Bob Ackerman: It’s Time for Government Investing in Research Again

The American economy is a mess. Growth has been stuck at a tortoise-like pace for years. The unemployment rate continues to hover at nine percent or higher. And faltering research and development threatens not only innovation, but our future.

The good news is there’s a fix for this: The U.S. government simply needs to invest more in research and development, with a particular emphasis on fundamental scientific research. This specialty field is both the seed for innovation and the key to healthy, long-term economic growth.

Why the government and not the private sector? Attractive startups need the opportunity to build advancements in areas like energy, next-generation Internet, secure communications and nanotechnology. This requires patient capital, something the government has and the private for-profit sector doesn’t. While venture capitalists are capable of allocating investment capital when the risk/reward ratio is appropriate, only the government has the resources to support a multi-year, multi-decade commitment in scientific research.

The need for this sort of investment is compelling. The Information Technology and Innovation Foundation, a Washington-based policy think tank, recently measured “the rate of change in innovative capacity” over the past decade among the top 40 industrialized nations. Essentially, that’s a look at how countries were preparing themselves to be more innovative in the future – and the U.S. ranked dead last.

The trends back up this disheartening ranking. Between 1981 and 2005, the share of industrial R&D in the U.S. done by companies with more than 25,000 employees dropped from 70.7% percent to 37.6% percent, according to the National Science Foundation, and it continues to fall. Smaller companies with fewer than 1,000 employees have picked up some of the slack growing from 4.4% to 24.1%), but hardly all of it – and they don’t have the resources to do long-term R&D.

Meanwhile, once-vaunted research laboratories such as Bell Labs and Xerox PARC have disappeared or downscaled, and universities increasingly are favoring sponsored R&D (in many cases with a short-term focus) as opposed to fundamental research.

The U.S. government still does some basic research. Lawrence Berkeley National Laboratory and the 16 other national laboratories regularly do very good and important work. The same is true of The National Science Foundation and the Defense Advanced Research Projects Agency, which developed the ARPAnet, the forerunner to the Internet.

Overall, though, U.S. government support for R&D — much of it fundamental scientific research — has declined by nearly two-thirds since the 1960s. The world, meanwhile, has become much more competitive and other countries have begun to take the lead in scientific research.

Consider the Russian Corporation of Nanotechnologies, which has a $5 billion budget. It develops and co-invests in nanotechnology industry projects with high commercial potential. It also helps build nanotechnology infrastructure, which includes centers of excellence, business incubators and early-stage investment funds. The Singapore government, meanwhile, has significantly increased its expenditures on R&D to three percent of the country’s GDP. This has included the building of the $360 million Campus for Research Excellence and Technological Enterprise (CREATE), whose first tenant was the Singapore-MIT Alliance for Research and Technology, MIT’s first overseas research institute.

The creation of The Large Hadron Collider near Geneva, Switzerland was an especially big blow to America’s lead in high-energy physics research. Today, that device (which is backed by the European Organization for Nuclear Research) is the world’s largest and highest-energy particle accelerator addressing some of the most fundamental questions of physics. What’s maddening is those advances could have – and should have – been happening in the U.S.

In the early ‘90s, construction was underway on a U.S. government-backed Superconducting Super Collider in Texas, which would have been bigger than the Hardron Collider. After an outlay of nearly $2 billion, however, Congress canceled the project in late 1993, due, in part, to cost overruns and the perception that the collapse of the Soviet Union negated the need to prove the supremacy of American science.

Beyond R&D spending, an effective innovation policy also needs to include the support of key foundational technologies, which can be transferred to the private sector for commercialization and applied innovation.

The U.S. government, however, should not make bets on individual companies. In other words, just as it should not create the Nanotechnology Corporation of America, it also should not invest billions to make GM, Ford or Chrysler America’s alternative fuel vehicles champion. Instead, the government needs to invest in key broad technologies, which is an area where creative approaches can work.

In-Q-Tel, for example, is a not-for-profit venture capital firm chartered at the request of the Central Intelligence Agency to build a bridge between the CIA and a new set of technology innovators. Instead of being a gravy train, it’s an organization that requires funded startups to produce.

Portfolio companies have a deadline of 36 months to provide strong, near-term advantages to the intelligence community. So far, more than 165 companies have managed to deliver more than 350 technology solutions. In-Q-Tel also effectively leverages its direct investments by attracting a significant amount of private sector funds – often from traditional top-tier venture capital firms – to co-invest in its portfolio companies. For every $1 In-Q-Tel has invested in a company, the venture capital community has invested more than $9, helping to deliver crucial new capabilities at a lower cost to the government.

In-Q-Tel is clearly a winner – and long-term scientific research investments by the federal government in more diversified non-intelligence arenas would be an excellent complement.
The benefits of this sort of enhanced long-term commitment to the fundamental science field are multifold. It will lead to life-changing breakthroughs. It will restore America’s innovative nature, making it a more imposing competitor on the global stage. And, as these technologies begin to bloom, it will also provide a nice ROI on taxpayer’s dollars.

Robert R. Ackerman, Jr. (Bob) is the Founder and Managing Director of Allegis Capital. All opinions expressed here are his own. He tweets here and blogs here.