Science in the Service of the Nation State
Tom Quirk
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Universities are the wrong place to look for sources of business innovation 

It has been running for years, the drama of politicians, science and innovation. In the 1960s Harold Wilson was going to ‘forge the new Britain in the white heat of the technological revolution’, Barry Jones wanted ‘Sunrise Industries’ in the early 1980s and John Dawkins introduced national needs to direct scientific research in 1987. Science was the source of innovation. Ideas flowed through ‘commercialization’ to create wealth and enhance and transform the economy.

This bipartisan thesis continues to be believed by John Dawkins’ successors. Its present efflorescence is to be found in ‘Backing Australia’s Ability’, a federal government programme begun in 2001 that commits $52 billion over ten years to science and innovation. The idea is explained in The Australian Government’s Innovation Report 2004-0 5: ‘Researchis the key source of knowledge and ideas. It is these ideas that are a major force in increasing productivity and economic growth’. [1]

This recital discloses an important purpose again laid out later in the report. ‘For researchers bringing ideas and inventions to market in a timely and effective manner helps realise the relevance and value of research’. [2]

The engine that gives life to these ideas about research and innovation is the ‘National Innovation System’. The flow of technology and information among people, enterprises and institutions is defined as the key to the innovative process on the national level

This article explores ‘Backing Australia’s Ability’ and the ideas behind it, testing the validity of its central thesis by examining other experience in industrial innovation.

Innovation policy

The Innovation Report 2004-05 is a progress report on the policies and programs pulled together in 2001 along with some new initiatives.

The report has four sections:
Measurement of progress;
Initiatives;
National Research Priorities; and
Informing the community.

Let us look at the first two sections in turn and then see how they relate particularly to National Research Priorities.

Measuring performance

How to measure innovation and its precursors is an interesting and vexing question. The Innovation Report chooses measures that enable comparison with the OECD group of countries. Fifteen measures are grouped into knowledge creation, human resources, finance, knowledge diffusion, international collaboration and market outcomes.

Knowledge creation includes government and higher education and business Research and Development (R&D) as a percentage of GDP. R&D is defined as creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.

This measure is the frequently used lead indicator for judging Australia’s R&D performance against that of other countries. Its weakness is that OECD countries differ in their R&D mixes. Business R&D is particularly sensitive to R&D intensive industries. For mineral exploration, the development of new or vastly improved methods of data acquisition, processing and interpretation is included as R&D, so expenditure by Geoscience Australia and CSIRO is counted. However, searching for minerals using existing methods is excluded from R&D. Thus for Australia exploration and development expenditure by major mining companies is not included in reported R&D, although it is arguably equivalent to the R&D used to generate a new business.

Table 1 with selective country measures illustrates the difficulty of using the broad measures. There is no analysis of the industrial mix in Australia so that a more useful comparison could be made. We are a small country with few ‘high tech’ businesses. Total Australian business R&D spending was $6 billion in 2002 while Intel Corporation spent US$4 billion. Intel on the other hand has a market capitalisation of US$140 billion and a skill base that covers every aspect of semi-conductor and integrated circuit development. They are arguably the original source of the Information Technology revolution with their enabling electronics. We cannot possibly expect to match such a skill base. Foreign and local ownership of business also needs to be taken into account. International business tends to keep R&D close to headquarters.

As an aside, while Australia’s R&D expenditure is seen as average, GDP growth over ten years places Australia second in the OECD behind Ireland. As a result absolute R&D expenditure has been carried up with the GDP growth. Further a comparison with our performance in the 1980s shows that along with other low-tech countries, we have lifted our industrial R&D expenditure significantly as a fraction of GDP. This represents no more than the general industrial shift to the use of more advanced technology. Clearly high national R&D spending is not a prerequisite of growth over the medium term. Fifteen years after the Dawkins national needs in research there should have been some detectable impact on national performance. Is there any evidence that R&D has driven GDP growth?

The Innovation Report’s measure of papers published and patents filed in the United States confuse pure and applied research and engineering. Pure research is the systematic explanation of the natural world, ‘know why’. Applied research and engineering deal with practical issues of ‘know how’. Knowledge creation is in part a public good but for business it may be proprietary and never published or patented. Further patents filed in the US have their utility in that market and except for licence fees and royalties may not contribute to the Australian economy directly. In a ponderous paper, ‘The Scientific Impact of Nations’, David King, Chief Scientist to the present British Government admits, ‘A strong science base does not lead directly to wealth generation’. [3]

The second cluster of measures in the Innovation Report, ‘human resources’, discloses a mechanistic attitude to ‘commercialization: The measure is ‘the capacity of the labour force to transform these ideas and technologies into tangible economic outcomes’. [4] In fact as we shall see later, people educated in a number of disciplines are the key to innovation.

The most relevant group of measures is of course ‘market outcomes’ with growth in multi-factor productivity and expenditure on innovation as a percentage of sales as indicators. Changes in these indicators may be driven by factors other than ideas coming from science in the sense intended above.

The measures used by the Innovation Report do not in fact measure innovation or the progression from ideas to products and processes. The Australian Bureau of Statistics, through surveys such as Innovation in Australian Business2005  (Cat. 8158), is attempting to measure innovation in business. Only limited data is currently available.

 Initiatives

This section of the Innovation Report covers knowledge creation in government research establishments, universities and business along with infrastructure projects. There follows a review of government support for commercial application and finally programs for the development of skills in the workforce.

The catalogue of institutions supported by the Federal Government covers an extraordinary range of pure and applied research. There are scientific services, optical and radio astronomy, nanotechnologies and all other things in between the very small and the very large and the most abstract and the most applied. All these have been drawn in for assessment against national priorities. Of course a cynical view is that institutions present themselves as yielding but quietly get on with what they want to do most.

The initiatives in supporting business establishment and business development are substantial programs. These have created their own demand, as using ‘other people’s money’ is very appealing to businesses.

Many of the support programs probably serve a useful function when developing companies find it hard to raise funds from skittish capital markets. On the other hand a business in which R&D is an imperative that cannot find market financial support may be getting a signal that it is not judged commercially attractive by investors. Government financial aid may therefore be skewed to supporting higher risk ventures with high failure rates. A measure of the returns from these programs would be useful.

The programmes fostering entrepreneurship and innovation looks like a poor cousin of the Australian Institute of Sport. Indeed there is an Australian Institute of Commercialisation to encourage and help ‘commercialise’ research investment. Innovative ability is more difficult to identify than sporting talent and is built on business experience.

Finally and most importantly are the government programmes for educating secondary and tertiary students. Encouraging learning in science and mathematics is clearly most important. The provision of more university places and further loan schemes are well aimed at allowing more students to enter university and to develop their talents. There is however a worrying bias towards vocational training at the expense of general higher education. Engineering, science and mathematics courses are the proper starting points for those who may finally contribute to the technologies. Courses in information and communication technologies are expressions of the output of more fundamental knowledge.

National Research Priorities

 There are four National Research Priorities:
An Environmentally Sustainable Australia;
Promoting and Maintaining Good Health;
Frontier Technologies for Building And Transforming Australian Industries; and
Safeguarding Australia.

A whole of government approach aims to improve research and deliver significant long-term benefits. All government research and research-funding agencies are to be judged against these priorities. However r esearch with its own global marketplace will not be seriously affected by national priorities. Leading research universities will look at their particular areas of interest, hire leaders, present or future, and will contribute globally to their fields. We should expect that discoveries will have global appeal and be pursued by worldwide interests—and not contained within Australia.

The Truth about Innovation

A body of evidence shows that the policymakers’ view of how innovations come about is seriously wrong. Innovation is not the smooth progression of an idea from a university research laboratory through ‘commercialization’ to a successful business. The interaction of governments, academia, business and the commercial markets has a random pattern of success and failure. Further, policymakers’ misreading of the innovation process may raise false and undeliverable expectations from universities and damage general education as priorities are shifted from what is well done towards what is not.

The commercial market is the final arbiter of innovative ideas. While a market of ideas exists in science and in research institutions, it is not the place where innovations are fashioned. Two recent publications, one a book by the eminent economist John Kay, The Truth about Market) and the other an essay by an Industrial Visitor to Cambridge, Stephen Allott, ‘From Science to Growth’, touch on how innovations come about in the market. [5]

Innovation in practice

One example of innovation that we have all grown up with is the personal computer (PC). The emergence of the PC is worth examining.

A Brief History of the PC – courtesy John Kay

IBM engineers for years stated that there could never be home or personal computing, as you would need a room set-aside for the computer. But in 1971 Intel developed a microprocessor for a Japanese customer (a story in its own right) and in 1973 engineers at Xerox Parc built the first functioning personal computer, the Alto. It was eight years before an expensive commercial version appeared. Meanwhile in 1974 hobbyists were making the Altair computer from a ‘do-it-yourself’ kit. Two young Harvard students, Paul Allen and Bill Gates, devised a version of the BASIC program language for the Altair. In 1976, Apple Computers released the Apple I computer.

Meanwhile larger companies were taking an interest. And when IBM launched its personal computers, the PC’s, the business became serious. IBM’s machines were slow and less user friendly than other machines on the market. It did not matter; IBM’s presence vastly expanded the market. Within months PC was the generic term for small computers. IBM turned to Microsoft run by Gates and Allen for the operating system. Gates and Allen in turn bought one for $50,000, renamed it MS-DOS and supplied it with a non-exclusive agreement to IBM, who over-estimated their market power. IBM subsequently lost control of the software side of the PC business.

However the choice of the computer enthusiast was Apple. While Microsoft provided a certain ease of use, Steve Jobs, one of the two founders of Apple, went further. Xerox Parc supplied the invention, the graphical user interface with its desktop, icons and mouse. The user did not have to understand about computers. Only Apple supplied the bundled hardware and software in a proprietary system, the Macintosh. The open standards of the IBM PC allowed Microsoft to develop and market the equivalent, Windows. The result was the Microsoft domination of the personal computer industry. [6]

John Kay sums this up by asking, ‘Who was in charge of the successful development of the personal computer industry?’ The answer is that nobody was ‘in charge’. In fact it was difficult to see even a year ahead what might be, let alone plan for it.

Would the mapping of the National Innovation System referred to in ‘Backing Australia’s Ability’ have helped understand or guide the emergence of personal computing? To paraphrase Barnett Newman, the American abstract expressionist painter, the National Innovation System is to innovation as ornithology is to birds.

Universities are minor sources of innovation

Moving from the anecdotal to the statistical, Table 2 shows studies of European and United States innovation in the 1980s, confirmed by United Kingdom data in 2001 and now preliminary results from Australia in 2003.

Australian data on Research and Development Expenditure and Licence Fees and Royalties paid by business tells a similar story in Table 3. This is a proxy for the importance business places on academia for innovation and problem solving.

Another measure of the importance is to estimate the markets commanded through royalties received from patented innovations. This is shown in Table 4 and should be regarded as indicative only. One of the immediate problems with royalties is that a significant proportion of patents are licensed to overseas corporations and the benefits are largely gained offshore. This, on reflection, is not surprising. Researchers operate in a global competitive business. Their discoveries and ideas command worldwide attention. This exposes a fatal flaw in the linkage of Australian research to Australian business. Frequently we do not have businesses that could benefit.

 Universities and government laboratories are minor ‘direct’ contributors to innovation. Other surveys within companies show commercial staff were twice as successful as the technical staff in choosing winners but still had a success rate of only 55 percent. The worst performers were CEOs. This is a mirror of the position of academia, the equivalent of the technical staff, with the government as the CEO.

Being in the right place, in the market and in the business, are key attributes for successful innovation.

How do universities contribute?

Commercialization or technology transfer is the supposed mechanism that creates wealth from science. Research institutions have technology transfer offices for this. They do not enjoy a high reputation from those in business who have to deal with them. Faculties in some American universities have voted not to have them! There are a number of identifiable problems. The flow of proposals may be too small to sustain interest and attention. The offices frequently try to push projects at the business world rather than respond to a market pull from business. Further, to outsiders, dealing with an inventor is hard enough. Inventors over-estimate their invention’s importance and under-estimate the work needed to take it to the market. Add to that a bureaucracy as the agent and the difficulty is doubled. An alternative is to have a panel of outsiders for this transfer function with academics able to choose with whom to work.

So how do universities make their contribution? The answer is by the general education of graduates. Degrees in science, engineering and medicine may supply future technology-based innovation. Degrees in the arts, law and commerce may do it for non-technology based innovation, a powerful area often overlooked. They enter businesses and the professions. They have to understand and solve problems in their own businesses. They have customers or clients who provide needs and opportunities.

Transfer of technology is most effective when people migrate out of universities and into business. The lesson is learned in business. Frequently staff depart to ‘go out on their own’. The most famous example of this is the ‘Traitorous Eight’, the under-30 engineers who walked out of Shockley Semiconductor in 1957. Robert Noyce and Gordon Moore went on to found Intel. Eugene Kleiner launched the premier venture capital firm Kleiner Perkins Caufield & Byers. These engineers along with the more mature founders of Hewlett-Packard seeded Silicon Valley. They used their wealth to fund the next generation of engineering entrepreneurs and so begat further wealth. (There is in fact a poster that shows the family tree of Silicon Valley starting from Fairchild Semiconductor!)

Where does research fit? First, as part of a virtuous circle. Universities acquire prestige by being old and being good at research and their reputations attract good students. Second, innovations may still have their start in ideas, observations and interpretations. These are the classic outputs for university scholars. Their contributions are vital, as they ‘know why’ things happen, not ‘know how’ to make things happen.

Conclusion

Australia possesses few fully integrated ‘high-tech’ companies. We have a beginning but it takes ten to twenty years to build a substantial business. When it happens though, we will need our well-trained university graduates to manage and grow these businesses. In addition we might find that there is more opportunity for businesses to turn to academia for help and ideas.

How can government assist? It is remote from the action. Its bureaucracy does not get direct market signals. So governments should not be too prescriptive in setting research directions. They should support infrastructure and ensure a continuing high standard of general undergraduate education. It should be possible to establish an encouraging framework, both cultural and financial, so that the blossoming of talent can take its course.

This may be more by example than policy. Governments should not think that research will directly lead to wealth creation or that royalties will be an important source of revenue for higher education.

‘Backing Australia’s Ability’ is misplaced policy. A mountain top set of priorities is so remote from the fields of innovation that it has little relevance. The view that scientific research can be directly harnessed to innovation has been enthusiastically used to promote the economic relevance of research but it does not stand up to scrutiny.

Table 1: Selected countries R & D Expenditure

Source: OECD in Figures 2003: Selected data from Tables on pages 14, 70 & 72

Table 2: Sources of Innovation

Table 3: Measures of Business Expenditure for 2002-2003

Sources ABS, DEST

Sources ABS, DEST

[1] Department of Education, Science and Training, The Australian Government’s Innovation Report 2004-0 5 (Canberra: DEST, 2005), xi.

[2] DEST, Innovation Report,.57.

[3] David King, ‘The Scientific Impact of Nations’, Nature (430), 15 July 2004, 311-316.

[4] DEST, Innovation Report, 5.

[5] John Kay, The Truth about Markets (London: Penguin Books, 2004); Stephen Allott, ‘From Science to Growth, available: http://trinamo.co.uk/articles.htm

[6] Kay, Truth about Markets, p.102.

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