Science and R&D

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R&D Credits Essential for Competitiveness: New Evidence

A new SSRN paper finds that research and development (R&D) helps manufacturers keep ahead of competition from imports. U.S. manufacturing firms in industries with strong import competition from China fared better 50 percent better when they had larger stocks of capital used for R&D. While this finding is intuitive, it provides an important piece of evidence that reiterates a critical point about the U.S. economy: international competitiveness is extremely important and smart R&D policy (including tax credits) is a key method of maintaining it.

The authors Johan Hombert and Adrien Matray use granular industry-level data on imports from China and show that these imports have a significant impact on the performance of U.S. manufacturing firms. They then examine whether this impact changes depending on how much R&D capital firms have. In order to make sure the R&D capital isn’t related to other factors, they use state-level changes in R&D credit policy during the 1980s.

Their results here show that firms that had access to cheaper R&D and were thus more likely to acquire more R&D capital had an easier time “climbing the quality ladder” and staying competitive in the face

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Can Competition Hurt Innovation?

A new NBER paper, “Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early -Stage Pharmaceutical Innovation” (summarized here), asks whether competition from generic drugs disincentivizes research. The authors, Branstetter, Chatterjee and Higgins, find that this does broadly seem to be the case: drug development activity decreases after generic drugs are introduced. This result highlights the important tradeoff between research and consumption. When consumers pay for drugs, intellectual property (IP) policies play a large role in determining how much of that cost goes toward future drug development.

Pharmaceutical markets are risky: drug development takes 12 years from initial pre-trial preparation to bringing a drug to market, and between the complexity of the human body and the extended regulatory approval process only a small proportion of drugs make it all the way to market. Of the ones that do, a small minority make up the large majority of profits.

This riskiness means that policies play a critical role in getting pharmaceutical markets to work correctly: if companies do not have incentives that outweigh the risks, they will not invest in researching new drugs and bringing them

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Will the next Silicon Valley be located in the United States?

In 1956, an American engineer, William Shockley, had an idea that silicon could be used to make transistors, and founded a company in Mountain View, California. The rest is history. The area experienced explosive growth after the invention of the silicon semiconductor sparked waves of innovation. Other firms developed around the Shockley’s first company, also developing and improving on the invention. Continual support from nearby Stanford University, along with collaboration between local firms, created an innovative environment ideal for fostering growth. By the 1960s, 31 semiconductor firms had been established in the country, of which only five were located outside the region. Smaller firms providing research, specialized services, and other inputs located nearby the larger companies. Innovation thrived, the local economy boomed, the center of high-tech innovation shifted from the east coast to the west, and the Silicon Valley was born.

The Silicon Valley is a prime example of how advanced R&D tends to focus in clusters- geographically concentrated industries that maximize spillovers from firm to firm and between public and private researchers. Once research concentrates in an area, it is hard to displace, which is why DOE and other

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Universities are Innovation Engines: New Evidence

University spinoffs more innovative, more successful than comparable firms

A new working paper by Swedish economist Andreas Stephan asks whether startups that were born as spinoffs from public universities are more innovative than similar, non-spinoff firms. Using a 2004 survey of East-German firms, Stephan compares the innovativeness of firms as measured by their patent applications and the originality of their patents. Even compared to firms of a similar age, industry, and location, the paper finds that university spinoffs do a better job of innovating.

The obvious lesson here for economic policy is that universities are studying useful things, and that we should have policies that encourage their transition from academic papers to real-world businesses. Business incubation has been on the U.S. national agenda for decades—since at least the passing of the 1980 Bayh-Dole Act—but there is much more that we can do.

For instance, Stephan finds that spinoff firms were more successful due to their collaboration, their proximity to universities, and their ability to get public research grant funding. All three of these traits are easy to translate into policy. Stephan also notes that even those firms that were

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What’s Wrong with This Picture?

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(Source: OECD)

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Ernest Moniz’ Confirmation Hearing Underscores Importance of Innovation

MIT physics professor Dr. Ernest Moniz has yet to receive Senate confirmation to serve as the nation’s next Energy Secretary, let alone begin his tenure. This hasn’t stopped speculation about what a Moniz-led Department of Energy (DOE) might look like. National Journal quotes one Brookings Institution scholar as saying “I think it will be a very different agency than it was in the first term. Ernie knows climate change, but also unconventional oil and gas and coal and nuclear. He will push the president towards a more balanced policy.” But if Dr. Moniz’ comments during his confirmation hearing yesterday are any indication of what would come from a department under his leadership, clean energy innovation has a good chance of remaining a top priority for the DOE.

Although the hearing covered a host of topics, ranging from cybersecurity to nuclear waste cleanup, the importance of public investment in research and development emerged as a topic of discussion at several points. Moniz’ opening statement actually started with a strong defense of a continued DOE role in research: “More than a hundred Nobel Prizes have resulted from DOE-associated research. DOE operates an

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Critical Materials Institute a Welcome Addition to the Energy Innovation Ecosystem

Dysprosium, a rare earth metal used in magnets for wind turbines and electric vehicles. Photo credit: Wikimedia Commons

Last week, the Department of Energy announced the establishment of a new Energy Innovation Hub at the Ames Laboratory in Ames, Iowa – the fifth such Hub, following the creation of the Joint Center for Energy Storage Research last November. The new Hub will be named the Critical Materials Institute and will “develop solutions to the domestic shortages of rare earth metals and other materials critical for U.S. energy security,” as stated in the Department of Energy (DOE) press release. The Hub-system continues to be a model for concentrating national research efforts, both public and private, and the focus area of the newest addition is a vital one.

As the DOE notes in a helpful infographic, rare earth metals like dysprosium and neodymium are essential to the creation of a wide array of electronics, as well as clean energy technologies like photovoltaic solar film, wind turbines, and electric vehicles. Yet China alone produces close to 95 percent of the world’s supply of rare earth metals, a set of seventeen different chemical

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R&D Tax Credits: They Work! Will Policymaker’s Listen to the Evidence?

As we approach the end of 2012, the currently expired U.S. R&D tax credits are being altogether ignored by the media, and generally ignored by policy makers. Nothing has been done this year to ensure that firms will receive the same benefits as in the past. This leaves firms guessing as to whether or not they should increase or decrease their investments in R&D, or move them abroad.  The evidence on the effectiveness of R&D tax incentives continue to mount.  In the latest edition of New Economics Papers in Technology and Industrial Dynamics, another compelling analysis by Bond & Guceri, “Trends in UK BERD after the Introduction of R&D Tax Credits,” shows that R&D tax incentives not only bolster business investment in R&D, but businesses respond even more than previously predicted by Bloom et al.  The analysis shows that especially in high-tech manufacturing, the R&D tax credit causes a substantial increase in R&D, which provides further evidence that a permanent R&D tax credit is needed here in the United States.

The study shows that when R&D costs are treated more favorably by the tax code than capital investment,

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Government Support for Clean Energy Innovation: Breakthrough Carbon Capture Modeling

Researchers affiliated with the University of Minnesota, the University of California (UC), Berkeley, and the U.S. Department of Energy’s (DOE) Lawrence Berkeley National Laboratory have developed a breakthrough computer model that can identify the best molecules for capturing carbon from power plant stacks. The model greatly accelerates the search for new low-cost and efficient ways to burn coal and natural gas while also drastically reducing greenhouse gas emissions. But this significant breakthrough would not have been possible without key public investments in energy innovation.

Carbon capture technology development largely focuses on amine scrubbing, a process that uses chemical solvents to absorb carbon dioxide from coal and gas power plant stacks. However, fueling the traditional amine-based processes requires it to use as much as a third of the energy produced by the power plant itself. As a result, the process induces so-called “parasitic energy” costs – power producers must burn more coal or gas to run a power plant with amine carbon capture technology than a plant without. The added energy costs greatly reduce the potential for deployment, so dramatically lowering those costs through new technologies could go a long

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Basic Research the Wrong Focus for ARPA-E

The Advanced Research Projects Agency-Energy (ARPA-E) has enjoyed bipartisan support since its inception, with members of Congress from both parties appearing at this year’s Energy Innovation Summit to laud its achievements. The agency’s reputation is such that a 2010 report by scholars from the American Enterprise Institute, the Breakthrough Institute, and the Brookings Institution entitled Post-Partisan Power called for its annual budget to be increased to $1.5 billion. (Congress appropriated $275 million for the agency for fiscal year 2012). Yet there has been a troubling trend as an increasing number of policymakers and advocates are calling for ARPA-E’s mission to be redirected to focus solely on basic research – exploration of fundamental principles with no regard for commercial applications. A move in that direction, however, would completely misunderstand the role the agency is meant to play in the energy innovation cycle and would be a serious mistake.

Last year, Congressman James Sensenbrenner (R-WI) accused the Obama Administration of shifting the Department of Energy’s focus from basic research to “later-stage technology development and commercialization efforts,” an approach that he panned as “picking winners and losers.” It was thus unsurprising when

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