DURHAM – Science is at the root of inventions that improve lives and increase firms’ productivity and profits. But Professor Ashish Arora of Duke University’s Fuqua School of Business says companies who rely on public scientific discoveries may find it difficult to earn above-average returns from the innovation.

“When you have a public resource, like university science, which is available to all—including your competitors—how do you extract a private benefit from that resource?” Arora asked.

In a new paper, published in the Research Policy journal, Arora and co-authors Sharon Belenzon of Fuqua and Bernardo Dionisi, a Fuqua PhD candidate, argue that being a first mover in science-based inventions justifies corporate investment in scientific research.

EPO is a good example, Arora said.

Patients undergoing dialysis or otherwise suffering from anemia, he said, benefit from a hormone called Erythropoietin (EPO), first purified by Professor Eugene Goldwasser of the University of Chicago, who described EPO’s role in stimulating the production of red blood cells.

“But the first to move to produce EPO and introduce it to the market was Amgen, because it was closely following the developments in genetics,” he said.

Being a first mover allowed Amgen to obtain broad patent protection on using rDNA technology to produce EPO in 1989. Amgen has since sold more than $50 billion worth of Epogen.

A foot in the door

Arora said companies “need to have a foot in the door in the scientific community” in order to be able to translate the preliminary science in a commercial product.

“They need to understand what’s going on,” Arora said. ”They need to attend conferences and they need to actively participate in the scientific community. They are not just passive observers.”

Fuqua Professor Wesley Cohen was the first to label this ability to be embedded in science to foster innovation the “absorptive capacity” of firms.

Testing the advantage

The researchers analyzed patents granted between 1980 and 2010 to U.S.-based public firms. They found that companies that are the first to cite a scientific article in their patent are able to capture a significant value from the inventions.

The researchers also found that firms that engage in science have a higher chance of being early users of that science ahead of their competition—and the greater the competition, the higher the private value of science-based inventions.

“When lots of companies use the same science, the average value is less, because they are all competing—many companies could have supplied EPO, for instance,” Arora said. “But the company who moves first, will grab most of the value.”

First movers are the ones who can secure broader patent protection, Arora said, which will also make it harder for followers to work around the edges of the patent to find ways of exploiting the science without infringing on the protection.

In fact, pre-empting competitors is one of the ways inventions are more valuable, he said. Arora points to Artificial Intelligence, where early AI researchers were able to corner complementary assets—like large datasets, or computational power—which gave them an advantage once the science became public.

“Suppose you make a deal with whoever is producing data and you get some kind of exclusivity,” Arora said. “Then you have an advantage, even if you don’t file patents.”

Corporate labs and first movers

Arora and Belenzon have long studied the U.S. innovation system, and warned about the systemic cost of the demise of U.S. corporate labs.

Their research showed that in the last three decades, many corporate labs have shuttered and some are some are much smaller in scope or scale than in the past. The researchers also argued that the subsequent delegating of science to university labs has slowed the transformation of scientific knowledge into novel products and processes.

“Corporate labs helped firms discover the public science they needed,” Arora said.

However, Arora said, even without the structure of a scientific lab companies have ways to reap the rewards of science.

“They need to be connected, to actively participate in scientific research, and be part of a network of ideas,” he said. “If they are part of the scientific conversation, they will be able to find the smartest people, and they will be more likely to be the first mover.”

(C) Duke University

This story was originally published at: https://www.fuqua.duke.edu/duke-fuqua-insights/why-companies-should-prioritize-science