Innovation and Risk Management

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Innovation and Risk Management

• Three Policy Challenges

Jonathan West University of Tasmania
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Challenge 1Free markets tend to underinvest in
knowledge

• Free markets undermine appropriability of returns
  from investment in basic research.
• Especially true for free labor markets.
• Reliance on markets to drive research will lead
  to underinvestment, and failure.
• Paradox The more perfect are the markets for
  knowledge and labor, the greater must be the role
  of not-for-profits and government.

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Australia has fallen behind in science.
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Population required to generate one patent
USA 2,955 Japan 3,914 Switzerland 5,244 Taiwan
5,812 Canada 8,227 Germany 8,778 South
Korea 13,653 France 14,658 United
Kingdom 16,568 Australia 22,169 Singapore 25,73
5 Spain 127,273 Argentina 778,261 Mexico 1,267,
532 Brazil 1,869,318 India 10,647,319 Indonesia
21,610,345
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Challenge 2Innovation has become more complex

• Auto components 1920--1500 2003--30,000.
• Aircraft components 1945--20,000 2003
  3,500,000.
• Handgun components 51 (musket) 140 (rifle).
• Chip transistors 1970--1000 1980--100,000
  2003--100,000,000.
• Software operating system, lines of code
  1980--10,000 2003--80,000,000.
• PBX interconnects 1950--10002
  1990--100,000,0002.

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therefore demanding more resources
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and broader diversification to manage risk.

• The higher the risk, the broader the base over
  which risk must be diversified
• Low-risk, low-potential businesses funded by
  family and friends.
• Example Barbershops and building contractors.
• Higher risk technology businesses funded by
  venture capital.
• Example Information technology.
• Most intense and broadest risk underwritten by
  government.
• Example Commercial aircraft.

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Frontier technology can induce severe risk.
Number of projects to ensure probability of one
launch
33,333
10,000
100
20
5
2
Probability of market introduction from stage
.003
.01
1
5
20
50
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Risk management in life sciences

• Number of projects needed to start at
  Preclinicals to ensure probability of one success
  through Phase II
• 50.
• Number of projects needed to start at
  Preclinicals to ensure probability of success
  through Phase III
• 100.
• Minimum portfolio value to ensure one launch
  through Phase II
• US500m.
• Minimum portfolio value to ensure one launch
  through phase III
• US1.5b.
• (Assume 500m Phase III 20m Phase II 10m
  Phase I 2m Preclinicals)

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Institutional division of labor in risk management
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Challenge 3Innovation value is increasingly not
captured in wages
Source Commerce Department
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Implication

• A national strategy aimed at attracting
  foreign-owned companies wont enable sufficient
  value capture to recoup the public and private
  investments needed to become technologically
  competent.
• Local entrepreneurship, and long-term equity
  ownership, is essential.