Written evidence submitted by Manchester
Institute of Innovation Research, Manchester Business School,
University of Manchester (TIC 09)
1. The Science and Technology Committee announced
its inquiry into the Fraunhofer model as a blueprint for Technology
Innovation Centres in the UK. This is in response to the concern
that, although the UK has a strong science base, it faces challenges
in the ability to commercialise science. The argument is that
this gap between research findings and their subsequent commercialisation
can only be closed by making new technologies ready for the market
through a "translational infrastructure" that bridges
research and technology commercialisation, such as the adoption
of Fraunhofer institutes (Hauser 2010).
2. In what follows, we argue that Fraunhofer-type
institutes can only be a very partial solution. The Fraunhofer
institutes are part of the specific institutional framework of
the German innovation system, based on a model that has grown
over 60 years, and they are successful in tackling the specific
system failures of the German system. While the UK innovation
system would benefit from a better "translational infrastructure",
this has to be devised with an understanding of the UK institutional
framework. Indeed, any translational infrastructure needs to be
devised carefully to fit the specific opportunities offered by
the science and knowledge base. Thus, while Fraunhofer-type institutes
might play a role in carefully selected areas, they are not a
mechanism to improve the commercialisation of the knowledge base
in the UK across the board.
What are the Fraunhofer institutes?
3. The Fraunhofer institutes are organised within
the Fraunhofer Society. The Society was set up in Germany in 1949
and by 2010 has grown into a large organisation of 59 institutes,
17,000 staff and an annual research budget of Euro 1.6 billion.
The mission is to carry out applied research for industry and
public bodies. The budget has, with minor exceptions, grown steadily
in recent years, indicating demand for their activity. The number
of institutes experienced a boost in growth after re-unification,
when a range of institutes were set up in Eastern Germany. In
general, the rationale for setting up new institutes is that demand
for contract research in a given field will support an institute
after a start-up period. The Fraunhofer institutes are active
in ICT, life sciences, microelectronics, materials and components,
production, surface technologies and photonics and defense and
security (Fraunhofer Society 2010, Meyer-Krahmer 2001, Mina et
al 2010).
4. The safeguard of the Fraunhofer's industry-oriented
mission is the funding model: two thirds of the income stems from
research contracts (mainly from industry) and one third is institutional
funding (of which 90% comes from the Federal Government and 10%
from the state or (länder) in which the institute
is located in order to establish local buy-in). This applies to
the Society and to (most of) the individual institutes and thus
ensures incentives to acquire commissioned research from third
parties. Provided they meet their financial targets and serve
their industrial and public costumers satisfactorily, the institutes
have considerable autonomy in terms of research topics and directions.
The headquarter interferes mainly at the formation stage (deciding
which topics to tackle), in response to crises and offers support
with central services. It also supports cooperation across clusters
of institutes in areas of strategic importance.
What role do Fraunhofer institutes play in the
research and technology system and what are the potential shortcomings?
5. The institutional context of the Fraunhofer
model is illustrated in figure 1 below. Fraunhofer institutes
occupy a specific role in a very elaborate division of labour
within the German system of research. The universities, still
performing by far the bulk of public research, have, for many
years, experienced structural challenges, but new initiatives,
such as the Excellence Initiative, have increased their strategic
performance orientation. Closely linked to universities are the
research activities of the Max Planck Society which focus entirely
on basic research, particularly in natural sciences, and which
are fully institutionally funded. The Helmholtz Institutes are
traditionally oriented towards "big science", that is,
those activities considered too large for university departments
to carry out (eg nuclear research). In general, Fraunhofer institutes
are the most application-oriented publicly-funded research organisations
and have the highest share of industrial funding. This is also
confirmed by patent and publication analysis, showing Fraunhofer
leading in patents per staff, but trailing in publication per
staff (Heinze and Kuhlmann 2006). Accordingly, Fraunhofer institutes
have the lowest share of institutional funding in the German public
research system. Thus, the German Fraunhofer institutes fill a
gap between basic and strategy research, on the one hand, and
industry research and development, on the other hand. They operate
in areas in which German industry has a demand for external research,
and in which the generation of research results from universities
and other more basic-oriented organisations is not sufficient.
Figure 1
THE GERMAN SYSTEM OF RESEARCH
Source: BMBF (2010), p 21
6. Two main qualifications regarding the nature
and performance of the research and technology system in Germany
need to be made. First, the great degree of institutional fragmentation
in Germany (which is regarded as conducive for reinforcing existing
technological strengths) is argued to hinder the flexibility and
reaction of the system and hamper the take-up of innovative fields
of research that need more integrated approaches (Internationale
Kommission 1999). This has led to calls for more open and coordinated
structures, which may be important especially in knowledge-intensive
technological areas, ie where the development of technological
solutions for industry necessitates direct input from leading
edge science or in new areas where findings in basic science have
immediate application potential.
7. Second, the Fraunhofer institutes do not so
much transfer knowledge from university to industry (here
next to traditional means such as licences or start-ups, the German
system has a range of other solutions, such as the Steinbeis Centres).
Rather, Fraunhofer institutes generate relevant application-oriented
knowledge themselves on demand from their clients. While this
may often be strongly linked to research in universities (many
leading scientists at Fraunhofer institutes are active also in
universities), it nevertheless constitute a knowledge creation
sub-system of its own.
8. Thus, when borrowing the Fraunhofer approach
with its funding model, policymakers needs to keep in mind that
the Fraunhofer only work in areas with clear industrial demand,
a willingness to pay and an ability to absorb advanced technological
knowledge, and that Fraunhofer institutes in Germany tend to reinforce
industrial strengths rather than build up entire new technologies
and that they transfer knowledge form the university science base
only very indirectly.
Fraunhofer institutes in the specific German industrial
landscape
9. In order to understand the contemporary role
of Fraunhofer institutes, it in necessary to place them in their
wider country context. Germany was the pioneer of two institutions
that are today taken for granted in most advanced innovation systems:
the research-oriented university combining education with science
advancement and the science-based firms with an in-house R&D
department (Keck 1982). But Germany also has a high degree of
heterogeneity in industrial governance structures. Not only is
it a country of the well-known large vertically integrated enterprises
with close ties to universal banks but also has a parallel sector
of decentralised highly specialised small- and especially medium-size
producers with supporting institutions (Herrigel 1996). The bulk
of small and medium-sized firms are not new entrepreneurial ventures,
but well established organisations that, over decades, have been
successful in driving and adopting technological change, most
often in traditional sectors. Those companies have been the breeding
ground for the German Mittelstand, a characteristic of
the German industrial landscape for centuries. It is this sector
of highly specialised and flexible small and medium-sized firms,
with technological capability in industries where Germany has
a very long tradition of technological strength, that cooperate
closely with the Fraunhofer institutes.
Fraunhofer institutes and the UK science and technology
system
10. The innovation and production systems of
the UK and Germany are very different. Different institutional
frameworks have different advantages to solve the organisation
problems of different national innovation strategies. Germany
has a decentralised innovation system which has traditionally
been described as "diffusion oriented" (Ergas 1987),
in contrast to the "mission-oriented" system of the
UK (although these characterisations may be blurring in the last
20 years, with German policy now increasingly investing in dedicated
high-tech areas). In general, Germany has strength in "deepening"
rather than "shifting" the research frontier. Firms
(including small and medium-sized ones) in Germany traditionally
develop complex innovations along known trajectories (many involving
R&D-intensive sectors) in the automobile manufacturing, mechanical
engineering and the chemical industry. Germany has more difficulties
to enter fundamentally new trajectories in the sectors of IT,
biotechnology and new materials (except for its celebrated success
in IT with SAP and the more recent development of high-tech ventures,
mainly as a result of special measures encouraging high-tech entrepreneurship).
11. Furthermore, the German innovation system
is based on long-term capital, highly cooperative unions and powerful
employer associations and effective vocational training systems
(Soskice 1997). Strong collaboration between firms, business associations,
state agencies and public and private research organisations aid
in the development and diffusion of new technological knowledge.
Since the 1970s, the major policy orientation especially at Federal
level was to support research in thematic programmes mainly through
funding cooperation between public research organisation and firms
(Verbundforschung) to strengthen collaboration and the
flow of information and staff between organisations. By underwriting
a lot of the costs of technological research, and involving industry
associations in its management, the states encourage the involvement
of firms in the public science system. It is this environment,
with tradition in cooperation, high absorptive capacity within
firms, consensus-based standard-setting, stable shareholding,
long term funding and low product market competition, that enables
firms to invest in incremental innovation in high quality science-based
products especially in engineering and chemicals.
12. The UK, instead, has a centralised innovation
system which supports radical innovation in newly emerging technology
(eg biotechnology and new materials), knowledge intensive tradable
services and large complex systems where technology is changing
rapidly (defense, software and aircraft production). The UK has
a very strong science base, second only to the USA in sectors
such as medical and life sciences, mathematics and physics (and
this is what the UK science and technology system needs to exploit).
As in France and the USA, the institutional set up of the UK makes
it suitable for policy with definite "missions". But
the "mission-oriented" system of the UK has yielded
fewer benefits than those of the USA and France and also possibly
crowded out a share of private sector R&D. Indirect spin-offs
from public procurement have been low (Ergas 1987, Georghiou 2000).
Aside from this general characterisation, the UK has a different
kind of knowledge and industry structure, investment patterns
and trajectories than Germany. This, it appears, leaves Fraunhofer-type
models with a much smaller space to fill.
13. Indeed, in contrast to the German system,
the UK system is capital market-dominated, where priority is given
to short run profit maximisation and asset trading, which leads
to growth of firms through mergers and less investment in fixed
capital, R&D and long term incremental innovation. It lags
behind countries like Germany in engineering. R&D is concentrated
in a few leading firms in leading industries (such as pharmaceuticals)
and a large proportion of R&D is funded by foreign firms.
Furthermore, not only the number of government institutes has
been severely reduced in the last twenty years but also their
aim has changed from producing science as a public good, freely
available to potential social and economic users to a mode of
knowledge creation involving commodification of science and direct
relationship with users (Boden et al 2004). The major challenge
in this institutional environment is to support the commercialisation
of science-based inventions arising from the very productive UK
university system, which is inherently a very risky endeavour.
Although venture capital is substantial in the UK, it is not focused
on early-stage firms, it is prone to herding trends and seeks
an early exit. In this context, and because of deep uncertainty
surrounding science-based innovation, it may be unwise to leave
the responsibility of financing the commercialisation of this
research entirely to venture capitalists. Although a good "translational
infrastructure" would benefit the commercialisation of research,
a comprehensive analysis of how institutional arrangements of
science and the links between these institutions and business
influence the ability of science-based firms to manage risk, achieve
integration and facilitate learning is necessary.
Conclusions: intelligent investment and need for
institutional fit
14. The starting point for improving commercialisation
of science is to keep a high level of funding for universities.
It has been shown for the USA (the institutional arrangements
of science and technology of which are more similar to the UK
than those of Germany) that greater investment in science in university
(including basic science) have the potential to increase the attractiveness
of downstream R&D by reducing risk (Nelson 1982, Pisano 2006).
Thus, investing more in the UK universities (which are the most
productive in the world, in terms of journal articles produced
per millions of pounds spent), would result in greater commercialisation
of innovation. Indeed, universities have been shown to be a key
contributor to technical progress in industry (Mowery et al 2004).
A central challenge for policymakers is the intelligent and adequate
design of licensing policies for universities engaged in innovation
financed by public funds to ensure greater societal benefits.
Broad dissemination of scientific research by universities and
encouragement of more inter-disciplinary research and training
(typically constrained by the system of grant getting, which supports
narrow specialisation) can facilitate the diffusion and commercial
application of knowledge. A good example of support for cross-disciplinary
research is the development of the Eli and Edythe L. Broad Institute
of Harvard and MIT in the USA that brings together scientists
from biology, chemistry, mathematics, computer science, physics,
engineering and medicine.
15. Fraunhofer institutes as institutionalised
in Germany fit a specific institutional framework and have
had a particular history. They are not university centres, but
self-standing knowledge and solution producing institutes, with
structural incentives to work with and for industry with a strong
core funding and an overall supporting structure through a strong
headquarter. They cannot simply be interpreted as models to transfer
existing knowledge form universities into industry, but rather
fill a gap in the ability of public research to respond to immediate
needs of strong, largely traditional industry used to working
with and financing public research and capable of absorbing that
knowledge. The Fraunhofer model is highly successful in this German
context, but even in that context there are challenges of potential
compartmentalisation and of lack of support for newly emerging
technologies.
16. Thus, to solve the commercialisation challenge
in the UK system, it is of limited use to "transplant"
these institutes. A set of clearly defined institutes with a long-term
mission and with firms that express long-term interest and willingness
to engage can be sensible. However, to invest the bulk of scarce
resources into the Fraunhofer model might result in high opportunity
costs. There are a range of alternatives that fit better the UK
research and technology landscape. For example, there seems to
be more scope for mid- and long-term collaborative competence
centres with mid to long-term financing provided jointly by a
set of firms and universities. Those centres may allow
flexible arrangements, ranging from long term strategic research
agendas shared by all participants to bi-lateral, confidential
contracts. They have been introduced successfully in a whole range
of countries, including Northern Ireland (www.competence-research-centres.eu).
For concrete contract research and problem solving, another German
model, the Steinbeis institutes (www.stw.de/en) is much better
suited, as it has clear personal and institutional links with
the universities, but operates more autonomously and flexibly
than a university department.
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Professor Jakob Edler
and Professor Marcela Miozzo
Manchester Institute of Innovation Research
Manchester Business School
University of Manchester
November 2010
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