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8 Challenges for the Future Based on the conditions, experiences, and trends in the five industries exam- ined in this study, the committee identified six major challenges that are likely to affect the impact of university-based research on industry performance in the coming years. SERVICES Finding X-1. Although innovations in service delivery are becoming more im- portant, the academic research enterprise is not focused on or organized to meet the needs of service businesses. Services account for almost 80 percent of the U.S. gross domestic product, employ a large and growing share of the science and engineering workforce, and are the primary users of information technology. In most manufacturing indus- tries, the service functions, such as logistics, distribution, and customer service, have become leading sources of competitive advantage. The rate of innovation and level of productivity in the services infrastructure (e.g., finance, transporta- tion, communication, health care) have an enormous impact on the productivity and performance of all other segments of the economy. Moreover, as the studies of the financial services industry, the transportation, distribution, and logistics services industry, and the network systems and communications industry show, improving services is a major impetus for innovation throughout the economy. Nevertheless, the U.S. academic research enterprise, despite its broad dis- ciplinary base and potential for crossdisciplinary research and training, is not focused on or organized to meet the needs of service businesses. Major 219
220 THE IMPACT OF ACADEMIC RESEARCH ON INDUSTRIAL PERFORMANCE challenges facing universities are: (1) adapting and applying systems and in- dustrial-engineering concepts, methodologies, and quality-control processes to service functions and businesses; (2) integrating technological research with research in social sciences, management, and public policy; and (3) educating and training engineering and science graduates to deal with management, policy, and social issues. THE REGULATORY CLIMATE Finding 8-2. Regulations and regulatory changes have profoundly influenced industry receptivity to contributions by academic research. In some cases, aca- demic research has helped to shape the regulatory environment; academia is well qualified to provide interdisciplinary expertise to inform regulatory decisions. All of the industries in this study operate in an environment that is currently or has been highly regulated, and changes in the regulatory environment over time have affected them in obvious and not so obvious ways. At one end of the spectrum are the airline and trucking industries. For many years, strict regulation precluded airlines and trucking companies from competing based on price; there- fore, competition was based on speed, reliability, and other amenities that tended to spur innovation. Deregulation in both industries has led to intense competition, based on both price and quality of service. Although the need for innovation remains, lower margins and, therefore, tighter research budgets have restricted the focus of R&D. At the other end of the spectrum is the medical devices and equipment industry. Companies in this industry operate in a highly regulated environment in which the safety and effectiveness of new devices must be clearly demonstrated. Universities, specifically academic medical centers, are particu- larly well equipped to carry out the laboratory research and clinical trials de- scribed in regulatory requirements. This industry is a prime example of how the contributions of academic research are affected by the overall regulatory environ- ment in which an industry operates. Academic research has also greatly influenced the regulatory environment. Based on economics research, much of it performed in academia, the role of regulation has been redefined from protecting the public interest in naturally monopolistic markets to promoting market entry and ensuring vigorous compe- tition to achieve public benefits. The change has spurred deregulation in a num- ber of industries, including network systems and communications. In the finan- cial services industry, the impact of academic research on regulation has been small historically, usually in response to crises; however, the impact is growing, especially in the area of risk management. The influx of technically trained scientists and engineers into financial regulatory bodies has enabled regulators to draw on advances in risk modeling, which, in turn, has led to innovations in the industry proper. In the medical devices arena, academic researchers could
CHALLENGES FOR THE FUTURE 221 play an important role in the ongoing reform of the Food and Drug Administration's regulatory policies by assembling industry, regulatory, and clinical panels to discuss appropriate requirements for bringing products, such as artificial hearts and mechanical cardiac-assist devices, into widespread clinical use. INTELLECTUAL PROPERTY Finding 8-3. Over the past 25 years, research universities have increasingly emphasized technology transfer and the generation of income from research re- sults, through patenting, the creation of technology transfer offices, and licens- ing. Although the increased attention to management of intellectual property has had many positive consequences for industry and academia, questions remain about the overall effectiveness of technology transfer investments, as well as the impact of these activities on universities' core research and education missions. Throughout the 1970s and early 1980s, government policy increasingly favored stronger protections for intellectual property resulting from publicly funded research. Several universities had already increased patenting activity in the 1970s, largely as a result of the emergence of biotechnology, but the propen- sity to patent increased markedly after 1980. Since 1980, the number of univer- sity technology transfer offices has grown from 25 to more than 200 (Sampat and Nelson, l999~. These offices have provided an alternative interface with industry to the traditional offices of sponsored research. Technology-transfer offices focus on licensing university technologies and generating royalties. Other mechanisms for profiting from research have also been developed. For instance, some leading research universities have made long-term agreements with individual companies for joint research, joint clinical trials, and profit shar- ing; companies use these agreements to leverage research funded from other sources. Universities are becoming more willing to take equity stakes in new companies. A percentage of equity is often a requirement for companies' partici- pation in university-based business incubators, and universities are increasingly providing some of the initial funding for faculty members' start-up companies. In addition, a growing number of university researchers have added financial gain and entrepreneurship to their traditional university roles of teaching, research, and service. In some cases, patents and royalties are shared with the university. In other cases, faculty researchers have taken advantage of available venture capital to fund new companies to produce commercial products based on their research. All of these mechanisms patents, licensing, contracting, industrial liaison pro- grams, and start-up companies have expanded interactions between universities and industry and changed the traditional role of universities in that relationship, which, for the most part, had been limited to faculty consulting, small amounts of contract research for companies, and the preparation of graduates for careers in industry.
222 THE IMPACT OF ACADEMIC RESEARCH ON INDUSTRIAL PERFORMANCE The emphasis on commercializing research results has affected the structure and dynamics of industry interactions with leading research universities. For ex- ample, in the mature sectors of the aerospace industry the problem of the protection and ownership of intellectual property is a significant barrier to collaborative university-industry research. This situation may be attributable to the advanced level of competition in the industry and could be indicative of things to come in other mature, highly competitive, research-intensive industries. By contrast, the treatment of intellectual property rights has not figured prominently in relations between universities and the financial services industry, in which secrecy and first- mover advantages prevail. Indeed, the lack of intellectual property rights in finan- cial services might be an impediment to collaborative academic-industry research in a different way because it is difficult for universities to maintain secrecy. In the transportation, distribution, and logistics services industry, where intellectual prop- erty is often developed and commercialized by the same faculty, consultancies and start-up software companies have helped the industry avoid problems. Increased patenting activity by academic researchers has had many positive consequences for both industry and academia. Academic researchers now have new incentives and new avenues for pursuing their entrepreneurial energies and new products, services, processes, and companies to show for it. As Congress predicted when it passed the Bayh-Dole Act in 1980, allowing universities to own and profit from the results of their research has stimulated researchers to patent and seek the commercialization of research results. Recent research indicates that the willingness of industry to invest in the commercialization of inventions li- censed from universities is closely correlated with strong property rights (Jensen and Thursby, 2001; Dechenaux et al., 2002~. The increase in patents has also had benefits for industry: (1) patenting places research results in the public domain, where they are much more accessible than they are through journals or unpub- lished papers; (2) patents have value that can be capitalized through licensing agreements or as collateral in securing financial resources for start-up companies; and (3) patents provide at least some protection for the resulting commercial products, thereby encouraging investors to make the capital investments neces- sary for successful commercialization. At the same time, the growing emphasis on university ownership and exploi- tation of intellectual property has raised questions about the near-term efficacy of the patent-licensing infrastructure, as well as the long-term impact on university- industry interactions and the health of the academic research enterprise. To date, direct contributions of academic research through patenting activity has been small. The creation of technology-transfer offices, with the technical, financial, and legal expertise they require, however, can be expensive; indeed, relatively few universities have earned much of a direct financial return on these invest- ments. In fiscal year 2000, only 72 universities had income from licenses of more than $1 million; and the University of California system accounted for nearly one-quarter of the total license income reported in that year. Although even small
CHALLENGES FOR THE FUTURE 223 amounts of income are important in the context of tight university budgets, li- cense income exceeded 5 percent of total research expenditures at only 15 univer- sities; typically it is less than 1 percent (AUTM, 2001~. Students of technology transfer and the research university have begun to look into questions raised by the growing interest of universities and research faculty in intellectual property (e.g., Henderson et al., 1998; Link et al., 2002; Morgan and Strickland, 2000; Nelson, 2001; Press and Washburn, 2000; Stefan, 2000~. Have investments in patent licensing infrastructure been worth it? Have they made technology transfer from universities to industry more effective? Or would the licensed technologies have been picked up by industry in any case? Does the emphasis on capturing intellectual property rights raise the transaction cost of research? Are there other value-added results from these investments, and how should they be measured? To what extent does the emphasis on intellectual property and secrecy inhibit the free flow of ideas, impede advances, and disrupt the research culture? How has increased emphasis on intellectual property af- fected teaching and learning? A better understanding of these and related issues will have important implications for future practices and policies. Therefore, it is critical that these questions continue to be addressed. INFORMATION TECHNOLOGY Finding 8-4. Information technology is critical to the performance of all indus- tries and will continue to be so in the future. Industry's need for the continued development, diffusion, and application of advanced information technology pre- sents major opportunities for academic research in many disciplines, including mathematics, computer sciences, physical sciences, life sciences, multiple engi- neering disciplines, social sciences, and behavioral sciences. The importance of information technology to industry performance cannot be overstated. As hardware becomes cheaper and more powerful, networks and communications are becoming more pervasive, and the volume of information created, stored, and exchanged is growing exponentially. As a result, questions about the management of information for private gain and/or public benefit are also increasing. Addressing these issues will provide a wide range of challenges for academic researchers in almost every discipline. To name just a few ex- amples, industries will need software that facilitates the interoperability of legacy systems and reduces the vulnerability of infrastructure and business to breaches of security and privacy. Academia will also be expected to continue supplying skilled technicians. developers, and managers (NRC, 2000~. A BALANCED RESEARCH PORTFOLIO Finding X-5. Universities must maintain a balance of research projects to sustain their role as repositories of expertise and resources in many disciplines basic
224 THE IMPACT OF ACADEMIC RESEARCH ON INDUSTRIAL PERFORMANCE and applied research in engineering, life sciences, physical sciences, social sci- ences, behavioral sciences, managerial sciences, public policy studies, and inter- disciplinary research. Basic, long-term research performed at universities is an essential part of the national innovation system. All of the industries studied derive significant ben- efits from basic research, although the importance of basic research to industry performance is not well recognized, particularly among individual companies. Most federal funding continues to support basic research, but industry-funded academic research is focused mostly on problems that can be solved relatively quickly. As universities become more entrepreneurial, the potential financial gains from commercially relevant research could create strong incentives for universities to focus on applied research at the expense of basic research. If so, federal funding for basic, long-term research will be even more critical. Federal funding is now virtually the only source of support for basic re- search, which makes effective management of federal research programs of para- mount importance. At the highest level, Congress should recognize and reaffirm the importance of basic research at universities. To capture the imaginations of the best academic researchers, program managers at the Defense Advanced Re- search Projects Agency, National Science Foundation (NSF), and other agencies should work with researchers to develop agendas that might lead to major new insights. In some areas, such as network systems, the best researchers may al- ready be losing interest. The challenge is not just to maintain a balance between basic and applied research, but also to ensure that the basic research portfolio is sufficiently diverse to stimulate innovative thinking by academic researchers in many fields. To meet this challenge, the balance of federal funding for research in specific fields and agencies should be reassessed. The percentage of federal funding for academic research supported by the National Institutes of Health increased from 49 percent to 62 percent from 1980 to 2001. During the same period, NSF's funding decreased somewhat, from 20 percent to 17 percent. The relative shares of federal funding for academic research at other federal agencies, such as the National Aeronautics and Space Administration, the U.S. Department of Energy, and the U.S. Department of Defense, have also declined (NSF, 2001~. In a policy statement accompanying Science and Engineering Indicators 2000, the National Science Board noted (NSB, 2000~: The life sciences now account for more than 50 percent of the U.S. federal investment in basic research.... Today's strong federal support for the life sci- ences is warranted because biomedical research is on the cusp of a revolution in preventative medicine and treatment. Nevertheless, today' s overall research bud- get is increasingly out of balance.
CHALLENGES FOR THE FUTURE 225 The generation of key ideas that lead to technological breakthroughs, as well as sustained incremental innovation, requires contributions both direct and in- direct via cross-sector technologies from research in many fields. The value of research results in one field often depends heavily on advances in complementary fields, which is a strong argument for maintaining a balanced research portfolio in many fields of science and engineering. Finally, research opportunities in the social and behavioral sciences pose an- other challenge for industry program managers, as well as academic researchers. As the U.S. economy continues to shift toward services, and competitiveness in manufacturing and services industries is defined increasingly by the relative ability of firms to manage knowledge and human capital, as well as to anticipate and meet the wants of customers (involving them more and more directly in the design and production of goods and services), the importance of research in social, managerial, behavioral, and policy sciences for industry and government will certainly grow. For the most part, the value and relevance of this research has yet to be recognized by industry or government agencies. Although research in selected areas of eco- nomics and managerial sciences has had a demonstrable impact on industry prac- tices, researchers in the social and behavioral sciences, in general, have not con- veyed the value of their research to industry effectively. Examples in this study of five very different industries show that research in the social and behavioral sci- ences (integrated with the natural sciences and engineering) in areas related to information technology and services can greatly improve our understanding of how technological developments affect individuals and society as a whole. KEEPING PACE AND MOVING FORWARD Finding 8-6. The core strengths of the academic research enterprise are stable enough and flexible enough to respond to the rapidly changing needs of industry. A major challenge for universities is keeping pace with the rapidly changing research and human resource needs of industries while continuing to pursue basic research in new areas to generate ideas that will provide the foundation for industries in the future. This challenge is manifested differently in different in- dustries. In the network systems and communication industry, as well as the medical devices and equipment industry, where linkages to academic research have been very strong, industry leaders are concerned that academic research may not be able to adapt, articulate, and pursue basic and applied research and training in new directions. In the financial services and the transportation, distri- bution, and logistics services industries, which do not have a strong industry R&D ethos, and in the mature sectors of the aerospace industry, industry is less concerned about academic research "keeping up" than about academia meeting their research and educational/training needs. All five industry studies revealed
226 THE IMPACT OF ACADEMIC RESEARCH ON INDUSTRIAL PERFORMANCE problems with participants in academic long-term research adapting to shifting industry priorities and emerging opportunities in particular areas. The academic research enterprise has some very important core strengths. Universities address a broader spectrum of ideas and disciplinary perspectives than any other institutions in the U.S. innovation system; they have enormous potential for multidisciplinary research. Universities also integrate advanced re- search and education. The constant flow of new students through universities continuously revitalizes the academic research enterpnse, challenging the as- sumptions of faculty and bringing fresh perspectives to research. Research-trained graduates play a critical role in the development, transfer, diffusion, and applica- tion of new knowledge and technology in industry. Universities can draw on these core strengths to keep pace with current industry needs and move forward. REFERENCES AUTM (Association of University Technology Managers). 2001. AUTM Licensing Survey, FY 2000. Norwalk, Conn.: AUTM. Dechenaux, E., B. Goldfarb, S. Shane, and M. Thursby. 2002. Appropriability and the timing of innovation: evidence from MIT inventions. Summer Institute 2002, National Bureau of Eco- nomic Research, Cambridge, Mass. Available online at: http://www.nber.org/~confer/2002/ si2002/thursby.pdf. [June 24, 2003] Henderson, R., A. Jaffe, and M. Trajtenberg. 1998. Universities as a source of commercial technol- ogy: a detailed analysis of university patenting, 1965-1988. Review of Economics and Statis- tics 80(1): 119-127. Jensen, R. and Thursby, M. 2001. Proofs and prototypes for sale: the licensing of university inven- tions. American Economic Review 91(1): 240-259. Link, A.N., J. Scott, and D. Siegel. 2002. The economics of intellectual property at universities: an overview (forthcoming in Special Issue of the International Journal of Industrial Organization). Available online at: http://www.people.virginia.edu/~sa9w/ijio/abstracts/Accepted/ Overview.pdf. [June 24, 2003] Morgan, R.P., and D.E. Strickland. 2000. U.S. university research contributions to industry: findings and conjectures. Science and Public Policy 28(2): 113-121. Nelson, R.R. 2001. Observations on the post-Bayh-Dole rise of patenting at American universities. Journal of Technology Transfer 26(1-2): 13-19. NRC (National Research Council). 2000. Making IT Better: Expanding the Scope of Information Technology Research to Meet Society's Needs. Computer Science and Telecommunications Board. Washington, D.C.: National Academies Press. NSB (National Science Board). 2000. Science and Technology Policy: Past and Prologue. A Com- panion to Science and Engineering Indicators, 2000. Available online at: http://www.nsf gov/ pubs/2000/nsbO087/nsbO087.pdf. [June 24, 2003] NSF (National Science Foundation). 2001. Federal Funds for Research and Development: Federal Obligations for Research to Universities and Colleges by Agency and Detailed Field of Science and Engineering: Fiscal years 1973-2001. Arlington, Va.: National Science Foundation. Press, E., and J. Washburn. 2000. The kept university. Atlantic Monthly 285(3): 39-54. Sampat, B., and R. Nelson. 1999. The Emergence and Standardization of University Technology Transfer Offices: A Case Study of Institutional Change. Prepared for the 1999 Conference of the International Society for the New Institutional Economics, September 16-18, 1999. Wash- ington, D.C.: World Bank. Stefan, P. 2000. Remarks at the Conference on University-Industry Technology Transfer, Purdue University, West Lafayette, Indiana, June 10, 2000.