Incentives for innovation

This week my friend Kevin Short (former guest lecturer on drug discovery in my technology strategy class) introduced me to several healthcare blogs. The most interesting was “In the Pipeline” (referring to drugs under development) by Derek Lowe, a Ph.D. chemist who has worked for various pharma companies. Its average posts are as substantial (if not more so) than my longer posts, and it has the sort of dry humor that I enjoy.

There was a lot to enjoy. As an academic social scientist, I liked “Run! Anthropologists!” about the (decade-old) practice of hiring anthropologists to study corporate culture. As a former journalist, I relished how he skewers bad gonzo journalism in a visit by a wanna-be Hunter Thompson to the Genentech plant in Vacaville (about 80 miles north of Silicon Valley). Gonzo journalism is about 30 years out of date: at least imitating Hemingway (rather than Thompson) has some lasting value.

But the article most relevant to this audience bears on a core theme of this blog, the incentives for innovation. As someone whose business card says “innovation and entrepreneurship,” I think there is no more fundamental issue than who and why does someone develop important new innovations?

In the posting, Dr. Lowe talks about European Union efforts to stimulate more drug innovation. He quotes from a speech by Günter Verheugen, a commission official looking at pharmaceutical industry policy, acknowledging (very obliquely) the conflicting goals of containing prices and providing incentives for innovation.

After he praises EC for considering providing more financial incentive for European drug discovery, Lowe wonders whether that’s the major effect, instead pointing to cultural differences:

Perhaps I think this way because I used to work for a European company, and now work in Cambridge (home of a zillion startups). But I've long thought that there's a different attitude to research and development in this country, a greater willingness to try odd ideas and to put money behind them. I'm not saying that you don't find innovation in Europe, because you certainly can. But I think that innovators have, on the average, an easier time getting funded and being taken seriously over here. It’s not a huge difference, but it's a steady one, and it's been compounding over time.

In classical political and economic theory, the two issues are inherently related — encouraging risk-taking either reflects (or is reflected in) economic policies. The problem with such neat theorizing are the counterfactuals.

In the past decade, California has become one of the most redistributionist states in the country, and yet remains probably the most risk-taking. Cambridge (Mass.) is located in an even more redistributionist state, one that more than 20 years ago was dubbed “Taxachusetts” and yet still has the best concentration of biomedical research universities in the country. So will entrepreneurs continue despite regulation and taxation? Is there a lag effect? Or are the universities so important that California will always beat out Nevada, Arizona (or Utah) in entrepreneurial formation?

So as with any policy question, advocates on each side can only guess what would happen with a policy change. Would more generous payment for European drugs encourage innovation, or would it require a sea change in work attitudes and risk taking to make something happen? And will it ever matter if the Wild East (of Chinese coastal regions) boasts both low wages and high rates of industry growth and entrepreneurial opportunity, or if India becomes the preferred Anglo-American outsourcing venue for more than just I.T.?

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