Soundings

Carl J. Schramm
Brain Funding Drain
American universities are losing research money to overseas competitors.
Autumn 2007

Selected Responses:

Sent by Gregory P. Sullivan on 04-24-2008:

Carl Schramm of the Ewing Marion Kauffman Foundation writes that American universities are losing research money to overseas competitors because university technology transfer offices have become “ponderous bureaucracies” that “have frequently contravened contractual agreements to assert ownership over research that a company has sponsored and expects to profit from.”

We, the partners at TreMonti Consulting, LLC, an independent consulting firm specializing in intellectual property management, represent both U.S.-based research institutions and private industry in their technology commercialization efforts. Our university technology transfer colleagues are as professional, competent, and efficient as their counterparts in the private sector. Both have to answer for the deals they make, and with whom they make them.

It is essential to recognize that the work of a technology transfer office takes place in a complex matrix of university business procedures, institutional priorities, and regulatory concerns. Sponsorship agreements are typically managed by a university's sponsored research office, and the terms a university is able to offer corporate sponsors are constrained by the same factors that make universities such an appealing R & D partner in the first place. Typically, corporate sponsorship agreements cannot make an outright assignment of research deliverables to a sponsor. To preserve their eligibility for tax-exempt bonds, for example, universities must comply with IRS revenue procedure 2007-47, which stipulates that industry sponsors must pay a competitive price for the license or use of technology resulting from the project, and the price paid for that use must be determined at the time the license or other resulting technology is available for use (and not at the commencement of the work). Sponsored research agreements routinely grant industry sponsors a first option to negotiate for an exclusive license, and it is at this juncture that the technology transfer office comes into play.

True, companies would prefer not to have to negotiate licensing terms for research they sponsored. Entering into R & D arrangements with universities overseas may be a way to avoid those issues, except that the company is trusting that the host government will continue to lavish attention on the research infrastructure and will honor and enforce the licenses in the long term.

University-generated technology transfer in the U.S. remains the world’s gold standard. For example, according to a 2006 study by the Milken Institute, U.S. campuses have enjoyed great success as fountains of intellectual capital, innovation and advancement. Also, the Milken study found that, with respect to biotechnology, U.S. universities hold eight of the top 10 ranking slots worldwide for production of intellectual property. The key to continuing to unlock this potential is the patient work of professionals who understand both industry and academic concerns and are able to bridge those concerns in fair negotiation. We call on those who offer conjecture on if and why corporate sponsorship of intellectual-property development is going overseas to conduct a study of their own to establish a universal baseline of proof—and not offer simply guesswork or hearsay.

In 1980, Congress passed the Bayh-Dole Act, which allowed universities to own intellectual property arising from federally financed research. The result was an explosion of innovation. The number of universities and colleges receiving patents more than doubled from 1983 to 2003; the number of patents awarded to schools grew by over 600 percent. Today, royalties from patents and licenses bring in millions of dollars for many academic institutions. And the universities’ gains have redounded to the advantage of many regional economies, in the form of spin-off companies, jobs, and income growth.

To help move research discoveries into the marketplace, more than 200 universities have created offices of “technology transfer.” Unfortunately, many of the offices have become ponderous bureaucracies. Worse still, seeking to maximize profits for the schools, they have frequently contravened contractual agreements to assert ownership over research that a company has sponsored and expects to profit from.

Businesses seem to be taking notice. Over the last 50 years, industry-funded basic research in universities generally had kept pace with all categories of R&D, even outstripping basic research performed in companies’ own labs. And in the mid-1990s, with the explosion of transdisciplinary fields such as biotechnology, corporations began funding basic research at universities at a blistering pace: such investment grew 45 percent from 1995 to 2000, much faster than the growth of total R&D funding. But in 2000, industry abruptly reversed course. From 2001 to 2004, the most recent year for which data are available, corporate funding of basic research in American universities declined in each consecutive year—the longest period of contraction since data collection began. The contraction can’t be explained by the economic slowdown of 2001–02; harsher periods of slow growth have seen industry-funded research at universities keep expanding.

The likeliest reason for this worrisome trend is that many companies are tired of haggling over intellectual property rights—and in a world of globalized R&D, they no longer have to. IBM, Hewlett-Packard, Baker Hughes, Intel, Texas Instruments, and Microsoft, to name just a few major firms on a growing list, are now shifting research funding to universities in England, India, Russia, and China, where they have access to top scientists and often face fewer intellectual property hurdles. A 2006 survey found that most global firms anticipated their R&D expansion to take place in China and India; by the end of this year, 31 percent of R&D employees worldwide will work in one of those two countries, up from 19 percent in 2004. As one corporate official observes: “Not only is the cost significantly less, there is no doubt that at the end of the day we own the intellectual product.” A study published last year in Science found that the location of multinational R&D turns more heavily on the ease of collaboration with university faculty than on cost.

And make no mistake: universities abroad are eager for partnerships with American firms. In many fields, the technological edge appears to be shifting along with industry-supported research to foreign institutions such as the University of Beijing. “We went there for the cost, but we stay for the quality,” says one American executive. One striking example is the rise of Siberia’s “Silicon Forest,” centered in Novosibirsk State University, where such firms as Intel, IBM, and Schlumberger have growing R&D investments.

While the U.S. remains the leader in R&D and university science, its position may be slowly eroding. Universities don’t bear full responsibility for this decline—other factors, such as restrictive immigration laws, have helped push research overseas—but their part in it is undeniable. And as the quality of universities in emerging economies increases, they may encourage an even greater migration away from American campuses.

It may be unwise, therefore, for regions to rely on universities as primary engines of growth and innovation. But local governments might pursue a strategy of urging universities to pool their commercialization efforts. As Bob Litan, William Baumol, and I have suggested in our recent book Good Capitalism, Bad Capitalism, “One of the reasons technology transfer offices fail to generate a profit for their universities . . . is that they can neither reach a size sufficient to realize economies of scale nor attract licensing and other personnel with expertise comparable to that available in the private sector.” If a region’s universities—at the very least, its public universities—were to combine their resources into a single technology transfer office, they might solve both problems.

Carl Schramm, president and CEO of the Ewing Marion Kauffman Foundation, is author of The Entrepreneurial Imperative and coauthor, with William Baumol and Robert Litan, of Good Capitalism, Bad Capitalism.

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