Why industries are all research and almost no development

In the US, just 5% of patents ever result in a marketable product, and this rate holds true worldwide, because the funding isn’t there, says Edward Jung.

When business leaders talk about innovating their industries, they focus on initiatives such as improving government funding for research, or building technology hubs and incubators. But a crucial element of innovation is not discussed: The final product.

That’s no oversight. The lack of product-focused discussion is symptomatic of a more serious problem for businesses of all sizes in every industry: Product development takes a back seat in innovation strategy, because the financial link between ideation and commercialisation is broken.

For economies to prosper, good ideas need a nudge to get to market. Innovative products are what makes life healthier, more efficient, and more fun. But development — the ‘D’ in R&D — has not kept pace with the blistering speed of ‘R’ — research.

Even the most robust economies have a surplus of ideas that never reach consumers. In the US, for example, just 5% of active patents are ever licensed or commercialised. Most companies utilise less than a quarter of the inventions they own. Technology transfers from academia aren’t going so well either.

Although 75,000 patents have been issued to American universities since 1969, the vast majority of technology transfer offices — administrative units that manage a school’s intellectual-property output — are failing to generate enough revenue to cover their operating costs.

If we want to reverse these trends and maximise innovation output, we need more mechanisms for funding the commercialisation of smart ideas.

Venture capital-backed startups are the standard mechanism for moving from ‘R’ to ‘D.’ These companies exist to push good ideas through the development pipeline. And, given the stellar valuations of some startups, it is easy to assume that a healthy ecosystem of savvy companies and venture capital funding is all that is needed to ensure innovation.

But most companies are unable to take good ideas to market, because they lack access to pools of capital earmarked for innovation. Small- and medium-size enterprises (SMEs) often struggle to secure financing to build R&D infrastructure.

Multinational corporations use retained earnings to finance R&D, but because this approach can adversely affect a company’s stock valuation, even they tend to be conservative in pushing new ideas forward.

Compare that scenario with the way in which multinationals finance infrastructure investments. Let’s say, for example, that DuPont wanted to build a new manufacturing facility. It could borrow money from a bank and repay it from resulting profits. But if DuPont needed capital to produce a new chemical, it couldn’t get a loan, because banks don’t know how to assess the risks of innovative products.

Unless you’re a giant such as Alphabet, Apple, or Tesla, you can’t justify the risk and expense of a blue-sky R&D programme. Even the biggest companies are more likely to acquire a new, pre-packaged technology than to develop it in-house. That’s one reason why mergers and acquisitions are increasingly common (and why some observers see M&As as the new R&D).

This situation isn’t ideal for investors, either. Consider Sony’s PlayStation gaming console. Development of it attracted considerable attention from investors in the 1990s.

But the only way to back the project was to buy shares in the parent company — which encompassed music, film, camera, and television businesses. This sort of misalignment is just as inefficient for companies as it is for investors. And it’s not even an option for smaller companies; selling equity is hard when you’re an SME.

Current funding models stifle product-specific innovation and investment, and all-but freeze out SMEs. Government officials are more concerned with maintaining their countries’ SMEs than with protecting multinationals, for good reason: SMEs everywhere account for an overwhelming share of employment and job creation. Yet they aren’t getting the financing opportunities they deserve.

Businesses need financing vehicles tied to product development. One idea is debt-based funds, offering bonds with more predictable returns based on revenue from new products. These funds could be structured to distribute risk among a variety of projects or sectors, which might make them more attractive to investors who avoid high-stakes venture-financing.

This kind of funding would enable much closer alignment between investors and innovative projects. Companies with proven track records, technical skills, experienced management, and established sales channels are sources of innovation that no country can afford to squander.

Because of the limitations of the current financing regime, countries are letting opportunities pass them by. Despite few ready avenues for product commercialisation, the world’s companies, research institutes, and university and government laboratories together spend more than a trillion dollars on R&D annually. Without a new approach to product financing, most of what they discover will remain on the shelf.

  • Edward Jung, former chief architect at Microsoft, is founder and chief technology officer at Intellectual Ventures. Copyright: Project Syndicate.


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