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Understanding Private-Sector
Decision Making for Early-Stage
Technology Development
EXECUTIVE SUMMARYFinancial market failures create obstacles to the commercialization of science-based innovations originating from inventors and technology entrepreneurs.1 Such obstacles deny the economy new sources of revitalization and future growth.2 Studies of this topic have tended to focus on the particular challenges associated with bringing new ideas to market through the creation of a new firm. Start-up firms are particularly appropriate vehicles for more radical innovations (characterized by both technical and market novelty). Established enterprises are typically more successful in pursuing incremental extensions to existing technologies and markets. But what about radical innovations that fall within the business strategy of larger firms? Since the overwhelming majority of U.S. industrial research and development (R&D) expenditures come from large firms ($180.4 billion invested into R&D by U.S. industrial firms in 2000)3 surely large firms face fewer financial barriers to bringing radical innovations—including those stemming from their own corporate research—into their businesses. This is the line of reasoning followed by some critics of governmentfunded research partnerships with large and other size firms. That large firms have real difficulty creating radical innovations outside the core areas of business to which they are committed is well understood.4 This report shows that large firms may experience similar failures when trying to exploit high technology innovations that apply directly to markets already served by the firm—what we will refer to as “in-core” innovations. The obstacles to radical in-core innovations are not market failures so much as institutional ones, but they are no less real. The barriers to in-core radical business innovations may include incompatibility of the new product with existing production processes; the need for a radical change in business model; lack of familiarity with key technical knowledge by the product development teams; and concern about “fratricide” of existing products made obsolete by the radical, in-core innovation. Like the abandonment of “out-of-core” innovations, neglect of “in-core” innovations deprives the economy of valuable spillover benefits. Even given such obstacles, corporate support for early-stage technology development (ESTD) does occur. This study estimates that of the $180.4 billion invested into R&D by U.S. industrial firms in 2000 as much as $13.2 billion or 7.3% was for ESTD activities targeted at bringing disruptive new technological innovations to the marketplace.5 Such disruptive innovations are distinctive in their capacity to destabilize markets, create new opportunities for learning, and open up entirely new spheres of economic activity. While the portion of R&D funds directed at ESTD may be small, ESTD investments are essential to sustaining long-term economic growth, and corporate funds represent the most significant source of funding for the nation’s ESTD activities.6 Our research illuminates the varying levels of support for ESTD activities across industries and firms. We find that these inter-industry and intra-industry variations are shaped by several forces, including the increasing sophistication required to develop new technological innovations, mounting pressures on corporate R&D divisions to demonstrate financial value from R&D investments, and the importance of the lifecycle position of specific industries relative to other industries and individual companies relative to their peers. The report is based upon research and analysis performed by analysts at Booz Allen Hamilton, who conducted 39 detailed interviews with senior executives and investors from 31 large corporations across 8 industry sectors, and 8 venture capital firms. By drawing upon these interviews, we examine trends in management of corporate R&D and how new market realities are affecting the ways corporations manage and support ESTD activities. Among these emerging corporate strategies are an increasing formalization of portfolio management approaches to corporate R&D and a growing reliance on acquisitions, alliances, and contracting out to obtain access to and exploit earlier stage technologies, especially where internal barriers are blocking progress. Case studies suggest that government funding may be effective, even essential, in helping larger firms pursue in-core radical innovations (via alliances) that bring economic and social benefits that would otherwise be lost. ___________________
2. William J. Baumol, 1994. Entrepreneurship, Management, and the Structure of Payoffs (Cambridge, MA: MIT Press). 3. National Science Foundation, Research and Development in Industry: 2000 (Arlington, VA, 2003) (NSF–03–318), table A–2, page 19–20. Of this number $110.8 billion of R&D expenditures were in the manufacturing industry. The software industry (counted as non-manufacturing) spent $12.7 billion in R&D in 2000. 4. James McGroddy, “Raising Mice in the Elephant’s Cage,” in Lewis M. Branscomb and Philip Auerswald, Taking Technical Risks: How Innovators, Executives, and Investors Manage High-Tech Risks, (Cambridge, MA: MIT Press, 2001), pp. 87–95. 5. As is explained in the text below, the industry sample interviewed was relatively more R&D intensive the industry as a whole, and it appears than the more R&D intensive firms tend to have higher ratios of ESTD to R&D. This suggests that total funds actually spent on ESTD are likely to be lower than the estimate of $13.2 billion. 6. Branscomb and Auerswald, Between Invention and Innovation, 2002. Return to Table of Contents or go to next section. Date created: October 7, 2005 |
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