The Role of

Governmen
ts in
Innovation
Prof / Fareed Shoshia
Mamdouh Medhat

Mohab Saeed

STORY
In 1965, a U.S. government employee named Bob Taylor had an
idea about how computers could communicate. He took the idea to
his boss Charles Herzfeld, head of the Defense Advanced Research
Projects Agency (DARPA), who invested government funds in
exploring it. That led to the ARPAnet and, in turn, to the Internet,
changing the world.
In 1998, two Stanford graduate students named Sergey Brin and
Larry Page published a paper that begins: "In this paper, we present
Google, a prototype of a large-scale search engine..." The paper
says that Google is designed to crawl and index the Web efficiently
and produce much more satisfying search results than existing
systems. The two students succeeded: yesterday there were more
than a billion searches on the Google search engine. At page 16 of
their paper, Brin and Page write that their research was "supported
by the National Science Foundation," with funding "also provided
by DARPA and NASA."

1.

Why is government important to

innovation?

First and most basic -- because government protects intellectual

.property, with patents and other tools
That protection helps ensure that innovators benefit from their hard
.work and creativity, inducing more innovation
Second -- because the private sector under-invests in fundamental
.research. That's natural
Time horizons in many businesses are short. Few companies are in a
position to capture benefits from fundamental research they might
.fund on their own

In many fields, fundamental research requires resources available

.only to governments and the largest companies

Third -- because innovation depends on an educated workforce,

which is a job for governments.

Biomedical research requires medical technicians.

Energy research requires engineers.
Computer research requires programmers.

Although private companies often provide specialized training, an

educated workforce is the essential starting point. Primary and
secondary education is a vital precursor to much innovation.

Fourth -- because market failures stifle innovative technologies. For

example, lack of capital and information prevents homeowners from
investing in energy-saving technologies with very short payback
periods.
Governments have a central role in overcoming these barriers and
more.

Fifth -- because government policies and standards can lay a strong

foundation for innovation.
For example , Israel which has a teeming innovation culture in which
the Israeli government plays a central role, providing the foundation

for startups that commercialize civilian uses of military technologies

in materials, semiconductors, medical devices and communications.

2.How Government Fosters Innovation

Governments can foster innovation four basic ways: by buying it,
by reducing its risk, by collaborating on it, and by using standards or
regulations to encourage it.

Buying Innovation.
In many instances, the governments key role in fostering innovation
is as the lead customer. The government itself acquires the required
systems, products, and services, generally after following
a prescribed procurement procedure that provides free competition.
As very large and concentrated purchasers, governments have
major opportunities to promote innovation.
Public health departments and hospitals have also led the
innovation effort. In Canada, for example, there have been
considerable efforts to use procurement to support innovation in
health care products particularly for the elderly with the dual
objectives of supporting lower-public-cost independent living for the
elderly and supporting innovation in a nascent high-technology
industry.

Reducing the Risks of Innovation.

The government can also help reduce the technical, commercial,
and financial risks associated with industrial innovation. To reduce
technical risk (i.e., the chance that effective solutions to problems
being addressed will not be found), the government funds R&D
programs and Demonstration projects.
Governments also fund demonstration programs that help to reduce
not only technical risk but commercial and financial risks as well,
while the private sector gets a much better idea of potential
demand for the innovation.

Collaboration on R&D to Support Innovation.

Governments facilitate innovation by collaborating on advanced

R&D and product development, usually at the precompetitive stage
but increasingly at the competitive stage as well. Often a
government agency coordinates R&D efforts or innovative
technology applications.
For example, the two major public sector entities involved in
the transportation area in the United States are the DOT and the
Transportation Research Board (TRB), a unit of the National
Research Council that serves the National Academy of Sciences and
the National Academy of Engineering. The DOT and TRB coordinate
dissemination of information on innovative concepts and practices
in transportation systems, services, or infrastructure financing and
development through conferences, publications, and symposia.
United States and private businesses or industry consortia.
Governments are also entering into collaborative agreements with
their suppliers to develop new technologies and product applications
and to share the costs and returns.

Using Standards or Regulations.

Government regulations and standards serve as important barriers
and incentives for innovation.
For example,
Electric vehicle technology and automobile engine technology are
being driven by CAFE and ZEV regulations in the United States as
regions recognize the dual benefits of environmental enhancement
and economic development. Similarly, environmental, health, and
safety regulations are driving numerous innovations in
environmental technologies for power plants, automobiles,
environmental clean-up, and recycling.

3.The Experts: What Role Does Government

Play in Innovation?
What role does government play in spurring innovation? The Wall
Street Journal put this question to The Experts, an exclusive group
of industry and thought leaders who engage in in-depth online
discussions of topics from the print Report.

Rosabeth Moss Kanter: Fund Basic and Early-Stage

Research

One of the best roles for government is to support basic and earlystage research that stimulates the creation of new fields and new
knowledge.

Eric Spiegel: Promote Free Markets, Tax Incentives

and Patent Protections
The government can play an important role in several ways.
First, by promoting free markets and free-trade agreements which
encourage more innovation and the faster adoption of the best
ideas.
Second, by providing tax incentives for the longer-term, bigger
bets required for new technologies. By making the R&D tax credit
permanent we could avoid the "on again, off again" situation that
creates uncertainty.
And third, by protecting intellectual property rights with strong
patent, trademark and copyright systems. These systems provide a
reliable safeguard for our innovations driven by research and
development investments and serve to protect our products and
solutions.
Eric Spiegel (@ericspiegel) is the president and CEO of Siemens USA
and the author of the 2009 book "Energy Shift: Game-changing
Options for Fueling the Future."

Bruce Nolop: Establish a Framework and Get Out of

the Way
Innovation is hard enough without having the government getting
directly involved. For example, while companies are happy to accept
research and development tax credits, I'm skeptical that they
produce much incremental success and I don't think they are worth
the cost to taxpayers.
Instead, the government should cultivate an economic and business
climate that rewards innovationsuch as lower income-tax rates

and limit the regulatory hurdles that can impede a new product or
process improvement.

Jay Hooley: Even Regulatory Challenges Can Spur

Innovation
The old saying is that "necessity is the mother of invention," and to
some extent any new challenges or changes can spur innovation.
For example, the unprecedented level of new regulations in the
financial industry is creating challenges that will need to be
addressed with innovative solutions. These regulations mean many
companies will need to rethink how they operate, and that
disruption creates opportunity.

4.Examples on The Role of Government in

Boosting private sector Innovation
The powerful role traditionally played by governments in fostering
private-sector innovation is now expanding, and savvy companies
are taking full advantage of a wide range of governmental support,
both traditional and new.
In Japan, the Ministry of International Trade and Industry (MITI) sets
industrial policy and supports Japanese industrial competitiveness
through large-scale funding of selected high-priority advanced
technologies.
Similarly, the European Community and its member states
support numerous cooperative research ventures.
The European Community is also now beginning to use EC-wide
standards both to stimulate innovation and to reduce risk
.
Individual EC member states are also energetically fostering
innovation. Scotland has been very active in a broad range of
efforts to support innovation in the health care and medical
products industry.
Germanys Ministry of Research and Technology has made major
investments in megaprojects that are deemed to be of strategic
importance, such as magnetic levitation.

Germany also has Prometheus, a public/ private partnership

designed to stimulate the introduction of intelligent vehicle/highway
systems (IVHS) in Europe.
The French government has invested heavily to support video and
telecommunications innovations. In northern Europe and
Scandinavia there have been significant government efforts to
support innovation in environmental technology, food products, and
packaging.
Another example of public/private partnership in Europe is
Germanys Frunhofer Institute for Manufacturing and
Automation, which addresses organizational and technological
problems in the manufacturing sector. This institute has extensive
facilities to conduct research projects in manufacturing systems,
such as image processing, robot development, and computer
networks. These research projects, initiated by small and medium
sized firms, receive 40 to 60 percent of their budgets from federal
and state governments. Significantly, the results of the research are
published only with the permission of the clients, allowing them to
perform competitive research.
In the United States, despite strong resistance over the past
decade to industrial or technology policy, there are also
widespread efforts at all levels of government to foster innovation.
The National Aeronautics and Space Administration (NASA) has
long supported innovation and commercialization of technology.
The extensive and highly successful efforts by the U.S. government
to sponsor innovation in the agricultural and health care sectors
(through the agricultural extension and research services and
through the National Institutes of Health) are now being put forward
as models and expanded to support innovation and accelerated
commercialization in manufacturing and other service sectors.
in Canada. Local as well as federal governments and private
industry are supporting large numbers of manufacturing technology
centers and technology extension services designed to foster
innovation in small and medium-sized businesses.
5.

The Arab States

Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya,

Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Syria,
Sudan, Tunisia, United Arab Emirates, Yemen
The Arab world needs more champions of science and
technology, including in the political arena, to bring about
the positive change to which the region aspires.

5.1 The global financial crisis has ricocheted on the

region
The Arab world1 is of strategic importance, owing to its location and
wealth of oil and natural gas: 57% of the worlds proven oil reserves
and 28% of those for gas (AFESD et al, 2013).
The tremors of the global financial crises of 2008 and 2009 and the
subsequent recession in most developed countries affected Arab
states in a variety of ways.
In, Egypt, Jordan, Lebanon, Mauritania, Morocco, Syria and Tunisia,
where the banking sector is dependent on national borrowing
sources, the economy was not directly affected by fluctuations in
global capital markets. Such countries nevertheless felt these
external economic shocks through their close association with the
markets of developed countries and other major trading partners in
the European Union (EU) and USA.

5.2 Military spending is eating up resources for

development
Military spending in the Middle East increased by 4% in 2013 to an
estimated US$ 150 billion.
Saudi Arabias own budget shot up by 14% to US$ 67 billion,
allowing it to leapfrog over the UK, Japan and France to become the
worlds fourth largest military spender behind the USA, China and
the Russian Federation, according to the Stockholm International .

5.3 The Gulf States contribute nearly half of the

Arab worlds GDP

The six Gulf States, which contribute about 47% of total Arab GDP,
are all economically dependent on oil. Some 75 million people
(including a sizeable foreign labor force) belong to this group,
representing around 20.4% of the Arab world
population in 2014 (Table 17.1)

5.4 Investment remains low but change is in the air

Gross domestic expenditure on research and development
(GERD) as a percentage of GDP remains low in the Arab world.

It is, of course, hard for wealthy oil-rent economies like the Gulf
States to have a substantial GERD/GDP ratio, as GDP is so high. The
countries with the greatest R&D intensity are Libya and Morocco
(Figure 17.5).
Tunisia used to have the Arab worlds highest ratio but, after
revising its national data, it published a GERD/GDP ratio of 0.71% in
2009 and 0.68% in 2012.
The R&D intensity of Egypt, Jordan and Sudan has been low for
decades, despite a growing number of public and private
universities.
That appears to be changing in Egypt, the only country for which
there are recent data for this indicator: GERD reached an all-time
high of 0.68% of GDP in 2013.
Iraq, meanwhile, has failed to use the windfall of high oil prices in
recent years to
raise its own GERD/GDP ratio, which stood at about 0.03% in 2011.

5.5 Egypt and Bahrain close to gender parity

Egypt (43% women) and Bahrain (41%) are relatively close to
gender parity (Figure17.7).
In the majority of other countries for which data are available,
women make up between one in three and one in five researchers.

The notable exception is Saudi Arabia, where just 1.4% of

researchers were women in 2009, although only the King Abdulaziz
City for Science and
Technology was surveyed.

5.6 Little business R&D

In many Arab states, the bulk of GERD is performed by the
government sector, followed by the higher education sector; the
private sector assumes little or even no role in the research
enterprise.
In Egypt, for instance, the Academy of Scientific Research and
Technology estimates that the private sector contributes only
around 5% of the countrys research
expenditure (Bond et al., 2012).

5.7 Higher education sector

The higher education sector cost increase by (54%) of Arab in 2013

and the remainder by government (46%), although the business
sector was not surveyed (ASRT, 2014). In Iraq, as many as eight out
of ten (83%) researchers are working in academia.

6.

Israel

Israel needs to prepare for tomorrows science-based

industries.

6.1 No lasting impact of global financial crisis

The Israeli economy grew by 28% between 2009 and 2013 to PPP$
261.9 billion and GDP per capita progressed by 19% (Figure 16.1).

This impressive performance reflects the dominance of the mediumand high-tech sector, which constitutes the countrys main growth
engine and contributes
46% of Israeli exports (2012).
This sector is dominated by information and communication
technologies (ICTs) and high-tech services. Given its reliance on
international markets and venture capital, the Israeli business
enterprise sector was fairly exposed to the global financial crisis of
20082009.
The Israeli economy has sailed through the crisis mainly due to a
balanced fiscal policy and conservative measures in the real-estate
market. On the R&D front, government subsidies1 introduced in
2009 have helped high-tech firms to weather the storm, leaving
them relatively unscathed.

6.2 Trends in Israels GERD/GDP ratio

6.3 Still the world leader for R&D intensity

Israel tops the world for R&D intensity, reflecting the importance of
research and innovation for the economy.
Since 2008, however, Israels R&D intensity has weakened
somewhat (4.2% in 2014), even as this ratio has experienced
impressive growth in the Republic of Korea, Denmark, Germany and
Belgium (Figure 16.2)

7.Egypt: Innovation pillars , Problems &

Steps toward solving
7.1 Innovation pillars
Education System

Reduction of Education Expenditure from 6% of GDP in 2002

to 3.9% in 2009.

The great density of students.

Passive learning and lack of critical thinking.
Education curricula are irrelevant to market and employers
needs.

R&D Personnel Brain Drain

Egypt has been steadily losing scientists.

One third the students studying overseas do not return home.

Government and private sector interventions

Building state of the art research facilities.

Programs to encourage young researchers to return home.
Joint venture model or PhD program, which splits time and
financial support between travelling and infrastructure

building at the home institute.

Current legislations makes it hard for research institutes to
commercialize their own work for private sector.

7.2 Research to Market - Gap Analysis

The following are the gaps we found in the innovation
process from the phase of applied research until the
invention reaches the market place:

The majority of the grants are restricted to individuals

who are working at universities or research centers
Researchers search scientific journals for prior arts
before starting their research to make sure they are not

repeating work done in the same field.

Researchers might not find the lab equipment they need
at their universities. These equipment might exist at other

universities but they do not have access to them.

The government fund available for applied research is
very small.

7.3 Research to Market Recommendations

We recommend the following strategies to bridge the gap in
the current innovation process. An action plan with
milestones shall be developed for the implementation of
those strategies.

Establishing collaboration between the different government

funds in Egypt. The purpose is to make it easier for fund
applicants to apply for different funds without going through

the same procedures all over again.

Encouraging researchers to search the international patent

databases during their prior art search and literature review.

Encouraging universities and research institutions to align
their resources to support researchers in different areas of
science. Lab equipment is expensive to purchase and there is
currently a limited government budget to purchase all the
required equipment for universities and research centers. To
compensate this limitation in budget, we recommend
establishing virtual incubators in all fields of applied science.

7.4 Steps towards solving the problem

It is important to reform the university admission system to select
students

according to their needs, talents and resources.

Tax exemptions have to be offered to companies on any

expenditure related R&D.
Several research institutes have started programs for investors
.supporting knowledge transfer to industry
Egyptian research institutes network must be easily accessible to
.major business clusters
Academic people must be aware of the needs and the
mechanisms of technology transfer to industry.
support the link between research sector and industry.
Governmental incentives and financial support programs to
encourage private sectors to benefit from R&D.