Abstract
The paper argues that the increased flow and management of knowledge permitted by Knowledge-Based Capital (KBC), supported by appropriate policies, can be an important factor in reducing the decision risk facing enterprises due to uncertainty and imperfect information, helping improve the resilience of development outcomes. Enterprises are conceptualized as information platforms that manage risk through investments in KBC and complementary assets, providing them with the knowledge, protection/enabling, insurance and coping/leveraging abilities to make better decisions in response to shocks. Investments in KBC allow enterprises to better convert voluntary but risky reallocation and innovation decisions into productivity and wealth-enhancing opportunities. They can help the enterprise sector as a whole and most people to self-protect and realize better jobs, earnings and consumption outcomes by adapting to shocks. However, absent appropriate policies, KBC can have adverse distributional effects—including a skewed industrial concentration of productivity gains and more unequal consumption and income-earning outcomes between rich and poor people. The paper discusses the role of policy in facilitating risk management by enterprises, ultimately to reduce poverty and boost shared prosperity. Insufficient enterprise risk-taking is costly for the enterprise sector and the economy as it results in too little experimentation and learning. Governments should create business environments that stimulate entrepreneurial risk-taking to invest in market and social opportunities that combine new technologies with appropriately-skilled workers. Policies allowing people to better confront and manage their risks include: (1) spurring entrepreneurial experimentation; (2) supporting skills upgrading; and (3) promoting mechanisms for joint learning through global collaboration.
The paper is a product of the Trade and Competitiveness Global Practice Group, The World Bank Group. The author thanks in particular Charles Hulten and Xubei Luo for helpful suggestions on an earlier draft.
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Notes
- 1.
- 2.
In the UK, business investment in KBC is estimated to have more than doubled as a share of market sector gross value added between 1970 and 2004. For similar data on other developed high-income countries, see OECD (2013).
- 3.
One particular type of economic competencies-related KBC that has recently benefited from empirical studies in developing countries is “managerial capital”. See Bruhn et al. (2010) for an overview, and the complementary findings of Bloom et al. (2013a) on the impact of intensive consulting services from an international firm on the business practices of 20 large Indian textile experimental plants, and Bruhn et al. (2013) on the impact of a heterogeneous set of local consulting firms on 80 small and medium-sized Mexican firms across industries taking the support, with both studies finding that access to management consulting leads to better enterprise performance.
- 4.
- 5.
Exogenous risks include imposed productivity and/or demand shocks (both first-moment changes in levels and second-moment increases in volatility or “uncertainty shocks”) arising from unanticipated external-to-the-firm changes in input and output prices (and other non-price effects) due to natural/weather disasters, pandemic risks/illness of the workforce, resource risks, geopolitical risk and social unrest/strikes, infrastructure risks, other economic, financial, and regulatory risks, and changing trends over time in technology and tastes. Bloom (2009) highlights the importance to policymakers of distinguishing between the more persistent first-moment effects and the more temporary second-moment effects of major shocks (with the increased volatility of “uncertainty shocks” typically generating a rapid and costly slowdown followed by a bounce-back in enterprise investment, hiring and productivity growth). Endogenous risks are voluntary resource reallocation and innovation investments firms take in the pursuit of opportunities for better expected rates of return.
- 6.
Their measure of financial development is generated by the World Economic Forum (ranking countries according to the strength of their financial markets and the depth and breadth of access to capital and financial services), while the labor regulation measure is the World Bank’s Doing Business indicator of the strictness of hiring, firing and contract change regulations.
- 7.
Their data are comprised of 50–70,000 plants per year distributed over 140 three-digit industries.
- 8.
Their proxy for risk is the volatility of the portion of Total Factor Productivity (TFP) growth which cannot be forecast by means of factors, either known or unknown to the econometrician, that are systematically related to plant dynamics (which is not explained by either industry- or economy-wide factors, or by plants’ characteristics systematically associated with changes in TFP itself): the volatility of TFP growth due to idiosyncratic shocks ranges from 4 % for producers of fur goods to 12.4 % for manufacturers of computer equipment.
- 9.
Their industry-level proxies for product turnover, R&D and investment-specific technological change (ISTC) are, respectively: the monthly item substitution rate as collected by the US Bureau of Labor Statistics from sales outlets on more than 300 consumer good categories; the industry’s average ratio of R&D expenditures to sales in COMPUSTAT; and a time series of quality improvements collected by Cummins and Violante (2002). On average, 1 % increase higher product substitution rate implies 0.25 % higher volatility of TFP growth, 1 % increase in R&D intensity implies 30 % volatility increase, and 1 % increase in ISTC is associated with 0.93 % volatility increase.
- 10.
Enterprise resource reallocation involves expansion or contraction of factors of production while doing more or less of the same things, namely shifting resources across existing goods and services that the enterprise produces, including exiting some or all product lines. Enterprise innovation, on the other hand, is broadly defined as the commercialization through markets by entrepreneurs of improvements in technology, where technology captures transformations of inputs into outputs including improvements in products, processes, business processes/organization, and marketing—namely doing any productive activity in better ways by making progress over and above the duplication of physical capital and labor. In the context of development, innovations should be recognized as applying to a broader range of non-replicative entrepreneurial accomplishments than just new-to-the-world frontier products, and include value and productivity-enhancing activities that commercialize ideas that are new-to-the-firm—thereby including the adoption, adaptation to local context and use of technologies already used elsewhere but not yet used in the local economy (see Dutz et al. 2012a). Innovation can be measured as the within-firm component of TFP growth (see Dutz 2013). In addition to being a source of endogenous risk, innovation helps firms manage exogenous shocks that require more adaptation than just reallocation of resources. There are of course important interactions between the two: ease of reallocation affects the expected profitability of innovation, while innovation typically requires complementary reallocation of resources.
- 11.
The informal sector typically exhibits more flexible reallocation only when government policies overly constrain the formal sector’s flexibility. In Turkey, for instance, the share of informality increased in growing non-agricultural employment between 2004 and 2010 in the Anatolian East due to rigid and costly labor market rules facing formal enterprises, including a very expensive severance payment regime leading to one of OECD’s most rigid employment protection rules for permanent workers, and the most restrictive rules for temporary contracts among OECD countries (Gonenc et al. 2012). Taymaz (2009) suggests that the significant productivity gap between informal and formal firms, and wage gap between informal and formal workers, can be traced back to differences in professional and technical skills of owners and managers, with more educated entrepreneurs and workers moving to the formal sector. This process of self-selection contributes to widen the productivity gap between informal and formal enterprises.
- 12.
Hsieh and Klenow (2014) examine the importance of resource misallocations that prevent young efficient firms from growing and that punish larger firms over the enterprises’ life cycle. Comparing the life cycle of manufacturing enterprises in India and Mexico to the US, they conclude that differences in “within-firm TFP” (that part of aggregate TFP growth that does not come from cross-industry or within-industry cross-enterprise resource reallocation)—as successful US firms grow and accumulate intangible capital and complementary assets while Indian and Mexican firms exhibit little growth in terms of TFP, output and employment, and concurrently also exhibit lower post-entry investment in intangible capital—account for an important part of the gap in aggregate TFP between poor and rich countries. Bollard et al. (2013) similarly report the importance of “within-firm TFP”, namely the productivity growth within existing large plants rather than reallocation across plants, in accounting for the rapid productivity growth in Indian manufacturing from 1993 to 2007.
- 13.
They find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3 %.
- 14.
Based on a panel of 11,417 Italian manufacturing firms over 1992–2001, a 1 % increase in uncertainty lagged one period leads to a 0.69 % fall in the frequency of innovations of all entrepreneurial firms, and a 0.92 % fall for the group of less diversified/smaller entrepreneurial firms.
- 15.
It appears not to be driven by risk-loving preferences of entrepreneurs, as experimental studies generally find entrepreneurs to be as risk averse as, and some studies find them to be even more risk averse than non-entrepreneurs. See Sarasvathy et al. (1998), Miner and Raju (2004) and Hongwei and Ruef (2004).
- 16.
Herranz et al. (2009) find that, even in the US, 2 % of the primary owners of small businesses invested more than 80 % of their personal net worth in their firms, 8 % invested more than 60 %, and about 20 % invested more than 40 %.
- 17.
Corrado et al. (2012) show why investments in KBC matter for total factor productivity growth (TFPG), by comparing the correlation of investment in physical capital to TFPG versus the correlation of investment in KBC to TFPG across a range of developed and emerging market countries. There is a much stronger positive correlation between KBC and TFPG, consistent with strong spillover effects; for instance, when one firm invests in software, design, business process improvements or R&D, not only does that firm become more productive but other firms also benefit over time, which is good for overall productivity and provides a rationale for policy intervention.
- 18.
This aligns with related findings from Bloom and Van Reenen (2010) on measuring management practices of medium and large manufacturing firms covering monitoring (collection and processing of production data), target setting (whether coherent and binding on operations, inventory and quality control), and worker incentives (merit-based pay, promotion, hiring & firing), where Brazil, China and India are at the bottom of the table relative to industrialized countries. It should be mentioned, however, that there is no presumption that US spending levels on KBC are optimal, either for the US or for other countries, and emerging market spending may be appropriate given local returns to different types of KBC (and are no doubt linked to other drivers of investment patterns such as endowments, industrial structure, technological capabilities, and the broader business environment).
- 19.
The original KBC measurement agenda was launched by a request from then-US Fed Chairman Greenspan, and the types of KBC selected were driven by their perceived importance to the US economy, where a number of firms are relatively close to the technological frontier. Economic competencies related to the capture and learning from existing global knowledge is arguably less important for the US than for countries where most firms are relatively more distant from the prevailing global technological frontier.
- 20.
The investment in local assembly of stainless steel vats, and the complementary physical capital investments, “an apparently minor innovation”, allowed enterprises to export wines sanitarily safely and with reduced variability and higher quality and taste to international standards across vintages (Agosin and Bravo-Ortega 2009).
- 21.
The average private contribution to these global connectivity projects was 40 %. The use of global oenologists as foreign consultants also allowed Chilean enterprises to lower the risk of changing global tastes, as they acquired knowledge of the characteristics of changing international demand and began making Chilean wines to those specifications (Agosin and Bravo-Ortega 2009).
- 22.
In addition to 21 PROFOs, these collaborative investments in marketing also included 18 additional local wine tourism regional development initiatives, and four regional export development initiatives (e.g. “for Asia”). The average private contribution to these collaborative marketing projects was 47 %.
- 23.
Phylloxera devastated European wine production in the 1860s and led to widespread unemployment. Over time, it even affected Argentina just across the Andes. Chile is the only winemaking country in the world free of phylloxera, and has not been affected to-date.
- 24.
FONDEF does not fund research if there is not a substantial provision of resources by the private sector: in this case, FONDEF provided 29 % of funding, with 12 wineries and 4 nurseries providing 38 %, and the University of Talca providing the remaining 33 %.
- 25.
See Hulten (2013) on some policy implications of conceptualizing the firm as an information platform.
- 26.
Sheffi (2005) surveys a wide range of largely intangible investments spanning the four pillars that firms have made to increase knowledge, self-protect, insure against and cope with low-probability high-impact disruptions, broken down into “reducing vulnerability” (early detection and security investments in databases and software to reduce the likelihood of intentional disruptions from industrial actions, sabotage or terrorism), “building resilience through redundancy” (investments in slack, non-used inventory, capacity and IT systems, and increased holdings of retained earnings) and “building resilience through flexibility” (investments in new business models to allow interchangeability of plants, parts and people, realign supplier relations in supply chains, and modify internal culture towards greater safety, quality, continuous communications, and conditioning for disruptions).
- 27.
Bloom et al. (2007) show that higher uncertainty reduces the responsiveness of investment to demand shocks, with uncertainty increasing real option values and making firms more cautious when investing or disinvesting (firms only hire and invest when business conditions are sufficiently good, and only fire and disinvest when they are sufficiently bad; when uncertainty is higher, this region of inaction expands, as firms become more cautious in responding to business conditions). Investment is also shown to have a convex response to positive demand shocks, magnifying the response, and a concave response to negative demand shocks. Empirically, these ‘cautionary’ and ‘convexity’ effects of uncertainty are large and play an economically important role in shaping firm-level investment decisions, with a one-standard deviation increase in their measure of uncertainty (like that which occurred after September 11, 2001 and the 1973 oil crisis can halve the impact effect of demand shocks on enterprise investment. This implies that the responsiveness of firms to any given policy stimulus may be much weaker in periods of high uncertainty, suggesting that countries where firms face systematically higher uncertainty may require significantly higher levels of stimulus to achieve a comparable impact.
- 28.
The authors find a significant negative relationship between firm-level idiosyncratic volatility and intangible expenses, based on US data from the Kauffman Firm Survey and Compustat both for a general measure of intangibles (selling, general and administrative expenses) and for advertising expenditures, and controlling for industry-time fixed effects and a time trend: their results imply that if the top quartile firm of the intangible expenses distribution in the Compustat sample (a firm with $84 million in intangible expenses) reduces expenditures to that of the median firm, its volatility would increase by roughly 23 %. Their proxy for risk is the volatility of the portion of growth in sales which is not explained by either industry or economy-wide time effects, or firm characteristics associated with growth such as the firm’s age or size; all results are robust to a measure of idiosyncratic risk derived from TFP at the firm level.
- 29.
See Taleb (2012).
- 30.
- 31.
The inclusion of idiosyncratic, enterprise-specific distortion shocks—interpreted broadly to include any distortion that impacts the scale of a business—is consistent with evidence that certain regulations apply de jure differently to enterprises of different sizes (such as rules affecting the hiring and firing of workers applying only to enterprises above a certain size threshold in a number of countries), whereas other regulations are de facto enforced unevenly across enterprises of different sizes, industries, and rent-seeking propensities.
- 32.
Holding the distribution of plant productivity fixed, Hsieh and Klenow (2009) provide suggestive evidence that resource misallocation between existing plants can account for about one-third of the gaps in aggregate manufacturing TFP between the US and countries such as China and India. In Hsieh and Klenow (2014), they show that another type of misallocation that punishes large plants lowers the productivity of the average plant in India and Mexico. Both types of distortions are important in reducing aggregate output and consumption by households. Based on a panel of enterprises in Ghana, Kenya and Tanzania, Soderblom et al. (2006) find that TFP does not impact on survival of small firms, suggesting that there is no process of sorting or selection by which the more efficient firms survive and grow, again reducing aggregate output and consumption (see also Teal 2013).
- 33.
See Dahlman and Kuznetsov (2014) for a categorization of different types of base-of-the-pyramid (BOP) innovation and relevant policy issues. Their working definition of BOP innovation is any organizational and or technical novelty that is likely to be broadly diffused and have an impact on the welfare and living standards of low-income households through the consumption channel. They do not discuss how innovation helps the BOP population through its impact on income earners through jobs and increasing earnings, or as owners of even small amounts of capital.
- 34.
See “Energy technology: Cheaper and better solar-powered electric lights promise to do away with kerosene-fuelled lanterns”, The Economist, September 1, 2012.
- 35.
See “Technology and development: Each year 1.5 m children die from diarrhea. Better toilets could reduce the death toll”, The Economist, September 1, 2012; and Ramani et al. (2012).
- 36.
See “A brilliant, cheap little car has been a marketing disaster”, The Economist, August 20, 2011.
- 37.
Years of healthy life lost from being overweight as a percentage of years lost to all chronic disease, at over 30 %, was already significantly higher in Oceania and Middle East & North Africa in 2010 than in North America and Western Europe. The Vitality Group, part of a health insurance company in South Africa, finds ways to pay people to eat more fruit and vegetables and exercise, getting its money back because it pays fewer medical bills. See “The big picture: Obesity special report”, The Economist, December 15, 2012.
- 38.
See “The Sichuan earthquake: Bereaved parents treated like criminals”, The Economist, May 14, 2009, and “Lessons from Turkey: After the horror, there could be changes for the better”, The Economist, August 26, 1999.
- 39.
See “Deepwater Horizon: Mopping up the legal spill”, The Economist, March 3, 2012, “Nigeria’s oil: A desperate need for reform”, The Economist, October 20, 2012, and “Oil in the Niger Delta”, The Economist, June 25, 2010.
- 40.
See “The Dangers of Hubris on Human Health” in World Economic Forum (2013), where one cited study found that 98 % of children with the common cold at a Beijing hospital were given antibiotics (useless for treating viral infections), since drug prescriptions is their main income generator (Yezli and Li 2012), with strong antibiotics sold over-the-counter in pharmacies or in local marketplaces in India without a prescription, leading to significant inappropriate self-medication—while strong antibiotics should be a last line of defense, pharmacy sales in India increased nearly six-fold in India from 2005 to 2010 (Westly 2012). The slowdown in the development of new antibiotics is linked, among others, to the greater potential return on drugs to treat chronic illnesses such as diabetes and hypertension, diversion of attention to new life science technologies such as nano-scale engineering and synthetic biology, and the high cost of regulatory burdens for clinical trials.
- 41.
This matches the empirical findings from a large literature on firm age and innovation, where younger and smaller enterprises tend to produce more innovations per unit of research resources (Akcigit 2010).
- 42.
The main finding of Haltiwanger et al. (2013), based on comprehensive data tracking all enterprises and plants in the US non-farm business sector for the period 1976–2005, is that there is no systematic relationship between enterprise size and growth, once enterprise age is controlled for. They document an “up or out” dynamic for young enterprises in the US. Young firms are more volatile and exhibit higher rates of both gross job creation from entry and expansion and gross job destruction from exit. But conditional on survival, young firms grow more rapidly than their mature counterparts. Their findings show that small, mature businesses have negative net job creation.
- 43.
These patterns hold across many industries and for formal and informal plants alike. Growth in average employment of a cohort is driven by survivor growth and/or by the exit of smaller plants. Hsieh and Klenow show that what appears to differ between US and India is the growth of incumbents: in the US, surviving plants experience substantial growth while in India incumbent plants become smaller with age.
- 44.
Older plants in the US (more than 40 years old) account for almost 30 % of total employment in the US, while they account for less than 10 % of employment in Mexico and India; in contrast, less productive plants less than 10 years old account for 50 % of employment in Mexico and India, while they account for roughly 20 % of total employment in the US. Plants (informal and/or family-owned) that only employ unpaid workers account for 72 % of employment in India in 1989–90, while the employment share of family plants has increased in Mexico from 10 % in 1998 to almost 30 % by 2008.
- 45.
Using data on German manufacturing and service-sector firms from the third Community Innovation Surveys (CIS3) for the period 1998–2000, Peters (2005) finds that product innovations have a net positive impact on employment while process innovations are associated with employment reduction for manufacturing but not service firms. These findings are largely confirmed by Harrison et al. (2008) in a study that is also based on CIS3. Using comparable firm-level data across four European countries—France, Germany, Spain, UK—they find that process innovation has significant displacement effects that are partially counteracted by compensation mechanisms. The displacement effects of process innovation are most pronounced in manufacturing. On the other hand, product innovation is associated with employment growth and these results are similar across countries. Based on a firm-level comparison across provinces and cities in China, Mairesse et al. (2009) find that the compensation effects of product innovation more than counterbalance the displacement effects of process innovation, the net result being that innovation makes a strong positive contribution to total employment growth. Alvarez et al. (2011) find that in the case of Chile, process innovation is generally not a relevant determinant of employment growth, and that product innovation is positively associated with employment growth.
- 46.
A number of recent papers have sought to ascertain empirically whether low-wage employment is a stepping stone that enhances future occupational advancement prospects, or whether it results in a low-pay-no-pay poverty trap cycle. Although the evidence is somewhat mixed and subject to debate, there seems to be greater support for the stepping-stone effect. For analysis of the pathways of upward mobility for low-wage workers, see among others Booth et al. (2002), Knabe and Plum (2013) and Mosthaf (2011).
- 47.
In Mexico, Levy (2008) argues that payroll taxes (roughly 32 % of the wage bill) are more stringently enforced on large plants, as are other taxes (Anton et al. 2012). Indian labor regulations, applying more strictly to larger firms (or that small formal and informal firms find easier to evade), are emphasized by Besley and Burgess (2004). La Porta and Shleifer (2008) document that larger formal plants spend more on bribes (as a share of revenue) than do smaller formal and informal plants.
- 48.
Bloom et al. (2013a) argue that delegation costs raise the costs of managers in India, supported by models where managerial inputs are important for large plants but less important for smaller formal or informal plants (see the appendix in Hsieh and Klenow 2014). The fact that the gap in average wages between large and small plants in Mexico and India is almost twice that observed in the US also suggests that larger plants in Mexico and India may pay higher efficiency wages due to monitoring costs or that the cost of skilled managers is higher there.
- 49.
Hsieh and Klenow (2014) provide evidence that the average product of land is rising with plant size in India: this could be evidence of technological differences (if larger plants use less land-intensive techniques) but it can also be evidence that frictions to land reallocation raise the marginal cost of land faced by high-productivity plants.
- 50.
Holmes and Stevens (2012) show that larger plants sell to more distant domestic markets. Hsieh and Klenow (2014) provide a model in their appendix where higher shipping costs per unit of distance lower the number of markets a firm with a given productivity serves, which lowers the returns from investing in higher productivity.
- 51.
Cole et al. (2012) also construct a quantitative model to fit the same facts for the US, Mexico and India, where financing frictions inhibit incumbent technology adoption in Mexico and India.
- 52.
Cooper and Haltiwanger (2006) highlight that “the irreversibility of many projects caused by a lack of secondary markets for capital goods acts as an important form of adjustment cost.”
- 53.
High-income countries for which these data are available include the US, Canada and eight European countries (Austria, Denmark, Finland, Italy, Netherlands, Norway, Spain, and the UK). The data provide measures for the percentiles of the growth distribution for surviving enterprises with ten or more employees during 2002–05, as well as the share of enterprises growing or shrinking at a particular rate. The data only include surviving firms (defined as those that have survived with positive employment throughout the 3-year period), so do not allow analyses of entry and exit patterns or of the contribution of entry and exit to aggregate employment growth. However, the data do capture the reallocation and innovation processes that enterprises undertake, including jobs lost by firms that dismiss employees in response to external shocks or if innovations don’t turn out as anticipated, as well as spinouts that reduce the headcount, and on the upside organic growth and acquisitions. See Bravo-Biosca et al. (2012).
- 54.
Bartelsman et al. (2010) describe how firing costs reduce the incentive for firms to attempt adopting risky technology, impeding flexibility to be able to reorganize operations to best fit the technology (firms that turn out to be unsuccessful in adopting new risky technologies need to be able to avoid deep losses, otherwise the incentive for adoption is lost). More generally, any regulation that becomes more burdensome at some size threshold is shown by Bartelsman et al. (2013) to generate significant welfare losses from misallocation.
- 55.
Based on an econometric analysis of over 26,000 manufacturing enterprises across 71 countries, Dutz et al. (2012a) find that countries with a more competitive business environment (measured by Doing Business variables interpreted as reflecting access to key essential business services, especially access to credit and to registering property) are associated with more innovation and more inclusive-type job creation. Access to information (Internet use) and formal job training are much more important to the employment growth of young enterprises than they are to other categories of enterprises.
- 56.
The direction of the link between bankruptcy regimes and innovation is less clear-cut and varies according to the capital intensity and the dependence on external finance of the industry, as loose bankruptcy regulation with weaker creditor rights also attenuates the creditors’ insurance effect and thereby increases the cost of raising external finance. For a review of recent empirical evidence, see Andrews and Criscuolo (2013).
- 57.
- 58.
In his 1969 AEA presidential address, Kenneth Arrow observed: “While mass media play a major role in alerting people to the possibility of an innovation, it seems to be personal contact that is most relevant in leading to its adoption. Thus, the diffusion of innovation becomes a process formally akin to the spread of an infectious disease”.
- 59.
Fogli and Veldkamp (2012), pp. 31–2. Results are based on data on the prevalence of 34 diseases in 78 geopolitical regions (the countries with the highest pathogen prevalence are Brazil, China, Ghana, India and Nigeria, with the lowest include Canada, Hungary, Switzerland and Sweden), and a survey by Hofstede (2001) on national differences in cultural values reflecting degrees of collectivism (where low-connectivity societies where people from birth onwards are integrated into strong, cohesive in-groups, often extended families, with people averse to breaking those ties, and with weak or non-existent global ties are labeled collectivist, and high-connectivity societies with strong global ties are labeled individualistic; the most collectivist countries are Ecuador, Guatemala, Indonesia, Pakistan and Venezuela, while the most individualist are Australia, Canada, the Netherlands, the UK and the US).
- 60.
Nicholson and Ioannidis (2012) ask whether the US National Institutes of Health award its grants to those most likely to make fundamental breakthroughs in their fields (based on biomedical researchers who studies received more than 1,000 citations), and find that only 40 % of such high-impact primary authors who are not part of study sections (experts in the fields in question who hand out the grants) currently receive NIH grants. This finding that too many US researchers of the most innovative and influential papers in the life sciences do not receive NIH funding is supported by a second finding that study sections appear to favor work similar to that done by their existing members or that they recruit members with similar interests to themselves, and whose citation impacts typically were classed as ‘good’ or ‘very good’ but not ‘exceptional’.
- 61.
It is well-known that errors are part of science. However, examining what fraction of published biomedical research findings turn out not to be true in the light of further research, Ioannides (2005) shows that for most study designs and settings, it is more likely for a research claim to be false than true. In particular, the greater the financial and other interests and prejudices in a scientific field, the less likely the research findings are to be true. As an illustration, researchers at a US-based human therapeutics company were able to confirm the results of only six of 53 ‘landmark studies’ in preclinical cancer research (Begley and Ellis 2012). As another illustration regarding the higher risk of heart attacks from the use of a top diabetes drug (in September 2010, the FDA announced major restrictions on the use of the drug with European regulators ordering it off the market on the same day; a US FDA scientist later estimated that the drug had been associated with 83,000 heart attacks and deaths), each of the 11 authors of the drug’s clinical trial had received money from the company (four were employees and held company stock). Interviews, FDA documents and emails released by a US Senate investigation indicated “that the company withheld key information from the academic researchers it had selected to do the work; decided against conducting a proposed trial because it might have shown unflattering side effects; and published the results of an unfinished trial even though they were inconclusive and served to do little but obscure the signs of danger that had arisen” (Whoriskey 2012). In July 2012, the company pleaded guilty to criminal charges and agreed to a $3 billion settlement of the largest health-care fraud case in the U.S. and the largest payment by a drug company in the US. The settlement is related to the company's illegal promotion of best-selling anti-depressants and its failure to report safety data about this diabetes drug.
- 62.
Transparency about all research, including industry-sponsored trials, would allow independent researchers and potential entrepreneurs to analyze the data and come to their own conclusions. As stated by Yale Professor of medicine Harlan Krumholz, a leading advocate of open data access, “If you have the privilege of selling a drug [or any other product], in return should come the responsibility to share everything you know about the product” (quoted in Whoriskey 2012).
- 63.
As described by Gilson et al. (2008), transactions involving collaborative innovation across organizational boundaries are characterized by product characteristics design and specification not being able to be contracted ex ante. A desirable contracting structure should (1) induce efficient investment by both parties, (2) establish a framework for iterative collaboration and adjustment of obligations under continuing uncertainty, and (3) limit the risk of opportunism that otherwise could undermine relation-specific investments.
- 64.
The setting up in early 2009 of the Translational Health Science and Technology Institute, south of Delhi, modeled on the interdisciplinary Harvard-MIT Health Science and Technology Program, was specifically designed to foster collaboration among research institutes, hospitals and companies by encouraging practicing doctors to work with basic researchers and engineers to solve local health problems.
- 65.
An estimated 130,000 infants still die annually in India from sever rotavirus gastroenteritis.
- 66.
Other PDP members, in addition to Bharat Biotech, the Indian company headquartered in Hyderabad, include: AIIMS (all India Institute of Medical Science, Delhi), IISc (India Institute of Science, Bangalore), PATH (Program for Appropriate Technologies in Health), the Atlanta Center for Disease Control, Stanford University, and the Bill and Melinda Gates Foundation. While the PDP model arose to address the mismatch between the need for health technologies to address developing country needs and the private sector’s inability to meet that need profitably due to the costs and risks of such R&D being too high relative to ability to pay, it could in principle be applied to a range of BoP needs ranging from agriculture and education to climate change.
- 67.
On the most recent status of the “Phase III Clinical Trial to Evaluate the Protective Efficacy of Three Doses of Oral Rotavirus Vaccine (ORV) 116E (ROTAVAC)”, see http://clinicaltrials.gov/show/NCT01305109
- 68.
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Dutz, M.A. (2015). Resource Reallocation and Innovation: Converting Enterprise Risks into Opportunities. In: Bounfour, A., Miyagawa, T. (eds) Intangibles, Market Failure and Innovation Performance. Springer, Cham. https://doi.org/10.1007/978-3-319-07533-4_10
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