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Charles Weiss Georgetown (retired) and William B. Bonvillian MIT Spurring Technological Innovation in Americas Legacy Sectors Information Technology and Innovation Foundation (ITIF) Nov. 3, 2015 Taking Covered Wagons West U.S.

  1. Charles Weiss Georgetown (retired) and William B. Bonvillian MIT “Spurring Technological Innovation in America’s Legacy Sectors” Information Technology and Innovation Foundation (ITIF) Nov. 3, 2015

  2. “Taking Covered Wagons West” U.S. is good at the NEXT BIG THING Don’ t like your neighborhood? Take your covered wagon over the mountains to new territory! This is true in technology –  The U.S. likes standing up technology in new territory, in open fields - like computing  We pack our Tech Covered Wagons and Go West , leaving Legacy problems behind 2

  3. U.S. Innovations Like to Land in Unoccupied Territory -- Legacy Sectors are Occupied Territory …  In Legacy Sectors, new technology must parachute into occupied territory - - and it will be shot at  U.S.: not good at going Back East over the mountains  - at revisiting established territory and bringing innovation to it - we don’t do West to East  We do biotechnology, we don’ t go back and fix the health care delivery system  Yet huge economic gains not just from the new but fixing the old 3

  4. Can we innovate our way out of our big 21 st Century problems?  The big ones –  Climate – including food and water  Jobless Innovation  Health care delivery  Improve Education/address inequality  To do this we have to confront our Legacy Sector barriers  These are “hidden in plain sight”  To solve our big public challenges, we have no other move …  So how do we do it? 4

  5. Bringing emerging technologies into Legacy Sectors is not “ Mission Impossible ” --  Areas where innovation has transformed Legacy Sectors:  The “Revolution in Military Affairs” in the Defense Sector in the 90’s  Sectors where we now see the potential for new innovation:  Advanced Manufacturing  New Energy Technologies  Driverless Cars  Commercial Space  Online education 5

  6. A Unifying Analytic Framework To explain common features of barriers to innovation in legacy sectors, we:  Built on work of earlier scholars  Created a unifying analytic framework that e ncompasses the many steps in the innovative process:  R&D, prototype, invention, demonstration, testbed, manufacturing, market launch  Classified the active role of government in innovation into models of “innovation dynamics:”  Pipeline, induced innovation, extended pipeline, manufacturing-led, innovation organization  Explained the effect of context on the demand side for innovation  Economics, politics, law, culture 6

  7. Take-home Lessons  Innovation researchers need to pay more attention to “Legacy” sector s that resist disruptive innovation  The barriers to innovation in different Legacy sectors have much in common  The economic, political, cultural, social, and legal context of innovation can be as important as the innovation system  Manufacturing is a Legacy sector that is an important source of both jobs and innovation  Encouraging innovation in Legacy sectors requires attention to the entire innovation process . It should both consider R&D and anticipate and confront barriers to scale up and market launch 7

  8. Resistance to Innovation in Entrenched Legacy Sectors: Innovations in Legacy Sectors: Legacy Sectors:  Face no special obstacles IF  Provide incentives to producers that they fit the paradigm do not align with societal objectives  Face high obstacles if they do  Are well-positioned to resist NOT fit prevailing business disruptive innovation models –  -- especially if they are driven by  Are defended by technological/ externalitie s like environment, economic/ political/ climate, public health or safety social/cultural/legal paradigms :  These obstacles are defended  Institutions, infrastructure, by powerful vested interests policies, regulations, public a nd share common features attitudes, social systems,  Governments sometimes knowledge systems, career inhibit innovation and paths, political support, sometimes guide it into desirable directions.  and numerous market imperfections 8

  9. Legacy Sectors in the US Include:  Fossil Fuel Energy  These and similar legacy sectors  Manufacturing constitute more than  The Electric Grid half the US economy  Transportation  Their resistance to innovation drags down  Higher Education economic growth , job  Health Delivery creation and response  Buildings to environment, safety, public health, and  Agriculture other public goods  Defense 9

  10. Legacy Sector Paradigms Block Disruptive Innovation with -- Market Imperfections:  Perverse Subsidies  Network Economies  Established infrastructure  Non- Appropriability  Public Habits and  Lumpiness Expectations  (minimum investment size)  Financing Mechanisms  Need for Collective Action  Knowledge and human  These issues are well resources structure known to specialists – but  All Favoring Established the fact that legacy Technology sectors have features in  All Backed by Vested common is less well Interests appreciated 10

  11. Fossil Fuels as the ‘Poster Child’ Legacy Sector: Paradigm-Compatible innovations (e.g., fracking) expand smoothly; renewables and conservation must overcome obstacles favoring established technology Market Imperfections Hindering Legacy Characteristics: New Technologies/Renewables :  Perverse prices that do not reflect  Perverse subsidies externalities  (depletion allowances and tax  (no carbon charge) incentives)  Established infrastructure  Network Economies  (charging stations)  Public expectations of cheap energy  Non- Appropriability  Career paths and university curricula  (conservation investments) favor coal, oil, gas  Lumpiness  Regulatory requirements place  (minimum investment size for CCS, next obstacles before wind and solar gen nuclear, enhanced geothermal)  Limited r&d compared to revenue  Need for collective action  All defended by powerful vested  Short time horizon of venture financing 11 interests

  12. Other Legacy Sectors Display Many of These Obstacles to Disruptive Innovation --  Higher EdUcation  The Electric Grid  Fixed career paths  Network economies  Institutional structure  Non-appropriability  Vested interests (state regulators)  Public expectations  Perverse pricing  Industrial Agriculture  Needs for collective action (for learning science  Needs for collective action for research research and implementation)  Vested Interests (agribusiness)  Vested Interests (faculty)  Transport  Buildings  Infrastructure  Non-appropriability (for conservatIon  Regulatory impediments (to driverless cars) investments)  Network Economies  Need for collective action (for R&D)  Standards and Legal Regimes  Regulatory Impediments (building standards)  Health Delivery  Military – both legacy and innovative  Network economies  Disruption-resistant services and financial models  Lack of performance standards (for digital patient records)  Disruption-fomenting DARPA and change agents like Perry, Admiral Rickover  Non-appropriability 12

  13. Legacy sector paradigms are elements of an “ Innovation Context” at the sectoral level The Innovation Environment = the sum of the innovation System and the innovation Context Innovation System Consists of: Innovation Context Consists of:  The political, economic, social,  Firms, institutions and legal, and cultural context for policies that carry out, innovation encourage, facilitate,  This is as important as the and support research, innovation system in determining development,  Whether innovation does or innovation, and does not take place development of  Whether innovations improve technical capacity environment, safety, or health  Context: en abling or dis abling --  This is a common subject  Legacy sectors suffer from a of innovation research disabling innovation context 13

  14. Innovation System versus Innovation Context Innov ovation tion System em Innov ovation tion Context  Political  Institutions:  R&D laboratories, universities, research  Stable, relatively free of corruption and overregulation institutions, education, resource evaluation, standards, consulting, engineering, STEM  Economic organizations, innovative firms, technical  Macroeconomic environment, exchange rates, business publications, supporting services climate, trade & competition policy, tax system, stability  Access to finance  Policies and Programs:  Physical infrastructure and connectivity  R&D support, basic and applied  Science, technology and innovation policy  Legal  Protection of Intellectual property  Labor, commercial, commercial transactions,  Support to research and graduate education, immigration, bankruptcy, pensions, property  support to venture capital, risk capital  Functioning and reasonably honest court system investment  Prizes for innovation  Cultural attitudes toward  Public procurement for innovative technology  Risk, novelty, individualism, competition, cooperation, university-industry cooperation  Importance of family, class, alumni connections, religion  Acceptance of social mobility, promotion on merit, 14 failure, gender/sexual preference, ethnic orig in

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