Accelerating Energy Innovation: Lessons from Multiple Sectors

October 23, 2009
Sponsored by the NBER Programs on Environmental and Energy Economics and Productivity, with support from the Doris Duke Charitable Foundation.
A conference to present the findings of a forthcoming book edited by Professor Rebecca Henderson, Harvard University and NBER and Richard G. Newell, Duke University (on leave)

Rebecca Henderson

Rebecca Henderson, Harvard University and NBER


Several recent studies have suggested that significantly increasing the rate of innovation in the energy sector is a critical part of a cost effective response to the threat of climate change. This literature has contributed to a lively discussion about how such acceleration might best be accomplished and, in particular, about the role that public policy in general and the federal government in particular might play in supporting innovation. Henderson notes that this volume contributes to this discussion through an exploration of the histories of innovation in four particularly innovative sectors of the U.S. economy: agriculture, chemicals, life sciences, and information technology. The authors have compiled the collective experiences of some of the world's leading specialists in the economics of technological change, all of whom set out to explore the roots of accelerated innovation in their sector. These authors focus particularly on the role that public policy has played in kick starting rapid innovation and in sustaining it once in motion. The focus here is largely on the United States and almost overwhelmingly on the last fifty years, but the contributors to this volume nonetheless believe that there is much here that may help to inform policymaking going forward.

Brian Wright, UC, Berkeley; and Tiffany Shih, UC, Berkeley
Agricultural Innovation

Wright and Shih note that the achievements in agricultural innovation over the past century have been impressive, supporting large increases in agricultural yields and low food prices. Sustained public sector investment in a decentralized and competitive public research system in the United States has been critical to this success. Recent intellectual property reforms motivated increased private investment concentrated in a handful of major crops. The private sector still relies largely on basic research produced by the public sector. Problems with freedom to operate, as well as concentration in the agricultural biotechnology industry, also have emerged because of intellectual property rights. For new technologies, the case of agriculture demonstrates that government has an important role to play in basic research, as well as in development of technologies for all but the highest value crops – it also has a role in antitrust, the effective and efficient regulation of technologies, and in facilitating technology adoption. Similarities between the demands for agricultural and energy products as essential consumer goods, the importance of local environmental factors in both markets, and the role of agriculture in biofuels technology, make agriculture’s history especially relevant for the energy R and D landscape.

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Ashish Arora, Duke University and NBER; and Alfonso Gambardella, Bocconi University
Implications for Energy Innovation from the Chemical Industry

The history of innovation in the chemical industry offers many insights for accelerating energy innovation. Arora and Gambardella begin by laying out the early history of the chemical industry for an overview of the role innovation has played in its development. They then explore three noteworthy historical experiences. They describe the switch in feedstocks from coal to oil, and briefly analyze two government programs that have attempted to promote innovation: synthetic rubber and synfuels. They take a close look at the role that specialized engineering firms have played in the diffusion of important innovations, and they detail the effect that government policies have had on fostering innovation. In particular, they highlight the role of anti-trust policies, and of policies for protecting intellectual property rights.

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Iain M. Cockburn, Boston University and NBER; Scott Stern, Northwestern University and NBER; and Jack Zausner, Northwestern University
Finding the Endless Frontier: Lessons from the Life Sciences Innovation System for Energy R&D

Though the Federal government initiated significant commitments to both life sciences research and alternative energy research during the 1970s, there has been a sharp divergence in the growth and performance of these two innovation systems over the past three decades. Cockburn, Stern, and Zausner consider the drivers of the structure and evolution of the life sciences innovation system. The growth and performance of this system reflects the interaction between abundant scientific and technological opportunity, a reasonably effective and adaptive institutional and property rights framework, and a reservoir of unmet demand for therapies and technologies that significantly enhance human health care. Examining the evolution and dynamism of the life sciences innovation system, these researchers emphasize three central foundations: a long-term, slowly growing commitment of financial and human resources by both the public and private sector; an institutional framework that encourages competition on the basis of innovation across multiple dimensions; and the promise of significant financial rewards for private sector innovators leveraging publicly funded scientific discoveries. While there have been calls that energy innovation should focus on a one-off, centrally managed "Manhattan Project" approach to identify and commercialize climate change technologies, the experience of the life sciences suggests this emphasis may be misplaced. A productive and dynamic energy innovation system is more likely to emerge in an environment where both public and private resource commitments are growing at a reasonable and stable pace, competition between technologies, institutions and individuals is pervasive and oriented around innovation, and significant (and well-defined) financial rewards are available for those innovators who offer practical and general approaches to reduce or mitigate the impact of carbon-intensive energy technologies.

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David C. Mowery, UC, Berkeley and NBER
Federal Policy and the Development of Semiconductors, Computer Hardware, and Computer Software: A Policy Model for Climate-Change R&D?

Advances in electronics technology in the postwar U.S. economy have created three new industries-electronic computers, computer software, and semiconductor components. These three industries also combined to give birth to the Internet, a "general purpose technology" that spans these and other industrial sectors. Electronics-based innovations supported the growth of new firms in these industries and revolutionized the operations of more mature industries, such as telecommunications, banking, and airline and railway transportation. Federal policy, especially federal R and D investment, played a central role in the development of all of these industries. But much more than federal R and D and procurement programs were essential to the development of these technologies. Federal policies in intellectual property rights and antitrust also influenced their development, commercialization, and widespread commercial adoption of products based on them. Mowery reviews the early history of Federal R and D investment and related policies in supporting innovation in the IT sector and considers the implications of this history for public policies to accelerate energy-related innovation to combat global climate change.

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Shane Greenstein, Northwestern University and NBER
Nurturing the Accumulation of Innovations: Lessons from the Internet

The Internet began as a government sponsored operation in the 1970s and 1980s and grew into a commercial industry in the 1990s. As the Internet diffused, it touched a wide breadth of economic activities. The diffusion transformed the use of information technology throughout the economy. What economic lessons can we learn from the Internet for large innovative efforts, such as in major energy innovation? Greenstein divides the Internet's development into a pre-commercial and commercial era. The pre-commercial era illustrates the operation of several useful non-market institutional arrangements. It also illustrates a potential drawback to government sponsorship - in this instance, truncation of exploratory activity. The commercial era illustrates a rather different set of lessons. It highlights the extraordinary power of market-oriented and widely distributed investment and adoption, which illustrates the power of market experimentation to foster innovative activity. It also illustrates a few of the conditions necessary to unleash such growth, such as standards development and competition, and nurturing legal and regulatory policies.

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Josh Lerner, Harvard University and NBER
Chapter 8: Venture Capital and Innovation in Energy

The past year has seen challenging times for venture capital activity: the volume of funding raised by venture capital organizations and the amount disbursed to portfolio firms have both dropped. In few places has this drop been as dramatic as in alternative energy, spurring worries about the implications of this decline for technological innovation. Lerner seeks to understand the implications of the difficulties in the venture market on innovation, with particular emphasis on alternative energy. He argues that venture capital funding has an important role to play in stimulating innovation and economic growth, but tends to be cyclical, which reduces reduce the private and social returns to these innovations. These dynamics have important implications for thinking both about the probable effectiveness of private sector investments in energy and whether and how the government should play a role.