The American Interest
Policy, Politics & Culture
No-Cost Stimulus

How to get the economy going again without busting
the budget.

Published on January 1, 2011

As the U.S. economy struggles to recover from the deepest economic downturn since the Great Depression, the debate over how to move forward has focused until quite recently on the traditional levers of fiscal and monetary policy. There is, however, no longer much room to pull on either one of them. The huge Federal deficit is constraining the ability to enact additional fiscal stimulus measures, and the record expansion of the Federal Reserve’s balance sheet and near-zero real interest rates mean that it has done about as much as it can to boost job growth without unduly risking significant future inflation.

We are left with two choices: Either we wait for the economy to somehow heal its own wounds, as it has done many times before, or we stimulate innovation through programs focused on encouraging entrepreneurship to meet a host of serious long-term needs: a greener economy, a more efficient health care system, better schools, and more. Taking action to stimulate innovation is by far the wiser course of action, but for political and other reasons the Federal government’s record in supporting innovation is, to be generous, fitful.

Washington’s traditional answer to the innovation challenge has been to spend more money on research and development (R&D;). One problem with this answer is that R&D; money is hard to come by in the current economic environment. Fortunately, sometimes the right answer is not more money, but better ways to spend it. Such exactly is the case with the $90 billion that the Federal government grants to universities every year to advance the scientific ball in many areas of endeavor.

The United States already has a legal superstructure in place to help convert research money into commercial products: The Bayh-Dole Act of 1980 gives universities intellectual property rights to the innovations their faculty discover with the help of Federal funds. However, the commercialization ecosystem that has developed on campuses throughout the country since that law was passed has become too cumbersome. We can make modest improvements to that ecosystem that would significantly accelerate the commercialization of new discoveries, and thus help to restore some of the hope for the future that America has lost in the ongoing recession.

Long overdue adjustments in our immigration laws offer a second, low-cost opportunity to unleash pent-up economic dynamism. The debate between Washington and the states today is mostly about low-skilled illegal immigrants, but we would be better off if we concentrated on high-skilled immigrants already attending our universities or working here on short-term H1-B visas. These immigrants could transform our economy for the better, as they have in the recent past.

In short, policymakers looking for inexpensive ways to boost our economy need not look far. With simple tweaks in these two areas, the United States can get back on the path of entrepreneurial renewal. Skeptical? Consider these two facts: 1) Entrepreneurs launching new firms have been responsible since 1980 for virtually all new jobs created in the U.S. economy; and 2) immigrants disproportionately account for the success of high-tech ventures. It is time that we craft our policies to exploit these basic features of our economy. Our future depends on it.

Federally Funded Research

In 2009, the various agencies of the Federal government spent $147 billion on research and development. According to the National Science Foundation, roughly 60 percent of this amount, about $90 billion, flowed through U.S. universities. This is money generally well spent, as it has been in years past. U.S.-funded research benefits not only Americans but also the world when it leads to new knowledge and innovation. Universities are central to this process through their instruction and their faculty’s publications.

Increasingly, universities and Federal government labs also disseminate innovation through their commercialization activities—specifically the licensing of discoveries by faculty members to companies they form or to existing firms. Some question whether commercialization should be a university function at all. They argue that universities exist to create new basic knowledge, not to commercialize applications of it. Some skeptics worry that commercial activities divert faculty from fundamental research and teaching. Some assert, too, that commercialization distorts the values and culture of the university.

These worries are misplaced. Universities may be ivory towers, but they are not monasteries. New knowledge cannot benefit mankind if it is locked away on campus. To contribute real value, research must also be applied to real problems and disseminated throughout society. In market economies, commercializing innovations is often the best way to disseminate them, for it is the infusion of human and financial capital that enables innovations to “scale.” To take the academic inventors out of this process would significantly reduce the likelihood that discoveries in the lab will be turned to constructive uses outside university walls.

The notion that a bright line exists between “basic” and “applied” research is also misplaced. It is impossible to predict which research activities will turn out to have commercial potential. This fact highlights another key point: Invention (the discovery of a new idea or technology) is not the same as innovation (the application of the invention to real problems or needs). Generally speaking, universities and Federal labs are much better at invention than innovation. The exception is the rare “inventor/innovator” who both discovers something new and finds ways to introduce it into the marketplace.

Rare though they may be, America’s academic inventors/innovators have a great record of contributions to our society and economy. This record has been boosted with the aid of Federal funding and the Bayh-Dole Act. Consider the list of the fifty most important innovations and discoveries funded by the National Science Foundation in its first half century. Although this Nifty Fifty list, identified by the NSF in 2000, includes several major advances in basic science (such as the Edwin Hubble’s discovery that the universe is expanding), most are innovations that have been commercialized or have become platforms for widely used commercial products and services: barcodes, CAD/CAM software, data compression technology used in compact discs and other storage media, and, perhaps most significant of all, the Internet (which the NSF funded along with DARPA).1 Non-tech items on the list include the yellow barrels used on highways to slow out-of-control vehicles before they hit hard barriers, and the American Sign Language Dictionary, which has changed the lives of the deaf.

R&D; Magazine’s annual analysis of the top hundred “most technologically significant new products” gives us a good way to take account of the importance of university-generated innovations. According to R&D;, universities and Federal labs have become much more important sources of innovation in recent years.2 In 1975, for example, private firms accounted for more than 70 percent of the R&D; top hundred, while academic institutions accounted for just 15 percent. By 2006, these percentages were reversed: Academia contributed more than 70 percent, and private firms contributed about 25 percent.

University-generated innovations should be even more important to the United States in the years ahead, yet as important as Federal support for such research is for innovation, there are other important ingredients, too. America’s “innovation machine” is a complicated engine with many parts: universities, Federal labs, entrepreneurs, financiers, and, yes, even lawyers (for intellectual property rights). Before we pour even more fuel—that is, Federal money—into this innovation engine, we need to make sure it is firing on all cylinders. It’s not.

There are several reasons why our current innovation system is not performing as well as it could and should. First, there are problems with the peer-review system by which the Federal government distributes R&D; money to researchers. One well-known by-product of this system is its inclination to “clubbiness”, and thus its bias against out-of-the-box thinking. Scientists have an incentive to scratch each other’s backs to ensure that grant money continues to flow. In addition, peer reviewers at the top of their fields often discourage challenges to the scientific orthodoxies they may have helped establish. These features of the current peer-review system, whatever other justifications they may have, skew the distribution of Federal funding toward older, more orthodox researchers and away from those from whom real breakthroughs often come.

Many recognize the problem of age bias in peer-review rewards. The Bill and Melinda Gates Foundation has launched an important initiative, Grand Challenges in Global Health, aimed at funding untested ideas with high innovative potential. It specifically hopes to avoid the standard peer-review process by reaching out to researchers of all ages who are working on breakthrough ideas to fight global diseases.3 The Fields Medals for mathematics, too, are usually limited to researchers forty and under. The Federal government should follow suit. It might, for instance, set aside some fraction of Federal research dollars for younger scientists, or see that younger scholars are included on peer review panels.

Another problem with the current Federal research spending effort is one that it shares with defense spending: Research dollars must be spread around key congressional districts. It’s just a fact of life pertaining to all centers of professional excellence that the best institutions tend to have disproportionate numbers of the most creative innovators. Sustaining political support in Congress comes at the cost of diminishing innovation.

This problem is not easily solved. One fix might be to get Congress to allocate Federal money for broad categories of research rather than specific regions or projects. Another might be to tie funding to research outcomes (such as new firms started and their revenue and employment growth, and patents filed for or received), as measured by the funding agency. Sunlight has a way of restraining the natural impulse to distribute funds for political reasons.

Perhaps even more important than the flaws in the Federal funding process, however, are inefficiencies in the system for commercializing innovation in general. These concern the particulars of licensing of the intellectual property in innovations developed by universities and Federal labs with Federal research funding.

One of the unintended consequences of the Bayh-Dole Act that gave universities rights to the intellectual property in faculty innovations is that the universities then centralized the licensing and commercialization of that intellectual property into single offices: technology licensing offices (TLOs) or technology transfer offices (TTOs). There were good reasons to do this. Centralization allowed universities to realize economies of scale in licensing; to ensure that faculty members reported their discoveries to the universities so that universities could accurately keep tabs on royalties owed to them under faculty employment agreements; to coordinate patenting decisions when multiple faculty and students were involved; and to coordinate licensing arrangements when faculty from other universities were co-inventors. The universities also thought that TLOs would learn more about licensing opportunities than would individual faculty members.

But centralization has exacted a price. It has given the TLO on each campus what amounts to monopoly control over the licensing activities of all university faculty innovators. Lesa Mitchell and I have recently argued that this subjects faculty inventors to a bureaucracy that may not always know how to quickly and most efficiently commercialize their discoveries.4 It helps to imagine what would happen if universities applied the same model to faculty research, forcing faculty to obtain the approval of a central “publications office” that would coordinate the submission of articles to journals and books to publishers. Faculty would not stand for this, nor would universities voluntarily adopt it for fear of slowing their scholars’ output or narrowing the dissemination of research results. Yet when it comes to commercial activity, universities have shown no qualms about pursuing a strategy that generates less innovation than would be the case if the market, rather than bureaucracies, directed key choices concerning licensing and commercialization issues.

If market forces drove decisions about licensing and commercialization, then faculty or government inventors would have a far greater say than they currently do about when, to whom and under what conditions those licenses should be given. Universities and Federal labs already get a share of the income from their intellectual property; there is no good reason why they should have a monopoly over licensing decisions as well. Why not allow faculty and government inventors to choose their licensing agents, whether they be their university’s own TTO, that of another university, or even an independent licensing agent or attorney—in other words, whichever agent has the most expertise licensing a particular technology?

In a world of free agency, with no bureaucratic bottleneck between inventors and the marketplace, we would enjoy speedier commercialization of discoveries. That could only benefit society at large, not to mention the universities, labs and inventors who create them. Choice in licensing also would encourage specialization and thus economies of scale among licensing agents, regardless of their university affiliation. Some universities might even decide to drop their TLOs, merge or pool them with other research institutions, allowing them to streamline staff, save money and generate better returns on their investments. Or universities could decide to keep their TLOs, but encourage them to compete with other licensing agents, or transform them into technology consulting offices to advise faculty about the commercialization and licensing process.

The Federal government needs to help push universities along this new path by facilitating a market in technology licensing. Individual funding agencies could require grantee organizations to provide evidence of their commercialization capabilities as a condition of obtaining research grants. Providing licensing freedom to faculty innovators would presumably be one way to satisfy this requirement. Agencies overseeing the various Federal labs (the Department of Energy, in particular) could also require the labs to grant licensing freedom to their employee innovators. These policy changes could be effected through regulations issued by the Department of Commerce, which has authority to implement Bayh-Dole.

Congress could advance these reforms, too, with either legislation or appropriations bills that require agencies to encourage licensing reform. There is no need to change the Bayh-Dole Act itself or any other statute in order to implement these reforms.

Some will object to the freer market in technology licensing that these reforms would create. Inertia is a perennial barrier to significant change, of course, and some universities are probably content with the money they already earn from commercialization. Some will resist change on the grounds that faculty innovators need guidance from the licensing office because they lack experience as entrepreneurs. But this is an argument for universities to provide entrepreneurship training, not an argument to keep doing things the same old way.

One objection to the free agency model that we should take seriously, however, is that it could generate messy disputes and even litigation regarding the ownership of intellectual property when innovators from several labs or multiple universities are involved. Yet TLOs and university general counsels are already wrestling with this conundrum and will continue to do so. Free agency would not make these problems any worse.

A final concern is the possible impact of innovation-run-amok. Ideas that seem safe in the confines of a university lab, especially in the fields of biotech research and genetic engineering, may present a more troubling face if they are brought to market without a framework for considering their social or ethical impact. The disruptive impact of IT innovation is evidence enough that the effects of new inventions are not easily forecast or controlled. Given the accelerating pace of innovation in every realm, designing some mechanism for anticipating social impact or at least ensuring transparency seems like a worthwhile task. But it is hardly a reason to preserve an inefficient system.

In short, none of these objections are show-stoppers for free agency. Each can be readily addressed with a little ingenuity. At a broad level, we can answer critics with a basic question: On what grounds can a technology licensing monopoly be justified when the presumption in virtually every other sphere of economic activity favors competition? At the very least, opponents to free agency would seem to have the burden of proof.

There are several other ways to speed up the commercialization process, most notably commercialization education for innovators at universities and Federal labs. While some university scientists have extensive entrepreneurial and licensing experience, others (especially first-timers) do not. This is one of the main justifications for having a centralized TLO.

But if innovators only need entrepreneurial education and coaching, then why not fill that need directly? We ought to look for creative ways to bring in panels of outside entrepreneurs to help university (and Federal lab) innovators develop the commercial potential of their innovations and navigate complex decisions about whether to license their intellectual property rights to existing firms or start new ones. In particular, if they decide to start their own firms, faculty/lab innovators could profit from expert guidance about how to build companies, seek outside capital, build a management team, and so on. There are excellent examples of this kind of activity going on formally and informally at MIT, Stanford, Washington University in St. Louis, and the University of Texas, among other institutions.

Federal agencies responsible for research grants could also add some modest additional funds for such training and mentoring, provided the university/lab sponsor has developed an appropriate plan for doing this. In addition, universities may want to band together to support a team of serial entrepreneurs who could help faculty innovators at all participating institutions. Federal labs could do the same. There is no single right answer here, but some more creative thinking and multiple experiments would be helpful.

Yet another idea for accelerating commercialization at universities and Federal labs comes from Harold Bradley, chief investment officer at the Kauffman Foundation. Taking inspiration from the X Prize Foundation, Bradley proposes the creation of several Federal prizes for universities that show success in commercialization. “Success” could be defined by an index that measures the number of new firms launched, revenues realized and jobs created from these enterprises. One could envision a $1 million prize to the university demonstrating the greatest success each year, and perhaps a larger prize (say $5 million) for the best success measured over a five-year period. The prize shouldn’t be contingent on the traditional measures of TLO performance, notably patents generated and licensing income earned. It should instead reward what is most important for society and jobs: namely, new firms created and measures of their performance.

There is an extensive economics literature on the powerfully strong incentives that prizes create. The quest for fame stimulates far more activity than the amount of the prize itself. Also, in creating such prizes, the Federal government would indirectly encourage the other two commercialization reforms suggested here: more licensing freedom for and entrepreneurial education of innovators.

Importing Entrepreneurs

Not only are new firms generally important to the vitality of the economy and job growth, but new firms that “scale”, that grow in revenues and jobs, are especially important. Using Census Department jobs data, Dane Stangler has shown that the top 1 percent of all companies generate 40 percent of new jobs, and that the vast majority of these firms are no more than five years old. Furthermore, although the most rapidly growing young firms (those between three and five years old) represent less than 1 percent (measured in employment growth) of all companies in the economy, these few firms account for 10 percent of new jobs created each year.5

No one doubts that new firms and the entrepreneurs who found them are vital parts of the innovation ecosystem. What is less well appreciated is how many of these firms are founded by immigrants. Vivek Wadhwa of Duke University and Anna Lee Saxenian of the University of California at Berkeley, among others, have documented that immigrants account for a disproportionate share of startups of successful new enterprises, high-tech companies and patents. These immigrants bring both skills (often acquired at U.S. universities) and entrepreneurial drive to their efforts. If we want more such companies, then we need to make some relatively straightforward changes in our immigration policies.

The most ambitious reform would be simply to staple green cards to all U.S. university diplomas handed out to foreign students. For whatever reason, in recent years foreign students have received nearly 60 percent of all engineering doctorates awarded in the United States and more than 50 percent of all doctorates in engineering, mathematics, computer sciences, physics and economics. This trend presents an opportunity to harvest the creativity and entrepreneurial inclinations of foreign citizens to the benefit of the U.S. economy and society.

There are variations on this idea. Green cards could be attached to any kind of diploma in any subject, to graduate degrees, or to degrees in certain fields (such as science, technology, engineering and math, or STEM) which are likely to generate most of the next big innovations. A less politically risky option would be to create a new “startup visa.” Senators John Kerry (D-MA) and Richard Lugar (R-IN) have proposed granting a temporary visa to entrepreneurs who receive at least $250,000 in outside financing and hire at least one non-family member, and then a green card once their enterprises employ at least five non-family members or earn at least $1 million in revenue. This is a good first step, and certainly far better than the current EB-5 visa, which is available for only 10,000 individuals who bring at least $1 million into the country and invest it in companies here (the threshold is $500,000 if the investment is in an economically distressed area). Even then, the EB-5 visa is valid for just two years.

An even better entrepreneurs’ visa, a true “job creators visa”, would be based solely on jobs created here and not have any investment requirement, which many immigrants will not be able to meet. After all, what could be more important in the current distressed economic environment than encouraging the formation of firms that actually hire Americans? Immigrants who establish enterprises here should immediately receive a temporary visa and then a time-limited visa, perhaps for five years, once they hire at least one non-family member. As in the proposed Kerry-Lugar legislation, the visa should convert to a green card once the immigrant-entrepreneur hires some larger number of non-family members (say five or ten).

There is an ample supply of immigrants who might qualify for a lengthened startup visa: the one million skilled foreign workers who are here now on temporary (six-year) H1-B visas, as well as the roughly 60,000 foreign students who earn a STEM degree at an American university every year. These are far larger numbers than the relatively few individuals who could qualify for entry under the Kerry-Lugar proposal. If, conservatively, just one in ten of the H1-B’s and foreign students launch a U.S. business (which would equal the share of self-employed in this country among all workers), and if each hires just one employee, then a true “job creators” visa could generate at least 100,000 new jobs. The number could be significantly higher given immigrants’ propensity to launch job-creating businesses at a greater rate than native-born Americans. Moreover, the new businesses that highly educated immigrants launch are likely to be more technology-intensive than the typical business. This outcome serves the need to accelerate the development and commercialization of innovation in this country.

Immigration reform for highly skilled workers, especially those with an entrepreneurial bent, is long overdue. We are competing in a global marketplace for ideas and talent. We do not have the luxury of driving budding entrepreneurs to take their ideas and energy to countries with more sensible and constructive immigration policies.

Getting a better return on Federal research dollars and opening immigration to prospective entrepreneurs will not magically restore the U.S. economy, but these are low-cost steps we can take now to spark our stuttering national job creation engine. Perhaps more fundamentally, creative policies that nurture entrepreneurs and convert invention into innovation can provide a long-term foundation for economic growth even as they deliver permanent improvements in the way we live.

1National Science Foundation, Nifty Fifty (2000).
2Fred Block and Matthew Keller, “Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970–2006”, Information Technology and Innovation Foundation, 2008.
3The President of the Gates Foundation’s Global Health Program, Tadataka Yamada, has written, “Peer review can kill truly novel ideas because they are, by definition, peerless.” See Yamada, “In Search of New Ideas for Global Health”, New England Journal of Medicine, March 27, 2008.
4Litan & Mitchell, “A Faster Path from Lab to Market”, Harvard Business Review (January 2010).
5Stangler, “High-Growth Firms and the Future of the American Economy”, Kauffman Foundation, March 10, 2010.

Robert E. Litan is vice president for research and policy at the Kauffman Foundation. This article is adapted from testimony prepared for the Joint Economic Committee, June 29, 2010.