What Works in Boston, Won’t Necessarily Work in Birmingham: 4 Pragmatic Principles for Building Commercialization Capacity in Innovation Ecosystems
Just like crop tops, flannel, and some truly unfortunate JNCO jeans that one of these authors wore in junior high, the trends of the 90’s are upon us again. In the innovation world, this means an outsized focus on tech-based economic development, the hottest new idea in economic development, circa 1995. This takes us back in time to fifteen years after the passage of the Bayh Dole Act, the federal legislation that granted ownership of federally funded research to universities. It was a time when the economy was expanding, dot-com growth was a boom, not a bubble, and we spent more time watching Saved by the Bell than thinking about economic impact.
After the creation of tech transfer offices across the country and the benefit of time, universities were just starting to understand how much the changes wrought by Bayh-Dole would impact them (or not). A raft of optimistic investments in venture development organizations and state public-private partnerships swept the country, some of which (like Ben Franklin Technology Partners and BioSTL) are still with us today, and some of which (like the Kansas Technology Enterprise Center) have flamed out in spectacular fashion. All of a sudden, research seemed like a process to be harnessed for economic impact. Out of this era came the focus on “technology commercialization” that has captured the economic development imagination to this day.
Commercialization, in the context of this piece, describes the process through which universities (or national labs) and the private sector collaborate to bring to the market technologies that were developed using federal funding. Unlike sponsored research and development, in which industry engages with universities from the beginning to fund and set a research agenda, commercialization brings in the private sector after the technology has been conceptualized. Successful commercialization efforts have now grown across the country, and we believe they can be described by four practical principles:
- Principle 1: A strong research enterprise is a necessary precondition to building a strong commercialization pipeline.
- Principle 2: Commercialization via established businesses creates different economic impacts than commercialization via startups; each pathway requires fundamentally different support.
- Principle 3: Local context matters; what works in Boston won’t necessarily work in Birmingham.
- Principle 4: Successful commercialization pipelines include interventions at the individual, institutional, and ecosystem level.
Principle 1: A strong research enterprise is a necessary precondition to building a strong commercialization pipeline.
The first condition necessary to developing a commercialization pipeline is a reasonably advanced research enterprise. While not every region in the U.S. has access to a top-tier research university, there are pockets of excellent research at most major U.S. R1 and R2 institutions. However, because there is natural attrition at each stage of the commercialization process (much like the startup process) a critical mass of novel, leading, and relevant research activity must exist in a given University. If that bar is assumed to be the ability to attract $10 million in research funding (the equivalent of winning 20-25 SBIR Phase 1 grants annually), that limits the number of schools that can run a fruitful commercialization pipeline to approximately 350 institutions, based on data from the NSF NCSES. A metro area should have at least one research institution that meets this bar in order to secure federal funding for the development of lab-to-market programs, though given the co-location of many universities, it is possible for some metro areas to have several such research institutions or none at all.
Principle 2: Commercialization via established businesses creates different economic impacts than commercialization via startups; each pathway requires fundamentally different support.
When talking about commercialization, it is also important to differentiate between whether a new technology is brought to market by a large, incumbent company or start-up. The first half of the commercialization process is the same for both: technology is transferred out of universities, national labs, and other research institutions through the process of registering, patenting, and licensing new intellectual property (IP). Once licensed, though, the commercialization pathway branches into two.
With an incumbent company, whether or not it successfully brings new technology to the market is largely dependent on the company’s internal goals and willingness to commit resources to commercializing that IP. Often, incumbent companies will license patents as a defensive strategy in order to prevent competition with their existing product lines. As a result, license of a technology by an incumbent company cannot be assumed to represent a guarantee of commercial use or value creation.
The alternative pathway is for universities to license their IP to start-ups, which may be spun out of university labs. Though success is not guaranteed, licensing to these new companies is where new programs and better policies can actually make an impact. Start-ups are dependent upon successful commercialization and require a lot of support to do so. Policies and programs that help meet their core needs can play a significant role in whether or not a start-up succeeds. These core needs include independent space for demonstrating and scaling their product, capital for that work and commercialization activities (e.g. scouting customers and conducting sales), and support through mentorship programs, accelerators, and in-kind help navigating regulatory processes (especially in deep tech fields).
Principle 3: Local context matters; what works in Boston won’t necessarily work in Birmingham.
Unfortunately, many universities approach their tech transfer programs with the goal of licensing their technology to large companies almost exclusively. This arises because university technology transfer offices (TTOs) are often understaffed, and it is easier to license multiple technologies to the same large company under an established partnership than to scout new buyers and negotiate new contracts for each patent. The Bayh-Dole Act, which established the current tech transfer system, was never intended to subsidize the R&D expenditures of our nation’s largest and most profitable companies, nor was it intended to allow incumbents to weaponize IP to repel new market entrants. Yet, that is how it is being used today in practical application.
Universities are not necessarily to blame for the lack of resources, though. Universities spend on average 0.6% of their research expenditures on their tech transfer programs. However, there is a large difference in research expenditures between top universities that can attract over a billion in research funding and the average research university, and thus a large difference in the staffing and support of TTOs. State government funding for the majority of public research universities have been declining since 2008, though there has been a slight upswing since the pandemic, while R&D funding at top universities continues to increase. Only a small minority of TTOs bring in enough income from licensing in order to be self-sustaining, often from a single “blockbuster” patent, while the majority operate at a loss to the institution.
To successfully develop innovation capacity in ecosystems around the country through increased commercialization activity, one must recognize that communities have dramatically different levels of resources dedicated to these activities, and thus, “best practices” developed at leading universities are seldom replicable in smaller markets.
Principle 4: Successful commercialization pipelines include interventions at the individual, institutional, and ecosystem level.
As we’ve discussed at length in our FAS “systems-thinking” blog series, which includes a post on innovation ecosystems, a systems lens is fundamental to how we see the world. Thinking in terms of systems helps us understand the structural changes that are needed to change the conditions that we see playing out around us every day. When thinking about the structure of commercialization processes, we believe that intervention at various structural levels of a system is necessary to create progres on challenges that seem insurmountable at first—such as changing the cultural expectations of “success” that are so influential in the academic systems. Below we have identified some good practices and programs for supporting commercialization at the individual, institutional, and ecosystem level, with an emphasis on pathways to start-ups and entrepreneurship.
Practices and Programs Targeted at Individuals
University tech transfer programs are often reliant on individuals taking the initiative to register new IP with their TTOs. This requires individuals to be both interested enough in commercialization and knowledgeable enough about the commercialization potential of their research to pursue registration. Universities can encourage faculty to be proactive in pursuing commercialization through recognizing entrepreneurial activities in their hiring, promotion and tenure guidelines and encouraging faculty to use their sabbaticals to pursue entrepreneurial activities. An analog to the latter at national laboratories are Entrepreneurial Leave Programs that allow staff scientists to take a leave of up to three years to start or join a start-up before returning to their position at the national lab.
Faculty and staff scientists are not the only source of IP though; graduate students and postdoctoral researchers produce much of the actual research behind new intellectual property. Whether or not these early-career researchers pursue commercialization activities is correlated with whether they have had research advisors who were engaged in commercialization. For this reason, in 2007, the National Research Foundation of Singapore established a joint research center with the Massachusetts Institute of Technology (MIT) such that by working with entrepreneurial MIT faculty members, researchers at major Singaporean universities would also develop a culture of entrepreneurship. Most universities likely can’t establish programs of this scale, but some type of mentorship program for early-career scientists pre-IP generation can help create a broader culture of translational research and technology transfer. Universities should also actively support graduate students and postdoctoral researchers in putting forward IP to their TTO. Some universities have even gone so far as to create funds to buy back the time of graduate students and postdocs from their labs and direct that time to entrepreneurial activities, such as participating in an iCorps program or conducting primary market research.
Once IP has been generated and licensed, many universities offer mentorship programs for new entrepreneurs, such as MIT’s Venture Mentorship Services. Outside of universities, incubators and accelerators provide mentorship along with funding and/or co-working spaces for start-ups to grow their operation. Hardware-focused start-ups especially benefit from having a local incubator or accelerator, since hard-tech start-ups attract significantly less venture capital funding and support than digital technology start-ups, but require larger capital expenditures as they scale. Shared research facilities and testbeds are also crucial for providing hard-tech start-ups with the lab space and equipment to refine and scale their technologies.
For internationally-born entrepreneurs, an additional consideration is visa sponsorship. International graduate students and postdocs that launch start-ups need visa sponsors in order to stay in the United States as they transition out of academia. Universities that participate in the Global Entrepreneur in Residence program help provide H-1B visas for international entrepreneurs to work on their start-ups in affiliation with universities. The university benefits in return by attracting start-ups to their local community that then generate economic opportunities and help create an entrepreneurial ecosystem.
Practices and Programs Targeted at Institutions
As mentioned in the beginning, one of the biggest challenges for university tech transfer programs is understaffed TTOs and small patent budgets. On average, TTOs have only four people on staff, who can each file a handful of patents a year, and budgets for the legal fees on even fewer patents. Fully staffing TTOs can help universities ensure that new IP doesn’t slip through the cracks due to a lack of capacity for patenting or licensing activities. Developing standard term sheets for licensing agreements can also reduce administrative burden and make it easier for TTOs to establish new partnerships.
Instead of TTOs, some universities have established affiliated technology intermediaries, which are organizations that take on the business aspects of technology commercialization. For example, the Wisconsin Alumni Research Foundation (WARF) was launched as an independent, nonprofit corporation to manage the University of Wisconsin–Madison’s vitamin D patents and invest the resulting revenue into future research at the university. Since its inception 90 years ago, WARF has provided $2.3 billion in grants to the university and helped establish 60 start-up companies.
In general, universities need to be more consistent about collecting and reporting key performance indicators for TTOs outside of the AUTM framework, such as the number of unlicensed patents and the number of products brought to the market using licensed technologies. In particular, universities should disaggregate metrics for licensing and partnerships between companies less than five years old and those greater than five years old so that stakeholders can see whether there is a difference in commercialization outcomes between incumbent and start-up licensees.
Practices and Programs Targeted at Innovation Ecosystems
Innovation ecosystems are made up of researchers, entrepreneurs, corporations, the workforce, government, and sources of capital. Geographic proximity through co-locating universities, corporations, start-ups, government research facilities, and other stakeholder institutions can help foster both formal and informal collaboration and result in significant technology-driven economic growth and benefits. Co-location may arise organically over time or result from the intentional development of research parks, such as the NASA Research Park. When done properly, the work of each stakeholder should advance a shared vision. This can create a virtuous cycle that attracts additional talent and stakeholders to the shared vision and can integrate with more traditional attraction and retention efforts. One such example is the co-location of the National Bio- and Agro-Defense Facility in Manhattan, KS, near the campus of Kansas State University. After securing that national lab, the university made investments in additional BSL-2, 3 and 3+ research facilities including the Biosecurity Research Institute and its Business Development Module. The construction and maintenance of those facilities required the creation of new workforce development programs to train HVAC technicians that manage the independent air handling capabilities of the labs and train biomanufacturing workers, which was then one of the selling points for the successful campaign for the relocation of corporation Scorpius Biologics to the region. At best, all elements of an innovation ecosystem are fueled by a research focus and the commercialization activity that it provides.
For regions that find themselves short of the talent they need, soft-landing initiatives can help attract domestic and international entrepreneurs, start-ups, and early-stage firms to establish part of their business in a new region or to relocate entirely. This process can be daunting for early-stage companies, so soft-landing initiatives aim to provide the support and resources that will help an early-stage company acclimatize and thrive in a new place. These initiatives help to expand the reach of a community, create a talent base, and foster the conditions for future economic growth and benefits.
Alongside the creation of innovation ecosystems should be the establishment of “scale-up ecosystems” focused on developing and scaling new manufacturing processes necessary to mass produce the new technologies being developed. This is often an overlooked aspect of technology development in the United States, and supply chain shocks over the past few years have shone a light on the need to develop more local manufacturing supply chains. Fostering the growth of manufacturing alongside technology innovation can (1) reduce the time cycling between product and process development in the commercialization process, (2) capture the “learning by doing” benefits from scaling the production of new technologies, and (3) replenish the number of middle-income jobs that have been outsourced over the past few decades.
Any way you slice it, commercialization capacity is one clear and critical input to a successful innovation ecosystem. However, it’s not the only element that’s important. A strong startup commercialization effort, standing alone, without the corporate, workforce, or government support that it needs to build a vibrant ecosystem around its entrepreneurs, might wane with time or simply be very successful at shipping spinouts off to a coastal hotspot. Building a commercialization pipeline is not, nor has it ever been, a one-size-fits-all solution for ecosystem building.
It may even be something we’ve over-indexed on, given the widespread adoption of tech-based economic development strategies. One significant reason for this is the fact that entrepreneurship via commercialization is most open to those who already have access to a great deal of privilege–who have attained, or are on the path to, graduate degrees in STEM fields critical to our national competitiveness. If you’ve already earned a Ph.D. in machine learning, chances are your future is looking pretty bright—with or without entrepreneurial opportunity involved. To truly reap the economic benefits of commercialization activity (and the startups it creates), we need to aggressively implement programs, training, and models that change the demographics of who gets to commercialize technology, not just how they do it. To shape this, we’ll need to change the conditions for success for early-career researchers and reconsider the established model of how we mentor and train the next generation of scientists and engineers–you’ll hear more from us on these topics in future posts!
Leveraging Pharmacoeconomics and Advance Market Commitments to Reduce Healthcare Expenditures
Summary
By establishing a self-sustaining fund to incentivize pharmaceutical companies to develop new and improved treatment protocols using low-cost, off-patent and unmonopolizable therapies, billions of dollars in cost savings could be realized by US government payers and health insurers in a financially “de-risked” manner while improving quality of care —truly a win/win opportunity.
Currently, pharmaceutical companies do not develop medical therapies unless they can enforce a monopoly price using patents. As a result, thousands of low-cost therapies, such as repurposed generic drugs, nutraceuticals, plant medicines, medical diets, lifestyle interventions, and dose de-escalation protocols, lack private financial incentives for development. Clinically validating the safety and efficacy of these affordable treatments would help many patients while saving billions of dollars. Meanwhile, the largest pharmaceutical companies are earning trillions of dollars in revenue for new patented drugs that often provide limited or no added benefit to patients, while causing significant financial burden on patients and the taxpayer.
We can solve these misaligned incentives using new payment models such as interventional pharmacoeconomic (IVPE) randomized controlled trials (RCTs) that result in cost savings for healthcare systems, even if RCTs fail, by comparing the efficacy of low-cost therapies to expensive patented drugs. Further, outcomes-based financing mechanisms known as Advance Market Commitments or Pay-For-Success (PFS) contracts, can incentivize the successful development of new low-cost therapies, entirely funded by payer costsavings from reduced reliance on monopoly-priced drugs.
We propose that the National Institutes of Health (NIH), National Center for Advancing Translational Sciences (NCATS) work together with payers such as Centers for Medicare & Medicaid Services (CMS) and the United States Department of Veterans Affairs (VA) to transfer a fraction of their costsavings from IVPE RCTs and AMCs to create a self-sustaining “prize” fund for development of low-cost therapies under the 2010 America COMPETES Reauthorization Act.
With these new payment models, it is possible to create a scalable and sustainable business for a sponsor to develop affordable therapies, while improving patient outcomes and saving significant costs. For example, every 10,000 patients treated under an IVPE RCT + AMC contract comparing off-patent ketamine to patented esketamine, which could be more effective for treatment-resistant depression, would save payers at least $1.8 billion over 10 years until the expiry of the esketamine patent, part of which can be paid back into the fund. The IVPE + AMC contract can also provide revenues of at least $250 million to a sponsor of the clinical trials for development, FDA-approval, and post-approval (Phase IV) pharmacovigilance studies for ketamine (see Appendix).
Challenge and Opportunity
Patients urgently need more effective treatments that are readily accessible and affordable. For many Americans, treatments are prohibitively scarce or expensive, with an estimated 42% of newly-diagnosed cancer patients losing all of their assets within 2 years. As national health expenditures continue to rise and drug R&D productivity continues to stagnate, it is crucial to rethink private-public alignment by implementing improved incentive design systems to support better health and economic outcomes.
Generic medicines have substantial potential for addressing healthcare costs and improving R&D productivity: low-cost generic drugs saved the U.S. healthcare system $1.67 trillion in the last decade. Thousands of FDA-approved generic drugs—as well as 50,000+ nutraceuticals, plant medicines, diets, lifestyle interventions, and dose de-escalation regimens (collectively known as unmonopolizable therapies)—could be studied to treat diseases significantly cheaper and faster than developing new patented drugs. It costs an estimated $1 billion-plus and takes more than 10–15 years to get a newly patented drug to market, whereas it is significantly cheaper and faster to find new uses for existing drugs and other unmonopolizable therapies that have known safety profiles and mechanisms of action from their use over many years.
However, it is often not economically viable for pharmaceutical companies to pay for clinical trials assessing unmonopolizable therapies, which can be prescribed off-label at relatively low-cost. Generic-drug companies are protected by “skinny labeling” legislation, which makes it difficult or impossible to enforce patents for new uses of generic drugs. While pharmaceutical companies can reformulate generic drugs and re-patent them to charge a monopoly price, this might only be commercially viable if the reformulation is better than the original generic. And where a reformulation involves a combination of generic drugs, compounding pharmacies can prescribe the drug using the original low-cost generics.
Due to this market failure, there is a lack of funding for large and robust clinical trials for such low-cost therapies; the chance of the original formulation of a generic drug obtaining FDA approval for a new use approaches zero when it goes generic. The same problem applies to funding large clinical trials for nutraceuticals, medical diets, lifestyle interventions, and novel dosing regimens, where it is almost impossible to stop doctors and patients accessing these therapies. Patients who desperately need more treatment options are unable to realize the benefits that existing off-patent, unmonopolizable, or low-cost therapies might offer, and there may be significant harm to the public due to such gaps in patent incentives.
Increased direct grant funding for clinical trials can also create suboptimal outcomes. During the height of the COVID-19 pandemic in 2020, the Pepcid AC (famotidine) COVID-19 Study raised red flags weeks after a $21 million grant was awarded to study its effects as a potential therapy. Concerns over study integrity, outcome measures, and even administrative protocols were all brought to light. Ironically, such grant funding can lead to even more risk and wasted taxpayer funds, such as $150 million of federal funding on the dietary supplement curcumin studied in more than 120 clinical trials, with no tangible evidence that it is an effective treatment for any medical condition. Further, conservative estimates of publicly funded clinical trials for repurposing phospholipidosis-inducing CADs to treat COVID-19, including hydroxychloroquine, may be over $6 billion. Other than the large and pragmatic RECOVERY and TOGETHER trials initiated by the United Kingdom, which discovered that dexamethasone significantly reduced mortality in COVID patients on respiratory support, funding smaller, low-powered clinical trials did not lead to the development of significantly beneficial COVID therapies for patients. A risk-transferring market mechanism to fund large clinical trials would have been more efficient—or at least not have exposed taxpayers to the risk of failed clinical trials. IVPE RCTs are paid from cost savings, and AMC contracts only pay out when pre-specified requirements are met, so taxpayers and health insurers do not pay for any failures.
To quickly and affordably improve the lives of millions of patients, we propose that Congress should appropriate, and the Biden-Harris Administration should direct, the NIH, CMS, and VA with the support of the NCATS Repurposing Drugs program, to establish a self-sustaining fund utilizing IVPE RCTs and AMCs to fund clinical trials for affordable therapies generating cost savings (“IVPE + AMC Fund”), using their federal authorization to establish market rewards or “prizes” under the 2010 America Competes Reauthorization Act. Private health insurers are fragmented and have limited incentives to reduce the costs of the $4 trillion p/a US healthcare industry in order to justify the high premiums charged to their US customers, while providers earn more revenue by charging higher fees. However, there is some movement away from fee-for-service and towards PFS contracts and Value Based Pricing (VBP). There is also a significant risk of lawsuits (including personal liability for decisionmakers) under ERISA legislation and the Consolidated Appropriations Act of 2021, which impose a fiduciary duty on self-insured employers to reduce healthcare spend. Taxpayer-funded payers such as CMS, VA, United States Army and large self-insured employers can use IVPE RCTs and AMCs to incentivize development of low-cost therapies as a fiduciary and financial risk management mechanism. Their net cost savings would far exceed the cost of administering the IVPE + AMC Fund.
In particular, IVPE RCTs compare equivalence or superiority of a low-cost repurposed generic drug to an expensive patented drug normally funded by a payer. For example, there was a recent proposal to establish a self-sustaining IVPE fund to determine the optimal minimum dose for expensive oncology drugs to save costs while reducing side-effects. The price difference between the low-cost and expensive intervention can far exceed the cost of running the RCT, which means it pays for itself in cost savings, even if the RCT fails. And if the RCT shows the low-cost treatment provides at least the same standard of care as the patented drug, this can save payers billions of dollars until the patent expires. If some of these cost savings are transferred back into an IVPE + AMC Fund, this will create a scalable business model for developing new low-cost therapies.
The self-sustaining nature of the IVPE + AMC Fund could be demonstrated, for example, by providing market rewards up to $100 million (which can be pooled between federal agencies) to reimburse a sponsor recruiting patients into IVPE trials comparing low-cost and expensive therapies. The reimbursement amount should ideally be less than the cost of the expensive therapy and the resulting guaranteed payer cost savings from the low-cost therapy substituting the expensive therapy could be paid back to increase the size of the fund. The IVPE clinical trial would require ethics approval and provide valuable data to “de-risk” whether the low-cost therapy works, without requiring additional taxpayer support. AMCs then would act as a “pull” mechanism to reward sponsors of large Phase III Randomized Controlled Trials (RCTs) that result in FDA approval with higher reimbursement price for an otherwise low-cost therapy that would substitute the expensive therapy. For example, a sponsor can partner with a generic drug manufacturer to guarantee supply of a repurposed generic in return for sharing revenue under an AMC. The sponsor can then submit bioequivalence and efficacy RCT data under the 505(b)(2) pathway to obtain a new “label” for the new use, which also provides a 3-year period of data exclusivity. Alternatively, a sponsor can leverage the revenue from the AMC to develop a nominal reformulation (e.g. new mechanism of administration or dose) to disincentivize generic substitution and obtain a 5-year period of data exclusivity under the 505(b)(1) New Drug Application pathway. The sponsor can earn additional revenue from the sale of the repurposed generic or RCT data to other healthcare systems, with the payers backing the IVPE + AMC Fund receiving a lower price or royalties. Payer cost savings from substituting an expensive therapy with the lower-cost therapy can be paid back into the IVPE + AMC Fund to ensure long-term sustainability.
AMC contracts are already implemented in various other contexts to address market failures. For example, so-called Social Impact Bonds (SIBs), a type of AMC contract, have been used to help fund projects preventing homelessness and prisoner recidivism, with over $700 million in SIBs raised to date. Operation Warp Speed used AMCs to incentivize vaccine development through FDA approval and lab-to-patient stages. Similar methodologies to IVPE RCTs have also been used to prove that a low dose of bevacizumab (Avastin) could treat age-related macular degeneration rather than patented ranibizumab (Lucentis), which was estimated to save Medicare Part B $18 billion over 10 years.
Therefore, an IVPE + AMC Fund can generate billions of dollars in revenue from payers due to cost savings through the development of new low-cost therapies that reduce reliance on expensive therapies. It can also address misaligned incentives under the patent system by encouraging pharmaceutical companies to (1) “de-link” profits from maximizing sales of a monopoly-priced drug, (2) ensure that patented drugs are value for money rather than pursuing “evergreening” strategies such as patenting slight modifications of generic drugs to extend the period of monopoly pricing, and (3) pursue the most effective therapies rather than the most patentable. AMCs can also be used to incentivize development of low-cost therapies to address unmet medical needs if an expensive comparator treatment is not available or otherwise, the IVPE methodology can compare usual care.
A Market Failure Caused by a Tragedy of the Commons
Thousands of potentially safe and effective off-patent and low-cost therapies are currently ignored due to misaligned incentives under the patent system. Core to this tragedy is that the clinical trial data validating the safety and efficacy of treatment protocols is what is valuable to healthcare payers and patients, not whether the drug’s active ingredient is new. In essence, treatment protocols involving new uses for off-patent and unmonopolizable therapies are nonrivalrous and “highly non-excludable” public goods. The co-author Savva Kerdemelidis’s 2014 master’s thesis concluded that because the patent system provides inadequate incentives for the pharmaceutical industry to develop such “unmonopolizable therapies,” alternative “prize-like” incentives are needed. This allows payers to put a price on clinical trial data validating the efficacy of these new and more affordable treatment protocols.
Scaling the Development of Low-Cost Therapies with IVPE RCTs and AMCs
IVPE RCTs and AMCs (see definition in FAQ section) recognize that the value of a therapeutic intervention is not the cost of an active ingredient but the clinical trial data showing it is safe and effective in a particular patient population. To accelerate the development of unmonopolizable therapies through the clinical and regulatory pipeline, we propose that payers—specifically government agencies such as CMS and VA as well as health insurers responsible for pharmaceutical reimbursement (ideally a consortium of payers)—support IVPE RCT pilots to de-risk early-stage clinical research and the use of AMC contracts through the IVPE + AMC Fund. The AMC will incentivize a sponsor fund the Phase III studies need to obtain FDA approval and conduct post-approval (Phase IV) pharmacovigilance studies. It will be self-sustaining if a percentage of savings from the availability of low-cost therapies is paid back into the IVPE + AMC Fund.
The total amount of outcome payments under an AMC drawn from the IVPE + AMC Fund can be calculated with reference to the level of clinical impact or Quality-Adjusted Life-Years (QALYs) generated, disability-adjusted life-years (DALYs) reduced, or even future cost savings from allowing a low-cost therapy to be substituted for an expensive one or reduce hospitalisation costs. For example, the number of QALYs resulting from an approved unmonopolizable therapy can be calculated in advance by a committee of pharmacoeconomic experts under a similar process to the United Kingdom National Health System’s Subscription-Style-Payment (SSP) model for incentivizing development of new antibiotics. Under an SSP, a fixed amount is paid annually according to the total QALY value of the new therapy, as assessed by an elected, independent Medical Evaluation Committee. Similarly, CMS in Louisiana implemented a “Netflix-subscription” model to guarantee supply of low-cost generic drugs to treat Hepatitis C by agreeing to a fixed annual payment in advance. Pay-for-performance and value-based-payment (VBP) contracts are similar to AMC contracts and often negotiated with payers to provide more cost-effective delivery of healthcare services, where rewards are based on certain conditions being met. Accordingly, using AMC contracts to reward successful RCTs is not a novel mechanism that will require a significant administrative burden for federal agencies to implement. It may only require changing a few sentences in an existing VBP contract to refer to a repurposed generic drug or low-cost therapy.
The following example describes how the IVPE + AMC model works:
- A payer (e.g., CMS) agrees to an IVPE RCT with a sponsor comparing the equivalence or superiority of a repurposed generic drug or low-cost therapy to a patented drug (or expensive standard of care). The payer can reimburse the low-cost therapy at a higher price or per-patient price sufficient to cover the costs of the IVPE RCT. If the higher reimbursement is at a lower price than the patented drug or expensive treatment, it will guarantee cost savings for the payer, even if the RCT fails. If the IVPE RCT is successful, the payer agrees to a AMC worth, say, at least $100 million to purchase a minimum quantity of the repurposed generic drug in advance or reimbursing the sponsor at the higher price, subject to a sponsor obtaining FDA approval and being responsible for post-approval pharmacovigilance. Notably, because the IVPE RCT is funded from immediate cost savings due to the price difference between the low-cost therapy and patented drug, both parties are financially de-risked. (See Appendix 1 for an example of the IVPE + AMC model using the example of generic ketamine vs. patented esketamine to treat depression.)
- The sponsoring pharmaceutical company raises $50 million to conduct the clinical trials needed for FDA approval, on the basis of the agreement to transfer cost savings under the IVPE RCT and the $100 million AMC, subject to FDA approval and post-approval (Phase IV) pharmacovigilance studies showing continued safety and efficacy.
- If the IVPE RCT is successful and the generic drug or low-cost therapy is shown to be equivalent to or better than the expensive patented drug, the AMC is triggered: sponsors are guaranteed minimum sales of $100M and also have a “branded” generic or low-cost therapy with new label and data exclusivity for three years by filing an abbreviated new drug application (ANDA) with the FDA. A new drug application (NDA) with five years of data exclusivity is possible if the generic or low-cost therapy contains a new active ingredient. They can also obtain a method of use patent on the optimal treatment protocol, which provides some commercial benefit and leverage to negotiate AMCs with other payers. A payer’s cost savings from updating their reimbursement guidelines to substitute a low-cost generic drug for the expensive patented drug will exceed the $100 million outcome payments under the AMC, which can be used to top-up the IVPE + AMC Fund to make it self-sustaining. In the case that clinical trials fail, the sponsor loses their investment, unless payers agree to transfer part of their cost savings for the duration of the IVPE RCTs to reimburse the sponsor. This is truly a win-win arrangement to fund new RCTs with very limited commercial risks compared to traditional drug development. The main task is finding repurposed generic drugs or low-cost interventions that could reduce reliance on expensive patented drugs by having at least the same safety and efficacy. There are many low-hanging fruits that are already medically “de-risked” (see generic drug repurposing use cases section below).
Once the repurposed generic or low-cost therapy receives FDA approval and market authorization, the insurer can then market the approved therapy to prescribing medical doctors. Doctors in turn can prescribe the treatment protocol to their patients, who benefit from improved health. Moreover, this payment model that generates revenue from RCT data resulting in costsavings helps redress the conflict of interest and information asymmetry between government and healthcare payers and pharmaceutical companies, who are now incentivized to develop the most effective therapies for the lowest cost.
Financial and Health Impact of the IVPE + AMC Fund
According to the Office of Management and Budget and the Office of Science and Technology Policy, prize competitions benefit the federal government by allowing federal agencies to:
- Pay only for success
- Establish ambitious goals and shift technological and other risks to prize participants
- Increase the number and diversity of individuals, organizations, and teams tackling a problem, including those who have not previously received federal funding
- Increase cost effectiveness, stimulate private-sector investment, and maximize the return on taxpayer dollars
- Motivate and inspire the public to tackle scientific, technical, and societal problems
There are additional reasons why implementing a self-sustaining IVPE + AMC Fund as a prize-like “pull” incentive to reward development of low-cost therapies is more efficient and scalable than providing grant funding or “push” incentives (although the approaches can be complementary and push incentives can be superior when likely outcomes are known to the grantor). First, IVPE RCTs de-risk sponsors if the payer cost savings are shared by ensuring payer reimbursement of the low-cost therapy is sufficient to cover the costs of the RCT. Under an AMC contract, there is a transfer of risk from payers to the market: payers are not willing to take on the risk and expense of large RCTs, the responsibility of marketing to patients and doctors, and managing adverse events or product recalls. In turn, the market is comfortable taking on this risk and expense, as long as investors can obtain a standard rate of return (e.g., 10-20% p/a). Second, payers and government agencies are often not as well-qualified or equipped as the pharmaceutical industry, which has access to the most experienced staff and latest technological advances, including artificial intelligence. Third, grant programs have high administration costs, both for grantors and grantees, while the latter are not incentivized to deliver successful outcomes. By comparison, the markets are incentivized to fail fast and efficiently allocate capital to those best able to deliver results for the lowest cost. Lastly, repurposed off-patent and unmonopolizable therapies could outcompete patented drugs by providing improved health outcomes for a lower cost to payers. Pharmaceutical companies may also benefit from IVPE RCTs and AMC contracts versus developing novel molecules, due to decreased risk, costs, and time to market.
The IVPE + AMC Fund creates a clinical trial data marketplace that incentivizes the funding of large-scale clinical trials of unmonopolizable therapies such as low-cost generic drugs that can result in billions, if not trillions, of dollars in healthcare savings for health insurers and governments and, moreover, provide better treatment options and outcomes for patients. Those cost savings can then be reinvested in additional IVPE + AMC Funds to incentivize further development of treatment protocols. Accordingly, the IVPE + AMC model not only incentivizes investment in unmonopolizable therapies, it can also be used to generate a sustainable and scalable business model for additional investment into low-cost therapies that also help improve access to healthcare in the Global South.
Many Generic Drug Repurposing or Low-Cost Therapy Candidates Exist
Use Case 1: Metastatic Cancer
Hundreds of non-cancer generic drugs have already been tested by researchers and physicians in preclinical and clinical studies for cancer, some up to Phase II trials, and show promise. For example, repurposing the off-patent NSAID ketorolac as a prevention treatment resulting in 10% reduction in breast cancer recurrence would cost $5 million annually (100,000 cases at $50 per case for ketorolac and its administration). The savings could be over $1 billion annually (10,000 patients at approximately $100,000 per patient for the treatment of metastatic disease). These savings would be dwarfed by the cost savings available under an IVPE fund comparing low doses of expensive patented cancer drugs with their standard dose, which can result in fewer side-effects for patients, including nivolumab, abiraterone, trastuzumab, ibrutinib, paclitaxel, and pembrolizumab. The latter (Keytruda) is the top-selling blockbuster drug, with annual sales in excess of $15B; dosing Keytruda by weight could reduce use by 25% in approved indications such as lung cancers.
Use Case 2: Major Depressive Disorder & Treatment-Resistant Depression
Depression is the leading cause of disability in the United States for people between the ages of 15 and 44. An estimated 12-month prevalence of medication-treated major depressive disorder (MDD) in the United States was 8.9 million adults, and 2.8 million had treatment-resistant depression (TRD). A growing body of evidence has shown that infusions of generic ketamine can be a viable and affordable therapy for both forms of depression, which cost the United States over $320 billion in 2018. Generic ketamine has been used as a general anesthetic since the Vietnam War and costs less than $2 per dose. However generic ketamine is not authorized to treat any form of depression. The patented and FDA-approved s-ketamine or esketamine, has a price at $850 per dose and is used for TRD and MDD with suicidal ideation.
To date, many clinical trials show that generic ketamine is more effective. Moreover, a 2020 study indicated that esketamine is unlikely to be cost-effective for management of treatment-resistant depression in the United States unless its price falls by more than 40%. And recently, the UK payer NICE declined to reimburse esketamine. With approximately nine million American adults living with treatment-resistant depression, successfully repurposing generic ketamine using the self-sustaining IVPE + AMC Fund could save many lives through improved access and standard of care—and save healthcare payers hundreds of millions of dollars in monopoly prices.
Plan of Action
The IVPE + AMC Fund can be established through the America COMPETES Reauthorization Act of 2010 (P.L. 111-358), which encourages prize competitions by authorizing the head of any federal agency to carry out a competition that has the potential to stimulate innovation and advance the agency’s mission. In 2016, the 21st Century Cures Act (P.L. 114-255) directed the director of the NIH to support prize competitions that would realize significant advancements in biomedical science or improve health outcomes, especially as they relate to human diseases or conditions. IVPE + AMC contracts can act like a “prize-like” incentive that is designed to address market failures but also lower healthcare treatment costs for federal agencies (e.g., CMS or VA) by incentivizing the discovery and validation of evidence that low-cost interventions such as repurposed generic drugs may be equivalent to or more effective than expensive interventions such as patented drugs.
In short, we propose that the IVPE + AMC Fund be established and operate as follows:
The IVPE + AMC Fund is established through the America COMPETES Reauthorization Act of 2010 (P.L. 111-358) to support backing of IVPE RCTs by payers as a self-funding mechanism and authorize outcome payments of up to $100 million under an AMC for successful clinical trials of a repurposed generic drug, nutraceutical, and/or other low-cost unmonopolizable therapy to treat a specific indication of high unmet medical need and cost burden (e.g. cancer, treatment resistant depression, glioblastoma, Crohn’s Disease, Alzheimer’s).
The IVPE + AMC Fund is furthermore supported by Section 2002 of The 21st Century Cures Act (Division A of P.L. 114-255), which requires the director of the NIH, under authorities in 15 U.S.C. §3719, to support prize competitions for one or both of the following goals:
- Identify and fund areas of biomedical science that could realize significant advancements through a prize competition; and
- Improve health outcomes, particularly with respect to human diseases and conditions that are serious and represent a significant disease burden in the United States. The prize competition may also target human diseases and conditions for which public and private investment in research is disproportionately small relative to federal government expenditures for prevention and treatment activities and those diseases and conditions with potential for a significant return on investment via reduction in federal expenditures.
The director of the NIH elects a Medical Evaluation Board, which oversees and manages the prize purpose held by the IVPE + AMC Fund as follows:
- Determining the minimum reimbursement price to sponsors for patients receiving a low-cost therapy under an IVPE RCT which is less than the price of an expensive patented drug or intervention that it substitutes. Then determine the minimum purchase order or outcome payments under an AMC contract relative to total QALY / DALY improvement or cost savings, subject to large Phase 3 RCTs resulting in FDA-approval of the low-cost therapy, and further subject to ongoing safety and efficacy shown in Phase 4 pharmacovigilance studies.
- The Medical Evaluation Board will be required to collect information on the effect of the IVPE + AMC Fund on advancing biomedical science or improving health outcomes and the effect of the innovations on federal expenditures.
Initially, we propose that Congress should fund the NIH with $2 million to establish a pilot IVPE + AMC Fund program in partnership with the NIH Office of Acquisition Management and Planning and NCATS. The focus of this would be to create a menu of “de-risked” low-cost therapies suitable for reimbursement under an IVPE + AMC Fund, and feasibility studies to show projected cost savings for payers such as CMS and VA and patient access benefits based on existing NCATS translational efforts, including generic drugs or dose de-escalation interventions by comparing them to expensive patented interventions under the IVPE model. For example, for treatment of age-related macular degeneration, generic drugs such as bevacizumab (Avastin) could save Medicare Part B $18 billion over 10 years compared with ranibizumab (Lucentis). Or compare the cost of prescribing the generic fluvoxamine to treat Covid at $6000 per QALY with molnupiravir at $55,000 per QALY, substituting sirolimus for nab-sirolumus to treat locally advanced unresectable or metastatic malignant perivascular epithelioid cell tumors (PEComa), or substituting sirolimus for everolimus in various cancers. Significant cost savings from IVPE RCT de-escalation studies comparing a lower dose of an expensive cancer drug to the standard treatment can fund the development of new unmonopolizable therapies. For example, this includes savings from low-dose nivolumab for head and neck cancer, low-dose abiraterone, and trastuzumab, ibrutinib, paclitaxel, and pembrolizumab for various other cancers, as noted above. The key to this pilot would be a sufficient evidence-based evaluation process to generate a menu of low-cost IVPE use cases. Ideally, at scale the IVPE + AMC Fund would cover a wide expanse of market failures, but we recommend the low-hanging fruit of repurposing generic drugs and dose de-escalation studies for specialist oncology drugs before expanding to other types of unmonopolizable therapies, including medical diets such as ketogenic diet, non-pharmaceutical, and lifestyle interventions that can reduce reliance on expensive therapies.
Conclusion
An IVPE + AMC Fund established under the America COMPETES Act can provide a more flexible, self-sustaining and cost-effective payment model for developing affordable and effective medical therapies, as opposed to the pharmaceutical industry’s traditional model of charging a monopoly price for new patented drugs. Establishing IVPE RCTs that compare low-cost treatments with expensive treatments generates immediate cost savings for payers from reduced reliance on monopoly-priced drugs as well as future cost savings if clinical guidelines are updated to recommend the low-cost treatment. AMC contracts incentivize FDA-approval and help correct misaligned incentives under the patent system by ensuring rewards are de-linked from maximizing the sales of a single monopoly-priced drug.
If our proposed self-sustaining IVPE + AMC Fund can be implemented, this will create new incentives to leverage the biotech innovations of the last 40 years and optimize the efficient delivery of healthcare, including genetic engineering, personalized medicine (informed by blood tests and low-cost DNA sequencing), artificial intelligence, decentralized clinical trials, and telemedicine. The pharmaceutical industry is not to blame if they can only rely on the patent system to obtain a return on investment for funding medical innovation. New outcomes-based payment models are needed to develop more affordable and effective treatments that can pull the practice of medicine into the 21st century and address significant health inequities.
Appendix
IVPE RCT + AMC Financial Model Example
This IVPE RCT + AMC financial model uses generic ketamine and patented esketamine as an example of how to leverage immediate and future cost savings by comparing a low-cost intervention to an expensive intervention to incentivize funding of RCTs for unmonopolizable therapies.
Advanced market commitments are a type of pay-for-success contract that guarantees a viable market for a product once it is successfully developed. Harvard economist Michael Kremer was the first to propose AMCs to stimulate private sector investment in innovations undersupplied by the market. In 2005, global foundations supported the creation of a detailed proposal by the Center for Global Development that described how an AMC might be structured. In 2009, the first AMC was launched, with $1.5 billion in funding for vaccines for diseases primarily affecting people living in poverty. Three vaccines have since been developed and more than 150 million children immunized, saving an estimated 700,000 lives.
Drug pricing can stay uniform if differential pricing is not permitted. Outcome payments under an AMC can be in the nature of a fixed annual “Netflix” subscription-style payment for the RCT data showing that the repurposed generic is safe and effective for the indication, and can be “de-linked” from sales of a drug. Alternatively, if differential pricing is permitted under applicable regulations and policy, then the repurposed generic drug could be priced higher in the new indication under an AMC.
Some of the most widely used prominent repurposed drugs include the following (not exhaustive):
Drug name | Original indication | Disease name |
---|---|---|
Aspirin | Analgesia | Colorectal cancer |
Gemcitabine | Antiviral | Cancer |
Raloxifene | Osteoporosis | Breast cancer |
Sildenafil | Angina | Erectile dysfunction |
Off-label drug use is when drugs are prescribed for a condition, a type of patient, or a dosage not officially approved by the FDA, which can be 20% of all prescriptions. Off-label drug use is generally not backed by the level of testing and data that allows FDA approvals, so patients do not have the guides and warnings that come from FDA-approved labels. Doctors and patients therefore do not always have enough information about the effects and dangers of the off-label use of the drug to make informed decisions. This can create a situation where patients are unknowingly at risk for dangerous, unexpected side effects. This validates the need for large Phase 3 RCTs to prove that drugs prescribed off-label can be prescribed for a new indication and granted a new label for that indication. In addition, health insurers often do not reimburse off-label use, which means patients are forced to pay out of pocket.
Large health insurers, particularly in the United States, often own hospitals and are not incentivized to reduce healthcare costs. This model will become unsustainable due to an aging baby boomer population and insurance premiums increasing faster than wages. To avoid this situation, payers have started to implement more outcomes-based contracts such as value-based pricing and bundled payments to incentivize innovation that reduces healthcare costs. Similarly, payers can agree to support IVPE RCTs to clinically validate a low-cost off-patent intervention by comparing it to an expensive patented intervention or paying an amount representing future cost savings or QALY gains for repurposing a generic drug under an AMC contract. Currently, payers do not put a price on the clinical trial data or treatment protocol information about which generic drug works in a new disease and the optimal dose, but only pay the marginal cost of the generic drug as a chemical. This is like only paying an electrician for the cost of a new $1 part, rather than for the knowledge of the specific part needed to fix an electrical fault, which is the valuable information that takes years of experience and would save your business thousands of dollars or more.
Repurposed generic drugs and unmonopolizable therapies such as nutraceuticals are de-risked because they have years of efficacy and safety data from successful Phase 1 safety trials and post-marketing Phase IV data in the case of generic drugs and being generally recognized as safe (GRAS) compounds in the case of nutraceuticals. IVPE RCTs de-risk early clinical trials, and an AMC would incentivize scale-up of supply of the repurposed generic drug and encourage sponsors to train doctors and patients to ensure more rapid uptake of this innovation.
Under an AMC, there can be a fixed annual payment or minimum sales commitment calculated with reference to determination of cost savings from substitution with expensive patented drugs and/or QALYs gained, similar to the subscription-style payment model for antibiotics in the NHS. The AMC means that the sponsor would also benefit from additional sales of the “branded” generic drug, so they would be incentivized to monitor its use and conduct standard Phase IV pharmacovigilance (and can also be liable for adverse events and recalls). Moreover, payer cost savings from the IVPE + AMC Fund program would far exceed the cost of monitoring or administrative burden.
Other than benefitting from immediate cost savings due to reduced reliance on expensive patented drugs, payers backing an AMC can negotiate a favorable price and guaranteed supply of the “branded” generic drug from the sponsor, whereas other payers would be forced to use an off-label version and expose doctors and patients to increased risk of liability. Sponsors would benefit from outcome payments under the AMC and additional sales of the “branded” generic. They can also leverage data exclusivity and traditional patent rights such as method-of-use patent for the optimal treatment protocol and reformulations to negotiate similar AMCs with other payers and also reduce the risk of generic off-label competition. The more payers backing the IVPE + AMC model, the more costsavings can be shared with free-riding. RCT data regarding optimal treatment protocols informed by genetic testing and other diagnostics can also be commercialized as a clinical decision support tool and trade secret. It is the intention of the authors to support the establishment of Public Good Pharma as a biotech company and clinical trial data marketplace owned by the charity Crowd Funded Cures, to carry out this business model.
Scaling High-Impact Solutions with a Market-Shaping Mechanism for Global Health Supply Chains
Summary
Congress created the Development Finance Corporation (DFC) to finance private sector solutions to the most critical challenges facing the developing world. In parallel, the United States Agency for International Development (USAID) has committed to engaging the private sector and shifting more resources to local market providers to further the impact of U.S. foreign aid dollars.
USAID is on the verge of awarding its largest-ever suite of foreign aid contracts, totaling $17 billion over the next ten years and comprising nine awards as part of the “NextGen Global Health Supply Chain” (GHSC) contracts. This is a continuation of previous global health supply chain contracts that date back to the 1960s that have grown exponentially in total value but have underperformed and not meaningfully transitioned responsibility for deployment to low- and middle-income country (LMIC) governments and LMIC-based organizations.
Now is the time for USAID and the DFC to pilot new ways of working with the private sector that put countries on a path to high-impact, sustainable development that builds markets.
We propose that USAID set aside $300 million of the overall $17 billion package – or less than 2 percent of the overall value – to create a Supply Chain Commercialization Fund to demonstrate a new way of working with the private sector and administering U.S. foreign aid. USAID and the DFC can deploy the Commercialization Fund to:
- Create and finance instruments that pay for results against certain well-defined success metrics, such as on-time delivery;
- Provide blended financing to expand the footprint and capabilities of established LMIC-based healthcare and logistics service providers that may require additional working capital to grow their presence and/or expand operations; and
- If successful, invite other countries to participate in this model, with the potential for replication to other geographies and sectors where there are robust private sector markets, such as in agriculture, water, and power.
USAID and the DFC can pilot this new model in three countries where there are already thriving and well-established private markets, like Ghana, Kenya, and Nigeria.
Challenge and Opportunity
The world is facing an unprecedented concurrence of crises: pandemics, war, rising food insecurity, and a rapidly warming climate. Low- and middle-income countries (LMICs) are deeply affected, with many having lost decades’ worth of gains made toward the Sustainable Development Goals in only a few short years. We now face the dual tasks of regaining lost ground while ensuring those gains are more durable and lasting than before.
The Biden Administration recognizes this pivotal moment in its new U.S. Strategy Toward Sub-Saharan Africa. The Strategy acknowledges the continent’s growing importance to U.S. global priorities and lays out a 21st-century partnership to contribute to a strong and sustainable global economy, foster new technology and innovation, and ultimately support the long-envisioned transition from donor-driven to country-driven programs. This builds on past U.S. foreign aid initiatives led by administrations of both political parties, including Administrator Mark Green’s Journey to Self Reliance and Administrator Raj Shah’s USAID Forward initiatives. Rather than creating a new flagship program, the U.S. Strategy Toward Sub-Saharan Africa focuses on improved implementation and better integration of existing initiatives to supercharge results. Such aims were echoed repeatedly during the U.S.-Africa Leaders Summit in December 2022.
To realize a new vision for U.S.-Africa partnerships, the Biden Administration should more effectively fuse the work of USAID and the DFC. A key policy rationale for the DFC’s creation in 2018 was to counter China’s Belt and Road Initiative (BRI) and growing economic influence in frontier markets. By combining this investment arm with USAID’s programmatic work, Congress hoped to accelerate major development impact. However numerous mismatches between USAID and DFC priorities have limited and sometimes actively undermined Congress’ goals. In the worst cases, USAID dollars have been used to pay international aid contractors to perform work in places where existing market providers could. Rather than bolster markets, this can distort them.
This memo lays out a new approach to development rooted in better USAID-DFC collaboration, where the work of both agencies contributes to the commercialization of sectors ready to transition from aid-dependent models to commercial and trade-enabled ones. In these sectors, USAID should work to phase out its international aid contractor-led model and instead scale up the work of existing market participants, including by paying them for results. This set of recommendations also advances USAID priorities outlined in the Agency’s new Acquisition and Assistance Strategy and proposed implementation plan, as well as USAID’s policy framework, which each call for working more closely with the private sector and transitioning to more pay-for-performance models.
The global health supply chain is ideal for USAID and the DFC to test the concept of a commercialization fund because of the sector’s discrete metrics and robust existing logistics companies. Investing in cheaper, more efficient evidence-driven solutions in a competitive marketplace can improve aid effectiveness and better serve target populations with the health goods like PPE, vaccines, and medications they need. This sector receives USAID’s largest contracts, with the Agency spending more than $1B each year on procurement and logistics to get the right health products to the right place, at the right time, and in the right condition across dozens of countries. In the logistics space, only about 25%1 of USAID’s expenditure supports directly distributing commodities to health facilities in target nations; the other 75% is spent on fly-in contractors who oversee that work. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still common, according to USAID’s reports and audits.2
A Commercialization Fund can directly address policy goals such as localization or private-sector engagement by building resilient health supply chains through a marketplace of providers that ensures patients and providers access the supplies they need on time. In addition to improving sustainability and results and cutting costs, a well-structured Commercialization Fund can improve global health donor coordination, crowd-in new investments from other funders and philanthropy that want to pay for outcomes, and hasten the transition from donor-led aid models to country-led ones.
Plan of Action
USAID should create the Global Health Supply Chain Commercialization Fund, a $300 million initiative to purchase commercial supply chain services directly from operators, based on performance or results. USAID should pilot using the Commercialization Fund to pay providers in three countries where there are already thriving and well-established private logistics markets, such as Kenya, Nigeria, and Ghana. In these countries, dozens of logistics and healthcare providers operate at scale, serving millions of people.
With an initial focus on health logistics, USAID should use $300 million from its yet-to-be-awarded suite of $17 billion NextGen Global Health Supply Chain contracts to provide initial funding for the Commercialization Fund. If successful, the Commercialization Fund will create an open playing field for competition and crowd-in high-impact technology, innovation, and more market-based actors in global health supply chains. This fund will build upon existing efforts across the Agency to identify, incubate, and catalyze innovations from the private sector.
To quickly stand up this Commercialization Fund and select vendors, Administrator Power should utilize her “impairment authority.” Though typically applied to emergencies, the “impairment authority” has been used previously during global health events like the COVID-19 pandemic and the Ebola response and could be used to achieve a specific policy priority such as localization and/or transforming the way USAID administers its global health supply chains. (See FAQ for more information regarding this authority).
The creation of this Fund, which can be fully budget-neutral, requires the following steps:
Step 1. USAID and DFC take administrative action to design and capitalize the $300 million, five-year, cross-cutting, and disease-agnostic Supply Chain Commercialization Fund. A joint aid effectiveness “tiger team” within USAID and the DFC should:
- Spearhead the design and implementation framework for the Fund and stipulate clear, standardized key performance indicators (KPIs) to indicate significant improvements in health supply chain performance in countries where the Commercialization Fund operates.
- Select three countries to adopt the Commercialization Fund, chosen in coordination with overseas USAID Missions and the DFC. Countries should be selected and prioritized based on factors such as analyses of health systems’ needs, the existence of local supply chain service providers, and countries’ desire to manage more of their own health supply chains. As a follow-on to the U.S.-Africa Leaders Summit, we recommend USAID and the DFC direct initial Commercialization Fund funds to support activities in Africa where there are already thriving and well-established private markets such as Ghana, Kenya, and Nigeria.
- Set pricing for each KPI and product in each Commercialization Fund country market. For example, pay-for-performance indicators could include percent of on-time deliveries. USAID and the DFC should set high expectations for performance, such as 95+ percent on-time delivery, especially in geographies where existing market providers can already deliver against similarly rigorous targets in other sectors. USAID bureaus and missions, partner country governments, and in-country private sector healthcare and logistics leaders, as well as supply chain and innovative financing experts, should be consulted during this process.
- Choose funding mechanisms that pay for results (see Step 2 for details).
- Provide blended financing to vendors that may need additional resources to scale their footprint and/or increase their capabilities.
- Select a third-party auditor(s) to audit the results upon which providers are paid.
Step 2: USAID structures financial instruments to pay service providers against results delivered in selected Commercialization Fund countries
USAID should pay Commercialization Fund providers to deliver results, consistent with the KPIs set in Step 1 by the joint aid effectiveness “tiger team.” Pay-for-performance contracts can also provide incentives and/or price assurances for service providers to build infrastructure and expand to areas they don’t traditionally serve.
Structuring pay-for-performance tools will favor providers that can demonstrate their ability to deliver superior and/or more cost-effective results relative to status quo alternatives. Preference should be given to providers that are operational in the target country where there is existing market demand for their services, as evidenced by factors such as whether the host country government, national health insurance program, or consumers already pay for the providers’ services. USAID should work with the host country government(s) to select vendors to ensure strong country buy-in.
To maximize performance and competition, USAID should explicitly not use cost-reimbursable payment models that reimburse for effort and optimize for compliance and reporting. The red tape associated with these awards is so cumbersome that non-traditional USAID service providers cannot compete.3
USAID should consider using the following pay-for-performance modalities:
- Fixed-price, milestone-based awards that trigger payment when a service provider meets certain milestones, such as for each delivery made with a 95% on-time rate and with little-to-no product spoilage or wastage. Using fixed-price grants and contracts in this way can effectively make them function as forward-contracts that provide firms with advanced price assurances that, as long as they continue to deliver against predetermined objectives, the U.S. Government will pay. Fixed-amount grants and contracts are easier for non-traditional USAID partners to apply for and manage than more commonly-used “cost reimbursement” awards that reimburse vendors for time, materials, and effort and have enormous compliance costs. Because pay-for-results awards only pay upon proof of milestones achieved, they also increase accountability for the U.S. taxpayer.
As USAID’s proposed acquisition and assistance implementation plan points out, “‘pay-for-result’ awards (such as firm fixed price contracts or fixed amount awards) can substantially reduce burdens on [contracting officers] and financial management staff as well as open doors for technically strong local partners unable to meet U.S. Government financial standards.” - Innovation Incentive Awards (IIAs) that pay providers retroactively after they meet certain predetermined results criteria. This award authority, expanded by Congress in December 2022, enables USAID to pre-publish its willingness to pay up to $100,000 for certain well-defined, predetermined results; then pay retroactively once a service provider can demonstrate it met the intended objective.
Unlike a fixed-price award, which establishes a longer-term relationship between USAID and the selected vendor, USAID can use the IIA modality to provide vendors with one-time spot payments. However, USAID could still use this payment modality to move more money at scale provided a vendor(s) can successfully meet multiple objectives (e.g. USAID could make multiple $100,000 payments for multiple on-time deliveries). - USAID could pursue Other Transaction Authority (OTA) opportunities without additional authorization, but the Agency may also benefit from consultation with the White House, the Office of Management and Budget (OMB), and The Office of Information & Regulatory Affairs (OIRA), as well as Congress, to secure additional authorities or waivers to disburse Commercialization Fund resources using innovative pay-for-results tools, including OTA, which other federal agencies have used to invite greater private sector participation from nontraditional U.S. Government partners.
Step 3: USAID and DFC should provide countries with additional technical assistance resources to create intentional pathways for selected countries to contribute to the design and management of program implementation.
To ensure these initiatives support countries’ needs and facilitate country ownership and increase voice, USAID should also consider establishing a supra-agency advisory board to support the success of the Commercialization Fund modeled after DFC’s Africa Investment Advisor Program that seats a panel of experts that can continually advise both agencies on strategic priorities, key risks, and award structure, etc. It could also model elements of the Millennium Challenge Corporation’s compact model to ensure participating countries have a hand in the design of relevant aspects of the Commercialization Fund.
USAID should additionally provide participating Commercialization Fund countries with Technical Assistance resources to ensure that host country governments can eventually take on larger management responsibilities regarding the administration of Commercialization Fund pay-for-performance contracts.
Step 4: As needed, USAID and the DFC should collaborate to provide sustainable pathways for blended financing that allows existing market providers to access working capital to scale their footprint.
While the DFC and USAID have worked on blended finance deals in the past, the Biden Administration should explicitly direct the two agencies to work together to identify and scale the footprints and capabilities of logistics and healthcare providers in targeted Commercialization Fund countries.
Many of the existing healthcare and logistics providers that could potentially manage a greater share of global health supply chains could need additional financing to expand their operations, increase working capital, or grow their capabilities, but they often find themselves in a chicken or the egg problem to secure financing from financial institutions like the DFC.
Traditional banks and DFC investment officers often consider these companies to be potentially risky investments because their revenue in health supply chains is not assured, especially because one of the largest healthcare payers in many LMICs is the U.S. Government, but USAID (and other global health donors) have historically funded international aid contractors to manage countries’ health supply chains, not local firms or alternative service providers. However, at the same time, USAID and other donors have not relied more on existing logistics service providers to manage health supply chains because many of these providers do not operate at the scale of larger international aid contractors.
To break this cycle, and to enable the DFC and other lenders to offer better financing terms to firms that need it to grow their capabilities or secure working capital, USAID could provide identified firms with more blended finance deals, including guaranteed eligibility to receive pay-for-performance revenue using the funding modalities described above. It could also provide unrestricted early-stage and/or phased funding to cover operational costs associated with working with the U.S. Government.
Increasing available credit to firms via the DFC and using a USAID pay-for-performance contract as collateral would also enhance firms’ overall ability to raise credit from other sources. This assurance, in turn, reduces the cost of capital for receiving firms, resulting in more significant, impactful investments from private capital in the construction of other supply chain infrastructure, including warehouses, IT systems, and shipping fleets.
Step 5: Pending success, USAID and the DFC should replicate the Commercialization Fund in additional countries. Congress should codify the Commercialization Fund into law and authorize larger-scale commercialization funds in additional geographies and sectors as part of the BUILD Act reauthorization in 2025.
While this initial Commercialization Fund will focus on building sustainable, high-performing global health supply chains in three LMICs, the same blueprint could be leveraged in other countries and in other sectors where there are robust private sectors, such as in food or power.
- Congress should require USAID and DFC to report overall Commercialization Fund performance every six months for a minimum of three years.
- If the Commercialization Fund proves successful after the first year, USAID and the DFC should proactively invite other countries to participate to expand this model to other geographies, where appropriate.
- If successful with healthcare supply chains, the Commercialization Fund should also be expanded to cover additional sectors and geographies and included in the BUILD Act 2025 reauthorization.
Conclusion
Continued reliance on traditional aid in commercial-ready sectors contributes to market failures, limits local agency, and minimizes the opportunity for sustainable impact.
As a team of researchers from the Carnegie Endowment’s Africa Program pointed out on the heels of the U.S.-Africa Leaders Summit, “A persistent humanitarian approach to Africa…creates pathologies of unhelpful dependency, insufficient focus on the drivers of inclusive growth, and perverse incentives for the continuation of the status quo by a small coterie of connected beneficiaries.” Those researchers identified 18 new initiatives announced at the Summit supported with public money in economic sectors that can facilitate trade, investments, entrepreneurship, and jobs creation, signaling an unprecedented readiness in this Administration to prioritize trade alongside aid.
The Commercialization Fund outlined in this memo — a market-shaping mechanism designed to correct market failures that conventional aid models can perpetuate — has the potential to become a model for accelerating the transition of other key economic sectors away from the status quo and toward innovation, investment, impact, and long-term sustainability.
The global health supply chain is an ideal sector for USAID and the DFC to test the concept of a Commercialization Fund:
First, virtually every industry relies on robust supply chains to get goods around the world. There are dozens of African logistics companies that deliver goods to last-mile communities every day, including hard-to-transport items that require cold-chain storage like perishable goods and vaccines. These firms can deliver health commodities faster, cheaper, and more sustainably than traditional aid implementers, especially to last-mile communities.
Second, health supply chain performance metrics are relatively straightforward and easy to define and measure. As a result, USAID can facilitate managed competition that pays multiple logistics providers against rigorous, predetermined pay-for-performance indicators. To provide additional accountability to the taxpayer, it could withhold payment for factors such as health commodity spoilage.
Third, global health receives the largest share of USAID’s overall budget, but a significant share of those resources pay for contractor overhead and profit margin, so there is considerable opportunity to re-allocate those resources to create a pay-for-performance Supply Chain Commercialization Fund. Only about 25 percent of USAID’s in-country logistics expenditures pay for the actual work of distributing commodities to health facilities in target nations; the other 75 percent pays for larger aid contractors’ overhead, management, and other costs. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still a common occurrence, according to USAID’s reports and audits.
Investing in cheaper, more efficient, and effective operators in a competitive marketplace can improve aid effectiveness and better serve target populations with essential healthcare. A Commercialization Fund can directly address policy goals of “progress over programs” by building resilient health supply chains that, once and for all, ensure patients and providers get the supplies they need on time. Since local providers can typically provide services faster, cheaper, and more sustainably than international aid contractors, transitioning to models that pay for results with fees set to prevailing local rates can also advance USAID’s localization priorities and bolster markets rather than distort them.
The administrator could activate her unique “impairment authority” to fashion the scope of procurement competitions at will. The fundamental concept is that if full and open competition for a contract or set of contracts—the normal process followed to fulfill the U.S. Government’s requirements—would impair foreign assistance objectives, then the administrator can divide procurements falling under the relevant category to advance an objective like localization. This authority, which is codified in USAID’s core authorizing legislation (the Foreign Assistance Act of 1961, as amended), along with a formal U.S. Government regulation, was previously used to quickly procure during Iraq reconstruction, Afghanistan humanitarian needs, and the Ebola and COVID-19 responses. While “impairment authority” may be an untested pathway for global health supply chains, it does offer the administrator a viable pathway to launch the Fund and ensure high-impact operators are receiving USAID contracts while continuing to consult with Congress to codify the Fund’s activities long-term. The administrator’s extraordinary “impairment authority” comes from 636(a)(3) of the Foreign Assistance Act and AIDAR (the USAID-specific Supplement to the FAR) Section 706.302-70 “Impairment of foreign aid programs.” See especially 706.302-70(a)(3)(ii).
Many LMIC governments increasingly embrace technological solutions outside of traditional aid models because they know technology can lead to greater efficiencies, support job creation and economic development, and drive improved results for their populations. Sustaining a marketplace within a country or region is an advantage to supporting new entrants and existing firms in the sector. The impact of these companies’ services can also be scaled via pay-for-results models and domestic government spending, as the firms that deliver superior performance will rise to the top and continue to be demanded, and those that do not meet established metrics will not be contracted with again.
Supply chain and innovative financing experts who deeply understand the challenges plaguing global health supply chains should be consulted to design successful pay-for-results vehicles. These individuals should support the USAID/DFC tiger team to support the design and implementation framework for the Commercialization Fund, define KPIs, set appropriate pricing, and select auditors. USAID Missions and local governments will be most familiar with the unique supply chain challenges within their jurisdictions and should work alongside supply chain experts to define the desired supply chain results for the Commercialization Funds in their countries.
Through the Commercialization Fund, USAID will contract any supply chain service provider that can meet exceptionally high performance targets set by the Agency. USAID will increase its volume of business with providers that consistently hit relevant targets over consecutive months. Operators will be paid based on their performance under these contracts, providing them with predictable and consistent cash flows to grow their businesses and reach system-wide scale and impact. Based on these anticipated cash flows, DFC will be well-positioned with equity investments and able to provide upfront and working capital financing.
As the highest-performing operators scale, they gain cost efficiencies that allow them to lower their pricing, just as with any technology adoption curve making services accessible to more customers. Over time, as clear pricing and operating standards are realized, USAID will transition from directly paying these operators for performance to supporting governments to remunerate them against transparent, auditable service contracts.
The Supply Chain Commercialization Fund will also facilitate an exchange of expertise, greater interagency learning, and long-term coordination. DFC will share with USAID how to commercialize sectors, transition them from aid to trade, and lay the groundwork for DFC deal flow, while USAID will help DFC evaluate smaller, riskier deals in sectors with fewer commercial entrants. Both institutions can use the Fund to align on clear measures of success through USAID’s contracting directly with supply chain service providers that get paid only if they hit exceptionally high performance targets and DFC’s increasing investment in companies based on their development effectiveness.
The risk of supply chain disruptions is low because the initial three countries proposed—Kenya, Ghana, and Nigeria—already have existing African-based logistics providers that provide essential health commodities to communities every day, including in last-mile and low-resourced settings. Many of these providers deliver products faster, cheaper, and more sustainably than international aid donor-funded distributors. The capacity-building fund mechanisms described above can also mitigate risks to ensure firms have the capital investment to scale their existing work to meet contract requirements.
USAID should hire third-party auditors to verify the impact and results of Fund investments. We anticipate the Agency should draw from Commercialization Fund resources to pay for these services.
While $300 million represents less than 2 percent of the overall Global Health Supply Chain suite of awards, this commitment would send important, long-term market signals for firms in partner countries over a multi-year period. It would also provide sufficient capital to scale selected companies and demonstrate how a new supply chain funding model can work.
How to Replicate the Success of Operation Warp Speed
Operation Warp Speed (OWS) was a public-private partnership that produced COVID-19 vaccines in the unprecedented timeline of less than one year. This unique success among typical government research and development (R&D) programs is attributed to OWS’s strong public-private partnerships, effective coordination, and command leadership structure. Policy entrepreneurs, leaders of federal agencies, and issue advocates will benefit from understanding what policy interventions were used and how they can be replicated. Those looking to replicate this success should evaluate the stakeholder landscape and state of the fundamental science before designing a portfolio of policy mechanisms.
Challenge and Opportunity
Development of a vaccine to protect against COVID-19 began when China first shared the genetic sequence in January 2020. In May, the Trump Administration announced OWS to dramatically accelerate development and distribution. Through the concerted efforts of federal agencies and private entities, a vaccine was ready for the public in January 2021, beating the previous record for vaccine development by about three years. OWS released over 63 million doses within one year, and to date more than 613 million doses have been administered in the United States. By many accounts, OWS was the most effective government-led R&D effort in a generation.
Policy entrepreneurs, leaders of federal agencies, and issue advocates are interested in replicating similarly rapid R&D to solve problems such as climate change and domestic manufacturing. But not all challenges are suited for the OWS treatment. Replicating its success requires an understanding of the unique factors that made OWS possible, which are addressed in Recommendation 1. With this understanding, the mechanisms described in Recommendation 2 can be valuable interventions when used in a portfolio or individually.
Plan of Action
Recommendation 1. Assess whether (1) the majority of existing stakeholders agree on an urgent and specific goal and (2) the fundamental research is already established.
Criteria 1. The majority of stakeholders—including relevant portions of the public, federal leaders, and private partners—agree on an urgent and specific goal.
The OWS approach is most appropriate for major national challenges that are self-evidently important and urgent. Experts in different aspects of the problem space, including agency leaders, should assess the problem to set ambitious and time-bound goals. For example, OWS was conceptualized in April and announced in May, and had the specific goal of distributing 300 million vaccine doses by January.
Leaders should begin by assessing the stakeholder landscape, including relevant portions of the public, other federal leaders, and private partners. This assessment must include adoption forecasts that consider the political, regulatory, and behavioral contexts. Community engagement—at this stage and throughout the process—should inform goal-setting and program strategy. Achieving ambitious goals will require commitment from multiple federal agencies and the presidential administration. At this stage, understanding the private sector is helpful, but these stakeholders can be motivated further with mechanisms discussed later. Throughout the program, leaders must communicate the timeline and standards for success with expert communities and the public.
Example Challenge: Building Capability for Domestic Rare Earth Element Extraction and Processing |
Rare earth elements (REEs) have unique properties that make them valuable across many sectors, including consumer electronics manufacturing, renewable and nonrenewable energy generation, and scientific research. The U.S. relies heavily on China for the extraction and processing of REEs, and the U.S. Geological Survey reports that 78% of our REEs were imported from China from 2017-2020. Disruption to this supply chain, particularly in the case of export controls enacted by China as foreign policy, would significantly disrupt the production of consumer electronics and energy generation equipment critical to the U.S. economy. Export controls on REEs would create an urgent national problem, making it suitable for an OWS-like effort to build capacity for domestic extraction and processing. |
Criteria 2. Fundamental research is already established, and the goal requires R&D to advance for a specific use case at scale.
Efforts modeled after OWS should require fundamental research to advance or scale into a product. For example, two of the four vaccine platforms selected for development in OWS were mRNA and replication-defective live vector platforms, which had been extensively studied despite never being used in FDA-licensed vaccines. Research was advanced enough to give leaders confidence to bet on these platforms as candidates for a COVID-19 vaccine. To mitigate risk, two more-established platforms were also selected.
Technology readiness levels (TRLs) are maturity level assessments of technologies for government acquisition. This framework can be used to assess whether a candidate technology should be scaled with an OWS-like approach. A TRL of at least five means the technology was successfully demonstrated in a laboratory environment as part of an integrated or partially integrated system. In evaluating and selecting candidate technologies, risk is unavoidable, but decisions should be made based on existing science, data, and demonstrated capabilities.
Example Challenge: Scaling Desalination to Meet Changing Water Demand |
Increases in efficiency and conservation efforts have largely kept the U.S.’s total water use flat since the 1980s, but drought and climate variability are challenging our water systems. Desalination, a well-understood process to turn seawater into freshwater, could help address our changing water supply. However, all current desalination technologies applied in the U.S. are energy intensive and may negatively impact coastal ecosystems. Advanced desalination technologies—such as membrane distillation, advanced pretreatment, and advanced membrane cleaning, all of which are at technology readiness levels of 5–6—would reduce the total carbon footprint of a desalination plant. An OWS for desalination could increase the footprint of efficient and low-carbon desalination plants by speeding up development and commercialization of advanced technologies. |
Recommendation 2: Design a program with mechanisms most needed to achieve the goal: (1) establish a leadership team across federal agencies, (2) coordinate federal agencies and the private sector, (3) activate latent private-sector capacities for labor and manufacturing, (4) shape markets with demand-pull mechanisms, and (5) reduce risk with diversity and redundancy.
Design a program using a combination of the mechanisms below, informed by the stakeholder and technology assessment. The organization of R&D, manufacturing, and deployment should follow an agile methodology in which more risk than normal is accepted. The program framework should include criteria for success at the end of each sprint. During OWS, vaccine candidates were advanced to the next stage based on the preclinical or early-stage clinical trial data on efficacy; the potential to meet large-scale clinical trial benchmarks; and criteria for efficient manufacturing.
Mechanism 1: Establish a leadership team across federal agencies
Establish an integrated command structure co-led by a chief scientific or technical advisor and a chief operating officer, a small oversight board, and leadership from federal agencies. The team should commit to operate as a single cohesive unit despite individual affiliations. Since many agencies have limited experience in collaborating on program operations, a chief operating officer with private-sector experience can help coordinate and manage agency biases. Ideally, the team should have decision-making authority and report directly to the president. Leaders should thoughtfully delegate tasks, give appropriate credit for success, hold themselves and others accountable, and empower others to act.
The OWS team was led by personnel from the Department of Health and Human Services (HHS), the Department of Defense (DOD), and the vaccine industry. It included several HHS offices at different stages: the Centers for Disease Control and Prevention (CDC), the Food and Drug Administration (FDA), the National Institutes of Health (NIH), and the Biomedical Advanced Research and Development Authority (BARDA). This structure combined expertise in science and manufacturing with the power and resources of the DOD. The team assigned clear roles to agencies and offices to establish a chain of command.
Example Challenge: Managing Wildland Fire with Uncrewed Aerial Systems (UAS) |
Wildland fire is a natural and normal ecological process, but the changing climate and our policy responses are causing more frequent, intense, and destructive fires. Reducing harm requires real-time monitoring of fires with better detection technology and modernized equipment such as UAS. Wildfire management is a complex policy and regulatory landscape with functions spanning multiple federal, state, and local entities. Several interagency coordination bodies exist, including the National Wildfire Coordinating Group, Wildland Fire Leadership Council, and the Wildland Fire Mitigation and Management Commission, but much of these efforts are consensus-based coordination models. The status quo and historical biases against agencies have created silos of effort and prevent technology from scaling to the level required. An OWS for wildland fire UAS would establish a public-private partnership led by experienced leaders from federal agencies, state and local agencies, and the private sector to advance this technology development. The team would motivate commitment to the challenge across government, academia, nonprofits, and the private sector to deliver technology that meets ambitious goals. Appropriate teams across agencies would be empowered to refocus their efforts during the duration of the challenge. |
Mechanism 2: Coordinate federal agencies and the private sector
Coordinate agencies and the private sector on R&D, manufacturing, and distribution, and assign responsibilities based on core capabilities rather than political or financial considerations. Identify efficiency improvements by mapping processes across the program. This may include accelerating regulatory approval by facilitating communication between the private sector and regulators or by speeding up agency operations. Certain regulations may be suspended entirely if the risks are considered acceptable relative to the urgency of the goal. Coordinators should identify processes that can occur in parallel rather than sequentially. Leaders can work with industry so that operations occur under minimal conditions to ensure worker and product safety.
The OWS team worked with the FDA to compress traditional approval timelines by simultaneously running certain steps of the clinical trial process. This allowed manufacturers to begin industrial-scale vaccine production before full demonstration of efficacy and safety. The team continuously sent data to FDA while they completed regulatory procedures in active communication with vaccine companies. Direct lines of communication permitted parallel work streams that significantly reduced the normal vaccine approval timeline.
Example Challenge: Public Transportation and Interstate Rail |
Much of the infrastructure across the United States needs expensive repairs, but the U.S. has some of the highest infrastructure construction costs for its GDP and longest construction times. A major contributor to costs and time is the approval process with extensive documentation, such as preparing an environmental impact study to comply with the National Environmental Policy Act. An OWS-like coordinating body could identify key pieces of national infrastructure eligible for support, particularly for near-end-of-lifespan infrastructure or major transportation arteries. Reducing regulatory burden for selected projects could be achieved by coordinating regulatory approval in close collaboration with the Department of Transportation, the Environmental Protection Agency, and state agencies. The program would need to identify and set a precedent for differentiating between expeditable regulations and key regulations, such as structural reviews, that could serve as bottlenecks. |
Mechanism 3: Activate latent private-sector capacities for labor and manufacturing
Activate private-sector capabilities for production, supply chain management, deployment infrastructure, and workforce. Minimize physical infrastructure requirements, establish contracts with companies that have existing infrastructure, and fund construction to expand facilities where necessary. Coordinate with the Department of State to expedite visa approval for foreign talent and borrow personnel from other agencies to fill key roles temporarily. Train staff quickly with boot camps or accelerators. Efforts to build morale and ensure commitment are critical, as staff may need to work holidays or perform higher than normally expected. Map supply chains, identify critical components, and coordinate supply. Critical supply chain nodes should be managed by a technical expert in close partnership with suppliers. Use the Defense Production Act sparingly to require providers to prioritize contracts for procurement, import, and delivery of equipment and supplies. Map the distribution chain from the manufacturer to the endpoint, actively coordinate each step, and anticipate points of failure.
During OWS, the Army Corps of Engineers oversaw construction projects to expand vaccine manufacturing capacity. Expedited visa approval brought in key technicians and engineers for installing, testing, and certifying equipment. Sixteen DOD staff also served in temporary quality-control positions at manufacturing sites. The program established partnerships between manufacturers and the government to address supply chain challenges. Experts from BARDA worked with the private sector to create a list of critical supplies. With this supply chain mapping, the DOD placed prioritized ratings on 18 contracts using the Defense Production Act. OWS also coordinated with DOD and U.S. Customs to expedite supply import. OWS leveraged existing clinics at pharmacies across the country and shipped vaccines in packages that included all supplies needed for administration, including masks, syringes, bandages, and paper record cards.
Example Challenge: EV Charging Network |
Electric vehicles (EVs) are becoming increasingly popular due to high gas prices and lower EV prices, stimulated by tax credits for both automakers and consumers in the Inflation Reduction Act. Replacing internal combustion engine vehicles with EVs is aligned with our current climate commitments and reduces overall carbon emissions, even when the vehicles are charged with energy from nonrenewable sources. Studies suggest that current public charging infrastructure has too few functional chargers to meet the demand of EVs currently on the road. Reliable and available public chargers are needed to increase public confidence in EVs as practical replacements for gas vehicles. Leveraging latent private-sector capacity could include expanding the operations of existing charger manufacturers, coordinating the deployment and installation of charging stations and requisite infrastructure, and building a skilled workforce to repair and maintain this new infrastructure. In February 2023 the Biden Administration announced actions to expand charger availability through partnerships with over 15 companies. |
Mechanism 4: Shape markets with demand-pull mechanisms
Use contracts and demand-pull mechanisms to create demand and minimize risks for private partners. Other Transaction Authority can also be used to procure capabilities quickly by bypassing elements of the Federal Acquisition Regulation. The types of demand-pull mechanisms available to agencies are:
- Volume guarantees: Commits the buyer (i.e., a federal agency) to purchase a minimum quantity of an existing product at a set price from multiple vendors.
- Advance purchase agreements: Establishes a contract between a single buyer and a single supplier in which the buyer provides advance funding for resources to manufacture a product or provide a service.
- Advance market commitments: Engages multiple suppliers or producers to produce a product or service by providing advance funds.
- Prize competitions: Solicits the development of creative solutions for a particular, well-defined problem from a wide range of actors, including individuals, companies, academic teams, and more, and rewards them with a cash prize.
- Challenge-based acquisitions: Solicits creative solutions for a well-defined problem and rewards success by purchasing the solution.
- Milestone payments: Provide a series of payments contingent on achieving defined objectives through the contract timeline.
HHS used demand-pull mechanisms to develop the vaccine candidates during OWS. This included funding large-scale manufacturing and committing to purchase successful vaccines. HHS made up to $483 million in support available for Phase 1 trials of Moderna’s mRNA candidate vaccine. This agreement was increased by $472 million for late-stage clinical development and Phase 3 clinical trials. Several months later, HHS committed up to $1.5 billion for Moderna’s large-scale manufacturing and delivery efforts. Ultimately the U.S. government owned the resulting 100 million doses of vaccines and reserved the option to acquire more. Similar agreements were created with other manufacturers, leading to three vaccine candidates receiving FDA emergency use authorization.
Example Challenge: Space Debris |
Low-earth orbit includes dead satellites and other debris that pose risks for existing and future space infrastructure. Increased interest in commercialization of low-earth orbit will exacerbate a debris count that is already considered unstable. Since national space policy generally requires some degree of engagement with commercial providers, the U.S. would need to include the industry in this effort. The cost of active space debris removal, satellite decommissioning and recycling, and other cleanup activities are largely unknown, which dissuades novel business ventures. Nevertheless, large debris objects that pose the greatest collision risks need to be prioritized for decommission. Demand-pull mechanisms could be used to create a market for sustained space debris mitigation, such as an advanced market commitment for the removal of large debris items. Commitments for removal could be paired with a study across the DOD and NASA to identify large, high-priority items for removal. Another mechanism that could be considered is fixed milestone payments, which NASA has used in past partnerships with commercial partners, most notably SpaceX, to develop commercial orbital transportation systems. |
Mechanism 5: Reduce risk with diversity and redundancy
Engage multiple private partners on the same goal to enable competition and minimize the risk of overall program failure. Since resources are not infinite, the program should incorporate evidence-based decision-making with strict criteria and a rubric. A rubric and clear criteria also ensure fair competition and avoid creating a single national champion.
During OWS, four vaccine platform technologies were considered for development: mRNA, replication-defective live-vector, recombinant-subunit-adjuvanted protein, and attenuated replicating live-vector. The first two had never been used in FDA-licensed vaccines but showed promise, while the second two were established in FDA-licensed vaccines. Following a risk assessment, six vaccine candidates using three of the four platforms were advanced. Redundancy was incorporated in two dimensions: three different vaccine platforms and two separate candidates. The manufacturing strategy also included redundancy, as several companies were awarded contracts to produce needles and syringes. Diversifying sources for common vaccination supplies reduced the overall risk of failure at each node in the supply chain.
Example Challenge: Alternative Battery Technology |
Building infrastructure to capture energy from renewable sources requires long-term energy storage to manage the variability of renewable energy generation. Lithium-ion batteries, commonly used in consumer electronics and electric vehicles, are a potential candidate, since research and development has driven significant cost declines since the technology’s introduction in the 1990s. However, performance declines when storing energy over long periods, and the extraction of critical minerals is still relatively expensive and harmful to the environment. The limitations of lithium-ion batteries could be addressed by investing in several promising alternative battery technologies that use cheaper materials such as sodium, sulfur, and iron. This portfolio approach will enable competition and increase the chance that at least one option is successful. |
Conclusion
Operation Warp Speed was a historic accomplishment on the level of the Manhattan Project and the Apollo program, but the unique approach is not appropriate for every challenge. The methods and mechanisms are best suited for challenges in which stakeholders agree on an urgent and specific goal, and the goal requires scaling a technology with established fundamental research. Nonetheless, the individual mechanisms of OWS can effectively address smaller challenges. Those looking to replicate the success of OWS should deeply evaluate the stakeholder and technology landscape to determine which mechanisms are required or feasible.
Acknowledgments
This memo was developed from notes on presentations, panel discussions, and breakout conversations at the Operation Warp Speed 2.0 Conference, hosted on November 17, 2022, by the Federation of American Scientists, 1Day Sooner, and the Institute for Progress to recount the success of OWS and consider future applications of the mechanisms. The attendees included leadership from the original OWS team, agency leaders, Congressional staffers, researchers, and vaccine industry leaders. Thank you to Michael A. Fisher, FAS senior fellow, who contributed significantly to the development of this memo through January 2023. Thank you to the following FAS staff for additional contributions: Dan Correa, chief executive officer; Jamie Graybeal, director, Defense Budgeting Project (through September 2022); Sruthi Katakam, Scoville Peace Fellow; Vijay Iyer, program associate, science policy; Kai Etheridge, intern (through August 2022).
The OWS approach is unlikely to succeed for challenges that are too broad or too politically polarizing. For example, curing cancer: While a cure is incredibly urgent and the goal is unifying, too many variations of cancer exist and they include several unique research and development challenges. Climate change is another example: particular climate challenges may be too politically polarizing to motivate the commitment required.
No topic is immune to politicization, but some issues have existing political biases that will hinder application of the mechanisms. Challenges with bipartisan agreement and public support should be prioritized, but politicization can be managed with a comprehensive understanding of the stakeholder landscape.
The pandemic created an emergency environment that likely motivated behavior change at agencies, but OWS demonstrated that better agency coordination is possible.
In addition to using processes like stakeholder mapping, the leadership team must include experts across the problem space that are deeply familiar with key stakeholder groups and existing power dynamics. The problem space includes impacted portions of the public; federal agencies and offices; the administration; state, local, Tribal, and territorial governments; and private partners.
OWS socialized the vaccination effort through HHS’s Office of Intergovernmental and External Affairs, which established communication with hospitals, healthcare providers, nursing homes, community health centers, health insurance companies, and more. HHS also worked with state, local, Tribal, and territorial partners, as well as organizations representing minority populations, to address health disparities and ensure equity in vaccination efforts. Despite this, OWS leaders expressed that better communication with expert communities was needed, as the public was confused by contradictory statements from experts who were unaware of the program details.
Future efforts should create channels for bottom-up communication from state, local, Tribal, and territorial governments to federal partners. Encouraging feedback through community engagement can help inform distribution strategies and ensure adoption of the solution. Formalized data-sharing protocols may also help gain buy-in and confidence from relevant expert communities.
Possibly, but it would require more coordination and alignment between the countries involved. This could include applying the mechanisms within existing international institutions to achieve existing goals. The mechanisms could apply with revisions, such as coordination among national delegations and nongovernmental organizations, activating nongovernmental capacity, and creating geopolitical incentives for adoption.
The team included HHS Secretary Alex Azar; Secretary of Defense Mark Esper; Dr. Moncef Slaoui, former head of vaccines at GlaxoSmithKline; and General Gustave F. Perna, former commanding general of U.S. Army Materiel Command. This core team combined scientific and technical expertise with military and logistical backgrounds. Dr. Slaoui’s familiarity with the pharmaceutical industry and the vaccine development process allowed OWS to develop realistic goals and benchmarks for its work. This connection was also critical in forging robust public-private partnerships with the vaccine companies.
It depends on the challenge. Determining which mechanism to use for a particular project requires a deep understanding of the particular R&D, manufacturing, supply chain landscapes to diagnose the market gaps. For example, if manufacturing process technologies are needed, prize competitions or challenge-based acquisitions may be most effective. If manufacturing volume must increase, volume guarantees or advance purchase agreements may be more appropriate. Advance market commitments or milestone payments can motivate industry to increase efficiency. OWS used a combination of volume guarantees and advance market commitments to fund the development of vaccine candidates and secure supply.
Streamlining the Patent Application Process to Nurture the Innovation of Tomorrow
Summary
To clear a path for the innovations that will fuel our nation’s economic recovery, the Biden-Harris Administration should streamline the patent application process by improving the correspondence between patent claims and the specification, supporting search clarity, and ensuring concise specifications. Not only would this reduce the time lost to bureaucratic paperwork, but these efforts would also give innovators a more efficient road to acquire patents. In turn, applicants, examiners, and the public at large would benefit from the new industries and innovations to come.
Unlocking Beneficial Capital by Improving Investor Transparency
Summary
Beneficial investment organizations (BIOs)—such as public pension funds, endowments, and the investment arms of charitable organizations—are a cornerstone of American welfare and the foundation of our modern capitalist system. American BIOs manage tens of trillions of dollars in pursuit of their goals, and this financial capital serves to power the American economy. But hundreds of billions of dollars are wasted by BIOs every year due to insufficient portfolio transparency, which contributes to BIOs paying excessive fees, assuming unnecessary and uncompensated risks, and chronically underperforming. Insufficient BIO transparency thus harms not only their direct beneficiaries (e.g., retirees, universities and charities), but it also harms America. Due to this opacity, billions of investment dollars are artificially diverted away from long-term projects that could have widespread social and economic benefits. In short, poor transparency on portfolio attributes, such as costs and sustainability, prevents beneficial investment organizations from actually benefiting their stakeholders and America.
Increasing BIO transparency through enhanced reporting and disclosure could unlock hundreds of billions of dollars in beneficial capital for long-term projects that would aid large segments of American society. Improved transparency would allow stakeholders to better understand BIOs’ investment decisions and their long-term consequences, which could then underpin design changes (e.g., better governance and regulatory structures). Transparency is thus a catalyst to make BIOs more willing to change and improve how they invest, which will unlock capital for long-term, large-scale projects that America desperately needs and drive high risk-adjusted returns. Launching a Presidential Advisory Commission is the best first step for the Biden-Harris Administration to take to improve transparency among BIOs and unlock substantial volumes of long-term beneficial capital.
Leverage Transit-Oriented Development Loan Programs to Accelerate Equitable Economic Recovery
Summary
The COVID-19 pandemic has exacerbated the challenges faced by millions of Americans in accessing healthy, prosperous, and resilient neighborhoods. However, the ability for all Americans to afford to live, work, play in, and benefit from these neighborhoods, also known as Communities of Opportunity, has been in crisis for decades. Whether in urban, suburban or rural markets, demand for walkable and resilient communities with affordable housing and transportation options, great amenities, and a sense of place continues to outstrip supply. Despite broad recognition of the enormous economic and environmental benefits of walkable communities, particularly transit-oriented development (TOD), communities face many federal, state, and local barriers to meeting this demand.
To help communities meet the pent-up demand for affordable housing and businesses in walkable, resilient communities, and to accelerate an equitable economic recovery, the Administration should establish a national equitable transit-oriented development policy. The policy should promote and coordinate federal investments and action to support equitable transit-oriented development and community revitalization projects that lead to more mixed-income housing, new revenue streams for budget-constrained public transportation agencies, climate change mitigation and a stronger and sustainable post-COVID-19 economic recovery.
Creating an Advanced Manufacturing Collaborative for PPE and Other Medical Device Supplies
Summary
Personal Protective Equipment (PPE) is a critical component of medical care that ensures the safety of both the patient and the provider, as well as the general public. During the COVID-19 pandemic, a global shortage of PPE left many providers insufficiently protected, resulting in infection, increased spread, and even the deaths of providers. To assist, the World Health Organization urged for a 40% increase in production. Treatment of those infected was further hampered by critical shortages of necessary medical supplies such as ventilator parts. The fragility of the supply chain also left civilians without immediate access to PPE, and later widespread use of disposable masks has created a significant environmental hazard. Innovation in PPE has remained stagnant and reliant on single use options which are vulnerable to manufacturing shortcomings and harmful to the environment. This need for improvement also applies directly to other medical equipment, where focus has largely been on single use parts. A collaborative panel and acting body is needed to drive changes forward for the current pandemic, next pandemic, the next critical part shortage, the next wildfire, or even for our agricultural workers who use protective gear every day but still face harmful exposures while ensuring our collective safety.
To drive innovation in PPE and medical parts, there is a need to align regulatory bodies and bridge the gap between regulation and research and development. Collaboration between federal, private, and academic entities is essential. Recently the Federal Drug Administration (FDA), Department of Veterans Affairs (VA), National Institutes of Health (NIH), and America Makes formed a COVID-19 response public-private partnership which addresses some – but not all – of these issues. In particular, reusable equipment is excluded, despite its numerous benefits such as allowing hospitals to ensure availability of equipment on demand and protecting the broader population.
The next administration should target the shortcomings of PPE and single use medical parts more broadly by creating a cross-agency collaboration center for PPE and medical device innovation that focuses on improving efficacy of PPE; stimulating new designs including reusable options; fostering collaborations for the design, research, and manufacture of improved medical parts; and identifying ways to ramp up manufacturing during times of crises while maintaining optimal safety of such equipment.
Establishing a National Manufacturing Foundation
Emerging technologies developed in the United States are routinely scaled up overseas due to a lack of domestic engineering skills, manufacturing know-how, investment capital, and supply chains.1 A new national initiative is needed to ensure that discoveries and inventions made in the United States are manufactured at scale in the United States. Such an initiative will create good-paying jobs, strengthen defense preparedness, and protect intellectual property (IP) created through federally funded research. Building a strong manufacturing base at home will also strengthen the domestic innovation cycle, as the knowledge gained through manufacturing supports process improvements and new product iterations.
Manufacturing cuts across multiple disciplines and the missions of multiple federal agencies, but no agency has the nation’s long-term manufacturing success as its sole objective. We propose creation of a new agency—a National Manufacturing Foundation (NMF)—to address this gap. The goal of the proposed NMF is not to restore lost industries, but to rebuild our lost capabilities and capacities to build and scale up products in the United States.
Funding for the NMF should be at least five percent of the total annual federal research and development (R&D) budget, about $150 billion in 2018. Five percent for the NMF would be $7.5 billion annually appropriated as an increase in total funds, not as a carve out from existing funds.
The NMF would do the following:
- Engage with other federal S&T agencies to set technology priorities, mature promising product and process technologies funded through other federal agencies, access relevant expertise, and coordinate funding to ensure that promising technologies receive full support from discovery and invention to commercial-scale domestic production.
- Invest in translational R&D to help advance emerging technologies beyond the pilot stage. This would include awarding grants and contracts to U.S. universities and other research institutions to support translational engineering (not science) research and manufacturing process technologies common to multiple industrial applications. This would also include establishment of a series of Translational Research Centers (TRCs) affiliated with universities. TRCs would focus on advancing technology and manufacturing readiness of emerging technologies in order to enable successful hardware start-ups and to transform research results to new products and processes manufactured in the United States.
- Build connections between hardware start-ups and other federal agencies, especially the DOD, to support translational research in defense-critical technologies. This would include leveraging federal purchasing power and the federal government’s role as a customer to help American companies procure financing for plants and equipment to establish and ramp up production of new technologies.
- Facilitate public-private partnerships to create Manufacturing Investment Funds (MIFs). These MIFs would fill gaps in existing venture-capital markets, providing sufficient funding for hardware start-ups to scale production in the United States beyond pilot plants.
- Support small and medium-sized manufacturers (SMMs) through technical assistance and financial support: including loans, grants, loan guarantees, and tax incentives. As the foundation of manufacturing value chains and the geographic distribution of diverse industrial clusters, it is essential that SMMs have the capacity to upgrade equipment, train staff, and fully participate in Industry 4.0.
- Grow engineering and technical talent at all levels by significantly increasing federally funded graduate fellowships in engineering for U.S. citizens, partnering with state and local governments to increase the number of four-year engineering technology degree programs and to expand successful apprenticeship and skillstraining programs.
The NMF will not be able to fulfill its promise and achieve its objectives if inventions continue to be manufactured abroad. Therefore, recommend a binding rule that if the intellectual property for a product or process is developed based on federally funded R&D, then that product or process must be manufactured substantially (e.g., a 75% minimum value-add) in the United States, without any exceptions or waivers.
Why a National Manufacturing Foundation
Thanks in large part to decades of offshoring manufacturing, the United States has compromised its ability to realize the full potential of its tremendous investments in research and development (R&D). An increasing amount of corporate R&D is done abroad, closer to where most factories are now located. Worse, products built on federally funded R&D in advanced technologies (such as organic electronics and nanomaterials) are increasingly manufactured abroad. The erosion of important industrial centers throughout the United States—machine tools in Cincinnati, steel in Pittsburgh and Youngstown, furniture in North Carolina—has resulted in a loss of engineering skills, infrastructure, supply chains, and production know-how domestically, limiting the ability of U.S.-based manufacturers to build and scale new technologies.2 Overseas manufacturing of products based on taxpayer-funded R&D essentially subsidizes foreign producers in creating jobs and wealth from American inventions. Because of these dramatic changes in the nation’s industrial base, it is difficult for the United States to establish—let alone lead—the industries of the future. The longstanding U.S. strategy of “invent here, manufacture there” is fast becoming “invent there, manufacture there”— a dangerous trend for our nation.
Restoring U.S. manufacturing leadership requires the public sector to step in to correct a market failure. Short-term profit incentives will drive the private sector to continue offshoring manufacturing (and R&D) as long as it is economically favorable. But because the societal benefits of domestic manufacturing (in the form of national wealth, jobs, and national security) exceed the concentrated benefits of offshore manufacturing (see Section 3.4), the U.S. government has a critical role to play in realigning incentives.
Unfortunately, the U.S. government is not well positioned to respond effectively. No single federal agency has the health of the nation’s manufacturing sector as its primary mission. Multiple agencies—Defense, Energy, Commerce, and others—have programs to support manufacturing.3 But these programs are neither strategic nor coordinated, poorly funded (relative to the need), and have not been successful at arresting the decline in engineering and manufacturing capabilities to support domestic production of emerging technologies.
In 2018, MForesight, a federally funded advanced manufacturing research consortium, conducted a nationwide study of challenges facing the United States in developing and implementing advanced product and process technologies. An overarching recommendation in the resulting report, Manufacturing Prosperity, is to establish a new agency, a National Manufacturing Foundation (NMF), tasked with (1) developing and implementing a national manufacturing strategy and (2) providing sufficient, sustained, and coordinated federal resources focused on ensuring the long-term success of U.S. manufacturing.
Additional work by MForesight in 2019, Reclaiming America’s Leadership in Advanced Manufacturing, confirmed the findings and recommendations in Manufacturing Prosperity, emphasizing the growing urgency to rebuild the nation’s capacity for manufacturing innovation. Creating a National Manufacturing Foundation would clearly demonstrate U.S. commitment to strengthening national manufacturing capacity and to the steps needed to achieve this goal. The proposed NMF would be an independent agency akin to the National Science Foundation (NSF). It would invest in translational R&D (engineering and manufacturing R&D) to advance promising results from the R&D investments made by other science and technology (S&T) agencies from bench/pilot scale to large/commercial scale. It would also coordinate early adoption of emerging technologies for national security, help small and medium-sized manufacturers invest in technology and equipment upgrades, and help build the pipeline of domestic talent for all components of a robust, modern manufacturing. Overall, the NMF would build the intellectual, financial, and physical infrastructure needed for the United States to regain its capacity to manufacture its inventions at scale and to leverage its R&D for economic growth and national security.
the State of U.S. Manufacturing
American manufacturing—especially in advanced technology products—is under threat. In 2017, as Figure 1 illustrates, the United States had a positive trade balance in only two advanced industries: aerospace and (minimally) engines and turbines. The United States does not maintain a positive trade balance even in industries such as medical devices and pharmaceuticals: industries where the U.S. federal government invests significant R&D and is the single largest customer. Furthermore, most domestic manufacturing industries use substantially more imported content than they did 20 years ago.4
Between 2006 and 2016, some of the largest reductions in U.S. manufacturing output were in advanced industries, including pharmaceuticals (down 3.1%), industrial machinery (2.9%), communications equipment (2.5%), and computers and peripherals (2.3%). Imports increased in all of these industries. Since 2013, imports from Asia have increased by 19% while U.S. manufacturing gross output has increased by just 1%.
It is worth noting that Japan, Germany, and South Korea have maintained trade surpluses in advanced manufacturing, are well ahead of the United States in their use of industrial robots, and have a greater share of high-technology production in their manufacturing sectors. In 2017, the U.S had a $859 billion trade deficit in goods, whereas Germany, Japan and South Korea (all high-wage countries with strict regulations and higher energy costs) had trade surpluses of $279 billion, $27 billion, and $95 billion respectively.
Since 2011, labor productivity in manufacturing has risen by only 0.7% total. Worse, total factor productivity in manufacturing actually fell by 5.8% between 2011 and 2015.
Much of these declines can be explained a nationwide drop in capital investment in machinery and equipment. Fixed assets fell from nearly 10% of U.S. GDP in the 1980s to less than 5% in 2018. The rate of investment in fixed assets by non-financial corporations averaged more than 5% between 1947 and 2000, but has been half that since then. The result is not only greater dependence on imports in virtually every industry (and especially in defense-related industries), but also an older capital stock that makes domestic production much less competitive than it could be.
Since the 1980s, when U.S. manufacturing competitiveness was initially challenged by Japanese automotive and electronics companies, a few economists made the case that manufacturing matters to the innovative capacity and overall health of the nation. Shifts in the composition of industrial production over time are to be expected in a healthy, dynamic economy. The United States was expected to shift from low-value, labor-intensive products to high-value, advanced technology products. But more than other advanced economies, the United States shifted away from advanced manufacturing, maintaining a consistent trade balance only in aerospace. Only recently have the negative consequences of this shift away from manufacturing been widely recognized: consequences that include precarious defense production, drug shortages, lost wages, declining communities, and missed opportunities. In too many cases, game-changing inventions emerging from U.S. labs have become blockbuster products manufactured somewhere else.
Factors Contributing to U.S. Manufacturing Decline
Generating knowledge but not wealth
Investments in basic research generate knowledge—scientific discoveries and engineering inventions. Innovation—technological and business—is the process of transforming a promising idea into a new product or a process at a large enough scale to meet societal needs. Investments in translational research generate engineering methods and manufacturing know-how to create national wealth and security. Unless the nation makes large and sustained investments in translational R&D, we will continue to offshore our innovation and manufacturing even if we double our investments in basic research or science.
The benefits derived from federal support for R&D are clear. Starting in the 2010s, nearly one-third of U.S. patented inventions relied on federal government funding.5 For example, research supported by the Department of Defense (DOD) underlies touch screens, the Global Positioning System (GPS), and other technologies used in smart phones. Research supported by the Department of Energy (DOE) underlies lithium-ion batteries, hydraulic fracturing, solar panels, and light-emitting diodes (LEDs). Research supported by the National Institutes of Health (NIH) underlies biopharmaceuticals, advanced prosthetics, and gene therapy. But these R&D investments made by the American taxpayers have generated significantly more national wealth in other countries than they have in the United States. Because many of the products resulting from these R&D breakthroughs are manufactured abroad. All of the economic activity associated with that production—factory construction, capital equipment investment, and wages across entire supply chains, as well as the associated multiplier effect—created wealth and spurred economic development in foreign countries, not here in the United States.
On the other hand, aerospace—an industry in which the U.S. continues to lead in advanced technology—is an instructive example of the power of strategic, long-term government support. Aerospace is the last major industry that continues to maintain a strong trade surplus in the United States. Not surprisingly, the aerospace industry is also more dependent on government customers (mostly the DOD) and is the beneficiary of substantial government R&D investments in basic, translational, and applied research. The aerospace industry is the successful beneficiary of a de facto industrial policy to support an industry critical to national defense.
Continued federal support for R&D is essential to American invention. But if U.S. industry does not manufacture the resulting innovations, most of the economic benefits are lost to other countries. Imagine how many millions of jobs were created abroad from products largely invented in the United States over in the past two decades. No smart phones are made here, and China dominates global production of solar panels, lithiumion batteries, and unmanned aerial vehicles (drones). There are other consequences to offshoring advanced manufacturing as well. For instance, growing dependence on pharmaceutical imports has led to recurring shortages of critical drugs such as Heparin.
In addition, offshoring manufacturing greatly diminishes the nation’s long-term capacity for innovation. Consider flat-panel displays such as those used in televisions. The technologies that enable most flat-panel displays were invented by U.S. companies and universities, emerging from basic research funded by the federal government. But few factories for LCD and LED large diameter flat panel displays were ever opened in the United States.6 Without that production experience, U.S. companies have been unable to manufacture the next generation of flat and flexible displays, despite significant R&D investments by the U.S. military.7
The unfortunate reality is that the United States is at the forefront of enabling scientific understanding, but lags when it comes to producing the resulting global output. Our inability to scale emerging technologies is not due to high wages and strict regulations, but to the loss of our “industrial commons”—i.e., the investment, manufacturing knowledge, suppliers, and skills needed to advance products beyond the concept stage. Indeed, nations such as Germany, Japan and South Korea have robust advanced manufacturing sectors despite also having higher wages, stricter regulations, higher levels of automation and higher taxes than the United States. These countries are weathering China’s rise far better than the United States. The difference is that multinational corporations based in these countries are not as focused on quarterly profits as U.S multinationals. These foreign corporations therefore often have longer investment time horizons, with greater concern for the interests of multiple stakeholders rather than just shareholders. In fact, many of these foreign corporations have been investing in manufacturing facilities in the United States, attracted by the large U.S. market and unencumbered by the same emphasis on financial objectives as U.S. corporations. Some of these same corporations are also taking on significant technical and market risk by investing in nascent but promising technologies developed in the United States. In many cases, these corporations believe that they can leverage the engineering skill and the manufacturing capabilities in their home countries—capabilities that have been lost in the United States—to scale these technologies abroad and realize a profit.
It is important to note that for advanced technologies, a common argument in favor of offshoring manufacturing—lower labor costs—does not hold. Labor is a minor share of production costs for virtually all advanced technology products. Production processes for new advanced technologies are sophisticated and highly automated, and even previously labor-intensive processes such as semiconductor packaging and circuit-board assembly are now fully automated. In the short term, after having lost decades of manufacturing experience, American companies do indeed face challenges in finding the requisite skills and support infrastructure to reshore crucial parts of the value chain for advanced electronics manufacturing. But in the long term, there is no reason why the United States cannot compete with other countries in this arena. Indeed, we must start to compete now, or risk repeating the pattern for critical emerging technologies such as 5G communications, quantum information systems, advanced energy storage, and synthetic biology.
Gaps in the national innovation cycle
The United States still leads the world across a broad spectrum of discoveries, publications, and citations. Being the best in the world in science is important—but it’s not sufficient to ensure success. As a nation, we’re not investing sufficient public resources in turning these basic discoveries into new products and processes. Gaps in our nation’s innovation cycle, from basic research to manufacturing, help explain why the United States is not capturing the full value of its investments in R&D. These gaps include:
- Brain drain. The United States has long been dependent on foreign graduate students in science and engineering (S&E). Over one-third of S&E doctoral degrees (56% in engineering) from U.S. universities are awarded to foreign students, a figure that is projected to grow to 50% in 2020 and beyond. Historically, most of these students have stayed and worked in the United States for at least 10 years after graduation, but there is evidence that this pattern may be changing as opportunities increase in students’ home countries. In particular, the Chinese government provides tuition and scholarships for many of its students to pursue advanced degrees in the United States with the expectation that those students return home after graduation. Many do, taking with them the cutting-edge knowledge, research experience, and results gained from their work.
- Foreign investments in translational R&D. The U.S. provides plenty of funding for basic science, but relatively little to support development and scale-up of commercial products. U.S. research institutions therefore partner with foreign entities to access capital and infrastructure needed to advance home-grown emerging technologies. Foreign investment often fills the gap. Many academic researchers establish research labs at foreign institutions to access funding needed to develop technologies created with initial support from U.S. federal agencies, sometimes in contradiction to U.S. laws and institutional policies.
- Willingly giving away intellectual property (IP). While IP theft by foreign competitors is an important concern, most instances of American IP use abroad are U.S. companies willingly licensing IP and U.S. startups voluntarily exporting their IP for production abroad, frequently by contract manufacturers in China. Foreign entities also access promising technologies from U.S. research institutions (as stated above), invest directly in high-risk, high-reward U.S. startups, and buy U.S. companies with specialized production processes (thereby gaining access to new technologies).
- Lack of investment, skills and know-how. Scaling new technologies to volume production is costly and often requires engineering skills, production know-how, and a comprehensive supply base that is not readily available in the United States. Investors therefore frequently push startups to produce in China. A recent study of 150 hardware startups based on MIT technology found that none scaled production domestically mainly the “industrial commons” (see previous section) needed to do so was not available.
For decades, our “strategy” has been to fund basic research and leave the follow-on activities to the magic hand of the free-market. As these gaps in the innovation cycle emerged, it has become increasingly clear that a new national initiative is need to convert research output into successful products and competitive industrial sectors in this country.
Conflating science with engineering
Science is not the same as engineering. Engineering involves not just analysis and discovery, but also synthesis and innovation aimed at turning abstract ideas into tangible products. Too frequently, engineering research at American institutions is hypothesisdriven rather than problem- or application-driven. This results in arcane, highly specialized investigations that lead to journal publications but little practical benefit.
Distinguishing between science and engineering may seem trivial but actually has profound effects on national R&D investments and outcomes. How a government allocates its resources among the two disciplines is both a reflection of and an influence on the prevailing national mindset.
The United States is already behind many foreign competitors in funding practical engineering research. Federal spending on manufacturing-related R&D is difficult to determine precisely due to insufficient information and inconsistent labeling. Estimates range from $773 million to $3.7 billion.8 A recent analysis by MForesight estimates that in 2017, $796 million of federal R&D spending could be reasonably attributed to manufacturing. Most of this money is federal spending through DOE’s Advanced Manufacturing Office, NSF’s Advanced Manufacturing Program, and DOD’s Manufacturing Technology (ManTech) programs. The remainder is federal funding (from DOD, DOE, and the Department of Commerce) and required non-federal cost share for the Manufacturing USA institutes. By comparison, Germany spends $4.34 billion on “Industrial Production and Technology” research (six times U.S. spending). Japan and South Korea spend three and eight times as much, respectively.
Some would argue that manufacturing-related translational research is the role of private companies. However, American Original Equipment Manufacturers (OEMs), other than in the semiconductor and pharmaceutical industries, do not invest much in the translational R&D needed to mature the nascent technologies coming out of basic research and to mature manufacturing capabilities needed to scale up technologies of the future. Over three-quarters of business R&D is development focused on incremental product improvements.
It is also important to recognize that the large companies that conduct the vast majority of R&D in the American private sector have interests that extend beyond the United States. Many of America’s largest OEMs derived between half and two-thirds of their revenue from foreign sales in 2018—including Apple (58%), HP (65%), GE (62%), IBM (63%), and Caterpillar (58%).9 Many of these companies employ more than half of their total workforce outside the U.S. and have more than half of their corporate assets outside the U.S. These companies have also been cutting costs by offshoring manufacturing and, increasingly, moving R&D abroad to their foreign affiliates. They cannot be counted on to restore American manufacturing.
Market failures
Restoring U.S. manufacturing leadership requires the public sector to step in to correct a market failure. Short-term profit incentives will drive the private sector to continue offshoring manufacturing (and R&D) as long as it is economically favorable—and it is. American firms are not concerned with the societal benefits that flow from domestic production in the form of jobs, national wealth, and national security. The manufacturing sector offers a wide range of job opportunities for blue-collar production workers and supervisors, as well as for white-collar researchers, design and manufacturing engineers, accountants, and business managers. In 2017, the average U.S. manufacturing worker earned $84,832 in pay and benefits, 27% more than the average worker in non-farm industries, and the multiplier effects from manufacturing exceed those of most other sectors. Manufacturing’s economic footprint is nearly three times as large as its share of direct economic output (value added in 2018 was 11.3% of GDP), and more than four times as large as its share of total U.S. employment. A significant portion of the domestic rise in income inequality, the long-term stagnation of personal income in the United States, and the redistribution of national wealth to coastal states is attributable to the loss of manufacturing employment, especially in the Midwest. Because the societal benefits of domestic manufacturing exceed the concentrated benefits of offshore manufacturing, the U.S. government has a critical role to play in realigning incentives.
Past efforts
Multiple defense programs and initiatives exist to address critical manufacturing issues in the United States. These include the Manufacturing Technology (ManTech) program, Title III, armories, the Manufacturing USA institutes, and the Defense Innovation Unit. Most of these are long-established programs that can at best address defense-specific production issues. They have not and will not arrest the long-term erosion of the U.S. innovation ecosystem and decline of broader U.S. manufacturing.
The Hollings Manufacturing Extension Partnership (MEP) at NIST is one of the few nondefense programs targeting manufacturers. Created in the late 1980s and analogous to the Agricultural Extension Service, MEP provides business and technical assistance to the nation’s small and medium-sized manufacturers. Current funding is about $140 million, but through much of its history, MEP has faced strong opposition from Republican administrations as an example of “industrial policy”. Other advanced countries invest far more on programs to support SMMs and have had significantly better success than the U.S. in maintaining a strong manufacturing sector. Germany, for instance, invests 20 times as much as the United States on manufacturing extension services. Japan invests even more.
Beginning in 2014, the most recent initiative launched to benefit domestic manufacturing, the Manufacturing USA institutes illustrate both the extent of the challenge and the need for a more comprehensive approach. Currently there are 14 institutes, addressing a range of specific production issues and technology segments. Each institute is a public-private partnership that focuses on promoting robust and sustainable manufacturing research and development in a specific, promising advanced manufacturing technology area. The program advances American manufacturing innovation by creating the infrastructure needed to allow U.S. industry and academia to work together to solve industry-relevant manufacturing problems in research and development, technology transition, workforce training, and education.
The Manufacturing USA institutes are a worthwhile concept and deliver value for the niches that they address. But there are three main reasons why these institutes are insufficient to solve the broader manufacturing issues facing the United States. First, there are simply not enough institutes to have much impact across the national manufacturing sector. Federal funding for the institutes is less than $200 million and the total number of member companies, fewer than 2000, is less than one percent of U.S. manufacturers.31 Second, many of the institutes have yet to focus adequately on advancing technology and manufacturing readiness levels. Most of the institutes remain in start-up mode, focusing on building facilities and laboratories and increasing membership. Third, the scale of these institutes is such that only the largest corporations can provide sufficient matching funds and much of that has been in-kind support; larger cash contributions by members would increase research flexibility and strengthen members’ commitment to achieving tangible outcomes.
The NMF would address shortcomings these existing programs by creating a comprehensive support system for the nation’s manufacturing sector. A band-aid approach—spending more on the MEP program or creating a few new Manufacturing USA institutes, for example—will not restore the eroded industrial commons. A new agency with a national strategy and adequate and sustained investment could if we can act with some urgency. Other nations are not standing still.
Proposed Action: Establish a National Manufacturing Foundation
Based on research conducted in 2018 by MForesight,10 the U.S. manufacturing community agrees that bold steps are needed to ensure that the challenges facing U.S. manufacturing are met quickly and aggressively. Market forces alone will not achieve the needed change. In fact, market forces have made manufacturing challenges worse over time. With sustained, strategic investments, the United States can regain fundamental manufacturing capabilities, rebuild its industrial commons, ensure a return on federal investments in R&D, capitalize on technology changes broadly affecting manufacturing, establish leadership in new industries, and restore the broad-based supplier networks that are essential to economic and national security. The objective is not to re-shore lost industries but to rebuild our lost capabilities and capacities to establish and grow industries of the future.
An overarching recommendation in Manufacturing Prosperity is to establish a new federal agency, the National Manufacturing Foundation (NMF), to oversee and coordinate the federal government’s manufacturing-related investments, initiatives, and policies. Currently, no single federal agency has the health of the nation’s manufacturing as its primary mission. Although existing agencies have programs to support manufacturers (mostly targeting defense production) these programs are scattered, uncoordinated, and underfunded relative to the need. Most importantly, these small programs are always subordinate to the primary mission of their managing agency, be it defense, energy, labor, etc. Justifying programs to support manufacturing solely on the basis of national defense disregards the crucial high-wage employment, innovation, and wealth-building that only a strong, balanced commercial manufacturing sector can provide. A robust manufacturing sector is also essential to lessen our dependence on foreign countries for defense-critical technologies and security. And finally, the DOD alone can no longer build/rebuild the domestic industrial base on its own—defense procurement needs today are dwarfed by global commercial markets.
Although it might be politically easier to simply increase funding for existing manufacturing-support programs and to increase spending on engineering research, the results would be suboptimal. Such efforts would lack focus and likely lack the resources and breadth needed to make a meaningful difference. A separate, independent agency is essential to ensuring a bright future for U.S. manufacturing. Similar steps have been taken before. Consider DOE, the NIH, and the National Aeronautics and Space Association (NASA). Each of these agencies was established pursuant to a federal determination that the sectors they manage (energy, healthcare, and aerospace, respectively) are critical to national well-being and so deserve large, focused government resources to ensure long-term American leadership. These agencies have been successful in achieving this goal. Similarly, if national leaders agree that the United States must also be a global leader in manufacturing, then creating a National Manufacturing Foundation is a necessary step.
The NMF would develop and implement a national strategy to achieve a world-leading manufacturing sector and would drive federal policy, programs, and sustained investments in accordance with this strategy. Certain existing programs such as the Hollings Manufacturing Extension Partnership (MEP) and Manufacturing USA would be transferred to the NMF. Other existing programs—for instance, defense-related programs—would retain their current organizational structure in order to avoid unnecessary disruption. The NMF would ensure close coordination among these programs. Most importantly, the NMF would provide strategic direction, fill programmatic gaps, maintain long-term focus, and track metrics to ensure federal efforts are making the expected difference in domestic manufacturing.
Specifically, the NMF would do the following:
- Engage with other federal S&T agencies to set technology priorities, mature promising product and process technologies funded through other federal agencies, access relevant expertise, and coordinate funding to ensure that promising technologies receive full support from discovery and invention to commercial-scale domestic production.
- Invest in translational R&D to help advance emerging technologies beyond the pilot stage. This would include awarding grants and contracts to U.S. universities and other research institutions to support translational engineering (not science) research and manufacturing process technologies common to multiple industrial applications. This would also include establishment of a series of Translational Research Centers (TRCs) affiliated with universities. TRCs would focus on advancing technology and manufacturing readiness of emerging technologies in order to enable successful hardware start-ups and to transform research results to new products and processes manufactured in the United States.
- Build connections between hardware start-ups and other federal agencies, especially the DOD, to support translational research in defense-critical technologies. This would include leveraging federal purchasing power and the federal government’s role as a customer to help American companies procure financing for plants and equipment to establish and ramp up production of new technologies.
- Facilitate public-private partnerships to create Manufacturing Investment Funds (MIFs). These MIFs would fill gaps in existing venture-capital markets, providing sufficient funding for hardware start-ups to scale production in the United States beyond pilot plants.
- Support small and medium-sized manufacturers (SMMs) through technical assistance and financial support: including loans, grants, loan guarantees, and tax incentives. As the foundation of manufacturing value chains and the geographic distribution of diverse industrial clusters, it is essential that SMMs have the capacity to upgrade equipment, train staff, and fully participate in Industry 4.0.
- Grow engineering and technical talent at all levels by significantly increasing federally funded graduate fellowships in engineering for U.S. citizens, partnering with state and local governments to increase the number of four-year engineering technology degree programs and to expand successful apprenticeship and skills-training programs.
This 6-point action plan is designed to address multiple shortcomings in the current U.S. manufacturing-innovation ecosystem. But to succeed, this plan must be complemented by policies ensuring that products based on the nation’s R&D investments are manufactured domestically. In particular, we recommend a binding rule that if the intellectual property for a product or process is developed based on federally funded R&D, then that product or process must be manufactured substantially (e.g., a 75% minimum value-add) in the United States, without any exceptions or waivers.11
Implementation
To accomplish these goals and fulfill its mission, we recommend funding the NMF with at least 5% of total federal R&D funding, or roughly $7.5 billion per year. These funds should be appropriated to the NMF as part of an increase in total R&D funds, not as a carve out. This could be reasonably accomplished by starting with first-year funding of $1 billion, then growing the NMF rapidly over 3–5 years until the 5% goal is met. To put these numbers in perspective, consider that the U.S. IP Commission has estimated the cost to the U.S. economy of IP theft, counterfeit goods, and pirated software by Chinese actors alone at nearly $2 billion per day. If we are serious about protecting our IP, bolstering our economy, and increasing defense preparedness, investing an additional 5% of federal R&D to create an NMF is necessary and urgent. Simply spending more on existing programs (e.g., doubling every existing S&T program for the next 10 years) will result in comparable costs but will not result in improved domestic industrial competitiveness—nor will it position the United States to establish the industries of the future. The NMF is the missing piece in our federal S&T programs.
An effective operational model is essential to meet stated goals. This not only includes sensible administrative structures and talented administrative personnel, but also strong mechanisms for engaging experienced engineers and business leaders. These experts would engage with researchers to identify promising technologies, design and conduct necessary translational research, and build the financial, legal, and technical mechanisms needed to transfer production to U.S.-based factories.
Metrics are also needed to assess progress on the NMF’s overall objectives of strengthening domestic manufacturing and advancing commercialization of new technologies emerging from federally funded R&D. Metrics to consider include the number of technologies successfully reaching commercial production, number of jobs created in the manufacturing sector, number of new manufacturing facilities built in the United States., domestic availability of critical defense technologies, exports of advanced technologies, and returns on investment for both public and private stakeholders. Programs and initiatives that fail to demonstrate progress according to these metrics should be adjusted or terminated.
Aggressive action is needed to ensure that any new innovation supports domestic job creation and other economic-development goals in the United States. As stated above, the United States should encourage domestic production through minimal licensing fees and through government-procurement contracts. Legislation may be needed to ensure that any technology based on federally funded R&D must be scaled (e.g., a 75% minimum value add) in the United States. The federal government must provide create clear, meaningful incentives to manufacture new hardware technologies in the United States—though it should not matter whether or not the entity that scales the technology is headquartered in America. In fact, many foreign manufacturers, such as BAE Systems (UK), Thyssenkrupp (Germany), Dassault Systems (France), and Ericsson (Sweden) have recently made large investments in the U.S., joining companies such as Toyota, Honda, Siemens, and Hitachi that have invested in U.S. manufacturing for decades. Such investments must be further encouraged.
Government has played an indispensable role in American industrial development throughout history. Federal investments in basic and translational R&D, combined with early defense procurements, enabled creation of the aviation industry, semiconductors, computers, and the internet. Other federal investments led to horizontal drilling of shale gas/oil human-genome sequencing and CRISPR, and most of our advanced medical devices, pharmaceuticals, and treatments. The leading U.S.-manufactured exports today are aircraft and weapons—areas in which the federal government invests considerably in basic and translational R&D, and areas in which the government is the dominant customer. 12
Congressional Action
The concept of establishing an NMF is receiving bipartisan support in the current U.S. Congress. Specific legislation is being developed to create the NMF and clearly define its role and mission. Senator Gary Peters (D-MI) has proposed the creation of a National Institute of Manufacturing (essentially the same as an NMF), modeled on the National Institutes of Health, that would consolidate existing programs and invest in translational R&D to fill the gaps in the innovation cycle. Other ideas are being discussed in Congress that could strengthen federal support for U.S. manufacturing.
Responses to Possible Criticisms
“Creating and funding a new agency is difficult in a tight budget climate”
Although a new agency would not fit within current budgetary constraints, the NMF should be considered a long-term investment in U.S. prosperity, not an additional cost burden. By defining the NMF budget as a percentage of the total R&D budget, funds would vary as Congress determines R&D appropriations. Perhaps a more important consideration is that the status quo is not sustainable. The nation’s R&D enterprise cannot continue to focus on basic science research with limited capabilities to engineer and manufacture results domestically. Eventually, political support for continued R&D spending could wane, leaving both the overall economy and the defense industry worse off.
“Government should not be picking winners and losers”
The argument that the government would be “picking winners and losers” by supporting domestic manufacturing is an argument that does not hold water. If anything, the opposite is true: without a robust domestic manufacturing sector, other countries have the power to pick our winners and losers by deciding which technologies developed here to mature and manufacture. The “picking winners and losers” argument also does not bear historical scrutiny. The United States has strongly favored specific industries in the past, through R&D spending, tax policy, and other policy levers. American leadership in industries such as aerospace, health care, oil and gas, and defense has depended on long-term government support. The fact that many advanced industries are now threatened by a weakening domestic production base and increasing dependence on imports indicates the need for a proactive role by government to restore American manufacturing. Furthermore, manufacturing ensures national security and provides greater employment opportunities for a larger number of people at higher wages than almost any other economic activity. Support for manufacturing will help boost percapita incomes, reduce income inequality, and restore the American Dream.
“There are so many manufacturing programs already. Why create a new one?”
The federal government has created a variety of manufacturing programs over the decades, and the DOD has long had internal programs to support defense manufacturers. Yet despite these programs, American manufacturing broadly has been declining three decades. None of the programs created to support manufacturing in the United States have had sufficient scale to make an impact beyond the edges. The 56 manufacturing programs across 11 federal agencies are not coordinated and are not motivated to do so. Unlike major foreign competitors such as Germany, Japan, and South Korea, the United States has never established a comprehensive set of programs and policies to nurture and support its manufacturing base and the innovation ecosystem. The United States cannot afford to continue a piecemeal approach to restoring its much-eroded industrial commons.
The NMF would also play an as-yet-unfilled role in ensuring that promising developments based on federally funded R&D are matured and ultimately produced at full scale in the United States. Too often, promising technologies emerging from basic research funding from one agency are sit idle instead of being commercialized. This may be because funding for continued development does not fit the mission of the original funding agency, other agencies that could fund further development are unaware of the new technologies, and the inventors do not know how to engage other agencies for continued funding. The NMF would be responsible for eliminating this situation through strategic coordination of S&T agencies.
Potential champions and advocates
The recommendation to create an NMF is the result of MForesight’s discussions (totaling more than 1,200 hours) around the country with nearly 200 industry leaders, academics, investors, and state and local economic developers. These discussions revealed an urgent desire for a coordinated, long-term, and well-funded national manufacturing initiative, led by the NMF, to compete with the ambitious plans and actions of international competitors, such as China 2025.39 Potential champions and advocates also include policymakers concerned about national security challenges, including the House and Senate Armed Services Committees; the DOD; the International Trade Administration; trade organizations including the National Defense Industries Association, the Association for Manufacturing Technology, and the National Association of Manufacturers; professional societies including the American Society of Mechanical Engineers, the Institute of Electrical and Electronics Engineers, and the Society of Manufacturing Engineers; and advocacy groups and think tanks including the Alliance for American Manufacturing, the Information Technology and Innovation Foundation, the Brookings Institute, the Heritage Foundation, and the Center for American Progress.
Opportunities for complementary action
Creating the NMF would clearly indicate that the government is ready to support manufacturing. But the weaknesses in the national industrial base are too widespread for the federal government to solve on its own. Rather, the federal government must recognize the unique part that other sectors can and must play to truly position the United States as a global leader in manufacturing. Private industry can attract matching funds, expertise, and commitments to maintain and build factories in the United States. The private financial sector—investment bankers, venture capitalists, and retail banks— can provide the financial capital needed to scale production at home. Universities can commit to channeling research results and IP to domestic producers, not foreign competitors. Universities can also ramp up efforts to recruit domestic engineering students, and can strengthen investments in engineering training and degree programs. OEMs can restore apprenticeships and internship programs to train the needed skilled workforce. State and local governments can provide matching funds, ramp up educational programs for skilled trades, and offer incentives to encourage development of manufacturing clusters. State and local governments can also work with the NMF to aggregate and accelerate place-based manufacturing initiatives for the benefit of the entire nation. The NMF provides a clear vehicle through which the federal government can work to ensure that all of these roles are filled.
Conclusion
The challenges facing American manufacturing have been building over decades as more and more industries have offshored production or been overwhelmed by imports. Dependence on imports matters relatively little for low-technology products.
But when that dependence encroaches on knowledge-intensive industries and defense production, the prospects for maintaining American defense superiority and a high-income, prosperous society come into question. Without a robust manufacturing sector, the United States cannot realize the full value—in terms of economic growth, job creation, national security, and capacity for continued innovation—of its investments in research and development.
Meanwhile, other countries are not standing still. China has set up a $21 billion national investment fund to promote the transformation and upgrading of its manufacturing industry. Japan, Germany, and South Korea all far outpace the United States when it comes to manufacturing investment and capabilities.
It is high time for the United States to restore its lost industrial commons and reposition itself as a global leader in product innovation, engineering, and commercialization. Establishing the National Manufacturing Foundation is a necessary and important step towards achieving this goal.
Closing Critical Gaps from Lab to Market
Summary
Closing critical gaps across the interconnected ecosystem that supports discoveries in science and technology (S&T), developing discoveries into promising inventions, and commercializing inventions into thriving businesses should be of top priority for federal policymakers. In brief, intentional focus and dedicating resources to discovery and commercialization of inventions ensures that the United States maintains and expands its economic vitality, its global leadership in S&T innovation, and its strategic entrepreneurial advantages. This proposal presents a rationale and vision for the launch and deployment of a national plan—called Innovate the Future: The American Inventors Initiative—to provide comprehensive support and acceleration paths for postdoctoral researchers, early-stage entrepreneurs, and S&T investors, in order to advance domestic economic growth.