Research

Basic research by universities is critical to U.S. innovation

Basic research is the raw material of new knowledge and the base of an innovative society, says Dennis Hoffman, associate dean for research at the W. P. Carey School of Business. But how much public money should be spent on the research and development infrastructure, and what role should universities play? A paper written by W. P. Carey research Professor Kent Hill suggests that universities are better suited to pursue basic research than private firms or other research organizations. Hill's paper, "Universities in the U.S. National Innovation System," is one of a series written for ASU's Productivity and Prosperity Project (P3), a public policy research initiative.

2006-03-15

"Growth in the stock of knowledge has been the most important factor behind the dramatic rise in living standards in the United States and other countries over the past one hundred years," says Kent Hill, a research professor in the W. P. Carey School of Business. Hill's research paper, "Universities in the U.S. National Innovation System," is one of a series of papers written for the Productivity and Prosperity Project (P3), a research agenda being pursued by W. P. Carey School of Business faculty.

"There has been some controversy about how much the public sector should spend on R&D infrastructure and what role universities should play," says Dennis Hoffman, professor of economics and associate dean for research at the W. P. Carey School. This paper, along with the other work already under way, responds to that controversy by articulating the value proposition for universities as performers of basic research, Hoffman says.

The importance of basic research

In contrast to the other types of R&D (including development, which is directed at production and design; and applied research, aimed at meeting a specific need with particular consideration for commercial application), basic research is directed toward developing big-picture understanding and general knowledge enhancement.

For that reason, basic research is the foundation of all other knowledge — and the ultimate base of an innovative society, according to Hoffman. "Imagine the kinds of things you can do today and then ask yourself: Could I have done those things 20 years ago? If the answer is no, and all of your knowledge is centered on one now obsolete application, you're hard pressed to find lucrative employment opportunities," says Hoffman.

Coupling basic research with education — as American universities do — provides our next generation of researchers with the ability to flow with technological changes by being firmly grounded in the fundamental principles of a subject. That's the kind of understanding gained through basic research, Hoffman says.

Who performs basic research?

Private industry conducts less than 20 percent of the nation's basic research. In fact, says Hill, if funding for basic research was left to private industry, it would be under-funded. That's because, Hill writes, "industry perspectives are too narrow, and firms will have a difficult time appropriating commercial value from basic research findings."

For most private firms, appropriating commercial value from activities — in other words, achieving returns on investment — is critical. Basic research has its benefits, to be sure, but they can be long-term in nature, diffuse, and difficult to predict, Hill writes — not the kind of benefits commercial firms profit from.

That's why government support for basic research at universities is critical. "Because of spillovers and an inability to appropriate commercial value from research findings, societies will underinvest in basic research unless it is supported by the government," Hill writes. Universities are better suited to basic research than are private firms or other research organizations (such as government laboratories). Universities and colleges perform nearly 60 percent of basic research in the United States, Hill notes.

The involvement of students in basic research at universities allows for easier transfer of research findings to industry as graduate students take their knowledge to work in industry after graduation. And because universities require students to take a range of classes, university-trained researchers are better able to have a big-picture understanding than are researchers trained without broad curriculum requirements. The academic merit system, which bases professors' performance largely on research publication, also fosters innovation through the rapid dissemination of research findings.

Publication — the dissemination of research findings to as wide a community of fellow researchers as possible — is not only helpful, it's often required. While private industry is not well-suited to basic research, it does well in applied research and development. Indeed, private industry performs over 90 percent of development and about 70 percent of applied research. Unlike universities, private firms are intimately involved in the market for their products and can make good commercial judgments in areas of product or process development.

Who funds basic research?

About 57 percent of funding for basic research now comes from the federal government. That share was about 70 percent through the early 1980s. In the late 1980s it fell to about 60 percent and has been at about 57 percent since 1991. Other funding sources for basic research include universities and colleges, whose share has increased from 3.4 percent in the 1960s to 9.1 percent in the last decade; and private industry, whose share was as high as 25 percent in the mid-1990s but has since fallen to about 19 percent.

Effective public policy requires that governments provide financial support for basic research, says Hill. "The best policy for basic research is that it be subsidized by the government, with other users allowed free access to research findings," Hill says. That way, researchers can cover their costs while the findings can be widely disseminated.

There has been concern that the government is withdrawing its support for research. Indeed, federal funding for defense-related R&D has fallen dramatically over the past two decades. Federal government funding for basic research, however, has actually increased: from 0.23 percent of GDP in the mid-1980s to 0.27 percent in the early 2000s. Federal government support of overall academic R&D also has increased as a percent of GDP.

"It's not true that the federal government is no longer supporting innovation in this country," Hill says.

Hill says it's hard to tell how state funding of university research has changed because states' figures include only funds directly targeted to academic R&D activities. "Much state funding in the U.S. does support departmental research, but detailed accounting breakdowns are not maintained by universities," Hill writes.

Hill does note that general state appropriations for higher education have fallen as a percent of GDP over the past 15 years. "States may feel less inclined to step up and support research relevant to local industry because markets are so broad and people are so mobile. It may no longer seem clear that the benefits of education and university research funding will accrue locally."

But Hoffman believes the thinking among state policymakers may be shifting away from that point of view. "The benefits of basic research and the innovations it supports are gaining increasing awareness among economic development advocates," he says. "Evidently, gaining recognition for nurturing the knowledge creation business is overriding fears of not retaining all the benefits of research locally. And there is increasing evidence that these knowledge economy investments yield regional benefits."

Hill notes that universities have responded to perceived threats to government support of research by trying to commercialize their research programs, a move that makes some economists uncomfortable. When government pulls back from research and universities feel forced to look to private industry for funding, Hill suggests there is the worry that the nature of that research will change and the research findings will become proprietary.

Hill says that the Bayh-Dole Act, passed in 1980, was the first step in the broader effort by universities to profit from their research. The act allowed universities to patent research funded by the federal government. Its logic, Hill writes, is that "intellectual property protection will enable university researchers to realize a commercial return on their investments and this will serve to accelerate commercial innovation."

According to Hill, this logic is very different than that recommended by economic theory. "To optimally invest in and develop new knowledge, research should be publicly funded and the findings should then be liberally disclosed and disseminated," Hill writes. Among the problems with commercialization of basic research are difficulty identifying parties for whom the research will have commercial value and bringing them into the licensing process.

"Scholars are concerned that university licensing of research will involve restriction of publication and other avenues of dissemination that will ultimately undermine the value of research by reducing the volume of information flowing to potentially interested parties," Hill adds.

Advantages of U.S. universities

Hill says that he came away from the paper with a greater appreciation of the U.S. system of basic research compared to other countries. "The U.S. will remain a leader in basic research not just because we spend a great deal on research but because our system of conducting research is relatively efficient," he says.

One unique aspect of the way basic research is performed in the U.S. is the coupling of research and graduate education. "In other countries, few universities rank among the best research institutions, and many of the best research scholars in science and engineering do not teach," Hill writes. That top U.S. researchers are also teachers presents an efficient way for knowledge to be diffused throughout the country — from innovative professors through graduate students who, upon graduation, take their knowledge to others.

The U.S. graduate education system also requires students to develop a broad range of knowledge. "Students are not simply research students. They are expected to master a broad range of skills which will help prepare them for a long research career," Hill writes. That requirement — unique to U.S. graduate schools — fosters the big-picture understanding that Hoffman says is so critical in an innovative environment.

Another defining aspect of the U.S. education system is the decentralization of funding. While 57 percent of funding for basic research comes from the federal government, it comes from a number of departments and agencies with diverse goals. Decentralization "has enabled U.S. universities to pursue multiple lines of research without being stifled by prevailing paradigms," Hill writes. A competitive landscape is the third unique feature of the American university system.

Hoffman sees universities beginning to understand that they must have a unique value proposition — something to offer potential faculty, potential students, and potential financiers that the next university can't. "Universities will be driven to be attuned to the marketplace of ideas and innovation," Hoffman says.

Furthermore, Hill suggests, because of competition for research funding, universities must manage costs well and be willing to adjust research agendas to respond to changes in demand. Competition among universities also helps to create a competitive market for faculty and scientists, which raises compensation and increases the mobility of researchers, Hill says.

The future of the U.S. innovation system

Hill suggests that the future of the U.S. innovation system, and the university's role within it, is sound. Compared to other countries, the U.S. is set to maintain its competitive advantage in innovation. But Hill suggests that there are some potential concerns for universities performing basic research, including the move to commercialize their research — a response to the pullback of state government funding for basic research programs.

If the U.S. is to remain a leader in innovation, Hill suggests, people will need to become more cognizant of the importance of basic research and universities performing government-funded research. But Hill and Hoffman both say they are optimistic about the future of the U.S. innovation system. "I come away from this paper heartened," Hill says, "that the U.S. will remain a real innovative leader."

Economics Faculty