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Innovation Requires Risk, but... Government Risk?

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What is the government's role in driving innovation?

Listening to Senators during the recent Senate Energy and Natural Resources Committee hearings on the Energy Department loan guarantee program (specifically loans to the now-infamous Solyndra), you'd think the federal government has no role in American innovation. The lawmakers love it when they can show up at a ribbon cutting or jobs creation announcement at a successful company they supported, but are quick to criticize when the pendulum swings the other direction (especially for the other party).

Clearly, there is a role for government in innovation, or there would be no DARPA, no ARPA-E, no National Institutes of Health, no NASA, no Small Business Innovation Research (SBIR) grants and no Congressional Committees on the topic, such as the Subcommittee on Competitiveness, Innovation and Export Promotion. Even the Department of Energy's mission statement pointedly refers to "ensuring America's security and prosperity... through transformative science and technology solutions."

"There isn't the financial incentive for industry to take on certain risks," Dr. Mark Rohrbaugh, Director of the NIH's Office of Technology Transfer told me, adding that the NIH "assumes the risk until the invention is ready for industry to take it over." He added that the NIH's investments are "more likely than those from industry to be meeting unmet needs." In an email follow-up Dr. Rohrbaugh added, "NIH funding is complementary to research funded by the private sector in that it generally involves research that is too high risk for the private sector to conduct on its own."

This is precisely why those who say we need to "leave it to the markets" are dead wrong.

Here are a few facts about the federal government's investments in innovation:

1. The Small Business Innovation Research/Small Business Technology Transfer program (SBIR/STTR) disbursed grants through 11 federal agencies, and is very popular across party lines.

The March 2012 issue of Hawaii Business cuts to the chase: "SBIR has always been a politically popular program. After all, it's a way to direct federal funds into almost every congressional district under the cover of helping innovation and improving the economy."

According to the SBIR website, "Through FY2009, over 112,500 (SBIR/STTR) awards have been made totaling more than $26.9 billion."

In 2010, another $2 billion-plus was invested, and the program has been funded through 2017. This includes 11 agencies, each of which is required to allocate 2.5% of their annual research and development budget to SBIR/STTR grants: the USDA, Department of Commerce, Department of Defense (and DARPA), Education Department, Department of Energy (and ARPA-E), Health and Human Services (and the NIH), Department of Homeland Security, Department of Transportation, Environmental Protection Agency, NASA and the National Science Foundation.

According to the New York Times:

"The consensus view is that S.B.I.R. is probably the best R&D program in the federal government,' said Jere Glover, executive director of the Small Business Technology Council, an affiliate of the National Small Business Association. A 2008 study by researchers from the University of California found that S.B.I.R. recipients accounted for between 20 and 25 percent of top American innovations since 1997,'"

By the way, an SBIR-grantee company, MicroStrain, saved the Liberty Bell when it was discovered to have a hairline crack that would be exacerbated by the Bell being moved.

2. The DOE-Environmental Protection Agency Energy Star program provides another example of successful government innovation, as it turns 20 years old this year. The Energy Star program now "include(s) nearly 20,000 organizations from every sector of the economy. More than 80 percent of Americans now recognize the Energy Star label. American families and businesses have saved nearly $230 billion on utility bills and prevented more than 1.7 billion metric tons of greenhouse gas emissions, with help from Energy Star."

"Americans, with the help of Energy Star, saved enough energy in 2010 alone to avoid greenhouse gas emissions equivalent to those from 33 million cars -- all while saving nearly $18 billion on their utility bills."

3. Revenue generator: Many of these patents and inventions have resulted in royalties from licensing agreements, for example, Dr. Rohrbaugh told me they generated $97 million in 2011 for the NIH.

It's when the experiments and investment don't turn out as hoped that suddenly there's a "problem" with government's role in supporting them. "We can't put taxpayer dollars at risk" seems to be a rallying cry for some lawmakers.

Yet, they bemoan that China is overtaking the U.S. in important markets for the future, such as in solar panel manufacturing, which was originally developed in the U.S. (and subsidized substantially by the Chinese government).

The lesson that seems to be lost in the discussion on Capitol Hill these days is that it's not about "picking winners." It's about keeping America competitive.

It's about hedging bets by investing in a number of innovative technologies knowing that some will thrive and others will lead to new ones that thrive. All "mistakes" or "failures" are merely lessons to be applied in the next go 'round. As Benjamin Franklin once said, "I haven't failed. I just found 10,000 ways that do not work."

Isn't keeping America competitive the federal government's responsibility?