[LINK] Einstein's fridge an example for NICTA?

[Brendan Scott]

Summary: 

The problem with all of this is that benefits are determined by the reporting mechanism (eg royalties/money).  Any other benefits are automatically discounted to valueless. 

Organisations like NICTA have to invest more money in developing models which better value their contributions to the economy and better justify the investment made in them.

Comments below. 


Tom Worthington wrote:
> I wrote Mon, 04 Dec 2006 08:43:00 +1100 (was: "IT Innovation Seminar, 6
> December, Canberra"
> 
>> The Challenges of Research in ICT:  What can we learn from the Past -
>> with a focus on the case of INRIA, France ... Professor Alain
>> Bensoussan ... University of Texas ... 6 December, 2006 ...
> 
> Professor Bensoussan talked about the role of government funded IT
> research organisations, such as INRIA (the French research body he
> headed), in supporting national goals for industry development. He
> argued that INRIA had been successful in producing good fundamental
> research.
> 
> Professor Bensoussan is in Australia talking to NICTA and his comments
> were very relevant to NICTA. Like France, Australia had a blend of
> government and private organisations involved in research. It has
> provincial and national governments with diverging interests in economic
> development. It has to come to terms with the globalisation of industry
> and of research and development.
> 
> Professor Bensoussan argued Australia was well placed as a western
> country in Asia to take advantage of opportunities in Asia, China and
> India. Having visited China and India, I have seen those opportunities,
> but how do we make them happen?
> 
> What was less convincing in Professor Bensoussan's talk was his argument
> as to the value of organisations such as INIRA and NICTA to their
> national sponsors. He argued the US "Stanford Model" of spinoffs from
> research into companies did not fit with the European approach to R&D.
> However, he was unable to point to a successful alternative in Europe,
> with IT research funded by government leading to industrial development.
> 
> This points to a major weakness in the Government strategy behind the
> development of NICTA. Essentially NICTA follows the European model: fund
> good research and hope it is of economic benefit somehow, some time. The
> result is likely to be the same as in the French case: the rest of the
> world will thank Australia for contributing to the overall increase in
> knowledge and then commercially exploit our research to sell products
> back to us.
> 
> We should not be surprised if NICTA fails to produce any economic
> benefit for Australia, if we fail to plan how to obtain such benefit.
> One alternative model is the "Cambridge Phenomenon", which I saw on a
> visit to the University of Cambridge (England). This model has the
> university actively involved in investment in startup ventures based on
> the university research. But it also has informal connections between
> the researchers and industry. A contributing factor is the limited
> tenure of the researchers, so they are forced to go out and set up a
> company after a time.
> 
> Whatever the model, we need one. All those conducting research at NICTA
> using government money need to be asked the question I ask every PHD
> candidate giving a seminar at the ANU: "How are we going to make money
> out of this?".

Moderately to strongly disagree with the comments made above. 

The problem with all of this is that benefits are determined by the reporting mechanism (eg royalties/money).  Any other benefits are automatically discounted to valueless. 

As I understand it, the Web was developed in Europe and has not been a great money spinner for anyone.  On the above analysis, you'd have to conclude that it was a waste of funds to invent the Web.  The reality of course is somewhat different. 

The problem will only be solved by creating metrics which properly value the outputs of these organisations.  That value should be determined by net benefit to the economy, not by net benefit to the government/ research organisation.  Eg: is it better to have a project which costs $5 million but produces $10 million for the government and no efficiency gains for the economy (since gains are priced into the royalty stream to the government), or one which produces $10 million in efficiency gains for the economy with no royalty to the government?  (btw: arguably the second is better because the government doesn't incur costs of managing the royalty stream). 

I have chosen the same returns in the example above for ease of comparison.  Economic theory suggests that the reality is probably tilted strongly in favour of there being more efficiency gains - the royalty method has a number of pernicious effects including:
(a) the picking winners (ie the corporation chosen to "commercialise" the output), if the winner is picked incorrectly (eg corruption or stupidity on the part of the government) the outcome will be suboptimal.  Small organisations are typically at a strong disadvantage when bidding for this kind of work;
(b) government inefficiency - governments are accused of being inefficient because of their bureaucracy and mental distance from the market.
(c) lack of competition - related to (a).  By choosing a particular organisation to commercialise the product creates a monopoly, with consequent inefficiency.  
(d) search and transaction costs - the cost of identifying the relevant rights and negotiating a contract has hard costs (lawyers and royalty fees) and soft costs (lost time to market). 
(e) rent seeking - when organisations know that there is a monopoly to be won they will waste resources chasing that monopoly (eg lobbying/corruption).  If multiple organisations do this, it can result in a net loss to the economy through rent seeking;
(f) pricing - typically in these deals the Government is faced by restricting moral obligations to maximise both return to government and access to technology.  This can lead to underpricing, the main benefits of which go to the bidder (who appropriates the surplus value) rather than consumers/business.  This can also be the result of lack of knowledge/skills within government to accurately price the invention. 
(g) motivation - research on use of patents over ideas in the private sector is that they are primarily used to prevent competition (including by cross trading or use as bargaining chips), not to generate revenue.   Since these motivations are not appropriate to government, what is the point of government playing the same game?


Organisations like NICTA have to invest more money in developing models which better value their contributions to the economy and better justify the investment made in them.

In terms of the French example - this is where a clash of cultures arises.  Either the government accepts that there should be a free market for ideas - in which case it must set licence terms which do not permit licensors to charge the government (or, as a consequence anyone else) licence fees for the implementation of the invention, or the government must concede that it will always be on the losing end in negotiations with vendors.    If the research results in efficiency gains for vendors who sell products back to France, then France does gain through reduced prices for those products.  Indeed, for countries which are net importers of ideas, there is more to be gained from exporting a free market ideology as it reduces the effect of foreign monopolies.

 
> ps: Perhaps we can draw inspiration from Albert Einstein. While doing
> fundamental research he patented a refrigerator, which was licensed to
> European appliance makers, who paid royalties:
> <http://en.wikipedia.org/wiki/Einstein_refrigerator>.

The question would need to be asked - would the net benefit to the economy have been greater if the patent was available for use without a royalty fee.  Did the patent hold up subsequent  innovations?


Brendan