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Universities and Innovation

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I've written before on government attempts to stimulate entrepreneurship and innovation through subsidies, prizes, tax incentives, state-funded science parks and incubators, and similar policies. Both theory and evidence suggest that these programs are unlikely to be successful, for a variety of reasons. Government actors lack the information to pick winners and the incentives to try. (Instead, they tend to fund their political supporters, their pet projects and causes, their friends in the banking industry, and so on.) More generally, successful innovation is a non-linear, bottom-up process that involves complex interactions between scientists, technologists, entrepreneurs, investors, and a host of other actors. Absent private property and market prices, economic calculation is impossible, so top-down attempts to "plan" the innovation process will inevitably fail. 

I have done some empirical work on attempts by large research universities — all of which get the bulk of their research funding from the state — to foster innovation and entrepreneurship. One of my papers, which is forthcoming in the Strategic Entrepreneurship Journal, has been focused in Inside Higher Ed. This paper studies business incubators established on university campuses. These incubators are designed to help faculty and students start companies, and to attract entrepreneurs who potentially benefit from close interaction with university personnel and access to university resources. My coauthor Christos Kolympiris and I find, however, that after a university establishes an incubator, the average quality of its subsequent innovations falls. This suggests that universities are shifting resources from conventional research and teaching activities aimed at knowledge discovery and dissemination toward more visible, but less important, programs that create companies. (Note that we are studying large, research-intensive universities, so the results may not apply to smaller, specialized institutions.)

Should research universities emphasize business incubation, technology commercialization, local economic development, or should they stick to their knitting? Given the vast public resources consumed by academic research — for activities not governed by the profit-and-loss system — it is hard to say. Publicly funded universities certainly do produce valuable innovations (US schools earned $2.6 billion in patent licensing fees in 2012.) But there is a broken-window problem here. Could those resources have been better spent? Absent government funds, universities would almost certainly have a different focus.


Contact Peter G. Klein

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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