturers will likely

be strong competitors in producing devices that

meet the U.S. standard, their competitive position

will be much weaker than if the United States had

adopted the MUSE standard.

Federal procurement policies also influence

standards-setting. After several years of debate

22 The American Heritage Dictionary of the English Language, New College Edition (Boston, MA: Houghton-Mifflin, 1980).

23 U.S. Congress, Office of Technology Assessment, Global Standards: Building Blocks for the Future, TCT-512 (Washington, DC: U.S.

Government Printing Office, March 1992), ch. 1, esp. pp. 17-18.

24 See J. Hart, “The Politics of HDTV in the United States,” Policy Studies Journal, vol. 22, No. 2, summer 1994, pp. 213-238.
Chapter 3 Elements of lnnovation Systems 69

Widespread diffusion of computer technology—from desktop PCs to high-performance computers—

hinges on the development of standards to promote software portability; that is, the ability of software

written for one type of computer to run correctly and efficiently on another type of computer without

modification, Portability encourages development of applications software because it expands potential

markets to Include owners of different types of computers. Increased software development, in turn,

makes the computer hardware more valuable because it can perform more functions.

Government has been involved in several industry efforts to develop standards to promote software

portability, including development of the COBOL programming language in the 1960s. Some recent examples include scalable parallel computing, whose commercialization has been hampered by a proliferation of differing computer architectures that run incompatible software. No single architecture has yet

become an Industry standard, which has stymied the development of applications software and made

the machines less attractive to prospective users.

To help overcome this deficiency, the federal government supported the development of the Message

Passing Interface (M PI) standard, which helps to make applications portable across different types of scalable parallel computers. ’ The standard defines a set of system software routines that applications programs may call to pass messages between processors. Each participating computer manufacturer provides system software routines written to run efficiently on its machine, taking into account factors such as

the number of processors and the number, speed, and arrangement of communications channels between

them. When a program is ported (i.e., moved) from one machine to another, the second machine’s system

software routines perform the required interprocessor communication efficiently, just as the first machine’s

system software routines had done. This approach, while not perfectly efficient and not always applicable,

has substantially contributed to software portability.

The effort to create the MPI standard, lasting from summer of 1991 until March 1994, was led by the

University of Tennessee and the Department of Energy’s Oak Ridge National Laboratory, and was supported by modest grants from the Advanced Research Projects Agency (Department of Defense) and the

National Science Foundation (NSF). Several European participants were supported by ESPRIT, a technology program of the European Union. The process involved two-day working group meetings every six weeks

for nine months and extensive discussions by electronic mail, both open to all in the high-performance

computing field. Most major vendors of scalable parallel computers participated, and the MPI standard

was strongly influenced by existing industry message-passing approaches.2

Government is also supporting the High Performance Fortran Forum (HPFF), an ongoing effort led by

Rice University and the NSF-supported Center for Research on Parallel Computation. HPFF is trying to

extend the standard Fortran computer language to computers having more than one processor. Fortran,

commonly used in scientific and engineering computing, was developed to run efficiently on various single

processor computers and is not well suited for use on multiprocessor machines. Various extensions of Fortran were developed for particular multiprocessor machines, but a standard, widely accepted extension of

Fortran was needed to achieve software portability. HPFF is trying to achieve this. A first version of a standard Fortran extension was completed in the fall of 1994; an improved version is under development. As

with the MPI standard, the HPFF’s approach is not perfectly efficient, and IS not always applicable; but the

HPFF’s effort is expected to contribute substantially to software portability.

SOURCE: Office of Technology Assessment, 1995

1 MPI is intended primarily for distributed memory computers and for networks of workstations, but can also be used for shared

memory computers The Internationai Journal of Supercomputer Applications and High Performance Computing, voI. 8, Nos. 3/4,

fall/winter 1994, pp. 159-416 (Special Issue: MPI: A Message-Passing Interface Standard), p 171

2 Ibid., pp. 165-168
70 | Innovation and Commercialization of Emerging Technology

between IBM and other computer manufacturers

(including RCA and Univac) regarding a standard

for COBOL, a high-level computer language for

business applications, the American National

Standards Institute (ANSI) adopted a single standard COBOL version. DOD quickly adopted that

standard as a federal data processing standard,

guaranteeing that major manufacturers would

supply compilers for the ANSI version of COBOL, and enabling programs written in ANSI

COBOL to be used on various types of computers.25

Federal procurement standards can sometimes

impede the commercialization of new technology

by being overly prescriptive. Military standards

and specifications have been cited as factors that

limit innovation in developing systems for the

military and that segregate the military and commercial domestic production bases.26 Military

standards and specifications often specify in detail

the inputs and processes required in the production of goods and services. As practices have

changed in the commercial sector, military standards have presented increasingly insurmountable barriers to commercial firms that might

otherwise participate in defense markets. For

many advanced technologies, the military’s reliance on outdated standards has left it behind

commercial systems in performance; this practice

has resulted in segregated manufacturing facilities

for military systems, driving up the costs of production. Recognizing these problems, DOD has

begun to move toward performance-based standards that emphasize characteristics of the end

product or system, rather than the method of production. This approach allows military procurement officials to take advantage of the commercial

sector in many areas. It also enables the use of military procurement policies in fostering the development of new technologies and products, such as

those that are less harmful to the environment (see

box 3-3).

Government attempts to dictate standards for

commercial or dual-use technologies (i.e., those

with both military and commercial applications)

have also run into difficulty. DOD’s efforts to establish Ada as a standard language for object-oriented computer software, for example, have

generally fallen short of their initial objectives and

failed to promote synergy between defense and

commercial computer markets. Similarly, government adoption of the Escrowed Encryption Standard (EES) in 1994 as a voluntary, federal

information-processing standard has not enticed

commercial organizations to follow. This standard includes a decrypting key that can be reconstructed by combining information escrowed with

two different federal agencies. Only with a court

order—and for law enforcement purposes only—

would the information from the two agencies be

combined to decrypt a particular communication.

Because of its interest in law enforcement, the

government hoped that EES would be accepted by

industry. However, the private sector has shown

little interest in EES since it can be cracked by the

government.27

25 IBM apparently opposed the standard proposed by RCA and Univac because easy transfer of software from one machine to another

would help RCA and Univac to compete against IBM, which dominated the market. Such behavior by IBM is consistent with economic theory;

see S. Besen and J. Farrell, “Choosing How To Compete: Strategies and Tactics in Standardization,” Journal of Economic Perspectives, vol. 8,

No. 2, spring 1994, pp. 126-129.

26 For an examination of factors in the integration of defense and commercial sectors, see U.S. Congress, Office of Technology Assessment,

Assessing the Potential for Civil-Military Integration: Technologies, Processes, and Practices, OTA-ISS-611 (Washington, DC: U.S. Government Printing Office, September 1994).

27 U.S. Congress, Office of Technology Assessment, Information Security and Privacy in Network Environments, OTA-TCT-606 (Washington, DC: U.S. Government Printing Office, September 1994), pp. 127-132; see also U.S. Congress, Office of Technology Assessment, Issue

Update on Information Security and Privacy in Network Environments, OTA-BP-ITC-147 (Washington, DC: U.S. Government Printing Office,

June 1995).
Chapter 3 Elements of Innovation Systems 71

Military standards and specifications are important factors that govern the cleaning of electronic assemblies. Because the military IS such a large customer for electronic products, its standards have

served as de facto Industry standards. One example is CFC-113, a solvent used for cleaning electronic

assemblies, fine optical and mechanical parts (e. g., disk drives and gyroscopes), and dry cleaning of

delicate materials. CFC-113’s superior cleaning characteristics, noncorrosiveness, low cost, low toxicity,

slight odor, and nonpolluting qualities made the compound ideal for many cleaning applications. The

chemical’s characteristics also meant that users did not have to install and operate expensive ventilation or air pollution control equipment. A 1989 estimate suggested that 50 percent of global CFC-113

use in electronic circuit board manufacturing was determined by U.S. military specifications.

However, CFC-113 has been identified as an ozone-depleting substance (ODS). In September 1987,

the United States joined 23 other countries in signing the Montreal Protocol on Substances that Deplete

the Ozone Layer. The June 1990 London Amendments to the Protocol require the total phaseout of various CFCs by the year 2000, including CFC-113. In 1987, the Environmental Protection Agency and the

Department of Defense (DOD) created an Ad Hoc Solvents Working Group to develop a benchmark

program to test CFC alternatives. Manufacturers, academics, and government officials initiated a strategy to switch military specifications from prescribing particular production processes, Including CFC

use, to procurement standards based on product performance. One estimate concluded that at one

time nearly 2,000 military specifications or standards required CFC cleaning.

One result of the Working Group’s efforts was creation of MIL-STD-2000 Rev. A, a military standard

on soldered electronic assemblies that allows contractors—with adequate documented testing and

evaluation—to use alternatives to CFC solvents. Most other DOD procurement documents referencing

ODSs have also been revised.1 DOD also cooperates with NATO and other foreign militaries on military

standards and ODS alternatives. These performance-based revisions have removed impediments to

the adoption of CFC-113 alternatives by manufacturers. More generally, they remove the impediments

to innovation created by procurement standards that constrain manufacturers’ ability and incentives to

try new processes and materials.

SOURCE: Alan Miller, Pamela Wexler, and Susan Conbere, “Commercializing Alternatives for CFC-113 Solvent Applications, ” unpublished contractor report prepared for the Off Ice of Technology Assessment, U S Congress, Washington, DC, May 16, 1995

1 U.S. Air Force Materiel Command, Specifications and Standards Revision Tracking System DOD Revision Summary Report,

Mar 271995, cited in Alan Miller, Pamela Wexler, and Susan Conbere, “Commercializing Alternates For CFC-113 Solvent Applications, ” unpublished contractor report prepared for the Off Ice of Technology Assessment, U S Congress, Washington, DC, May 16,

1995

In sum, government does, at times, influence private industry whose interests differ from those

the standards-setting process. Cases in which gov- of the government.

ernment has attempted to facilitate industry’s own

attempts to set standards, or in which it has used its

procurement policies to tip the balance in favor of SCIENTIFIC RESEARCH

a proposed standard, appear to have met with suc- Basic scientific research is a key resource for success. Attempts to unilaterally impose standards on cessful innovation, providing scientific knowlcommercial industry have met resistance from edge to support the development of new products,
72 I Innovation and Commercialization of Emerging Technology

Performer Basic research Applied research Development Total R&D —

Industry $ 9 7 31 % $28 3 69% $85 8 85% $123.8 72%

Government 2 7 9 4,9 12 9 6 10 17.2 10

University 137 54 5 2 13 1 6 2 20.5 12

Other a

5 1 16 2 7 7 3 3 3 11.1 6

Total $312 10070 $410 10070 $100,4 10070 $1726 1 OO%

a Includes nonprofit institutions and federally funded research and development centers run by colleges and universities.

—

NOTE Totals may not add because of rounding

SOURCE National Science Foundation, National Patterns of R&D Resources 7994, NSF 95-304 (Arlington, VA 1995) pp. 57-69.

processes and services. For example, advances in

the nascent biotechnology industry rely heavily

on advances in genetics and biochemistry; and

early advances in electronics were based on new

insight into solid state physics. Yet, firms invest

less in research than economic theory suggests

would be optimal for society as a whole.28 This

underinvestment is due largely to problems of appropriability, the ability of firms to capture the

benefits of their research efforts. Basic research is

often far more costly to produce than to diffuse or

imitate, so companies cannot easily prevent their

competitors from benefiting from their research

activities. Nor can they hope to fully exploit all the

knowledge they could gain from basic research.

Several studies confirm that companies rely on

outside sources of knowledge and technical inventions for the vast majority of their commercially significant new products.29

Firms conduct basic research for a number of

reasons—to gain first-mover advantages; to help

them better plan and interpret the results of applied research programs; and, more importantly,

to enable them to better evaluate and exploit

knowledge produced elsewhere30—but the conduct of basic research in the United States has fallen mostly to universities. University-performed

research accounted for only 12 percent of the nation’s total R&D spending in 1994, but amounted

to 54 percent of all basic research (table 3-2). Universities allocated two-thirds of their R&D to basic research, compared with only 8 percent for

development activities. Industry, in contrast,

skews its R&D heavily toward development. In

1994, almost 70 percent of industry-performed

R&D was in development, versus only 8 percent

in basic research. Government laboratories performed less than 10 percent of the nation R&Din

1994, with over half of the effort in development.

Most of this work supports government missions

that are of limited commercial interest.

University research plays several roles in the

development of industrial technology. In immature industries such as biotechnology, university

research is often the source of new inventions.

University researchers accounted for over 18 percent of the patents in genetic engineering in 1990

and had high shares in some related patent classes

(table 3-3). Other chemical and biological research, though rarely the source of new drugs,

identifies the types of reactions pharmaceutical

companies should look for in their quest for new

28 Kenneth Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in The Rate and Direction of Inventive Activity

(Princeton, NJ: Princeton University Press, 1962); and Richard Nelson, “The Simple Economics of Basic Research." Journal of Political Economy, June 1959.

29 R.S. Rosenbloom, ‘“Product Innovation in a Scientific Age,” ch. 23 in New Ideas for Successful Marketing, Proceedings of the 1966

World Congress, American Marketing Association, Chicago, IL, 1966; J. M. Utterback, “Innovation in Industry and the Diffusion of Technology,” Science, Feb. 15.1974, pp. 620-626; C. Freeman, The Economics of Industrial Innovation (Cambridge, MA: MIT Press, 1982).

30Nathan Rosenberg, “Why Do Firms Do Basic Research (With Their Own Money)?” Research Policy, vol. 19, 1990, pp. 165-174
Chapter 3 Elements of Innovation Systems 73

Patent class Total patents University patents University share

Genetic engineering/recombinant DNA 321 58 18.1%

Molecular biology and microbiology 1,417 171 121

Superconductor technology 233 25 107

Drugs: bio-affecting and body-treating 1,490 147 9 9

Robots 251 12 4 8

Semiconductor device manufacturing 755 23 3 0

Active solid state devices (e g , transistors) 1,535 34 2 2

Optics: systems and elements 2,280 41 18

Electrical computers and data processing 6,474 53 0 8

Communications 2,026 14 0 7

SOURCE: Nathan Rosenberg and Richard R Nelson, “American Universities and Technical Advance in Industry” Research Policy, vol. 23, No. 3

 May 1994, p 339, from unpublished data gathered by Jonathan Putnam and Richard Nelson

drugs, and enables companies to better assess the

possible uses for a drug they are testing. In more

mature industries, such as electronics, that are

characterized by greater emphasis on incremental

innovation and improvement in existing product

lines, innovation is less dependent on academic

research. Universities held less than 3 percent of

the patents in fields such as semiconductors, computers, and communications in 1990. Nevertheless, academic research serves as the source of

revolutionary new technologies that provide the

impetus for entirely new types of products in these

fields.31

The linkages between university research and

industrial technology vary considerably across

academic disciplines and industries (see table

3-4). Survey data indicate that in the pharmaceuticals industry, 27 percent of new products and 29

percent of new processes introduced between

1975 and 1985 could not have been developed

without substantial delay without university research. Another 17 percent of products and 8 percent of processes relied substantially on recent

academic findings. In other fields, the linkages are

not as strong. In the information processing,

scientific instruments, and electronics industries,

only 11, 16, and 6 percent, respectively, of new

products were highly dependent on academic research. 32

As companies redirect their own R&D funding

toward shorter term projects, they are increasing

their reliance on university research. Between

1974 and 1994, the percentage of university R&D

funded by industry increased from 3.1 percent to

7.1 percent, while total university R&D more than

doubled from $8.75 billion to $20.5 billion.33 Recent estimates indicate that 19 percent of all university research is conducted in programs that

have significant industrial participation.34 Except

in rare cases in which university R&D substitutes

for industrial R&D (typically in industries that do

not support much in-house R&D), the vast majority of this work involves basic and applied research.

31 Government-University -Industry Research Roundtable, New Alliances and Partnerships in American Science and Engineering, (Washington, DC: National Academy Press, 1986), as reported in Nathan Rosenberg and Richard Nelson, “American Universities and Technical Advance in Industry,” Research Policy, vol. 23, 1994, p. 343.

32 Edwin Mansfieid, “Academic Research and Industrial Innovation,” Research Policy, vol. 20, No. 1, February 1991. pp. 1-12.

33 National Science Foundation, National Patterns of R&D Resources, 1994, NSF 95-304 (Arlington, VA: 1995), table B-2.

 34Wes Cohen et al., University-Industry Research Centers in the United States, report to the Ford Foundation, 1993.
74 I Innovation and Commercialization of Emerging Technology

Percentage that could not have been Additional Percentage developed

developed (without substantial delay) with substantial aid from recent

Industry without recent academic research academic research

—

Products Processes Products Processes

Information processing 11% 11% 17% 16%

Electronics 6 3 3 4

Chemicals 4 2 4 4

Instruments 16 2 5 1

Pharmaceuticals 27 29 17 8

Metals 13 12 9 9

Petroleum 1 1 1 1

Average — 1170 8%— 8% 6%

SOURCE: Edwin Mansfield, “Academic Research and Industrial Innovation,” Research Policy, vol. 20, No 1, February 1991, table 1, p 2

—

FINANCING

New technologies often require decades to move

from the laboratory to the marketplace, and costs

tend to increase exponentially with each step forward. Availability of capital can, therefore, become a bottleneck for large and small companies

alike as they attempt to move promising technologies closer to the marketplace and select among

multiple projects that compete for limited resources. Firms differ in the types of financing they

seek and attract. Large, established firms tend to

finance innovation from revenues generated by

sales of existing products, but corporate decisions

regarding resource allocation are influenced by

the structure of external capital markets and the

expectations of investors. Large, established

firms can also issue a new stock series to raise

additional capital. Small startup firms, in contrast,

tend to finance innovation with their own savings,

venture capital, and wealthy investors referred to

as angels. Each of these sources has its own

strengths and weaknesses that reflect the differing

relationships between investors and innovators.

❚ Sources of Financing

Government and industry share responsibility for

funding innovation and commercialization in the

United States. Public institutions tend to play a

major role in financing basic scientific or technical research, whereas primarily private capital

supports company efforts to transform basic

knowledge into proprietary commercial applications. Government expenditures for R&D totaled

$62.2 billion in 1994, representing just over onethird of total R&D (table 3-5). Some$18 billion of

this funding went to basic research, making the

government the largest supporter of basic research

in the country, accounting for more than half of all

such funding. Industry funded 59 percent of total

R&D, but spent about 69 percent of its resources

on development activities and another 23 percent

on applied research. Only 8 percent of industry

funding went toward basic research.

Federal R&D funding has declined in both real

and relative terms since 1987. Between 1987 and

1994, federal expenditures declined from $73 billion to $62 billion (in constant 1994 dollars), falling from 46 percent to 36 percent of total U.S.
Chapter 3 Elements of lnnovation Systems 75

Source Basic research Applied research Development Total R&D

Industry $8,2 26% $23.9 58% $70.0 70.0% $1021 59%

Government 18,2 58 14,5 35 29.6 29.0 622 36

University 3.3 11 1.7 4 0.4 0.4 5.3 3

Othera1,5 5 1 0 2 0 5 0 5 3 0 2

Total -– $31. 2 100’%0 $41.0 100?40 $1004 100% $172.6 10070

a Includes nonprofit institutions and federally funded research and development centers run by colleges and universities.

NOTE: Totals may not add because of rounding

SOURCE: National Science Foundation, National Patterns of R&D Resources, 7994, NSF 95-304 (Arlington, VA: 1995), pp. 54-68.

R&D.35 This trend places greater demand on private sources of funding. Private financiers typically provide equity rather than debt financing for

new technology development. One reason is that

technology development typically offers little

collateral for a loan. Failed R&D projects generally do not generate any salable property, physical

or intellectual. Specialized facilities and equipment purchased for technology development

often have low resale value, and can be difficult to

resell at all.36 Also, technology development

tends to be riskier than other sorts of investment.

Not only do new technology ventures need sound

business plans, appropriate marketing strategies,

and requisite management and business skills in

order to succeed; they must also develop the

technology sufficiently to turn it into a product.

Potential investors often lack the ability to evaluate a project technical merits.

Private funding for innovation ultimately

derives from national savings.

37 U.S. savings

rates, however, lag those of its major economic

competitors. Between 1990 and 1992, the U.S. national savings rate averaged 2 percent of GDP,

compared with 20 percent for Japan, 11 percent for

Germany, 8 percent for France, and 3 percent for

the United Kingdom.38 This lower rate results in

part from the need to pay interest on the national

debt, which amounted to roughly 4 percent of

GDP. U.S. investments in nonresidential fixed

capital have also lagged those of its primary competitors since at least 1970. Between 1990 and

1992, nonresidential fixed investment (including

government capital expenditures) in the United

States averaged 12 percent of GDP, compared

with 26 percent for Japan, 15 percent for France

and Germany, 14 percent for Canada, and 13 percent for the United Kingdom.39 This may result,

in part, from the U.S. tax system, which taxes corporate investments twice: once as corporate profits and once as distributed dividends.

❚ External Capital Markets

Differences in the structure of capital markets tend

to make U.S. providers of equity capital less patient and less knowledgeable about the internal

operations of particular firms than capital providers in Japan and Germany. In Japan, most large

35 National Science Foundation, op. cit., footnote 33.

36 Stephen J. Kline and Nathan Rosenberg, “An Overview of Innovation,” in The Positive Sum Strategy, Ralph Landau and Nathan Rosenberg (eds.) (Washington, DC: National Academy Press, 1986), p. 300.

37 Foreign investment in the U.S. economy during 1990-92 averaged less than 1 percent of GDP. National Research Council, Board on

Science, Technology, and Economic Policy, Investing for Productivity and Prosperity (Washington, DC: National Academy Press, 1994), p. 15,

table 2.

38 Ibid., p. 16, table 3. Earlier years show a similar pattern.

39 Ibid.,p. 4, table 4, citing Organisation for Economic Cooperation and Development, Annual and Quarterly National Accounts.
76 | Innovation and Commercialization of Emerging Technology

company stock is held by keiretsu, or groups of related industrial firms that give preference to other

group members in procuring supplies and services.40 Each group member has a vested interest

in other group members’ long-term success and

tends to hold the stock for long periods of time,

rather than trading it to win short-term profits. In

addition, both Japanese and German banks may

hold equity in borrowing firms, giving them a further interest in the firms’ long-term success.

Bankers also tend to understand in detail the business of firms they lend to, which can give them

confidence in a firm’s long-term viability in the

face of short-term setbacks. Both banks and stable

shareholders often have close relationships with

the firm’s management and offer them advice. Of

course, such arrangements can have negative consequences if the bank within the keiretsu or closely affiliated with a particular company fails.

In the United States, company stock is less

closely held; most is readily traded by investors

looking for short-term gain. In fact, most publicly

traded stock is owned by managed funds, such as

pension funds and mutual funds, whose managers

are evaluated on the fund’s quarterly performance.

U.S. tax laws provide no incentive to hold stocks

for sustained periods, as capital gains tax rates no

longer distinguish between stocks held for shorter

or longer periods of time. The average period a

stock is held has declined from over seven years in

1960 to just two years in 1990.41 U.S. banks are

prohibited from owning equity in their clients, and

typically know little about their clients’ business;

therefore they add little stability to the market.

While the effects of rapid turnover are hard to deduce, the frequent revaluing of stock prices, combined with an obligation to protect shareholder

interests, provides an incentive for company managers to favor short-term returns over long-term

investments such as R&D.

On the other hand, the openness of the U.S. capital system allows mobilization of large amounts

of capital, and enables small firms better opportunities to raise money on the stock market through

an initial public offering. This ability motivates a

vital venture capital industry—unparalleled

abroad—to invest in risky startup companies.

New firms rely on venture capital and angels—

wealthy individuals who invest in small companies—for much of their startup funding because

they have no product, track record, or earnings.

They must sell investors on the viability of their

idea and the competence of their people. Both the

venture capital and angel markets share some attributes with the overall financial systems of Japan and Germany in that investors are patient,

they are well informed about the firms they invest

in, and they have a say in management decisions.42 However, both are limited in their ability

to help startup firms.

❚ Venture Capital and Angel Financing

Small startup companies in the United States

often look to the venture capital markets and

wealthy angels for their capital needs. These markets bear some resemblance to external capital

markets in Japan and Germany. Investors tend to

be patient, are knowledgeable about the firms in

which they invest, and provide management expertise. Yet, these markets are much smaller than

other capital sources for innovation.

Venture capital is widely viewed as a strength

of the U.S. system of innovation. The total value

of existing venture capital investments in U.S.

40 Typically, a minority portion of the target firm’s stock is sold on the open market. While that portion is frequently traded and can experience large price swings, it tends to have little effect on the firm’s behavior. Japan is moving somewhat in the direction of the United States.

Long-term investors are reconsidering their strategies and, in some cases, selling stock, partly to gain needed liquidity during Japan’s current

recession. R. Steiner and J. Sapsford, “Japanese Investors Get Choosy About Stocks, Depressing the Market,” Wall Street Journal. June 28,

1995, p. A1.

41 Michael Porter, Capital Choices: Changing the Way America Invests in Industry, report presented to the Council on Competitiveness and

cosponsored by the Harvard Business School (Washington, DC: Council on Competitiveness, June 1992), p. 5.

42 Although neither Japan nor Germany has a robust venture capital market for financing startup companies.
Chapter 3 Elements of lnnovation Systems 77

1975 19761977 19781979 1980 1981 1982 19831984 1985198619871988 198919901991 1992 1993 1994

SOURCE: Venture Economics, Inc., as cited in William D. Bygrave and Jeffry A. Timmons, Venture Capital at the Crossroads (Boston, MA Harvard

Business School Press, 1992), p 26, and in Lisa Vincenti, “Fund Raising Renaissance, ” Venture Capital Journal, Feb. 1995, p 40

firms was $35 billion in 1992, more than 10 times

43 Venture capital firms that of Japan or Germany.

raise money from institutions and individuals to

invest in relatively high-risk, but potentially highreward, new firms. In return, firms receiving funding from venture capitalists transfer an average of

69 percent of their equity to venture capital

firms.44 Within a fixed period of time, typically

seven to 10 years for successful investments, venture capitalists liquidate their holdings, often

through private buyouts or initial public offerings

in the stock market. Because their compensation

depends on the performance of their investments,

venture capitalists not only have strong stakes in

the success of firms in their portfolio, but they

have strong incentives to cut losses on firms that

do not perform satisfactorily. Venture capital

helped spawn many startup companies such as

Apple, Digital Equipment Corp., Genentech, and

Intel by providing not only early-stage financing,

but managerial assistance to help firms develop

business plans, manage technology and product

development, and deal with regulations in areas

such as taxes, working conditions, and environment.

Venture capital can support only a limited number of technology-based firms at any given time.

While new venture capital commitments have

nearly tripled since 1991, reaching $3.8 billion in

1994, they are still only slightly larger than the

R&D budget of IBM Corp. (figure 3-1). Only 10

to 20 percent of the new technology ventures

started in the United States each year receive venture capital. Far greater resources are invested by

entrepreneurs themselves, larger companies, and

angels. In addition, venture capitalists appear to

be backing away from capital-intensive industries

like electronics and shifting their attention toward

43 Richard Florida and Donald F. Smith, Jr., “Keep the Government Out Of Venture Capital,” Issues in Science and Technology, summer

1993. p. 62.

44 Coopers & Lybrand, Fifth Annual Economic Impact of Venture Capital Study, 1995, as cited in Gene Koprowski, “Venture Capitalists

Taking Big Chunks Of Startups,” HPCC Week, Apr. 20, 1995, p. 7.
78 | Innovation and Commercialization of Emerging Technology

industries like biotechnology and software that

have lower startup costs.45 Despite growth in seed

capital investments in 1994, venture capitalists

also appear to be moving toward funding at later

stages, reducing their emphasis on seed capital.46

Angels—affluent individual investors—play

an important role in seeding startup firms, infusing an estimated $10 billion to 30 billion per year

into firms at the earliest stages of development.47

In contrast to the market for venture capital, the

market for angel funding is informal and fragmented, limiting its potential ability to help startup firms. Angel investors typically learn about

investment opportunities through accidents of geography and personal acquaintances. More formal

mechanisms for matching angels to needy companies, or for pooling the resources of several angels

for a single investment, do not exist on a large

scale. Some researchers estimate that up to $300

billion in angel funding could be tapped if information about investments could be targeted to

potential investors.48

Several initial efforts have been made to help

entrepreneurs and angels find each other. In 1984,

the Venture Capital Network, Inc. (VCN) was established as a not-for-profit affiliate of the Center

for Venture Research at the University of New

Hampshire. VCN began to build databases of entrepreneurs and angels and to provide selective

introductions. VCN moved to the Massachusetts

Institute of Technology in 1990, and was renamed

the Technology Capital Network, Inc. in 1992.

Between 1984 and 1990, the program served

1,200 entrepreneurs and 800 investors. It made

3,500 introductions that led to at least 31 ventures

(of which 80 percent were technology-based),

raising a total of $12 million from 50 investors.

VCN helped initiate six similar networks in the

United States and Canada.49 Another effort to facilitate angel financial markets is The Capital Network (TCN), established by the IC2 Institute at the

University of Texas and located at the Austin

Technology Incubator. TCN provides a computerized information clearinghouse and introduction

service that matched up nearly $25 million in investments over the past five years.

❚ Small Business Assistance Programs

Small firms also receive assistance from technology incubators (see box 3-4) and from federal programs that address entrepreneurial needs. Many of

these latter programs, however, are not targeted to

the specific needs of high-technology firms. Programs operated by the Small Business Administration (SBA) serve small firms, whether or not

the firms focus on high-technology work, and

they serve small, high-technology firms without

specifically targeting startups. For example, the

SBA operates a number of small business development centers (SBDCs) that provide small firms

with an array of services—from expert referrals to

export assistance—but they often lack the exper45 Of new venture capital commitments in 1994, 28 percent went to biotechnology, 14 percent to software, 14 percent to media and communications, and 12 percent to semiconductors and electronics. Coopers & Lybrand, ibid.

46 OTA interviews with venture capitalists and managers of high-technology startups.

47 J. Freear, J. Sohl, and W. Wetzel, “The Private Investor Market for Venture Capital,” The Financier: ACMT, vol. 1, No. 2, May 1994, pp.

7-15.

48 J. Freear, J. Sohl, and W. Wetzel, “Angels and Non-Angels: Are There Differences?” Journal of Business Venturing, vol. 9, pp. 109-123.

49 J. Freear, J. Sohl, and W. Wetzel, “The Private Investor Market for Venture Capital,” The Financier: ACMT, vol. 1, No. 2, May 1994, pp.

7-15.
Chapter 3 Elements of Innovation Systems 79

Often endowed with both public and private support, a business incubator helps entrepreneurs by providing: 1 ) low-cost office space; 2) shared support services; 3) assistance in developing business strategy

and in coping with practical concerns such as government regulations; and 4) access to capital sources,

technical expertise, and business partners. Incubators form a hub for entrepreneurial interaction and business development by connecting investors, business groups, universities, and public agencies with new

firms. 1 About 20 to 25 percent of the more than 700 existing incubators specifically assist new hightechnology firms. Many are located at or near universities or research parks, bringing entrepreneurs close

to valuable technical resources and making them a natural home for commercialization efforts arising from

Innovations at academic laboratories.

Data on the success rates of technology incubator clients are sparse, partly because two-thirds of incubators are less than five years old and have few, if any, graduates, However, evidence suggests that they

contribute to the creation and development of technology-based firms. One study showed that graduates

of the selected incubators experienced an average annual growth rate of 166 percent in sales and 49 percent in employment between 1986 and 1990.2

Although incubators are intended to breed successful companies, critics charge that they offer Iife support to firms that would and should ordinarily fail. While some incubators have graduated dozens of firms,

others have experienced only failures. Moreover, despite their expressed preference for high-technology

firms, few Incubators can provide technology-based firms with the expertise and resources they need to

flourish,3 To succeed, incubators must provide the resources and services that clients need, Some say that

an incubator, by example, can show how to run an efficient, customer-oriented firm. To succeed, an incubator also needs clients committed to business success, rather than entrepreneurs content to remain small 4

The federal government currently assists incubators. Regional offices of the Department of Commerce’s

Economic Development Administration support feasibility studies, technical assistance, and construction

costs for Incubators sponsored by both public and nonprofit organizations.5 Incentives and assistance

have been offered to help link disparate public and private resource providers into incubators and other

small business assistance programs. Small Business Development Centers perform some of these services, and other entitles, such as the federal/state-supported TEXAS-ONE initiative and the private Coopers & Lybrand Batorlink, provide electronic links among small businesses, research organizations, incubators, and other resources. A possible future federal role would be to work with the National Business

Incubators Association to develop criteria and certification procedures to assure quality services to clients.

SOURCE Office of Technology Assessment, 1995

1 S. Birley, “The Role of Networks in the Entrepreneurial Process, ” Journal of Business Venturing, vol. 1, No. 1, winter 1985, pp.

107-117, R. Smilor and M.D. GiII. The New Business Incubator (Lexington, MA: Lexington Books, 1986); M.P. Rice, Linking the Performance of the Rensselaer Incubator Program and the Performance of its Participating Companies, paper presented at the 1994 Babson Entrepreneurship Research Conference, University of Houston, Houston, TX, June 11, 1994.

2S.A. Mian, “U.S. University-Sponsored Technology Incubators: An Overview of Management, Policies, and Performance. ” Technovation, voI. 14, No 8, 1994, pp. 515-528.

3 Johanna Ambrosio, “Incubators Nurture Start-up Firms, ” Computerworld, Sept 16, 1991, pp 105, 112; G.G. Udell, “Strategies

for Stimulating Home-Grown Technology-Based Economic Development, ” Business Horizons, November-December 1988, pp

60-64, see also, The State of the Business Incubation Industry 7997 (Athens, OH National Business Incubation Association). In a

mid-1980’s study, 86 percent of responding incubators indicated a preference for high technology. Cited in R. Smilor, “Commercializing Technology Through New Business Incubators, ” Research Management September-October 1987, pp 36-41

4 M.P. Rice and J B Matthews, Growing New Ventures—Creating New Jobs Principles and Practices of Successful Business

Incubation, (Kansas City, KS CEL Kauffman Foundation, forthcoming 1995), Smilor, ibid., Rice, op. cit., footnote 1.

5 About 10 percent of the Economic Development Administration’s work is related to assisting incubators, Rick Sebenoler, Technical Assistance Program, Economic Development Administration, U.S. Department of Commerce, Austin, TX, personal communication, Aug 22, 1995.
80 | Innovation and Commercialization of Emerging Technology

tise and contacts needed in many high-technology

sectors.50

The SBA also authorizes and supports Small

Business Investment Companies (SBICs) that invest in small business through long-term loans

and equity stakes. Although data are limited,

available evidence indicates that SBICs help

channel investment to new high-technology

firms. It is estimated that of the $11 billion invested in over 57,000 small businesses between

1958 and 1992, 60 percent went to firms less than

three years old.51 Over the same period, approximately $1.6 billion of SBIC investments went into

high-technology enterprises.52 SBICs often finance low-collateral business activities—including R&D, marketing, and self-acquisition—that

are crucial to such firms.53

Small, high-technology businesses are the target of the federal Small Business Innovative Research (SBIR) program. The program requires

large federal agencies to reserve a percentage of

their extramural research budget for competitive

grants to small firms (see box 3-5). The SBIR

program provides critical funding, as well as the

opportunity to further R&D and product development, to many firms in the early stages of their

development. Many small businesses also participate in other federally sponsored cooperative

technology programs, such as the Advanced

Technology Program (ATP), which funds precompetitive research programs. Approximately half of

the ATP awards to date have gone to small businesses or joint ventures led by small businesses.54

HUMAN RESOURCES

Human resources are important to innovation because new technologies imply new ways of performing tasks related to research, manufacturing,

or marketing.55 Successful innovation requires

that entrepreneurs assemble a team of well-trained

scientists, engineers, technicians, managers, and

marketers who develop new technologies; incorporate them into products; manufacture them in a

way that is timely, cost-effective, and responsive

to the market; and sell them. Training workers

with these diverse skills is the responsibility of

different institutions, both public and private.

The formal education system, from kindergarten through graduate school, provides the basic

50 G. G. Udell, “Strategies for Stimulating Home-Grown Technology-Based Economic Development,” Business Horizons, November-December 1988, p. 63; in interviews with OTA, administrators of technology incubators and state technology programs stated that high-tech firms

typically sought assistance from SBDCs only after pursuing the support of a technology incubator or state-sponsored technology program. In

recent partnerships with other federal agencies, however, the SBDC program combines small business assistance with other agencies’ technical

resources. For example, SBDC subcenters have been established at 10 National Institute for Standards and Technology (NIST) Manufacturing

Technology Centers to bring a greater range of financial and business expertise to the centers’ primary manufacturing extension services for

small and medium-sized manufacturers; “NIST Manufacturing Centers to Host SBA Experts in Coop Program,” Industrial Engineering, December 1993, pp. 7-8.

51 U.S. Congress, Senate, Committee on Small Business, “Hearing on Investment in Critical Technologies Through the Small Business

Administration’s Existing Financing Programs,” 103d Congress, 1st session, June 9, 1993.

52 This amount is said to have leveraged an additional $7.1 billion from other private sources; ibid. Apple Computer, Cray Research, and

Intel received SBIC financing in their early years.

53 E. Brewer, III, and H. Genay. “Funding Small Business Through the SBIC Program,” Economic Perspectives. May-June 1994, pp. 22-34.

On average, bank-related SBICs raise more private capital and rely less on SBA funding and guarantees than other SBICs.

54 Of the 24 ATP awards announced in July 1995, 18 of the total 47 participants were small businesses and 13 of the 24 joint ventures were

led by small businesses; U.S. Department of Commerce, “NIST Announces 24 New Advanced Technology Program Awards,” Commerce News

press release, Washington, DC, July 13, 1995, p. 30.

55 For a more in-depth discussion of this subject, see U.S. Congress, Office of Technology Assessment, Worker Training: Competing in the

New International Economy, OTA-ITE-457 (Washington, DC: U.S. Government Printing Office, September 1990); U.S. Congress, Office of

Technology Assessment, Higher Education for Science and Engineering—A Background Paper, OTA-BP-SET-52 (Washington, DC: U.S.

Government Printing Office, March 1989); and U.S. Congress, Office of Technology Assessment, Educating Scientists and Engineers: Grade

School to Grad School, OTA-SET-377 (Washington, DC: U.S. Government Printing Office, June 1988).
Chapter 3 Elements of lnnovation Systems 81

The Small Business Innovative Research program (SBIR) seeks to increase the level of small firm participation in federal R&D activities and to improve private sector commercialization of federally developed

Innovations. All federal agencies with external R&D budgets greater than $100 million must set aside a

specified percentage of this budget for small businesses. ’ Although the SBA is the overseeing agency,

each participating agency selects areas of research, solicits and chooses proposals, and administers

funding. This keeps the SBIR work closely related to each agency’s mission. After two phases of SBIR

funding, a firm may move its renovation toward commercial markets by seeking private investment and

support; although no SBIR funding is available for the third phase, these firms may win production contracts or non-SBIR funding from federal agencies.

Between 1983 and 1993, 11 agencies gave nearly 25,000 Phase I and II awards worth over $3.2 billion

to more than 50,000 small firms. Awards enable small firms to expand research, hire new personnel, develop new products, and find new markets and customers. Eighty-four percent of one study’s respondents

Indicated that their technology would not have been pursued without SBIR assistance. Many SBIR participants are young firms; over 20 percent of Phase I awardees are less than two years old, For most participants established after 1983, SBIR was their first experience with federal R&D programs. In 1989, project

administrators judged about half of SBIR projects to be at least equal in quality to other agency R&D, nearly 30 percent were considered better. There was a strong sense at all agencies that SBIR work was more

Iikely to be commercialized than other agency-supported R&D.

Evidence suggests that SBIR maybe helping to increase the participation of small firms in federal R&D

activities In 1982, the National Science Foundation estimated that small firms’ share of federal R&D was 2.8

percent. By 1991, that share had reached 3.7 percent. Commercialization, too, may be facilitated. By 1992,

SBIR firms had received $471 million in sales and $646 million in additional development funding for Phase

Ill (commercialization) work. While the sales figure is modest compared to the $3.2 billion in federal Phase I

and Phase II investments, many investments are still maturing. A total of 27 percent of the firms responding

to one study had commercialized or expected to commercialize SBIR related work in the near future.

There are some downsides, however. A large percentage of sales realized through SBIR work is derived

from the public rather than the private sector. In 1991, the majority of SBIR participants earned 65 percent

or more of their sales from government markets. In addition, because SBIR is based on agencies’ R&D

needs, award selection is driven by technology, not by markets; market concerns are left for Phase Ill. By

this point, however, the deck may be stacked against a number of innovations with little or no identifiable

commercial appeal. Also, while some grant recipients may seek commercialization, a large portion may be

Interested primarily in further research. Some recent agency efforts have taken modest steps to increase

the priority on commercialization. The Department of Energy has provided commercialization training sessions, and in 1994 the Navy required firms to submit a commercialization plan before receiving the last 20

percent of a phase II award. Another concern is that some firms have received several duplicative grants

from different agencies

SOURCES: U.S. Congress, General Accounting Office, Federal Research: Interim Report on the Small Business Innovation Research

Program, GAO/T-RCED-95-154 (Gaithersburg, MD: Apr. 6, 1995), U.S. Small Business Administration, Small Business. Building

America's Future, Results of a Three-Year Commercialization Study of the SBIR Program (Washington, DC 1991 ), p 5, U S Congress,

General Accounting Office, Federal Research’ Small Business Innovation Research Participants Give Program High Marks, GAORCED-87-161-BR (Washington, DC July 1987), pp. 13-30,35-38, U S Congress, General Accounting Office, Federal Research: Assessment of Small Business Innovation Research Programs, GAO/RCED-89-39 (Washington, DC January 1989), and Thomas Enterprises, Inc., Small Business Innovation Research (SBIR) Program Analysis, report prepared for the Office of Technology

Commercialization, U.S. Department of Commerce, Washington, DC, Jan. 17, 1995, pp. 8-9

1 Public Laws 97-219, 99-443, and 102-564 The percentage rose annually from O 2 percent m 1983 to 1 25 percent in 1986, increased to 1 5 percent in 1993 and 20 percent in 1995, and is scheduled to increase to 25 percent in 1997.

2U.S. Congress, General Accounting Office, Federal Research: Interim Report on the Small Business Innovation Research program, GAO/T-RCED-95-154 (Gaithersburg, MD: Apr. 6, 1995), pp. 4-5

3

Ibid., pp. 5-6.
82 | Innovation and Commercialization of Emerging Technology

skills that workers can apply to innovation. While

U.S. universities are generally considered the best

in the world, especially in technical fields, they

have also been criticized for training graduates too

narrowly, especially engineering graduates who

often receive little training in manufacturing processes, product design (including design-formanufacture and design-to-cost), and teamwork.

Moreover, in international comparisons of

achievement in mathematics and science, U.S.

schools from kindergarten through high school

perform poorly compared with other industrialized and industrializing countries, and often fail to

impart the basic reading and math skills required

in the workplace.

Workplace education supplements formal

education, as workers learn through experience

and formal training programs. For emerging

technologies in particular, many of the skills needed for commercial success are not available in the

formal education system, but are developed

instead by firms engaged in proprietary R&D programs. Few engineering graduates could develop

a new device using high-temperature superconductors without the guidance of a more experienced engineer; similarly, the skills of managers

tend to improve with experience. Universities, research institutes, and corporations recruit and

train people in skills related to innovation, whether in research techniques, project management, or

production. Job transfers and workforce mobility

tend to disseminate these skills throughout the industry, but, at the same time, reduce the ability of

organizations to capture the benefits of their investments in training and education.

Labor force skills are expanded through industry conferences, technical committees, trade publications, and technical journals, which provide an

opportunity for industry participants to exchange

ideas and share knowledge. Information is also

exchanged through “invisible colleges” or informal networks of engineers within particular industries who exchange know-how. Studies of

steel-making minimills reveal that engineers frequently trade information that is not critical to

their companies’ competitive advantage.56 This is

especially useful when the particular piece of information is too small to justify a negotiated license or exchange because it effectively

distributes technical information among participants in an industry. Recent evidence indicates

that differences in the degree to which researchers

share information can influence a region’s ability

to successfully innovate and commercialize new

technologies. The greater success of California’s

Silicon Valley compared with Boston’s Route 128

during the late 1980s and early 1990s has been attributed, in part, to the more open culture of Silicon Valley, which facilitated information

sharing.57

TECHNOLOGY DEVELOPMENT

Development of new technology—as well as new

products, processes, and services based on new

technology—is the central activity of technological innovation. Private corporations must appropriate basic knowledge of science, technology,

and markets and convert it into proprietary knowledge through applied research and development.

This process is best characterized as a trial-and-error search for a viable set of product attributes that

meets market demand, and for technologies capable of providing those attributes at a cost the market will support.

While the private sector bears primary responsibility for developing commercial technologies

in the United States, government activities influence those efforts. Products and technologies developed by or for the government often find

commercial application. Most U.S. jet engines

56 Eric von Hippel, “Cooperation Between Rivals: Informal Know-How Trading,” Research Policy, vol.16, 1987, pp. 291-302.

57 AnnaLee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press, 1994).
Chapter 3 Elements of Innovation Systems | 83

used on commercial aircraft today derive from

military antecedents,58 as do other aircraft

technologies such as fly-by-wire control systems

and swept-back wings. The Internet derives largely from ARPANET, a national computer network

developed in the early 1970s by DOD’s Advanced

Research Projects Agency (ARPA). Numerous

other examples of such “spin-off” exist in industries such as aircraft, electronics, and materials

that serve important government missions.

Though spin-off has declined over time as military and commercial requirements have diverged

and commercial markets have developed,59 military technology—and government technology

more generally—contributes substantially to the

nation’s stock of technical knowledge and to its

current competitive position.

Federal laboratories also contribute to commercial technology development. Several

hundred federally funded research and development centers (FFRDCs)60 and governmentowned laboratories conducted $22.3 billion in

R&D in 1994.61 Since 1980, numerous attempts

have been made to facilitate the transfer of

technologies from these labs to the commercial

sector. The Stevenson-Wydler Technology Innovation Act of 1980 requires most federal laboratories to establish Offices of Research and

Technology Applications to promote technology

transfer and to allocate 0.5 percent of their R&D

budgets to technology transfer activities. The Federal Technology Transfer Act of 1986 amended

Stevenson-Wydler to allow government-owned

and -operated laboratories to enter into cooperative research and development agreements (CRADAs) with private industry. Under this authority,

which was extended to government-owned, contractor-operated labs in 1989, government laboratories were allowed to contribute personnel,

equipment, and other nonfinancial resources to

projects undertaken jointly with industry. Such

legislation has resulted in thousands of CRADAs

to date with firms working in the automotive, biotechnology, computer, and semiconductor industries, to name a few.

NETWORKS AND LINKAGES

In developing new products and processes, firms

must create linkages to sources of new knowledge

and providers of key components for their products. These linkages serve several purposes for the

innovating firm, allowing it to: 1) spread the costs

and risks associated with innovation among a

greater number of organizations; 2) gain access to

new research results and technological capabilities for innovation efforts; 3) acquire key components of a new product or process; and 4) gain

access to complementary assets in manufacturing,

marketing, and distribution. Acquiring such resources means linking with other developers of

similar products, suppliers of critical components, and university researchers.

Firms often link together to share the cost and

risk associated with innovation. New commercial

aircraft easily cost over $1 billion to develop, as

do the jet engines that power them. Estimates of

the R&D costs required for next-generation semiconductor manufacturing, which will use 10- to

12-inch wafers of silicon, start at $3 billion, and

58 General Electric’s CF6 engine and Pratt & Whitney’s JT9, both used to power the 747 aircraft, derive from engines designed or built for

military transports. The core of GE’s newest engine, the CFM-56, built in collaboration with the French firm, SNECMA, derives from the engine

used on the B-1 bomber. Jerry Sheehan, Commercialization and Transfer of Technology in the U.S. Jet Aircraft Engine Industry, unpublished

master’s thesis, Massachusetts Institute of Technology, June 1991.

59 Alic et al., op. cit., footnote 17.

60 FFRDCs are research organizations owned and operated by nongovernment organizations (industry or universities) that receive their

funding from the federal government.

61 National Science Foundation, National Patterns of R&D Resources, 1994 (Arlington, VA: 1995), table B-2. The figure is the sum of R&D

performed by government and by university-run FFRDCs.
84 | Innovation and Commercialization of Emerging Technology

the cost of individual semiconductor fabrication

facilities tops $1 billion.62 Pharmaceuticals companies often spend more than $200 million to get a

new drug to market.63 At the same time, innovators face numerous uncertainties in developing

new products and processes. The innovation may

not work as expected, or it may not be possible to

manufacture it with the right combination of price

and performance. The market may not develop as

rapidly as anticipated—or to the size needed to

support profitable manufacture.

Few companies can afford to assume these

risks alone. As a result, they rely on alliances, consortia, and suppliers to shoulder some of the burden. Large systems integrators such as Boeing use

subcontracting arrangements to spread risk

among a large number of suppliers and subcontractors, each of whom is responsible for a portion

of the final product that Boeing itself will integrate. Sometimes competitors form alliances to

jointly conduct R&D that no one firm could support single-handedly. Even large, diversified

firms are finding such alliances necessary to develop next-generation technology. In the semiconductor industry, for example, IBM has teamed

with Toshiba and Siemens to develop memory

chips capable of storing 256 million bits of information (256 Mbit DRAMs).

Firms also form consortia, such as SEMATECH, the Semiconductor Manufacturing

Technology consortium, which finances R&D

projects of joint interest to its 11 member companies. Consortia are similar to subcontracts in that

multiple participants each perform a part of the

overall task; however, they differ in that responsibility for overall project initiation and design is

shared, rather than controlled by the system integrator. In some industries, such as aircraft and portions of the electronics industry, international

consortia are common. Because these industries

have strong economies of scale and high R&D

costs, typically just one leading company, or at

most a few, resides in any one country. Airbus Industries, for example, is a consortium of several

European countries. None was able to independently sustain a viable international presence in

large commercial aircraft, but together they

formed a viable competitor to Boeing and displaced McDonnell-Douglas as the world’s second

largest producer of commercial jet aircraft.64

Interfirm linkages are also a response to the increasing complexity of new products and processes. Many new products incorporate a large

number of individual components. A personal

computer, for example, contains a microprocessor, memory, a hard disk drive, a floppy disk or

diskette drive, a keyboard, and a monitor.

Manufacturing each of these components requires

its own individual expertise, as does the process of

linking them together in a properly functioning

computer. The maker of microprocessors must be

skilled in logic design, circuit layout, timing analysis, and semiconductor manufacturing techniques. The disk drive manufacturer must

understand the fabrication and operation of read/

write heads, servo mechanisms, controllers for

maintaining alignment of the read/write heads and

the disk, and precision assembly.

Complex technologies such as these—containing many components with numerous linkages

between them—now account for the majority of

world trade. Between 1970 and 1990, complex

products manufactured with complex processes

are estimated to have grown from 31 percent to 51

62 “Scaling the Silicon Summit,” Electronic Engineering Times, Apr. 4, 1994, p. 30.

63 This figure represents an average cost for new product development that incorporates both successes and failures. Joseph A. DiMasi,

“Risks, Regulation, and Rewards in New Drug Development in the United States,” Regulatory Toxicology and Pharmacology, vol. 19, 1994,

pp. 228-235. For a more detailed discussion of pharmaceuticals’ R&D costs, see U.S. Congress, Office of Technology Assessment, op. cit.,

footnote 12.

64 It should be noted, however, that Airbus often receives subsidies and preferential treatment from national governments of participating

companies.
Chapter 3 Elements of lnnovation Systems 85

Innovation developed by:

Innovation type User Manufacturer Supplier Other

Scientific instruments 77% 23% O% O%

Semiconductor and printed circuit board 67 21 0 12

processes

Pultrusion processes 90 10 0 0

Tractor shovel-related 6 94 0 0

Engineering plastics 10 90 0 0

Plastics additives 8 92 0 0

Industrial gas—using 42 17 33 8

Thermoplastics—using 43 14 36 7

Wire termination equipment 11 33 56 0

SOURCE: Eric von Hippel, The Sources of Innovation (New York, NY: Oxford University Press, 1988), table 4-1, pp. 44.

percent of the value of the top 30 exports in world

trade. Simple products declined from 58 percent

of exports in 1970 to just 12 percent in 1990.65

Complexity challenges the capabilities of individual companies, often prompting interfirm collaboration. Suppliers are one source of expertise. Not

only do they improve the performance or cost of

the components they produce, but they often generate innovations in end products that, in turn,

stimulate demand for their own components. One

study found that suppliers of electrical connectors

developed 56 percent of the innovations in wire

termination equipment; machine manufacturers

developed only 33 percent.66 Customers or endusers can also be the source of innovation, providing feedback to manufacturers on product

improvement (see table 3-6).

MARKETS

Although most new products are developed in response to expressed or anticipated market demand, firms must still actively cultivate markets

for their products, especially for those that represent a large departure from current offerings.

Sometimes demand is latent. Potential customers

may not understand the uses and advantages of a

new technology. Or an innovation’s usefulness to

a customer is dependent on the presence of other

users (e.g., a fax machine is only useful if others

have fax machines); other technologies (e.g.,

computer hardware needs software); or other

changed circumstances (e.g., a cleaner production

process may be more attractive if pollution standards have tightened). Cost can also deter consumers. Technologies that are interesting or

products that are technically superior to existing

alternatives do not necessarily become market

successes. Technical successes can easily be market failures.

Though generally associated with the private

sector, market creation can be—and is—influenced by numerous government activities.

Institutional arrangements-sometimes involving government policy, as in the case of health

care—shape markets for new technology. Regulations, such as those to promote environmental

protection and safety, often create incentives to

purchase new types of products or services, or

65 Don Kash and Robert W. Rycroft, “Nurturing Winners with Federal R& D,” Technology Review, November/December 1993, pp. 58-64.

Complex technologies are those with numerous components assembled together, such as computers, automobiles, and industrial machinery.

Simple technologies have few assembled components, such as chemicals, drugs, foods, and metals. Simple technologies can sometimes be

“high-tech,” as in the case of biotechnology-derived drugs and chemicals, and advanced materials.

66 Eric von Hippel, The Sources of Innovation (New York, NY: Oxford University Press, 1988), pp. 36-38.
86 | Innovation and Commercialization of Emerging Technology

adopt new manufacturing processes. Government

procurement frequently provides initial markets

for new products and processes, giving manufacturers an incentive to invest in production capacity

and an opportunity to demonstrate product performance and reliability. Changes in the tax code

create incentives for users to purchase particular

types of products or to vary their consumption patterns accordingly. Many of these influences result

from the day-to-day activities of government and

exemplify the close intertwining of public- and

private-sector forces in shaping technology development and implementation. Although at times

government activities have retarded the development of commercial technologies, they also have

played a critical role in launching many of the nation’s most important industries, from aircraft to

semiconductors.

❚ Institutional Issues

Institutional arrangements, often involving government, shape markets for innovative technologies. For instance, the market for medical

technologies is shaped by a system in which those

who prescribe treatment (physicians and other

providers), pay for treatment (usually insurance,

Medicare, Medicaid, or health maintenance organizations), and seek treatment for health concerns

(patients) are different parties with different incentives. Because of this third-party payer system,

markets exist for expensive drugs, devices, and

procedures that might otherwise be unaffordable

to many who need them. The growing cost-consciousness of payers, consumers, and government

is motivating medical technology innovators to

analyze coverage and reimbursement issues earlier and more carefully in the development of drugs

and devices and in the approval process.

In commercial satellite communications, users

benefited from federal establishment of the Communication Satellite Corp. (COMSAT) as a quasipublic company to guide communication satellite

system development and oversee U.S. participation in INTELSAT, an international consortium.67

Leasing arrangements may promote or impede

new technologies, depending on circumstances:

landlords have little incentive to improve the energy efficiency of their buildings when tenants pay

for energy, and tenants may balk at improving a

landlord’s property at their own expense. In contrast, leasing arrangements for capital goods and

office equipment can facilitate the demand for

new or upgraded technologies. For potential users, such arrangements lower the costs and risks of

trying new technology without diminishing producer incentives for innovation.

❚ Regulation68

Regulations can create markets for new technologies by requiring products and processes to meet

certain standards. Technological responses to regulation sometimes take the form of discrete

devices or services for meeting regulatory requirements (e.g., pollution control devices, safety apparel, automatic seatbelts, or aircraft flight data

recorders). In other cases, regulations induce

modifications to core products and process

technologies, such as “no clean” soldering to

avoid solvents, energy-efficient appliances, less

toxic pigments, automated processes to avoid

worker exposure to hazardous chemicals, and

cleaner burning motor fuels. The distinctions between add-on devices and core product or production technologies are fuzzy. It is difficult to

discern, for instance, whether redundant avionics

and electronic fuel injectors are add-on or integral

technologies for aircraft and automobiles, or

whether their markets are determined by regulatory demands or good engineering design.

Markets for energy and environmental technologies are especially influenced by regulations, at

both the federal and state levels. The Public Utility Regulatory Policy Act (PURPA) of 1978, for

example, requires electric utilities to buy power

67 That industry also benefited from NASA support, including the use of federal launch and other facilities.

68 This section concentrates on regulations pertinent to the environment, health, and safety.
Chapter 3 Elements of Innovation Systems | 87

from nonutility heat and electricity cogenerators

and from small power producers at the avoided

cost of the utility’s power. By doing so, the legislation spawned the establishment of independent

power producers and stimulated markets for cogeneration equipment, gas turbines, and certain

renewable energy technologies.69 In a similar

vein, California’s new automobile regulations

(also adopted by Massachusetts and New York)

require that zero-emission vehicles account for at

least 2 percent of automobile sales from major

producers by 1998 and 10 percent by 2003. This

policy has led to significant efforts by vehicle

manufacturers, suppliers, and industry outsiders

to develop automobiles with alternative fuel and

power systems. Likewise, the Energy Policy Act

of 1992 requires certain federal, state, and private

fleets to choose alternatively fueled or powered

vehicles for certain percentages of their new vehicle purchases during the late 1990s and early

2000s.70

Regulations can also impede technological innovation; in fact, some critics argue that regulatory impediments to innovation undermine the

health, safety, and environmental goals they are

meant to further.71 This can happen if particular

technologies or products do not meet the requirements of new regulations, or if the costs of doing

so are so great as to impede technology development. Product approval requirements, as in the

case of pharmaceuticals and pesticides, can delay

or prevent new products from coming to market,

though such delays are intended to minimize the

chance of dangerous or ineffective products being

marketed. Regulatory systems that grandfather

existing facilities may dissuade investments in

new or upgraded technologies if such changes

trigger more stringent standards or lengthy permitting processes.

Furthermore, regulations can be written or administered in ways that favor tried-and-true

technologies over more uncertain innovations.

When permitting procedures are lengthy, costly,

or uncertain, firms cannot easily alter processes or

introduce new products.72 Product reviewers and

permit writers may act conservatively because of

professional risks associated with approving untried technologies. Separate permitting procedures for each state or locality—as is common

under environmental regulations—adds cost,

time, and uncertainty. Such differentiation fragments the market and burdens new technology

vendors—particularly small companies—and can

diminish the interest of venture capitalists and

other investors.73 Also, most regulations do not

reward innovators who exceed performance requirements.

Regulations that are overly prescriptive can

lock in existing technologies to the detriment of

other technologies that might also meet or exceed

69 A number of utilities claim, however, that PURPA and state provisions led them into long-term supply contracts with independent power

producers that became less economical as energy prices decreased. Agis Salpukas, “70’s Dreams, 90’s Realities—Renewable Energy: A

Luxury Now. A Necessity Later?” New York Times, Apr. 11, 1995, pp. D1, D8; U.S. Congress, Office of Technology Assessment, Energy Efficiency: Challenges and Opportunities for Electric Utilities, OTA-E-561 (Washington, DC: U.S. Government Printing Office, September 1993),

p. 41. PURPA, the Public Utility Holding Company Act, the Energy Policy Act, state law, and state public utility commissions impose numerous

economic regulations regarding rate-setting, utility planning, competition, and other aspects of utility governance. These significantly influence the market for energy efficiency and alternative energy technologies.

70 It is too early to measure the costs or effectiveness of these vehicle technology mandates. It is worth noting that these vehicle- and powerpurchasing requirements do not mandate purchases of a particular narrow technology. Most of the requirements can be met through a variety of

technical routes. One exception is the California zero emissions vehicle standard, which effectively mandates electric vehicles. Even here, however, a number of competing battery, recharging, and propulsion technologies vie for the prospective market. Another OTA assessment, “Advanced Automotive Technologies” (forthcoming), examines technological possibilities for future automobiles.

71 For example, Sam Kazman, Competitive Enterprise Institute, presentation at “BioEast’95,” Washington Hilton and Towers, Washington,

DC, Jan. 10, 1995.

72 For permitting barriers to innovative environmental technologies, see U.S. Environmental Protection Agency, op. cit., footnote 19.

73 Dag Syrrist, Technology Funding, testimony before the Senate Committee on Environment and Public Works, May 21, 1993.
88 | Innovation and Commercialization of Emerging Technology

requirements. Some U.S. environmental, health,

and safety regulations mandate the use of particular devices or methods (so-called technology- or

design-based standards), though most regulations

are theoretically performance-based (i.e., they establish a standard to be met, rather than a means

for meeting the standard). However, even performance-based standards are frequently based on

established reference technologies. In such cases,

companies and regulators are likely to prefer reference technologies they are confident will meet

standards, rather than innovative approaches that

are less certain.

Many of these problems can be overcome with

proper formulation, interpretation, and enforcement of regulations. In the environmental arena,

several proposals and regulatory experiments

have been implemented to simultaneously lower

compliance costs, maintain or improve environmental performance, and improve the climate for

technological innovation. Some of the approaches

give companies flexibility to meet overall facility

emissions and effluent requirements without requiring detailed permitting of each source at the

facility. In New Jersey, for example, a pharmaceutical plant was recently issued a single permit in

place of numerous individual air, water, and waste

permits. In Minnesota, the state’s environmental

agency issued a flexible permit for certain air pollutants to a 3M plant in St. Paul. It allows the firm

to modify processes without requiring repermitting if it gives the agency 10 days’ advance notice

and stays within facility-wide emissions limits.74

Tradable pollution allowances, such as those authorized under the Clean Air Act Amendments of

1990 to govern sulfur dioxide emissions from

power plants, also add regulatory flexibility and

may lower compliance costs, although the effect

on innovation is not yet clear. In the pharmaceutical arena, the FDA has proposed dropping preapproval requirements for certain changes in

pharmaceutical production processes.75 These

and other related efforts do not directly promote

markets for innovative technologies, but they may

remove impediments to changes.

Another approach is to offer companies waivers that allow limited environmental noncompliance, or reduced penalties for noncompliance,

when innovative technologies are tried or developed, but do not quite meet the mark.76 Such “failsoft” approaches would still need safeguards to

ensure protection of public health and the environment, and to prevent abuse. Participation might be

limited to firms with good compliance records,

similar to the Occupational Health and Safety Administration’s (OSHA’s) Star program that allows

eligible firms greater compliance flexibility.77

Overall, such efforts could enable regulators to

protect public safety and the environment, while

encouraging technological innovation.

❚ Government Procurement

Government procurement can also create markets

for new technologies. Aircraft, integrated circuits,

computers, satellites, biotechnology products,

and some energy technologies all received significant boosts from government purchases. Such

procurement can provide potential developers of

new technology with sufficient assurances of a

market to make it attractive for them to invest in

production facilities. By acting as a launch customer, the government provides manufacturers

with the early revenues, scale economies, experience, and user feedback they need to improve their

products and make them affordable for commercial users. Early government use may also demonstrate the performance of new technology for

74 U.S. Congress, Office of Technology Assessment, op. cit., footnote 18, p. 275.

75 David J. Hanson, “Clinton Unveils Environmental and Pharmaceutical Regulation Reform,” Chemical and Engineering News, vol. 73,

No. 14, Apr. 3, 1995, pp. 15-16.

76 U.S. Environmental Protection Agency, op. cit., footnote 19.

77 U.S. Congress, Office of Technology Assessment, op. cit., footnote 18, p. 277.
Chapter 3 Elements of Innovation Systems | 89

potential commercial users, stimulating future demand. Nevertheless, there are limitations to relying on government procurement to commercialize

new technologies to civilian markets.

Federal purchases were a major impetus for the

commercialization of integrated circuits (ICs).

Though integrated circuits were developed by private industry without government funding or

direction, commercial firms were hesitant to use

them because of their higher cost and uncertain

long-term reliability. IBM, for example, opted to

use “hybrid” integrated circuits—a stepping stone

between discrete components and full integration—in its 360 series computers because existing

vendors had not yet demonstrated an ability to

manufacture ICs at the scale and quality IBM required.78 The first uses of ICs were in the guidance system of NASA’s Apollo spacecraft and

DOD’s Minuteman intercontinental ballistic missile systems.79 Government users were willing to

pay high prices for the miniaturized components

because they provided a capability essential to the

success of government missions.80 These early

government markets provided manufacturers

with early incentives for investing in production

facilities, and funded further improvement in IC

capability and great decreases in cost. This led to a

greatly expanding commercial IC market. During

the decade from 1962 to 1972, the government

share of the IC market dropped from 100 percent

to one-third or less, while IC capabilities increased greatly and costs decreased (in current

dollars) from $50 to a little more than $1 per IC.81

Military procurement has benefited other industries as well. Innovation in the aircraft industry

was strongly influenced by military demand, although postal air mail contracts in the 1920s also

provided a market. Commercial satellites, computers, and a host of other products are regarded as

spin-offs of military and space efforts. Penicillin

was first produced in large quantity for defense

needs, although its initial development was not a

military project. During World War II, the federal

government bought all American production of

penicillin at very high prices. 82 Although the market price for penicillin collapsed after the war, a

firm foundation for innovation and commercial

leadership in antibiotics and pharmaceuticals generally had emerged in the United States.

Civilian government procurement also has an

impact. For instance, the National Institutes of

Health (NIH) and other federal agencies support a

market for biotechnology products, specialized

reagents, and instruments to fill research needs.

Such products are now sold to commercial researchers and for diagnostic and clinical use. In

the case of alglucerase, an enzyme used for treating a rare genetic ailment called Gaucher disease,

NIH procurement from an academic laboratory

led to the creation of a biotechnology company

that used the revenues and its increasing expertise

78 Charles H. Ferguson and Charles R. Morris, Computer Wars: How the West Can Win in a Post-IBM World (New York, NY: Random

House/ Times Books, 1993), pp. 8-9.

79 Thomas R. Howell, Brent L. Bartlett, and Warren Davis, Creating Advantage: Semiconductors and Government Industrial Policy in the

1990s (Semiconductor Industry Association and Dewey Ballantine, 1992), pp. 25-26, fn. 35.

80 A Philips executive is reported to have said: “This thing [a very early integrated circuit from Texas Instruments] only replaces two transistors and three resistors and costs $100. Aren’t they crazy!” See Ernest Braun and Stuart Macdonald, Revolution in Miniature: The History and

Impact of Semiconductor Electronics (New York, NY: Cambridge University Press, 1978), p. 113.

81 Ibid.

82 Basil Archilladelis, “The Dynamics of Technological Innovation: The Sector of Antibacterial Medicines,” Research Policy, vol. 22,

1993, pp. 279-308. During the war, the federal government paid producers cost plus $20 per dose. When commercial sales were permitted in

1946, prices dropped to $1 per dose and, by 1949, to 10 cents.
90 | Innovation and Commercialization of Emerging Technology

to commercialize the drug.83 Federal funding of

academic institutions, as well as government laboratories, also promotes initial markets for high

performance computers and scientific instruments that may then be adapted for commercial requirements.

The day-to-day operations of government—as

a major user of energy, motor vehicles, buildings,

office equipment, paper, and so on—also open up

opportunities for using the government’s buying

power to facilitate new technology commercialization. As the federal government is the largest

user of energy in the nation, a number of laws and

Executive Orders have been promulgated since

the mid-1970s to try to improve federal energy efficiency.84 The most recent examples are the Energy Policy Act (EPACT) of 1992 and Executive

Order 12902 on Energy Efficiency and Water

Conservation in Federal Facilities. By serving as a

testbed for innovative technologies, government

facilities may reduce the federal government’s energy bill and demonstrate performance for wider

markets (though many of the cost-effective energy

efficiency options are already commercially available85). Executive Order 12873 on Federal Acquisition, Recycling and Waste Prevention, which

promotes federal purchases of environmentally

preferable goods, may also stimulate markets for

new technologies and products, though it is difficult to predict the effectiveness of such procurement standards in areas in which the federal

government represents only a small portion of the

market.

While the ability of government to pay a premium for products that meet defense and space

program needs can be a springboard for commercial technology spin-offs, government market

needs can also lead producers away from commercial markets. Military needs are often specialized

or unique, and may not match civilian market demands. High technology military production

often occurs at relatively low production rates and

emphasizes product characteristics that have little

commercial utility. Commercial producers, in

contrast, usually look for frequent process improvements that allow lower cost, high-volume

manufacturing. These and other differences between military and civilian needs suggest important limitations to relying on defense-related

procurement, and more generally, defense-related

technology transfer for spin-offs to the commercial sector.86 Overreliance on specialized government markets has been implicated in the demise of

some firms and technologies. For instance, Thinking Machines Corp., a developer of high-performance computer systems, was forced into

bankruptcy reorganization at least in part because

it concentrated its efforts on the needs of government clients instead of potential commercial users

of scalable parallel computers.

❚ Tax and Credit Provisions

Tax provisions, subsidized or facilitated tax credits, loan guarantees, and other subsidies also influence commercialization by channeling economic

activities. Some provisions specifically target

technological change, while others address broader economic activities (e.g., capital investment)87

that indirectly provide incentives for new technologies. Such provisions may simultaneously serve

a goal of stimulating new technology markets

83 U.S. Congress, Office of Technology Assessment, Federal and Private Roles in the Development and Provision of Alglucerase Therapy

for Gaucher Disease, OTA-BP-H-104 (Washington, DC: U.S. Government Printing Office, October 1992).

84 U.S. Congress, Office of Technology Assessment, Energy Efficiency in the Federal Government: Government By Good Example? OTAE-492 (Washington, DC: U.S. Government Printing Office, May 1991).

85 Ibid., p. 3.

86 Alic et al., op. cit., footnote 17, pp. 43-44.

87 For instance, capital investment may be affected by tax rates on income and capital gains, by depreciation and amortization provision,

and—in the past when they were in force—investment tax credits.
Chapter 3 Elements of Innovation Systems | 91

while assisting certain user industries, such as

small business. For instance, the Japanese government and some quasi-public bodies have provided

subsidized credit and leases since the 1980s to

help small and medium-sized companies modernize. These measures also stimulated markets for

advanced manufacturing technologies such as numerically controlled machine tools, robots, and

computers.88

Tax provisions can interact with consumer

preferences and other market factors to propel

markets for certain technologies in some countries, while demand remains low in others. A case

in point is the commercialization of electronic fuel

injection (EFI) for automobiles (see box 3-6).

Taxes on automobiles by engine displacement and

high taxes on fuel were significant factors leading

to earlier commercialization of EFI in Europe than

in the United States. They also may have contributed to a foreign EFI supplier capturing the technological lead from an American innovator.

Tax and other provisions work on both the supply side and demand side of technology development, as exemplified by the research and

experimentation tax credit on the one hand, and

tax credits for purchase or use of particular types

of technologies in certain industrial sectors on the

other. The current tax code contains at least 17

provisions that may affect technological development through incentives for research, purchases of

particular products, or investments in certain industries, not including general provisions such as

tax rates and alternative minimum taxes (see table

3-7). Many of these provisions are related to energy and environmental technologies, reflecting the

strong regulatory role the government maintains

in these areas and the energy crisis of the 1970s,

which placed a premium on developing alternative energy sources and reducing energy consumption. Only the research and experimentation

tax credit is more widely applicable to U.S. industry.

Tax provisions that favor certain activities or

industries are often considered market distortions

that produce an inefficient allocation of resources;

some tax provisions, however, correct for costs

borne by those outside a particular market or by

society as a whole, such as pollution costs or national security costs associated with high reliance

on imported petroleum. Often such negative externalities are dealt with through regulations; in

some cases, fiscal incentives in the form of taxes

and tax breaks may yield results that are more

cost-effective and promote innovation more than

conventional regulatory approaches.89 Fiscal incentives can allow firms to be more flexible in the

means by which they meet standards and can give

companies incentives to do better than standards

require.

Tax credits or deductions can be costly to government. Every dollar of forgone tax income is

equivalent to an additional dollar of expenditures.

The investment tax credit cost between $13 billion

and $37 billion each year between 1979 and its

elimination in 1987. Accelerated cost recovery,

which is still available for some classes of assets,

cost as much as $64 billion in 1987.90 Also, taxes

forgone may or may not efficiently lead to desired

innovation or investment. For instance, the investment tax credit stimulated between $0.12 to $0.80

in additional equipment investment for every dollar forgone by the Treasury, according to a number

88 U.S. Congress, Office of Technology Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443 (Washington,

DC: U.S. Government Printing Office, March 1990), pp. 162-166.

89 A discussion of this can be found in U.S. Congress, Office of Technology Assessment, op. cit., footnote 18, ch. 9; and another OTA assessment, Environmental Policy Tools: A Users Guide (forthcoming).

90 Joint Committee on Taxation, Estimates of Federal Tax Expenditures, Fiscal Years, Annual.
92 I Innovation and Commercialization of Emerging Technology

Electronic fuel injection (EFI) for gasoline-powered automobile engines, while patented by a U.S.

firm, was commercialized more quickly in Europe. To some extent, institutional factors were responsible.

In the vertically integrated U.S. auto firms, carburetor divisions resisted EFI because it would make their

technology obsolete; European auto manufacturers, on the other hand, outsourced carburetors and

could readily switch to EFI. For the most part, however, the faster commercialization in Europe resulted

from more favorable market conditions.

U.S. and European firms developed mechanical fuel injection first for airplanes and then for racing

cars. Users were willing to accept the fuel injectors’ high cost and weight because they provided engine power critical to their missions. Bendix

1961, having transferred the technology from

While EFI promised several advantages

smaller size, improved performance (faster

haust emissions—these attributes were not

United States. Most drivers were content to

Corp. patented the first EFI system for automotive use in

its aerospace division to its automotive division.

over carburetor technology in automotive applications—

acceleration), improved fuel efficiency, and reduced exvalued highly by either manufacturers or drivers in the

purchase larger cars with larger engines in order to get

improved performance; interest in fuel efficiency did not grow until the oil shocks of 1974 and 1979 and

the imposition of CAFE (corporate average fuel efficiency) standards in 1975. Though the U.S. Environmental Protection Agency (EPA) promulgated emission regulations in 1970, they could be easily met by

adding electronic controls to carbureted engines. Only in the mid-1980s—when European and Japanese manufacturers demonstrated that properly designed and tuned EFI systems could meet more

stringent fuel economy and emissions standards, while improving performance without Increasing

manufacturing costs---did EFI become popular in the United States.

EFI achieved earlier success overseas because of differences in market demand. European drivers

typically valued performance and handling more than American drivers, and saw the benefit of extracting greater power from a smaller engine. This tendency was reinforced by taxes assessed on vehicles

in proportion to engine displacement in Europe during the 1960s and 1970s. Higher gasoline taxes in

Europe also gave drivers an incentive to seek improved fuel economy even without government regulation. Bosch GmbH, a German auto parts supplier, licensed EFI from Bendix in 1967, and began supplying the technology to Volkswagen in 1968 (and later to other European manufacturers). By the time U.S.

consumers demanded EFI in their vehicles, Bosch was well positioned to capture a large share of the

global market.

SOURCE: Kevin Beaty, “Electronic Fuel Injection, ” unpublished contractor report prepared for the Office of Technology Assessment,

U S Congress, Washington, DC, June 1995

of estimates.91 Increased income and tax revenues tial investments in renewable energy and energy

resulting from the additional capital investment efficiency between 1977 and 1985 were limited to

are less certain. add-on equipment such as weather-stripping,

Inadequate design of tax provisions can limit storm windows, and solar water heaters. Certain

their effectiveness in achieving a desired policy energy-efficient and solar features integrated into

goal. For example, federal tax credits for residen- building architecture to serve both energy and

91 Joseph J. Cordes, “The Effect of Tax Policy on the Creation of New Technical Knowledge: An Assessment of the Evidence,” in Richard

M. Cyert and David C. Mowery (eds.), The Impact of Technological Change on Employment and Economic Growth (Cambridge, MA: Ballinger, 1988), and Robert Chirinko and Robert Eisner, “Tax Policy and Investment in Major U.S. Macroeconomic Models, ’’Journal of Public -Economics. March 1983.
Chapter 3 Elements of lnnovation Systems 93

U.S. Code

Annotated, title

26, section(s): Section title and description

23

28

29

30

40

41

43

45

48(a)

136

174

179A

193

611, 612, 613,

613A

616, 617

4041

4064

4681, 4682

Resident/a/Energy Credit (repealed Nov. 5, 1990 by Public Law 101-508)—provided nonrefundable credits

of 15% for energy conservation and 40% for renewable energy for qualified residential investments,

Clinical Testing Expenses for Certain Drugs for Rare Diseases or Conditions— nonrefundable 50% credit for

clinical testing expenses for orphan drugs; such expenses cannot be applied to research tax credit (section

41) simultaneously, although it counts toward base expenses,

Credit for Producing Fuel from a Nonconventional/ Source—$3 per barrel of oil equivalent credit adjusted for

Inflation and real 011 prices for certain unconventional oil and gas production; repealed for certain biomass

energy; credit reduced by value of other federal, state, or local credits, grants, subsidies, and tax-free bonds,

Credit for Qualified Electric Vehicles---- 10% of cost, up to $4,000 per vehicle put in service, credit phases

down during years 2002 to 2004.

Alcohol Used as Fuel— $0.60 refundable credit per gallon for alcohol used as or in fuel; $0,45 per gallon for

150-190 proof alcohol; an additional $0.10 per gallon for qualified small producers; terminates Dec. 31,2000,

Credit for Increasing Research Activities----- 20% refundable credit on qualified research and experimentation

expenses above a base amount (this credit has required annual renewal).

Enhanced Oil Recovery Credit—-- 15%. refundable credit on qualified enhanced (tertiary recovery) 011 recovery costs; phased down as real oil price increases,

Electricity Produced From Certain Renewable Resources— $0.015 per kilowatt hour for electricity generated

by wind or closed-loop biomass systems; credit good for the first 10 years of a facility built before July 1,

1999; phased down with real electricity price increases; credit reduced by value of other government credits,

grants, subsidies, tax-free bonds.a

Energy Credit— 10% credit on portion of energy facility for certain solar heat, hot water, cooling, electric and

geothermal electric investments; credit reduced by value of other government credits, grants, subsidies,

tax-free bonds

Energy Conservation Subsidies Provided by Public Utilities - deductions for utility subsidies for purchase

and Installation of listed industrial, commercial, and residential energy conservation equipment; 100% for

residential equipment, for nonresidential equipment, 40% in 1995, 50% in 1996, 65% thereafter

Research and Experimental Expenditures— such expenditures can be treated as deductible expenses

Deduction for Clean-Fuel Vehicles and Certain Refueling Properties---- up to $2,000 per car, $5,000 per medium truck, $50,000 for heavy trucks and buses; deductible for acquisition or retrofit to run on certain alternative fuels other than electricity; deduction phases down 25% in 2002, 50% in 2003, 75% in 2004; up to

$100,000 deductible per location for alternative fuel refueling and electric vehicle recharging facilities,

Tertiary Injectants— deduction for certain materials injected for tertiary oil recovery

Depletion allowances for mines, oil and gas wells, other natural deposits, and timber.

Deductibility of certain development and mining exploration expenses.

Lower taxes for alcohol fuels relative to gasoline and diesel fuel.

Gas Guzzler Tax— schedule of excise taxes on automobiles rated at fewer than 22.5 miles per gallon; tax

Increases from $1,000 to $7,700 as fuel economy decreases,

Tax on Ozone-Depleting Chemicals--- taxes on ozone depleting chemicals phased out under law.

a The Energy Policy Act of 1992 (Public Law 102-486), Section 1212, provides for the Department of Energy to pay $0.015 per kilowatt hour for

qualified renewable electricity production for the first 10 years of production.

NOTE: This list is not necessarily complete. Other general provisions of the tax code and Alternate Minimum Tax provisions may affect new technology markets. Some of the provisions listed above directly affect incentives for research and development, rather than the purchase of new technologies.

SOURCE: Office of Technology Assessment, 1995.
94 | Innovation and Commercialization of Emerging Technology

structural purposes were disallowed by the Internal Revenue Service (IRS)—even though integrated features were a more efficient means to

achieve national energy goals.92 Also, credits

were offered on the basis of dollars spent on certain technologies, rather than on the performance

(amount of energy saved) of those technologies.

Even if Congress and the IRS considered these issues at the time residential energy credits were in

force, it might still have been difficult for the IRS

to decide whether or not a window should be considered a passive solar energy collection device

and to determine the actual energy savings resulting from residential energy investments.

❚ Other Market Incentives

Purchase commitments, bounties, and other incentives from potential users of a new technology

can also speed commercialization. Such approaches may allow the private sector alone, or

with some government support, to help bridge the

gaps between R&D, manufacturing, and initial

sales, while ameliorating risks for developers and

earliest users. Several examples from the energy

technology arena follow: 

1) Following successful field demonstrations of

gas-fired residential heat pumps, a consortium

of gas utilities provided $14 million in incentives for the first three years’ sales of the devices.93 In return for the support of utility

companies, the manufacturer will begin reimbursing utilities after the 50,000th unit is sold.

The manufacturer benefits from promotion of

the new technology by the gas utilities, who

then benefit by being better able to compete

with electric utilities. Early customers benefit

from a utility subsidy, as well as any advantages the technology may offer over rival options.

2) Electric utilities took the lead in offering a $30

million bounty—termed a golden carrot—to

manufacturers for developing and commercializing high-efficiency refrigerators that did

not use chlorofluorocarbons as their coolant.94

The winning manufacturer, Whirlpool, collects the reward as it markets the award-winning models in the service areas of the 24

participating utilities. Golden carrot competitions are planned for other appliances as well.

3) Energy utilities are also participating in innovative commercialization approaches for new

power generation technologies. The Fuel Cell

Commercialization Group (FCCG) links gas

and electric utilities in the United States and

Canada as a buyer’s group.95 FCCG members,

a fuel cell manufacturer chosen by FCCG on

the basis of a winning development and commercialization proposal, the Electric Power

Research Institute, and DOE participate in

technology development, demonstrations, exchange of information, and the establishment

of project milestones. As an incentive to buy

early demonstration and commercial units,

manufacturers have agreed to pay FCCG

members royalties on later sales. This arrangement helps defray the risks of early participation. The manufacturer agrees to meet certain

cost and technical criteria before receiving

payment from FCCG buyers.

4) The Utility PhotoVoltaic Group (UPVG) and

the Utility Biomass Energy Commercialization Association (UBECA) are other utilityled efforts to move technologies out of the

92 For instance, 26 CFR Part 1 Sec. 1.23-2(e)(3) disallows dual-use features such as windows and greenhouses as “solar energy properties”

within the meaning of the tax provision.

93 Howard Geller and Steven Nadel, “Market Transformation Strategies To Promote End-Use Efficiency,” Annual Review of Energy and

Environment, vol. 19, 1994, pp. 301-346.

94 Ibid.

95 Fuel Cell Commercialization Group, FCCG Update, vol. 5, No. 1, spring 1994.
Chapter 3 Elements of Innovation Systems | 95

laboratory and into the market by involving

potential buyers in late development, demonstration, and early purchases.96 UPVG plans to

catalyze early sales of photovoltaic systems by

sharing technical information with potential

users, aggregating purchases for some smallscale applications, and proposing private-public cost-shared projects that can lead to wider,

higher volume commercial markets.

Buyers’ commitments to precommercial

technologies do not guarantee successful commercialization. In the 1960s, U.S. airlines committed $60 million to develop the supersonic

transport (SST), in partnership with airframe and

engine manufacturers and the federal government

(which spent nearly $920 million over about a

decade).97 At its peak in 1967, airlines reserved

129 delivery positions for the SST—most required $200,000 refundable deposits, although

the last 16 positions required nonrefundable

$750,000 payments. The SST project failed to

meet technological and commercial goals and

faced high cost overruns; nevertheless, the government did not terminate the program. The government continued to fund development of the

SST despite industry’s resistance to providing

matching funds of 25 percent in 1963 and the lowering of the private cost-share requirements to 10

percent in 1967. In contrast, most recent U.S. public-private cost-shared technology programs have

featured 50 percent or greater private shares.

The energy utility sector appears prominently

in this discussion on commercialization incentives not because utility managers are necessarily

more imaginative than executives in other sectors,

but because energy utilities are highly regulated

entities (financial as well as environment, health,

and safety regulations) in which numerous technological, institutional, regulatory, and tax provision changes have recently or are currently taking

place. In many states, public utility commissions

have made changes in utility governance that

make conserving energy an attractive alternative

to increasing production capacity. In some cases,

utilities are allowed to earn a financial return on

energy saved; a number of other utilities are finding that increasing capacity can be costly, lengthy,

and uncertain due to both regulatory requirements

and the resistance of local residents to new facilities. Also, the federal tax code allows utilities to

deduct certain energy-efficient subsidies provided

to customers (26 U.S.C. 136). These circumstances have allowed or encouraged utilities to

prime markets for new energy-efficient technologies through rebates, bounties, technical assistance, and bulk buying. Although energy utilities

operate under conditions different from other industries, there may be opportunities for nontraditional commercialization approaches in other

industries as well.

CONCLUSION

Successful innovation and commercialization depend on far more than a strong science and

technology base. Commercialization is a business

decision based on reasoned judgments about future returns from investments in product design

and development, manufacturing, marketing, and

distribution. The size of these returns—and hence

the incentives for firms to commercialize new

technology—depends on a number of factors beyond the boundaries of individual firms. The

availability of capital, the size and nature of markets, and the existence of complementary assets

all influence the ability of firms to commercialize

new technologies. Firms often have little control

over these factors, or little incentive to adapt them

to their needs. The effort required is often too extensive and the benefits are often too diffuse for

96 Utility PhotoVoltaic Group, “The TEAM-UP Request for Proposals,” fact sheet; Utility Biomass Energy Commercialization Group, Biomass Bulletin, vol. 1, No. 1, autumn 1994.

97 Susan A. Edelman, “The American Supersonic Transport,” in Linda R. Cohen and Roger G. Noll (eds.), The Technology Pork Barrel

(Washington, DC: The Brookings Institution, 1991), ch. 6, pp. 97-147.
96 | Innovation and Commercialization of Emerging Technology

any one firm to capture. Attempts to improve U.S.

capabilities in commercializing emerging

technologies must recognize both the importance

of such factors and the need for new forms of interaction among industry, government, and universities to address them.