The InterAcademy Council has released a strategy paper for "Building Worldwide Capacities in Science and Technology"
Recommendations focus on five major areas for action:
- Science, technology, and society:
To achieve societal goals, governments must develop national S&T strategies; the S&T community should provide knowledge and advice for addressing critical issues; and the public must be informed about and engaged in national S&T policymaking.
- Human resources:
New efforts are required for the attraction, development, and retention of scientific and technological talent in all nations.
- Institutions:
Centers of excellence are needed for S&T to flourish. Virtual networks of excellence, linking professionals from different locations working on similar problems through the power of ICT, can multiply the potential effectiveness of individual centers, as can regional cooperation between countries.
- The public-private interface:
The private (and the literally “productive”) sector is now the primary global force in R&D for S&T, and clear distinctions between public goods and proprietary interests would help in the establishment of true public-private partnerships.
- Financing:
To complement national efforts, creative new mechanisms are needed to ensure adequate funding for S&T capacity-building.
Monday
Competition or cooperation?
Much has been made of the importance of alliances in the biotech industry. Large pharmaceutical firms are particularly good at testing and marketing drugs, but are facing pipeline shortages, while smaller start-ups are better at research and innovation. Alliances can help each benefit from the other. Research alliances between firms and with universities are also important drivers of innovation - as demonstrated by W. Powell and others.
Is this a phenomenon specific to biotech or a general one? Are the gales of creative destruction no longer a threat to large incumbent firms? Joshua Gans, David Hsu and Scott Stern set out to formulate some general rules in a paper presented by K@W.
The researchers found that the likelihood of start-ups cooperating with established companies depends upon three factors:
1) the strength of the startups’ intellectual property rights;
2) whether they have relationships with intermediaries such as venture capitalists; and
3) whether their industry requires big investments in things such as manufacturing and distribution.
To draw their conclusions, they surveyed 118 technology start-ups.
“In economic environments like the biotechnology industry – where patents are relatively effective in protecting [intellectual property rights], firms face high relative investment costs, and brokers are available to facilitate trade – start-up innovators tend to earn their returns from innovation through the market for ideas, acting as an upstream supplier of ‘technology’ rather than as a horizontal innovation-oriented competitor,” the authors write. “In contrast, when investment costs for the entrant are relatively low and the technological innovation is not protected by patents, as in the disk-drive industry, the disclosure threat tends to foreclose the ideas market. Start-up innovators in this environment are more likely to commercialize their innovations through product market competition.”
Patents protect start-ups from having their inventions stolen by incumbents. That, in turn, gives them greater leverage in negotiations. “Under cooperation, negotiating over the sale of an idea inevitably involves a disclosure risk, eroding the bargaining position of the start-up and reducing the incumbent’s willingness to pay,” the researchers explain. “Increasing the strength of [intellectual property rights] reduces the expropriation threat for either strategy, and thus it increases the absolute expected returns to start-up innovators.” Negotiations often lead to cooperative relationships such as joint ventures and even acquisitions.
It’s not only the small biotechs that have embraced the cooperative model of innovation, Hsu pointed out in an interview. Merck & Co., the giant drug maker based in Whitehouse Station, N.J., has made partnering a cornerstone of its strategy for bringing new drugs to the market. Two of its leading products – Fosamax, an osteoporosis drug, and Cozaar/Hyzaar, a hypertension medication – came to the company via license agreements.
Of course, negotiating, like marriage, requires a partner, and finding the right one can make the difference between happiness and divorce. But as a rule, start-ups aren’t well-suited to finding good partners. They tend to be small and thus stretched thin. What they need are matchmakers, that is, intermediaries such as venture capitalists, lawyers and accountants.
Intermediaries often specialize in particular industries, working mostly with, say, biotech or information-technology companies. As a result, they have a deep knowledge of the industry’s players; they know whether those players are looking for partners and whether they can be trusted in negotiations. Likewise, they can vouch for the value of a startup’s innovation and the ability of its founders. Hsu and his co-authors find that start-ups that work with intermediaries are more likely to choose cooperation over competition.
Finally, “As the sunk costs of product-market entry increase, the gains from trade between start-up innovators and incumbents also increase, so start-ups will be more likely to forgo competition,” they point out.
What does all this mean if you are an entrepreneur with a company or a manager within a big, established firm? Ideally, it will help you pick the right path, cooperation or competition. But as Hsu points out, no formula fits all companies within an industry. Two of the best-known and biggest biotech companies – Amgen and Genentech, both based in California – partnered early on with established companies. But they invested the earnings from those partnerships in becoming fully integrated pharmaceutical companies.
Is this a phenomenon specific to biotech or a general one? Are the gales of creative destruction no longer a threat to large incumbent firms? Joshua Gans, David Hsu and Scott Stern set out to formulate some general rules in a paper presented by K@W.
The researchers found that the likelihood of start-ups cooperating with established companies depends upon three factors:
1) the strength of the startups’ intellectual property rights;
2) whether they have relationships with intermediaries such as venture capitalists; and
3) whether their industry requires big investments in things such as manufacturing and distribution.
To draw their conclusions, they surveyed 118 technology start-ups.
“In economic environments like the biotechnology industry – where patents are relatively effective in protecting [intellectual property rights], firms face high relative investment costs, and brokers are available to facilitate trade – start-up innovators tend to earn their returns from innovation through the market for ideas, acting as an upstream supplier of ‘technology’ rather than as a horizontal innovation-oriented competitor,” the authors write. “In contrast, when investment costs for the entrant are relatively low and the technological innovation is not protected by patents, as in the disk-drive industry, the disclosure threat tends to foreclose the ideas market. Start-up innovators in this environment are more likely to commercialize their innovations through product market competition.”
Patents protect start-ups from having their inventions stolen by incumbents. That, in turn, gives them greater leverage in negotiations. “Under cooperation, negotiating over the sale of an idea inevitably involves a disclosure risk, eroding the bargaining position of the start-up and reducing the incumbent’s willingness to pay,” the researchers explain. “Increasing the strength of [intellectual property rights] reduces the expropriation threat for either strategy, and thus it increases the absolute expected returns to start-up innovators.” Negotiations often lead to cooperative relationships such as joint ventures and even acquisitions.
It’s not only the small biotechs that have embraced the cooperative model of innovation, Hsu pointed out in an interview. Merck & Co., the giant drug maker based in Whitehouse Station, N.J., has made partnering a cornerstone of its strategy for bringing new drugs to the market. Two of its leading products – Fosamax, an osteoporosis drug, and Cozaar/Hyzaar, a hypertension medication – came to the company via license agreements.
Of course, negotiating, like marriage, requires a partner, and finding the right one can make the difference between happiness and divorce. But as a rule, start-ups aren’t well-suited to finding good partners. They tend to be small and thus stretched thin. What they need are matchmakers, that is, intermediaries such as venture capitalists, lawyers and accountants.
Intermediaries often specialize in particular industries, working mostly with, say, biotech or information-technology companies. As a result, they have a deep knowledge of the industry’s players; they know whether those players are looking for partners and whether they can be trusted in negotiations. Likewise, they can vouch for the value of a startup’s innovation and the ability of its founders. Hsu and his co-authors find that start-ups that work with intermediaries are more likely to choose cooperation over competition.
Finally, “As the sunk costs of product-market entry increase, the gains from trade between start-up innovators and incumbents also increase, so start-ups will be more likely to forgo competition,” they point out.
What does all this mean if you are an entrepreneur with a company or a manager within a big, established firm? Ideally, it will help you pick the right path, cooperation or competition. But as Hsu points out, no formula fits all companies within an industry. Two of the best-known and biggest biotech companies – Amgen and Genentech, both based in California – partnered early on with established companies. But they invested the earnings from those partnerships in becoming fully integrated pharmaceutical companies.
Tuesday
Virtual meetings
The Economist reports on a Wainhouse survey of remote conferencing.
Nobody was surprised at the growth in audio, video and web-based conferencing after the terrorist attacks of 2001. Such technologies allow “virtual meetings” ranging from a simple three-way conference call to a fancy multimedia presentation beamed to hundreds over the internet. A sluggish economy, last year's SARS scare and lengthy security lines at airports have also fuelled interest. But as the economy rebounds, will enthusiasts of virtual meetings simply go back to real ones?
Apparently not, according to a new survey. Enthusiasm for virtual meetings has continued to grow (see chart). Having been prompted to try virtual meetings, many people seem to like them, says Ira Weinstein of Wainhouse Research, which carried out the survey.
But while virtual meetings are often seen as a cheaper alternative to travel, they are better understood as a middle ground between a phone call and a face-to-face meeting, argues Mr Weinstein. They save money, but they also save time. In a survey of business travellers carried out by MCI, a big American telecoms firm, 69% said they preferred a virtual meeting to travelling because it saved time, while only 37% said they did it to save money. Each has its place, argues Mr Weinstein. “Video conferencing is a perfect second-meeting tool after the first handshake,” he says.
Growing fastest is “web conferencing”, which usually combines a phone-based audio conference with a visual display (such as a slide presentation or software demonstration) delivered via a web browser. It grew by 40% last year, and hybrid web-audio conferences are now starting to displace audio-only conference calls. There is no need for fancy equipment, since most people already have a phone and a PC on their desks.
The boom in web conferencing was happening anyway, says Praful Shah of WebEx, the dominant web-conferencing provider, with 67% of the market. The firm's revenues grew from $2.6m in 1999 to $189m in 2003. “We were already on a fast track,” he says, even before the technology started to get more exposure.
Nobody was surprised at the growth in audio, video and web-based conferencing after the terrorist attacks of 2001. Such technologies allow “virtual meetings” ranging from a simple three-way conference call to a fancy multimedia presentation beamed to hundreds over the internet. A sluggish economy, last year's SARS scare and lengthy security lines at airports have also fuelled interest. But as the economy rebounds, will enthusiasts of virtual meetings simply go back to real ones?
Apparently not, according to a new survey. Enthusiasm for virtual meetings has continued to grow (see chart). Having been prompted to try virtual meetings, many people seem to like them, says Ira Weinstein of Wainhouse Research, which carried out the survey.
But while virtual meetings are often seen as a cheaper alternative to travel, they are better understood as a middle ground between a phone call and a face-to-face meeting, argues Mr Weinstein. They save money, but they also save time. In a survey of business travellers carried out by MCI, a big American telecoms firm, 69% said they preferred a virtual meeting to travelling because it saved time, while only 37% said they did it to save money. Each has its place, argues Mr Weinstein. “Video conferencing is a perfect second-meeting tool after the first handshake,” he says.
Growing fastest is “web conferencing”, which usually combines a phone-based audio conference with a visual display (such as a slide presentation or software demonstration) delivered via a web browser. It grew by 40% last year, and hybrid web-audio conferences are now starting to displace audio-only conference calls. There is no need for fancy equipment, since most people already have a phone and a PC on their desks.
The boom in web conferencing was happening anyway, says Praful Shah of WebEx, the dominant web-conferencing provider, with 67% of the market. The firm's revenues grew from $2.6m in 1999 to $189m in 2003. “We were already on a fast track,” he says, even before the technology started to get more exposure.
Creative destruction revisited
Among innovation economists Joseph Schumpeter is revered for his concept of 'creative destruction.' Still, he might not have been getting enough credit.
A while back, The Economist published a piece on innovation by monopolists. Traditionally, monopoly (or market dominance) is considered to discourage firms from innovating or doing anything else that might be in consumers' interests. Paradoxically, there is evidence that some of the firms with the largest market shares have above-average rates of innovation, as measured by R&D investments.
Why does it happen? A new paper by Federico Etro, of the University of Milan, aims to resolve Mr Arrow's paradox. He sets out a model in which a market leader has a greater incentive than any other firm to keep innovating and thus stay on top. Blessed with scale and market knowledge, it is better placed than potential rivals to commit itself to financing innovations. Oddly — paradoxically, if you like — in fighting to maintain its monopoly it acts more competitively than firms in markets in which there is no obviously dominant player.
Of course, this doesn't mean that all monopolies are wrongfully accused of abusing their market power. For one, Etro's findings only hold under certain conditions:
The most important requirement for this result is a lack of barriers to entry: these might include, for example, big capital outlays to fund the building of new laboratories, or regulatory or licensing restrictions that make it hard for new firms to threaten an incumbent. If there are no such barriers, a monopolist will have an excellent reason to innovate before any potential competitor comes up with the next new thing. It stands to lose its current, bloated profits if it does not; it stands to gain plenty from continued market dominance if it does.
If the world works in the way Mr Etro supposes, the fact that a dominant firm remains on top might actually be strong evidence of vigorous competition. However, observers (including antitrust authorities) may well find it difficult to work out whether a durable monopoly is the product of brilliant innovation or the deliberate strangulation of competitors. More confusing still, any half-awake monopolist will engage in some of the former in order to help bring about plenty of the latter. The very ease of entry, and the aggressiveness of the competitive environment, are what spur monopolists to innovate so fiercely.
But what if there are barriers to entry? These tend to make the dominant firm less aggressive in investing in new technologies—in essence, because its monopoly with the existing technology is less likely to be challenged. Over time, however, other companies can innovate and gradually overcome the barriers—“leapfrogging”, as Mr Etro calls it. Meanwhile, the monopolist lives on marked time, burning off the fat of its past innovations.
A while back, The Economist published a piece on innovation by monopolists. Traditionally, monopoly (or market dominance) is considered to discourage firms from innovating or doing anything else that might be in consumers' interests. Paradoxically, there is evidence that some of the firms with the largest market shares have above-average rates of innovation, as measured by R&D investments.
Why does it happen? A new paper by Federico Etro, of the University of Milan, aims to resolve Mr Arrow's paradox. He sets out a model in which a market leader has a greater incentive than any other firm to keep innovating and thus stay on top. Blessed with scale and market knowledge, it is better placed than potential rivals to commit itself to financing innovations. Oddly — paradoxically, if you like — in fighting to maintain its monopoly it acts more competitively than firms in markets in which there is no obviously dominant player.
Of course, this doesn't mean that all monopolies are wrongfully accused of abusing their market power. For one, Etro's findings only hold under certain conditions:
The most important requirement for this result is a lack of barriers to entry: these might include, for example, big capital outlays to fund the building of new laboratories, or regulatory or licensing restrictions that make it hard for new firms to threaten an incumbent. If there are no such barriers, a monopolist will have an excellent reason to innovate before any potential competitor comes up with the next new thing. It stands to lose its current, bloated profits if it does not; it stands to gain plenty from continued market dominance if it does.
If the world works in the way Mr Etro supposes, the fact that a dominant firm remains on top might actually be strong evidence of vigorous competition. However, observers (including antitrust authorities) may well find it difficult to work out whether a durable monopoly is the product of brilliant innovation or the deliberate strangulation of competitors. More confusing still, any half-awake monopolist will engage in some of the former in order to help bring about plenty of the latter. The very ease of entry, and the aggressiveness of the competitive environment, are what spur monopolists to innovate so fiercely.
But what if there are barriers to entry? These tend to make the dominant firm less aggressive in investing in new technologies—in essence, because its monopoly with the existing technology is less likely to be challenged. Over time, however, other companies can innovate and gradually overcome the barriers—“leapfrogging”, as Mr Etro calls it. Meanwhile, the monopolist lives on marked time, burning off the fat of its past innovations.
Venture hedge funds?
Here's an interesting idea from Bill Hilliard and Charles Baden-Fuller for venture capital funds to increase their performance: invest in start-ups and buy put options on their competitors' stock shortly before the start-up publicizes market-entry, an IPO etc. Or in plain English: invest in company X, then use your inside information on company X to place bets on its competitors' stock prices. If X announces a success, you can expect its competitors' stocks to fall in the short-run.
It sounds like insider trading but isn't because the VCs don't have any inside information on the companies they're betting against. The information is private, but apparently there's no law against using it.
As with hedge funds, it's easy to forget that these increased revenues come with increased risk. However, private information is a clear advantage, and VCs get to diversify risk across time between short-term bets and long-term investments.
Any estimates of extra returns from using hedging strategies “must factor in risks and transaction costs,” [Baden-Fuller] says. “Stock prices of companies can move up when market experts expect them to move down. There are carrying costs to put options.”
But Hilliard and Baden-Fuller write that possession of “asymmetric information shades the risk in favor of the venture investor analogously to the way that card counting adjusts the odds in blackjack.” They also maintain that acquiring put options in transparent markets may be inherently less risky than any underlying venture investments made by the venture fund in the potentially disruptive new company itself.
If the model works (and remains legal), there will be cases where the options trade will allow projects to be financed that could not be financed otherwise, except perhaps by government subsidy.
It sounds like insider trading but isn't because the VCs don't have any inside information on the companies they're betting against. The information is private, but apparently there's no law against using it.
As with hedge funds, it's easy to forget that these increased revenues come with increased risk. However, private information is a clear advantage, and VCs get to diversify risk across time between short-term bets and long-term investments.
Any estimates of extra returns from using hedging strategies “must factor in risks and transaction costs,” [Baden-Fuller] says. “Stock prices of companies can move up when market experts expect them to move down. There are carrying costs to put options.”
But Hilliard and Baden-Fuller write that possession of “asymmetric information shades the risk in favor of the venture investor analogously to the way that card counting adjusts the odds in blackjack.” They also maintain that acquiring put options in transparent markets may be inherently less risky than any underlying venture investments made by the venture fund in the potentially disruptive new company itself.
If the model works (and remains legal), there will be cases where the options trade will allow projects to be financed that could not be financed otherwise, except perhaps by government subsidy.
Wednesday
Human competitive advantage
HBS Working Knowledge interviewed Frank Levy and Richard Murnane, authors of The New Division of Labor: How Computers Are Creating the Next Job Market.
The authors argue that the pervasiveness of computers is drastically changing the mix of available jobs in the United States and elsewhere. If the industrial revolution shifted jobs from highly skilled (e.g. weaving) to less skilled (see Modern Times...), then the IT revolution may be reversing that shift to some extent.
As Levy and Murnane see it, repetitive rule-based work can and will be better fulfilled by computers. This "rules-based" repetitive work occurs most frequently in clerical jobs—particularly back office work—and in assembly line work. These jobs are also vulnerable from a second direction because the ability to describe a job in rules makes it easier to move the jobs to a lower wage country with minimal misunderstanding.
Conversely, three main types of work cannot be described in rules:
1. Identifying and solving new problems (if the problem is new, there is no rules-based solution to program).
2. Engaging in complex communication—verbal and non-verbal—with other people in jobs like leading, negotiating, teaching, and selling.
3. Many "simple" physical tasks that are central to janitorial work, waiting on tables, and other service work. (For example, entering an unfamiliar room and making sense of what you see is trivial for a human but extremely difficult to program.)
Advances in computerization in the coming years will hollow out the occupational distribution even more, leaving a smaller and smaller percentage of the U.S. labor force employed in manufacturing and clerical jobs. Workers with the skills to do the growing number of managerial, technical, and sales jobs will prosper. Those without the requisite skills will be forced to compete for service jobs, the number of which is growing, but which do not pay well because almost all workers can do these jobs.
The authors acknowledge that IT isn't the only factor in this development, albeit an important one. I, for one, see strong parallels to Richard Florida's work (more on that in a different post, though).
The first two of Levy and Murnane's categories clearly speak to my interest in innovation. You could say that, because of IT, innovative work has become even more important (our competitive advantage over computers so-to-speak), but also, it has become easier to distribute this work across large distances. Reversing the authors' take on outsourcing, you might wonder whether innovative work itself has become more routine, even rules-based.
I have heard this speculation before. After all, how could you develop a new chip with teams working together in 3 time zones if there isn't a significant amount of standardization/regulation in the process? This is certainly one aspect on which I hope to find some more input in my own work.
The authors argue that the pervasiveness of computers is drastically changing the mix of available jobs in the United States and elsewhere. If the industrial revolution shifted jobs from highly skilled (e.g. weaving) to less skilled (see Modern Times...), then the IT revolution may be reversing that shift to some extent.
As Levy and Murnane see it, repetitive rule-based work can and will be better fulfilled by computers. This "rules-based" repetitive work occurs most frequently in clerical jobs—particularly back office work—and in assembly line work. These jobs are also vulnerable from a second direction because the ability to describe a job in rules makes it easier to move the jobs to a lower wage country with minimal misunderstanding.
Conversely, three main types of work cannot be described in rules:
1. Identifying and solving new problems (if the problem is new, there is no rules-based solution to program).
2. Engaging in complex communication—verbal and non-verbal—with other people in jobs like leading, negotiating, teaching, and selling.
3. Many "simple" physical tasks that are central to janitorial work, waiting on tables, and other service work. (For example, entering an unfamiliar room and making sense of what you see is trivial for a human but extremely difficult to program.)
Advances in computerization in the coming years will hollow out the occupational distribution even more, leaving a smaller and smaller percentage of the U.S. labor force employed in manufacturing and clerical jobs. Workers with the skills to do the growing number of managerial, technical, and sales jobs will prosper. Those without the requisite skills will be forced to compete for service jobs, the number of which is growing, but which do not pay well because almost all workers can do these jobs.
The authors acknowledge that IT isn't the only factor in this development, albeit an important one. I, for one, see strong parallels to Richard Florida's work (more on that in a different post, though).
The first two of Levy and Murnane's categories clearly speak to my interest in innovation. You could say that, because of IT, innovative work has become even more important (our competitive advantage over computers so-to-speak), but also, it has become easier to distribute this work across large distances. Reversing the authors' take on outsourcing, you might wonder whether innovative work itself has become more routine, even rules-based.
I have heard this speculation before. After all, how could you develop a new chip with teams working together in 3 time zones if there isn't a significant amount of standardization/regulation in the process? This is certainly one aspect on which I hope to find some more input in my own work.
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