The University As Innovator: Bumps in the Road

For much of the past century, universities and university-based researchers have played a critical role in driving technological progress. In the process, universities have been a strong catalyst for U.S. economic growth. But a perennial challenge related to university-driven innovation has been to ensure that university structures help, not hinder, innovation and its commercialization. This challenge has been growing in recent years, and if universities fail to address it, they could gradually lose their global leadership in innovation, and U.S. economic growth could suffer.

The Bayh-Dole Act of 1980 was supposed to make commercialization easier, faster, and more productive by clearing the way for universities to claim legal rights to innovations developed by their faculty using federal funding. But with new rights have come new layers of administration and often bureaucracies. Rather than implementing broad innovation and commercialization strategies that recognize different and appropriate pathways of commercialization, as well as multiple programs and initiatives to support each path, many universities have channeled their innovation-dissemination activities through a centralized technology transfer office (TTO).

We spent the past several years discussing the role of TTOs with multiple university leaders and researchers. Although we found that some universities have enabled their TTOs to disseminate innovations effectively, in too many other cases university leaders have backed policies that encourage TTOs to become bottlenecks rather than facilitators of innovation dissemination. Where this has happened, it is because TTOs have been charged with concentrating too heavily on maximizing revenues from the licensing of university-developed intellectual property rather than on maximizing the volume of innovations brought to the marketplace. It is vital that universities begin to emphasize the latter, and there are a number promising of ways to do so.

Financing university research

For several decades after World War II, most R&D in the United States was financed by the federal government, specifically through the National Science Foundation (NSF), the National Institutes of Health (NIH), and the Department of Defense (DOD). By 1979, industry R&D expenditures surpassed government spending, growing more than threefold (after controlling for inflation) between 1975 and 2000. By comparison, although government-funded R&D rose quickly after the war, since 1975 it has inched up about 75%, according to 2006 NSF data. Government-funded R&D has focused, appropriately, more on basic than on applied research, whereas the priorities of private R&D spending have been on development.

Industry performance of government-funded R&D rose quickly from 1955 to the early 1960s but has since fluctuated significantly. Conversely, universities and colleges have shown a steady acceleration in their R&D performance, particularly in basic research. Today, more than half of basic research is conducted in universities. And although much less is spent on basic than on applied science, the absolute number of dollars of funding going into basic science is a misleading indicator of its importance, because basic science stands at the base of the economic pyramid. It is breakthroughs in basic science, after all, that have created new industries.

U.S. institutions of higher learning and their research output appear to be in good shape, remaining atop the standard global rankings. But there are disturbing signs beneath the surface. For one thing, the United States has experienced stagnant-to-declining levels of industrial R&D investment, decreasing industry/university co-authorships, and decreasing citations of U.S. science and engineering articles by industry. There is some indication that foreign-sourced R&D is being driven in part by access to foreign universities and that the type of science is driven primarily by access to and the quality of university faculty.

Anecdotally, it also appears that relative to some foreign universities, U.S. universities are becoming less friendly to collaborations and commercialization. In particular, U.S. universities historically have benefited significantly from an inflow of R&D capital from U.S. affiliates of foreign companies, particularly European companies. These benefits are threatened, however, by a growth in bureaucracy and an increasing and shortsighted emphasis by U.S. universities on securing intellectual property rights to inventions by their faculty. If these two trends continue, the flow of R&D funding from these U.S. affiliates is likely to slow, if not reverse.

In short, if the U.S. economy is to continue its rapid pace of economic growth, it will be necessary not only to adopt innovations from other parts of the world but also to make investments in basic research in a setting that supports commercialization, spillovers, and general interactions between academic researchers and industry.

The rise of university technology transfer

In 1923, Harry Steenbock, a University of Wisconsin biochemistry professor, demonstrated a means of fortifying vitamin D in food and drugs through a process called irradiation. Although this was a major breakthrough, it wasn’t long before Steenbock became concerned about how the technology would be implemented. Specifically, he recognized that unqualified individuals or organizations could use his invention and possibly do harm unless he brought it to market with the legal protection of a patent. The University of Wisconsin declined his offer of patent ownership. Working with alumni, Steenbock instead created the Wisconsin Alumni Research Foundation (WARF), a separate entity that was university-affiliated and could accept patents, license them out, and disperse revenues back to the inventor and the university without exposing the university to potential financial and political liability. Thus, in 1924 the nation’s first TTO was conceived, although in unusual fashion, given that WARF does not operate directly under university control.

By the 1960s and 1970s, formal endorsement of technology transfer from federally funded research was bubbling up on the policy agenda. The Department of Health, Education, and Welfare, NIH, and DOD began to grant to selected universities the rights to patent inventions that resulted from their government-funded research. But these rights were often negotiated, and the bureaucracy that this created frustrated many, including then-Senator Robert Dole, who said that “rarely have we witnessed a more hideous example of over-management by the bureaucracy.”

Congress passed the Bayh-Dole Act largely to address this problem and to accelerate the commercialization of federally funded research that yielded promising new technologies. Bayh-Dole had the practical effect of standardizing patenting rules for universities and small businesses, something that previous conflicting laws had not done. The federal government was off the hook, and universities were given the opportunity and obligation to commercialize innovations resulting from federal funding.

Bayh-Dole came into effect at a time when government support for universities had begun to decline. Thus, it made sense for many universities to look to technology transfer—and the offices that were in charge of it, the TTOs—as a new potential source of revenue. Indeed, championing commercialization came to be viewed almost as a core university activity on some campuses. The proliferation and growing importance of TTOs that followed Bayh-Dole were not, however, the stated goals of the legislation, but rather its byproducts.

Today’s technology transfer system

Although some basic research investments at universities have been successfully commercialized through the technology transfer process, the cumulative impact has been something of a disappointment. Commercialization of university research (whether judged by numbers of patents, licensing of revenue, or new companies formed) remains differentially successful and largely concentrated in just a handful of universities.

There are a variety of explanations for the shortcomings in the technology transfer process, but the fundamental one is structural: Many universities have established the TTO as a monopoly, centralizing all university invention and commercialization activities and requiring all faculty to work through these offices by notifying them of their discoveries and delegating to them all rights to negotiate licenses on their behalf.

In addition, many university administrations have often rewarded TTO offices and their personnel on the basis of the revenues they generate rather than on the volume of inventions that the universities transfer or commercialize. We label this current system the revenue maximization model of technology transfer, even though there is some evidence to suggest that universities structure their TTO operations to maximize revenues only in the short term.

There are several flaws in the revenue maximization model of university technology transfer. One is that the current reward structure and the centralization that accompanies it have created incentives for TTOs to become gatekeepers rather than facilitators of commercialization. This is less the fault of the TTO staff than it is of how their offices are structured: with the majority of financial and human resources dedicated to patent licensing, and minimal resources (materials, tools, and software) dedicated to nonpatented innovations. But the net effect is that TTOs, like any monopoly, do not have incentives to maximize output—the actual numbers of commercialized innovations—but only to maximize revenues earned by the university.

This, in turn, leads to a home-run mentality, in which many TTOs focus their limited time and resources on the technologies that appear to promise the biggest, fastest payback. Technologies that might have longer-term potential or that might be highly useful to society as a whole, even if they return little or nothing in the way of licensing fees (such as research tools used mainly by other researchers), tend to pile up in the queue, get short shrift, or be overlooked entirely.

How predominant is the revenue maximization model among TTOs? One study published in 2005 (by Gideon Markman of the University of Georgia and colleagues) found that the principal mechanism favored by most TTOs was licensing for cash (72%), with licensing for an equity stake and sponsored research being less popular at 17% and 11%, respectively. These interview-based findings were confirmed by the researchers in a review of TTO mission statements, which showed a heavy focus on licensing and protection of the university’s intellectual property and are consistent with research in this area published in 2001 by Marie Thursby and Jerry Thursby of Georgia Tech and Emory University, respectively, and Richard Jensen of the University of Notre Dame, which found that revenue, licensing, and inventions commercialized all drive TTOs.

With revenue maximization as a central goal, it is not surprising that most technology transfer activities are portrayed as linear processes in which research is performed, inventions are disclosed, technology licenses are executed, income is received, and wealth is generated. But the process of technology transfer is much more complex. It is critical for universities to better appreciate that patenting and licensing of research are not the only means or even the most important means of transferring new knowledge to the market. As Don Siegel of the University of California, Riverside, and colleagues have pointed out, 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. Measuring university success in spawning innovation solely by licensing or patenting activities, therefore, almost certainly masks the importance of these other means of knowledge diffusion.

These other means include nonpatent innovations, startup companies launched by university faculty or related parties, and consulting engagements between industry and faculty. A study by the Thursbys published in 2005, for example, indicated that approximately 29% of patents with public-university faculty inventors were assigned to firms rather than to the university, which indicates a significant degree of faculty/industry engagement.

Meanwhile, university faculty members are learning how to maximize their own self-interest within a general environment that impels TTOs to maximize revenue. In particular, and not surprisingly, faculty members engaged in commercialization activities are becoming more competent in these endeavors. One measure of this is the substantial increase in rates of disclosure of innovations over time by faculty, perhaps the best indicator of university-based technology transfer at the faculty level.

Still, as an earlier 2003 study by the Thursbys has documented, university commercialization activity remains highly concentrated within the university itself, with somewhat less than 20% of university faculty having engaged in patent disclosure of any kind. Further, there is a trend toward greater university ownership of research and commercialization, reflected in the significant increases in university patenting, increased contributions to R&D spending, and proliferation of university spinoffs and research parks.

Although spinoffs from universities are few in number, they are disproportionately high-performing companies and often help to bridge the development gap between university technology and existing private-sector products and services. According to the Association of University Technology Managers, although only 3,376 academic spinoff companies were created in the United States from 1980 to 2000, fully 68% of these companies remained operational in 2001. A 2003 study by Brent Goldfarb of the University of Maryland and Magnus Henrekson of the Stockhom School of Economics estimated that 8% of all university spinoffs had gone public, which is 114 times the going public rate for U.S. enterprises generally. As impressive as these figures are, they actually understate the extent of university-based entrepreneurship because they do not include startup companies represented in business plan competitions, back-door entrepreneurial activities emerging out of faculty consulting, and general spillovers from graduate students creating companies tied to outcomes of university research.

There must be a better way of advancing university inventions. Commercialization policies can and must be structured to realize the social benefits of a greater number of innovations. The question is how.

Bolstering university innovation

Universities commercialize the innovations developed by their faculty largely by licensing the intellectual property in these breakthroughs (typically patents) to entrepreneurs, to the faculty members themselves, or to established companies. Historically, faculty and students have generated a range of innovations that have found their way into the market and have helped launch new companies. The Internet browser Netscape, Internet search engine Google, and various biotechnologies (such as Genentech) are just a few examples. There are, however, strong reasons to believe that the objectives of Bayh-Dole could be met even more effectively.

During the 1980s and 1990s, most universities had little experience in negotiating with industry and considering commercialization activities. With time and experience, however, universities and, more important, faculty have gained expertise in the invention and commercialization processes. As individual university and academic cultures have evolved, some universities have begun to recognize that commercialization and innovation activities are too varied and extensive to be run by a single office and require cross-university programmatic initiatives in the classroom and the laboratory. Examples of universities that have moved in this direction include MIT (with a high number of faculty members who have been founders of startup companies), the University of Arizona, and the University of California. Examples within the University of California (UC) system include the BioInfoNano R&D Institute, which is an effort to create a commons around shared work while still respecting the interests of member companies and startups; UC Berkeley’s one-stop shop for industry research partners; and Berkley’s leadership in implementing its socially responsible licensing program.

As these new forms emerge, or more accurately, as TTOs become just one component of the innovation and commercialization ecosystem, technology transfer will increase in efficiency, volume, and quality on most college campuses. Indeed, technology will be best diffused by recognizing and taking advantage of the decentralized nature of innovation and university faculty who participate in this process.

It is also important to consider university culture in fostering and supporting entrepreneurial activity among faculty. The shrinking gap in disclosure and other entrepreneurial activities by women, for example, is evidence that incremental changes in practice can have important effects on university culture. Janet Bercovitz of Duke University and Maryann Feldman of the University of Georgia also have found, in their study of two prominent medical schools, that disclosure increased when a faculty member was at an institution with a tradition of disclosure, observed others in a department disclosing, and worked in a department with a chair who actively disclosed innovations derived from its research.

Because of the importance of faculty researchers to innovation and commercialization, a university culture that is accepting of entrepreneurial activities is best built from the ground up by researchers who promote and connect other colleagues inside and outside of academe. But how can universities support the development of entrepreneurial capabilities in their faculty?

In our view, the answer does not lie in an expanded role for TTOs. Many research faculty members are likely to have better opportunity-recognition skills, both scientific and entrepreneurial, than do TTO professionals. Academic researchers have spent years working in their fields, and they have incentives within their disciplines to recognize avenues for scientific advances and breakthroughs. Furthermore, researchers’ social capital (their professional relationships with their peers inside and outside the academy) gives them a greater ability to link scientific opportunity recognition to entrepreneurial opportunity recognition.

To be sure, these opportunity-recognition skills, particularly regarding commercial opportunities, take time to develop. Many university campuses have experienced a gradual cultural change since the passage of Bayh-Dole, and they now face the challenges of defining multiple pathways to support university innovation and commercialization and redefining the role of TTOs.

It has been suggested that TTOs should reorganize in ways that would reduce the potentially substantial transactions costs involved in moving scientific discoveries more rapidly into the marketplace. Those costs include tangible and intangible expenses related to the identification, protection, and modification of innovation and commercialization, as well as the administrative expenses and the opportunity costs of the time that would need to be invested by researchers. To reduce these costs, it has been suggested that TTOs adopt something like a value chain model that encourages universities to disaggregate their functions, slicing and dicing a range of what are considered to be technology transfer functions and assigning them to specialists, while leveraging outside organizations and other partners in the process.

We build on this basic concept, recognizing both the comparative advantage of faculty in opportunity recognition and the limited budgets of university administration. In particular, we believe that universities must recognize that patenting is only one of many pathways from innovation to marketplace. Specifically, we suggest a move from a licensing model that seeks to maximize patent-licensing income to a volume model that emphasizes the number of university innovations and the speed with which they are moved into the marketplace.

In fact, there are multiple volume models, but they share several features. They provide rewards for moving innovations into the marketplace, rather than simply counting the revenue they may return. They focus on faculty as the key agents of innovation and commercialization. And they emphasize further standardization of the interactions of campuses with their faculty and with industry.

There are four basic variations of the volume model, all with advantages and drawbacks.

• Free agency. Under this approach (the name of which we borrow from the sports world), faculty members are given the power to choose a third party (or themselves) to negotiate license arrangements for entrepreneurial activities, provided that they return some portion of their profits to the university. The TTOs can be one of the third parties offering services, but other parties can also compete on a range of services and experience offered.

WARF is an exemplar of such a model. WARF is independent of the university, and Wisconsin faculty members are not obligated to use it except in the case of federal funding. As a practical matter, however, nearly all of them use WARF because the organization has acquired expertise over time that is viewed to be valuable.

Free agency introduces a strong dose of competition to the university TTO, while giving academic researchers the freedom to seek out the best arrangement on the speediest terms to commercialize their innovation. This model is best suited for innovations in which faculty members have deep commercial expertise and social networks to facilitate commercialization.

One drawback to free agency, however, is that university faculty members often lack the resources to pay for patent searches and applications, functions now performed by the TTO. This problem might be overcome through profit-sharing arrangements between researchers and their lawyers or third-party commercialization agents.

• Regional alliances. A second possible model provides more technology transfer activities via regional alliances, provided that those alliances operate in ways to maximize volume rather than licensing income. Under this approach, multiple universities form consortia that develop their mechanisms for commercialization. Economies of scale allow for lower costs of the commercialization functions overall, and the universities are able to share these costs among the multiple participants.

This model may prove particularly attractive for smaller research universities that may not have the volume to support a seasoned and highly able licensing and commercialization staff independently. WARF, through the WiSys Technology Foundation, is experimenting with more of a regional approach to technology transfer and has had positive results so far. This type of hub-and-spoke model is effective when supported by experienced staff and dedicated local resources.

There are two principal concerns about the regional alliances model, however. First, a regional TTO with insufficient resources may try to behave like a super TTO, seeking to maximize licensing revenue for the consortium as a whole rather than the number of commercialization opportunities and the speed with which they are moved out the door. In addition, regional models may face coordination challenges or disputes over attribution of inventiveness, with one or more universities pitted against others when a commercial opportunity is realized through the joint work of several researchers at different universities. The probability of disputes is probably related to the amount of money at stake.

• Internet-based approaches. Closely related to the regional alliance model, these approaches use the Web to facilitate commercialization. Given their structure, Internet matchmaking approaches, which seek to match those who have ideas and those who want to implement them, are inherently built to maximize volume rather than licensing income.

An example of this approach is www.ibridgenetwork.com, a Web-based platform launched in January 2007, operated by the Kauffman Innovation Network and funded by the Kauffman Foundation. Universities joining the iBridge Network are able to post information about their innovations directly on the site, which provides an alternative pathway to research tools, materials, and nonexclusive licensed technologies that should accelerate university innovation and lower transaction costs. Its success remains to be seen, but initial Web traffic suggests that the program has had an auspicious start.

• Faculty loyalty. In this model, universities would relinquish their intellectual property rights altogether, in anticipation that loyal faculty will donate some of the fruits of their success back to the university. Although surrendering rights to faculty may seem drastic, this strategy offers the ultimate incentive for the external agents of commercialization to engage in the process.

In fact, the United States has a great tradition of philanthropy, and this model allows administrators to focus on the core activities of a university while securing additional operational dollars through the virtuous cycle of giving. There is a history of successful faculty members donating some of their profits back to the university. Jan T. Vilcek, for example, pledged $105 million to the New York University School of Medicine in 2005, largely as the result of royalties earned from Remicade, a drug invented by Vilcek and a colleague while working at the school’s Department of Microbiology. Other examples abound, including George Hatsopoulos’s gifts to MIT and James Clark’s generosity toward Stanford.

The obvious downside to the loyalty model is the inherent and significant risk. There is always the possibility that successful academic entrepreneurs will not voluntarily share their success with their employers. This risk is even greater for universities that have difficult relationships with their faculty.

For most universities, however, this risk is worth taking. Academics pursue their work in large part because they have a thirst for knowledge and discovery. Financially successful professors who give back to their universities will set positive examples for their colleagues to follow. Furthermore, the loyalty model avoids the haggles associated with intellectual property rights and, therefore, would theoretically promote more rapid commercialization of inventions than would either of the other models. In particular, the loyalty model should entail very low risks for well-run universities that promote collegiality.

Remaining competitive

U.S. universities today are not only competing with other U.S. institutions for collaborative relationships with industry, they are also both collaborating and competing within a global economy. U.S. institutions must continue to be leaders in research, the advancement of innovation, and the commercialization of ideas in order to remain competitive.

The majority of university/industry agreements relate to technologies that are many years away from being commercialized, and universities cannot take on the burden of forecasting uncertain commercial returns. This function is best performed by the private sector. In the end, society will be best served by a knowledge transfer system that encourages interactions between universities and industry but also inspires each party to capitalize on its relative advantage, with universities focusing on discovery and entrepreneurs devoting their efforts to commercialization.

The issue of how innovations are transferred from universities to industry is an important part of the current national conversation about U.S. economic competitiveness. This country is now at a critical point in which the incentives of some universities (or specific officials within the universities) may lead to the codification of a system that would inhibit rather than promote the commercialization of technological breakthroughs. The most effective way to avoid this outcome is to refocus university administration away from the historic patent-licensing big-hit model to one or more volume models that concentrate on the number of and speed with which university innovations are sent out the door and into the marketplace. These models will include open-source collaborations, copyright, nonexclusive licensing, and a focus on developing the social networks for graduate students and faculty to commercialize all types of innovations.

The federal government, as the funding source for university-based research, is in an ideal position to encourage experimentation with these and other alternative arrangements. At a minimum, the government can help educate universities regarding the importance of providing a more fluid environment that will allow for more rapid commercialization of ideas developed by students and faculty. More ambitiously, agencies of the federal government can and should condition their research grants on university demonstrations that they are experimenting with and using multiple pathways to provide competition or advance innovations into the commercial market.