Economic Growth from Universities - Reality or Illusion

Education Summit
Tohoku University Centenary

Introduction

Matters were simpler for the good citizens of Ferrara in 1442. They addressed a petition to Prince Leonello for the establishment of a university there.

“For to begin with its utility, strangers will flock hither from various remote regions, and many scholars will stay here, live upon our bread and wine, and purchase of us clothing and other necessities for human existence, will leave their money in the city, and not depart hence without great gain to all of us. Moreover, our citizens who go elsewhere to acquire an education and take their money there, will have an academy at home where they can learn without expense, and our money will not fly away.”

Driven by a strong mercantilist spirit, these 15th Century proponents of a local university did not ignore social justice: “Besides, there are many excellent wits in this town of ours which remain undeveloped and lost, whether from the carelessness of their fathers or their own negligence or lack of money. These will be aroused by the presence of a university and the conveniences for study, and will be enabled to pursue their education without great expense.”

Now let us fast-forward to the 21st Century and Richard Florida’s concept of universities as creative attractors. His university hub is characterised by three T’s:

“Technology: Universities are centres for cutting-edge research in fields from software to biotechnology and important sources of new technologies and spin-off companies.

Talent: Universities are amazingly effective talent attractors, and their effect is truly magnetic. By attracting eminent researchers and scientists, universities in turn attract graduate students, generate spin-off companies and encourage other companies to locate nearby in a cycle of self-reinforcing growth.

Tolerance: Universities also help to create a progressive, open and tolerant people climate that helps attract and retain members of the Creative Class. Many college towns from Austin, Texas, to Iowa City, Iowa have always been places where gays and other ‘outsiders’ in those parts of the country could find a home.”

The medieval passage sees the university as a teaching academy for professional development. Florida’s university is very much a research driven enterprise. Both are optimistic and both emphasise the ‘place’ of the university and its local influence.

Universities continue to evolve in a changing world and greater connectedness offers opportunity and challenge. Can we look further forward and retain our optimism? Let us start by looking backwards once more.

Nineteenth century

In the early 1800s Benjamin Jowett, Master of Balliol and Vice-Chancellor at Oxford was famously provoked to declaim, “Research! A mere excuse for idleness; it has never achieved, and never will achieve any results of the slightest value.”

It was in this context that John Henry Newman developed his eloquent and persuasive defence of liberal education. Under no circumstances would he have said “For, to begin with its utility…” On the other hand his ideas remind us that utilitarianism when it descends into mere instrumentalism is not ultimately useful! There is a faint echo of Jowett when he states that “the great discoveries in chemistry and electricity were not made in Universities. Observatories are more frequently out of universities than in them, and even within their bounds need have no moral connexion with them.”

In contrast, in the 19th Century a concept of university, integrating teaching and research, having a liberal romantic vision but not eschewing the practical, developed in Germany. Beginning with von Humboldt’s founding in Berlin of the University which now bears his name and grounded on the high principles of Lehrfreiheit and Lernfreiheit the German 19th Century model is often taken as the foundation stone of the modern research university.

In Britain, the ‘red-brick’ universities were spawned by the progress of the Industrial Revolution and certainly had a spirit of enlightened utilitarianism. One should, however, be careful to note that they had high intellectual aspirations from the start and were influenced by the Humboldt University and University College, London.

Idealistic too but even more down to earth were the US Land Grant Colleges created by the 1862 Morrill Act, signed by Abraham Lincoln. These were established to provide training for the working classes in agriculture, military tactics and the mechanical arts – but also in classical studies in order to provide a liberal education.

It did not take long for research to be incorporated, for the Hatch Act of 1887 provided for the dissemination of agriculture research findings in proportion to the number of small farmers in each state.

Both the land-grant universities and the red-bricks grew to be important research-intensive universities in their own right. From their inception, however, they served another valuable role by challenging and exerting pressure on the established institutions. Let me give a concrete example. In writing of the politics of change at the University of Cambridge around the beginning of the 20th Century, Gordon Johnson, while noting that improvement “was also a consequence of enthusiasm for change from within”, gives many illustrations of how the rise of the civic universities in Birmingham, Liverpool, Leeds and Manchester made Cambridge spruce up.

Johnson reminds us that medicine was relatively underfunded at Cambridge and students were starved of practice. The dry wit, F M Cornford, author of Microcosmographia Academica, sang the following song:

“When students to Cadavers are
As eighteen is to one
The dividend’s inadequate,
The thing cannot be done
. . . . .
At Owens and at Birmingham
One man, one leg’s the rule:
And students have a head a-piece
At happy Liverpool”

I chose to visit the 19th Century because so many people, especially those with a cultural heritage similar to mine, respond to the stimulus “university” by conjuring up a mental image which is a mixture of the Newman and Humboldt models. It is as well to remember that the practical economic value of the university remained a serious consideration while these ideal concepts were being formulated and that much of the vigour of the broader system of higher education was generated with economic gain explicitly in mind.

United States research universities

The great success story of the 20th Century, at least the second half, is the development of higher education in the United States, led by the research universities. Overall participation rates are very high and there are many alternative pathways but most admiration is reserved for the top 100 research universities which account for almost 80% of the sector’s R&D spending. There is a glittering array of achievement – Nobel Prizes, medical breakthroughs, discipline defining books.

This has come at some expense. I learned from Frank Rhodes an unflattering description of the modern Newman-Humboldt hybrid, which was given by Charles Clotfelter, “Featuring the size of a small city, the complexity of a major conglomerate, the technical sophistication of the space program, the quaintness of a medieval monastery, and the political intrigue of a Trollope novel, the modern research university in this country is a peculiar institution indeed”.

Might it be that such an unwieldy monster loses touch with direct economic stimuli and that the new surrogate currency is prestige? Bequests, donations, competitive grants can fuel the enterprise whose leadership may require more coordination and facilitation than strategic engagement.

I have argued that, in the 19th Century, new universities with a targeted economic mission added dynamism to the whole. This may no longer be true. Let me quote Frank Rhodes, “But growth of these ‘new universities’ has brought little variety of subject matter and teaching style. The blinkered goal of each new institution seems to be to become another Harvard, offering as full a range as possible of traditional undergraduate, graduate and professional programs... Even the prewar denominational colleges and universities, which added variety and conviction to the educational enterprise, seem to have lost their intellectual moorings.”

Let me paraphrase another comment by Rhodes. A great invigorating strength of the American university is a governance structure whose members are actively engaged in raising funds to fulfil the mission of the institution. This contrasts with other countries where the governing body is largely helping to spend and police a central government allocation. Could it be that the US research university is now so successful and (usually) so large that the mission is diffused and much of that stimulus is lost?

Asia

Nobody can fail to be impressed by the rapid economic growth of China and India. Moreover we see massive government investment in establishing a number of world-class universities whose facilities make the rest of us catch our breath.

A very interesting player is Singapore. That nation has already achieved prodigious economic development and now the Government is investing heavily in universities, both local and invited overseas institutions, with a clear objective of becoming the higher education hub of Asia.

Singapore has English language, a British cultural background as well as Chinese, Indian and Malay ethnic citizens. One aim is to train future leaders and the next layer of key personnel for India and China. At the same time there is a program to develop Singaporean research and innovation to build a future economy for the country itself.

Already the National University of Singapore ranks high amongst the world’s leading universities and continues to make rapid progress. During the period when China and India raise their capacity for providing their own mass higher education, Singapore is well-placed to repay investment by seizing market share from other provider countries, notably US, UK, Canada and Australia, who currently rely on export earnings from higher education and on training and retaining researchers from other countries.

In Australia, with which I am most familiar, the structure of higher education funding encourages increasing dependence on income from foreign students. There is, as yet, no acceptance by government that additional investment in overall university infrastructure may be needed to protect this educational export income.

Australia’s relatively low investment (by OECD standards) in R & D, admittedly in business R & D rather than in government expenditure, is explained away as a feature of the structure of the economy. It is indeed true that, if one reprocesses OECD figures based on the existing structure of each country’s economy, then Australia’s current investment moves from 5th bottom to a median position some three places below the average. However a recent draft Productivity Commission report dismisses in a single sentence the notion that university research should be supported with the goal of transforming Australia’s industry structure.

I believe that it is fair to describe the prevailing Australian orthodoxy as follows: Countries which invest heavily in university research are pursuing fool’s gold, deluded by a discredited linear model. The recent strength of the Australian economy demonstrates that our current level of investment is appropriate. The strongest reasons for public support of R & D are the ‘spillovers’ i.e., those returns that cannot be captured by the innovator. Public investment should reflect the existing structure of the economy.

This is in marked contrast to China where university companies have had a great impact on developing high-tech industry. Moreover the leading universities depend on the profits from their commercial enterprise, for example Peking University and Tsinghua University cover more than half of their operating costs in this way.

Already in 2000, the Chinese Ministry of Education reported that university enterprises earned 36.8 billion Yuan, generating 3.5 billion Yuan in profits. In 2005 the revenue reached 96.9 billion, with 24.5 billion coming from the Peking University Founders Group alone.

Elsewhere in Asia, notably here in Japan, central governments have transferred significant fiscal responsibility to universities. I believe that this is an encouraging move offering great opportunities. There will be a difficult transition in which new skills need to be developed in university management and that, in turn will determine what degree of autonomy is finally granted. My Australian experience suggests that this will be a challenging period. Over the last decade in my country the Government has progressively withdrawn direct funding from universities and made it necessary for us to engage in more entrepreneurial activities. As some of these have failed, as is inevitable, government regulations have increased in the name of risk management.

Thus we have a paradox: universities are obliged to take risks in generating income but, at the same time, protective regulations increase and make that more difficult! It is a constant battle to find room to manoeuvre.

Personally I welcome being less dependent on government funding and having more scope to determine our University’s future. Many of my colleagues, however, call to mind George Bernard Shaw who said “Liberty means responsibility. That is why most men dread it.”

Connectivity and the future

What have we learned from historical and international comparisons? I would submit that universities do promote beneficial economic outcomes but that this is clearer when an economy is in a developmental phase. As economies and their universities become more sophisticated there is a tendency to separate the applied research from the original mother institution and for the translational activity to take place elsewhere.

Public investment remains necessary, not least because governments expect ‘public good’ research from universities where benefit flows to the community but is not directly captured by the innovator.

Accordingly, the degree of optimism with which one greets Florida’s analysis seems to me to depend on how much one can believe in enlightened public support for creative hubs whose direct economic impact is difficult to measure.

It is easy to find grounds for pessimism in mature economies. A recent global CEO survey by IBM found great enthusiasm for embracing innovation but in ranking significant sources of innovative ideas, the CEO’s placed employees as first of nine options – academia last and internal R & D second last. On the other hand, when companies were ranked on revenue compound annual growth rate over five years, the outperformers made significantly more use of external ideas than did underperformers.

Writing in the Harvard Business Review, November 2006, Rosabeth Moss Kanter provides a bromide for the CEO enthusiasm for innovation. “Innovation is back at the top of the corporate agenda,” she writes. “Never a fad, but always in or out of fashion, innovation gets rediscovered as a growth enabler every half-dozen years (about the length of a managerial generation).”

The previous month, in the same Review, Gary P Pisano argues vigorously that “Biotech has not delivered on its promise because of the industry’s structure – much of it borrowed from Silicon Valley – is flawed. Businesses engaged in advancing basic science as a core activity need a new design.”

We are looking here at major research projects with lead times of a dozen years and contributions from many parties. Pisano argues that we have neither the legal framework nor the behavioural patterns in place to cope with this.

In fact successful spinoffs of discrete pieces of technology in less complex commercializations have encouraged a form of narrow-minded selfishness.

Pisano’s proposed cure is not necessarily bad news for universities but it suggests that the examples we have been discussing are obsolete. In particular he claims that “a shift in the mentality and policies of universities is needed. They should focus primarily on maximizing their contributions to the scientific community, not maximizing their licensing revenues and equity returns.” We need not only benign enlightened governments but benign enlightened university presidents!

This sounds cynical – so now is the moment for me to come out of the closet as Candide! I believe that universities in their economic engagement should be pursuing an ‘open innovation’ model (a phrase coined in the business context by Henry Chesbrough) and I believe with Pisano that, in cooperation with business and governments, there needs to be developed a new structured anatomy for science business.

It is part of Chesbrough’s thesis that companies often benefit more by purchasing IP than by creating IP. This could, of course, lead to a game of ‘pass the parcel’ in which everyone is reluctant to create the seed corn. Chesbrough notes that “governments and universities will need to address this imbalance. Increasingly, the university system will be the locus of fundamental discoveries. And industry will need to work with universities to transfer these discoveries into innovative products, commercialized through appropriate business models.”

Let me add that for major breakthroughs we will need networks of universities rather than individual universities and a business model which can cope with long development phases. Moreover we must envisage crossing national boundaries.

These are not remote speculations. We have dramatic connectivity. Surgeons in my University can ‘perform’ operations in Viet Nam via the internet. Our electron-microscopists can analyse in Sydney samples which are located in another country.

The world has strong university networks fostering collaborative research some of which will undoubtedly lead to commercial development. So far we are more comfortable with benchmarking of educational practices and commercial joint ventures in teaching delivery but we must learn to formalise effective IP agreements in general. These must not be too restrictive.

Let me quote Pisano once more: “Open licensing that makes an upstream discovery widely available on reasonable economic terms works best when the technologies in question are broadly applicable tools, techniques or concepts with many potential (but uncertain) paths for development.” The point is that such technologies should not be buried by the granting of exclusive licences.

Here is the challenge. Connectivity allows us to tackle big science with commercial potential, big science that is beyond the scope of one player or one location. Universities want to participate but remain free agents and to work on bits of many problems simultaneously. How do you structure this activity without killing it?

Ease of travel and ease of communication have led to the formation of formalised international networks of universities. To realize their full potential we must tackle challenges of the kind I have just outlined. I am unrepentantly optimistic.