1 Innovation Economy and FinanceFinance and strategy Innovation Economy and Finance Session 1 Innovation : Disruption and Challenge January the 27th 2017 Jacques Darcy / Patrick Terroir 1 2017

2 SHORT HISTORY OF RESEARCH2017

3 RESEARCH IN HISTORY research as a specific discipline is relatively recent Thanks to the Renaissance and the Enlightenment, Western elites gradually abandoned superstition, magic, and submission to religious authority. The Western scientific tradition that underlies the modern approach to technical change and innovation had clearly emerged by the seventeenth century and began to impregnate the educational system. In the sixteenth and seventeenth centuries, there was a revolutionary change in the quality of western science with close interaction of savants and scientists such as Copernicus, Erasmus, Bacon, Galileo, Hobbes, Descartes, Petty, Leibnitz, Huyghens, Halley and Newton. Many of them were in close contact with colleagues in other countries, or spent years abroad. This type of co–operation was institutionalised by the creation of scientific academies which encouraged discussion and research, and published their proceedings. Much of this work had practical relevance, and many of the leading figures were concerned with matters of public policy. In the course of the nineteenth century the main locus of technical progress moved from Europe to the USA. Since the 1890s, the USA has clearly been the lead country and their performance has been much faster than the UK had achieved in the nineteenth century (as measured by its rate of growth of total factor productivity). This acceleration was achieved by a massive and systematic R & D effort by corporations and government and was helped by unusual economies of scale in production of new standardised products” (Angus Maddison, L'économie mondiale. Une perspective millénaire, ) 2017

4 Some Landmarks The first scientific society to be established, was the Royal Society of England. 1662 The French established the Academy of Sciences in 1666. In the US The American Academy of Arts and Sciences (1780) is closely linked to the American Revolution In 1911 the KaiserWilhelm-Society was created in Germany The Science Academy was founded in Tokyo in 1879 as engineers schools. In the 19th and 20th centuries, European universities increase their focus on science and research, and announce the contemporary universities. By the 19th century, the German and the French university models were established. The French established the Ecole Polytechnique in 1794 The German university — the Humboldtian model — The Universities of Oxford and Cambridge Academic institutions such as Caltech and MIT grew dramatically during the twenties. France : CNRS 1939, INRA 1946, CNES 1961, INSERM 1964, CEA, plan Calcul, atomic energy Germany : Fraunhofer 1949, Max Plank Society 1911 USA : NASA 1958, NIH 1967, Space program, Pentagon 2017

5 Government and industrial researchGerman firms are the first to conduct research activities : Bayer, Hoechst, BASF, AEG, Siemens Between 1919 and 1936, U.S. manufacturing firms established over a thousand industrial research laboratories. The number of scientists employed in research laboratories increased tenfold between 1920 and 1940, from 2,775 to 27,777. (Research and Development in the United States since 1900, Steven W. Usselman, School of History, Technology, and Society, Georgia Institute of Technology, November 2013) The WW2 see a period of growing commitment of the federal government to research and science. (Cf the Manhattan Project) : the New Frontier doctrine. “Scientific progress is one essential key to our security as a nation, to our better health, to more jobs, to a higher standard of living, and to our cultural progress.” "New frontiers of the mind are before us, and if they are pioneered with the same vision, boldness, and drive with which we have waged this war, we can create a fuller and more fruitful employment and a fuller and more fruitful life."-- FRANKLIN D. ROOSEVELT November 17, 1944 Vannevar Bush (founder of National Science Fondation) advisor of the President propose a new vision that came to be known by the title “Science – The Endless Frontier” (1945). In his report Bush advocate for a reseparation of the parties and the establishment of a new division of labor, in which academic researchers generated “basic” knowledge that diffused to more practically-oriented teams in industry and the military, who would develop applications. The vision came to be known as the linear model of innovation. But National Science Fondation was only created in 1950 – which allows the development of specialized agencies 2017

6 The Military-Industrial-University Complex 1940-1960The federal share of research spending grew from 54% in 1953 to 65% in In 1953, nine out of every ten dollars the federal government spent on research and development went to defense and of the $9 billion the federal government spent on R&D in 1960, eight of every ten dollars were targeted directly for military endeavors ( Research and Development in the United States since 1900, Steven W. Usselman, 2013). Eisenhower in his farewell address of 1961 raised concerns about what he characterized as a military-industrial-university complex Post 1960 : shifting to private sector Federal funding spiked upward during the Reagan defense buildup of the early 1980s, but funding from private sources increased even more rapidly, as corporations responded to government incentives offering tax credits for funds spent on R&D. The federal share dropped steadily to a low of just 25% in Federal investment in basic research was accompanied by new policies intended to encourage the commercialization of results. The Bayh-Dole Act of 1980 enabled universities to retain patent rights for innovations resulting from federally-funded research

7 The new landscape Dominance of private financingVenture capital has became an integral part of the innovation system in leading OECD countries, and combined with increased labour mobility, the result has been a larger role for small and medium sized enterprises (SMEs) in the industrial innovation systems of these countries. The new landscape Dominance of private financing Expanded role of public institutions (Universities and PROs) in basic research Small entrepreneurial firms contribute disproportionate numbers of major innovations - the diminishing role of the largest corporations as sources of innovation innovations stemming from collaborations with spin-offs from universities and federal laboratories make up a much larger share. Expanding role of interorganizational collaborations in producing award winning innovations. Where do Innovations Come From? Transformations in the U.S. Economy, Fred Block, Department of Sociology, University of California, Davis Matthew R. Keller, Department of Sociology, Southern Methodist University May 2011 19/02/2016

8 Industrial research historyAt the beginning of the 19th century, technological innovation was largely performed by individual inventors and small-scale entrepreneurs. In the middle of the 20th century the industries developed large in-house research lab. Then new innovation systems emerged, whereby a variety of organizations collectively push the knowledge frontier – including scientific institutions, large R&D intensive firms and entrepreneurial startups. 2017

9 Origin and use of funds Funding is mainly provided and spent by businesses The % of helped companies do not meet the economic performance 19/02/2016

10 INNOVATION ECONOMICS 2017

11 A normative acknowledgment of R&DFrascati manuel (OECD) : Research comprises "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. The term R&D covers three activities: basic research, applied research and experimental development Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed. 2017

12 SOME DEFINITIONS Gross domestic expenditure on R&D (GERD) is defined according to the OECD Frascati Manual and can be broken down by four sectors of performance: Business enterprise expenditure on R&D (BERD); Government intramural expenditure on R&D (GOVERD); Higher education expenditure on R&D (HERD); Private non-profit expenditure on R&D (PNPRD). GERD can also be broken down by four sources of funding: business enterprise; government; other national sources; abroad. Source : Science, technology and innovation in Europe, Eurostat 02/02/2016

13 Invention and innovationInvention (# discovery) Tacit knowledge / codified knowledge From invention to innovation : « valorisation » / monetization Knowledge transfer, rapport au Parlement européen 02/02/2016

14 The innovation and growth engine: Schumpeter and creative destructionJoseph Schumpeter “Capitalism, Socialism and Democracy”, 1942, stressed that evolving institutions, entrepreneurs, and technological change that were at the heart of economic growth and that “Creative Destruction is the essential fact about capitalism”. Schumpeter proposed a list of five types of innovations: i) Introduction of new products. ii) Introduction of new methods of production. iii) Opening of new markets. iv) Development of new sources of supply for raw materials or other inputs. v) Creation of new market.” . 2017

15 Looking for the explanation of long term and medium term growthWipo Report 2015 2017

16 Innovation and industrial revolutions“Historically, major breakthroughs in technological innovation have been at the root of long-lasting expansions in economic output. Those breakthroughs changed the face of production. In many ways, innovation in the 21st century is thriving as never before. Yet how far the breakthroughs of today can invigorate growth for tomorrow remains an open question. For economies to make productive use of technologies developed abroad, they need to possess sufficient absorptive capacity – including the human capital able to understand and apply technology, organizational and managerial know- how, and institutions that coordinate and mobilize resources for technology adoption. World Intellectual Property Report 2015

17 Neo classical analysis of progress and endogeneous theory of innovation and growth« The residual factor » : study of a mystery E.F Denison evidences in « The Residual Factor and Economic Growth” (1962) that 2/3 of growth cannot be explained by capital or labor increase and identifies two main causes : increasing economies of scale and knowledge diffusion. Carré, Dubois, Malinvaud, conduct a similar study in France and evidence that 50% of growth between 1951 and 1969 is « residual » and underlined the role of schooling, economic policy, free trade… But it is Robert Solow who conceptualized this residual factor as “TOTAL FACTOR PRODUCTIVITY” (“A Contribution to the Theory of Economic Growth"(1956), "Technical Change and the Aggregate Production Function"(1957). Paul Romer on 1986, and Robert Lucas (Nobel 1995) the group of endogenous growth economists, replaced the exogenous growth variable (unexplained technical progress) by internally decided factors. They stressed the effect of investment in human capital which had spillover effect on the economy. They emphasize the importance of economies of scale, increasing returns and positive externalities which produce a self sustainable economic growth. Economic progress or total factors productivity (TFP) is no longer an exogenous variable but the result of policies implemented in different domains (training, research…) – which legitimate Government intervention, The ultimate analyses on the growth differences give the last word to « institutions » (Rodrik). 2017

18 The diffusion of inventions in the economy and society“Both 1 and 2 industrial revolutions required about 100 years for their full effects to percolate through the economy. During the two decades the benefits of the IR2 were still transforming the economy, including air conditioning, home appliances, and the interstate highway system.” (Robert Gordon, NBER) 2017

19 A Secular stagnation ? Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds Robert J. Gordon, NBER Working Paper No , August 2012 This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow's seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor by computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it”

20 3rd or 4th industrial revolution?- Exponential: we have reached a tipping point where each further step will be infinitely bigger than the last - Digital: everything becomes digital (or almost). Our interactions of course but our cars, each object will become more intelligent and connected each day -Combinatorics: the relationship between human and artificial intelligence This has three major consequences: - Jobs threatened are routine work, manual or intellectual. Non-routine jobs are protected, whether manual or intellectual "Winner takes all": A digitalized economy where the marginal cost of an additional unit of output tends to zero: address the world is not more costly than addressing a city. Conclusion: winner takes all, and there are only crumbs for the others The measure of growth has to be reconsidered 2017

21 HISTORY OF THE PATENT SYSTEMSource : D. Guellec and B. van Pottelsberghe 2017

22 Crystallization and debate during the 19th centuryPatent system is born in Renaissance Italy. First patent law : Venice 1474 Royal privilege and Mercantilist vision (reward, attract skills, protect local, substitute imports) : The British statute of monopoly of 1623, Patentes royales in mid 16th century in France. France patent law of 1791 consider intellectual property a natural right of individual as any other type of property and has a strong influence among European countries and Latin America. In the US the constitution of 1787 states « The Congress shall have the power… to promote the progress of science and useful Arts by securing for a limited time to authors and inventors the exclusive rights to their respective writings and discoveries ». Patent act of Creation of the USPTO in 1836. German states adopt laws early in the century (Prussia 1815). Creation of the Deutche Patentamt (Patent Office) in 1891. In Japan successive laws were decided and withdraw : 1871, 1885, 1899, 1920… with particularities. Essential concepts were introduced during this time : quality of patent, first to invent/fist to file, grace period, compulsory licence if reasonable conditions are offered, juge control Patent controversy was however very vivid about the effect on progress (« un outrage à la liberté et l’industrie », M. Chevalier, french economist) and even drove to the abolition of the Dutch patent system in 1869. But this controversy faded after 1875 for three reasons : the continuous expansion of patent system in a growing number of countries, a growing number of inventions filed in industrial innovation domains (T. Edison filed mote than 1000 patents), the international pressure for harmonization of the patent systems. 2017

23 Maturity : international harmonization 19th- 20th centuryCentury of trade expansion and international expositions drive to the Paris Convention of 1883, joined by UK in 1884, US in 1887, Germany in 1903 : national treatment where foreigner are treated the same way as they are nationals (< reciprocity) / priority application (worldwide protection during one year). Creation of WIPO in (Paris Convention has been revised six time and integrated in the UN system). The Patent Cooperation Treaty (PCT) was signed in 1970 and implemented in PCT offers an international patent examination procedure which allows to file one application before WIPO. Integration in the GATT/WTO system with the TRIPS (Trade related IP) agreement in 1994 Harmonization of national administrative procedure by the Patent Law Treaty (PLT) of 2004. Europe : creation of EPO in On going adoption of unitary patent and the unitary court of justice? 2017

24 Patent : technical conceptsPatentable fields “patents shall be available for any inventions, whether products or processes, in all fields of technology” (TRIPS). However commercial and business methods, methods for medical treatment (as opposed to medical products) or computer programs are not patentable in every countries (USA versus Europe). Patentability conditions : new, inventive step, industrial application The novelty concept : the prior art : an asymmetric situation between worldwide and men history prior art and the territorial validity of a patent EPO : “For your idea to be regarded as an invention, at least one significant part of its technology must be completely novel. There must be no evidence that this novel aspect of your idea has ever been described before, or used for the same purpose before. Prior art is any evidence that your invention is already known. Prior art does not need to exist physically or be commercially available. It is enough that someone, somewhere, sometime previously has described or shown or made something that contains a use of technology that is very similar to your invention. A prehistoric cave painting can be prior art. A piece of technology that is centuries old can be prior art. A previously described idea that cannot possibly work can be prior art. Anything can be prior art.” Inventive step : not only novel but significantly different from existing techniques, which means that it could not be obviously deduced by a person having ordinary skill in the relevant technical field (plant or animal varieties, discoveries of natural substances, are not) Industrial application : product and process capable of being used for an industrial or business purpose beyond a mere theoretical phenomenon, or be useful. Scientific theories, aesthetic creations, mathematical methods are not patentable 2017

25 Technical concepts (2) Patent offices : USPTO, EPO, SIPO, JPO, national and regional offices : African Intellectual Property Organization (OAPI), African Regional Intellectual Property Organization (ARIPO, Eurasian Patent Organization (EAPO), Patent Office of the Cooperation Council for the Arab States of the Gulf (GCC Patent Office)… Procedure : Filing, examination, granting, opposition Who can fill a patent : First to file (first to invent suppressed), foreigner and nationals, grace period Duration : 20 years (+ 5 years in UE for medicaments with “supplementary protection certificate (SPC); 10 years for “utility models” Fees : filling and renewable taxation (yearly renewal / four years renewal in US) Disclosure : invention must be disclosed in an application in a manner sufficiently clear and complete to enable it to be replicated by a person with an ordinary level of skill in the relevant technical field; 18 months after the filing. Obligations : effectively put in use, compulsory licensing 2017

26 Double nature of patentsA legal title, To protect a exclusive right to forbid « cf Article 28 TRIPS “Rights Conferred : A patent shall confer on its owner the following exclusive rights to prevent third parties not having the owner’s consent from the acts of making, using, offering for sale, selling, or importing for these purposes that product); Which allow to sue the infringers. And at the same time, A codified instrument To identify and value an intellectual asset To transfer and diffuse innovation

27 WORLD ECONOMY OF INVENTION EXPERIENCES RADICAL TRANSFORMATIONSMore inputs New domains More complexity New actors More collaboration, more competition New financing

28 input GROWTH

29 The race for R&D expendituresLong-Term Outlook for R&D Expenditures, Batelle 19/02/2016

30 Student explosion Between 2001 and 2010, the number of first university degrees in the United States increased from 1.3 million to 1.7 million. During the same time period, the number of first university degrees in China grew from 0.5 million to 2.6 million 19/02/2016

31 Researchers increasing – especially in Asian developing Science and Engineering Indicators 2014 19/02/2016

32 New Domains

33 Rise of IoT: “The number of connected devices in and around people’s homes in OECD countries willprobably increase from 1 billion in 2016 to 14 billion by By 2030, it is estimated that 8 billion people and maybe 25 billion active “smart” devices will be interconnected and interwoven in one huge information network” (OECD, 2015b). OCDE science & technology outlook 2016

34 "KETs are knowledge and capital-intensive technologies associated with high research and development (R&D) intensity, rapid and integrated innovation cycles, high capital expenditure and highly-skilled employment. Their influence is pervasive, enabling process, product and service innovation throughout the economy. They are of systemic relevance, multidisciplinary and trans-sectorial, cutting across many technology areas with a trend towards convergence, technology integration and the potential to induce structural change” 19/02/2016

35 2017

36 MORE COMPLEXITY

37 Transformation of innovation process“Technology has become so complex that it is impossible for a single business to be the source of every invention that comprises a single product” (THE EVOLVING IPMARKET PLACE, Federal Trade Commission report,2011)

38 Innovations results of combination of key technologies inventionsSource : HLG report on KETs, EC

39 Multiplication of researchers collaboration

40 RESULT IN MORE complex innovationsMore radical business model changes combine knowledge from unrelated fields. Companies pull in expertise from industries and fields that have never been related previously to the current industry to which the small firm belongs 19/02/2016

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43 BUT ALSO SOMETIME IN PATENT THICKET AND ANTI-COMMON SITUATIONPlethora of overlapping property right block single property exploitation 19/02/2016

44 A triple is defined as a group of three firms in which each firm has critical prior art limiting claims on recent patent applications of each of the other two firms. The descriptive evidence shows strong increases in the density of thickets in almost all technologies related to Electrical Engineering, especially in Telecommunication, Audiovisual- and Computer-technology A study of patent thicket, UKIPO

45 ANNEX 2017

46 Some statistics Source : Eurostat Government budget appropriationsor outlays on research and development (GBAORD) are funds allocated to R&D in central government or federal budgets. They represent budgetary provisions, not actual expenditure. Total UE amount is 92 Mds€. (US : 112 Mds€, Japon : 33 Mds€) Source Eurostat Source : Eurostat 19/02/2016

47 The PCT system administered by the International Bureau of the World Intellectual Property Organization (WIPO), The PCT facilitates the obtaining of protection for inventions. It provides for the filing of one patent application (“the international application”), with effect in several States, 2017

48 Article 2 National Treatment for Nationals of Countries of the Union Paris Convention for the Protection of Industrial Property of March 20, 1883, Article 2 National Treatment for Nationals of Countries of the Union Article 4 Patents, Utility Models, Industrial Designs, Right of Priority (one year) Article 5 : Each country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work. Patent Cooperation Treaty, June 19, 1970,amended on September 28, 1979 Article 3 The International Application Applications for the protection of inventions in any of the Contracting States may be filed as international applications under this Treaty. Convention Establishing the World Intellectual Property Organization (Signed at Stockholm on July 14, 1967 and as amended on September 28, 1979) The objectives of the Organization are: (i) to promote the protection of intellectual property throughout the world through cooperation among States and, where appropriate, in collaboration with any other international organization, (ii) to ensure administrative cooperation among the Unions. 2017