Will Financial Crisis Starve Academic Innovation?

The recession and resulting budget cuts endanger key university and state efforts that promote economic growth, writes Roger L. Geiger.

May 4, 2009

Even before Thomas Friedman announced that the world was flat, it was increasingly recognized that innovations stemming from academic research play a vital role in sustaining the competitiveness of the United States in the global economy. Federal science agencies and the states have adopted policies that focused academic research on fields with commercial potential and ensured that research findings would be shared with industry. Corporations in electronics, healthcare, and even petroleum have deepened their relations with university scientists and established long-term partnerships. Now, however, with the financial crisis disrupting virtually all corners of the economy, academic innovation too is threatened. The nation’s ability to innovate should be a potential antidote to the economic slump, not its victim.

Academic innovation is a complex process, with strategic actors in federal agencies, state governments, corporate labs, start-up companies, and venture capital -- as well as universities. Each faces somewhat different challenges.

If there is one bright spot in the gloom, it would be the relatively generous federal support for academic research, especially the additional stimulus funds from the American Recovery and Reinvestment Act. President Obama specifically called on the National Institutes of Health and the National Science Foundation to spur “new discoveries and breakthroughs that will make our economy stronger.” Both agencies have oriented grants toward areas of potential innovation.

Full federal science coffers, even temporarily, are a welcome change for university researchers. Basic research should be well provided for, especially in strategic science-based technologies, like nanotechnology, informatics, advanced materials, and biotechnology. Such fields are the seed beds of future innovation. However, potential problems lie in the transition from university laboratories to the commercial economy.

University start-up companies are particularly valuable for bringing to market technologies that might otherwise never escape the laboratory. The pharmacy industry draws heavily from the many biotech spinoff firms that undertake high-risk product development, and a similar division of labor has been emerging in industrial applications of nanotechnology. University start-ups grew at a rate of 15 percent per year in the late 1990s, but then stagnated following the recession of 2000-1. Start-ups have grown nearly as fast since 2003, but the current slump will surely bring this latest spurt to a halt. Economic conditions will be difficult for most small businesses, but university start-ups face the additional obstacle of raising long-term capital.

New technology firms typically face an extended period in which they spend money to develop products while generating little or no income. This is referred to in the trade as the “valley of death,” and traversing it usually requires early-stage investments from angel investors or venture capitalists. As the economic conditions make these sources more risk averse, investments are delayed until innovations are closer to becoming actual products. Smaller amounts of capital are often available from special university funds or state programs. These entities will need to fill some of the void left by the shrinkage of early-stage capital if this source of innovation is to remain robust.

Mature corporations conduct the vast majority of their R&D in their own laboratories, but universities can and do make distinctive contributions to corporate innovations through sponsored and collaborative research. Corporate-sponsored academic research registered a rare decrease after the last recession, and we can expect that the current downturn will reproduce this same pattern. In difficult times, firms hunker down and foreshorten their horizons. To counteract under-investment, a good deal of university-industry research collaboration is subsidized by state and federal programs. But, the outlook is particularly grim at the state level.

For more than a decade, state governments have been increasing the size and the range of their investments in technology-based economic development. Some programs have encouraged collaborative university-industry research in strategic areas, and most states have found ways to assist university start-ups, since almost three-quarters of these firms remain within their state of origin. Existing state programs are now under severe pressure and new initiatives unlikely. Arizona, facing one of the worst budget shortfalls, has been dismantling a well-conceived plan for building bioscience industries. Cutbacks may be unavoidable, of course, but unfortunately they have been accompanied by outdated rhetoric about “university boondoggles” and “corporate welfare.” Such attempts to discredit the entire endeavor could undermine both past achievements and future efforts.

With the ignominious collapse of the financial industry, it should be evident that the strength of American industry lies with technological innovation — most obviously in software, information technologies, medicine, and advanced materials, but now touching virtually all manufacturing industry. University research provides vital inputs to the innovations that keep American firms on the cutting edge of fiercely competitive fields, and these contributions should not be allowed to atrophy during the current downturn. While the public investment in research seems assured, at least in the short run, it is imperative to maintain our investments in the multiple channels that have made it possible to translate university inventions into products that enhance economic competitiveness and human well-being.


Roger L. Geiger, distinguished professor of higher education at Pennsylvania State University, is co-author with Creso Sá of Tapping the Riches of Science: Universities and the Promise of Economic Growth,published in January by Harvard University Press.


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