Technology offers the greatest source for innovation in the public sector and one of the best examples falls within the area of cloud computing. As I noted in a recent paper, the U.S. federal government spends nearly $76 billion each year on information technology, and $20 billion of that is devoted to hardware, software, and file servers. Traditionally, computing services have been delivered through desktops or laptops operated by proprietary software. But new advances in cloud computing have made it possible for public sector agencies alike to access software, services, and data storage through remote file servers.

I looked at possible cost savings a federal agency might expect from migrating to the cloud. After undertaking case studies of government agencies that made the move, I found that the agencies generally saw between 25 and 50 percent savings in moving to the cloud. Public officials can save money by reducing the number of file servers they need to purchase, cutting software costs, relying on fewer information technology specialists, and improving the efficiency of their data storage utilization.

In 2008, Washington, D.C. city government shifted many of its 38,000 employee email services across 86 agencies to the cloud, and the migration saved 48 percent on email expenditures. In 2009, the city of Los Angeles moved email service for its 30,000 employees to the cloud. An analysis undertaken by City Administrative Officer Miguel Santana for the City Council found that the five-year costs of running the new Google system would be $17,556,484, which was 23.6 percent less than the $22,996,242 for operating GroupWise during that same period. And in terms of personnel savings, the city needed nine fewer people in its information technology department.

The U.S. Air Force 45th Space Wing is responsible for launching and tracking unmanned space vehicles from Cape Canaveral Air Force Station and employs more than 10,000 workers. The Wing had 60 distinct file servers, but found that it utilized only 10 percent of central processing unit capacity. Commanders modernized their system and saved $180,000 per year in annual computing costs. In addition, the unit saved money by not buying new hardware or deploying new software. These are just some of the ways the government is using technology to save money and increase efficiency of its operations.

      

Our former Brookings colleague Rebecca Blank, now at the Commerce Department, is today leading the first meeting of the Obama Administration’s Innovation Advisory Board, looking at the innovative capacity and economic competitiveness of the United States.

I applaud the effort.  Nothing is more important to America’s longterm competitiveness than emphasizing innovation.  As the council looks to the private sector and global markets, I urge it to examine how the U.S. government can lead innovation and contribute to economic growth.  The best place to look is new and emerging digital technologies that can make government more accessible, accountable, responsive and efficient for the people who use government services every day.

Here are some of the recommendations I made in a recent paper I wrote with colleagues here at Brookings as part of our “Growth Through Innovation” initiative:

• Save money and gain efficiency by moving federal IT functions “to the cloud,” i.e., using advances in cloud computing to put software, hardware, services and data storage through remote file servers.

• Continue to prioritize the Obama administration’s existing efforts to put unparalleled amounts of data online at Data.gov and other federal sites, making it easier and cheaper for citizens and businesses to access the information they need.

• Use social media networks to deliver information to the public and to solicit feedback to improve government performance.

• Integrate ideas and operations with state and local organizations, where much of government innovation is taking place today. 

• Apply the methods of private-sector business planning to the public sector to produce region-specific business plans that are low cost and high impact.

These improvements in government services innovations in the digital age can help spur innovation and support a robust business climate.  And, as a sorely needed side benefit, they can also serve to eliminate some of the current distrust and even contempt for government that has brought public approval of the performance of the federal government to near historic lows.  

      

       

Announcements of new federal regulations on the use of program-related investments (PRIs) and the launch of a groundbreaking fund in Chicago are the latest signals that impact investing, once a marginal philanthropic and policy tool, is moving into the mainstream. They are also illustrative of two important and complementary paths to institutional change: fast-moving, collaborative local leadership creating innovative new instruments to meet funding demands; federal regulators updating policy to pave the way for change at scale.

Impact investing, referring to “investment strategies that generate financial returns while intentionally improving social and environmental conditions,” provides an important tier of higher-risk capital to fund socially beneficial projects with revenue-generating potential: affordable housing, early childhood and workforce development programs, and social enterprises. It is estimated that there are over $60 billion of impact investments globally and interest is growing—an annual JP Morgan study of impact investors from 2015 reports that the number of impact investing deals increased 13 percent between 2013 and 2014 following a 20 percent increase in the previous year.

Traditionally, foundations have split their impact investments into two pots, one for mission-related investments, designed to generate market-rate returns and maintain and grow the value of the endowment, and the other for program-related investments. PRIs can include loans, guarantees, or equity investments that advance a charitable purpose without expectation of market returns. PRIs are an attractive use of a foundation’s endowment as they allow foundations to recycle their limited grant funds and they count towards a foundation’s charitable distribution requirement of 5 percent of assets. However they have been underutilized to date due to perceived hurdles around their use–in fact among the thousands of foundations in the United States, currently only a few hundred make PRIs.

But this is changing, spurred on by both entrepreneurial local action and federal leadership. On April 21, the White House announced that the U.S. Department of the Treasury and Internal Revenue Service had finalized regulations that are expected to make it easier for private foundations to put their assets to work in innovative ways. While there is still room for improvement, by clarifying rules and signaling mainstream acceptance of impact investing practices these changes should lower the barriers to entry for some institutional investors.

This federal leadership is welcome, but is not by itself enough to meet the growing demand for capital investment in the civic sector. Local innovation, spurred by new philanthropic collaborations, can be transformative. On April 25 in Chicago, the Chicago Community Trust, the Calvert Foundation, and the John D. and Catherine T. MacArthur Foundation launched Benefit Chicago, a $100 million impact investment fund that aims to catalyze a new market by making it easier for individuals and institutions to put their dollars to work locally and help meet the estimated $100-400 million capital needs of the civic sector over the next five years.

A Next Street report found that the potential supply of patient capital from foundations and investors in the Chicago region was more than enough to meet the demand – if there were ways to more easily connect the two. Benefit Chicago addresses this market gap by making it possible for individuals to invest directly through a brokerage or a donor-advised fund and for the many foundations without dedicated impact investing programs to put their endowments to work at scale. All of the transactional details of deal flow, underwriting, and evaluation of results are handled by the intermediary, which should lead to greater efficiency and a significant increase in the size of the impact investing market in Chicago.

In the last few years, a new form of impact investing has made measurement of social return to investments even more concrete. Social impact bonds (SIBs), also known as pay for success (PFS) financing, are a way for private investors (including foundations) to provide capital to support social services with the promise of a return on their investment from a government agency if some agreed-upon social outcomes are achieved. These PFS transactions range from funding to support high-quality early childhood education programs in Chicago to reduction in chronic individual homelessness in the state of Massachusetts. Both the IRS and the Chicago announcements are bound to contribute to the growth of the impact bond market which to date represents a small segment of the impact investing market.

These examples illustrate a rare and wonderful convergence of leadership at the federal and local levels around an idea that makes sense. Beyond simply broadening the number of ways that foundations can deploy funds, growing the pool of impact investments can have a powerful market-making effect. Impact investments unlock other tiers of capital, reducing risk for private investors and making possible new types of deals with longer time horizons and lower expected market return.

In the near future, these federal and local moves together might radically change the philanthropic landscape. If every major city had a fund like Benefit Chicago, and all local investors had a simple on-ramp to impact investing, the pool of capital to help local organizations meet local needs could grow exponentially. This in turn could considerably improve funding for programs—like access to quality social services and affordable housing—that show impact over the long term.

Impact investing can be a bright spot in an otherwise somber fiscal environment if localities keep innovating and higher levels of government evolve to support, incentivize, and smooth its growth. These announcements from Washington and Chicago are examples of the multilevel leadership and creative institutional change we need to ensure that we tap every source of philanthropic capital, to feel some abundance in an era where scarcity is the dominant narrative.

Editor's Note: Alaina Harkness is a fellow at Brookings while on leave from the John D. and Catherine T. MacArthur Foundation, which is a donor to the Brookings Institution. The findings, interpretations and conclusions posted in this piece are solely those of the authors and not determined by any donation.

      

In 2015 the international community agreed on a set of ambitious sustainable development goals (SDGs) for the global society, to be achieved by 2030. One of the lessons that the implementation of the Millennium Development Goals (MDG s) has highlighted is the importance of a systematic approach to identify and sequence development interventions—policies, programs, and projects—to achieve such goals at a meaningful scale. The Chinese approach to development, which consists of identifying a problem and long-term goal, testing alternative solutions, and then implementing those that are promising in a sustained manner, learning and adapting as one proceeds—Deng Xiaoping’s “crossing the river by feeling the stones”—is an approach that holds promise for successful achievement of the SDGs.

Having observed the Chinese way, then World Bank Group President James Wolfensohn in 2004, together with the Chinese government, convened a major international conference in Shanghai on scaling up successful development interventions, and in 2005 the World Bank Group (WBG ) published the results of the conference, including an assessment of the Chinese approach. (Moreno-Dodson 2005). Some ten years later, the WBG once again is addressing the question of how to support scaling up of successful development interventions, at a time when the challenge and opportunity of scaling up have become a widely recognized issue for many development institutions and experts.

Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.”

In parallel with the recognition that scaling up matters, the development community is now also focusing on social enterprises (SEs), a new set of actors falling between the traditionally recognized public and private sectors. We adopt here the World Bank’s definition of “social enterprises” as a social-mission-led organization that provides sustainable services to Base of the Pyramid (BoP) populations. This is broadly in line with other existing definitions for the sector and reflects the World Bank’s primary interest in social enterprises as a mechanism for supporting service delivery for the poor. Although social enterprises can adopt various organizational forms—business, nongovernmental organizations (NGOs), and community-based organizations are all forms commonly adopted by social enterprises—they differ from private providers principally by combining three features: operating with a social purpose, adhering to business principles, and aiming for financial sustainability. Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.” (Figure 1)

Figure 1. Role of SE sector in public service provision

Social enterprises often start at the initiative of a visionary entrepreneur who sees a significant social need, whether in education, health, sanitation, or microfinance, and who responds by developing an innovative way to address the perceived need, usually by setting up an NGO, or a for-profit enterprise. Social enterprises and their innovations generally start small. When successful, they face an important challenge: how to expand their operations and innovations to meet the social need at a larger scale. 

Development partner organizations—donors, for short—have recognized the contribution that social enterprises can make to find and implement innovative ways to meet the social service needs of people at the base of the pyramid, and they have started to explore how they can support social enterprises in responding to these needs at a meaningful scale. 

The purpose of this paper is to present a menu of approaches for addressing the challenge of scaling up social enterprise innovations, based on a review of the literature on scaling up and on social enterprises. The paper does not aim to offer specific recommendations for entrepreneurs or blueprints and guidelines for the development agencies. The range of settings, problems, and solutions is too wide to permit that. Rather, the paper provides an overview of ways to think about and approach the scaling up of social enterprise innovations. Where possible, the paper also refers to specific tools that can be helpful in implementing the proposed approaches. 

Note that we talk about scaling up social enterprise innovations, not about social enterprises. This is because it is the innovations and how they are scaled up that matter. An innovation may be scaled up by the social enterprise where it originated, by handoff to a public agency for implementation at a larger scale, or by other private enterprises, small or large. 

This paper is structured in three parts: Part I presents a general approach to scaling up development interventions. This helps establish basic definitions and concepts. Part II considers approaches for the scaling up of social enterprise innovations. Part III provides a summary of the main conclusions and lessons from experience. A postscript draws out implications for external aid donors. Examples from actual practice are used to exemplify the approaches and are summarized in Annex boxes.

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Event Information

On August 1-3, 2012, Brookings Global Economy and Development hosted the ninth annual Brookings Blum Roundtable on Global Poverty in Aspen, Colorado. The year’s roundtable theme, "Innovation and Technology for Development", brought together global leaders, entrepreneurs and practioners to discuss how technology and innovation can be seized to help solve some of the world's most pressing global development challenges.

2012 Brookings Blum Roundtable: Related Materials
	Read the roundtable report - Clicks into Bricks, Technology into Transformation, and the Fight Against Poverty »  View videos from roundtable participants »  Download the participant list » (PDF)  Download the scene setter » (PDF)  Download the full roundtable agenda » (PDF)

Global development challenges are of massive scale: 61 million children out of school and many more failing to learn basic literacy and numeracy skills; 850 million facing hunger; 1 billion living in slums and 1.3 billion without access to electricity. Yet remarkably little is understood about successful strategies for designing scalable solutions, the impediments to reaching scale, or the most appropriate pathways for getting there.

However, a batch of new technologies offers the promise of a breakthrough by encouraging innovative business models, pushing down transaction costs and disintermediating complex activities. Mobile money could realistically reach over 1 billion poor people in the next decade and directly connect millions of rich individuals with millions of poor people. Real-time data can allow resources to be better targeted and managed. New media can sharpen accountability and reduce waste and overlap.

 

Roundtable Agenda

Wednesday, August 1, 2012

Welcome: 8:40AM - 9:00AM
Brookings Welcome
• Strobe Talbott, Brookings

Opening Remarks
• Richard C. Blum, Blum Capital Partners, LP and Founder of the Blum Center for Developing Economies at Berkeley
• Mark Suzman, Bill and Melinda Gates Foundation
• Kemal Derviş, Global Economy and Development, Brookings

Session I: 9:00AM - 10:30AM
Framing Session: Translating Technological Innovations into Transformational Impact
In this opening discussion, participants will explore the overarching questions for the roundtable: If the poor can readily be identified and if they have access to financial services and participate in technology-driven communication networks, how does this change the development paradigm? How can effective partnerships be forged to combine the efforts of different international and local actors (businesses, governments, foundations, NGOs, and universities) in propagating solutions? Can scalable technologies raise the profile and potential of new business models, approaches and partnerships?

Moderator
• Homi Kharas, Brookings

Introductory Remarks
• Thomas A. Kalil, White House Office of Science and Technology
• Michael Kubzansky, Monitor Group 
• Lalitesh Katragadda, Google India
• Smita Singh, Independent

Session II: 10:50AM - 12:20PM
Mobile Money and Mass Payments
Participants will explore the following questions for the rountable: Is the rapid uptake of mobile money/payment technology throughout the developing world assured and if not, what (or whom) are the impediments? What is required to enable successful mass payments systems that employ mobile money technology? What is the optimal role of government, non-profits and private actors in supporting mobile money services? How can mass payments systems be used to implement national safety nets?

Moderator
• Gillian Tett, Financial Times

Introductory Remarks
• Neal Keny-Guyer, Mercy Corps
• Mwangi Kimenyi, Brookings
• Mung Ki Woo, MasterCard Worldwide Group Executive Mobile

Dinner Program: 7:30PM - 9:15PM
Aspen Institute Madeleine K. Albright Global Development Lecture

Featuring
• Rajiv Shah, Administrator, United States Agency for International Development

Click here to read Rajiv Shah's remarks »

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Thursday, August 2, 2012 

Session III: 9:00AM - 10:30AM 
Mass Networks: Leveraging Information from the Crowd
Participants will explore the following questions for the rountable: What are the most promising examples of using social media, crowdsourcing and “big data” to advance development and humanitarian outcomes? How can traditional foreign assistance make use of virtual networks to support transparency, democratic governance and improved service delivery? How can technologies be used to understand clients, promote beneficiary feedback and learning to fine tune business models in base of the pyramid markets?

Moderator
• Walter Isaacson, Aspen Institute

Introductory Remarks
• Anne-Marie Slaughter, Princeton University
• Juliana Rotich, Ushahidi
• Robert Kirkpatrick, UN Global Pulse Initiative
• Rakesh Rajani, Twaweza

Session IV: 10:50AM - 12:20PM
Innovation and Technology for Green Growth
Participants will explore the following questions for the rountable: How advanced is green growth technology vis-à-vis the scale and urgency of the global climate challenge? What is the role of pricing and intellectual property and push and pull mechanisms in speeding up propagation within developed and developing markets? How can the goal of “sustainable energy for all” be achieved, and is it feasible in all countries?

Moderator
• Al Gore, The Climate Reality Project

Introductory Remarks
• Mary Robinson, Mary Robinson Foundation - Climate Justice
• Helen Clark, United Nations Development Programme
• Arthur Njagi, International Finance Corporation
• Viswanathan Shankar, Standard Chartered Bank

Lunch Program: 12:30PM - 2:00PM
Partnering with Academic Research Institutions
This discussion will explore partnerships between public sector development institutions and academic research institutions to support global development goals. Topics will include the constraints to research; how to make research more relevant to developing country problems; issues around incentives for scientists and universities; and relationships between universities, financiers and implementers.

Moderator
• Javier Solana, ESADE

Panel
• Richard C. Blum, Blum Capital Partners, LP and Founder of the Blum Center for Developing Economies at Berkeley
• Luis Alberto Moreno, Inter-American Development Bank
• Shankar Sastry, University of California, Berkeley
• Alex Deghan, United States Agency for International Development

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Friday, August 3, 2012 

Session V: 9:00AM - 10:30AM
Business Solutions and Private Sector Development
Participants will explore the following questions for the rountable: What role can the new breed of socially conscious private actors (e.g., social enterprises and impact investors) play in overcoming finance and delivery constraints and scaling up development impact? Where is the need for investment finance most acute, and who or what can fill these gaps? How are management approaches evolving to suit base of the pyramid markets? What are the impediments to the adoption or adaptation of scalable technologies by developing country enterprises, and are southern innovations being efficiently spread? What is constraining private sector development in Africa, and is technology a key bottleneck?

Moderator
• Laura Tyson, University of California, Berkeley

Introductory Remarks
• Rob Mosbacher, Mosbacher Energy Company
• Mathews Chikaonda, Press Corporation Limited
• Elizabeth Littlefield, Overseas Private Investment Corporation
• Amy Klement, Omidyar Network

Session VI: 10:50AM - 12:20PM
Delivering U.S. Leadership: Role for the Public Sector
Participants will explore the following questions for the rountable: What is an appropriate role for the U.S. government in promoting technological solutions for development and scaling these up? How should the government leverage new private sector players? What are the best examples of, and lessons learned from, earlier and on-going public private partnerships? How can the U.S. government work more effectively to support local innovation and technology in developing countries?

Moderator
• Sylvia Burwell, Walmart Foundation

Introductory Remarks
• Rajiv Shah, Administrator, United States Agency for International Development
• Sam Worthington, InterAction
• Henrietta Fore, Holsman International

Closing Remarks: 12:20PM - 12:30PM

• Richard C. Blum, Blum Capital Partners, LP and Founder of the Blum Center for Developing Economies at Berkeley
• Kemal Derviş, Global Economy and Development, Brookings

Lunch Program: 12:30PM - 2:00PM
A Conversation with Michael Froman and Thomas Nides
This conversation will focus on the politics and finance of the US government’s efforts on global development, including its specific initiatives regarding technology and innovation for development.

Moderator
• Madeleine K. Albright, Albright Stronebridge Group

Live Webcast Event: 4:00PM - 5:30PM
Brookings and the Aspen Institute Present: "A Conversation with Former World Bank President Robert Zoellick"

Global Economy and Development at Brookings and the Aspen Strategy Group will host Robert Zoellick, who recently stepped down as president of the World Bank after serving in that office for the past five years. Mr. Zoellick has held several senior positions in the U.S. Government, including deputy secretary of state and U.S. trade representative under President George W. Bush. This event will be webcast live on the Brookings website. Click here for more details.

Introduction
• R. Nicholas Burns, Director, Aspen Strategy Group and Professor of the Practice of Diplomacy and International Politics, Harvard Kennedy School of Government

Moderator
• Strobe Talbott, President, Brookings

       

Policy Brief #172

Why Institutions Matter

When experts and pundits are asked what the president and Congress should do to promote economic growth, they typically respond with a list of policies, often mixed with stylistic and political suggestions. Few focus on institutional change, which is too easy to conflate with yawn-inducing “governmental reorganization.”

This neglect of institutions is always a mistake, never more than in times of crisis. Throughout American history, profound challenges have summoned bursts of institutional creativity, with enduring effects. The dangerous inadequacies of the Articles of Confederation set the stage for a new Constitution. The Civil War resulted in three amendments that resolved—at least in principle—our founding ambivalence between the people and the states as the source of national authority, between the states and the nation as the locus of citizenship, and between slavery and the equality the Declaration of Independence had proclaimed and promised. Similarly, the Federal Reserve Board, Bretton Woods international economic system, Department of Defense, National Security Council, CIA, Congressional Budget Office and Department of Homeland Security all arose through changes occasioned by great challenges to the nation.

Today’s economic crisis is reflected in three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. 

	RECOMMENDATIONS
	Today’s economic crisis is characterized by three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. The following institution-based recommendations would help the nation meet the current economic crisis and could help prevent future crises of similar destructiveness. To promote fiscal sustainability, change longterm budget procedures and create empowered commissions—answerable to Congress but largely insulated from day-to-day politics. To boost savings, consider new mandatory individual retirement accounts as a supplement to Social Security. To improve public investment, create a National Infrastructure Bank with public seed capital—this entity would mobilize private investment and force proposed projects to pass rigorous cost-benefit analysis as well as a market test. Today’s polarized political system is an obstacle to reform in every area, including the economy. A multi-year collaboration between Brookings and the Hoover Institution produced a series of suggestions. At least two of those suggestions are worth adopting: Alter redistricting authority, so state legislatures can no longer practice gerrymandering. Experiment, in a few willing states, with compulsory voting—to move politicians away from the red-meat politics of appealing only to their bases, which now dominate elections, and toward a more moderate and consensual politics.

Institutional reform

Promoting fiscal sustainability

Setting the federal budget on a sustainable course is an enormous challenge. If we do nothing, we will add an average of nearly $1 trillion to the national debt every year between now and 2020, raising the debt/ GDP ratio to a level not seen since the early 1950s and sending the annual cost of servicing the debt sky-high. Restoring pay-as-you-go budgeting and putting some teeth in it are a start, but not nearly enough. We need radical changes in rules and procedures.

One option, recently proposed by a bipartisan group that includes three former directors of the Congressional Budget Office, would change the giant entitlement programs: Social Security, Medicare and Medicaid. The new rules would require a review every five years to determine whether projected revenues and outlays are in balance. If not, Congress would be required to restore balance through dedicated revenue increases, benefits cuts or a combination. After a financial crisis in the early 1990s, Sweden introduced a variant of this plan, which has worked reasonably well.A number of Brookings scholars—including Henry Aaron, Gary Burtless, William Gale, Alice Rivlin and Isabel Sawhill—have suggested a Value Added Tax (VAT) as part of a program of fiscal and tax reform. Burtless offers an intriguing proposal that would link a VAT to health care finance. Revenue from the VAT would be dedicated to—and would cover—the federal share of health care programs. If the federal cost rises faster than proceeds from the VAT, Congress would have to either raise the VAT rate or cut back programs to fit the flow of funds. The system would become much more transparent and accountable: because the VAT rate would appear on every purchase, citizens could see for themselves the cost of federal support for health care, and they could tell their representatives what balance they prefer between increased rates and reduced health care funding.

Another option draws on the experience of the Base Realignment and Closure Commission, which enables the military to surmount NIMBY politics and shut down unneeded bases. The basic idea is straightforward: once the independent commission settles on a list of proposed closures, Congress has the option of voting it up or down without amendment. A similar idea undergirds the president’s “fast-track” authority to negotiate proposed trade treaties, which Congress can reject but cannot modify.

Suitably adapted, this concept could help break longstanding fiscal logjams. Here is one way it might work. Independent commissions with members from both political parties could submit proposals in designated areas of fiscal policy. To increase bipartisan appeal, each proposal would require a super-majority of the commission. In the House and Senate, both the majority and the minority would have the opportunity to offer only a single amendment. This strategy of “empowered commissions” changes the incentive structure in Congress, reducing negative logrolling to undermine the prospects of proposals that would otherwise gain majority support.

Empowered commissions represent a broader strategy—using institutional design to insulate certain activities from regular and direct political pressure. For example, the Constitution mandates that federal judges, once confirmed, hold office during “good behavior” and receive salaries that Congress may not reduce during their term of service. (By contrast, many states subject judges to regular election and possible recall.) In another striking example, members of the Board of Governors of the Federal Reserve Board are appointed to 14-year non-renewable terms, limiting the ability of the executive branch to change its membership rapidly and removing governors’ incentives to trim their policy sails in hopes of reappointment. Additionally, action by neither the president nor any other entity in the executive branch is required to implement the Fed’s decisions, and Fed chairmen have been known to take steps that vex the Oval Office.

This strategy is controversial. Officials with populist leanings often argue that fundamental decisions affecting the economy should be made through transparent democratic processes. The counterargument: experience dating back to the founding of the republic suggests that when interest rates and the money supply are set at the whim of transient majorities, economic growth and stability are at risk.

Boosting savings

An adequate supply of capital is a precondition of long-term economic growth, and household saving is an important source of capital. During the 1960s, U.S. households saved 12 percent of their income; as recently as the 1980s, that figure stood at 8 percent. By 2005–2006, the savings rate dipped into negative territory, and today it stands at a meager 3 percent. In recent years, funds from abroad—principally Asia— filled the capital gap. But evidence is accumulating that foreign governments have reached the limit of their appetite (or tolerance) for U.S. debt. To avert a capital shortage and soaring interest rates, which would choke off growth, we must boost private savings as we reduce public deficits.

For a long time, tax incentives for saving have been the tool of choice. But as evidence mounts that these incentives are less effective than hoped, policy experts are turning to alternatives. One rests on a key finding of behavioral economics: default settings have a large impact on individual conduct and collective outcomes. If you require people to opt in to enter a program, such as 401(k) retirement plans, even a modest inconvenience will deter many of them from participating. But if you reverse the procedure— automatically enrolling them unless they affirmatively opt out—you can boost participation.

To achieve an adequate rate of private saving, we may need to go even further. One option is a mandatory retirement savings program to supplement Social Security. Workers would be required to set aside a fixed percentage of earnings and invest them in generic funds—equities, public debt, private debt, real estate, commodities and cash. For those who fail to designate a percentage allocation for each fund, a default program would take effect. (Participants always would have the option of regaining control.) As workers near retirement age, their holdings would be automatically rebalanced in a more conservative direction. One version of this proposal calls for “progressive matching,” in which low-earning individuals receive a subsidy equal to half their payroll contributions; those making more would get a smaller match along a sliding scale, and those at the top would receive no match at all.

This strategy requires careful institutional and programmatic design. To ensure maximum benefits to wage earners, the private sector would be allowed to offer only funds with very low costs and fees. To ensure that the program actually boosts net savings, individuals would be prohibited from withdrawing funds from their accounts prior to retirement; except in emergencies, they would not be allowed to borrow against their accounts; and they would be prohibited from using them as collateral. And a clear line would be drawn to prevent government interference in the private sector: while government-administered automatic default investments would be permitted, government officials could not direct the flow of capital to specific firms.

Improving public investment

The investment deficit has a public face as well. Since the early 19th century, government has financed and helped build major infrastructure projects—roads, bridges, ports and canals, among others, have spurred economic growth and opened new domestic and international markets. Recently, however, public infrastructure investment has fallen well short of national needs, and often has been poorly targeted. Americans travelling and working abroad are noticing that U.S. infrastructure is falling behind not only advanced countries’ but rapidly developing countries’ as well. A study by Emilia Istrate and Robert Puentes of Brookings’s Metropolitan Policy Program, presented in a December 2009 report entitled “Investing for Success,” documents three key shortcomings of federal infrastructure investment: it lacks long-term planning, fails to provide adequately for maintenance costs, and suffers from a flawed project selection process as benefits are not weighed rigorously against costs.

Istrate and Puentes explore several strategies for correcting these deficiencies. One of the most promising is a National Infrastructure Bank (NIB), to require benefit-cost analyses of proposed projects, break down financial barriers between related types of investment (facilitating inter-modal transportation, for example), and improve coordination across jurisdictional lines. The NIB could be funded through a modest initial infusion of federal capital designed to attract private capital. Projects receiving loans from the NIB would have to provide for depreciation and document the sources of funds to repay the face amount of each loan, plus interest. In short, the NIB would be more than a conduit for the flow of federal funds; it would function as a real bank, imposing market discipline on projects and making infrastructure investments attractive to private capital, partly by providing flexible subordinated debt.

Istrate and Puentes identify diverse problems that designers of an NIB would confront. Insulating the selection process from political interference would pose serious difficulties, as would providing federal seed capital without increasing the federal deficit and debt. Requiring the repayment of loans could skew project awards away from projects that cannot easily charge user fees—wastewater and environmental infrastructure projects, for example. Despite these challenges, a properly designed bank could increase the quantity of infrastructure investment while improving its effectiveness, reducing bottlenecks and promoting economic efficiency. The potential benefits for long-term growth would be considerable.

Creating the Political Conditions for Reform

The rise of political polarization in recent decades has made effective action much more difficult for the U.S. government. Polarization has impeded efforts to enact even the progrowth reforms sketched in this paper. A multiyear collaboration between the Brookings and Hoover Institutions—resulting in a two-volume report, Red and Blue Nation?, with Volume One published in 2006 and Volume Two in 2008— has mapped the scope of the phenomenon. This effort has shown that, while political elites are more sharply divided than citizens in general, citizens are more likely now to place themselves at the ends of the ideological spectrum than they were as recently as the 1980s. With a smaller political center to work with, even leaders committed to bipartisan compromise have been stymied. The fate of President Bush’s 2005 Social Security proposal illustrates the difficulty of addressing tough issues in these circumstances.

It might seem that the only cure for polarization is a shift of public sentiment back toward moderation. The Brookings-Hoover project found, however, that changes in institutional design could reduce polarization and might, over time, lower the partisan temperature. Here are two ideas, culled from a much longer list.

Congressional redistricting

While population flows account for much of the growth in safe seats dominated by strong partisans, recent studies indicate that gerrymanders account for 10 to 36 percent of the reduction in competitive congressional districts since 1982. This is not a trivial effect.

Few Western democracies draw up their parliamentary districts in so patently politicized a fashion as do U.S. state legislatures. Parliamentary electoral commissions, operating independently and charged with making reasonably objective determinations, are the preferred model abroad.

Given the Supreme Court’s reluctance to enter the thicket of redistricting controversies, any changes will be up to state governments. In recent years, voter initiatives and referenda in four states—Washington, Idaho, Alaska and Arizona—have established nonpartisan or bipartisan redistricting commissions. These commissions struggle with a complicated riddle: how to enhance competitiveness while respecting other parameters, such as geographic compactness, jurisdictional boundaries, and the desire to consolidate “communities of interest.” Iowa’s approach, where a nonpartisan legislative staff has the last word, is often cited as a model but may be hard to export to states with more demographic diversity and complex political cultures. Arizona has managed to fashion some workable, empirically based standards that are yielding more heterogeneous districts and more competitive elections.

Incentives to participate

Another depolarizing reform would promote the participation of less ideologically committed voters in the electoral process. Some observers do not view the asymmetric power of passionate partisans in U.S. elections as a cause for concern: Why shouldn’t political decisions be made by the citizens who care most about them? Aren’t those who care also better informed? And isn’t their intensive involvement an indication that the outcome of the election affects their interests more than it affects the interests of the non-voters? While this argument has surface plausibility, it is not compelling. Although passionate partisanship infuses the system with energy, it erects road-blocks to problem-solving. Many committed partisans prefer gridlock to compromise, and gridlock is no formula for effective governance.

To broaden the political participation of less partisan citizens, who tend to be more weakly connected to the political system, several major democracies have made voting mandatory. Australia, for one, has compulsory voting; it sets small fines for non-voting that escalate for recidivism, with remarkable results. The turnout rate in Australia tops 95 percent, and citizens regard voting as a civic obligation. Near-universal voting raises the possibility that a bulge of casual voters, with little understanding of the issues and candidates, can muddy the waters by voting on non-substantive criteria, such as the order in which candidates’ names appear on the ballot. The inevitable presence of some such “donkey voters,” as they are called in Australia, does not appear to have badly marred the democratic process in that country.

Indeed, the civic benefits of higher turnouts appear to outweigh the “donkey” effect. Candidates for the Australian Parliament have gained an added incentive to appeal broadly beyond their partisan bases. One wonders whether members of Congress here in the United States, if subjected to wider suffrage, might also spend less time transfixed by symbolic issues that are primarily objects of partisan fascination, and more time coming to terms with the nation’s larger needs. At least campaigns continually tossing red meat to the party faithful might become a little less pervasive.

The United States is not Australia, of course. Although both are federal systems, the U.S. Constitution confers on state governments much more extensive control over voting procedures. While it might not be flatly unconstitutional to mandate voting nationwide, it would surely chafe with American custom and provoke opposition in many states. Federalism American-style also has some unique advantages, including its tradition of using states as “laboratories of democracy” that test reform proposals before they are elevated to consideration at the national level. If a few states experiment with compulsory voting and demonstrate its democracy- enriching potential, they might, in this way, smooth the path to national consideration.  

Conclusion

In challenging times, political leaders undertake institutional reform, not because they want to, but because they must. Our own era—a period of profound economic crisis—is no exception. Even in circumstances of deep political polarization, both political parties have accepted the need to restructure our system of financial regulation.

As well, recognition is growing that we face three key challenges—a fiscal deficit, a savings deficit and an investment deficit—that have eluded control by existing institutions and, unless checked, will impede long-term economic growth. The question is whether we will be able to adopt the needed changes in an atmosphere of reflection and deliberation, or whether we will delay until a worse crisis compels us to act.

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Policy Brief #173

America needs to transform its energy system, and the Great Lakes region (including Minnesota, Wisconsin, Iowa, Missouri, Illinois, Indiana, Ohio, Michigan, Kentucky, West Virginia, western Pennsylvania and western New York) possesses many of the needed innovation assets. For that reason, the federal government should leverage this troubled region’s research and engineering strengths by launching a region-wide network of collaborative, high intensity energy research and innovation centers.

Currently, U.S. energy innovation efforts remain insufficient to ensure the development and deployment of clean energy technologies and processes. Such deployment is impeded by multiple market problems that lead private firms to under-invest and to focus on short-term, low-risk research and product development. Federal energy efforts—let alone state and local ones—remain too small and too poorly organized to deliver the needed breakthroughs. A new approach is essential.

	RECOMMENDATIONS
	The federal government should systematically accelerate national clean energy innovation by launching a series of “themed” research and commercialization centers strategically situated to draw on the Midwest’s rich complex of strong public universities, national and corporate research laboratories, and top-flight science and engineering talent. Organized around existing capacities in a hub-spoke structure that links fundamental science with innovation and commercialization, these research centers would engage universities, industries and labs to work on specific issues that would enable rapid deployment of new technologies to the marketplace. Along the way, they might well begin to transform a struggling region’s ailing economy. Roughly six compelling innovation centers could reasonably be organized in the Great Lakes states with total annual funding between $1 billion and $2 billion. To achieve this broad goal, the federal government should: Increase energy research funding overall. Adopt more comprehensive approaches to research and development (R&D) that address and link multiple aspects of a specific problem, such as transportation. Leverage existing regional research, workforce, entrepreneurial and industrial assets.

America needs to transform its energy system in order to create a more competitive “next economy” that is at once export-oriented, lower-carbon and innovation-driven. Meanwhile, the Great Lakes region possesses what may be the nation’s richest complex of innovation strengths—research universities, national and corporate research labs, and top-flight science and engineering talent. Given those realities, a partnership should be forged between the nation’s needs and a struggling region’s assets.

To that end, we propose that the federal government launch a distributed network of federally funded, commercialization-oriented, sustainable energy research and innovation centers, to be located in the Great Lakes region. These regional centers would combine aspects of the “discovery innovation institutes” proposed by the National Academy of Engineering and the Metropolitan Policy Program (as articulated in “Energy Discovery-Innovation Institutes: A Step toward America’s Energy Sustainability”); the “energy innovation hubs” created by the Department of Energy (DOE); and the agricultural experiment station/cooperative extension model of the land-grant universities.

In the spirit of the earlier land-grant paradigm, this network would involve the region’s research universities and national labs and engage strong participation by industry, entrepreneurs and investors, as well as by state and local governments. In response to local needs and capacities, each center could have a different theme, though all would conduct the kinds of focused translational research necessary to move fundamental scientific discoveries toward commercialization and deployment.

The impact could be transformational. If built out, university-industry-government partnerships would emerge at an unprecedented scale. At a minimum, populating auto country with an array of breakthrough-seeking, high-intensity research centers would stage a useful experiment in linking national leadership and local capacities to lead the region—and the nation—toward a more prosperous future.

The Great Lakes Energy System: Predicaments and Possibilities

The Great Lakes region lies at the center of the nation’s industrial and energy system trials and possibilities. No region has suffered more from the struggles of America’s manufacturing sector and faltering auto and steel industries, as indicated in a new Metropolitan Policy Program report entitled “The Next Economy: Rebuilding Auto Communities and Older Industrial Metros in the Great Lakes Region.”

The region also lies at ground zero of the nation’s need to “green” U.S. industry to boost national economic competitiveness, tackle climate change and improve energy security. Heavily invested in manufacturing metals, chemicals, glass and automobiles, as well as in petroleum refining, the Great Lakes states account for nearly one-third of all U.S. industrial carbon emissions.

And yet, the Great Lakes region possesses significant assets and capacities that hold promise for regional renewal as the “next economy” comes into view. The Midwest’s manufacturing communities retain the strong educational and medical institutions, advanced manufacturing prowess, skills base and other assets essential to helping the nation move toward and successfully compete in the 21st century’s export-oriented, lower-carbon, innovation-fueled economy.

Most notably, the region has an impressive array of innovation-related strengths in the one field essential to our nation’s future—energy. These include:

• Recognized leadership in R&D. The Great Lakes region accounts for 33 percent of all academic and 30 percent of all industry R&D performed in the United States.
• Strength and specialization in energy, science and engineering. In FY 2006, the Department of Energy sent 26 percent of its federal R&D obligations to the Great Lakes states and is the second largest federal funder of industrial R&D in the region. Also in 2006, the National Science Foundation sent 30 percent of its R&D obligations there.
• Existing clean energy research investments and assets. The University of Illinois is a key research partner in the BP-funded, $500 million Energy Biosciences Institute, which aims to prototype new plants as alternative fuel sources. Toledo already boasts a growing solar industry cluster; Dow Corning’s Michigan facilities produce leading silicon and silicone-based technology innovations; and the Solar Energy Laboratory at the University of Wisconsin-Madison, the oldest of its kind in the world, has significant proficiency in developing practical uses for solar energy. Finally, the region is home to the largest U.S. nuclear utility (Exelon), the nation’s largest concentration of nuclear plants and some of the country’s leading university programs in nuclear engineering.
• Industry potential relevant to clean energy. Given their existing technological specializations, Midwestern industries have the potential to excel in the research and manufacture of sophisticated components required for clean energy, such as those used in advanced nuclear technologies, precision wind turbines and complex photovoltaics.
• Breadth in energy innovation endeavors and resources. In addition to universities and industry, the region’s research laboratories specialize in areas of great relevance to our national energy challenges, including the work on energy storage systems and fuel and engine efficiency taking place at Argonne National Laboratory, research in high-energy physics at the Fermi National Accelerator Laboratory, and the work on bioenergy feedstocks, processing technologies and fuels occurring at the DOE-funded Great Lakes BioEnergy Research Center (GLBRC).
• Regional culture of collaboration. Finally, the universities of the Great Lakes area have a strong history of collaboration both among themselves and with industry, given their origins in the federal land-grant compact of market and social engagement. GLBRC—one of the nation’s three competitively awarded DOE Bioenergy Centers—epitomizes the region’s ability to align academia, industry and government around a single mission. Another example is the NSF-supported Blue Waters Project. This partnership between IBM and the universities and research institutions in the Great Lakes Consortium for Petascale Computation is building the world’s fastest computer for scientific work—a critical tool for advancing smart energy grids and transportation systems.

In short, the Great Lakes states and metropolitan areas—economically troubled and carbon-reliant as they are—have capabilities that could contribute to their own transformation and that of the nation, if the right policies and investments were in place.

Remaking America’s Energy System within a Federal Policy Framework

America as a whole, meanwhile, needs to overcome the massive sustainability and security challenges that plague the nation’s energy production and delivery system. Transformational innovation and commercialization will be required to address these challenges and accelerate the process of reducing the economy’s carbon intensity.

Despite the urgency of these challenges, however, a welter of market problems currently impedes decarbonization and limits innovation. First, energy prices have generally remained too low to provide incentives for companies to commit to clean and efficient energy technologies and processes over the long haul. Second, many of the benefits of longrange innovative activity accrue to parties other than those who make investments. As a result, individual firms tend to under-invest and to focus on short-term, low-risk research and product development. Third, uncertainty and lack of information about relevant market and policy conditions and the potential benefits of new energy technologies and processes may be further delaying innovation. Fourth, the innovation benefits that derive from geographically clustering related industries (which for many years worked so well for the auto industry) have yet to be fully realized for next-generation energy enterprises. Instead, these innovations often are isolated in secure laboratories. Finally, state and local governments—burdened with budgetary pressures—are not likely to fill gaps in energy innovation investment any time soon.

As a result, the research intensity—and so the innovation intensity—of the energy sector remains woefully insufficient, as pointed out in the earlier Metropolitan Policy Program paper on discovery innovation institutes. Currently, the sector devotes no more than 0.3 percent of its revenues to R&D. Such a figure lags far behind the 2.0 percent of sales committed to federal and large industrial R&D found in the health care sector, the 2.4 percent in agriculture, and the 10 percent in the information technology and pharmaceutical industries.

As to the national government’s efforts to respond to the nation’s energy research shortfalls, these remain equally inadequate. Three major problems loom:

The scale of federal energy research funding is insufficient. To begin with, the current federal appropriation of around $3 billion a year for nondefense energy-related R&D is simply too small. Such a figure remains well below the $8 billion (in real 2008 dollars) recorded in 1980, and represents less than a quarter of the 1980 level when measured as a share of GDP. If the federal government were to fund next-generation energy at the pace it supports advances in health care, national defense, or space exploration, the level of investment would be in the neighborhood of $20 billion to $30 billion a year.

Nor do the nation’s recent efforts to catalyze energy innovation appear sufficient. To be sure, the American Recovery and Reinvestment Act (ARRA) provided nearly $13 billion for DOE investments in advanced technology research and innovation. To date, Great Lakes states are slated to receive some 42 percent of all ARRA awards from the fossil energy R&D program and 39 percent from the Office of Science (a basic research agency widely regarded as critical for the nation’s energy future). However, ARRA was a one-time injection of monies that cannot sustain adequate federal energy R&D.

Relatedly, the Great Lakes region has done well in tapping two other relatively recent DOE programs: the Advanced Research Projects Agency–Energy (ARPA-E) and Energy Frontier Research Centers (EFRCs). Currently, Great Lakes states account for 44 and 50 percent of ARPA-E and EFRC funding. Yet, with ARPA-E focused solely on individual signature projects and EFRC on basic research, neither initiative has the scope to fully engage all of the region's innovation assets.

The character and format of federal energy R&D remain inadequate. Notwithstanding the question of scale, the character of U.S. energy innovation also remains inadequate. In this respect, the DOE national laboratories—which anchor the nation’s present energy research efforts—are poorly utilized resources. Many of these laboratories’ activities are fragmented and isolated from the private sector and its market, legal and social realities. This prevents them from successfully developing and deploying cost-competitive, multidisciplinary new energy technologies that can be easily adopted on a large scale.

For example, DOE activities continue to focus on discrete fuel sources (such as coal, oil, gas or nuclear), rather than on fully integrated end use approaches needed to realize affordable, reliable, sustainable energy. Siloed approaches simply do not work well when it comes to tackling the complexity of the nation’s real-world energy challenges. A perfect example of a complicated energy problem requiring an integrated end-use approach is transportation. Moving the nation’s transportation industry toward a clean energy infrastructure will require a multi-pronged, full systems approach. It will depend not only upon R&D in such technologies as alternative propulsion (biofuels, hydrogen, electrification) and vehicle design (power trains, robust materials, advanced computer controls) but also on far broader technology development, including that related to primary energy sources, electricity generation and transmission, and energy-efficient applications that ultimately will determine the economic viability of this important industry.

Federal programming fails to fully realize regional potential. Related to the structural problems of U.S. energy innovation efforts, finally, is a failure to fully tap or leverage critical preexisting assets within regions that could accelerate technology development and deployment. In the Great Lakes, for example, current federal policy does little to tie together the billions of dollars in science and engineering R&D conducted or available annually. This wealth is produced by the region’s academic institutions, all of the available private- and public-sector clean energy activities and financing, abundant natural resources in wind and biomass, and robust, pre-existing industrial platforms for research, next-generation manufacturing, and technology adoption and deployment. In this region and elsewhere, federal policy has yet to effectively connect researchers at different organizations, break down stovepipes between research and industry, bridge the commercialization “valley of death,” or establish mechanisms to bring federally-sponsored R&D to the marketplace quickly and smoothly.

A New Approach to Regional, Federally Supported Energy Research and Innovation

And so the federal government should systematically accelerate clean energy innovation by launching a series of regionally based Great Lakes research centers. Originally introduced in the Metropolitan Policy Program policy proposal for energy discovery-innovation institutes (or e-DIIs), a nationwide network of regional centers would link universities, research laboratories and industry to conduct translational R&D that at once addresses national energy sustainability priorities, while stimulating regional economies.

In the Great Lakes, specifically, a federal effort to “flood the zone” with a series of roughly six of these high-powered, market-focused energy centers would create a critical mass of innovation through their number, size, variety, linkages and orientation to pre-existing research institutions and industry clusters.

As envisioned here, the Great Lakes network of energy research centers would organize individual centers around themes largely determined by the private market. Based on local industry research priorities, university capabilities and the market and commercialization dynamics of various technologies, each Great Lakes research and innovation center would focus on a different problem, such as renewable energy technologies, biofuels, transportation energy, carbon-free electrical power generation, and distribution and energy efficiency. This network would accomplish several goals at once:

• Foster multidisciplinary and collaborative research partnerships. The regional centers or institutes would align the nonlinear flow of knowledge and activity across science and non-science disciplines and among companies, entrepreneurs, commercialization specialists and investors, as well as government agencies (federal, state and local) and research universities. For example, a southeastern Michigan collaboration involving the University of Michigan, Michigan State University, the University of Wisconsin and Ford, General Motors, and Dow Chemical could address the development of sustainable transportation technologies. A Chicago partnership involving Northwestern and Purdue Universities, the University of Chicago, the University of Illinois, Argonne National Lab, Exelon and Boeing could focus on sustainable electricity generation and distribution. A Columbus group including Ohio State University and Battelle Memorial Institute could address technologies for energy efficiency. Regional industry representatives would be involved from the earliest stages to define needed research, so that technology advances are relevant and any ensuing commercialization process is as successful as possible.
• Serve as a distributed “hub-spoke” network linking together campus-based, industry-based and federal laboratory-based scientists and engineers. The central “hubs” would interact with other R&D programs, centers and facilities (the “spokes”) through exchanges of participants, meetings and workshops, and advanced information and communications technology. The goals would be to limit unnecessary duplication of effort and cumbersome management bureaucracy and to enhance the coordinated pursuit of larger national goals.
• Develop and rapidly deploy highly innovative technologies to the market. Rather than aim for revenue maximization through technology transfer, the regional energy centers would be structured to maximize the volume, speed and positive societal impact of commercialization. As much as possible, the centers would work out in advance patenting and licensing rights and other intellectual property issues.Stimulate regional economic development. Like academic medical centers and agricultural experiment stations—both of which combine research, education and professional practice—these energy centers could facilitate cross-sector knowledge spillovers and innovation exchange and propel technology transfer to support clusters of start-up firms, private research organizations, suppliers, and other complementary groups and businesses—the true regional seedbeds of greater economic productivity, competitiveness and job creation.
• Build the knowledge base necessary to address the nation’s energy challenges. The regional centers would collaborate with K-12 schools, community colleges, regional universities, and workplace training initiatives to educate future scientists, engineers, innovators, and entrepreneurs and to motivate the region’s graduating students to contribute to the region’s emerging green economy.
• Complement efforts at universities and across the DOE innovation infrastructure, but be organizationally and managerially separate from either group. The regional energy centers would focus rather heavily on commercialization and deployment, adopting a collaborative translational research paradigm. Within DOE, the centers would occupy a special niche for bottom-up translational research in a suite of new, largely top-down innovation-oriented programs that aim to advance fundamental science (EFRCs), bring energy R&D to scale (Energy Innovation Hubs) and find ways to break the cost barriers of new technology (ARPA-E).

To establish and build out the institute network across the Great Lakes region, the new regional energy initiative would:

• Utilize a tiered organization and management structure. Each regional center would have a strong external advisory board representing the participating partners. In some cases, partners might play direct management roles with executive authority.
• Adopt a competitive award process with specific selection criteria. Centers would receive support through a competitive award process, with proposals evaluated by an interagency panel of peer reviewers.
• Receive as much federal funding as major DOE labs outside the Great Lakes region. Given the massive responsibilities of the proposed Great Lakes energy research centers, total federal funding for the whole network should be comparable to that of comprehensive DOE labs, such as Los Alamos, Oak Ridge and others, which have FY2010 budgets between $1 and $2 billion. Based on existing industry-university concentrations, one can envision as many as six compelling research centers in the Great Lakes region.

Conclusion

In sum, America’s national energy infrastructure—based primarily upon fossil fuels—must be updated and replaced with new technologies. At the same time, no region in the nation is better equipped to deliver the necessary innovations than is the Great Lakes area. And so this strong need and this existing capacity should be joined through an aggressive initiative to build a network of regional energy research and innovation centers. Through this intervention, the federal government could catalyze a dynamic new partnership of Midwestern businesses, research universities, federal laboratories, entrepreneurs and state and local governments to transform the nation’s carbon dependent economy, while renewing a flagging regional economy.

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• Pursuing Large Scale Innovation

      

Policy Brief #174

A nation’s education system is a pillar of its economic strength and international competitiveness. The National Bureau of Economic Research analyzed data from 146 countries, collected between 1950 and 2010, and found that each year of additional average schooling attained by a population translates into at least a two percent increase in economic output. A 2007 World Bank policy research working paper reported similar results. Based on these findings, if the United States increased the average years of schooling completed by its adult population from the current 12 years to 13 years—that is, added one year of postsecondary education—our gross domestic product would rise by more than $280 billion.

The story also can be told by focusing on the returns to education for individuals. The difference in income between Americans who complete high school and those who drop out after 10th grade exceeds 50 percent. Large income differentials extend throughout the continuum of education attainment, with a particularly huge gap occurring between an advanced degree and a four-year college degree.

Although education clearly pays, the education attainment of the nation’s youth has largely stagnated, falling substantially behind that of countries with which we compete. In 1960, the United States led the world in the number of students who graduated from high school. Today young adults in many countries, including Estonia and Korea, exceed their U.S. counterparts in education attainment.

	RECOMMENDATIONS
	America’s economic productivity and competitiveness are grounded in education. Our public schools and our higher education institutions alike are falling behind those of other nations. Four policy proposals offer substantial promise for improving American education, are achievable and have low costs: Choose K–12 curriculum based on evidence of effectiveness. Evaluate teachers in ways that meaningfully differentiate levels of performance. Accredit online education providers so they can compete with traditional schools across district and state lines. Provide the public with information that will allow comparison of the labor market outcomes and price of individual postsecondary degree and certificate programs.

The problem of low education attainment is particularly salient among students from low-income and minority backgrounds. The graduation rate for minorities has been declining for 40 years, and majority/minority graduation rate differentials have not converged. Hispanic and black students earn four-year or higher degrees at less than half the rate of white students.

The economic future of the nation and the prospects of many of our citizens depend on returning the United States to the forefront of education attainment. Simply put, many more of our students need to finish high school and graduate from college.

At the same time, graduation standards for high school and college must be raised. Forty percent of college students take at least one remedial course to make up for deficiencies in their high school preparation, and a test of adult literacy recently given to a random sample of graduating seniors from four-year U.S. institutions found less than 40 percent to be proficient on prose and quantitative tasks.

Barriers to Innovation and Reform

Our present education system is structured in a way that discourages the innovation necessary for the United States to regain education leadership. K-12 education is delivered largely through a highly regulated public monopoly. Outputs such as high school graduation rates and student performance on standardized assessments are carefully measured and publicly available, but mechanisms that would allow these outputs to drive innovation and reform are missing or blocked. For example, many large urban districts and some states are now able to measure the effectiveness of individual teachers by assessing the annual academic growth of students in their classes. Huge differences in teacher effectiveness are evident, but collective bargaining agreements or state laws prevent most school district administrators from using that information in tenure or salary decisions.

Further complicating K-12 reform is the fact that authority for education policy is broadly dispersed. Unlike countries with strong national ministries that can institute top-down reforms within the public sector, education policy and practice in the United States are set through a chaotic network of laws, relationships and funding streams connecting 16,000 independent school districts to school boards, mayors, and state and federal officials. The lack of central authority allows the worst characteristics of public monopolies to prevail—inefficiency, stasis and catering to interests of employees—without top-down systems’ offsetting advantage of being capable of quick and coordinated action.

The challenges to reforming higher education are different. The 6,000-plus U.S. postsecondary institutions have greater flexibility to innovate than do the public school districts—and a motive to do so, because many compete among themselves for students, faculty and resources. However, while output is carefully measured and publicly reported for public K-12 schools and districts, we have only the grossest measures of output for post secondary institutions.

Even for something as straightforward as graduation rates, the best data we have at the institutional level are the proportion of full-time, first-time degree-seeking students who graduate within 150 percent of the normal time to degree completion. Data on critical outputs, including labor market returns and student learning, are missing entirely. In the absence of information on issues that really matter, postsecondary institutions compete and innovate on dimensions that are peripheral to their productivity, such as the winning records of their sports teams, the attractiveness of their grounds and buildings, and their ratio of acceptances to applications. Far more information is available to consumers in the market for a used car than for a college education. This information vacuum undermines productive innovation.

Examining Two Popular Reforms

Many education reformers across the political spectrum agree on two structural and governance reforms: expanding the public charter school sector at the expense of traditional public schools and setting national standards for what students should know. Ironically, the evidence supporting each of these reforms is weak at best.

Charter schools are publicly funded schools outside the traditional public school system that operate with considerable autonomy in staffing, curriculum and practices. The Obama administration has pushed to expand charter schools by eliminating states that don’t permit charters, or capping them, from competition for $4.35 billion in Race to the Top funding. Both President Obama and Education Secretary Arne Duncan have proposed shuttering poorly performing traditional public schools and replacing them with charters.

What does research say about charter schools’ effects on academic outcomes? Large studies that control for student background generally find very small differences in student achievement between the two types of public schools.

For example, on the 2005 National Assessment of Educational Progress (the “Nation’s Report Card”), white, black and Hispanic fourth graders in charter schools performed equivalently to fourth-graders with similar racial and ethnic backgrounds in traditional public schools. Positive findings do emerge from recent studies of oversubscribed New York and Boston area charter schools, which use lotteries to determine admission. But these results are obtained from children whose parents push to get them into the most popular charter schools in two urban areas with dynamic and innovative charter entrepreneurs.

What about common standards? Based on the belief that high content standards for what students should know and be able to do are essential elements of reform and that national standards are superior to individual state standards, the Common Core State Standards Initiative has signed up 48 states and 3 territories to develop a common core of state standards in English-language arts and mathematics for grades K-12. The administration has praised this joint effort by the National Governors Association and Council of Chief State School Officers, made participation in it a prerequisite for Race to the Top funding, and set aside $350 million in American Recovery and Reinvestment Act funding to develop ways to assess schools’ performance in meeting common core standards.

Does research support this approach? The Brown Center on Education Policy at Brookings examined the relationship between student achievement outcomes in mathematics at the state level and ratings of the quality of state content standards in math. There was no association. Some states with strong standards produce high-achieving students, such as Massachusetts, while other states with strong standards languish near the bottom in terms of achievement, such as California. Some states with weak standards boast high levels of achievement, such as New Jersey, while others with weak standards experience low levels of achievement, such as Tennessee.

Four Ideas

For every complex problem there is one solution which is simple, neat, and wrong. — H. L. Mencken

I will avoid Mencken’s approbation by proposing four solutions rather than one. Although education has far too many moving parts to be dramatically reformed by any short list of simple actions, we can start with changes that are straightforward, ripe for action and most promising, based on research and past experience.

Link K-12 Curricula to Comparative Effectiveness

Little attention has been paid to choice of curriculum as a driver of student achievement. Yet the evidence for large curriculum effects is persuasive. Consider a recent study of first-grade math curricula, reported by the National Center for Education Evaluation and Regional Assistance in February 2009. The researchers randomly matched schools with one of four widely used curricula. Two curricula were clear winners, generating three months’ more learning over a nine-month school year than the other two. This is a big effect on achievement, and it is essentially free because the more effective curricula cost no more than the others.

The federal government should fund many more comparative effectiveness trials of curricula, and schools using federal funds to support the education of disadvantaged students should be required to use evidence of effectiveness in the choice of curriculum materials. The Obama administration supports comparative effectiveness research in health care. It is no less important in education.

Evaluate Teachers Meaningfully

Good education outcomes for students depend on good teachers. If we have no valid and reliable system in place to identify who is good, we cannot hope to create substantial improvements in the quality of the teacher workforce.

A substantial body of high-quality research demonstrates that teachers vary substantially in effectiveness, with dramatic consequences for student learning. To increase academic achievement overall and address racial, ethnic and socioeconomic achievement gaps, we must enhance the quality of the teacher workforce and provide children from poor and minority backgrounds with equitable access to the best teachers.

Despite strong empirical evidence for differences in teacher performance—as well as intuitive appeal, demonstrated when we remember our own best and worst teachers—the vast majority of public school teachers in America face no meaningful evaluation of on-the-job performance. A recent survey of thousands of teachers and administrators, spanning 12 districts in four states, revealed that none of the districts’ formal evaluation processes differentiated meaningfully among levels of teaching effectiveness, according to a 2009 report published by The New Teacher Project. In districts using binary ratings, more than 99 percent of teachers were rated satisfactory. In districts using a broader range of ratings, 94 percent of teachers received one of the top two ratings, and less than one percent were rated unsatisfactory. In most school districts, virtually all probationary teachers receive tenure—98 percent in Los Angeles, for example—and very small numbers of tenured teachers are ever dismissed for poor performance.

Conditions of employment should be restructured to recruit and select more promising teachers, provide opportunities for them to realize their potential, keep the very best teachers in the profession, and motivate them to serve in locations where students have the highest needs. The precondition for these changes is a valid system of evaluating teachers.

The federal government should require school districts to evaluate teachers meaningfully, as a condition of federal aid. Washington also should provide extra support to districts that pay substantially higher salaries to teachers demonstrating persistently high effectiveness and serving in high-needs schools. But, because many technical issues in the evaluation of on-the-job performance of teachers are unresolved, the federal government should refrain, at least for now, from mandating specific evaluation components or designs. The essential element is meaningful differentiation—that is, a substantial spread of performance outcomes.

Accredit Online Education Providers

Traditional forms of schooling are labor-intensive and offer few economies of scale. To the extent that financial resources are critical to education outcomes, the only way to improve the U.S. education system in its current configuration is to spend more. Yet we currently spend more per student on education than any other country in the world, and the appetite for ever-increasing levels of expenditure has been dampened by changing demographics and ballooning government deficits. The monies that can be reasonably anticipated in the next decade or two will hardly be enough to forestall erosion in the quality of the system, as currently designed. The game changer for education productivity will have to be technology, which can both cut labor costs and introduce competitive pressures.

Already, at the college level, online education (also termed “virtual education” or “distance learning”) is proving competitive with the classroom experience. Nearly 3.5 million students in 2006—about 20 percent of all students in postsecondary schools and twice the number five years previously—were taking at least one course online, according to a 2007 report published by the Sloan Consortium.

In K-12, online education is developing much more slowly. But, the case for online K–12 education is strong—and linked to cost control. A survey reported on page one of Education Week (March 18, 2009) found the average per-pupil cost of 20 virtual schools in 14 states to be about half the national average for a traditional public school.

Local and state control of access to virtual schooling impedes the growth of high-quality online education and the competitive pressure it contributes to traditional schooling. Development costs are very high for virtual courseware that takes full advantage of the newest technologies and advances in cognitive science and instruction—much higher than the costs for traditional textbooks and instructional materials. These development costs can only be rationalized if the potential market for the resulting product is large. But, states and local school districts now are able to determine whether an online program is acceptable. The bureaucracy that may be most disrupted by the introduction of virtual education acts as gatekeeper.

To overcome this challenge, K-12 virtual public education would benefit from the model of accreditation used in higher education. Colleges and universities are accredited by regional or national bodies recognized by the federal government. Such accrediting bodies as the New England Association of Schools and Colleges and the Accrediting Council for Independent Colleges and Schools are membership organizations that determine their own standards within broad federal guidelines. Once an institution is accredited, students residing anywhere can take its courses, often with the benefit of federal and state student aid.

Federal legislation to apply this accreditation model to online K-12 education could transform public education, especially if the legislation also required school districts to cover the reasonable costs of online courses for students in persistently low-performing schools. This approach would exploit—and enhance—U.S. advantages in information technology. We are unlikely to regain the international lead in education by investing more in business as usual; but we could leapfrog over other countries by building new, technology-intensive education systems.

Link Postsecondary Programs to Labor Market Outcomes

On a per-student basis, the United States spends two and one-half times the developed countries’ average on postsecondary education. Although our elite research universities remain remarkable engines of innovation and are the envy of the world, our postsecondary education system in general is faltering. The United States used to lead the world in higher education attainment, but, according to 2009 OECD data, is now ranked 12th among developed countries. We have become a high-cost provider of mediocre outcomes.

Critical to addressing this problem is better information on the performance of our postsecondary institutions. As the U.S. Secretary of Education’s Commission on the Future of Higher Education concluded in 2006:

Our complex, decentralized postsecondary education system has no comprehensive strategy, particularly for undergraduate programs, to provide either adequate internal accountability systems or effective public information. Too many decisions about higher education—from those made by policymakers to those made by students and families—rely heavily on reputation and rankings derived to a large extent from inputs such as financial resources rather than outcomes. Better data about real performance and lifelong working and learning ability is absolutely essential if we are to meet national needs and improve institutional performance.

Ideally, this information would be available in comparable forms for all institutions through a national system of data collection. However, achieving consensus on the desirability of a national database of student records has proved politically contentious. One of the issues is privacy of information. More powerful is the opposition of some postsecondary institutions that apparently seek to avoid accountability for their performance.

The way forward is for Congress to authorize, and fund at the state level, data systems that follow individual students through their postsecondary careers into the labor market. The standards for such state systems could be recommended at the federal level or by national organizations, to maximize comparability and eventual interoperability.

The public face of such a system at the state level would be a website allowing prospective students and parents to compare degree and certificate programs within and across institutions on diverse outcomes, with corresponding information on price. At a minimum, the outcomes would include graduation rates, employment rates and average annual earnings five years after graduation. Outcomes would be reported at the individual program level, such as the B.S. program in chemical engineering at the University of Houston. Price could be reported in three ways: advertised tuition,average tuition for new students for the previous two years, and average tuition for new students for the previous two years net of institutional and state grants for students eligible for federally subsidized student loans. These different forms of price information are necessary because institutions frequently discount their advertised price, particularly for low-income students. Students and families need information about discounts in order to shop on the basis of price.

Many states, such as Washington, already have data that would allow the creation of such college search sites, at least for their public institutions. The primary impediment to progress is the federal Family Educational Rights and Privacy Act (FERPA), which makes it very difficult for postsecondary institutions to share data on individual students with state agencies, such as the tax division or unemployment insurance office, in order to match students with information on post-graduation employment and wages. Congress should amend FERPA to allow such data exchanges among state agencies while maintaining restrictions on release of personally identifiable information. To address privacy concerns, Congress also should impose substantial penalties for the public release of personally identifiable information; FERPA currently is toothless.

Creating a higher education marketplace that is vibrant with transparent and valid information on performance and price would be a powerful driver of reform and innovation. Easily addressed concerns about the privacy of student records and political opposition from institutions that do not want their performance exposed to the public have stood in the way of this critical reform for too long. America’s economic future depends on returning the United States to the forefront of education attainment. Simply put, many more of our students need to finish high school and graduate from college. Investments in improved data, along with structural reforms and innovation, can help restore our leadership in educational attainment and increase economic growth.

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Antimicrobial resistance is one of the most significant threats to public health globally. It will worsen in the coming decades without concerted efforts to spur the development of new antibiotics, while ensuring the appropriate use of existing antibiotics. Antimicrobial therapy is essential for treating and preventing bacterial infections, some of which can be life-threatening and acquired as a result of
critical medical interventions, including surgery, chemotherapy and dialysis. However, the international rise in antimicrobial resistance has weakened our antibiotic armamentarium and multi-resistant bacteria now cause over 150,000 deaths annually in hospitals around the world (WHO, 2013). Unfortunately, the evolution of drug-resistant pathogens is unavoidable due to random genetic changes in the pathogens that can render antibiotics ineffective. While antibiotic therapy can succeed in killing susceptible pathogens, it also inadvertently selects for organisms that are resistant. Because each exposure to antibiotics contributes to this process, efforts to restrict antibiotic usage only slow the development of resistance. Ultimately, innovative antimicrobial drugs with diverse mechanisms of action will be needed to treat emerging resistant pathogens.

Combating resistance

Inappropriate use of antibiotics contributes significantly to the acceleration of resistance. Needlessly exposing patients to antibiotics (for example, for viral or mild infections likely to resolve on their own), the use of overly broad-spectrum antibiotics and suboptimal doses of appropriate therapy hasten the evolution of resistant pathogens. While affordable, rapid and accurate point-of-care diagnostics are essential for determining appropriate therapy for many bacterial diseases, routine clinical use will be limited if the tests are too expensive or not accessible during routine clinical encounters. In the absence of a clear diagnostic result, many health care providers prescribe empiric broadspectrum therapy without knowing exactly what they are treating. Although inappropriate use is widespread in many parts of the world, where antibiotics are available without a prescription or oversight by a health care provider or stewardship team, overuse abounds even where antibiotic prescribing is more tightly regulated.

Studies conducted in the USA indicate that around 258 million courses of antibiotics are dispensed annually for outpatient use (Hicks, 2013) and up to 75 per cent of ambulatory antibiotic prescriptions are for the treatment of common respiratory infections, which may or may not be bacterial in origin (McCaig,1995). Recent evidence suggests that over half of these prescriptions are not medically indicated. For example, 60 per cent of US adults with a sore throat receive an antibiotic prescription after visiting a primary care practice or emergency department, despite the fact that only ten per cent require treatment with antibiotics. This is particularly troubling given the availability of rapid tests that can detect Group A Streptococcus, the bacteria responsible for the ten per cent of cases that require antibiotic treatment.

The overuse of antibiotics has been driven largely by their low cost and clinical effectiveness, which has led many patients to view them as cure-alls with few risks. This perception is reinforced by the fact that antibiotics are curative in nature and used for short durations. However, the clinical effectiveness of these drugs decreases over time, as resistance naturally increases, and this process is accelerated with inappropriate use. Moreover, there are numerous consequences associated with the use of antibiotics, including over 140,000 emergency department visits yearly in the USA for adverse incidents (mostly allergic reactions; CDC, 2013a). In addition, antibiotics can eliminate protective bacteria in the gut,
leaving patients vulnerable to infection with Clostridium difficile, which causes diarrhoeal illness that results in 14,000 deaths every year in the USA (CDC, 2013b). It is estimated that antimicrobial resistance costs the US health care system over US$20 billion annually in excess care and an additional $35 billion in lost productivity (Roberts et al., 2009).

The inappropriate use of antimicrobial drugs is particularly concerning because highly resistant pathogens can easily cross national borders and rapidly spread around the globe. In recent years, strains of highly drug-resistant tuberculosis, carbapenem-resistant Enterobacteriaceae and other resistant pathogens have spread outside their countries of origin within several years of their detection. Because resistant bacteria are unlikely to stay isolated, stewardship efforts must be improved globally and international attention is needed to improve surveillance of emerging pathogens and resistance patterns.

A major challenge for clinicians and regulators will be to find stewardship interventions that can be scaled-up and involve multiple stakeholders, including providers, drug manufacturers, health care purchasers (insurers), governments and patients themselves. Such interventions should include practical and costeffective educational programmes targeted towards providers and patients that shift expectations for antibiotic prescriptions to a mutual understanding of the benefits and risks of these drugs.

Educational programmes alone, however, will not be sufficient to lower prescribing rates to recommended levels. Pushing down the inappropriate use of antibiotics also warrants stronger mechanisms that leverage the critical relationships between the stakeholders. For example, health care purchasers can play an important role by using financial disincentives to align prescribing habits with clinical guidelines that are developed by infectious disease specialists in the private and public sectors. This type of approach has the potential to be effective because it includes multiple stakeholders that share responsibility for the appropriate use of antibiotics and, ultimately, patient care.

Key obstacles to antibiotic development

The continual natural selection for resistant pathogens despite efforts to limit antibiotic use underscores the need for new antibiotics with novel mechanisms of action. To date, antimicrobial drug innovation and development have not kept pace with resistance. The number of approved new molecular entities (NME) to treat systemic infections has been steadily declining for decades (see Figure 1). Some infections are not susceptible to any antibiotic and in some cases the only effective drugs may cause serious side effects, or be contra-indicated due to a patient’s allergies or comorbidities (e.g. renal failure). There is significant unmet medical need for therapies that treat serious and life-threatening bacterial diseases caused by resistant pathogens, as well as some less serious infections where there are few treatment alternatives available (e.g. gonorrhoea).

Antibiotic development for these areas of unmet medical need has been sidelined by a number of scientific, regulatory and economic obstacles. While the costs and complexity of any clinical trial necessary for approval by drug regulators can be substantial, in part due to the large study samples needed to demonstrate safety and efficacy, the infectious disease space faces a number of unique clinical challenges. Patients with serious drug-resistant infections may be in need of urgent antibiotic therapy, which can preclude efficient consent and timely trial enrolment procedures; prior therapy can also confound treatment effects if the patient is later enrolled in a trial for an experimental drug. In addition, many patients with these pathogens are likely to have a history of longterm exposure to the health care setting and may have significant comorbidities that render them less likely to meet inclusion criteria for clinical trials.

Emerging infections for which there are few or no treatment options also tend to be relatively rare. This makes it difficult to conduct adequate and well-controlled trials, which typically enrol large numbers of patients. However, clinical drug development can take many years and waiting until such infections are more common is not feasible. Another issue is that it may also not be possible to conclusively identify the pathogen and its susceptibility at the point of enrolment due to the lack of rapid diagnostic technologies. Ultimately, uncertainty about the aetiology of an infection may necessitate trials with larger numbers of patients in order to achieve sufficient statistical power, further compounding the challenge of enrolling seriously ill infectious disease patients in the first place.

The need to conduct large trials involving acutely ill patients that are difficult to identify can make antibiotic development prohibitively expensive for drug developers, especially given that antibiotics are relatively inexpensive and offer limited opportunities to generate returns. Unlike treatments for chronic diseases, antibiotic therapy tends to last no longer than a few weeks, and these drugs lose efficacy over time as resistance develops, leading to diminishing returns. The decline in antimicrobial drug innovation is largely due to these economic obstacles, which have led developers to seek more durable and profitable markets (e.g. cancer or chronic disease) in recent decades. There are only a handful of companies currently in the market and the development pipeline is very thin. Changes to research infrastructure, drug reimbursement and regulation are all potentially needed to revitalise antibiotic innovation.

Opportunities to streamline innovative antibiotic development

In the USA, several proposals have been made to expedite the development and regulatory review of antibiotics while ensuring that safety and efficacy requirements are met. In 2012, the US President’s Council of Advisors on Science and Technology recommended that the US Food and Drug Administration (FDA) create a ‘special medical use’ (SMU) designation for the review of drugs for subpopulations of patients with unmet medical need. Drug sponsors would be required to demonstrate that clinical trials in a larger patient population would need much more time to complete or not be feasible. A drug approved under the SMU designation could be studied in subgroups of patients that are critically ill, as opposed to the broader population, under the condition that the drug’s indication would be limited to the narrow study population. The SMU designation was discussed at an expert workshop convened by the Brookings Institution in August 2013. Many participants at the meeting agreed that there is a pressing need to develop novel antibiotics and that such a limited-use pathway could support the appropriate use of newly approved drugs.

The Infectious Diseases Society of America developed a related drug development pathway called the Limited Population Antibacterial Drug (LPAD) approval mechanism. The LPAD approach calls for smaller, faster and less costly clinical trials to study antibiotics that treat resistant bacteria that cause serious infections. Both the SMU and LPAD approaches would allow drug developers to demonstrate product safety and efficacy in smaller patient subpopulations and provide regulatory clarity about acceptable benefit–risk profiles for antibiotics that treat serious bacterial diseases. The US House of Representatives is currently considering a bill¹ that incorporates these concepts.

A recent proposal from the drug manufacturer industry for streamlined antibiotic development is to establish a tiered regulatory framework to assess narrow-spectrum antibiotics (e.g. active versus a specific bacterial genus and species or a group of related bacteria) that target resistant pathogens that pose the greatest threat to public health (Rex, 2013: pp. 269–275). This is termed a ‘pathogen-focused’ approach because the level of clinical evidence required for approval would be correlated with the threat level and feasibility of studying a specific pathogen or group of pathogens. The pathogen-focused approach was also highlighted at a recent workshop at the Brookings Institution (Brookings Institution, 2014). Some experts felt that the approach is promising but emphasised that each pathogen and experimental drug is unique and that it could be challenging to place them in a particular tier of a regulatory framework. Given that pathogen-focused drugs would likely be marketed internationally, it will be important for drug sponsors to have regular interactions and multiple levels of discussion with regulators to find areas of agreement that would facilitate the approval of these drugs.

Antibiotics with very narrow indications could potentially support stewardship as well by limiting use to the most seriously ill patients. Safe use of these drugs would likely depend on diagnostics, significant provider education, labelling about the benefits and risks of the product, and the scope of clinical evidence behind its approval. Because these antibiotics would be used in a very limited manner, changes would potentially need to be made to how they are priced and reimbursed to ensure that companies are still able to generate returns on their investment. That said, a more focused drug development programme with regulatory clarity could greatly increase their odds of success and, combined with appropriate pricing and safe use provisions, could succeed in incentivising antimicrobial drug development for emerging infections.

Endnote
1 H.R. 3742 – Antibiotic Development to Advance Patient Treatment (ADAPT) Act of 2013.

References
Barnett, M. L. and Linder, J. A., 2014. ‘Antibiotic prescribing to adults with sore throat in the United States, 1997–2010’. JAMA Internal Medicine, 174(1), pp. 138–140.

Brookings Institution, 2013. Special Medical Use: Limited Use for Drugs Developed in an Expedited Manner to Meet an UnmetMedical Need. Brookings Institution. Available at: www.brookings.edu/events/2013/08/01-special-medical-use

Brookings Institution, 2014. Modernizing Antibacterial Drug Development and Promoting Stewardship. Available at: www.brookings.edu/events/2014/02/07-modernizing-antibacterialdrug-development [Accessed 11 March 2014].

CDC, 2013a. Antibiotic resistance threats in the United States,2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threatreport-2013/pdf/ar-threats-2013-508.pdf#page=25 [Accessed 16 January 2014].

CDC, 2013b. Clostridium difficile. Antibiotic resistance threats in the United States, 2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threat-report-2013/pdf/ar-threats-2013-508.pdf#page=50 [Accessed 16 January 2014].

Hicks, L. A. et al., 2013. ‘US Outpatient Antibiotic Prescribing, 2010’. New England Journal of Medicine, 368(15), pp. 1461–1463.
Infectious Disease Society of America, 2012.

Limited Population Antibacterial Drug (LPAD) Approval Mechanism. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf [Accessed 5 March 2014].

Infectious Disease Society of America, 2012. Limited Population Antibacterial Drug (LPAD) Approval Mechanism [PDF] Infectious
Disease Society of America. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf  [Accessed 18 January 2013].

Kumarasamy, K. K., Toleman, M. A., Walsh, T. R. et al.,2010. ‘Emergence of a new antibiotic resistance mechanism in India,
Pakistan, and the UK: A molecular, biological, and epidemiological study’. Lancet Infectious Diseases, 10(9), pp. 597–602.

McCaig, L. F. and Hughes, J. M., 1995. ‘Trends in antimicrobial drug prescribing among office-based physicians in the United
States’. Journal of the American Medical Association, 273(3), pp. 214–219.

President’s Council of Advisors on Science and Technology, 2012. Report to the President on Propelling Innovation in Drug
Discovery, Development and Evaluation. Available at:www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-fdafinal.pdf    [Accessed 5 March 2014].

Rex, J. H. et al., 2013. ‘A comprehensive regulatory framework to address the unmet need for new antibacterial treatments’. Lancet Infectious Diseases, 13(3), pp. 269–275.

Roberts, R. R., Hota, B., Ahmad, I. et al., 2009. ‘Hospital and societal costs of antimicrobial – Resistant infections in a Chicago
teaching hospital: Implications for antibiotic stewardship’. Clinical Infectious Diseases, 49(8), pp. 1175–1184.

WHO (World Health Organization), 2010. Fact Sheet: Rational Use of Medicines [webpage] WHO. Available at:
www.who.int/mediacentre/factsheets/fs338/en [Accessed 28 February 2014].

WHO (World Health Organization), 2013. Antimicrobial Drug Resistance [PDF] WHO. Available at: http://apps.who.int/gb/ebwha/pdf_files/EB134/B134_37-en.pdf [Accessed 6 March 2014].

WHO (World Health Organization), 2013. Notified MDR-TB cases (number per 100,000 population), 2005–12. WHO. Available at:
https://extranet.who.int/sree/Reports?op=vs&path=/WHO_HQ_Reports/G2/PROD/EXT/MDRTB_Indicators_map [Accessed 28 February 2014].

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In 2015 the international community agreed on a set of ambitious sustainable development goals (SDGs) for the global society, to be achieved by 2030. One of the lessons that the implementation of the Millennium Development Goals (MDG s) has highlighted is the importance of a systematic approach to identify and sequence development interventions—policies, programs, and projects—to achieve such goals at a meaningful scale. The Chinese approach to development, which consists of identifying a problem and long-term goal, testing alternative solutions, and then implementing those that are promising in a sustained manner, learning and adapting as one proceeds—Deng Xiaoping’s “crossing the river by feeling the stones”—is an approach that holds promise for successful achievement of the SDGs.

Having observed the Chinese way, then World Bank Group President James Wolfensohn in 2004, together with the Chinese government, convened a major international conference in Shanghai on scaling up successful development interventions, and in 2005 the World Bank Group (WBG ) published the results of the conference, including an assessment of the Chinese approach. (Moreno-Dodson 2005). Some ten years later, the WBG once again is addressing the question of how to support scaling up of successful development interventions, at a time when the challenge and opportunity of scaling up have become a widely recognized issue for many development institutions and experts.

Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.”

In parallel with the recognition that scaling up matters, the development community is now also focusing on social enterprises (SEs), a new set of actors falling between the traditionally recognized public and private sectors. We adopt here the World Bank’s definition of “social enterprises” as a social-mission-led organization that provides sustainable services to Base of the Pyramid (BoP) populations. This is broadly in line with other existing definitions for the sector and reflects the World Bank’s primary interest in social enterprises as a mechanism for supporting service delivery for the poor. Although social enterprises can adopt various organizational forms—business, nongovernmental organizations (NGOs), and community-based organizations are all forms commonly adopted by social enterprises—they differ from private providers principally by combining three features: operating with a social purpose, adhering to business principles, and aiming for financial sustainability. Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.” (Figure 1)

Figure 1. Role of SE sector in public service provision

Social enterprises often start at the initiative of a visionary entrepreneur who sees a significant social need, whether in education, health, sanitation, or microfinance, and who responds by developing an innovative way to address the perceived need, usually by setting up an NGO, or a for-profit enterprise. Social enterprises and their innovations generally start small. When successful, they face an important challenge: how to expand their operations and innovations to meet the social need at a larger scale. 

Development partner organizations—donors, for short—have recognized the contribution that social enterprises can make to find and implement innovative ways to meet the social service needs of people at the base of the pyramid, and they have started to explore how they can support social enterprises in responding to these needs at a meaningful scale. 

The purpose of this paper is to present a menu of approaches for addressing the challenge of scaling up social enterprise innovations, based on a review of the literature on scaling up and on social enterprises. The paper does not aim to offer specific recommendations for entrepreneurs or blueprints and guidelines for the development agencies. The range of settings, problems, and solutions is too wide to permit that. Rather, the paper provides an overview of ways to think about and approach the scaling up of social enterprise innovations. Where possible, the paper also refers to specific tools that can be helpful in implementing the proposed approaches. 

Note that we talk about scaling up social enterprise innovations, not about social enterprises. This is because it is the innovations and how they are scaled up that matter. An innovation may be scaled up by the social enterprise where it originated, by handoff to a public agency for implementation at a larger scale, or by other private enterprises, small or large. 

This paper is structured in three parts: Part I presents a general approach to scaling up development interventions. This helps establish basic definitions and concepts. Part II considers approaches for the scaling up of social enterprise innovations. Part III provides a summary of the main conclusions and lessons from experience. A postscript draws out implications for external aid donors. Examples from actual practice are used to exemplify the approaches and are summarized in Annex boxes.

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As policy agendas for 2015 come into sharper focus, much of the national conversation is aimed at tackling challenges in biomedical innovation. The first two months of the year alone have seen landmark proposals from Congress and the Obama Administration, including the House’s 21^st Century Cures initiative, a bipartisan Senate working group focused on medical progress, President Obama’s Precision Medicine Initiative and a number of additional priorities being advanced by federal agencies and other stakeholders.

On March 13, the Engelberg Center for Health Care Reform hosted the State of Biomedical Innovation Conference to provide an overview of emerging policy efforts and priorities related to improving the biomedical innovation process. Senior leaders from government, academia, industry, and patient advocacy shared their thoughts on the challenges facing medical product development and promising approaches to overcome them. The discussion also examined the data and analyses that provide the basis for new policies and track their ultimate success.

 Join the conversation by following @BrookingsMed or #biomed

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Many proposals to accelerate and improve medical product innovation and regulation focus on reforming the product development and regulatory review processes that occur before drugs and devices get to market. While important, such proposals alone do not fully recognize the broader opportunities that exist to learn more about the safety and effectiveness of drugs and devices after approval. As drugs and devices begin to be used in larger and more diverse populations and in more personalized clinical combinations, evidence from real-world use during routine patient care is increasingly important for accelerating innovation and improving regulation.

First, further evidence development from medical product use in large populations can allow providers to better target and treat individuals, precisely matching the right drug or device to the right patients. As genomic sequencing and other diagnostic technologies continue to improve, postmarket evidence development is critical to assessing the full range of genomic subtypes, comorbidities, patient characteristics and preferences, and other factors that may significantly affect the safety and effectiveness of drugs and devices. This information is often not available or population sizes are inadequate to characterize such subgroup differences in premarket randomized controlled trials.

Second, improved processes for generating postmarket data on medical products are necessary for fully realizing the intended effect of premarket reforms that expedite regulatory approval. The absence of a reliable postmarket system to follow up on potential safety or effectiveness issues means that potential signals or concerns must instead be addressed through additional premarket studies or through one-off postmarket evaluations that are more costly, slower, and likely to be less definitive than would be possible through a better-established infrastructure. As a result, the absence of better systems for generating postmarket evidence creates a barrier to more extensive use of premarket reforms to promote innovation.

These issues can be addressed through initiatives that combine targeted premarket reforms with postmarket steps to enhance innovation and improve evidence on safety and effectiveness throughout the life cycle of a drug or device. The ability to routinely capture clinically relevant electronic health data within our health care ecosystem is improving, increasingly allowing electronic health records, payer claims data, patient-reported data, and other relevant data to be leveraged for further research and innovation in care. Recent legislative proposals released by the House of Representatives’ 21st Century Cures effort acknowledge and seek to build on this progress in order to improve medical product research, development, and use. The initial Cures discussion draft included provisions for better, more systematic reporting of and access to clinical trials data; for increased access to Medicare claims data for research; and for FDA to promulgate guidance on the sources, analysis, and potential use of so-called Real World Evidence. These are potentially useful proposals that could contribute valuable data and methods to advancing the development of better treatments.

What remains a gap in the Cures proposals, however, is a more systematic approach to improving the availability of postmarket evidence. Such a systematic approach is possible now. Biomedical researchers and health care plans and providers are doing more to collect and analyze clinical and outcomes data. Multiple independent efforts – including the U.S. Food and Drug Administration’s Sentinel Initiative for active postmarket drug safety surveillance, the Patient-Centered Outcomes Research Institute’s PCORnet for clinical effectiveness studies, the Medical Device Epidemiology Network (MDEpiNet) for developing better methods and medical device registries for medical device surveillance and a number of dedicated, product-specific outcomes registries – have demonstrated the potential for large-scale, systematic postmarket data collection. Building on these efforts could provide unprecedented evidence on how medical products perform in the real-world and on the course of underlying diseases that they are designed to treat, while still protecting patient privacy and confidentiality.

These and other postmarket data systems now hold the potential to contribute to public-private collaboration for improved population-based evidence on medical products on a wider scale. Action in the Cures initiative to unlock this potential will enable the legislation to achieve its intended effect of promoting quicker, more efficient development of effective, personalized treatments and cures.

What follows is a set of both short- and long-term proposals that would bolster the current systems for postmarket evidence development, create new mechanisms for generating postmarket data, and enable individual initiatives on evidence development to work together as part of a broad push toward a truly learning health care system.

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The biomedical innovation ecosystem continues to evolve and enhance the processes by which treatments are developed and delivered to patients. Given this changing biomedical innovation landscape, it is imperative that all stakeholders work to ensure that development programs, regulatory practices, and the policies that enable them are aligned on and achieving a common set of goals. This will require a thorough reexamination of our understanding of biomedical innovation – and the subsequent ways in which we seek to incentivize it – in order to more effectively bridge research and analysis of the process itself with the science and policy underpinning it.

Traditional research into the efficiency and effectiveness of drug development programs has tended to focus on the ‘inputs’ and process trends in product development, quantifying the innovation as discrete units. At the opposite end of the research spectrum are potential measures that could be categorized as “value” or “outcomes” metrics. Identifying the appropriate measures across this spectrum – from inputs and technological progress through outcomes and value – and how such metrics can be in conversation with each other to improve the innovation process will be the focus of this expert workshop. On October 14, the Center for Health Policy at Brookings, under a cooperative agreement with the U.S. Food and Drug Administration, convened a roundtable discussion that engaged key stakeholders from throughout the innovation ecosystem to explore the factors and characteristics that could improve our understanding of what constitutes modern “innovation” and how best to track its progress.

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Good afternoon Chair Ayotte, Ranking Member Cantwell, and Members of the Subcommittee. Thank you very much for the opportunity to testify today on the important topic of domestic unmanned aircraft systems (UAS).

I am a nonresident senior fellow in Governance Studies and the Center for Technology Innovation at the Brookings Institution. I am also a National Fellow at the Hoover Institution at Stanford, and a professor at UCLA, where I hold appointments in the Electrical Engineering Department and the Department of Public Policy. The views I am expressing here are my own, and do not necessarily represent those of the Brookings Institution, Stanford University or the University of California.

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Five years ago, my mother needed an orthopedic surgeon for a knee replacement. Unable to find any data, we went with an academic doctor that was recommended to us (she suffered surgical complications). Last month, we were again looking for an orthopedic surgeon- this time hoping that a steroid injection in her spine might allay the need for invasive back surgery. This time, thanks to a recent data dump from CMS, I was able to analyze some information about Medicare providers in her area and determine the most experienced doctor for the job.  Of 453 orthopedic surgeons in Maryland, only a handful had been paid by Medicare for the procedure more than 10 times.  The leading surgeon had done 263- as many as the next 10 combined. We figured he might be the best person to go to, and we were right- the procedure went like clockwork.

Had it been a month prior to the CMS data release, I wouldn’t have had the data at my fingertips. And I certainly wouldn’t have found the most experienced hand in less than 10 minutes.

It’s been a couple of month since the release of Medicare data by the Centers for Medicare and Medicaid (CMS) on the volume and cost of services billed by healthcare providers, and despite the whiff of scandal surrounding the highest paid providers (including the now-famous Florida ophthalmologist that received $21 million) the analyses so far have been somewhat unsurprising. This week, coinciding with the fifth Health DataPalooza, is a good time to take stock of the utility of this data, its limitations, and what the future may hold.

The millions of lines of data was exactly as advertised: charges and paid services under traditional Medicare “fee-for-service,” including the billing provider’s ID and the costs to Medicare. The initial headlines touting “Medicare Millionaires” relied on some basic arithmetic and some sorting.  And the cautions piled up: the data could reflect multiple providers billing under a single ID; payments are not the same as a provider’s actual take home income; it’s not complete information as it doesn’t contain information about other insurers, or even Medicare Advantage, and so on.

But perhaps most damning was how little insight the data seemed to provide on the quality or value of care provided, as opposed to volume of services.  As Lisa Rosenbaum wrote in the New Yorker, “So much of that good isn’t captured by these numbers. You don’t bill for talking to a patient about how he wants to die. There’s no code for providing reassurance rather than ordering a test.”

Where is the value in the data?

Data bear witness to the fundamental flaw of the payment system that generates them. The absence of information on quality, safety, appropriateness, or outcomes appears to have been a genuine revelation to many, but it is in fact exactly the type of output that we should expect from this volume-based system that we have built. This is not a critique of the data release. It is an indictment of our payment system.

Data is revealing important trends in how we pay doctors differently. Not all physician payments are created equal, and the data certainly shows the disparities across specialties, primary care, and others. For example, the average total annual Medicare payment to geriatricians was less than $100,000, while dermatologists and radiation oncologists (who presumably also see non-elderly patients) received on average $200,000 and $360,000 respectively. The important question will be why and should it continue?

Figure 1: Distribution of Total Medicare Pay by Provider Type, 2012 

Source: Author's calculations based on Medicare data released in April 2014

Data is revealing important indicators of cost and pricing – a major contributor to rising health care costs. Why is it that a brief visit with a geriatrician is worth $13; a 45-minute visit with a geriatrician sorting through medications, educating family members, and developing a quality of life plan with a terminal cancer patient is worth $79; and a dermatologist treating suspected skin cancer can earn upwards of $600 for a procedure that takes them minutes?

Data sheds light on practice patterns. The data is also revealing important variances in utilization of drugs and treatments. For example, a block apart on Park Avenue, two ophalmologists differ significantly in their use of treatments for macular degeneration. One uses expensive injectable drugs and gets paid over $10,000 per injection, while the other receives less than $500 for the lower-cost equivalent.

A CBS News report looked at spinal fusion surgeries—a procedure where there is almost no evidence demonstrating a net benefit to patients compared to other conservative therapies. They observed that “while the average spine surgeon performed them on 7 percent of patients they saw, some did so on 35 percent.”

At the extremes, outlier “practice pattern” begins to raise questions of potential improper billing or outright fraud and abuse. For example, simply looking at the frequency and volume of services provided to individual beneficiaries can identify concerning outliers. This laboratory company billed for 28,954 blood glucose reagent strips in 2012- for 88 patients. And yes, that’s highly unusual.

Figure 2: "Outlier" Medicare Billing for Blood Glucose Reagent Strips, 2012

Source: Author's calculations based on Medicare data released in April 2014

One clinical social worker billed for 1,697 separate days of service on 28 patients (the size of the bubble is proportional to the total amount of reimbursement by Medicare in 2012).

Figure 3: "Outlier" Medicare Billing for Days of Service, 2012

Source: Author's calculations based on Medicare data released in April 2014

The most extreme outlier, Dr. Gary Ordog, was named by NPR and ProPublica in their examination of providers who are outliers on their pattern of coding for the highest intensity office. Ordog had previously lost the right to bill California’s state Medicaid program, and yet continued to charge Medicare for over $500,000 in billing in 2012. It’s important to caution however, that even in these extreme outliers, statistics alone cannot provide definitive evidence of abuse. There is a need for formal investigation.

Medicare and law enforcement officials will need to create new processes for dealing with a potential flood of outlier reports from amateur sleuths like me.

What's Next for Medicare Data?

Data can be trended. Updates of data releases can begin to show us not just snapshots, but moving pictures of our healthcare system as it undergoes rapid changes. The New York Times reported on the increase in charges for certain frequent causes of hospitalization between 2011 and 2012. It will be interesting to see whether the data release itself, and the Steven Brill landmark Time article on hospital charges, have an impact on reversing these trends.  

Data can be “mashed up”.  The value of open data is hugely greater than the sum of its parts. As more and more data becomes available, the files can be cross-linked and “mashed up” to be able to answer questions no one database could have.  ProPublica linked together cobbled together data on state actions and sanctions on physicians with the Medicare data release to ask why these physicians are still being paid by Medicare.

What does the future hold? Correlations with drug prescribing data, meaningful use, and referral patterns are possible today, Sunshine Act disclosures and quality reporting, and much more is soon to come.

As we get comfortable with the data, analysts can move past the basics of arithmetic and sorting, we have an opportunity to make more ‘meaningful use’ of this data. We can begin to identify practice patterns, overuse, variations in geography or demographics, and potentially even fraud and abuse. As more and more data becomes available, the files can be cross-linked and “mashed up” to be able to answer questions no one database could have addressed. What will determine the value of the Medicare data release will be the creativity of those data scientists, epidemiologists, and health services researchers (amateur as well as professional) who can ask the challenging questions that must be answered.

      

Event Information

2015 is a crucial year for the international community. For the first time, all nations will converge upon a new set of Sustainable Development Goals applicable to advanced countries, emerging market economies, and developing countries, with the experience of implementing the Millennium Development Goals to build upon. Implementation is the critical component.

The Brookings Global Economy and Development program hosted a day-long private conference at the Brookings Institution in Washington, DC on Monday, March 30 to focus on “Governance innovations for implementing the post-2015 Sustainable Development Agenda.”

Hosted in collaboration with the Ministry of Foreign Affairs of Finland, this high-level conference drew on experiences from the North-South Helsinki Process on Globalization and Development carried out over the past 15 years. The Helsinki Process presaged many of the prerequisites for achieving accelerated progress by linking goal-setting to goal-implementation and by utilizing multistakeholder processes to mobilize society and financing for social and environmental goals to complement sound economic and financial policies. 

Download the conference agenda »
Download the related report »
Download the list of registrants »
Download the conference statement »

Brookings President Strobe Talbott shakes hands with Finland’s Minister of Foreign Affairs Erkki Tuomioja after welcoming participants to the conference.

Former President of Finland Tarja Halonen shares insights in the conference’s opening panel.

Over 75 conference participants from governments, multilateral institutions, civil society, the private sector, and think tanks participated in a number of roundtable discussions throughout the day.

President Halonen and Minister Tuomioja share lessons from the Helsinki process as conference participants consider paths forward for implementing the post-2015 Sustainable Development Goals.

Event Materials

• 330 PostReportFinal
• Conference Agenda_FINAL
• March 30 List of Registrants
• Conference Statement Brookings Post2015 Implementation

       

2015 is a pivotal year. Three major workstreams among all the world’s nations are going forward this year under the auspices of the United Nations to develop goals, financing, and frameworks for the “post-2015 sustainable development agenda.” First, after two years of wide-ranging consultation, the U.N. General Assembly in New York in September will endorse a new set of global goals for 2030 to follow on from the Millennium Development Goals (MDGs) that culminate this year. Second, to support this effort, a financing for development (FFD) conference took place in July in Addis Ababa, Ethiopia, to identify innovative ways of mobilizing private and public resources for the massive investments necessary to achieve the new goals. And third, in Paris in December the final negotiating session will complete work on a global climate change framework. 

These three landmark summits will, with luck, provide the broad strategic vision, the specific goals, and the financing modalities for addressing the full range of systemic threats. Most of all, these three summit meetings will mobilize the relevant stakeholders and actors crucial for implementing the post-2015 agenda—governments, international organizations, business, finance, civil society, and parliaments—into a concerted effort to achieve transformational outcomes. Achieving systemic sustainability is a comprehensive, inclusive effort requiring all actors and all countries to be engaged.

These three processes represent a potential historic turning point from “business-as-usual” practices and trends and to making the systemic transformations that are required to avoid transgressing planetary boundaries and critical tipping points. Missing from the global discourse so far is a realistic assessment of the political decisions and institutional innovations that would be required to implement the post-2015 sustainable development agenda (P2015).

For 2015, it is necessary is to make sure that by the end of year the three workstreams have been welded together as a singular vision for global systemic transformation involving all countries, all domestic actors, and all international institutions. The worst outcome would be that the new Sustainable Development Goals (SDGs) for 2030 are seen as simply an extension of the 2015 MDGs—as only development goals exclusively involving developing countries. This outcome would abort the broader purposes of the P2015 agenda to achieve systemic sustainability and to involve all nations and reduce it to a development agenda for the developing world that by itself would be insufficient to make the transformations required.

Systemic risks of financial instability, insufficient job-creating economic growth, increasing inequality, inadequate access to education, health, water and sanitation, and electricity, “breaking points” in planetary limits, and the stubborn prevalence of poverty along with widespread loss of confidence of people in leaders and institutions now require urgent attention and together signal the need for systemic transformation.

As a result, several significant structural changes in institution arrangements and governance are needed as prerequisites for systemic transformation. These entail (i) political decisions by country leaders and parliaments to ensure societal engagement, (ii) institutional innovations in national government processes to coordinate implementation, (iii) strengthening the existing global system of international institutions to include all actors, (iv) the creation of an international monitoring mechanism to oversee systemic sustainability trajectories, and (v) realize the benefits that would accrue to the entire P2015 agenda by the engagement of the systemically important countries through fuller utilization of  G20 leaders summits and finance ministers meetings as enhanced global steering mechanisms toward sustainable development.   Each of these changes builds on and depends on each other.

I. Each nation makes a domestic commitment to a new trajectory toward 2030

For global goal-setting to be implemented, it is essential that each nation go beyond a formal agreement at the international level to then embark on a national process of deliberation, debate, and decision-making that adapts the global goals to the domestic institutional and cultural context and commits the nation to them as a long-term trajectory around which to organize its own systemic transformation efforts. Such a process would be an explicitly political process involving national leaders, parliaments or rule-making bodies, societal leaders, business executives, and experts to increase public awareness and to guide the public conversation toward an intrinsically national decision which prioritizes the global goals in ways which fit domestic concerns and circumstances. This political process would avoid the “one-size-fits-all” approach and internalize and legitimate each national sustainability trajectory.

So far, despite widespread consultation on the SDGs, very little attention has been focused on the follow-up to a formal international agreement on them at the U.N. General Assembly in September 2015. The first step in implementation of the SDGs and the P2015 agenda more broadly is to generate a national commitment to them through a process in which relevant domestic actors modify, adapt, and adopt a national trajectory the embodies the hopes, concerns and priorities of the people of each country. Without this step, it is unlikely that national systemic sustainability trajectories will diverge significantly enough from business-as-usual trends to make a difference. More attention needs to now be given to this crucial first step.  And explicit mention of the need for it should appear in the UNGA decisions in New York in September.

II. A national government institutional innovation for systemic transformation

The key feature of systemic risks is that each risk generates spillover effects that go beyond the confines of the risk itself into other domains. This means that to manage any systemic risk requires broad, inter-disciplinary, multi-sectoral approaches. Most governments have ministries or departments that manage specific sectoral programs in agriculture, industry, energy, health, education, environment, and the like when most challenges now are inter-sectoral and hence inter-ministerial. Furthermore, spillover linkages create opportunities in which integrated approaches to problems can capture intrinsic synergies that generate higher-yield outcomes if sectoral strategies are simultaneous and coordinated.

The consequence of spillovers and synergies for national governments is that “whole-of-government” coordinating committees are a necessary institutional innovation to manage effective strategies for systemic transformation. South Korea has used inter-ministerial cabinet level committees that include private business and financial executives as a means of addressing significant interconnected issues or problems requiring multi-sectoral approaches. The Korea Presidential Committee on Green Growth, which contained more than 20 ministers and agency heads with at least as many private sector leaders, proved to be an extremely effective means of implementing South Korea’s commitment to green growth.

III.  A single global system of international institutions

The need for a single mechanism for coordinating the global system of international institutions to implement the P2015 agenda of systemic transformation is clear. However, there are a number of other larger reasons why the forging of such a mechanism is crucial now.

The Brettons Woods era is over. It was over even before the initiative by China to establish the Asia Infrastructure Investment Bank (AIIB) in Beijing and the New Development Bank (NDB) in Shanghai. It was over because of the proliferation in recent years of private and official agencies and actors in development cooperation and because of the massive growth in capital flows that not only dwarf official development assistance (concessional foreign aid) but also IMF resources in the global financial system. New donors are not just governments but charities, foundations, NGOs, celebrities, and wealthy individuals. New private sources of financing have mushroomed with new forms of sourcing and new technologies. The dominance of the IMF and the World Bank has declined because of these massive changes in the context.

The emergence of China and other emerging market economies requires acknowledgement as a fact of life, not as a marginal change. China in particular deserves to be received into the world community as a constructive participant and have its institutions be part of the global system of international institutions, not apart from it. Indeed, China’s Premier, Li Keqiang, stated at the World Economic Forum in early 2015 that “the world order established after World War II must be maintained, not overturned.”

The economic, social and environmental imperatives of this moment are that the world’s people and the P2015 agenda require that all international institutions of consequence be part of a single coordinated effort over the next 15 years to implement the post-2015 agenda for sustainable development. The geopolitical imperatives of this moment also require that China and China’s new institutions be thoroughly involved as full participants and leaders in the post-2015 era. If nothing else, the scale of global investment and effort to build and rebuild infrastructure requires it.

It is also the case that the post-2015 era will require major replenishments in the World Bank and existing regional development banks, and significantly stronger coordination among them to address global infrastructure investment needs in which the AIIB and the NDB must now be fully involved. The American public and the U.S. Congress need to fully grasp the crucial importance for the United States, of the IMF quota increase and governance reform.  These have been agreed to by most governments but their implementation is stalled in the U.S. Congress. To preserve the IMF’s role in the global financial system and the role of the U.S. in the international community, the IMF quota increase and IMF governance reform must be passed and put into practice. Congressional action becomes all the more necessary as the effort is made to reshape the global system of international institutions to accommodate new powers and new institutions within a single system rather than stumble into a fragmented, fractured, and fractious global order where differences prevail over common interests.

The IMF cannot carry out its significant responsibility for global financial stability without more resources. Other countries cannot add to IMF resources proportionately without U.S. participation in the IMF quota increase.   Without the US contribution, IMF members will have to fund the IMF outside the regular IMF quota system, which means de-facto going around the United States and reducing dramatically the influence of the U.S. in the leadership of the IMF. This is a self-inflicted wound on the U.S., which will damage U.S. credibility, weaken the IMF, and increase the risk of global financial instability. By blocking the IMF governance reforms in the IMF agreed to by the G-20 in 2010, the U.S. is single-handedly blocking the implementation of the enlargement of voting shares commensurate with increased emerging market economic weights.  This failure to act is now widely acknowledged by American thought leaders to be encouraging divergence rather than convergence in the global system of institutions, damaging U.S. interests.

IV. Toward a single monitoring mechanism for the global system of international institutions

The P2015 agenda requires a big push toward institutionalizing a single mechanism for the coordination of the global system of international institutions.  The international coordination arrangement today, is the Global Partnership for Effective Development Cooperation created at the Busan High-Level Forum on Aid Effectiveness in 2011.  This arrangement, which recognizes the increasingly complex context and the heightened tensions between emerging donor countries and traditional western donors, created a loose network of country platforms, regional arrangements, building blocks and forums to pluralize the architecture to reflect the increasingly complex set of agents and actors. This was an artfully arranged compromise, responding to the contemporary force field four years ago.

Now is a different moment. The issues facing the world are both systemic and urgent; they are not confined to the development of developing countries, and still less to foreign aid. Geopolitical tensions are, if anything, higher now than then.  But they also create greater incentives to find areas of cooperation and consensus among major powers who have fundamentally different perspectives on other issues. Maximizing the sweet spots where agreement and common interest can prevail is now of geopolitical importance.  Gaining agreement on institutional innovations to guide the global system of international institutions in the P2015 era would be vital for effective outcomes but also importantly ease geopolitical tensions.

Measurement matters; monitoring and evaluation is a strategic necessity to implementing any agenda, and still more so, an agenda for systemic transformation.  As a result, the monitoring and evaluation system that accompanies the P2015 SDGs will be crucial to guiding the implementation of them.  The UN, the OECD, the World Bank, and the IMF all have participated in joint data gathering efforts under the IDGs  in the 1990s and the MDGs in the 2000s.   Each of these institutions has a crucial role to play, but they need to be brought together now under one umbrella to orchestrate their contributions to a comprehensive global data system and to help the G20 finance ministers coordinate their functional programs.   

The OECD has established a strong reputation in recent years for standard setting in a variety of dimensions of the global agenda.  Given the strong role of the OECD in relation to the G20 and its broad outreach to “Key Partners” among the emerging market economies, the OECD could be expected to take a strong role in global benchmarking and monitoring and evaluation of the P2015 Agenda.  The accession of China to the OECD Development Centre, which now has over fifty member countries, and the presence and public speech of Chinese Premier Li Keqiang at the OECD on July 1^st, bolsters the outreach of the OECD and its global profile.

But national reporting is the centerpiece and the critical dimension of monitoring and evaluation.  To guide the national reporting systems and evaluate their results, a  new institutional arrangement is needed that is based on national leaders with responsibility for implementation of the sustainable development agendas from each country and is undertaken within the parameters of the global SDGs and the P2015 benchmarks.

V.   Strengthening global governance and G20 roles

G-20 leaders could make a significant contribution to providing the impetus toward advancing systemic sustainability by creating a G-20 Global Sustainable Development Council charged with pulling together the national statistical indicators and implementing benchmarks on the SDGs in G-20 countries.  The G-20 Global Sustainable Development Council (G-20 GSDC) would consist of the heads of the presidential committees on sustainable development charged with coordinating P2015 implementation in G-20 countries.  Representing systemically important countries, they would also be charged with assessing the degree to which national policies and domestic efforts by G20 countries generate positive or negative spillover effects for the rest of the world.  This G-20 GSDC would also contribute to the setting of standards for the global monitoring effort, orchestrated perhaps by the OECD, drawing on national data bases from all countries using the capacities of the international institutions to generate understanding of global progress toward systemic sustainability. 

The UN is not in a position to coordinate the global system of international institutions in their functional roles in global sustainable development efforts.  The G-20 itself could take steps through the meetings of G-20 Finance Ministers to guide the global system of international institutions in the implementation phase of the P2015 agenda to begin in 2016. The G-20 already has a track record in coordinating international institutions in the response to the global financial crisis in 2008 and its aftermath. The G-20 created the Financial Stability Board (FSB), enlarged the resources for the IMF, agreed to reform the IMF’s governance structure, orchestrated relations between the IMF and the FSB, brought the OECD into the mainstream of G-20 responsibilities and has bridged relations with the United Nations by bringing in finance ministers to the financing for development conference in Addis under Turkey’s G-20 leadership. 

There is a clear need to coordinate the financing efforts of the IMF, with the World Bank and the other regional multilateral development banks (RMDBs), with the AIIB and the BRICS NDB, and with other public and private sector funding sources, and to assess the global institutional effort as whole in relation to the P2015 SDG trajectories.  The G-20 Finance Ministers grouping would seem to be uniquely positioned to be an effective and credible means of coordinating these otherwise disparate institutional efforts.  The ECOSOC Development Cooperation Forum and the Busuan Global Partnership provide open inclusive space for knowledge sharing and consultation but need to be supplemented by smaller bodies capable of making decisions and providing strategic direction.

Following the agreements reached in the three U.N. workstreams for 2015, the China G-20 could urge the creation of a formal institutionalized global monitoring and coordinating mechanism at the China G-20 Summit in September 2016. By having the G-20 create a G-20 Global Sustainable Development Council (G-20 GSDC), it could build on the national commitments to SDG trajectories to be made next year by U.N. members countries and on the newly formed national coordinating committees established by governments to implement the P2015 Agenda, giving the G-20 GSDC functional effectiveness, clout and credibility.   Whereas there is a clear need to compensate for the sized-biased representation of the G20 with still more intensive G-20 outreach and inclusion, including perhaps eventually considering shifting to a constituency based membership, for now the need in this pivotal year is to use the momentum to make political decisions and institutional innovations which will crystallize the P2015 strategic vision toward systemic sustainability into mechanisms and means of implementation.

By moving forward on these recommendations, the G-20 Leaders Summits would be strengthened by involving G-20 leaders in the people-centered P2015 Agenda, going beyond finance to issues closer to peoples’ homes and hearts. Systemically important countries would be seen as leading on systemically important issues.  The G-20 Finance Ministers would be seen as playing an appropriate role by serving as the mobilizing and coordinating mechanism for the global system of international institutions for the P2015 Agenda.  And the G-20 GSDC would become the effective focal point for assessing systemic sustainability not only within G20 countries but also in terms of their positive and negative spillover effects on systemic sustainability paths of other countries, contributing to standard setting and benchmarking for global monitoring and evaluation.    These global governance innovations could re-energize the G20 and provide the international community with the leadership, the coordination and the monitoring capabilities that it needs to implement the P2015 Agenda. 

Conclusion

As the MDGs culminate this year, as the three U.N. workstreams on SDGs, FFD, and UNFCC are completed, the world needs to think ahead to the implementation phase of the P2015 sustainable development agenda. Given the scale and scope of the P2015 agenda, these five governance innovations need to be focused on now so they can be put in place in 2016.

These will ensure (i) that national political commitments and engagement by all countries are made by designing, adopting, and implementing their own sustainable development trajectories and action plans; (ii) that national presidential committees are established, composed of key ministers and private sector leaders to coordinate each country’s comprehensive integrated sustainability strategy; (iii) that all governments and international institutions are accepted by and participate in a single global system of international institutions;   (iv) that a G-20 monitoring mechanism be created by the China G-20 in September 2016 that is comprised of the super-minister officials heading the national presidential coordinating committees implementing the P2015 agenda domestically in G-20 countries, as a first step;  and (v) that the G-20 Summit leaders in Antalya in November 2015 and in China in September 2016 make clear their own commitment to the P2015 agenda and their responsibility for its adaption, adoption and implementation internally in their countries but also for assessing G-20 spillover impacts on the rest of the world, as well as for deploying their G-20 finance ministers to mobilize and coordinate the global system of international institutions toward achieving the P2015 agenda.

Without these five structural changes, it will be more likely that most countries and actors will follow current trends rather than ratchet up to the transformational trajectories necessary to achieve systemic sustainability nationally and globally by 2030.

References

Ye Yu, Xue Lei and Zha Xiaogag, “The Role of Developing Countries in Global Economic Governance---With a Special Analysis on China’s Role”, UNDP, Second High-level Policy Forum on Global Governance: Scoping Papers, (Beijing: UNDP, October 2014).

Zhang Haibing, “A Critique of the G-20’s Role in UN’s post-2015 Development Agenda”, in Catrina Schlager and Chen Dongxiao (eds), China and the G-20: The Interplay between an Emerging Power and an Emerging Institution, (Shanghai: Shanghai Institutes for International Studies [SIIS] and the Friedrich Ebert Stiftung [FES], 2015) 290-208.

Global Review, (Shanghai:  SIIS, 2015,) 97-105.

Colin I. Bradford, “Global Economic Governance and the Role International Institutions”, UNDP, Second High-level Policy Forum on Global Governance: Scoping Papers, (Beijing: UNDP, October 2014).

Colin I. Bradford, “Action implications of focusing now on implementation of the   post-2015 agenda.”, (Washington: The Brookings Institution, Global Economy and Development paper, September 2015).

Colin I. Bradford, “Systemic Sustainability as the Strategic Imperative for the Future”, (Washington: The Bookings Institution, Global Economy and Development paper; September 2015). 

Wonhyuk Lim and Richard Carey, “Connecting Up Platforms and Processes for Global Development to 2015 and Beyond:  What can the G-20 do to improve coordination and deliver development impact?”, (Paris: OECD  Paper, February 2013).

Xiaoyun Li and Richard Carey, “The BRICS and the International Development System: Challenge and Convergence”, (Sussex: Institute for Development Studies, Evidence Report No. 58, March 2014).

Xu Jiajun and Richard Carey, “China’s Development Finance: Ambition, Impact and Transparency,” (Sussex :  Institute for Development Studies, IDS Policy Brief, 2015).

Soogil Young, “Domestic Actions for Implementing Integrated Comprehensive Strategies:  Lessons from Korea’s Experience with Its Green Growth Strategy”, Washington: Paper for the Brookings conference on “Governance Innovations to Implement the Post-2015 Agenda for Sustainable Development”, March 30, 2015).

       

       

Announcements of new federal regulations on the use of program-related investments (PRIs) and the launch of a groundbreaking fund in Chicago are the latest signals that impact investing, once a marginal philanthropic and policy tool, is moving into the mainstream. They are also illustrative of two important and complementary paths to institutional change: fast-moving, collaborative local leadership creating innovative new instruments to meet funding demands; federal regulators updating policy to pave the way for change at scale.

Impact investing, referring to “investment strategies that generate financial returns while intentionally improving social and environmental conditions,” provides an important tier of higher-risk capital to fund socially beneficial projects with revenue-generating potential: affordable housing, early childhood and workforce development programs, and social enterprises. It is estimated that there are over $60 billion of impact investments globally and interest is growing—an annual JP Morgan study of impact investors from 2015 reports that the number of impact investing deals increased 13 percent between 2013 and 2014 following a 20 percent increase in the previous year.

Traditionally, foundations have split their impact investments into two pots, one for mission-related investments, designed to generate market-rate returns and maintain and grow the value of the endowment, and the other for program-related investments. PRIs can include loans, guarantees, or equity investments that advance a charitable purpose without expectation of market returns. PRIs are an attractive use of a foundation’s endowment as they allow foundations to recycle their limited grant funds and they count towards a foundation’s charitable distribution requirement of 5 percent of assets. However they have been underutilized to date due to perceived hurdles around their use–in fact among the thousands of foundations in the United States, currently only a few hundred make PRIs.

But this is changing, spurred on by both entrepreneurial local action and federal leadership. On April 21, the White House announced that the U.S. Department of the Treasury and Internal Revenue Service had finalized regulations that are expected to make it easier for private foundations to put their assets to work in innovative ways. While there is still room for improvement, by clarifying rules and signaling mainstream acceptance of impact investing practices these changes should lower the barriers to entry for some institutional investors.

This federal leadership is welcome, but is not by itself enough to meet the growing demand for capital investment in the civic sector. Local innovation, spurred by new philanthropic collaborations, can be transformative. On April 25 in Chicago, the Chicago Community Trust, the Calvert Foundation, and the John D. and Catherine T. MacArthur Foundation launched Benefit Chicago, a $100 million impact investment fund that aims to catalyze a new market by making it easier for individuals and institutions to put their dollars to work locally and help meet the estimated $100-400 million capital needs of the civic sector over the next five years.

A Next Street report found that the potential supply of patient capital from foundations and investors in the Chicago region was more than enough to meet the demand – if there were ways to more easily connect the two. Benefit Chicago addresses this market gap by making it possible for individuals to invest directly through a brokerage or a donor-advised fund and for the many foundations without dedicated impact investing programs to put their endowments to work at scale. All of the transactional details of deal flow, underwriting, and evaluation of results are handled by the intermediary, which should lead to greater efficiency and a significant increase in the size of the impact investing market in Chicago.

In the last few years, a new form of impact investing has made measurement of social return to investments even more concrete. Social impact bonds (SIBs), also known as pay for success (PFS) financing, are a way for private investors (including foundations) to provide capital to support social services with the promise of a return on their investment from a government agency if some agreed-upon social outcomes are achieved. These PFS transactions range from funding to support high-quality early childhood education programs in Chicago to reduction in chronic individual homelessness in the state of Massachusetts. Both the IRS and the Chicago announcements are bound to contribute to the growth of the impact bond market which to date represents a small segment of the impact investing market.

These examples illustrate a rare and wonderful convergence of leadership at the federal and local levels around an idea that makes sense. Beyond simply broadening the number of ways that foundations can deploy funds, growing the pool of impact investments can have a powerful market-making effect. Impact investments unlock other tiers of capital, reducing risk for private investors and making possible new types of deals with longer time horizons and lower expected market return.

In the near future, these federal and local moves together might radically change the philanthropic landscape. If every major city had a fund like Benefit Chicago, and all local investors had a simple on-ramp to impact investing, the pool of capital to help local organizations meet local needs could grow exponentially. This in turn could considerably improve funding for programs—like access to quality social services and affordable housing—that show impact over the long term.

Impact investing can be a bright spot in an otherwise somber fiscal environment if localities keep innovating and higher levels of government evolve to support, incentivize, and smooth its growth. These announcements from Washington and Chicago are examples of the multilevel leadership and creative institutional change we need to ensure that we tap every source of philanthropic capital, to feel some abundance in an era where scarcity is the dominant narrative.

Editor's Note: Alaina Harkness is a fellow at Brookings while on leave from the John D. and Catherine T. MacArthur Foundation, which is a donor to the Brookings Institution. The findings, interpretations and conclusions posted in this piece are solely those of the authors and not determined by any donation.

       

This week the Dutch Ministry of Security and Justice announced that it will pay for the successful achievement of employment and prison recidivism outcomes among short-term adult prisoners as part of the new “Work After Prison” social impact bond (SIB)—the fifth such transaction in the Netherlands and one of about 60 in the world. In a SIB—which is a mix of results-based financing, a public-private partnership, and impact investing—private investors provide upfront capital for preventive social services, and in turn an outcome funder (usually government) pays them back plus a return contingent upon the achievement of agreed-upon outcomes. Where consistent social outcomes achievement poses challenges, this model has considerable potential to create a path forward.

What is the social challenge?

Each year in the Netherlands, around 40,000 adults are incarcerated and about 30,000 are released. What’s troubling is that the rate of recidivism two years after release from prison is nearly 50 percent. And the costs of successful reintegration and reduced recidivism rates are high and include enormous amounts of social benefits paid out to previously incarcerated individuals. Multi-pronged approaches are often necessary including programs that address housing needs, employment, mental health and substance abuse issues, and debt settlement. Addressing all of these challenges simultaneously is difficult and often the right incentives are not in place for the outcomes of importance to be at the forefront of decision-making. But SIBs may offer a promising way to meet these hurdles.

Who are the players in the SIB?

In a typical SIB, the players at the table include an outcome funder (government), investors (usually impact investors including foundations), a service provider or providers (usually a non-governmental entity but it can also be public), and the beneficiary population. In addition, there can be external evaluators who assess whether or not the agreed-upon outcome has been achieved; and, in many SIBs, there is also an intermediary party that brings the stakeholders to the table, structures the deal, manage the deal, or conducts performance management for the service provider.

The Dutch SIB for prison recidivism has a total of 10 players not including the beneficiary population. Most interestingly, this deal differs from all four previous SIBs in the Netherlands in that the outcome funder, the Ministry of Security and Justice, is at the national level rather than subnational level—the previous outcome funders were all municipal governments. Notably, less than half of the SIBs in the world have a national-level outcome funder. The Dutch bank ABN Amro, the Start Foundation, and Oranje Fonds are equal investors (and have all invested in previous Dutch SIBs). Three organizations that are part of the Work-Wise Direct Consortium—Exodus Foundation, Restart, and Foundation 180—will provide services to the population in need. Society Impact, an organization supporting social entrepreneurship and innovative financing in the Netherlands, acted as a matchmaker in the transaction by helping to bring all parties to the table. An evaluation arm of the Ministry of Security and Justice and a research entity, Panteia will evaluate whether or not outcomes are achieved.

The beneficiary population includes 150 adults who have been in prison between three and 12 months. There is no targeting based on type of crime, age, or gender and consent must be provided by the participant and the municipality.

What’s at stake?

There are two outcome metrics established in this SIB. In a period of two and half years, the outcome funder will repay investors the principal investment of 1.2 million euros plus a maximum return of 10 percent of the investment (but expected return is around 5 percent) contingent upon: 1) a 25 to 30 percent decrease in the social benefits issued to the previously incarcerated participants (which is estimated to require a 882-month increase in labor force participation by the entire group); and 2) a 10 percent reduction in recidivism among the participants.

Who will benefit?

The beneficiary population

In theory, with all eyes on the target (outcomes), beneficiary populations have a greater chance of success with this results-based financing mechanism compared to traditional input-based financing contracts. The potential for greater collaboration among stakeholders, performance management, and adaptive learning should all bode well for the delivery of the set goals. This could allow for improvements even beyond the targets within the impact bond structure such as improved family life, higher earnings, and increased civic participation.

The outcome funder (and taxpayers)

For the Ministry of Security and Justice, the SIB provides an opportunity to shift to private investors the implementation and financial risk of funding social service programs. If outcomes are achieved, then the ministry repays the investors an amount that represents the value they place on outcome achievement, and if outcomes are not achieved, then they do not pay. What’s more, the ministry could benefit from reduced costs as a result of shifting from remedial to preventive services. Additional cost savings, in particular the reduction in social welfare benefits, and other inherent benefits will be accrued to other government entities as well as society as a whole.

The service providers

There can be multiple benefits for services providers. First, the availability of upfront capital allows them to do their job better. Second, the longer-term (multi-year) contract reduces time spent on grant proposals and allows for more steady funding flows. Third, the SIB can provide an opportunity to strengthen the providers’ systems of data collection. Fourth, it allows the service providers to conduct a rigorous evaluation of their program. Further, SIBs can allow for flexibility and learning-by-doing in the delivery of the social services.

The investors

The three investors in this SIB have an opportunity to earn a financial return of maximum 10 percent if outcomes are successfully achieved. In addition, they benefit from having contributed to the improvement of the lives of the target population and their families. Furthermore, they could generate an impact that goes way beyond the SIB itself. They have the potential to create larger systemic change in the provision of social services by shifting government’s focus away from how services are delivered to which outcomes they want to achieve and by helping to build systems of monitoring and evaluation that allow for systematic assessment of those outcomes.

A way forward

Six years after the implementation of the first SIB for prison recidivism in the United Kingdom, this creative idea has spread to at least 12 other countries with the aim of tackling some of the world’s most intractable social problems. The Netherlands, known globally as a leader on many social and environmental issues, is taking a leading role in the adoption of this mechanism. Moving forward, the rest of the world will be watching to see what lessons can be gleaned from these early experiments as the burden of tough societal issues and potential solutions become increasingly global in nature.

       

       

       

       

Once upon a time, innovation was an isolationist sport. In America’s innovative economy 20 years ago, a worker drove to a nondescript office campus along a suburban corridor, worked in isolation, and kept ideas secret.

Today, by contrast and partly a result of the Great Recession, proximity is everything. Talented people want to work and live in urban places that are walkable, bike-able, connected by transit, and hyper-caffeinated. Major companies across multiple sectors are practicing “open innovation” and want to be close to other firms, research labs, and universities. Entrepreneurs want to start their companies in collaborative spaces, where they can share ideas and have efficient access to everything from legal advice to sophisticated lab equipment.

These disruptive forces are coming to ground in small, primarily urban enclaves—what we and others are calling “innovation districts.” By our definition, innovation districts cluster and connect leading-edge institutions with startups and spin-off companies, business incubators, and accelerators in the relentless pursuit of cutting-edge discoveries for the market. Compact, transit-accessible, and highly networked, they grow talent, foster open collaboration, and offer mixed-used housing, office, retail, and 21st century urban amenities. In many respects, the rise of innovation districts embodies the very essence of cities: an aggregation of talented, driven people assembled in close quarters, who exchange ideas and knowledge. It’s in the vein of what urban historian Sir Peter Hall calls “a dynamic process of innovation, imitation and improvement.”

Globally, Montreal, Seoul, Singapore, Medellin, Barcelona, Cambridge, and Berlin offer just a few examples of evolving innovation districts. In the US, the most iconic innovation districts can be found in the downtowns and midtowns of cities like Atlanta, Cambridge, Philadelphia, Pittsburgh, San Diego, and St. Louis, where advanced research universities, medical complexes, research institutions, and clusters of tech and creative firms are sparking business expansion, as well as residential and commercial growth. Even a cursory visit to Kendall Square in Cambridge, University City in Philadelphia, or midtown Atlanta shows the explosion of growth and mixed development occurring around institutions like MIT, the University of Pennsylvania, and Georgia Tech.

Other innovation districts can be found in Boston, Brooklyn, San Francisco, and Seattle, where former industrial and warehouse areas are charting a new innovative path, powered by their enviable location along transit lines, their proximity to downtowns and waterfronts, and their recent addition of advanced research institutions (reflected by Carnegie Mellon University’s decision to place its Integrative Media Program at the Brooklyn Navy Yard).

Perhaps the greatest validation of this shift is found in the efforts of traditional exurban science parks (like Research Triangle Park in Raleigh-Durham) to urbanize, in order to keep pace with the preferences of their workers for walkable communities and the preference of their firms to be near other firms and collaborative opportunities.

Innovation districts are already attracting an eclectic mix of firms in a diverse group of sectors, including life sciences, clean energy, design, and tech. We even see a return of small-scale and customized manufacturing, made possible by 3D printing, robotics, and other advanced techniques.

Unlike efforts to grow the “consumer city” via sports stadia, luxury housing, and high-end retail, innovation districts are intent on growing the firms, networks, and sectors that drive real, broad-based prosperity.

At a time of increasing concerns over inequality and resilience, innovation districts can spur productive, inclusive, and sustainable growth. If properly structured and scaled, they can provide a strong foundation for the commercialization of ideas, the expansion of firms, and the creation of jobs. They also offer the tantalizing prospect of expanding employment and educational opportunities for disadvantaged populations—many innovation districts are close to low- and moderate-income neighborhoods—as well as sparking more sustainable development patterns, given their embrace of transit, historic buildings, traditional street grids, and existing infrastructure.

Innovation districts represent one of the most positive trends that have emerged in the aftermath of the Great Recession. Smart cities, innovative companies, advanced universities, and financial institutions would be wise to embrace them.

This piece originally appeared on Quartz.

      

For years, corporate campuses like Silicon Valley were known for innovation. Located in suburban corridors that were only accessible by car, these places put little emphasis on creating communities where people work, live and go out.

But now, as the economy emerges from the recession, a shift is occurring where innovation is taking place. Districts of innovation can be found in urban centres as disparate as Montreal, Seoul, Singapore, Medellin, Barcelona, and London. They are popping up in the downtowns and midtowns of cities like Atlanta, Cambridge, Philadelphia, and St. Louis.

These are places where advanced research universities, medical complexes, and clusters of tech and creative firms are attracting businesses and residents.

Other innovation districts can be found in Boston, Brooklyn, San Francisco, and Seattle, where older industrial areas are being re-imagined and remade, leveraging their enviable location near waterfronts and city centres and along transit lines. Innovative companies and talented workers are flocking to these areas in abundance.

Even traditional science parks like Research Triangle Park in Raleigh-Durham are scrambling to urbanise to keep pace with their workers' preference for walkable communities and their companies' desire to be near other firms.

In these districts, leading anchor institutions and start-ups are clustering and connecting with one another. They are coming together with spin-off companies, incubators, and accelerators in the relentless pursuit of new discoveries for the market.

These areas are small and accessible, growing talent, fostering open collaboration, and offering housing and office space as well as modern urban amenities. They are both competitive places and "cool" spaces.

The growth of innovation districts is being driven by private and civic actors like universities, philanthropies, business associations and business improvement districts. Yet local governments play an important role in accelerating the growth of districts and maximising their potential . Three roles stand out:

1) Mayors are leading efforts to designate districts

Barcelona's former mayor Joan Clos set his eyes on transforming his city into a "city of knowledge". Through extensive, focused public planning and investment, Clos designed an innovation district from the debris of a 494-acre industrial area, which was scarred and separated from the rest of the city by railroad tracks. His vision included burying these tracks, increasing access via a new public tram, designing walkable streets, and creating new public spaces and housing.

Today, the area is a 21st-century urban community with 4,500 firms, thousands of new housing units, and clusters of universities, technology centres, and incubators.

Across the Atlantic in Boston, former mayor Tom Menino declared the South Boston waterfront an innovation district in 2010. Menino persuaded innovators like MassChallenge to move to the district and exacted important concessions from developers (including land for innovation-oriented retail, shared labs and other spaces, and micro-housing) to help realise the district's vision.

2) Changing land-use laws to build spaces with a mix of facilities

Barcelona and Research Triangle Park, for example, developed bold master plans encouraging the "mixing" of large and small firms, research facilities, housing, restaurants, and retail and outlining where to create open spaces for networking. Cambridge, Massachusetts, by contrast, has allowed incremental moves from rigid, antiquated rules to encourage similar outcomes in Kendall Square .

3) Supporting scarce public resources with large private and civic investments

In New York , former mayor Michael Bloomberg deployed $100m in municipal capital to prepare the infrastructure necessary to lure Cornell and Technion universities to Roosevelt Island. In other cities, including St Louis and Seattle, local resources are financing infrastructure improvements to buttress and accelerate private growth.

Given that many innovation districts are adjacent to low-income neighbourhoods, cities like Philadelphia are considering smart use of school investments to prepare disadvantaged youth for good jobs in the Stem (science, technology, engineering, and math) economy.

As this decade unfolds, we should expect more cities to use their powers in the service of this new model of innovative, inclusive, and resilient growth.

This opinion originally appeared in The Guardian

       

       

Event Information

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The geography of innovation is shifting and a new model for innovative growth is emerging. In contrast to suburban corridors of isolated corporate campuses, innovation districts combine research institutions, innovative firms and business incubators with the benefits of urban living. These districts have the unique potential to spur productive, sustainable, and inclusive economic development.  

On June 9, the Metropolitan Policy Program at Brookings released “The Rise of Innovation Districts,” a new report analyzing this trend. The authors of the paper, Brookings Vice President Bruce Katz and Nonresident Senior Fellow Julie Wagner, were joined by leaders from emerging innovation districts across the country to discuss this shift and provide guidance to U.S. metro areas on ways to harness its potential.

Join the conversation on Twitter using #InnovationDistricts

Presentation by Bruce Katz

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Event Photos

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Bruce Katz, Vice President and Director, Metropolitan Policy Program

Lydia DePillis, John A. Fry, Nicole Fichera, Kofi Bonner, Julie Wagner

The Honorable Andy Berke, Mayor, City of Chattanooga, TN and Bruce Katz

Video

• What Are Innovation Districts?
• Innovation Districts Aligned With Disruptive Dynamics of Our Era
• Cities are For People
• Boston's District Hall a Living Room for Innovation Economy
• Innovation Happens Anywhere and Everywhere
• Are Innovation Districts Another Form of Gentrification?
• Philadelphia Behind but Competing in Innovation Districts
• Chattanooga Has Fastest, Cheapest Internet in Western Hemisphere
• We Live In an Innovation Century
• The Rise of Innovation Districts - Opening Remarks
• The Rise of Innovation Districts - Presentation by Bruce Katz
• The Rise of Innovation Districts - Panel Discussion
• The Rise of Innovation Districts - Moderated Dialogue

Audio

• The Rise of Innovation Districts: A New Geography of Innovation in America

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20140609_innovation_districts_transcript

       

The geography of innovation is shifting. For proof, start with Google, which over the past 10 years has taken the core R&D and innovation-oriented activities it once housed only in Silicon Valley and extended them into cities. The company’s presence in London’s Tech City, New York City’s Chelsea district, and Pittsburgh’s Bakery Square reflects management’s calculation that being in cities increases the company’s access to growing tech-oriented ecosystems, advanced research institutions, deep pools of talent, and distinct regional specializations.

In its decision to go urban, Google has been joined by not only other tech firms such as Twitter, Microsoft, and Spotify, but also companies like Comcast, Amazon, Pfizer, Quicken Loans, and countless numbers of small start-ups and entrepreneurs. (Our recent research for the Brookings Institution, “The Rise of Innovation Districts: A New Geography of Innovation in America,” provides the larger context for these corporate choices.)

For the past 50 years, the landscape of innovation has been dominated by regions like Silicon Valley—suburban corridors of spatially isolated corporate campuses, accessible only by car, with little emphasis on the quality of life or on integrating work, housing, and recreation. After visiting dozens of U.S. and European cities, interviewing hundreds of practitioners and experts on the ground, and scouring scholarly analyses of investor and firm behavior, we are convinced that a complementary new urban model is now emerging, in the form of what we and others are calling “innovation districts.”

These districts, by our definition, are “geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators, and accelerators. Compact, transit-accessible, and technically-wired, innovation districts foster open collaboration, grow talent, and offer mixed-used housing, office, and retail.”

Globally, Barcelona, Berlin, Copenhagen, London, Medellin, Montreal, Seoul, Stockholm, and Toronto all contain emerging innovation districts. In the United States, the most iconic districts can be found in the downtowns and midtowns of Atlanta, Cambridge, Detroit, Philadelphia, Pittsburgh, and St. Louis. In each, advanced research universities, medical complexes, and clusters of tech and creative firms are sparking business expansion as well as residential and commercial growth.

Other innovation districts are developing in Boston, Brooklyn, Chicago, Portland, San Francisco, and Seattle. Former industrial and warehouse areas are undergoing a renaissance, powered by their enviable location along transit lines, proximity to downtowns and waterfronts, and recent additions of advanced institutions. (Note, for example, Carnegie Mellon University’s decision to place its Integrative Media Program at the Brooklyn Navy Yard.)

Perhaps the greatest validation of this shift is the fact that traditional exurban science parks like Research Triangle Park in Raleigh-Durham are now responding with efforts to meet the new demand for more vibrant and collaborative work and living environments.

Innovation districts are already attracting an eclectic mix of firms in the app economy and high tech sector as well as in high-value, research-oriented sectors such as life and material sciences, clean energy, and data computing. They are also home to companies in highly creative fields like architecture, design, theater production, advertising, and marketing. We even see a return to cities of small-scale and customized manufacturing, made possible by 3D printing, robotics, and other advanced techniques.

Much of this activity reflects a fundamental rethinking by corporate management about how and where innovation happens. In turn, it is making the case that discrete urban geographies can be instrumental in strengthening the competitive advantages of specific firms and clusters.

Rather than being the outgrowth of heavy-handed government programs, innovation districts are instead emerging from broader trends and market forces. For example, an economy increasingly oriented toward innovation (particularly through open collaborations) naturally rewards urban density. Companies, researchers, and entrepreneurs working in close proximity are able to share ideas rather than invent in isolation. No one company can master all the knowledge it needs, so they rely on a network of industry collaborators. A recent New York Times article on the growth of Pfizer, Novartis, and other major pharmaceutical companies in Cambridge, makes the point explicitly:

Pharmaceutical companies traditionally preferred suburban enclaves where they could protect their intellectual property in more secluded settings and meet their employees’ needs. But in recent years, as the costs of drug development have soared and R&D pipelines slowed, pharmaceutical companies have looked elsewhere for innovation. Much of that novelty is now coming from biotechnology firms and major research universities like MIT and Harvard, just two subway stops away.

If the benefits of urban density were already being experienced, they take on heightened importance in what Michael Mandel has called the “age of convergence” —when companies must simultaneously push forward with technology and content. Other analysis by the Center for an Urban Future in New York City finds many tech players focusing less on building new technologies and more on “applying technology to traditional industries like advertising, media, fashion, finance, and health care.” These shifts reinforce the importance of proximate location as companies strive to be physically close to the individuals and companies they partner with.

The rise of a convergence and collaborative economy also raises questions of how commercial buildings—offices, research labs, business incubators, and innovation institutes—should be designed. Thus, the creative solutions being tried in vanguard innovation districts will yield broad lessons. With their many variations on incubator space, collaborative venues, social networking, product competitions, technical support, and mentoring, they are beginning to sort out the best physical and social platforms for entrepreneurial growth.

Finally, large-scale demographic migrations are putting new value on cities and demanding more and better choices in where workers live, work and play. The City Observatory recently found, for example, that the number of young college graduates living within three miles of city centers (i.e., where innovation districts tend to be located) has surged, up 37 percent since 2000. This is happening not just in talent magnets like Denver, Portland, OR, and San Diego, but also in older industrial cities like Buffalo, Cleveland, and Pittsburgh.

The confluence of these disruptive economic, social, and demographic dynamics has changed corporate calculus. As companies design forward-looking strategies, they should be asking whether and how a greater commitment to urban locales could help them squeeze out even more success.

This commentary was originally published by Harvard Business Review.

       

In the year since we released “The Rise of Innovation Districts: A New Geography of Innovation in America,” Brookings has visited or interacted with dozens of leaders in burgeoning innovation districts in the United States and Europe. In so doing, we’ve sharpened our knowledge of what’s happening on the ground and gained some important insights into how cities and metros are embracing this new paradigm of economy-shaping, place-making, and network-building.

Innovation districts capture the remarkable spatial pattern underway in the innovation economy—the heightened clustering of anchor institutions, companies, and start-ups in small geographic areas of central cities across the United States, Europe, and other global-trading regions.

The rise of innovation districts has been situated against the familiar backdrop of suburban corporate campuses and science parks. Accessible only by car, these spatially isolated corridors place little emphasis on the quality of life or on integrating work, housing, and recreation.

By contrast, in our report we found the rise of urban innovation hubs to be the organic result of profound economic and demographic forces that are altering how we live and work. The growing application of “open innovation”—where companies work with other firms, inventors, and researchers to generate new ideas and bring them to market—has revalued proximity, density, and other attributes of cities. At the same time, the growing preference of young talented workers to congregate in vibrant neighborhoods that offer choices in housing, transportation, and amenities has made urban and urbanizing areas increasingly attractive.

We also found that innovation districts uniformly contain a mix of economic, physical, and networking assets. Economic assets are the firms, institutions, and organizations that drive, cultivate, or support an innovation-rich environment. Physical assets are the public and privately owned spaces—buildings, open spaces, streets, and other infrastructure—designed and organized to stimulate new and higher levels of connectivity, collaboration, and innovation. Lastly, networking assets are the relationships between actors—such as between individuals, firms, and institutions—that have the potential to generate, sharpen, and/or accelerate the advancement of ideas. These assets, taken together, create an innovation ecosystem—the synergistic relationship between people, firms, and place that facilitates idea generation and advances commercialization.

One year later, innovation districts continue to rise. What have we learned about how they are evolving?

First, the model of innovation districts has been embraced, co-opted, and (in some cases) misappropriated, further reinforcing the need for grounding this work in empirically based evidence.

A simple Google search will reveal the extent to which the language of “innovation districts” (or “innovation quarters,“ “innovation neighborhoods,” or “innovation corridors”) has rapidly permeated the field of urban and metropolitan economic development and place-making.

In some places, this labeling is being accurately used by globally recognized research institutions (e.g., Carnegie Mellon in Pittsburgh, Drexel University in Philadelphia) that are both experiencing extraordinary growth near their campuses as well as designing intentional efforts to build on their distinctive assets. In communities as diverse as Philadelphia, Pittsburgh, and St. Louis in the United States and Manchester and Sheffield in England, local leaders are conducting deep empirical analysis to understand their competitive advantages and existing weaknesses within their innovation ecosystem. They are exploring what it means to encourage greater collaboration and cooperation across their institutions, firms, and entrepreneurs. And they are exploring ways to better create “place” so as to increase overall vitality, facilitate innovation, and spur the growth of new businesses and jobs.

In other places, the nomenclature reflects an aspiration—and is spurring more deliberate efforts by local stakeholders to grow distinctive innovation ecosystems. In cities like Albuquerque, N.M., Chattanooga, Tenn., Chicago, Ill., Durham, N.C., and San Diego, Calif., local leaders are using the innovation district paradigm as a platform to measure their current conditions, develop strategies for addressing gaps and challenges, and build coalitions of stakeholders that can together help realize a unified vision for innovative growth. Some of these budding districts represent typologies not outlined in our report but that are ripe for future research, including “start-up” enclaves in or near downtowns of cities that lack a major anchor as well as “public markets” that blend locally produced food products and crafts with maker spaces, digital design, and other innovations in the creative arts.

There is one unfortunate trend in the rising use of the "innovation district" lexicon. In a number of cities, local stakeholders have applied the label to a project or area that lacks the minimum threshold of innovation-oriented firms, start-ups, institutions, or clusters needed to create an innovation ecosystem. This appears to result either from the chase to jump on the latest economic development bandwagon, the desire to drive up demand and real estate prices, or sometimes a true lack of understanding of what an innovation district actually is. The motivation for real estate developers to adopt the moniker seems clear: to achieve a price premium for their commercial, residential, and retail rents. Yet these sites are typically a collection of service-sector activities with little focus on the innovation economy. The lesson: labeling something innovative does not make it so.

From all these observations, it is clear that the field needs a routinized way to measure the starting assets of innovation districts—both to separate true districts from “in name only” ones as well as to give individual communities a platform for developing targeted strategies going forward. This means both running the numbers—conducting a quantitative audit—and undertaking a more qualitative assessment of strengths and weaknesses. Irrespective of their phase of development, innovation districts must evaluate the extent to which they have a critical mass of economic, physical, and networking assets to collectively generate the vitality that these districts demand. They need to evaluate the competitive advantages they have in certain economic sectors and learn how to cultivate them. And they need to ensure that they have the connectivity, diversity, and quality of place necessary to create a unique and vibrant environment in which innovation can thrive.

To facilitate this process, we are working in close collaboration with Mass Economics and the Project for Public Spaces to develop an audit template and tool. Over the next year, we intend to sharpen this tool in a subset of innovation districts across the country and then encourage others to employ it in their own established or burgeoning districts.

Second, the core economic assets of innovation districts are not fixed; in fact, many innovation districts are being created or enhanced by the relocation of major anchor facilities as institutions strive to achieve the highest return on investment.

The conventional notion of an “anchor” institution is that it is solidly weighted in a particular place. Yet over the past decade a substantial number of innovative companies and advanced educational and research institutions have moved key facilities and units as a means of generating greater innovation output. Examples of new locations include the University of California-San Francisco’s biotechnology campus in Mission Bay (2003); the University of Washington’s medical research hub in Seattle’s South Lake Union (2005); Brown University’s medical school in downtown Providence, R.I. (2011); Duke’s Clinical Research Institute in downtown Durham (2013); Carnegie Mellon University’s Integrative Media Program in the Brooklyn Navy Yard (2013); and, most famously, the new Cornell Tech campus on Roosevelt Island in New York City (2015).

These “first mover” relocations show how corporate and university leaders are departing from the tradition of building new facilities within their existing footprint and are willing to seek out new areas (and even new cities) to retain, or achieve, competitive advantage in their respective clusters and fields. As Cornell Professor Ronald Ehrenberg said about his school’s isolated Ithaca, N.Y. campus, “It is very, very difficult for us to do the kind of development through tech transfer that a place like Stanford or Berkeley can do in San Francisco or Harvard or MIT can do in Boston.” Our strong sense in talking with leaders around the country is that we are still at the early stage of corporate and university relocations given the extent to which urban areas have been revalued. The physical relocation of key innovation assets has now become a critical competitiveness strategy for companies, universities, and even states.

In some cases, the “unanchoring of anchors” is also compelling local leaders to rethink the traditional borders and boundaries of the innovation economy. In Philadelphia, for example, University City has always been recognized as a settled innovation hub, given the co-location of such anchor institutions as Drexel University, the University of Pennsylvania, the University City Science Center, and others. The recent decision of Comcast to consolidate its corporate presence in the downtown area and build its major new Innovation and Technology Center less than 10 blocks from 30th Street Station and the Drexel Campus is convincing some leaders to “stretch” Philadelphia’s University City district to incorporate this new corporate giant.

Third, almost all innovation districts have significant work ahead to understand the rising value of “place” in the innovation ecosystem and leverage or reconfigure their physical assets to create dense and dynamic communities.

While our paper dissected various types of physical assets to help practitioners understand their individual roles and value, the more important message to convey now is the imperative to combine and activate physical assets in ways that create vibrant “places.” The Project for Public Spaces aptly describes place as “…environments in which people have invested meaning over time. A place has its own history—a unique cultural and social identity that is defined by the way it is used and the people who use it.”¹

Our review of innovation districts, including those cited in our paper, reveals that many have not yet maximized the potential for creating lively communities in which their residents and workers feel invested, reducing the potential innovation output of these communities. When designed and programmed well, a district’s public spaces—whether within buildings or outside of them—facilitate open innovation by offering numerous opportunities to meet, network, and brainstorm. Strong places entice residents and workers to remain in the area off hours, extending the opportunities for collaboration. Strong places create a culturally and educationally enriched environment that strengthens human interaction, knowledge, and motivation.

While some university-led districts have made some improvements over the years, districts anchored by medical campuses have significant work ahead. These spaces were designed as isolated fortresses that valued parking over walking (ironic given their health mission), with little or no attention paid to amenities, cultural activities, retail, or housing. Significantly, some medical campuses are often located in close proximity to downtowns, as part of universities, or near organic entrepreneurial communities (e.g., the proximity of Oklahoma City’s Health District to Automobile Alley). This raises the potential for smart (and related) place-making activities in a nearby area and reinforces the need to rethink traditional geographies and artificial boundaries when considering interventions.

Fourth, the rapid growth and impact of national intermediaries (what we call innovation cultivators) shows real promise in helping innovation districts grow and steward their networking assets and stimulating new innovation opportunities.

The past year has seen substantial growth in multicity intermediaries along with scores of locally grown accelerators and incubators. It appears more than ever that intermediaries are increasingly the catalyst to growing innovation and entrepreneurial energy within local districts and across start-ups, small and medium-sized enterprises, and, even to some extent, large companies and research institutions. They are designed to think and act horizontally, encouraging people and firms to interact and work together in ways and at a scale previously unseen.

A growing and increasingly important role for intermediaries is helping innovation districts evolve from the traditional “research and development” model to a “search and development” one, where crucial answers to their innovation questions and technological challenges are discovered by finding and collaborating with other firms. Some districts immediately recognized this potential and have gone to great lengths to grow, lure, and fund the development of multiple intermediaries across their districts.

The Cortex Innovation Community in St. Louis has, in a short period, clustered new buildings owned and/or supported by a number of well-respected intermediaries. These development and programmatic moves are effectively creating a new focal point for Cortex innovation activities. The new Cambridge Innovation Center, which offers space for start-ups combined with access to venture capital firms, professional services, and a plug-and-play physical environment, is already at 85 percent occupancy. A newly constructed Tech Shop—a do-it-yourself “maker space” equipped with industrial tools, machinery, and technology to support entrepreneurs—is under construction nearby. The near complete renovation of the Center for Emerging Technologies, which provides training, specialized facilities, and technical support, adds yet another layer of support for entrepreneurs and start-ups. Adding more to this mix is a soon-to-be-constructed space for tech-commercial activities combined with new housing, which will exponentially increase the number of people in a very small radius.²

As one can imagine, this clustering was deeply intentional and viewed as a way to stimulate new relationships, new networks, and the cross-fertilization of ideas; Cortex refers to this deliberate process as “innovation engineering.” We anticipate more innovation districts to follow suit, pursuing, if not cultivating, such intermediaries in their own innovation ecosystems.

Finally, the rise of innovation districts takes place in a national and urban political environment that demands inclusive growth and equitable outcomes.

The past year has seen the elevation of income inequality and social mobility as issues of national and urban significance. With the federal government mired in partisan gridlock, cities have become the vanguard of efforts to raise the minimum wage, expand affordable housing, and extend pre-K education, among other initiatives. These efforts come at a time when the civil unrest in Baltimore and Ferguson has refocused national attention on neighborhoods of high poverty.

Because of their location in the cores of central cities, many established and emerging innovation districts are located several blocks away from distressed communities. This proximity creates an enormous opportunity to show the positive impact that innovative growth can have on inclusive outcomes. Innovation districts create employment opportunities that can be filled by local residents and procurement and construction opportunities that can be fulfilled by local vendors and contractors. The districts generate tax revenues that can be used to fund neighborhood services and neighborhood regeneration. And they offer the potential to link the ample expertise and talent in anchor educational institutions with the needs of neighborhood schools and children.

Recognizing these benefits, local leaders are demonstrating a genuine commitment to growing more inclusive districts. In our work, we’ve seen several early models that could be built on and replicated. In the Barcelona 22@ district, for example, leaders are trying to quantify the growth in service jobs accessible to local and regional residents while, at the same time, connecting those residents to training that increases their skills in more innovation-oriented sectors. Last year, Drexel University opened a new “urban extension center” that offers career-building workshops, legal clinics, and other services to residents of the adjacent Mantua Promise Zone. The Evergreen Cooperative in Cleveland’s University Circle district has been working for several years to leverage local purchasing power to create business ownership and employment opportunities for low-income residents. And in Baltimore, the University of Maryland partnered with surrounding neighborhood organizations, residents, and institutions to develop a detailed new plan for building what the Baltimore Southwest Partnership envisions as a “diverse, cohesive community of choice built on mutual respect and shared responsibility.”

These examples represent concrete initiatives to ensure that nearby neighborhoods and their residents connect to and benefit from new growth opportunities in innovation districts and beyond. Scaling such efforts will be critical in the years to come, as the success of these districts will be defined in large part by their broader city and regional impacts.

As Brookings works this year to help unleash more innovation districts across the U.S. and Europe, we will continue to hone our observations and knowledge about trends, challenges, and strategies. We will compile and publish what we have learned for anchor leaders, policymakers, scholars, and practitioners, focusing on many of the issues—accelerating commercialization to improving inclusion—noted above. We will do this work in close collaboration with proven organizations like Mass Economics and Project for Public Spaces. We look forward to contributing to this rapidly changing space via empirical and on-the-ground research, strategy and policy development, convenings, and network building. Stay tuned.

Read The Rise of Innovation Districts: A New Geography of Innovation in America

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Less than two years ago, the Brookings Institution unveiled the research paper, “The Rise of Innovation Districts,” which identified an emerging spatial pattern in today’s innovation economy. Marked by a heightened clustering of anchor institutions, companies, and start-ups, innovation districts are emerging in central cities throughout the world.

A Google search of the term “innovation district” reveals over 200,000 results, indicating the extent to which the phrase has permeated the fields of urban economic development, planning, and placemaking. The term is used to refer to areas, often in the downtowns of cities, where R&D-laden universities or firms are surrounded by a growing mix of start-ups and spin-offs. The term is also increasingly applied to densely populated urban neighborhoods where firms like Google are establishing campuses. But it also pops up to describe new office complexes whose amenities include a few stores or a fashionable coffee shop.

The variation in understanding of the term and its application suggests the need for a routinized way to measure the essential quantitative and qualitative assets of innovation districts. Given this, for the past nine months the Brookings Institution, Project for Public Spaces (PPS), and Mass Economics have collaborated to devise and test an audit tool for assessing innovation districts.

What to count? Considerations in designing an audit

Innovation ecosystems comprise complex, overlapping relationships between firms, individuals, unique spaces, private real estate, public infrastructure, capital, expertise, and conviviality, congregated in a roughly delineated area. To begin to determine how to identify and measure assets, we developed a process that was both rigorous and reflective, drawing together some of the brightest minds in the field, top practitioners on the ground, and a team strong in quantitative analysis.

First, we conducted research across numerous relevant topics including entrepreneurship, real estate development, commercialization, economic geography, city planning, institutional culture, finance, and inclusive development. This exercise generated hundreds of potentially applicable measures for the audit.  

       

Innovative activity and innovation districts are not evenly distributed across cities. Some metropolitan areas may have two or three districts scattered about, while other cities are lucky to have the critical mass to support even one strong district. London, however, a global city with nearly unparalleled assets, can best be understood as not just a collection of innovation districts but as a contiguous “city of innovation.” 

Our understanding of that innovative activity has taken a leap forward with the publication of a new report by the Centre for London called "Spaces to Think". Even for a paragon of innovation, a critique such as this is imperative if the city desires to maximize its assets while continuing to grow in a sustainable and inclusive manner. Much as we have recommended that urban leaders across the United States undertake an asset audit of their districts to identify key priorities, "Spaces to Think" focuses on 17 distinct districts, mapping their assets, classifying their typologies, and identifying governance structures.

The 17 study areas in "Spaces to Think"

The report provides lessons applicable to many cities.

Having identified, across all 17 districts, the three major drivers of innovative activity—talent, space, and financing—it becomes clear that the main hurdle for London, as a global magnet of talent and capital, is affordable physical space: “Increasing pressure for land…risks constraining London’s potential as a leading global city for innovation.” Similar to hot-market cities across the United States, many of the study areas of greatest promise are older industrial areas, such as Here East, Canary Wharf, and Kings Cross, where large plots of underutilized land have been reimagined as innovation districts. 

But who is prepared to undertake new regeneration projects? The report places significant responsibility on London’s many universities—whose expansions already account for much of the large-scale development opportunities in the city—for a “third mission” of local economic development. It is universities, the report notes, that are “devoting increasing amounts of money, resources, and planning to building new or redesigned facilities…pitched as part of a wider regeneration strategy, or the creation of an innovation district.” 

A second concern is the democratization of the innovation economy. Already a victim of rising inequality, London’s future growth must reach down the ladder. As we’ve argued, with intentionality and purpose, innovation districts can advance a more inclusive knowledge economy, especially given that they are often abut neighborhoods of above-average poverty and unemployment. Spaces to Think expands upon four key strategies: local hiring and sourcing practices for innovation institutions; upskilling of local residents through vocational and technical programs within local firms; increased tax yield, especially given recent reforms in which “local authorities retain 100 percent of business rates”; and shared assets and rejuvenation of place. This final lever requires inclusive governance that encourages neighborhood ownership of the public realm.

Finally, the report notes that, while there is much diversity of leadership in the study areas—some are university-led, some are entrepreneurial, some are industry-led—“good governance and good relations between institutions, are at the heart of what makes innovation districts tick.” This issue is at the heart of our work moving forward: identifying and spreading effective governance models that encourage collaboration and coordination between the public, private, and civic actors within innovation districts.

We are pleased that this future work will be strengthened by a new partnership between the Bass Initiative on Innovation and Placemaking and the Centre for London. The ambition of this Transatlantic Innovation Districts Partnership is to increase our mutual understanding of innovation districts found in Europe through additional qualitative and quantitative analysis and to integrate European leaders into a global network, all to accelerate the transfer of lessons and best practices from districts across the world.

       

A Q&A with Dennis Lower, president and CEO, Cortex Innovation Community

As leaders scan the landscape for strong examples of innovation districts, their tour is hardly complete without learning of the Cortex Innovation Community—an innovation district in the heart of St. Louis. We sat down with Dennis Lower, president and CEO of the Cortex Innovation Community to learn what kinds of interventions and instruments are driving their success.

What is the Cortex Innovation Community?

Cortex is the region’s largest innovation hub, generating 3,800 tech-related jobs and over $500 million in investment in the last 14 years. It’s located close to downtown and built on the intellectual assets and resources of St. Louis’ leading universities, a premier health care provider, and the Missouri Botanical Garden. The focal point is the 200 acres of old industrial land that one time separated these institutions but that now stitches them together. At full build-out, Cortex will likely generate $2 billion of development and create 13,000 jobs.

What sets Cortex apart from other innovation districts?

Of course, every district is distinctive and unique, building off its local character, culture, and assets. What sets Cortex apart, I would argue, is that we literally have billions of dollars of academic, cultural, and recreational assets in the neighborhoods that surround the district, which other places simply do not have.

We are bookended by two universities—Washington University and St. Louis University—each a magnet for international students and each with a reputation for research and academic excellence. Washington University, for example, was one of five consortium members funded by the National Institutes of Health to map the human genome. These universities, together with the University of Missouri-St. Louis, are the academic bedrock of our local innovation ecosystem.

Recent demographic analysis tells us we are now the most diverse employment environment in the region no matter how you slice it, including by age, ethnicity, and educational attainment.

Another Cortex advantage is the neighborhood that surrounds us. In addition to historic housing, the Grand Center arts district is to the east, to the west is Forest Park, which contains the St. Louis Zoo, fine arts and history museums, two golf courses, the St. Louis Science Center, abundant walking and biking trails, and the internationally renowned Botanical Garden. Restaurant corridors are to the north and south. I tell you all this to say that Cortex is where innovation, tech, culture, and community collide—and people are hungry for this mix.

Cortex Innovation Community is also a tax-exempt 501(c)3 that oversees the design and development of the innovation district. What makes your nonprofit unique in managing this district?

Cortex has been designated the master developer to transform an old industrial district into a center for innovation and commercialization. We are in a particularly advantageous position because the state and the city have granted the 501(c)3 powers of eminent domain, the power to abate taxes, and the power to approve or reject building plans. From a traditional economic development perspective, these powers have been critical in overcoming obstacles that land speculators sometimes put in our way. We have not had to use this power very often, fortunately. Only a handful of properties were acquired under the threat of eminent domain, and we reached an impasse only twice, sending us to court to purchase those properties. We take this responsibility seriously and only use eminent domain powers sparingly. We have a good reputation with the public as a result.

Can you describe one accomplishment you are particularly proud of?

We knew that to jump-start an innovation district it was essential to build entrepreneurial density. We developed an unorthodox strategy of sorts in that we built a concentration of innovation assets all within a block of each other. Today, we have six innovation centers, each with its own community and programming: the Center for Emerging Technologies, a traditional technical assistance incubator for information technology, bioscience, and consumer/manufacturing products; the BioGenerator, an accelerator with shared wet lab space and $3 million of shared core lab equipment; TechShop, a premier maker work space for prototyping and creating; the Cambridge Innovation Center–St. Louis, a co-working office and lab startup space); Venture Café–St. Louis, a shared public space for the startup community to meet weekly with 8 to 12 unconventional breakout educational sessions; and IdeaLabs/MedLaunch, a unique university graduate/undergraduate incubator that develops new technology to solve clinical problems. This strategy is working beyond our wildest expectations. It’s the “secret sauce” for supercharging our district’s innovation ecosystem. 

Venture Café: one of the six innovation centers that weekly draws together over 500 entrepreneurs from all technology sectors.

Can you highlight one particularly interesting innovation or invention coming out of Cortex? 

Let me highlight two. We have over 200 companies in Cortex—there’s too much innovation happening here to highlight only one!

First, we have a medical device company that is changing the way infectious diseases are diagnosed. Its products can rapidly detect bacterial infections, determine if the infection is resistant to a range of antibiotics, and provide clinicians with patient-specific guidance to treat infections quickly and accurately. Their first product can diagnose urinary tract infections in just three hours.

And then we have a company tackling the biggest challenge in agriculture today—preventing insects, diseases, and weeds from destroying food crops. This company is developing a cost-effective technology to produce and topically deliver RNAi for agricultural crops. Put simply, this technology helps plants develop desired genetic traits without the use of genetically modified organisms, or GMOs. This could be transformative.

Many people have asked us how innovation districts are supporting inclusive growth. There is a concern that innovation districts are focusing on innovation to the exclusion of employment of city residents, who may not possess the skills or education the district’s businesses are seeking.

We look at inclusion as an integral part of our work and mission at Cortex. We currently have six inclusion initiatives and will soon introduce two more. One of those is the development of a magnet high school in the St. Louis Public School District, the Collegiate School for Medicine and Biosciences. Working closely with the school district’s superintendent and an important group of institutional and civic leaders, we have been developing an urban high school centered on one of the major strengths of our Cortex sponsors—bioscience. We recruited our first class in 2013, providing instruction in a small, temporary school, and in 2015 moved to a permanent location that can support 400 students.

The students come from all across the region, representing the largest spread of zip codes of any regional public school. Currently, 53 percent of the students are African American, 23 percent are Asian, and 22 percent are white, representing a great mix. Last year’s proficiency testing in math and English revealed that we ranked first across the entire public school system. I find this particularly gratifying because a number of incoming freshmen were not performing at grade level. What this tells us is given the opportunity, creative teaching approaches, and a supportive structure, these kids will excel quickly. With our incoming 9th grade class this August, we will have a full complement of freshmen to seniors, graduating our first class in 2017.

Perhaps one of these students will find the next cure for cancer. To me, this illustrates an important part of our district’s DNA—to grow and cultivate innovation talent for the future.

       

The tide of uncertainty that has swept the United Kingdom after its vote to leave the European Union has spared few—including its emerging class of innovation districts.

These hubs of innovation—where anchor institutions, such as universities and R&D laden companies cluster and connect with startups, incubators, and a host of public spaces, coffee shops, retail and housing—are now asking themselves important questions that will affect their future. Will the U.K. broker a deal to continue free trade with Europe? Will access to talent across Europe be curtailed? Will the devalued pound keep U.K. advanced manufacturers competitive for the medium to long term? Will European Union legal frameworks be replaced with a regulatory platform that continues to support advanced sectors? What will happen to EU funding on science and innovation, such as Horizon 2020?

Of course, innovation districts are no stranger to uncertainty, if not chaos. These districts thrive on random mixing, on smashing different kinds of disciplines and people together to generate new ideas and new products for the market. In this close-knit, highly networked ecosystem, chaos breeds creativity. At the same time, the backbone of districts is a clear regulatory and legal framework with rules on intellectual property, investment, and funding streams. The twinning of chaos and certainty is what makes these places simply superb spaces to incubate new technology, aggregate talent, and experiment in linking placemaking with innovation.

Yet from the distinctive innovation districts in London to those emerging in the middle of England, such as in Sheffield and Manchester, to those rising in Scotland, such as in Glasgow, this moment of uncertainty could be not only painful—it could be downright dangerous. 

In the face of such uncertain times, the temptation will be to sit back and wait for the cards to fall. But this tempered, conservative approach is ironically the more risky tactic.

We recommend another path.

Now is the time for the institutions and firms that are driving innovation districts to strengthen their competitive position and expand their reach.

Now is the time to try new forms of collaboration between universities, large companies, and local enterprises.

Now is the time to test more democratic modes of innovation with maker spaces, fab labs, and shared infrastructure and equipment.

Now is the time to forge new partnerships with other innovation districts in the United States and Europe to share promising strategies around commercialization, networking, and financing.

Now is the time to apply new energy to creative placemaking, including strengthening the innovation–place nexus around key nodes and applying quick interventions around traffic calming, bike lanes, and pop-up gathering spaces. 

U.S. cities and innovation districts have demonstrated that progress can persist even when higher levels of government are adrift. U.K. cities and districts can do the same.

       

How are two innovation districts in Stockholm successfully melding their tech and life science clusters to create new products?

What can the Wake Forest Innovation Quarter in North Carolina teach us about creating strong, vibrant, and innovative places?

How are innovation districts in Australia leveraging government policies and programs to accelerate their development?

Over the last year, members of the Anne T. and Robert M. Bass Initiative on Innovation and Placemaking team talked with hundreds of local leaders and practitioners advancing innovation districts in almost every global region. These conversations revealed the remarkable level of creativity and innovative, out-of-the-box thinking being employed to grow individual innovation districts.

In the course of our work, we have been intrigued by the question, is there value to be gained from a global network of innovation districts? To this end, we have reached out to successful global networks in Europe, the United States, and Asia to distill what it takes to make a strong and sustainable global network. Among our findings so far:

• Network members are solving on-the-ground challenges by talking with and learning from their peers. Several said that these horizontal exchanges are essential to leapfrogging ahead. 

• Online interaction is growing but network members say that face-to-face contact is critical. Comparing notes, asking questions, and engaging in conversations foster collaboration while maintaining a healthy dose of competition. 

• The right tools and supports can make all the difference. In networks where participants had full schedules, developing new ways to share intelligence, like early morning webinars or virtual conferences, regular e-newsletters, and simple methods to share data helped facilitate their learning. 

To what extent do you feel that a network of innovation districts might supercharge your own efforts and successes?

It would help our work tremendously if you could complete our on-line survey. It will take two minutes or less!

Editor's Note: If you're interested in receiving the latest news from the Bass Initiative, please sign up for our newsletter at this link, http://connect.brookings.edu/bass-initiative-newsletter-signup. Feel free to share it widely.

       

       

       

Innovation is the driver of long-term economic growth and a key ingredient for improvements in healthcare, safety, and security, not to mention those little comforts and conveniences to which we have grown so accustomed. But innovation is not an unqualified good; it taxes society with costs.

The market system internalizes only a portion of the total costs of innovation. Other costs, however, are not included in market prices. Among the most important sources for those unaccounted costs are creative destruction, externalities, and weak safeguards for unwanted consequences.

Creative Destruction and Innovation

Schumpeter described creative destruction as the process by which innovative entrepreneurs outcompete older firms who unable to adapt to a new productive platform go out of business, laying off their employees and writing off their productive assets. Innovation, thus, also produces job loss and wealth destruction. Externalities are side effects with costs not priced in the marketplace such as environmental degradation and pollution. While externalities are largely invisible in the accounting books, they levy very real costs to society in terms of human health and increased vulnerability to environmental shocks. In addition, new technologies are bound to have unwanted deleterious effects, some of which are harmful to workers and consumers, and often, even to third parties not participating in those markets. Yet, there are little financial or cultural incentives for innovators to design new technologies with safeguards against those effects.

Indeed, innovation imposes unaccounted costs and those costs are not allocated in proportion of the benefits. Nothing in the market system obligates the winners of creative destruction to compensate the unemployed of phased-out industries, nor mandates producers to compensate those shouldering the costs of externalities, nor places incentives to invest in preventing unwanted effects in new production processes and new products. It is the role of policy to create the appropriate incentives for a fair distribution of those social costs. As a matter of national policy we must continue every effort to foster innovation, but we must do so recognizing the trade-offs.

Strengthening the Social Safety Net

Society as a whole benefits from creative destruction; society as a whole must then strengthen the safety net for the unemployed and double up efforts to help workers retrain and find employment in emerging industries. Regulators and industry will always disagree on many things but they could agree to collaborate on a system of regulatory incentives to ease transition to productive platforms with low externality costs. Fostering innovation should also mean promoting a culture of anticipation to better manage unwanted consequences.

Let’s invest in innovation with optimism, but let’s be pragmatic about it. To reap the most net social benefit from innovation, we must work on two fronts, to maximize benefits and to minimize the social costs, particularly those costs not traditionally accounted. The challenge for policymakers is to do it fairly and smartly, creating a correspondence of benefits and costs, and not unnecessarily encumbering innovative activity.

Commentary published in The International Economy magazine, Spring 2014 issue, as part of a symposium of experts responding to the question: Does Innovation Lead to prosperity for all?

      

Editors Note: This post is an extended version of a previous post.

Cozzens, Susan and Dhanaraj Thakur (Eds). 2014. Innovation and Inequality: Emerging technologies in an unequal world. Northampton, Massachusetts: Edward Elgar.

Historically, the debate on innovation has focused on the determinants of the pace of innovation—on the premise that innovation is the driver of long-term economic growth. Analysts and policymakers have taken less interest on how innovation-based growth affects income distribution. Less attention even has received the question of how innovation affects other forms of inequality such as economic opportunity, social mobility, access to education, healthcare, and legal representation, or inequalities in exposure to insalubrious environments, be these physical (through exposure to polluted air, water, food or harmful work conditions) or social (neighborhoods ridden with violence and crime). The relation between innovation, equal political representation and the right for people to have a say in the collective decisions that affect their lives can also be added to the list of neglect.

But neglect has not been universal. A small but growing group of analysts have been working for at least three decades to produce a more careful picture of the relationship between innovation and the economy. A distinguished vanguard of this group has recently published a collection of case studies that illuminates our understanding of innovation and inequality—which is the title of the book. The book is edited by Susan Cozzens and Dhanaraj Thakur. Cozzens is a professor in the School of Public Policy and Vice Provost of Academic Affairs at Georgia Tech. She has studied innovation and inequality long before inequality was a hot topic and led the group that collaborated on this book. Thakur is a faculty member of the school College of Public Service and Urban Affairs at Tennessee State University (while writing the book he taught at the University of West Indies in Jamaica). He is an original and sensible voice in the study of social dimensions of communication technologies.

We’d like to highlight here three aspects of the book: the research design, the empirical focus, and the conceptual framework developed from the case studies in the book.

Edited volumes are all too often a collection of disparate papers, but not in this case. This book is patently the product of a research design that probes the evolution of a set of technologies across a wide variety of national settings and, at the same time, it examines the different reactions to new technologies within specific countries. The second part of the book devotes five chapters to study five emerging technologies—recombinant insulin, genetically modified corn, mobile phones, open-source software, and tissue culture—observing the contrasts and similarities of their evolution in different national environments. In turn, part three considers the experience of eight countries, four of high income—Canada, Germany, Malta, and the U.S.—and four of medium or low income—Argentina, Costa Rica, Jamaica, and Mozambique. The stories in part three tell how these countries assimilated these diverse technologies into to their economies and policy environments.

The second aspect to highlight is the deliberate choice of elements for empirical focus. First, the object of inquiry is not all of technology but a discreet set of emerging technologies gaining a specificity that would otherwise be negated if they were to handle the unwieldy concept of “technology” broadly construed. At the same time, this choice reveals the policy orientation of the book because these new entrants have just started to shape the socio-technical spaces they inhabit while the spaces of older technologies have likely ossified. Second, the study offers ample variance in terms of jurisdictions under study, i.e. countries of all income levels; a decision that makes at the same time theory construction more difficult and the test of general premises more robust.[i] We can add that the book avoids sweeping generalizations. Third, they focus on technological projects and their champions, a choice that increases the rigor of the empirical analysis. This choice, naturally, narrows the space of generality but the lessons are more precise and the conjectures are presented with according modesty. The combination of a solid design and clear empirical focus allow the reader to obtain a sense of general insight from the cases taken together that could not be derived from any individual case standing alone.

Economic and technology historians have tackled the effects of technological advancement, from the steam engine to the Internet, but those lessons are not easily applicable to the present because emerging technologies intimate at a different kind of reconfiguration of economic and social structures. It is still too early to know the long-term effects of new technologies like genetically modified crops or mobile phone cash-transfers, but this book does a good job providing useful concepts that begin to form an analytical framework. In addition, the mix of country case studies subverts the disciplinary separation between the economics of innovation (devoted mostly to high-income countries) and development studies (interested in middle and low income economies). As a consequence of these selections, the reader can draw lessons that are likely to apply to technologies and countries other than the ones discussed in this book.

The third aspect we would like to underscore in this review is the conceptual framework. Cozzens, Thakur and their colleagues have done a service to anyone interested in pursuing the empirical and theoretical analysis of innovation and inequality.

For these authors, income distribution is only one part of the puzzle. They observe that inequalities are also part of social, ethnic, and gender cleavages in society. Frances Stewart, from Oxford University, introduced the notion of horizontal inequalities or inequalities at the social group level (for instance, across ethnic groups or genders). She developed the concept to contrast vertical inequalities or inequalities operating at the individual level (such as household income or wealth). The authors of this book borrow Stewart’s concept and pay attention to horizontal inequalities in the technologies they examine and observe that new technologies enter marketplaces that are already configured under historical forms of exclusion. A dramatic example is the lack of access to recombinant insulin in the U.S., because it is expensive and minorities are less likely to have health insurance (see Table 3.1 in p. 80).[ii] Another example is how innovation opens opportunities for entrepreneurs but closes them for women in cultures that systematically exclude women from entrepreneurial activities.

Another key concept is that of complementary assets. A poignant example is the failure of recombinant insulin to reach poor patients in Mozambique who are sent home with old medicine even though insulin is subsidized by the government. The reason why doctors deny the poor the new treatment is that they don’t have the literacy and household resources (e.g. a refrigerator, a clock) necessary to preserve the shots, inject themselves periodically, and read sugar blood levels. Technologies aimed at fighting poverty require complementary assets to be already in place and in the absence of them, they fail to mitigate suffering and ultimately ameliorate inequality. Another illustration of the importance of complementary assets is given by the case of Open Source Software. This technology has a nominal price of zero; however, only individuals who have computers and the time, disposition, and resources to learn how to use open source operative systems benefit. Likewise, companies without the internal resources to adapt open software will not adopt it and remain economically tied to proprietary software.

These observations lead to two critical concepts elaborated in the book: distributional boundaries and the inequalities across technological transitions. Distributional boundaries refer to the reach of the benefits of new technologies, boundaries that could be geographic (as in urban/suburban or center/periphery) or across social cleavages or incomes levels. Standard models of technological diffusion assume the entire population will gradually adopt a new technology, but in reality the authors observe several factors intervene in limiting the scope of diffusion to certain groups. The most insidious factors are monopolies that exercise sufficient control over markets to levy high prices. In these markets, the price becomes an exclusionary barrier to diffusion. This is quite evident in the case of mobile phones (see table 5.1, p. 128) where monopolies (or oligopolies) have market power to create and maintain a distributional boundary between post-pay and high-quality for middle and high income clients and pre-pay and low-quality for poor customers. This boundary renders pre-pay plans doubly regressive because the per-minute rates are higher than post-pay and phone expenses represent a far larger percentage in poor people’s income. Another example of exclusion happens in GMOs because in some countries subsistence farmers cannot afford the prices for engineering seeds; a disadvantage that compounds to their cost and health problems as they have to use more and stronger pesticides.

A technological transition, as used here, is an inflection point in the adoption of a technology that re-shapes its distributional boundaries. When smart phones were introduced, a new market for second-hand or hand-down phones was created in Maputo; people who could not access the top technology get stuck with a sub-par system. By looking at tissue culture they find that “whether it provides benefits to small farmers as well as large ones depends crucially on public interventions in the lower-income countries in our study” (p. 190). In fact, farmers in Costa Rica enjoy much better protections compare to those in Jamaica and Mozambique because the governmental program created to support banana tissue culture was designed and implemented as an extension program aimed at disseminating know-how among small-farmers and not exclusively to large multinational-owned farms. When introducing the same technology, because of this different policy environment, the distributional boundaries were made much more extensive in Costa Rica.

This is a book devoted to present the complexity of the innovation-inequality link. The authors are generous in their descriptions, punctilious in the analysis of their case studies, and cautious and measured in their conclusions. Readers who seek an overarching theory of inequality, a simple story, or a test of causality, are bound to be disappointed. But those readers may find the highest reward from carefully reading all the case studies presented in this book, not only because of the edifying richness of the detail herein but also because they will be invited to rethink the proper way to understand and address the problem of inequality.[iii]
 

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Policies and initiatives to promote U.S. manufacturing would be well advised to take a value chain perspective of this economic sector. Currently, our economic statistics do not include pre-production services to manufacturing such as research and development or design or post-production services such as repair and maintenance or sales. Yet, manufacturing firms invest heavily in these services because they are crucial to the success of their business. 

In a new paper, Kate Whitefoot and Walter Valdivia offer a fresh insight into the sector’s labor composition and trends by examining employment in manufacturing from a value chain perspective. While the manufacturing sector shed millions of jobs in the 2002-2010 period—a period that included the Great Recession—employment in upstream services expanded 26 percent for market analysis, 13 percent for research and development, and 23 percent for design and technical services. Average wages for these services increased over 10 percent in that period. Going forward, this pattern is likely to be repeated. Technical occupations, particularly in upstream segments are expected to have the largest increases in employment and wages.

In light of the findings, the authors offer the following recommendations: 

• Federal manufacturing policy: Expand PCAST’s Advanced Manufacturing Partnership recommendations—specifically, for developing a national system of certifications for production skills and establishing a national apprenticeship program for skilled trades in manufacturing—to include jobs outside the factory such as those in research and development, design and technical services, and market analysis.
• Higher education: Institutions of higher education should consider some adjustment to their curriculum with a long view of the coming changes to high-skill occupations, particularly with respect to problem identification and the management of uncertainty in highly automated work environments. In addition, universities and colleges should disseminate information among prospect and current students about occupations where the largest gains of employment and higher wage premiums are expected. 
• Improve national statistics: Supplement the North American Industry Classification System (NAICS) with data that permits tracking the entire value chain, including the development of a demand-based classification system. This initiative could benefit from adding survey questions to replicate the data collection of countries with a Value Added Tax—without introducing the tax, that is—allowing in this manner a more accurate estimation of the value added by each participant in a production network.

Whitefoot and Valdivia stress that any collective efforts aimed at invigorating manufacturing must seize the opportunities throughout the entire value chain including upstream and downstream services to production.

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Technical change is advancing at a breakneck speed while the institutions that govern innovative activity slog forward trying to keep pace. The lag has created a need for reform in the governance of innovation. Reformers who focus primarily on the social benefits of innovation propose to unmoor the innovative forces of the market. Conversely, those who deal mostly with innovation’s social costs wish to constrain it by introducing regulations in advance of technological developments. In this paper, Walter Valdivia and David Guston argue for a different approach to reform the governance of innovation that they call "Responsible Innovation" because it seeks to imbue in the actors of the innovation system a more robust sense of individual and collective responsibility.

Responsible innovation appreciates the power of free markets in organizing innovation and realizing social expectations but is self-conscious about the social costs that markets do not internalize. At the same time, the actions it recommends do not seek to slow down innovation because they do not constrain the set of options for researchers and businesses, they expand it. Responsible innovation is not a doctrine of regulation and much less an instantiation of the precautionary principle. Innovation and society can evolve down several paths and the path forward is to some extent open to collective choice. The aim of a responsible governance of innovation is to make that choice more consonant with democratic principles.

Valdivia and Guston illustrate how responsible innovation can be implemented with three practical initiatives: 

1. Industry: Incorporating values and motivations to innovation decisions that go beyond the profit motive could help industry take on a long-view of those decisions and better manage its own costs associated with liability and regulation, while reducing the social cost of negative externalities. Consequently, responsible innovation should be an integral part of corporate social responsibility, considering that the latter has already become part of the language of business, from the classroom to the board room, and that is effectively shaping, in some quarters, corporate policies and decisions.
2. Universities and National Laboratories: Centers for Responsible Innovation, fashioned after the institutional reform of Internal Review Boards to protect human subjects in research and the Offices of Technology Transfer created to commercialize academic research, could organize existing responsible innovation efforts at university and laboratory campuses. These Centers would formalize the consideration of impacts of research proposals on legal and regulatory frameworks, economic opportunity and inequality, sustainable development and the environment, as well as ethical questions beyond the integrity of research subjects.
3. Federal Government: Federal policy should improve its protections and support of scientific research while providing mechanisms of public accountability for research funding agencies and their contractors. Demanding a return on investment for every research grant is a misguided approach that devalues research and undermines trust between Congress and the scientific community. At the same time, scientific institutions and their advocates should improve public engagement and demonstrate their willingness and ability to be responsive to societal concerns and expectations about the public research agenda. Second, if scientific research is a public good, by definition, markets are not effective commercializing it. New mechanisms to develop practical applications from federal research with little market appeal should be introduced to counterbalance the emphasis the current technology transfer system places on research ready for the market. Third, federal innovation policy needs to be better coordinated with other federal policy, including tax, industrial, and trade policy as well as regulatory regimes. It should also improve coordination with initiatives at the local and state level to improve the outcomes of innovation for each region, state, and metro area.

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Tuesday night, President Obama presented four critical questions about the future of America and I should like to comment on the first two:

1. How to produce equal opportunity, emphasizing economic security for all.
2. In his words, “how do we make technology work for us, and not against us,” particularly to meet the “urgent challenges” of our days.

The challenges the president wishes to meet by means of technological development are climate change and cancer. Let’s consider cancer first. There are plenty of reasons to be skeptical: this is not the first presidential war against cancer, President Nixon tried that once and, alas cancer still has the upper hand. It is ironic that Mr. Obama chose this particular ”moonshot”, because not only are the technical aspects of cancer more uncertain than those of space travel, political support for the project is vastly different and we cannot be sure that even another Democrat in the White House would see this project to fruition. In effect, neither Mr. Obama nor his appointed “mission control”, Vice President Biden, have time in office to see fruits from their efforts on this front.

The second challenge the president wishes to address with technology is problematic beyond technical and economic feasibility (producing renewable energy at competitive prices); curbing carbon emissions has become politically intractable. The president correctly suggested that being leaders in the renewable energy markets of the future makes perfect business sense, even for global warming skeptics. Nevertheless, markets have a political economy, and current energy giants have a material interest in not allowing any changes to the rules that so favor them (including significant federal subsidies). Only when the costs of exploration, extraction, and distribution of fossil fuels rise above those of renewable sources, we can expect policy changes enabling an energy transition to become feasible. When renewables are competitive on a large scale, it is not very likely that their production will be controlled by new industrial players. Such is the political economy of free markets. What’s more, progressives should be wary of standard solutions that would raise the cost of energy (such as a tax on carbon emissions), because low income families are quite sensitive to energy prices; the cost of electricity, gas, and transportation is a far larger proportion of their income than that of their wealthier neighbors.

It’s odd that the president proposes technological solutions to challenges that call for a political solution. Again, in saying this, I’m allowing for the assumption that the technical side is manageable, which is not necessarily a sound assumption to make. The technical and economic complexity of these problems should only compound political hurdles. If I’m skeptical that technological fixes would curb carbon emissions or cure cancer, I am simply vexed by the president’s answer to the question on economic opportunity and security: expand the safety net. It is not that it wouldn’t work; it worked wonders creating prosperity and enlarging the middle-class in the post-World War II period. The problem is that enacting welfare state policies promises to be a hard political battle that, even if won, could result in pyrrhic victories. The greatest achievement of Mr. Obama expanding the safety net was, of course, the Affordable Care Act. But his policy success came at a very high cost: a majority of the voters have questions about the legitimacy of that policy. Even its eponymous name, Obamacare, was coined as a term of derision. It is bizarre that opposition to this reform is often found amidst people who benefit from it. We can blame the systematic campaign against it in every electoral contest, the legal subterfuges brought up to dismantle it (that ACA survived severely bruised), and the AM radio vitriol, but even controlling for the dirty war on healthcare reform, passing such as monumental legislation strictly across party lines has made it the lighting rod of distrust in government.

Progressives are free to try to increase economic opportunity following the welfare state textbook. They will meet the same opposition that Mr. Obama encountered. However, where progressives and conservatives could agree is about increasing opportunities for entrepreneurs, and nothing gives an edge to free enterprise more than innovation. Market competition is the selection mechanism by which an elite of enterprises rises from a legion created any given year; this elite, equipped with a new productive platform, can arm-wrestle markets from the old guard of incumbents. This is not the only way innovation takes place: monopolies and cartels can produce innovation, but with different outcomes. In competitive markets, innovation is the instrument of product differentiation; therefore, it improves quality and cuts consumer prices. In monopolistic markets, innovation also takes place, but generally as a monopolist’s effort to raise barriers to entry and secure high profits. Innovation can take place preserving social protections to the employees of the new industries, or it can undermine job security of its labor force (a concern with the sharing economy). These different modes of innovation are a function of the institutions that govern innovation, including industrial organization, labor and consumer protections.

What the President did not mention is that question two can answer question one: technological development can improve economic opportunity and security, and that is likely to be more politically feasible than addressing the challenges of climate change and cancer. Shaping the institutions that govern innovative activity to favor modes of innovation that benefit a broad base of society is an achievable goal, and could indeed be a standard by which his and future administrations are measured. This is so because these are not the province of the welfare state. They are policy domains that have historically enjoyed bipartisan consensus (such as federal R&D funding, private R&D tax credits) or low contestation (support for small business, tech transfer, loan guarantees).

As Mr. Obama himself suggested, technology can be indeed be made to work for us, all of us.

       

A review essay of “Governance of Socio-technical Systems: Explaining Change”, edited by Susana Borrás and Jakob Edler (Edward Elgar, 2014, 207 pages).

Phasing-out a useful and profitable technology

I own a Nokia 2330; it’s a small brick phone that fits comfortably in the palm of my hand. People have feelings about this: mostly, they marvel at my ability to survive without a smart-phone. Concerns go beyond my wellbeing; once a friend protested that I should be aware of the costs I impose onto my friends, for instance, by asking them for precise directions to their houses. Another suggested that I cease trying to be smarter than my phone. But my reason is simple: I don’t need a smart phone. Most of the time, I don’t even need a mobile phone. I can take and place calls from my home or my office. And who really needs a phone during their commute? Still, my device will meet an untimely end. My service provider has informed me via text message that it will phase out all 2G service and explicitly encouraged me to acquire a 3G or newer model. 

There is a correct if simplistic explanation for this announcement: my provider is not making enough money with my account and should I switch to a newer device, they will be able to sell me a data plan. The more accurate and more complex explanation is that my mobile device is part of a communications system that is integrated to other economic and social systems. As those other systems evolve, my device is becoming incompatible with them; my carrier has determined that I should be integrated.

The system integration is easy to understand from a business perspective. My carrier may very well be able to make a profit keeping my account as is, and the accounts of the legion of elderly and low-income customers who use similar devices, and still they may not find it advantageous in the long run to allow 2G devices in their network. To understand this business strategy, we need to go back no farther than the introduction of the iPhone, which in addition to being the most marketable mobile phone set a new standard platform for mobile devices. Its introduction accelerated a trend underway in the core business of carriers: the shift from voice communication to data streaming because smart phones can support layers of overlapping services that depend on fast and reliable data transfer. These services include sophisticated log capabilities, web search, geo-location, connectivity to other devices, and more recently added bio-monitoring. All those services are part of systems of their own, so it makes perfect business sense for carriers to seamlessly integrate mobile communications with all those other systems. Still, the economic rationale explains only a fraction of the systems integration underway.

The communication system of mobile telephony is also integrated with regulatory, social, and cultural systems. Consider the most mundane examples: It’s hard to imagine anyone who, having shifted from paper-and-pencil to an electronic agenda, decided to switch back afterwards. We are increasingly dependent of GPS services; while it may have once served tourists who did not wish to learn how to navigate a new city, it is now a necessity for many people who without it are lost in their home town. Not needing to remember phone numbers, the time of our next appointment, or how to go back to that restaurant we really liked, is a clear example of the integration of mobile devices into our value systems.

There are coordination efforts and mutual accommodation taking place: tech designers seek to adapt to changing values and we update our values to the new conveniences of slick gadgets. Government officials are engaged in the same mutual accommodation. They are asking how many phone booths must be left in public places, how to reach more people with public service announcements, and how to provide transit information in real-time when commuters need it. At the same time, tech designers are considering all existing regulations so their devices are compliant. Communication and regulatory systems are constantly being re-integrated.

The will behind systems integration

The integration of technical and social systems that results from innovation demands an enormous amount of planning, effort, and conflict resolution. The people involved in this process come from all quarters of the innovation ecology, including inventors, entrepreneurs, financiers, and government officials. Each of these agents may not be able to contemplate the totality of the system integration problem but they more or less understand how their respective system must evolve so as to be compatible with interrelated systems that are themselves evolving.  There is a visible willfulness in the integration task that scholars of innovation call the governance of socio-technical systems.

Introducing the term governance, I should emphasize that I do not mean merely the actions of governments or the actions of entrepreneurs. Rather, I mean the effort of all agents involved in the integration and re-integration of systems triggered by innovation; I mean all the coordination and mutual accommodation of agents from interrelated systems. And there is no single vehicle to transport all the relevant information for these agents. A classic representation of markets suggests that prices carry all the relevant information agents need to make optimal decisions. But it is impossible to project this model onto innovation because, as I suggested above, it does not adhere exclusively to economic logic; cultural and political values are also at stake. The governance task is therefore fragmented into pieces and assigned to each of the participants of the socio-technical systems involved, and they cannot resolve it as a profit-maximization problem. 

Instead, the participants must approach governance as a problem of design where the goal could be characterized as reflexive adaptation. By adaptation I mean seeking to achieve inter-system compatibility. By reflexive I mean that each actor must realize that their actions trigger adaption measures in other systems. Thus, they cannot passively adapt but rather they must anticipate the sequence of accommodations in the interaction with other agents. This is one of the most important aspects of the governance problem, because all too often neither technical nor economic criteria will suffice; quite regularly coordination must be negotiated, which is to say, innovation entails politics.

The idea of governance of socio-technical systems is daunting. How do we even begin to understand it? What kinds of modes of governance exist? What are the key dimensions to understand the integration of socio-technical systems? And perhaps more pressing, who prevails in disputes about coordination and accommodation? Fortunately, Susana Borrás, from the Copenhagen Business School, and Jakob Edler, from the University of Manchester, both distinguished professors of innovation, have collected a set of case studies that shed light on these problems in an edited volume entitled Governance of Socio-technical Change: Explaining Change. What is more, they offer a very useful conceptual framework of governance that is worth reviewing here. While this volume will be of great interest to scholars of innovation—and it is written in scholarly language—I think it has great value for policymakers, entrepreneurs, and all agents involved in a practical manner in the work of innovation.

Organizing our thinking on the governance of change

The first question that Borrás and Edler tackle is how to characterize the different modes of governance. They start out with a heuristic typology across the two central categories: what kinds of agents drive innovation and how the actions of these agents are coordinated. Agents can represent the state or civil society, and actions can be coordinated via dominant or non-dominant hierarchies.

	Change led by state actors	Change led by societal actors
Coordination by dominant hierarchies	Traditional deference to technocratic competence: command and control.	Monopolistic or oligopolistic industrial organization.
Coordination by non-dominant hierarchies	State agents as primus inter pares.	More competitive industries with little government oversight.

Source: Adapted from Borrás and Adler (2015), Table 1.2, p. 13.

This typology is very useful to understand why different innovative industries have different dynamics; they are governed differently. For instance, we can readily understand why consumer software and pharmaceuticals are so at odds regarding patent law. The strict (and very necessary) regulation of drug production and commercialization coupled with the oligopolistic structure of that industry creates the need and opportunity to advocate for patent protection; which is equivalent to a government subsidy. In turn, the highly competitive environment of consumer software development and its low level of regulation foster an environment where patents hinder innovation. Government intervention is neither needed nor wanted; the industry wishes to regulate itself.

This typology is also useful to understand why open source applications have gained currency much faster in the consumer segment than the contractor segment of software producers. Examples of the latter is industry specific software (e.g. to operate machinery, the stock exchange, and ATMs) or software to support national security agencies. These contractors demand proprietary software and depend on the secrecy of the source code. The software industry is not monolithic, and while highly innovative in all its segments, the innovation taking place varies greatly by its mode of governance.

Furthermore, we can understand the inherent conflicts in the governance of science. In principle, scientists are led by curiosity and organize their work in a decentralized and organic fashion. In practice, most of science is driven by mission-oriented governmental agencies and is organized in a rigid hierarchical system. Consider the centrality of prestige in science and how it is awarded by peer-review; a system controlled by the top brass of each discipline. There is nearly an irreconcilable contrast between the self-image of science and its actual governance. Using the Borrás-Edler typology, we could say that scientists imagine themselves as citizens of the south-east quadrant while they really inhabit the north-west quadrant.

There are practical lessons from the application of this typology to current controversies. For instance, no policy instrument such as patents can have the same effect on all innovation sectors because the effect will depend on the mode of governance of the sector. This corollary may sound intuitive, yet it really is at variance with the current terms of the debate on patent protection, where assertions of its effect on innovation, in either direction, are rarely qualified.

The second question Borrás and Edler address is that of the key analytical dimensions to examine socio-technical change. To this end, they draw from an ample selection of social theories of change. First, economists and sociologists fruitfully debate the advantage of social inquiry focused on agency versus institutions. Here, the synthesis offered is reminiscent of Herbert Simon’s “bounded rationality”, where the focus turns to agent decisions constrained by institutions. Second, policy scholars as well as sociologists emphasize the engineering of change. Change can be accomplished with discreet instruments such as laws and regulations, or diffused instruments such as deliberation, political participation, and techniques of conflict resolution. Third, political scientists underscore the centrality of power in the adjudication of disputes produced by systems’ change and integration. Borrás and Edler have condensed these perspectives in an analytical framework that boils down to three clean questions: who drives change? (focus on agents bounded by institutions), how is change engineered? (focus on instrumentation), and why it is accepted by society? (focus on legitimacy). The case studies contained in this edited volume illustrate the deployment of this framework with empirical research.

Standards, sustainability, incremental innovation

Arthur Daemmrich (Chapter 3) tells the story of how the German chemical company BASF succeeded marketing the biodegradable polymer Ecoflex. It is worth noting the dependence of BASF on government funding to develop Ecoflex, and on the German Institute for Standardization (DIN), making a market by setting standards. With this technology, BASF capitalized on the growing demand in Germany for biodegradables, and with its intense cooperation with DIN helped establish a standard that differentiate Ecoflex from the competition. By focusing on the enterprise (the innovation agent) and its role in engineering the market for its product by setting standards that would favor them, this story reveals the process of legitimation of this new technology. In effect, the certification of DIN was accepted by agribusinesses that sought to utilize biodegradable products.

If BASF is an example of innovation by standards, Allison Loconto and Marc Barbier (Chapter 4) show the strategies of governing by standards. They take the case of the International Social and Environmental Accreditation and Labelling alliance (ISEAL). ISEAL, an advocate of sustainability, positions itself as a coordinating broker among standard developing organizations by offering “credibility tools” such as codes of conduct, best practices, impact assessment methods, and assurance codes. The organization advocates what is known as the tripartite system regime (TSR) around standards. TSR is a system of checks and balances to increase the credibility of producers complying with standards. The TSR regime assigns standard-setting, certification, and accreditation of the certifiers, to separate and independent bodies. The case illustrates how producers, their associations, and broker organizations work to bestow upon standards their most valuable attribute: credibility. The authors are cautious not to conflate credibility with legitimacy, but there is no question that credibility is part of the process of legitimizing technical change. In constructing credibility, these authors focus on the third question of the framework –legitimizing innovation—and from that vantage point, they illuminate the role of actors and instruments that will guide innovations in sustainability markets.

While standards are instruments of non-dominant hierarchies, the classical instrument of dominant hierarchies is regulation. David Barberá-Tomás and Jordi Molas-Gallart tell the tragic consequences of an innovation in hip-replacement prosthesis that went terribly wrong. It is estimated that about 30 thousand replaced hips failed. The FDA, under the 1976 Medical Device Act, allows incremental improvements in medical devices to go into the market after only laboratory trials, assuming that any substantive innovations have already being tested in regular clinical trials. This policy was designed as an incentive for innovation, a relief from high regulatory costs. However, the authors argue, when products have been constantly improved for a number of years after an original release, any marginal improvement comes at a higher cost or higher risk—a point they refer to as the late stage of the product life-cycle. This has tilted the balance in favor of risky improvements, as illustrated by the hip prosthesis case. The story speaks to the integration of technical and cultural systems: the policy that encourages incremental innovation may alter the way medical device companies assess the relative risk of their innovations, precisely because they focus on incremental improvements over radical ones. Returning to the analytical framework, the vantage point of regulation—instrumentation—elucidates the particular complexities and biases in agents’ decisions.

Two additional case studies discuss the discontinuation of the incandescent light bulb (ILB) and the emergence of translational research, both in Western Europe. The first study, authored by Peter Stegmaier, Stefan Kuhlmann and Vincent R. Visser (Chapter 6), focuses on a relatively smooth transition. There was wide support for replacing ILBs that translated in political will and a market willing to purchase new energy efficient bulbs. In effect, the new technical system was relatively easy to re-integrate to a social system in change—public values had shifted in Europe to favor sustainable consumption—and the authors are thus able to emphasize how agents make sense of the transition. Socio-technical change does not have a unique meaning: for citizens it means living in congruence with their values; for policy makers it means accruing political capital; for entrepreneurs it means new business opportunities. The case by Etienne Vignola-Gagné, Peter Biegelbauer and Daniel Lehner (Chapter 7) offers a similar lesson about governance. My reading of their multi-site study of the implementation of translational research—a management movement that seeks to bridge laboratory and clinical work in medical research—reveals how the different agents involved make sense of this organizational innovation. Entrepreneurs see a new market niche, researchers strive for increasing the impact of their work, and public officials align their advocacy for translation with the now regular calls for rendering publicly funded research more productive. Both chapters illuminate a lesson that is as old as it is useful to remember: technological innovation is interpreted in as many ways as the number of agents that participate in it.

Innovation for whom?

The framework and illustrations of this book are useful for those of us interested in the governance of system integration. The typology of different modes of governance and the three vantage points from which empirical analysis can be deployed are very useful indeed. Further development of this framework should include the question of how political power is redistributed by effect of innovation and the system integration and re-integration that it triggers. The question is pressing because the outcomes of innovation vary as power structures are reinforced or debilitated by the emergence of new technologies—not to mention ongoing destabilizing forces such as social movements. Put another way, the framework should be expanded to explain in which circumstances innovation exacerbates inequality. The expanded framework should probe whether the mutual accommodation is asymmetric across socio-economic groups, which is the same as asking: are poor people asked to do more adapting to new technologies? These questions have great relevance in contemporary debates about economic and political inequality. 

I believe that Borrás and Edler and their colleagues have done us a great service organizing a broad but dispersed literature and offering an intuitive and comprehensive framework to study the governance of innovation. The conceptual and empirical parts of the book are instructive and I look forward to the papers that will follow testing this framework. We need to better understand the governance of socio-technical change and the dynamics of systems integration. Without a unified framework of comparison, the ongoing efforts in various disciplines will not amount to a greater understanding of the big picture. 

I also have a selfish reason to like this book: it helps me make sense of my carrier’s push for integrating my value system to their technical system. If I decide to adapt to a newer phone, I could readily do so because I have time and other resources. But that may not be the case for many customers of 2G devices who have neither the resources nor the inclination to learn to use more complex devices. For that reason alone, I’d argue that this sort of innovation-led systems integration could be done more democratically. Still, I could meet the decision of my carrier with indifference: when the service is disconnected, I could simply try to get by without the darn toy.

Note: Thanks to Joseph Schuman for an engaging discussion of this book with me.

       

       

In 2015 the international community agreed on a set of ambitious sustainable development goals (SDGs) for the global society, to be achieved by 2030. One of the lessons that the implementation of the Millennium Development Goals (MDG s) has highlighted is the importance of a systematic approach to identify and sequence development interventions—policies, programs, and projects—to achieve such goals at a meaningful scale. The Chinese approach to development, which consists of identifying a problem and long-term goal, testing alternative solutions, and then implementing those that are promising in a sustained manner, learning and adapting as one proceeds—Deng Xiaoping’s “crossing the river by feeling the stones”—is an approach that holds promise for successful achievement of the SDGs.

Having observed the Chinese way, then World Bank Group President James Wolfensohn in 2004, together with the Chinese government, convened a major international conference in Shanghai on scaling up successful development interventions, and in 2005 the World Bank Group (WBG ) published the results of the conference, including an assessment of the Chinese approach. (Moreno-Dodson 2005). Some ten years later, the WBG once again is addressing the question of how to support scaling up of successful development interventions, at a time when the challenge and opportunity of scaling up have become a widely recognized issue for many development institutions and experts.

Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.”

In parallel with the recognition that scaling up matters, the development community is now also focusing on social enterprises (SEs), a new set of actors falling between the traditionally recognized public and private sectors. We adopt here the World Bank’s definition of “social enterprises” as a social-mission-led organization that provides sustainable services to Base of the Pyramid (BoP) populations. This is broadly in line with other existing definitions for the sector and reflects the World Bank’s primary interest in social enterprises as a mechanism for supporting service delivery for the poor. Although social enterprises can adopt various organizational forms—business, nongovernmental organizations (NGOs), and community-based organizations are all forms commonly adopted by social enterprises—they differ from private providers principally by combining three features: operating with a social purpose, adhering to business principles, and aiming for financial sustainability. Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.” (Figure 1)

Figure 1. Role of SE sector in public service provision

Social enterprises often start at the initiative of a visionary entrepreneur who sees a significant social need, whether in education, health, sanitation, or microfinance, and who responds by developing an innovative way to address the perceived need, usually by setting up an NGO, or a for-profit enterprise. Social enterprises and their innovations generally start small. When successful, they face an important challenge: how to expand their operations and innovations to meet the social need at a larger scale. 

Development partner organizations—donors, for short—have recognized the contribution that social enterprises can make to find and implement innovative ways to meet the social service needs of people at the base of the pyramid, and they have started to explore how they can support social enterprises in responding to these needs at a meaningful scale. 

The purpose of this paper is to present a menu of approaches for addressing the challenge of scaling up social enterprise innovations, based on a review of the literature on scaling up and on social enterprises. The paper does not aim to offer specific recommendations for entrepreneurs or blueprints and guidelines for the development agencies. The range of settings, problems, and solutions is too wide to permit that. Rather, the paper provides an overview of ways to think about and approach the scaling up of social enterprise innovations. Where possible, the paper also refers to specific tools that can be helpful in implementing the proposed approaches. 

Note that we talk about scaling up social enterprise innovations, not about social enterprises. This is because it is the innovations and how they are scaled up that matter. An innovation may be scaled up by the social enterprise where it originated, by handoff to a public agency for implementation at a larger scale, or by other private enterprises, small or large. 

This paper is structured in three parts: Part I presents a general approach to scaling up development interventions. This helps establish basic definitions and concepts. Part II considers approaches for the scaling up of social enterprise innovations. Part III provides a summary of the main conclusions and lessons from experience. A postscript draws out implications for external aid donors. Examples from actual practice are used to exemplify the approaches and are summarized in Annex boxes.

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