Tech Transfer: Why Private Profit is Good Public Policy

An article in Biofuels Digest (see reports that in a presumably recent year the University of California system recorded royalties of $52.5 million on University research spending of almost $3 billion.  The number – as a bunch of others in the article – asks whether the public is getting a fair return on its research investments.  This is a question frequently posed by various public policy commentators and University researchers.  It’s a good question, but usually, as in the aforementioned article, poorly framed.

There are two huge problems with the way the “why does so much of the profit from public research spending go to the private sector” is usually posed.  The first is that it ignores the “D” side of the “R&D” equation, and overstates the “R” side.  As to the “R” side, most university research does not lead to commercial products or services, at least not in the time frame relative to this discussion.  In the above example, the $2.95 billion figure should be reduced to reflect only those research investments that have in fact been licensed out for commercialization, and reduced again to take out those licensed ideas that were never successfully commercialized.  My guess – shooting from the hip, here (I would love to see some real numbers) – is that the resulting figure would be a small fraction of $2.95 billion; certainly less than one half. 

What about the “D” side?  The bulk of the cited $2.95 billion no doubt went to life sciences research: that is where the majority of federal investment dollars in University research goes.  And in the area of life sciences, anyone who has followed the development of the biotechnology industry can tell you that development costs are typically an order of magnitude or more greater than research costs.  And development is a private sector expense.  The 2% return figure cited in the Biofuels Digest article may seem low – until you consider that the amount of money invested by the private sector in commercialization dwarf’s the public sector’s investment in the underlying research.

 The second problem with the way the “does the public sector get a fair return from it’s investments in basic research” is framed is that it focuses on only one narrow measure of return – the direct return in the form of license fees and royalties.  That ignores the very real, if harder to quantify, and much bigger “soft” returns.  Like keeping American industry a world leader in technology innovation as well as basic research, and the high-quality jobs and tax dollars that leadership generates when it results in large, growing, profitable businesses.  It seems to me that when we make a decision, as tax payers, to invest scarce tax dollars in basic research, what we mostly want to see resulting from those investments are jobs and tax revenues, not royalties.

One can reasonably debate whether our system of focusing public dollars on research and looking to the private sector to invest the development money in commercialization is the best way to do business.  But if you want to gauge the real world performance of the system, you’ve got to look a lot deeper than public research licensing revenues.


About Paul A. Jones

Serial venture capital backed entrepreneur, angel investor and venture capital investor; Co-chair of the VentureBest team at Michael Best & Friedrich, LLP.
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