Andrew P. Morriss* & Roger E. Meiners**
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In The Nature of the Firm, Ronald Coase explains how firms represent a suspension of the market mechanism. The allocation of activities depends on the relative costs of organizing activities within the firm versus direct reliance on the market. Despite Coase’s insight, economists often treat firms as black boxes with respect to innovation. Firms take in resources and produce innovations but why firms are successful at innovation is unspecified. As a result, the factors that enable wealth creation within the black boxes of firms, a key factor in economic progress, are little understood. Firms are not the only source of innovation, however. Economically valuable research also emerges from non-profit universities. They represent an alternative (which we term the “red box”) to research that occurs within firms’ black boxes, an alternative with specific advantages and disadvantages in producing innovations. Using a comprehensive set of patent data, we show that university patenting is largely the result of activity by a tiny subset of U.S. universities, contrary to the Bayh-Dole Act’s promise that it would produce a massive technology transfer from universities to the marketplace.
In this Article, we argue that research in non-profit universities is distinct from research in a for-profit firm. As a result, the process of moving inventions from the university to the market usually occurs through licensing innovations to firms that have a comparative advantage in assessing possible market value of inventions and can risk capital to exploit innovations. Because successful commercialization of the product of research requires entrepreneurship, we use the insights into entrepreneurship of economists Joseph Schumpeter and Israel Kirzner to begin to unpack the red box of university commercialization efforts. This Article examines the practices that have emerged after the Bayh-Dole Act’s grant of intellectual property rights to universities for the results of federally funded research and the many constraints imposed by university structure. It also considers how the differences in the incentive structure with black and red boxes create a role of university research.
Research universities funded by governments, non-profits, for-profits, and internal resources generate ideas.1 Some ideas are purely intellectual exercises: interpretations of Shakespeare, understandings of archeological findings, explanations of data on distant stars, or analyses of long-dead philosophers. But considerable resources go to research that has the potential for commercial payoffs: new drugs and medical devices, new seed varieties, improved industrial processes, and new materials. At one time, successful products were largely serendipitous. But since the Bayh-Dole Act gave universities the intellectual property rights to the fruits of federally funded research in 1980, the effort to commercialize research has become both more formalized and more important. Sponsors often want research with potential for commercialization through license agreements or start-ups: “Technology that remains in the lab provides almost no economic benefits.”2 Broader goals include revenue for universities, economic impact for states and communities, and prestige.3 To get technology out of labs and into the economy, the federal government granted universities intellectual property rights to the federally-funded research conducted by researchers via the Bayh-Dole Act of 1980.4 This model is spreading internationally as well.5
Federal research money has poured into universities since 1980. At the time Bayh-Dole was enacted, the funds up for competition via the National Science Foundation (NSF) and the National Institutes for Health (NIH) were paltry compared to what is at stake now. In fiscal 1980, the NSF was allocated $904 million. In 2021, the allocation was $6,910 billion.6 Nine schools received more than $100 million in grant money.7 Adjusting for inflation, this is more than a doubling in real terms of the funds available. The total NIH budget in 1980 was only $3.4 billion.8 In 2021, its budget was $42.7 billion, more than a fourfold increase in real terms.10 Researchers and administrators in non-profit universities aggressively seek more research funding.11
Unfortunately, Bayh-Dole was based on an overly simplistic linear model of innovation in which money poured in at the start of an invention pipeline in funding to produce useful commercial innovations at the other end. In some respects, the statute’s reliance on a simplistic model is unsurprising – the notion is old.12 Turning research results into products is not as simple as the linear model makes it out to be; Bayh-Dole took little notice of universities’ capabilities. As a result, despite pouring enormous amounts of funding into the innovation pipeline, we still struggle to get relevant research out of the laboratory and into the economy.13
Bayh-Dole’s results have been mixed. In 1980, at the end of the era when patents based on federally funded research were the property of the agency funding the research, universities were awarded 390 patents. Thirty years after universities acquired the patent rights to the results of federally-funded research, they were awarded more than 3,000 patents.14 By 2018, a survey found that universities had filed over 17,000 patent applications and received over 7,000 patents in that year alone and held a total of 77,880 patents.15 But patents have often translated into products. A 2010 study by the Association of University Technology Managers (AUTM) identified 657 products that resulted from university research and development, over 5,000 licenses for technologies, and 650 new companies.16 Even if it did not produce a flood of products, Bayh-Dole led to more research about commercialization: a survey found 173 articles published on the topic of commercializing university-based research between 1981 and 2005, three-quarters of them appearing between 2000 and 2005.17 This growth is the source of many of the claims that universities serve as engines of economic development. Unfortunately, only a handful of universities excel at commercialization, including Columbia, Stanford, and the Massachusetts Institute of Technology.18 “Many universities (in fact, most) do not have the economic capability, manpower, access to venture capital, nor desire to tend to an invention all the way from discovery to commercialization.”19 We argue that the neglect of entrepreneurship by universities is one reason for this lack of success. Despite frequent claims to be entrepreneurial in exploiting research, the survey of 173 articles noted above found few references to actual entrepreneurship among universities.20
Success in patenting (a commonly used measure of university research success) varies considerably and just a small number of universities do the vast majority of it. To measure universities’ patent performance, we used the PatentVector™ database. PatentVector™ contains the universe of digitized patent documents (both patents and patent applications) for the entire world.21 An eigenvector centrality algorithm (the same family as Google’s PageRank™ algorithm) provides a score for each patent.22 The score correlates well with extrinsic measures of value and is scaled to make the average patent have a score of 1.0. That is, a patent with a score of 2.0 is twice as central as a patent with a score of 1.0. We included both current and expired patents as we were interested in universities’ total performance across time, not just their current portfolios.
There are roughly 4,000 U.S. colleges and universities. Patenting and research activities are far from equally distributed among them. In our calculations, we include only members of the American Association of Universities (AAU), an organization of research universities with relatively stringent membership criteria, and land grant universities, which have a mission to develop and transfer technology to the public, in our data, to avoid having large numbers of observations with zero patents.23 (There is overlap among the two categories: fourteen AAU members are also land-grant universities, while forty-one are not). We dropped ten universities on the initial list that had zero patents24 as well as ten that had ten or fewer patents.25 This left us with ninety-six universities, less than two percent of all four-year U.S. higher education establishments. We searched a comprehensive database, PatentVector™, for each university’s patent documents.26 Table 1 provides summary statistics for our three measures; Table 2 shows the distribution of schools among the AAU and land grant categories. We also considered the public/private status of the universities (32\% are private).
Universities perform differently by all three of these measures in Figure 1, which provides histograms for the complete set.
We see this pattern in Figures 2, 3, and 4 as well, which provide “violin” plots of the data, disaggregated by public, AAU, and land grant statuses. Two conclusions can be drawn from these diagrams and statistics. First, there are substantial differences in the amount of patenting and, more importantly, the amount of patenting of valuable ideas, among universities. Indeed, for measuring the importance of ideas, PatentVector™’s eigenvector-based score is an excellent measure, even better than dollar values, since it represents the centrality of a patent within the network of patented ideas.27 Just a few universities produce the vast majority of patent documents in our sample: eleven produce half, and twenty-two produce two-thirds.28 The bottom fifty produce just ten percent of the patent documents.
Examining the patent documents by mean PVScore™ shows that even some small players are successful. Princeton, which is only 35th in total patent documents, tops the list for mean scores at 4.75, followed closely by New Mexico State University, which has only 101 patent documents but an impressive mean of 4.65. Indeed, just MIT and Stanford are in both the top 11 by mean PVScore™ and by number of patent documents. These differences are unsurprising. Even if the University of California System has more high value patents in absolute terms in its more than 73,000 patent documents, it will also have many average or low value ones as well than there will be among Princeton’s just over 5,000 or New Mexico State’s 101. In calculating the average PVScore™, the thousands of average value ones will dominate the average. In general, the larger bulge higher up for AAU members suggests that those universities are more successful at generating valuable patents. (In future work, we plan to delve more deeply into these statistics and generate additional measures of success.)
Why haven’t the billions of dollars in federal research money led to a broad-based, technology-driven economic boom based on university research? Our argument is that an important reason is that Bayh-Dole, federal policy on innovation, generally, and many university efforts are not built around a realistic model of how innovations become commercial products. In particular, the role of entrepreneurship is neglected by both policymakers and universities. This is unsurprising as, even in the private sector, how firms successfully stimulate innovation is unclear. For the most part, firms are treated in this regard as black boxes, the mechanics of which are skipped over in economic analysis.29 Even less understood than the private sector is how university research can evolve into market-valued products.
To fill this gap, we turn to the ideas of the economists who studied entrepreneurship, most notably Joseph Schumpeter and Israel Kirzner. Oddly, they are generally ignored in the literature on commercialization of innovations.30 This Article is a step to bring their ideas more fully into the discussion of the conditions relevant to greater levels of valuable innovations that help spur economic progress. We focus on Schumpeter and Kirzner as applied to inventions that occur in what we term the “red box” of universities, which, because they are non-profit institutions, differ significantly from the “black boxes” of for-profit firms.31 In both instances, the institutional incentive structures are absent from the discussion of the generation of valuable innovations and their evolution into products that succeed in the market.
Developing new ideas and turning them into products and services is the core of the entrepreneurial function: Schumpeter identified the essential function of the entrepreneur as the “doing of new things or the doing of things that are already being done in a new way (innovation).”32 Finding ways to accomplish this in the context of the university environment requires considering issues raised by the economic theory of entrepreneurship.
Part I of this Article examines how the red box context affects invention. There we develop the analogy to the black box of for-profit firms and explore the differences in incentive structures. Part II describes how U.S. universities approach commercialization. Part III applies an economic perspective to the commercialization process from the perspective of non-profit universities, looking to Schumpeter’s and Kirzner’s work for guidance on how to understand the process. Part IV concludes with suggestions on how the process might be improved.
I. Invention & Universities
To understand how universities might do a better job at commercializing emerging ideas, we need to be clear about the distinctive features of the red box of the university research environment compared to the black box of the commercial research environment. Hence, we summarize the general state of economic knowledge about working inside firms. This is contrasted to constraints generally faced inside universities. Then we consider how universities treat inventions.
A. Black & Red Boxes
The internal workings of for-profit firms, key actors in market economies and economic progress, were not traditionally well understood by economists. Nobel laureate Oliver Williamson, who works on the issue, notes that economics should “move beyond the older view of the firm as a production function or black box. We need to open the box and examine the mechanisms inside to get a better understanding of what is going on and why.”33 He notes further that “Innovation poses special challenges,” some of which are addressed by focusing on transaction costs, but there is no “well-rounded explanation.”34 Williamson’s work is complemented by that of Oliver Hart, also a Nobel Prize recipient (with Bengt Holmstrom) for “contributions to contract theory.”35 Hart notes that “In modern microeconomics textbooks, the firm is still represented in purely technological terms as a production function or production set.”36 In short, in standard economic theory it is presumed that diligent managers run organizations on behalf of the owners who wish to maximize profits. These managers face perfect competition in completely developed markets.37 Such assumptions allow effective modeling of activity outside the firm, but do not help understand what goes on inside the not-well-understood black box. Williamson, Hart, and others have advanced our understanding of how firms solve incentive problems (winning two Nobel Prizes while doing so), but how firms innovate remains relatively under-theorized.
The economics of the firm begin with the recognition that because organizing and operating firms is costly, there needs to be an economic rationale for their existence.38 Nobel Laureate Ronald Coase explained in his 1937 article, The Nature of the Firm, that firms exist where the transaction costs of organizing and operating a firm are less than the transaction costs of operating in the market.39 While Coase’s observation was eventually recognized as brilliant, it failed to spur further development by economists about the internal workings of firms for several decades.40 As that work developed, it yielded some insights. For example, while firms exist to reduce transaction costs, the savings from their creation can be transitory as “bureaucratic costs build up.”41 In more recent years, a rich literature has arisen on the role of contracts as firms deal with each other.42
As a result of this work, we know that firms engage in complex processes that no one person can grasp. Parties are brought to work together to further the objectives of the firm. But why firms are designed internally the way they are, where great variation is observed, is not as well understood.43 With respect to research and innovation within a firm, managers must grant authority to those with superior technical knowledge.44 This poses challenges to the firm in constraining resources to focus on areas of greater profit potential, because managers rarely have the same grasp of the scientific issues as the researchers they employ. In the context of non-profits like universities, there are even greater challenges to understanding the impact of their organization on the incentives facing researchers and others.45
The puzzle we need to address is thus why universities play such a large role (at least in dollar terms) in research. In other words, does funding research in universities serve an important function, distinct from that of for-profit firms, in developing research that leads to commercial products. Significant public and private money are invested in research at universities; why? Are there reasons to believe red boxes have advantages under certain conditions over black boxes?
Table 3 summarizes some key differences in the internal incentive structures within black and red boxes. First, the two organizations have different objective functions. Firms focus on profit maximization and universities on maximizing revenue and prestige (recognized by things such as quality publications, prizes, and student placements). We should thus expect different behaviors from identical researchers depending on which environment the researcher works. We should also expect sorting between black and red box organizations in the characteristics of researchers who seek employment in each.
Second, the constraints in red and black boxes differ. While both face budget constraints, the constraints are quite different. Firms must attract investors (different kinds at different stages of development, but all motivated by the desire to profit); investors are interested in firms’ potential to grow net revenue. Investors often want to see results within a specific time frame.46 Universities must attract investments from donors and funding agencies, whose motives are not the same as for-profit investors. Universities generally do poorly at attracting investment in university-developed technologies because they do not operate on the same time scale as venture capitalists or other potential profit-minded investors.47 Firms also are subject to market constraints: they must produce goods people will buy. Universities, on the other hand, seek rewards from scientific (disciplinary) bodies that award prizes and grants, offers of lectureships and publication, etc. for successful faculty.
Third, the decision makers who determine research direction are different. In firms, the primary decision makers are the firm’s directors, who decide the overall direction. Secondary (day-to-day) decision makers are executives who allocate resources and approve research projects. In universities, the primary decision-makers are the researchers themselves, who are not assigned to projects but generate their own research agendas and funding. Hence, the research funders play a major role. Few major scientific research endeavors will proceed beyond the pilot stage in a university if they do not receive external funding. (The median NSF grant in FY 2021 to an engineering department was about $127,000).48 The researcher is the primary decision-maker because the researcher determines whether or not to initiate a project, even if its funding depends on outside sources. The NSF reports that principal investigators submit “about 2.3 proposals for every award they receive.”49
Fourth, researchers in firms produce ideas that may be patented as part of products offered in the market (possibly yielding revenue streams even if the firm where they are developed does not exploit them). University researchers may also produce research that yields patents, but this is generally less important than the production of scholarly papers. (Some critics of commercialization in universities allege that producing papers and patents are in conflict, although evidence suggests this is false.50)
Fifth, when a researcher is unproductive or does not follow guidance, a firm can fire them. Universities, on the other hand, have more trouble getting rid of unproductive researchers, particularly once they are tenured.
Lastly, firms and universities differ in ownership of research results. Firms generally own internal or contracted research results; researchers (especially productive ones) may receive a share of the rewards, but this is a matter for individual negotiations. Since Bayh-Dole, universities generally own the intellectual property rights (or have a right of first refusal to it) for research done on campus, but they usually share net profits with the researchers when results are commercially exploited.
The differences between university and corporate approaches are also illuminated by considering the small number of corporate laboratories widely recognized as successful at producing innovation: Bell Labs, IBM Research, and Xerox’s Palo Alto Research Center (PARC)51. All three bear a striking resemblance to universities in many of the dimensions described above.
These labs focused on getting smart researchers together and then letting them pursue their own agendas. AT&T created Bell Labs to access what its president termed in a 1958 speech a “special brand of brains.”52 Bell Labs freed them from worrying about AT&T’s actual businesses: “Researchers were thus free to select their own research topics without worrying about business relevance or management approval. They could even ignore management suggestions or stop working on a topic without the fear of serious negative repercussions, provided the research led to good results.”53 As one Bell Labs researcher put it, AT&T had determined that “freedom to pursue one’s own ideas and stable, long-term funding were the best well-springs of innovation.”54 Likewise, PARC’s managers believed “that the only way to get the best research was to hire the best researchers they could find and leave them unburdened by directives, instructions, or deadlines. For the most part, the computer engineers at PARC were exempt from corporate imperatives to improve Xerox’s existing products. They had a different charge: to lead the company into new and uncharted territory.”55 Similarly, “[f]rom 1945 up until the 1990s IBM Research was funded primarily by headquarters and by the hardware and software divisions. The scientists had their own research agenda with some occasional technology transfer, but this was not the norm.”56 Looking back on over a decade of work there in 1966, IBM’s European research director reflected that the company’s Swiss facility had proven to be “a breeding ground for ideas that lie outside the mainstream and that, accordingly, would find it difficult to be accepted in the large central organization,”57 hardly a description of an organization focused on developing commercial products!
Funding in these labs was unrelated to business purposes. While it was an effective monopoly (before the antitrust suit led to the company’s breakup),58 “AT&T was generous in funding Bell Labs [as were IBM and Xerox in funding their laboratories], but until the late 1980s, they did not seem to care what Bell Labs did or did not do as long as they excelled at science.”59 A similar change happened around the same time at IBM60 and at PARC, as Xerox’s financial position deteriorated.61
Many descriptions of these labs explicitly analogize to university environments. For example, Bell Labs is described as being “like a university that had no students, a zero teaching load, no tenure problems, no running around for grants, and plenty of money for equipment and travel. A researcher could focus on building his or her professional credentials and reputation. Within a few years, with Bell Labs on his or her resume, the researcher would have a passport to a tenured position at one of the top universities or would be able to walk into a senior research position at one of the industrial research labs.”62 One Bell researcher recalled that “we had all the benefits of academic freedom, along with good resources, and none of the teaching or administration loads that our counterparts in academia usually faced. Furthermore, compared to academia at that time, the pay was relatively good.”63 PARC’s university-like atmosphere was partly the result of most of its staff being recruited from universities.64 One of its researchers recalled, “A lot of us even came to feel we were sort of like university instructors who got to spend all our time doing research without having to teach classes.”65
Financial constraints were loose at these labs. A Bell researcher nostalgically recalled how he would let a computer run for entire weekends at a cost of $600 per hour, with the only consequence being that his budget was increased.66 Similarly, Hiltzik concludes in his history of PARC that a key factor in its success was “Xerox’s money, a seemingly limitless cascade of cash flowing from its near-monopoly on the office copier.”67
Once AT&T’s breakup forced the company to behave more competitively, it began to expect “Bell Labs to help it compete by developing technologies that would lead to new products and services.”68 When much of Bell Labs was spun off to Lucent, one of the successor businesses, a Lucent executive asked a researcher what he did that was of value to Lucent. The researcher could not answer, finally saying, “This is a new way of looking at long-term research for me.”69 Similarly, when IBM Research changed its motto from “famous for its science and technology and vital to IBM” to “vital to IBM’s future success,” half the physics research team left in response.70 Even internal IBM researchers note that the shift to focus on “actual customer problems” was “a completely unheard-of concept at the time.”71 Corporate demands for focus were not the only consequence of the breakup; fear of violating antitrust laws made researchers reluctant to collaborate.72 And when Xerox imposed a more corporate-minded manager on PARC, one of the changes he made was that 50\% of researchers’ evaluations would be based on how well they worked with the developing and manufacturing units of the company.73
The result of this freedom was considerable innovation.74 Bell Labs produced key breakthroughs in multiple areas, from lasers to semiconductors. PARC invented technologies still at the core of modern computer interfaces, from computer mice to graphical interfaces. IBM Research developed leading edge technologies in hardware and software, but also including the “Deep Blue” system that eventually bested Gary Kasparov at chess and the scanning tunneling microscope.75 While their corporate parents sometimes benefited from these innovations, the dominant strain in researchers’ recollections of their time at these institutions is that the company sponsors cared little about practical uses of what the researchers did.
It is striking that when companies could afford it and sought to “lead the company into new and uncharted territory”76 as Hiltzik described PARC’s mission or Bell Labs’ mission “to advance the nation’s telecommunications network,”77 they sought to replicate conditions much like those in universities. This suggests that there is something about the conditions within the red box that produce innovation which is unavailable in the black box.
The different incentive structures we find when we open the black and red boxes thus points to the importance of the different internal incentive structures and decision processes to at least some types of innovation. We should therefore expect that researchers will behave differently in different boxes and that the boxes should attract different types of researchers.78 The combination of the differences in behavior and the differences in structure likely make the research output of a red box different from the output of a black box. Buying research from a red box supplier rather than from a black box supplier may thus be an appropriate choice under some circumstances but not under others.
B. What Makes University Research Different?
University research differs from research at for-profit firms in important ways. First, academic and research faculty, staff, and students, who have significantly more discretion in their research programs than do most black-box researchers, produce most university-based research.79 Their discretion may include what they research and whether or not they seek intellectual property protection for the fruits of their research.80
Unlike employees in a corporate research laboratory, to gain a commercially viable invention, academic researchers must be persuaded to focus attention on problems of interest to the outside world and to conduct research to make it possible to commercialize or otherwise move it into the marketplace.81 Many rewards in universities are correlated with dissemination of ideas that are potentially inconsistent with commercialization. A common story among TTOs is one of getting phone calls from a researcher about to board a plane for a conference to give a presentation, the contents of which could disclose a potentially patentable idea. The researcher wants to know: “Can we get a patent before my talk tomorrow?”82 As publications and presentations are primary coins of the realm in academia, that this is a frequent enough experience to enter the broader lore is unsurprising. This also illustrates the difficulty TTOs face in balancing their need to seek intellectual property protections for ideas and faculty members’ needs to publish the results of work in a timely way.
Second, researchers in universities are sequestered, at least in part, from market pressures.83 University administrators worry about budgets, but most research faculty enjoy the freedom to not worry about those pressures84 and many likely sought positions in the academic world to avoid research dictated by market-driven employers. Indeed, significant freedom from market pressures is an important attribute of faculty culture.85 They may be able to choose whether to pursue commercialization of a particular research result or to release it into the public domain. A fundamental justification for university-based research is that it provides a public good (basic research) that firms under provide.86 To demonstrate their economic impact, both methods can provide universities with concrete examples of benefits to persuade federal and state legislatures to provide financial support.
Third, university hierarchies are structured differently from firms’.87 Coase described firms as alternatives to the market organization of transactions;88 universities are another form of such an organization. Coase quoted economist D. H. Robertson’s image of firms as “islands of conscious power in this ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk” to illustrate the differences between firms and the market.89 In Coase’s formulation, firms offer a command-and-control structure in place of a market. Transactions occur within firms when the net advantages of command-and-control are greater than those of the decentralized marketplace and the unconscious coordination of the price mechanism.90 We posit that universities fall between the solidity of the firms-as-lumps-of-butter and the fluidity of the marketplace-as-buttermilk. Universities’ collective governance means that they have ‘less conscious power’ than most firms but they are nonetheless more ‘solid’ than the marketplace and they lack the coordinating mechanism of an internal price mechanism.91 Organizing research within a university in pursuit of some goal is likely less clear than in a ‘more solid’ for-profit company. The looser constraints universities provide is a significant part of the reason why organization is more difficult but, as noted above, may also be a key to enabling a different type of research.
Moving a university toward commercialization is not an easy task. For example, Siegel, et al. found disagreements over whether start-ups should be encouraged at a particular university, where the vice president for research favored them, but a faculty member commented that “we need to stop pretending that academics can be entrepreneurs, or at least good ones.” This signaled a need for university officials “to devote more time and effort to ensuring such goals permeate their institutions.”92 115, 130 (2004).[/efn_note] Getting those goals to “permeate” university culture is not simply a matter of adopting them – faculty skeptical of the role of commercialization need to be persuaded to participate and/or to not oppose participation by other faculty. The great variety in university research enabled by decentralized research interests can be an organizational strength, as it allows relatively unconstrained pursuit of creative ideas, but it also can make universities less easily focused than firms in pursuit of specific research goals.93 The highly concentrated nature of university patenting described above suggests that relatively few universities or faculty see pursuit of commercializable intellectual property as particularly important.
Fourth, research within a university is done in pursuit of tenure and prestige (awards, job offers, publications, etc.) rather than in (or perhaps in addition to) pursuit of financial rewards.94 Like everyone else, university-based researchers generally prefer greater to lesser financial rewards, but they know most university-awarded financial rewards likely pale compared to those of their counterparts who pursue research in private industry. They thus clearly value the other attributes of universities over those of for-profit firms sufficiently enough to give up some financial rewards.95
Finally, universities can be difficult for outsiders to navigate because they operate so differently from firms.96 Companies often complain about the problems of negotiating with universities.97 (Academics also complain about companies’ cultures.)98 To bridge the gap, commentators have identified a “strong need for individuals who can act as intermediaries or boundary spanners” between universities and businesses.99 As the president of the Maryland Technology Development Corporation testified, in support of the role of intermediary organizations like his, “the university culture is one of fairly complex and byzantine rules and regulations. Intermediaries help the entrepreneurs who have never even known the existence of tech transfer offices to understand what is going on, to help them understand what an express license is versus trying to negotiate on their own.”100 Universities’ organizational complexity and differences from the private sector increases the cost of commercialization efforts, making outsiders less willing to work with universities. Mitigating these transaction costs is important to try to expand commercialization efforts. However, such costs are desirable features, not bugs, for some in the university community. One example is the slower pace of decision making in universities due to shared governance; others include seemingly ever-expanding university bureaucracies that slow decision making. The slower pace or larger bureaucracies play important roles in securing support from constituencies within or important to universities.
In economic terms, we can think of the distinctive environment of universities as a series of constraints imposed on inventors’ plans to connect their research outputs to the economy. These constraints are not present (although different ones are) in private firms. These constraints raise the transaction costs of doing business with a university.101 But the constraints of university environments are not simply increased costs imposed by starry-eyed academics who fail to grasp the needs of the marketplace: The environment created in part by these constraints contains conditions for creativity that may enhance innovation. Firms – despite the many obstacles – contract with universities for research. This suggests the university environment offers something firms cannot buy elsewhere for a similar (or lower) price without incurring those transactions costs. In short, if universities were simply inefficient versions of the research environment that firms could create on their own, firms would have no need to contract with them. That firms contract with universities, faculty, and university-affiliated start-ups suggests that there is something valuable about the university environment and the researchers it attracts. This indicates that some research activities are best done through universities. One reason may be that universities are not just research laboratories: “[t]he differentiator for major research universities is the complementarity between teaching and research.”102 As we discuss below, there are reasons to think at least some universities may have a comparative advantage at some types of research.
C. Bayh-Dole & Incentives to Stimulate Research
Measuring research success is difficult. When a new idea is discovered, the future value is hard to know. Some inventions are not translated into success for some time and others, initially thought to be significant, fail to generate much revenue. One measure of university research output is the stock of inventions. In remarks on the Senate floor during debate over the 1980 Patent and Trademark Amendment Act, known as the Bayh-Dole Act after its cosponsors, Sens. Birch Bayh (D.-Ind.) and Robert Dole (R-Kan.),103 Bayh described a relatively simple, linear model as the framework for the Act: “Hundreds of valuable medical, energy, and other technological discoveries are sitting unused under Government control, because the Government, which sponsored the research that led to the discoveries, lacks the resources necessary for development and marketing purposes, yet is unwilling to relinquish patent rights that would encourage and stimulate private industry to develop discoveries into products available to the public.”104 The notion of good ideas sitting on the shelf of agencies for lack of investment reflected part of the problem but neglected the full context within which the translation of ideas from the academy to the world could occur. As Terence Kealey, who served as both a scientist at Cambridge and vice chancellor of the University of Buckingham, observes, the linear model did not match reality during the industrial revolution or today.105
Universities, which capture some rewards, have more incentive to commercialize the results of research than government bureaucracies do, but, as discussed above, they operate under a wider set of constraints than Bayh’s description suggested, which may help explain why so few successfully patent and transfer ideas. Moreover, “[t]he Act’s emphasis on patenting and licensing as a critically important vehicle for the transfer to industry of academic inventions lacked a strong evidentiary foundation at the time of its passage, and evidence on the role of patenting and licensing as indispensable components of technology transfer remain mixed.”106 There are plenty of ideas “on the shelf” produced at research universities but there are obstacles to getting them to the market for which Bayh-Dole’s linear model does not account. The supply of ideas that might be commercialized is only a partial answer to why firms would license university-produced ideas or buy university-related firms.
University research generally produces what Schumpeter termed inventions, rather than innovations. The distinction is that inventions alone will not have an economic impact without the transformational genius of the entrepreneur. As Schumpeter noted,
The inventor produces ideas, the entrepreneur ‘gets things done,’ which may but need not embody anything that is scientifically new. Moreover, an idea or scientific principle is not, by itself, of any importance for economic practice: the fact that Greek science had probably produced all that is necessary in order to construct a steam engine did not help the Greeks or Romans to build a steam engine; the fact that Leibnitz suggested the idea of the Suez Canal exerted no influence whatever on economic history for two hundred years.107
In Schumpeterian terms, what universities have to sell is just part of what is needed for an idea to succeed. To be useful in the marketplace, ideas must be manifested as designs, tools, methods, etc. that solve a problem or offer novelties previously unknown.108
Moreover, we need to keep in mind that licensing (or selling a firm with a license) is just one potential method of transferring knowledge from university to the market. As Litan, Mitchell, and Reedy argue,
Universities have a range of outputs, including information, materials, equipment and instruments, human capital, networks, and prototypes. The means by which these outputs are diffused, especially to industry, vary across universities. The Carnegie Mellon Survey of Industrial R&D found that the most commonly reported mechanisms for diffusion of public research to industry were publications, conferences, and informal exchanges. Patents ranked low in most industries except for pharmaceuticals.109
Idea transfers from universities to the world can occur independently of commercialization. Faculty generate papers, teach, consult, serve on boards, and so on – all means of knowledge transfer.110 Firms find value in these channels. A 2011 survey found the top two benefits reported by firms for interactions with universities were “access to fundamental understanding” and “access to direct assistance with problem solving.”111 An analysis of university strategies for interactions with firms therefore needs to incorporate channels besides commercialization. Over-estimates of the value of university-owned intellectual property can restrict faculty’s ability to pursue other avenues while fruitless commercialization efforts are made. Nonetheless, Bayh-Dole was created because these other methods were thought insufficient.
As discussed earlier, treating universities like profit-maximizing firms is a major conceptual error.112 Universities and firms operate under different legal and political constraints, actors within them face different incentives, and success is evaluated by different metrics both for the institutions and the researchers within them.113 Pathways for discoveries to move from university research to commercial development must account for those differences. As Gulbrandsen, Mowery, and Feldman (leaders in the academic study of technology transfer from universities to firms) wrote in their introduction to a symposium, “a recognition of the heterogeneity in the characteristics of university–industry linkages among disciplines is crucial to the formulation of intelligent public policy and for more effective management by universities of their relationships with industry.”114 This is challenging as “[p]ractice without process becomes unmanageable, but process without practice damps out the creativity required for innovation; the two sides exist in perpetual tension. Only the most sophisticated and aware organizations are able to balance these countervailing forces in ways that lead to sustained creativity and long-run growth.”115
If the fruits of university research are to make it to the marketplace, we need: (a) a variety of channels for the ideas to reach market actors, including means of commercialization, (b) a means of harnessing entrepreneurial talent from outside universities to innovations from within universities, and (c) methods that fit the unique environment within Coasian red boxes.
D. The University Environment & Innovation
As discussed above, the university environment differs from the environment of for-profit firms. The university is sometimes seen as the best environment for science, but not always.116 Both entities, though, require innovators to navigate inefficient bureaucracies. Just as the university environment can be challenging, the for-profit environment can also be difficult for innovators as firms too can have inefficient bureaucracies.117 At for-profit firms, innovators often struggle to adapt their method of project acceptance to the firm’s formalized process, causing problems for the organization. As Griffin, et al. noted in their study of “serial innovators” in firms, “the way in which they navigate the politics of project acceptance are so different from the firm’s formalized processes, they inherently cause problems for the organization.”118 Different incentive structures should mean that university researchers behave differently from researchers at for-profit firms. Although sarcastic, the account of a chemist hired away from academia by Dow Chemical in the 1920s (at twice his academic salary) in a letter to a friend written soon after the chemist started at Dow’s research laboratory captures the difference:
A week of the industrial slavery has already elapsed without breaking my proud spirit. Already I am so accustomed to the shackles that I scarcely notice them. Like the child laborers in the spinning factories and the coal mines, I arise before dawn and prepare myself a meager breakfast. Then off to the terrific grind arriving at 8 just as the birds are beginning to wake up. Harvard was never like this.119
In this section we discuss research on creativity and innovation that helps understand why the university environment should be productive for at least some kinds of research.
First, innovation requires creativity.120 As Richard Florida posits, creativity is “the faculty that enables us to derive useful new forms from knowledge.”121 Moreover, “creativity is often not just a single event or episode; it is sometimes an unplanned sequence of fortuitous events.”122 As a result, “creative success leads to further creativity, which helps to generate corporate funding to continue the work that initially did not appear to have potential—and frequently leads to business opportunities. . . . Working toward a goal can help creativity, but trying to predict or control the paths that link creative acts to useful results may do more harm than good.”123 It is thus a difficult force to control.
Second, we know that creativity is – contrary to popular perceptions of the lone genius toiling in a lab or studio124 – “heavily dependent on social interaction, which takes the form of face-to-face encounters and of immersion in the symbolic system of one or more domains.”125 Matt Ridley sums it up as “a collective, incremental and messy network phenomenon” and “a team sport.”126 As one scientist reported during an interview on the creative process:
Science is a very gregarious business; it’s essentially the difference between having this door open and having it shut. If I’m doing science, I have the door open. That’s kind of symbolic, but it’s true. You want to be all the time talking with people… it’s done by interacting with other people in the building that you get anything interesting done; it’s essentially a communal enterprise.127
Part of their value is surely that at least some universities are places where such “gregarious business” is relatively easy to conduct.
Third, we know that “[t]he most significant insights (e.g., those that lead to innovative new products or uses for new technology) are often characterized by a synthesis of information from multiple domains, which can be as far apart as chemistry is from social norms, or as close as neighboring branches of mathematics.”128 Ridley refers to this as “ideas having sex,”129 a metaphor that captures the environment in universities where ‘DNA’ from other fields is close at hand.
Fourth, there are “hot spots” as “access to the field is not evenly distributed in space. The centers that facilitate the realization of novel ideas are not necessarily the ones where the information is stored or where the stimulation is greatest.”130 These centers are “communities of practice” which are linked by “process and structure” to transfer knowledge, achieve scale, and generate growth.131 This is well-illustrated by a scientist’s description of the Berkeley chemistry department in 1930: “Successful research was the badge of honor. To not try to do research was unthinkable.”132 More broadly, Florida developed a theory to explain the success of cities due to the presence of a “creative class.”133 Although he focused on urban centers, he also contended that “Universities are the intellectual hubs of the creative economy. America’s vital university system is the source of much of our best scientific, social, and creative leadership.” Because they promoted talent and tolerance, as well as research, they too drew a creative class.134 These communities are also important because this is where tacit knowledge can be exchanged. Tacit knowledge plays an important role in transforming inventions into innovations.135 Universities often build clusters of faculty with related interests, making them into ‘hot spots’ for those fields.
With our data, we find there is more high-value patent activity in universities in urban areas than those in non-urban areas, which might be due to an effect akin to Florida’s “creative class” argument. Figure 4 shows the patent data broken down by urban/non-urban, with quite different patterns of patenting.
Although universities in non-urban areas, particularly large ones, create their own community of creative individuals, it may be that with respect to the specific types of creativity necessary to transform research into marketable intellectual property (a subset of entrepreneurial abilities), the lack of a sizeable urban center is problematic.
Fifth, individuals differ in creativity. Research suggests that individuals who have strong intrinsic motivation are more creative, and giving these individuals the freedom to explore ideas is also important.136 People must also be curious to be creative: “Without a good dose of curiosity, wonder, and interest in what things are like and in how they work, it is difficult to recognize an interesting problem.”137 They need to be able to engage in both divergent and convergent thinking138 and be able to engage in the “hard work” that is “necessary to bring a novel idea to completion and to surmount the obstacles a creative person inevitably encounters.”139 Creative people have different powers of attention.140 They also need to be able to discard bad ideas.
Practically all creative individuals say that one advantage they have over their peers is that they can tell when their own ideas are bad, and that they can immediately forget the bad ideas without investing too much energy in them. Linus Pauling, the winner of two Nobel prizes, was asked at his sixtieth birthday party how he had been able to come up with so many epochal discoveries. “It’s easy,” he is said to have answered, “You think of a lot of ideas, and throw away the bad ones.” To be able to do so, however, implies that one has a very strong internal representation of which ideas are good and which are bad–a representation that matches closely the one accepted by the field.141
Moreover, some people are better at identifying and solving problems that demand creative solutions, where “the nature of the problem to be solved is less clear; in fact, the problem itself might not be formulated until the moment of insight.”142 Identifying such problems is a key challenge.143 If universities are better than firms at attracting individuals with these skills, then universities will have a comparative advantage in producing creative ideas. Further, the hiring of creative people is not something that ever ends: talent is not a stock but a flow.144 Hiring processes must therefore focus on continually replenishing the flow. University hiring processes are generally driven by departments and so focused on excellence in particular fields, a focus which is likely to keep the flow moving.
Sixth, there must be an environment that fosters creativity for researchers,145 a part of the analysis of creativity that has often been neglected.146
Based on what we now know about creativity, this is what managers should do to foster creativity in organizations. First, they should work to eliminate the environmental obstacles—the turf battles, the caustic reactions to new ideas, the lack of commitment to innovation. Second, they should create an environment where the stimulants are richly, redundantly present: an orientation toward innovation and risk taking, from the highest levels of top management on down; strategic direction for projects, coupled with procedural autonomy for those doing the projects; work that people perceive as challenging, interesting, and important; rewards and recognition for creativity; frequent, work-focused feedback; stimulating, diverse work teams; open communication and collaboration across the organization; and commitment of adequate resources and time for projects.147
While universities can be far from ideal in this regard, with disciplinary barriers, rigidity in existing conceptions of disciplines, and barriers to collaboration that range from the relatively mundane (parking) to deeply problematic (tenure standards that discourage cross-disciplinary work),148 they can also be good places for creative work. One key advantage is that universities house smart, creative people from a variety of fields. This is important as a critical part of the creative process is interaction with people in “neighboring fields.”149
The freedom of the university environment is also an important ingredient in this environment.150 Indeed, Ridley says that freedom generally is the “secret sauce” that produces innovation: “[f]reedom to exchange, experiment, imagine, invest and fail; freedom from expropriation or restriction by chiefs, priests and thieves; freedom on the part of consumers to reward the innovations they like and reject the ones they do not.”151 This is not just the ability to choose an area of research but something broader. Creativity researchers identified “an environment where project goals are clear, challenging, and personally interesting, where they are given autonomy in deciding how to achieve project goals, where their new ideas are met with encouragement and enthusiasm, where they are not burdened with impossible project schedules or resource limitations” as important to fostering creativity.152
Finally, approaching the problem from the other end, Csikszentmihalyi and Sawyer argued that creativity is unlikely to be found where any of the following conditions are met:
● “The absence of a strong interest, curiosity, or intrinsic motivation that drives the person to commit attention to a problematic area in a domain. A person who is not intrinsically motivated has no incentive to push beyond generally accepted boundaries of knowledge.
● The absence of a thorough grounding in at least one symbolic domain, presumably as an apprentice to an expert, and not having experienced the colleagueship of other expert apprentices. Creative insights typically involve the integration of perspectives from more than one domain.
● The absence of interaction with other individuals who are experts in the domain or in potentially relevant other domains. At every stage of the process, the stimulation and feedback of peers is necessary to select and evaluate potential insights.
● A schedule in which a person is always busy, goal-directed, involved in conscious, rational problem-solving. Incubation is facilitated by periods of idling, leisure, and involvement in activities such as walking, gardening, driving (i.e., activities that require some attention but are automated enough to permit subconscious processes to work just below the threshold level of awareness).”153
The barriers they describe are less likely to be present within universities. Universities thus have some comparative advantages in hiring people likely to produce creative solutions to problems. This provides an incentive for firms to harness that human capital to solve problems or to purchase the results of faculty research.
E. The Results of Innovation in Universities
Most university research falls into two of the types of innovation Schumpeter described in The Theory of Economic Growth: (1) “The introduction of a new good—that is one with which consumers are not yet familiar—or of a new quality of a good”; and (2) “The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned.”154 These innovations require skills he attributes to entrepreneurs: “doing of new things or the doing of things that are already being done in a new way.” There is considerable opportunity to do “new things” or do things “in a new way” as a result of university-related research. As a result of outside research funding, which grew substantially in the United States after World War II primarily from federal sources, university researchers sought to both help solve specific problems (produce new technologies for defense, etc.) and foster the development of basic science. This built on a tradition of public investment in practical research, starting with the Morrill Act and the creation of the land-grant university system.155
University researchers regularly make contributions to industry,156 although as noted earlier, it is only a small minority of universities that do so. Such research is an important source of “key ideas” in many industries, “ideas that generate significant technological opportunities through fusion of knowledge of what’s doable with knowledge of what needs to be done.”157 It also makes important indirect contributions from areas outside a given industry.158 A survey of Advanced Technology Program projects suggested that industry invites universities into research projects that “involve what we have called ‘new’ science. Industrial research participants perceive that the university could provide research insight that is anticipatory of future research problems and that it could be an ombudsman anticipating and communicating to all parties the complexity of the research being undertaken.”159 Universities also produce inventions that “could not be developed independently by either the inventor or the firm.”160
One differentiator for university-based research is that the results are generally “done” –from the point of view of the university – at an earlier stage than much commercial research.161 As Jensen and Thursby put it, “when they are licensed, most university inventions are little more than a ‘proof of concept.’”162 Early-stage results are less certain to become commercial products – that is, they carry greater uncertainty about both their technological and commercial potentials. They are riskier investments than ideas from later-stage research.163 As a result, they are “fraught” with incentive problems and so are difficult to contract about. Licensing agreements are more time-consuming to conclude for early-stage status.164 In brief, the investments needed to commercialize embryonic research from universities have three basic characteristics:
1. the investment is substantially sunk and is rarely recouped;
2. the technical and market uncertainties may diminish as information becomes available about the technology; and,
3. the opportunity to invest is generally not completely dissipated by competition among rivals.165
These characteristics create incentives for market-driven investors to delay investments.166 The slowness of development makes valuation difficult167 and requires additional investment to bring products to the manufacturing stage.168 Commercialization depends in large part on the university’s ability to reduce commercial risk, which is more likely when there is a market “pull,” the invention has become technically feasible, and production is predicted to be cost-effective.169 As discussed below, these are difficult risks for early stage technologies.
What is missing from a university invention awaiting commercialization is what the entrepreneur brings to the table. As a result, connecting university research ideas to business partners is widely recognized as a critical step in enabling the ideas to have an impact. As one tech transfer expert put it, “if we can’t get a commercial partner, those good ideas are going to sit on shelves.”170 Finance for development is a necessary but not sufficient part of the solution. As economist Fritz Machlup noted in his 1958 analysis of the patent system, the incentive provided by the patent monopoly generally is intended to motivate the additional investment to bring ideas to market: “Financing the work that leads to the making of an invention may be a relatively small venture compared with that of financing its introduction, because costly development work, experimentation in production and experimentation in marketing may be needed before the commercial exploitation of the invention can begin. The risks involved may be too great to be undertaken except under the shelter of a monopoly grant.”171 These risks are greater when much of the research comes from universities, due to the early stage of development. Giving patent rights to universities provides rewards long before much of the work is done, which is a potential problem with the Bayh-Dole model.
Moreover, a related major challenge with the ideas coming out of universities is that “new information tends to be produced in tacit form, increasing in tacitness as a function of distance from prior knowledge…. Tacit knowledge tends to be highly personal, initially known only by one person (or a small team of discovering scientists) and is difficult to transfer to others.”172 Universities do well at producing tacit knowledge that can be an advantage in commercialization because greater tacitness offers greater opportunities by providing a firm with a competitive advantage.173 However, greater tacitness also requires greater participation by faculty (who have the tacit knowledge) in further development of the research.174
F. The Challenge of Incentivizing University Invention
Some politicians saw the research produced in universities as a potential economic development tool. Through a combination of aligned interests and personality-based politics, the primary legal framework became vesting ownership of intellectual property rights arising from federally-funded research in universities via the Bayh-Dole Act.175
Bayh-Dole promised to unlock technological treasures that federal agencies funded but failed to push into the marketplace. By some measures, the statute is a success: it dramatically increased the number of patents awarded to universities, university-related start-up companies, and licenses from universities to outside entities for faculty-developed technologies.176 In 2002, The Economist praised Bayh-Dole for creating incentives to invest private money “to turn a raw research idea into a marketable product” rather than allowing ideas of university researchers to be left “in warehouses gathering dust.”177 The then-director of the Wisconsin Alumni Research Foundation, the oldest and one of the most successful of the entities focused on commercializing university research, praised it for stimulating partnerships between government, universities, and start-up firms, and claimed that almost a third of the value of the NASDAQ (in 2007) came from university-based, federally-funded research.178 Further, an evaluation of time-to-market found a faster translation of research to market in 1986-1994 relative to 1975-1984, which could reflect improved commercialization or greater emphasis on applied research by universities.179 Not everyone sees the statute as a complete success: some studies of the value of the increased patents concluded that average quality was lower due in part to increased patenting of “losers”—patents that receive zero subsequent citations.180
Bayh-Dole’s approach, and the claims made for it, focus on the development potential of inventions stuck behind a wall of federal red tape combined with a more straightforward model of how research investments could turn ideas into marketable products. This approach neglects the Schumpeterian insight that this is not a linear or simple process. We need to appreciate “how multiple, unevenly paced, and nonlinear are the paths between scientific discovery and new technology.”181 What is needed is not just investment (although often quite a lot is needed) but what Schumpeter called the “creative response.” He distinguished that from the managerial “adaptive response” in three ways:
First, from the standpoint of the observer who is in full possession of all relevant facts, it can always be understood ex-post; but it can practically never be understood ex-ante; that is to say, it cannot be predicted by applying the ordinary rules of inference from the pre-existing facts. This is why the ‘how’ in what has been called above the ‘mechanisms’ must be investigated in each case. Secondly, creative response shapes the whole course of subsequent events and their ‘long-run’ outcome…. Creative response changes social and economic situations for good, or, to put it differently, creates situations from which there is no bridge to those situations that might have emerged in its absence. That is why creative response is an essential element in the historical process; no deterministic credo avails against it. Thirdly, creative response—the frequency of its occurrence in a group, its intensity and success or failure—has something, be that too much or little, to do (a) with quality of the personnel available in a society, (b) with relative quality of personnel, that is, with quality available to a particular field of activity relative to quality available at the same time, to others, and (c) with individual decisions, actions, and patterns of behavior. Accordingly, a study of creative response in business becomes coterminous with a study of entrepreneurship. The mechanisms of economic change in capitalist society pivot on entrepreneurial activity.182
We argue that university researchers often produced research results that were candidates for leading to a “new thing” or a “new way of doing things” because conditions gave university-based researchers more freedom in their research. However, this boost to creating good ideas was not without its costs. This enhanced potential makes translating the idea into the marketplace a greater challenge because the research demands financial investment, additional intellectual development, and, crucially, entrepreneurial talent to make that transition. Such investments require costly contracting to accomplish, given the early stage of most university-connected ideas. Such contracting is difficult for universities reliant on general counsel offices that lack sophisticated IP legal talent in the private sector.183
The most difficult input is entrepreneurial talent. Schumpeter thought entrepreneurial skills were in short supply: “It is in most cases only one man or a few men who see the new possibility and are able to cope with the resistances and difficulties which action always meets with outside of the ruts of established practice.”184 The challenge for universities wishing to see researchers’ ideas take root in the economy is to find how to connect the opportunity an idea offers with financial capital and entrepreneurial skill.
II. How Universities Commercialize Research
Universities have changed how they approach research commercialization as a result of Bayh-Dole. Understanding this helps us assess the current process and how it might be improved, as well as understanding the impact of recent changes to universities.
A. The Institutional Context
Formal university commercialization efforts started with the University of Wisconsin’s rejection of a faculty member’s offer of an invention to the university based on legal advice that the university could not spend state resources on patenting an idea. Prof. Harry Steenbock then created the Wisconsin Alumni Research Foundation (WARF) and assigned his invention (a way to increase the vitamin D content of food) to it in 1925. The invention was a success and WARF brought in millions of dollars.185 WARF later pioneered agreements with the federal government allowing Wisconsin to take title to patents based on research funded by agencies.186 That success served as a model for the Bayh-Dole Act.187
Among the goals of Bayh-Dole were to reduce the complexity would-be commercializers faced in dealing with agency licensing procedures, to clarify who held rights to patents, and to place ownership where there would be an incentive to license.188 University patenting increased dramatically.189 The number of TTOs increased from 25 at the time the statute was passed to 3,300 twenty-five years later.190 As Litan, Mitchell, and Reedy noted, TTOs “were the product—more than likely the unintended consequence of” Bayh-Dole.191
AUTM, formerly the Association of University Technology Managers, which has an interest in portraying the outcome of Bayh-Dole as favorable, estimated in 1999 that academic licensing of technologies led to $33 billion in economic activity and 280,000 jobs in the United States.192 A study commissioned by the National Academy of Engineering more modestly claimed that the impact of academic research on the medical device, financial services, and network systems and communications industry had been “large” and the impact on the transportation, distribution, and logistics and aerospace industries had been “moderate.”193 There is evidence that faculty entrepreneurs are highly cited and productive, suggesting that entrepreneurial activity need not reduce academic achievement.194 However, the effects differ across fields.195
Bayh-Dole spurred a focus on patenting by universities.196 This alone may be a benefit of the statute, even with respect to traditional views of the role of the university, as some research suggests patents are a reaffirmation of the originality of a scientist’s work.197 Azoulay, Ding, and Stuart argue that “patents and publications correspond to two types of output that have more in common than previously believed” and “encode similar pieces of knowledge.”198 Agrawal and Henderson’s study of two MIT departments found considerable differences between publications and patents.199 Specifically, faculty who patented also published work with more impact. Similarly, Magerman, Van Looy, and Debackere analyzed biotechnology patent-paper pairs and found no negative citation effects associated with patents.200 Papers associated with a patent received more citations, leading them to conclude that “patenting does not jeopardize one’s scientific footprint.”201 Patent rights may be “necessary to drive commercialization, particularly in the biomedical context,” because turning an idea into a product requires large investments.202
Fans of the statute argue that it gives university researchers an incentive to push ideas into the marketplace, enabling them, and society, to reap the rewards that come with patent licensing.203 Hellman suggests a model that yields a “science to market gap” in which firms are unaware of what scientific discoveries might meet their needs.204 This is bridged by communication between researchers and firms–which is encouraged by patenting’s incentive to researchers to push discoveries out to industry–with TTOs serving as the agents.205 How much this has succeeded is not clear, although data on university patents suggests it has not succeeded outside of a small subset of universities: one report suggested that 95 percent of university patents are unlicensed.206 If true, this signals a weakness in either (or both) the process or the value of the research pursued.
Not everyone cheers the focus on intellectual property, commercialization and the creation of TTOs. Critics challenge the reliance on exclusivity in licensing. Nelson argues that companies are willing to invest without exclusive rights to university-developed research because they anticipate being able to patent their own improvements and so reap rewards.207 Others raise concerns that increased patenting based on university research leads to an “anti-commons” in which a patent thicket slows or blocks future research.208 Empirical research suggests there is little evidence that patent licensing blocks research (in part because academic researchers often ignore patents) but there is evidence that materials and data access agreements pose problems.209 Eisenberg, one of the main proponents of the anti-commons interpretation, explained this to be the result of the high transaction costs of enforcing patents against researchers and the low transaction costs of denying researchers access to materials and data unless they agreed to restrictions on use.210
Other critics raise concerns about universities using patents “not for purposes of fostering commercialization, but instead to extract rents in apparent holdup litigation.”211 Some argue that university TTOs focus on short-term ‘lottery’ patents to get the quickest payback, over long-term investments in ideas that may have greater potential.212 Others claim that a focus on commercialization steers universities away from their proper role in society,213 and some contend that commercialization prioritizes applied research over the traditional goal of pure knowledge.214 Some are concerned that commercialization will restrict communication among scientists.215 The NAE study cautioned that commercialization efforts raise questions about whether “the entrepreneurial university and the new interest in financial gain are distorting the traditional values, goals, and the identity of the university with negative consequences.”216 These concerns are not merely rhetorical: there is evidence that publications associated with patents lead to slower rates of forward citations.217 Backward citations in industrial patents are increasing as university patenting increases, suggesting “a slowdown in the pace of firm knowledge exploitation.”218
Commercialization may be beyond the ability of universities. They may not be able “to adapt to, to articulate, and to pursue new directions in basic and applied research and training” to keep up with industry needs “while continuing to jump-start new areas of basic, long-term research and generate the key ideas that will provide the foundation for tomorrow’s industries.”219 More generally, Bayh-Dole has been criticized as a “poorly targeted institution” because intellectual property rights are “a blunt and costly mechanism for facilitating technology transfer from the government to industry when compared to alternatives.”220
There seems to be little empirical support for the sharpest criticism of university focus on TTOs and commercialization.221 There is evidence that licensing has not shifted university research away from basic research and that licensing promotes additional basic research.222 Azoulay, Ding, and Stuart found that “patenting is often accompanied by a flurry of publication activity in the year preceding the patent application, even after accounting for the lagged stock of publications” and, controlling for scientist-fixed effects, suggest that “surges of scientific productivity, not steady research performance, is most likely to be associated with patenting,” a finding they interpret to mean that “uncovering of new, productive areas of scientific inquiry is an important precursor to the act of patenting.”223 They also found a relationship between what they term the “latent patentability” of faculty research and the propensity to patent, having derived the former from a keyword analysis of publications of scientists already patenting in the same area.224 Thursby and Thursby found recent disclosure activity had an overall positive impact on both public and private faculty research funding and publication rates.225
Much of the university interest is, of course, about money. A 2000 review of the literature on university-industry partnerships found that university motivations were “largely financially based” while industry motivations focused on “access to complementary research activity and research results” and “access to key university personnel.”226 Despite the creation of many TTOs, commercialization efforts did not produce a financial windfall, which is unsurprising when we take into account how few universities are patenting extensively or patenting high value ideas. Reinforcing our conclusions from the patent data, one study of 2012 data found 130 of the 155 universities reporting data did not cover expenses for the year.227 Another concluded that “[v]ery few university ‘inventions’ garner significant license incomes. . . . Many universities are [likely] paying significantly more to run their patenting and licensing offices than they are bringing in license revenues.”228 One survey found that the top five inventions licensed by each university accounted for 78 percent of gross licensing revenue.229 Litan, Mitchell, and Reedy concluded that “[t]his is not an outcome one would expect from a nation rich in scientific talent at many universities” while Aldridge and Audretsch claim that the “paucity” of university start-ups post-Bayh-Dole is “startling and disappointing.”230 The dominance of a few patents should not be a surprise. At many firms, a few key products dominate revenue streams. However, maintaining money losing TTOs is another matter.231
Efforts to shift research into the economy at large pose three key challenges. First, it is not a major revenue source for universities. Aside from the occasional blockbuster (such as Gatorade™), earning enough licensing revenue to cover operating the TTO and paying for intellectual property is likely the best outcome for many inventions. Second, there are persistent concerns about the impact of pursuing commercialization opportunities on core university missions in research and teaching.232 “The incorporation of ‘extension of knowledge’ into a compatible relationship with ‘capitalization of knowledge’ is a profound normative change in science.”233 While we are skeptical of these concerns, their persistence means they need to be addressed to get faculty buy-in (or, at least, acquiescence) to the commercialization effort. Third, a focus on protecting intellectual property may have a deleterious effect on innovation outside the university.234 The evidence does not suggest this is a major problem, but more investigation must be done before the concerns can be addressed.235
The institutional context in which university commercialization efforts take place is complex. It is shaped in part by a statute built around an overly simplistic model of the production and translation of knowledge. Its primary effect appears to be the creation of university TTOs, which poses problems (e.g., how will they be paid for?) and focuses on solutions (licensing, patenting, creating new ventures) but does not solve the fundamental puzzle: that the vast majority of research universities are not producing research that takes the important initial step of being patented. We next turn to how this affects universities’ operations.236
B. Current Practice
The first step in commercialization is the discovery of an idea.237 The focus of the researcher is likely to be producing a paper, not commercialization.238 That process begins when the faculty member files a disclosure form with the university’s TTO.239 The form describes the idea and triggers the TTO process. “Faculty decisions to disclose, then, are shaped by the mixture of individual incentives, local organizational procedures, and institutional milieus. The meanings academic researchers attach to IP and their perceptions of the local patent process color decisions to disclose potentially valuable inventions within the context of a university’s history, environment, capacity, and reputation.”240 Patents also reflect the “seizing of opportunities along a novel research trajectory.”241
The next stage is an evaluation of the idea. In the best case, this involves analysis in three dimensions: intellectual property potential, business potential, and technology potential.242
● The IP evaluation focuses on if the idea can be protected by intellectual property (typically a patent). Among the questions asked is: Has the idea been disclosed (through a paper or presentation) in a way that precludes issuance of a patent?
● The business potential assessment involves examining potential demand (Are there customers? How much better is the product than its competition?) and the type of business likely needed to commercialize the idea (Is this something best licensed to an existing firm or developed through a start-up?).243
● The technology potential assessment asks if the technology is ready for commercialization. Because much of federal funding focuses on basic research, there is often a problem that the innovation is not mature enough for commercialization.244
Then the university decides whether to pursue commercialization. Who makes the decision differs across universities. At some, the central TTO or other entity does, while at others the decision is delegated to the unit where the researcher resides. Generally, decision-making follows the funding of patent applications. To some extent, this decision is based on cost, although the prestige of getting a patent at some universities or in some departments may spur some demand for non-economically viable patents to be pursued. Some universities emphasize particular disciplines for commercialization; others take a general approach.245 The initial up-front cost to a university of a provisional patent is generally relatively low ($3,000 is a range often mentioned). Pursuing a full patent usually costs considerably more ($10,000 to $25,000, depending on the area of technology and the complexity of the invention).246 Universities often seek to recapture these expenses from licensees.247 There can be a conflict of goals at this stage, with inventors preferring to own and TTOs preferring to license.248
Once an idea has been protected, a decision is made whether to seek to license the IP to a firm or to form a spin-off to further develop the idea. One issue is if there is a sponsored research agreement with a funder that might provide a right of first refusal and how the technology fits within the market. It appears that the more an idea needs a Schumpeterian entrepreneur, the more likely the idea is to be licensed to a start-up or existing firm that focuses on the idea. The more the idea produces a small change in an existing technology or process, the more likely it is to be licensed to an existing firm.
Universities vary in the services provided to new ventures that license the results of faculty research. Some universities take equity stakes in new ventures in lieu of license payments, others want royalties from the start, and others have deferred payment “express” license packages that pay lump sums when the venture receives outside funding.249 Some universities participate in incubators that help start-ups develop, some provide gap funding to develop ideas (often without requiring equity or repayment), and some do relatively little. Experienced businesspeople may be brought in as entrepreneurs or executives-in-residence to mentor university researchers who wish to start their own company. Some universities participate in the National Science Foundation’s I-Corps program, which puts would-be researcher entrepreneurs through a multi-week start-up boot camp focused on learning the market for an idea. Federal funding through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs also provides early-stage financial assistance for some university start-ups.250 Many states provide similar funds to supplement federal programs.251 In addition, there are informal technology transfers, including coauthoring papers with industry personnel and faculty serving as consultants to outside firms.252
Some university efforts for start-ups focus on getting the researcher with an invention up to speed as an entrepreneur. “There is more than one route to the commercialization of university intellectual property (IP) but that, whatever the route, core to its success will be the role played by the creator of the IP, the individual scientist or engineer.”253 This requires considerable effort, and many researchers lack business acumen. The focus of these efforts is on access to funding and business skills.
If Schumpeter’s description of the role of the entrepreneur is accurate, such efforts are unlikely to be enough. It is not clear if Schumpeter thought that entrepreneurship could be taught or if it derived from some combination of personality traits and experiences.254 There is some evidence that individual characteristics (which Clarysse, Tartari, and Salter say are “to a large extent genetically imprinted”) of potential faculty entrepreneurs play the most significant role in the decision to become an entrepreneur.255 Similarly, Haye and Pries found that “repeat commercializers” accounted for a disproportionate share of commercialization in their sample.256 Despite the proliferation of university-based entrepreneurship courses in recent years, it is difficult to know whether the training universities provide is teaching what is needed to be an entrepreneur.
There are proposals to improve the track record of bringing university-developed ideas into the world. Some critics argue that many universities’ focus on exclusive licensing rights is an obstacle to successful incorporation of ideas from into products; they contend that universities should prioritize non-exclusive licenses.257 Others argue that control of commercialization should be shifted away from university administration and given to research faculty.258 Conflicts between universities and faculty over ownership of ideas threaten to disrupt the core academic mission of universities.259 Some proposals would fundamentally change how universities conduct research and move ideas into the economy. Few are built around a coherent theory of the entrepreneur’s role.
III. Entrepreneurship & Red Boxes
We know for-profit firms wish to earn profits from innovations. How innovations emerge and are translated into successes is largely, in economics, still a black box matter. Universities wish for innovations to generate revenue, but they are not-for-profit entities. How entrepreneurial exploitation can happen within such red box organizations is not well understood. If we use Schumpeter’s and Kirzner’s insights into the role of the entrepreneur, how might we restructure university efforts at moving inventions from the lab to market? This section offers four suggestions. Our argument does not simply suggest universities devote more resources to commercialization.260 Rather, this is an argument for an approach that built on Schumpeter’s and Kirzner’s ideas about entrepreneurship and innovation.
A. Focus on the Entrepreneur
Schumpeter argued that the essential function of the entrepreneur is “the doing of new things or the doing of things that are already being done in a new way (innovation).”261 He distinguished this function from invention, management, risk-bearing, and financing – all necessary functions but ones provided by others (inventors, managers, capitalists, etc.).262 The entrepreneur adds something and is not, as Schumpeter put it in rebutting a simplistic idea of growth, “a sort of beast of prey who withhold the fruits of technological advance from the community and sabotage progress in their own interest.”263 Kirzner developed the idea of alertness further: “Entrepreneurial alertness means the ability to impose constraints on that freedom, so that the entrepreneur’s vision of the future may indeed overlap, to some significant extent, with the future that he is attempting to see.”264 This is critical to economic advances that arise from inventions; otherwise firms are only determining “wandering terms of exchange” for existing goods.265 The costly launching of innovative products requires conscious action by entrepreneurs, be they existing enterprises or new firms created for that purpose. Such expertise divorced from the invention process itself. “Entrepreneurship is… not something to be deliberately introduced into a potential production process: it is, instead, something primordial to the very idea of a potential production process awaiting possible implementation.”266
Is the entrepreneurial function present in the university process described above? While it may be, it is rarely recognized or explicitly addressed and, if it is addressed, it is done so accidentally. As a result, red boxes underperform their potential to seed the economy with new ideas. Incorporating a Schumpeterian perspective would increase the success rate in moving ideas from research to the economy.
Inventors do not know if an invention, regardless of how highly it is regarded by the inventors, if pushed forward, will have sufficient market value to be deemed a success.267 As Kirzner explains, this leads us into uncertainty or open-ended ignorance. The possibility of failure or success is not known. It is unlike risk, which is closed-ended ignorance—if you flip a coin, you do not know if it will come up heads or tails, but you know it will be one or the other and you know what the chances are so you can measure the risk.268 New products are launched into an uncertain world of open-ended ignorance. Capitalists risk capital in such ventures. They put their money into a black box to generate the product for the market. University managers are not capitalists, and they should not be risking taxpayer or student tuition money in endeavors unrelated to the educational mission by actually launching products. While worthy inventions arise in red boxes, TTO managers offer inventions to entrepreneurs who may be interested in them. That way, information about the possible opportunities are made known and firms may bid to risk capital and pay for the chance to promote an invention.269 The economy benefits from the progress generated by such “dynamic competition” from the introduction of new products.270 In such instances, investors are entrepreneurs—they operate in uncertainty where the outcome cannot be known. Such “entrepreneurial activity expresses pure discovery.”271
Unfortunately, the university process described above, which results from the Bayh-Dole framework, reflects a view of economic growth inconsistent with Schumpeter’s and Kirzner’s insights.272 University TTOs evaluate disclosures from faculty to identify those meriting an investment in intellectual property protection and then determine whether to seek to license the invention to an existing firm or to support the creation of a new firm. The TTO can execute this function well or not, but the paradigm remains primarily a straightforward linear process from idea to disclosure to product.273 As discussed, this linear progression rarely reflects reality.274
Research teams often consist of faculty and, perhaps, some graduate or post-doctoral students.275 The team experiments, theorizes, and develops results that reach the point at which team members are ready to share them through publications. If the idea appears to a team leader to be viable, they may file a disclosure with the TTO. From a practical point of view, this highlights the importance of the TTO staff regularly interacting with faculty. More conversations about researchers’ work will prompt more disclosures. Conceptually, the entrepreneurial content is an accident of whether or not a team member or someone who learns about the research has something of a Schumpeterian entrepreneurial mindset.276 In other words, is someone involved with the team thinking about the doing of new things?277
Although there is reason to believe (as discussed above) that universities have a comparative advantage in attracting creative people who can generate innovative ideas, there is no particular reason that faculty (or anyone else in a university) would be more likely than people in the general environment to have an entrepreneurial mindset unless universities set out to find such people. What we know about entrepreneurs in university start-ups is that we do not know much.278 Roberts and Peters concluded from their survey of MIT faculty that although a large percentage of faculty at MIT were likely to generate ideas with commercial value, only a “smaller fraction… can be expected to do anything toward exploiting these ideas; even fewer to undertake strong commercially oriented actions.”279 Smilor, Gibson and Dietrich’s study of the motivation of faculty entrepreneurs at the University of Texas at Austin found self-reported motivations for forming a start-up to include “recognition of a market opportunity, desire to try something new, desire to put theory into practice, the prospect of business contracts, the desire to start a company, and the desire to have fun with an entrepreneurial venture.”280 Another survey found that “engagement with industry may be fueled by an individual’s desire to compete effectively in the academic profession.”281 None of this is particularly helpful in identifying entrepreneurial faculty.
One reason for the difficulty in finding entrepreneurs on campuses is that they aren’t there. Many people with an entrepreneurial mindset are likely to have chosen career paths that enabled them to have the chance to become entrepreneurs without bearing the costs to acquire a Ph.D., get a job as a faculty member, and then develop their ideas.282 In many respects the stereotypical entrepreneurs are those who leave universities (sometimes without degrees) when they have entrepreneurial ideas they want to pursue (e.g., Sergey Brin, Bill Gates, and Larry Page).
This does not mean entrepreneurship is absent on campus. Etzkowitz argues that academic scientists are willing to mingle research and product development, with a “transmutation of ambivalence… into consonance” and the integration of entrepreneurship and basic research into “a complementary relationship.”283 If so, universities may have interest in encouraging entrepreneurship among research faculty. There is evidence that universities where faculty have greater ownership of their intellectual property produce more spinoff companies.284
Taking a more Schumpeterian-Kirznerian approach to commercialization requires focusing attention on the entrepreneurial potential a team might develop to build a business around the invention. As Schumpeter notes, “It is in most cases only one man or a few men who see the new possibility and are able to cope with the resistances and difficulties which action always meets with outside of the ruts of established practice.”285 One implication would be that a focus for ideas being licensed to new ventures should be on identifying team members who have entrepreneurial skills rather than on training team members to become entrepreneurs.286 (Because universities are not organized around other necessary functions for a business, matching start-ups with managerial and financing skills is also necessary.) For inventions being licensed, putting a priority on licensing to firms that demonstrate entrepreneurial skills would add an appropriate dimension to the criteria for evaluating potential licensees.
There are efforts to do some of this. The NSF initiated the “I-Corps” program to put faculty and graduate students who have NSF grants through start-up training focused on gaining knowledge of the potential market for inventions through interviews with potential customers. A common comment about I-Corps is that part of its value is that it disabuses some faculty inventors who think they are entrepreneurs of that notion by showing them what is involved, persuading them to focus on their strength in invention. Part of its value is in encouraging university-connected start-ups to find outside entrepreneurs to join them. Many universities and communities provide incubators and accelerators to support start-up businesses with physical space, equipment, support services, and mentoring.287 Expanding the number of universities participating in I-Corps and with incubators would likely improve universities’ overall success at commercialization.
However, the entrepreneurial function for ideas coming out of university research requires more than training programs for faculty in aspects of being an entrepreneur. Some faculty have ideas they would like to see marketed but are not personally interested in being entrepreneurs or, even if they are, lack the requisite skills.288 Then, matching ideas to potential entrepreneurs from the outside is necessary. Entrepreneurial abilities are scarce resources generally, so increasing their availability is critical to the transformation of ideas into impact in the broader community. Unfortunately, one of Schumpeter’s fundamental points was that competent entrepreneurs are harder to come by than money for entrepreneurs to use.289
Kirzner emphasizes that markets are filled with uncertainty. Were they not, things would be simple: “Without uncertainty… decision making would no longer call for any imaginative, creative determination of what the circumstances really are. Decision making would call merely for competent calculation. Its results could, in general, be predicted without doubt. Human judgment would have no scope.”290 Universities are not stocked with entrepreneurs, so managers emerging from red boxes likely have worse information about market opportunities than do black box managers. Red box managers, such as TTO directors, lack the experience of firms that, despite making errors, are more likely to come closer to what may be received in the market than are a team of inventors working within a university who have less information about what may be marketable. Red box managers generally know less about what is required to launch products and do not bear the costs of launching inventions. It is not a simple process. Part of the solution is to focus on university culture, which we turn to next.
B. Building an Entrepreneurial Culture
For entrepreneurs, there is no equivalent to Smith’s invisible hand. Indeed, the reason efforts are inside a red (or black) box is because conscious coordination is needed. The frequency of the “creative response” that entrepreneurs have, which is key to being entrepreneurial, is connected “(a) with quality of the personnel available in a society, (b) with relative quality of personnel, that is, with quality available to a particular field of activity relative to quality available at the same time, to others, and (c) with individual decisions, actions, and patterns of behavior.”291 The quality available is something universities can do little about, but they can take steps to enhance the second and third contributing factors. Recruiting those who have a “creative response” to improve the pool of potential entrepreneurs within the university is possible.292 Research into entrepreneurship may help understand how to identify potential entrepreneurs. Advertising a desire to have them and provision of programs can bring students and faculty with entrepreneurial talents to a university. Entrepreneur-in-Residence programs provide visits by successful entrepreneurs. Other programs, including project-based classes, mentoring programs, accelerators and incubators, business plan competitions, and business training may help.293
Doing well at commercialization—in a bit of a chicken-and-egg conundrum—can help.294 For example, one particularly successful TTO administrator said that faculty candidates often ask to meet with the TTO staff to learn whether or not that university is successful at commercializing faculty inventions.295 Being known in the academic community as a university that provides resources to help faculty entrepreneurs and values their efforts will increase the “relative quality of personnel.” Etzkowitz points to the importance of the creation of a “penumbra” of firms around the university.296 Patenting and licensing may be common only in a narrow swath of universities, making it unlikely those activities change the broader culture.297
Less attention has been paid to building student entrepreneurship, although Grimaldi et al. make a case for giving it attention.298 Bergmann et al. show the importance of climate and culture for students, particularly those not predisposed to be interested in entrepreneurship.299 The University of Utah’s Lassonde Studio is a leading example of a student-focused entrepreneurship program. Incorporating a living-learning community of 400 students with broader programs for the general student body, the program brings in students who have an entrepreneurial mindset and fosters its development.
A common theme in campus discussions of commercialization is whether the campus culture includes entrepreneurial success as something to be valued.300 This may be critical. Economic historian Deidre McCloskey argues that what set off the industrial revolution in Britain and Holland was not a particular confluence of capital, inventions, or markets in those countries. Those factors had been present in other places. What distinguished Britain and Holland were cultural features that were “stumbled upon.” There was “a new dignity for the bourgeoisie in its dealings and a new liberty for the bourgeoisie to innovate in economic affairs. Both were necessary for the modern world. The two, when linked, appear even to have been sufficient, if you supply a few routine background conditions enjoyed already in many places, as for example somewhat large cities and extensive trade and reasonable security of property and cheap if slow riverine or coastal transport in a biggish country.”301
Translating McCloskey’s argument to universities, their culture must provide recognition for entrepreneurship by faculty, staff, and students, as well as for more conventional measures of academic success (publications, prizes, grades, etc.) to convey its stature. Owen-Scott and Powell found that an “entrepreneurial culture” was a key differentiator between the two universities they studied and concluded that such culture “is central to informants’ explanations” of the more successful university’s efforts: “A strong culture of patenting attracts faculty interested in pursuing commercial endeavors and socializes new university members into that pursuit.”302 As our data shows, such a culture exists at only a small fraction of U.S. universities. Similarly, Rasmussen, Mosey, and Wright found departmental level effects on spinoff success that suggest the importance of culture: “Small differences in the local department environment relating to the access to commercial partners, legitimacy of venturing to the department management and availability of venturing and commercial experience had a disproportionate effect upon subsequent venture development.”303 Examining more than 6,000 life scientists, Ding and Choi found that differences in social networks and institutional support affected the likelihood of creating a start-up or joining a scientific advisory board.304
It is not just within the university that there needs to be an emphasis on the entrepreneurial climate. Friedman and Silberman found that the local entrepreneurial climate (as measured by the Milken Foundation Tech-Pole Index) had a statistically significant positive impact on TTO outputs.305 This is consistent with Florida’s insights on the role of a creative community. Powers and McDougall identify being located in an area containing greater venture capital resources with increasing start-ups.306 Another illustration is in Kenney and Goe’s comparative study of Stanford and Berkeley electrical engineering and computer science departments. They found that Stanford faculty believed the university’s most important motivation for supporting entrepreneurship by faculty was to increase university prestige while Berkeley faculty ranked that sixth, and believed financial rewards were the most important university motivation.307 Analyzing faculty relationships with businesses in those departments, Kenney and Goe found that more Stanford faculty had such affiliations; those produced more affiliations, reinforcing the culture.308 They concluded that “the institutional history, culture, and regulations of the broader university in which a faculty member is embedded influence professorial entrepreneurship and corporate involvement.”309 Creating that is not easy. As former Harvard President Derek Bok notes, “to commercialize a university is to engage in practices widely regarded in the academy as suspect, if not downright disreputable.”310 Some business people’s experience leaves them unconvinced that university culture is amenable to entrepreneurial behavior.311
A university must also accomplish the second part of McCloskey’s formula (which is also Ridley’s key insight), allowing the university community the liberty to “innovate in economic affairs,” at the least by not imposing too many restrictions. Bayh-Dole took one step toward creating this freedom by loosening some restrictions on entrepreneurial activity involving the results of federally funded research. Universities must also ensure their internal procedures do not squelch such activities.312
Universities can build cultures that value entrepreneurship by celebrating it in connection with commercialization.313 Litan, Mitchell, and Reedy argue that “a university culture that is accepting of entrepreneurial activities is best built from the ground up by researchers who promote and connect other colleagues both inside and outside of academe.”314 Schools can recognize and reward those who demonstrate entrepreneurial success, in the same way they reward success in publication or teaching. Entrepreneurship can be formally recognized as contributing to tenure decisions315 Bringing alumni and community entrepreneurs to campus can help build entrepreneurial culture by recognizing these individuals as worthy participants in the university community and being mentors for potential faculty, staff, and student entrepreneurs.
Boh, De-Haan, and Strom suggest that universities should “leverage all potential university resources for technology transfer” through courses and centers to send a strong message.316 One possibility is that greater knowledge production by university researchers that leads to publication in papers translates into greater local commercial research. Hicks, et al. found a strong relationship between the location of paper authors and patentees. Scientific knowledge is easy to get from conferences and articles, so distance between the producer and users should not have much impact. Nonetheless, they found a strong relationship.317
Changing a university’s culture is easier said than done, of course. However, finding ways to build an entrepreneurial culture on campus would be a critical part of a Schumpetarian-Kirznerian approach.
C. Reshaping the Pipeline
A well-functioning TTO is a crucial element of an entrepreneurial campus culture. Researchers disclosing ideas must feel valued and receive the service equivalent of a visit to Apple’s Genius Bar, a Disney resort, or a Four Seasons hotel.318 Rapid responses, transparent processes, and clear feedback are parts of such experience. Wu, Welch and Huang recommend that TTOs focus on identifying faculty likely to succeed at commercialization.319 Complicating this is that roles change on campuses.320 UK research suggests that TTO business development capabilities are important in the success of spinoffs.321 Not surprisingly, there are significant learning components to TTOs; experience helps performance.322 The TTO needs to be treated as more than a revenue creation tool because they generally are not revenue generators (as noted earlier), and treating them as such sends the wrong message to faculty considering filing disclosures. One computer science professor complained in an interview that his university “saw inventions as a way to augment the shrinking university budget” and so the tech transfer office was “overly aggressive in trying to make money,” forgetting that for him “money wasn’t the primary motivation” but that the goal was to get his ideas “into real-world situations.”323
Developing relationships between TTO staff and researchers is critical. As Owen-Smith and Powell note, “Most TTOs lack the resources and competencies necessary to search a wide range of laboratories and research groups for commercially viable technologies. Thus, institutional success depends in part on faculty perceptions of the benefits of patenting, the quality of the TTO, and the institution as a collective enterprise.”324 Relationships depend on delivering the level of services that inspire confidence and trust.325
A broader role for the TTO can pay dividends. Etzkowitz points to the importance of improving information about the technologies produced at the university that helps firms reduce uncertainty.326 Haeussler, Harhoff, and Mueller find that information generated during the patent process has value for venture capitalists independent of the patent itself.327 Agarwal and Shah point out the importance of micro-level policies to aid start-ups, where providing “access to complementary assets and resources for fledgling academic- and user-founded firms in early stage industries might encourage more rapid commercial introduction of novel innovations.”328 Mowery and Ziedonis find greater “localization” of knowledge spillovers from universities via licenses than through citations of academic work, which they suggest may be due to greater “tacitness” of licensed knowledge demanding closeness for access to the scientist.329
In a similar vein, Jain and George refer to TTOs as “uniquely suited to play a significant and active role in building legitimacy for new technologies emerging from university laboratories,” while the technology is “still wrapped in a fog of uncertainty that is technical, commercial, social and/or ethical in nature.”330 Examining a study of WARF’s role in the human stem cell technology at Wisconsin, they conclude “the activities of a TTO can extend beyond traditional patenting and licensing to include building legitimacy for nascent technologies.”331 Jain and George argue that WARF played the roles of protecting (“insulating the nascent technology from the extant institutional environment in situations where it is hostile to the innovation”), propagating (“dissemination of a coherent group of understandings and beliefs related to the technology” and not just diffusion), and influencing (“coalition building, lobbying, and compromise tactics”).332 TTOs’ efforts at these roles “are broadly applicable to other actors considering building legitimacy for a nascent technology.”333 The unusually successful WARF differs from most TTOs in that it has “skin in the game” in commercialization.
Beyond competency of a TTO, the implicit linear pipeline of disclosure-patent-license underlying much of current commercialization policy needs to be replaced with a broader vision of academic culture. It is not enough to get a researcher to disclose an idea to the TTO; the idea must be market feasible to be commercialized. This often requires pre-patent development funding to enable a promising idea to reach the stage at which viability can be assessed. As one commentator notes, “the single most common feedback we get from potential licensees is that the technology is too early. So proof-of-principle, proof-of-concept funding is the gating factor to getting more technology to a go-or-no-go decision point.”334 A survey of TTOs finds that universities with higher rankings license a higher proportion of disclosures in the proof-of-concept stage,335 suggesting that there may be some halo effect to overall reputation. (They may also have better TTOs.) TTOs can play a key role in designing contracts that solve the thorny incentive problems inherent in early-stage inventions. Dechaneaux, Thursby, and Thursby conclude from their survey that proper contract design plays a “critical role” in addressing incentive issues.336 Universities can also develop mechanisms for involving entrepreneurs in this process, both smoothing the way for faculty to share the critical tacit knowledge they possess and facilitating investment in the often-costly development process.
When the speed of innovation – the time from discovery to commercialization – is critical, universities need faster processes internally. Inventors play a crucial role in speeding up or slowing down particular inventions.337 Thursby and Thursby note that research shows that “faculty are often involved in the license process well beyond disclosure.”338 Jensen and Thursby conclude that active participation by the faculty is essential for commercialization.339
A broader task for TTOs is translating university research into real world impact. A narrow focus on commercialization as the primary path may miss important opportunities. Litan, Mitchell, and Reedy lament: “[r]ather than implementing broad innovation/commercialization strategies that recognize different and appropriate pathways of commercialization, as well as multiple programs and initiatives to support each path, many have channeled their innovation dissemination activities through a centralized technology transfer office (TTO).” Too often, this results in TTOs becoming “bottlenecks rather than facilitators of innovation dissemination.”340
D. Supporting Spinoffs
Entrepreneurship is needed for firms to emerge from universities. Spinoffs require particular support. Indeed, “[a]cademic spinoffs, given their technology basis, combine both the traditional problems associated with the start-up of a new business and the difficulties associated with the development of new technologies.”341 They are, of course, capital and credit rationed.342 Lerner points out that many candidates for start-ups are “characterized by uncertainty and informational gaps, which make it difficult for the investors to evaluate business plans or to oversee the entrepreneurs once the investments are made.”343 He argues that TTOs can play an important role in solving these problems in two dimensions: “reducing the uncertainty of academic entrepreneurs about the spin-out process and easing outside investors’ and strategic partners’ doubts about the new venture.”344 However Clarysse, Tartari, and Salter point out that, given that it is a desire to be an entrepreneur that drives faculty behavior, “the creation and efforts of TTOs is of modest or little use in itself unless such a creation is backed up by changes in the hiring and promotion practices of the university itself.”345 Creating a start-up may or may not be the most appropriate means of commercializing some university research.346 Start-ups are not a priority for all TTOs or university administrations.347 They have benefits for universities, but also have costs.348
Communities surrounding universities want start-ups as an economic development tool.
The key argument is that communities surrounding universities must have the capabilities to absorb and exploit the science and knowledge that universities generate. Even if new knowledge is generated in many places, it is only those regions that can absorb and apply ideas that are able to turn it into economic wealth. As a consequence, universities are a necessary but not sufficient condition for regional economic development.349
Students can also play this role.350
Spinning off a start-up may not be the right strategy. Evidence suggests this is often the case when the technology needs further development before it is ready for the market, as with many medical devices based on ideas from university researchers.351 As a result, “many [university] inventions are so embryonic that they might remain in the lab without license agreements designed to induce collaboration between inventors and licensees.”352 This has consequences for license terms, which must be designed to induce collaboration.353
Not all technologies are equally likely to result in start-ups. University spin offs commercialize more innovative technologies than industry incumbents’ spin offs.354 This may be the result of an earlier stage of university-related spin off technology. There is evidence that start-ups with radical technologies and strong intellectual property in fragmented industries are more likely to survive.355 As universities became more experienced with start-ups, they became more comfortable taking equity stakes rather than upfront license fees, which raised additional challenges for TTOs in structuring deals and monitoring performance.356 Taking equity stakes in lieu of royalties appears to promote the creation of start-ups.357 Similarly, permitting part-time employment at start-ups is valuable.358 However, Lerner catalogs a variety of dangers for university-related start-ups in obtaining financing and for universities in establishing their own venture funding.359
Creating a start-up company requires complex connections with entrepreneurial, managerial, and financial resources.360 Zahara, Van de Velde and Larrañeta propose that “a key source of the potential performance differences” among spinoffs “lies in their ‘knowledge conversion capability’ (KCC) that refers to their capacity to transform research and scientific discoveries into successful products and goods that are efficiently and quickly commercialized to create value,” although they concede that there is little knowledge of how spinoffs accomplish KCC.361 They suggest three key components: (1) “conceptualization and visioning”, which “means envisioning and conceiving potential uses and applications for the new technology;” (2) “configuration and design”, which “centers on developing working and functional prototypes that transform this knowledge into new products that are easy to develop and manufacture;” and (3) “embodiment and integration” that “denotes a firm’s ability to integrate and apply diverse knowledge from different sources and convert its technology to marketable products.”362 Surveying firms in five states, they find that corporate spin-offs have statistically significantly higher mean measures of all three KCC components.363 They suggest this was because corporate spinoffs had better access to KCC-related skills (from their parent corporations) than university spinoffs.364 A crucial step for universities is to bolster spinoffs’ access to the KCC components.
University policies affect the likelihood of a start-up being a solution. Preferential treatment for those engaged in building start-ups, such as non-research leaves, temporary freezing of tenure clocks, and various recognition increase faculty willingness to take on such projects.365
University-related spinoffs can develop with one of the research team serving as CEO or an outsider with prior business experience taking on that role.366 Relying on an academic entrepreneur rather than someone with business experience can bring more commitment to a new technology, but can mean the start-up lacks business knowledge and experience and may inappropriately focus the entrepreneur on the technology rather than the business aspects.367 Some research suggests companies are more likely to grow substantially if the academic entrepreneur leaves the university.368 Other research found that start-ups in a university incubator were slower to ‘graduate’ from the incubator if they had faculty members as part of senior management.369 Franklin, Wright and Lockett surveyed universities with start-up experience and found that the more successful among them saw fewer disadvantages to having “surrogate entrepreneurs” manage the start-ups rather than the faculty member behind the technology.370 The biggest challenge was locating appropriate surrogates.371
As noted earlier, one approach to start-ups is to train the research team in entrepreneurial skills. “Academics are often highly dependent on others in their environment to supply the competencies needed to launch a new venture given the traditionally non-commercial environment in which they operate.”372 Some argue that training programs such as the NSF I-Corps do not adequately prepare researchers because they focus on starting a business “but don’t necessarily teach them how to grow a business and manage a business.”373 One suggests that ten years of support would be needed, rather than just one year.374
Early-stage funding support makes a difference.375 Support programs are complicated to design and administer. The earlier stage of much technology coming out of universities raises problems for securing financing because it causes an “information asymmetry [for investors] vis-à-vis the TTO and the investment manager. Valuation of patents or tacit knowledge at the early stage of product development is quite uncertain and poses particular problems for venture capital firms. This problem is exacerbated because there is typically little information about the acceptability of the product in the market or the size of the market.”376 At the same time, leveraging IP rights is increasingly important for emerging technology companies’ funding strategies.377 To fill the gap created by these difficulties, some European countries provide public funding for start-ups. One fear with such funding is that firms will be overfunded relative to their merits, leading to overvaluations that then hinder subsequent funding rounds from market sources.378 A study of European university spinoffs found evidence to support this effect.379
Another support tactic is to increase entrepreneurial faculty opportunities to build social capital through pre-start-up connections with venture capitalists. Drawing on a dataset of MIT spinoffs, Shane and Stuart suggest that founders’ social capital as measured by pre-formation connections with venture capitalists improved university start-ups’ success at funding.380 Aldritch and Audretsch find that academics’ social capital (such as membership on a scientific advisory board or co-authoring with an industry scientist) is associated with higher propensity to become an entrepreneur.381 Examining data from start-ups from two European universities, Soetanto and van Geehuizen find the university networks aid in securing financing.382
Creating conditions that nurture start-ups is a complex problem not solved by throwing money at firms (although they appreciate it), providing training in finance, management, or accounting (although this is useful), or asking researchers to read Schumpeter. Environments that help start-ups flourish are analogous to a coral reef: a diverse ecosystem.383 The coral reef metaphor is apt because start-ups are not homogenous.384
Nelson concludes his case study of a Stanford-related innovation with mixed results in commercialization by pointing to the need for better “alignment” between universities and those who can make commercialization a success:
Rather than suggesting that “firms are better at innovation than universities,” “small firms are better at innovation than large firms,” or “entrepreneurial innovation plays a more important role [than] structural innovation in universities,” the present case points to the need to seek alignment between technological, organizational, institutional (and likely national) contexts – for it is in leveraging context and in recognizing where each context excels that we may hope to further both innovation and excellence in other university activities.385
This is a central issue for universities: how to harness resources to improve the flow of ideas from lab to market. It also highlights the central flaw in the Bayh-Dole approach of relying on universities to undertake a role for which they are ill-equipped.
To economists, the production of innovation by firms is still mostly a black box. How they generate research is not well understood. A few universities claim a significant role in innovation. There are touted successes: Gatorade (University of Florida) and the Moderna COVID-19 vaccine (MIT). These are not sufficient to allow us to know if universities play a major role in innovation; given the $50 billion spent by the NSF and NIH in 2021 alone, there should be many significant successes. Yet the data on university patents suggests that most universities are not engaged in this important preliminary step on the road to commercialization of research.
This Article provides insights into the red box innovation processes in non-profit universities that policymakers generally want to play a bigger role in successful research. Universities do offer an environment that businesses believe has advantages for at least certain types of research. Some of the most successful corporate laboratories mimicked university environments and those who have worked in them and studied them point to those features as critical to their successes. If we could do a better job of engaging universities in producing commercializable ideas – the first step toward which is more patenting of ideas from research – we might be able to unlock more of the benefits the proponents of Bayh-Dole promised the statute would deliver. However, universities are inherently conservative organizations, not prone to radical changes in structure. Nonetheless, from what we know of successful processes, some changes on the margins could improve university performance in commercialization.
Schumpeter put innovation in the center of his approach to economics, calling it a “third and logically distinct factor in economic change” (alongside the “non-cyclical element of growth” and “outside factors”), arguing that “If there be a purely economic cycle at all, it can only come from the way in which new things are, in the institutional conditions of capitalist society, inserted into the economic process and absorbed by it.”386 It drove the “incessant creation of new plant and equipment, embodying new technologies that revolutionize existing industrial structures”387 producing “great surplus gains” from new industries and methods.388
As generators of ideas and of research likely to teach us how to “do new things” and “new ways of doing things,” universities are a source of Schumpeterian innovation. But innovations have impact only if they reach the market. If we are to benefit more from investments of university researchers’ effort, we need a better approach to moving ideas from lab to market. Approaching that problem with a Schumpeterian/Kirznerian view is one way. O’Kane et al.] argue that TTOs struggle with contradictory identities, caught between a need for a scientific identity to connect with their faculty clients and a business identity to connect with university administration and potential licensees.389 Having a clear framework for their mission could help accomplish that. Developing that framework requires universities to reject the anti-capitalist ideas so common in academia and encourage researchers to meet market tests of value. Another step may be to fill more positions with people with entrepreneurial experience. This would require universities to consider entrepreneurial skills and interests in hiring research faculty.
At a more mundane level, better data on university efforts at commercialization is needed.390 We need to understand which technologies successfully move out of the university into the market, which faculty are more likely to be successful, and which forms of commercialization work best for various technologies. Better data includes better measures of success as well as more data on efforts at innovation.
The editors of a special issue of the Journal of Economic Behavior and Organization looked at academic science’s relationship with entrepreneurship. Its overarching theme was that there are tradeoffs, “including the opportunity cost of searching for (and negotiating with) industrial partners, the shift in the time horizon and direction of research, and the distortions induced by limiting the dissemination and future use of research findings,” involved in commercialization efforts.391 Broader recognition of these tradeoffs by universities is essential.
Schumpeter argued that innovations tended to “cluster at certain times” because “as soon as the various kinds of social resistance to something that is fundamentally new and untried have been overcome, it is much easier not only to do the same thing again but also to do similar things in different directions, so that a first success will always produce a cluster.”392 Universities support researchers from a range of disciplines. They are positioned to consider not just the technologies that produce these clusters but to analyze the development and impacts of these clusters. A focus on technologically driven clusters would likely yield more innovation, thereby enhancing the value of universities to society.
“Most innovations… especially the successful ones, result from a conscious, purposeful search for innovation opportunities.”393 Innovations rarely result from flashes of inspiration. Paul McCartney woke up one day with the melody for the song “Yesterday” in mind, but then worked to perfect it for two years. It was “hard grueling work,” not “sudden creative genius,”394 that produced the successful version. So, too, it is with researchers inside the red boxes. Long work based on expertise is required and results are not guaranteed. University researchers help develop innovations that spur the economy. If we could do better than Bayh-Dole has done at encouraging such efforts, society as a whole would benefit. The process that has arisen to try to sell inventions to the private sector, usually through TTOs, ultimately needs to incorporate the insights Schumpeter and Kirzner developed on entrepreneurship. If they do so, they will be more successful at the process of moving new things into the market. We should care about how the products of university research move from the lab to the economy because, as Kealey says, “technology is wealth.”395 More than forty years of Bayh-Dole’s inadequate linear model of innovation is enough. It is time for a serious effort to rethink how universities can best foster innovation and so create economic growth.