chapter 2 investing in knowledge

7/28/2019 Chapter 2 Investing in Knowledge

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2.Investin inknowled e2.1Publicandprivatemechanisms

Some slides adopted from Suzanne Scotchmer

Contents May Be Used Pursuant to AttributionNoncommercialNo Derivative Works 1.0

Genericttp: creat vecommons.org censes yn nc 1.0

Universityof ZurichDepartmentof BusinessAdministration

Prof.Dr.UlrichKaiser

TheEconomicsofInnovationSpringsemester2013

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Who Funds R&D? Is it the private sector that matters?

Which countries spend more on R&D?

How much money does the government give the private sector for R&D?Universities?

How much money does the private sector give to universities?

How much money goes for defenserelated R&D?

(cc)SuzanneScotchmer




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Big difference between public and private R&D:

Private R&D applied

Private R&D maximizes profits

PublicR&D maximizes welfare

(cc)UlrichKaiser




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BayhDoyle act (1980) patents are assigned to public research

institutions in the US

Europe followed suit

Technology transfer offices are all over the place (also at UZH)

Why was the act installed in the first place?

(cc)UlrichKaiser




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N o n d e f e n s e G o v e r n m e n t S e n d i n o n R & D

3

3 .5

1 .5

2

2 .5

rcentage

0 .5

1

P

Year

1981

1983

1985

1987

1989

1991

1993

1995

1997

I n d e c r e a s i n g o r d e r o f t e r m i n a l ( 1 9 9 8 ) v a l u e s : J a p a n ,


G e r m a n y , U . S . ( i n b o l d ) , F r a n c e , U . K . , C a n a d a , I t a l y




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R&D spending, Percentages of total

0.7

0.8

0.5

0.6

ntage

0.2

0.3

.

Perc

0

0.1

1953 1958 1963 1968 1973 1978 1983 1988 1993 1998

(cc)SuzanneScotchmer Darkblue=public,Lightblue=private




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0 . 5

0 . 6

.

0 . 2

0 . 3

0 . 4

0

0 . 1

Y e a r

To : US Fundin to industr . Bottom: US Fundin to universities





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2.Investin inknowled e2.1Publicandprivatemechanisms Federal Industrial Total Universities other State/Local

Total

$83,609 R&D Budget 23.67% 40.17% 8.88% 21.43% 5.01% 0.49% 0.34%

, . . . . . . .

$19,463 HHS 19.90% 5.92% 1.32% 56.47% 15.40% 0.68% 0.31%

$9,966 NASA 25.16% 48.67% 13.19% 7.90% 3.86% 0.11% 1.11%

$7,656 Energy 11.38% 15.32% 63.05% 9.43% 0.78% 0.04% 0.01%

, . . . . . . .

$1,892 Agriculture 72.09% 0.58% 0.00% 26.48% 0.48% 0.16% 0.21%$1,163 Commerce 69.82% 16.08% 0.00% 10.92% 2.06% 1.03% 0.00%

$882 Interior 88.06% 3.06% 0.00% 7.74% 0.16% 0.81% 0.32%

. . . . . . .

$620 EPA 18.60% 47.62% 0.00% 22.62% 9.38% 1.64% 0.30%

$1,401 Others 51.25% 7.07% 2.50% 14.78% 20.41% 2.50% 1.57%


ource: , c ence an ngneerng n ca ors , a e -




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Examples for public funds

Packetswitching technology of the Internet US DOD

Biotech basis UC Berkeley and San Franscico

Digital computer U Pennsylvania

Laser Columbia U

(cc)UlrichKaiser




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2.Investin inknowled e2.1PublicandprivatemechanismsResearch incentives

u c pu s n ourna s or per s ; repu a on; nowa ays a soincentives to attract funding

Private patent (or perish)

Outcome

Applies for for a patent

Universities apply for four times more patents as private industry

Pressure from university leadership to go for profits instead ofdissemination

Big bang: Harvard/Hoechst USD70 mio. deal in 1984; idea: leverage ideas

(cc)UlrichKaiser

and expertise in return for funding




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Public/private

Grantee may restrict communication between colleagues

7% of university funding is privateu c un s may su s ze pr va e un s as un ng goes o same

institution/even same lab

Example: Sandoz wanted to pay USD 300 mio. for 100% of Scrippsesearc ns u e an ego ; cr pps s an un e researc

organization; government asked to scale back (what patents will Sandozpick?)

Startup activity y universities see UZH 175 years year oo orexamples; more prominent examples are Genentech and Chiron (UC)

Licensing offices provide IPR in return for fees

(cc)UlrichKaiser




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vT+ s cost,funds,profit

v

s+m

s

v

m

v

s= overnmentalsubsid ,m=firmsmatchin re uirement invest. ,v=socialvalue,

v u


vT=profit,=firmsshareofv,T=patentlength




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Thegovernmentgrantprocess:fundingInventorsinsteadofInventions?

Whymightyouexpectitnottowork? Freeriding,etc.

Whydoesnoonecheat?

Discountedvalueoffuturegrants:)1( r t+

)(1

)()( ccct t

==

Investifthevalueofcheating,c,islessthanvalueoffuturegrants (selfselectionmechanismofthehighfertility(thebest)researchers)

11 rtt ==

c )(t

cc


=1t




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2.Investin inknowled e2.1PublicandprivatemechanismsQuestions about grants:

What if you are a highcost researcher?

What if you are a lowfertility (low)?

e governmen ave o over pay





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2.Investin inknowled e2.2HowIntellectualPropertyWorksThe (public goods) nature of knowledge & information goods

Long tu e Examp e: W at s t e esson

What do these have in common:

Knowled e that DNA is a double helix

Software

Digital music

u c oo s:

Nonrivalness: High cost to create; zero cost to distribute or use. Whatis the efficiency conclusion?

Nonexcludability: If the good is nonexcludable, IP will not work!!





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2.Investin inknowled e2.2HowIntellectualPropertyWorksThe(publicgoods)natureofknowledge&informationgoods

Pr vateGoo s:T ecompet t vemar et se c entprice=marginalcost: Whyisthatefficient?

Whatifatemplatemustbedeveloped?





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2.Investin inknowled e2.2HowIntellectualPropertyWorksWhatdoesIPdo?

IPcreates asa ega matter exc u a ty.

Doesthissolvethepublicgoodsproblem?

Whataboutnonrivalness?

IPprovidesatleastaweakefficiencytestastowhetherthevalueofinvestmentexceedscost

Itdoesnotprivilegethemoreefficientfirms Itdoesnotregulateentryandduplication

IPleadstodeadweightloss

IPconcentratescostsamongtheusers





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2.Investin inknowled e2.2HowIntellectualPropertyWorksIntellectualProperty:Comparedtowhat? PublicSponsorship?

1960 san 1970 sSuperSon cTransport

Publicsupportforprivateenterprise.

Na oleon: Food reservation

Inventionforthepublicgood

NIH,NSF: Researcherinitiatedprojects

: arge e governmen o ec ves





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2.Investin inknowled e2.2HowIntellectualPropertyWorksPrizes

Targete versus ues yresearc

Lyons(bluesky)

Na oleonsfood reservation tar eted

Simplemodel:Investinablueskyidea(v,c)?

Whynotmakethepricedependoncost?

y oesn epr zeg verge r ppe o

Needstomakethepricedependonvalue

TheroleofIPasabackgroundforprizes: Photography

Hyattandcelluoid





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2.Investin inknowled e2.2HowIntellectualPropertyWorksSimplePrizesandScarceIdeas

As ng e nventors asan ea. Hemust ec ew e t e rto nvest n t,an wewanthimtomaketherightdecision.

Anideaisapair(v,c)wherecisthecostofmakingtheideaaninnovationandvisperperiodprofit.

Investmentisefficientif (1/r)v>c.

Ifwewere oin touse rizesinstead whatvalueof rizeshouldweset?

Howdoestheoptimalprizerelatetov? toc?Howdoesthisdependonwhatisobservable?Verifiable?





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2.Investin inknowled e2.2HowIntellectualPropertyWorksPrizes:Cantheprizebelinkedtovalue?

Hows ou t eva ueo t epr ze ec osen

Howwastheprizechoseninthecaseoflongitude?

Cannin ? TheL onnaise silkweavers?

Woulditbebettertolinktheprizetocost?

Whatproblemsdopatentsandprizehaveincommon?





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chapter 2 investing in knowledge

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