A Blog by Jonathan Low


Nov 27, 2016

Why Research, the 'Engine of Innovation,' Is In Danger of Stalling

The private sector has used 'numericide' - death of innovation by numerical analysis - to take the risk out of risk capital. But they may be killing experimentation, creativity and future opportunities as well. JL

Christopher Mims reports in the Wall Street Journal:

Funding of R&D has shifted dramatically. Support from the government has waned, from nearly 2% of GDP during the 1960s to 0.6% today. Corporate R&D has grown to 2%. (But) not all R&D is created equal. For companies, spending is speculative with an uncertain, far distant, payoff. “As we became more sophisticated in quantifying things we became less and less willing to take risks. The spreadsheet is the weapon of mass destruction against creative power.”
This is a special time for technology. Five of the world’s seven most valuable companies are U.S. tech firms. But the core innovations underlying Apple Inc., Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook Inc. are decades old.
The transistor was born in the 1940s at AT&T’s Bell Labs. The internet was nurtured by the U.S. Defense Department in the 1960s. Many important, but less foundational inventions, such as GPS, were products of the Cold War.
Since then, the funding of research and development has shifted dramatically. Support from the federal government has waned, from nearly 2% of gross domestic product during the 1960s to about 0.6% today. Over the same time, corporate R&D has grown to nearly 2% of GDP, from less than 0.6% of GDP in the age of the Apollo program. For U.S. taxpayers, that carries a benefit; the costs of innovation are being borne by the shareholders who will reap the benefits. But such broad statistics mask a more-complicated reality: Not all R&D is created equal.
Think of innovation as a pipeline that starts with basic discoveries of things like microwaves or nuclear fission. Those sometimes lead to inventions, such as radar and nuclear power, respectively.
 Most modern corporate R&D, by necessity, focuses on the other end of the pipeline, bringing to market things that are ready to be commercialized.
“We used to say we need public investment in R&D because companies only worry about the next quarter,” says Arati Prabhakar, director of the Defense Advanced Research Projects Agency, also known as Darpa, the arm of the Pentagon that laid the groundwork for the internet.
Dr. Prabhakar previously worked as a venture capitalist and executive at two Silicon Valley companies. At those companies, “We didn’t focus on the next quarter because we were actually focused only on meeting numbers for this quarter,” she says.
For many companies, spending on research is a speculative bet with an uncertain, and far distant, payoff.
“As we became more sophisticated in quantifying things we became less and less willing to take risks,” says Horace Dediu, a technology analyst and fellow at the Clayton Christensen Institute for Disruptive Innovation, a think tank. “The spreadsheet is the weapon of mass destruction against creative power.”
The same could be said of university research, says Dr. Prabhakar. Research priorities are often decided by peer review, that is, a committee.
“It drives research to more incrementalism,” she says. “Committees are a great way to reduce risk, but not to take risk.”
So where will fundamental innovation come from?
For starters, some companies buck the trend. Google parent Alphabet and Facebook, for example, both are insulated from shareholder pressure by special classes of stock that give their founders near-absolute control.
Microsoft, General Electric Co., Dow Chemical Co., 3M Co., Space Exploration Technologies Corp. and others conduct early-stage research and acquire research-intensive startups, even when the potential payoff could be decades in the future.
Indeed, much R&D is now financed by private investors through venture capitalists who back startups that may not generate profit, or even commercialize a product, for years.
Venture funding has been riding high in recent years, and more of these startups are being acquired by more established tech companies.
There are limits to this approach, even at Alphabet. Its X unit aims to incubate “moonshot” businesses—including self-driving cars, delivery drones and life-sciences projects—that could transform the way we work and live. But X differs from Bell Labs, because its projects are intended to become businesses within a decade, says Astro Teller, head of X.
There also are other sources of support. Like everything else in our increasingly multipolar world, fundamental science is no longer primarily a U.S. enterprise. To the extent that discoveries continue to be shared by researchers, they belong to everyone, whether they happen here or anywhere else.
The U.S. government sent men to the moon, but it looks increasingly likely that a private company will send humans to Mars. The internet was invented by the Department of Defense but Google, Facebook and others are working to extend it to the stratosphere and beyond.
The federal government still spends extensively on R&D in the name of defense. About half of federal R&D spending goes to the Pentagon, says Dr. Prabhakar, though only a fraction of that goes to the far-out projects of Darpa.
Darpa currently funds 200 research areas. They include a plane capable of reaching outer space 10 times in 10 days, an effort to use artificial intelligence to increase wireless bandwidth by orders of magnitude, and direct, two-way interfaces between computers and the human brain.
“At the end of the day we’re willing to fund projects that others think are really crazy,” she says.


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