Mowery (2009) - Plus Ca Change

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• This page is referenced in BPP Field Exam Papers

Reference(s)

Mowery, D.C. (2009), "Plus ca change: Industrial R&D in the Third Industrial Revolution", forthcoming, Industrial and Corporate Change. pdf

Abstract

The structure of industrial R&D has undergone considerable change since 1985, particularly in the United States. But rather than creating an entirely novel system, this restructuring has revived important elements of the industrial research system of the United States in the late 19th and early 20th centuries. In particular, many of the elements of the "Open Innovation" approach to R&D management are visible in this earlier period. This article surveys the development of industrial R&D in the United States during the postwar period. In addition to emphasizing continuity rather than discontinuity, this discussion of the development of US industrial R&D during the "Third Industrial Revolution" stresses the extent to which industrial R&D in the United States, no less than in other nations, is embedded in a broader institutional context. My discussion also highlights the extent to which its development has been characterized by considerable path dependency.

Open Innovation

Open Innovation, as defined by Chesbrough, is:
"The purposive use of inflows and outflows of knowledge to accelerate internal innovation, 
and expand the markets for external use of innovation"

Chesbrough claimed that managers should external as well as internal ideas, and internal and external paths to market, as firms look to advance their technologies. Mowery notes that while there was a period of exception (1940-19??), this has held.

History

By the late 1800s the Sherman Act (antitrust) made agreements among firms to fix prices and outputs illegal. This resulted in a merger wave from 1895-1904 - horizontal mergers were a substitute for agreements. This ended with the Supreme Court's 1904 Northern Securities decision. Firms them diversified and created large in-house R&D departments or purchased external sources of innovation. Also reforms to patent policy strengthened patents from 1890-1910. For several firms, the expiration of key patents led to new R&D drives.

Markets in intellectual property that developed from 1880-1920 allowed innovators to specialize in innovation. However, the increased costs of research and the need for greater formal education, supplanted independent inventors with corporate inventors. Pharmaceitical firms in 1927-1946 located near universities and collaborated with them - suggesting good use of spillovers. Their collaboration was facilitated by the structure of US universities - the system was large, decentralized, heterogeneous, and encouraged competition. Public universities in particular had to rely on local resources. And curriculums were geared towards commercialization (more than Europe). Industry and universities were linked by training and direct interaction (especially MIT - see page 6). In 1930 federal spending accounted for 20% and industry for 65% of US R&D expenditures. State contributes exceed federal in this period.

In the post war years (1945-1980) things changed. Federal R&D, supported by defense spending in particular, accounted for a larger share. Though the NSF, established in 1950, which funds physical sciences, was dwarfed by other institutions, and remains that way. Academic research funded by industry declined from 8% in 1950 to 3% in 1967 before reviving. The US differed from other nations in at least three ways:

1. Anti-trust policy was unusually stringent
2. Small firms played an important role in new technology, especially in IT
3. Defense spending had a pervasive influence, especially in high tech.

Anti-trust policy was tough from 1930-1970. This made it more difficult for firms to acquire external R&D - leading to greater in-house development, as well as conglomeration, which weakened firms. Large basic research facilities served as incubators. Labor mobility was high.

After 1970 large corporations started eliminating their R&D facilities, increasing their reliance on outside sources. Entry by new firms was facilitated by vertical specialization in high tech, leading to a structural change in about 1985. By the 1990's firms again relied on acquisition to acquire inventions quickly, and some knowledge-intensive activities were outsourced. Generally there was a rise of smaller firms doing R&D.

Vertical Specialization

The growth of vertical specialization can be traced to the 1960's, but accelerated post 1985. In the 1960's there were the first fabless semiconductor firms, and pure-play foundries that did contract manufacturing. Hardware and software development became seperated. Anti-trust measures and defense contracts (to small firms) aided. Also relatively stable standards in interfaces emerged and there was a growth of institutions that mediated market transactions (venture capital, etc). In biotech in particular, equity financing and alliances and licensing agreements allowed entrants to specialize in innovation solutions for incumbents. A small number of new biotech firms were able to enter commerical production, but the general displacement effects were small.

Since 1980 the number of both domestic and internation alliances formed has increased dramatically (data on dissolution is not available). Stronger intellectual property rights (particularly in biotech again) may be a factor in this. Globalization also played a role. Measurements of globalization of innovation include:

• The R&D dollars spent abroad
• Patent inventor and assignee locations

Shifts in public policy post 1985

Crucial shifts include anti-trust policy and patent policy, as well as shifts in federal R&D spending. In anti-trust policy the 1984 (Reagan Era) National Cooperative Research Act was created. It was extended in 1993 to cover joint ventures. The act reduced anti-trust penalties for collaboration in precommercial research. However, the number of joint-ventures declined in the 1990s, as collaboration with non-US firms increased. The late 1908s also heralded the propatent era. Measures included:

• 1982 creation of the CAFC (Court of Appeals for the Federal Circuit) - which upheld 80% of cases argued before it (as compared with 30%)
• 1980 Diamond vs. Chakrabarty - which upheld validity of broad patenting in biotech (including life forms)
• 1986 Polaroid vs. Kodak awards billion dollar damages for patent infringement
• 1984+ Growth rate of patents exceeds 7%
• 1980 Bayh-Dole Patent and Trademark Amendments Act
• 1986 Federal Transfer Act - authorized federal labs to conduct commercial research and development agreements (CRADAs) with private firms

Bayh-Dole

Bayh-Dole simplified federal policy toward IPR resulting from federally sponsored research. Its basis was in the claim that "Too much federally funded research [was] not commercialized". It is frequently claimed as a transformative policy (and emulated to that end) that contributed to US economic innovation performance, though this claim should be 'placed in a broader context'. The Act was in response to increased licensing and patenting by universities who were relying on IPAs (Institutional Patent Agreements), and was lobbied for by universities who also gave 'amicus' briefs and other testimony to support the Acts passing. It coincided with other measures and court cases, and some breakthrough in certain fields (molecular biology). University TTOs had been growing in number and volume since the 1970s. IPAs were cumbersome, had transaction costs, and were at risk of renegotiation (or a change of terms) particularly from the NIH, which was the largest funder of research and user of IPAs.

The Act was sponsored by Birch Bayh (D-IN) and Robert Dole (R-KS), both senators, who introduced legislation in 1979. The Act provided blanket permission for performers of federally funded research to patent and license their inventions, including through exclusive licenses. It facilitating licenising by:

• Replacing the web of IPAs needed
• Allowing exclusive licenses
• Weaking the authority of funding agencies to oversee the terms of licenses.

The act granted "March-In" rights if the licensee fails (in good faith) to develop the invention, and the power to deny a license (only invoked once).

University Licensing

University licensing revenues are small as compared with their R&D expenditure. The UC system, which is a high performer in licensing revenues, averaged $16m a year to inventors (net of expenses - $76m gross) in 2001-2004, as compared with $235m in industry sponsored research and $3b in research expenditures.

Some evidence suggests that IP policies may impact research choices, but most suggests not, with the exception of MTAs (Material Transfer Agreements) which faculty claim as an obstacle.

There is also some recent evidence that industry may be collaborating with foreign universities, particularly in France, Russia and China, as a result of frictions in the US.