Working Paper

Something for Everyone: Building Incentives for Innovation Ecosystems

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Healthy innovation economies are the main driver of prosperity in the 21st century. But the three players that have traditionally sponsored basic research and invention in those economies are no longer willing or able to perform that role.

Corporate R&D has become increasingly conservative as concerns for profit push incremental, rather than radical, innovation. Governments are de-prioritizing funding for basic, blue-sky research. The days of massive, government-sponsored science and technology projects, such as the Apollo program or the military microelectronics investment that spurred Silicon Valley, are well behind us.

Even venture capital, the favorite alternative for financing disruptive technologies, is stumbling. The risk-reward ratio for boot-strapping deep-technology startups is no longer acceptable to most investors. The model works only when innovations are relatively cheap to implement and there’s a really large gain at the other end—a formula that is dependent on IPO market factors, interest rates and other externalities. Consequently, VC capital has fled from fundamental technologies such as semiconductors, optics, materials, medical devices and therapeutics and toward the next Instagram, Rovio or Facebook.