A Valley of Death in the Innovation Sequence: An Economic Investigation
44 Pages Posted: 14 Feb 2008 Last revised: 27 Apr 2018
Date Written: September 1, 2007
The United States Department of Commerce, Technology Administration provided support to the Phoenix Center to study the causes and potential solutions of the Valley of Death for technology development in the United States under Study Contract No. SB1341-05-2-0023 administered by KT Consulting, Inc. While several explanations for this Valley of Death have been proffered, this Paper takes a decidedly different approach to this issue. We focus our attention on the notion that the Valley of Death is, in fact, a valley in the innovation process - an image that implies that funding for R&D projects is more readily available for basic or early-stage research (a peak) than the intermediate stages (the valley). Our economic model indicates that such a nonlinear phenomenon can only occur if noneconomic investments (such as government expenditures on basic research) are made in very early stage research without sufficient attention to the likely investment decisions at later stages of the innovation process. This is not meant to imply that government support of R&D activity is unwarranted; in fact, there are important and valid reasons for government to support R&D activity. In some respects, the Valley of Death may be an inevitable consequence of socially-valuable government intervention. An important question is whether technology policymakers should devote some attention and resources to the study of the optimal mix of government support for early-stage and intermediate-stage R&D projects. In particular, it may be possible to increase economic welfare from government R&D efforts by increasing support for intermediate stage projects or by altering the allocation of a fixed level of support between early and intermediate stages of the innovation process. Even if the current mix of funding across the stages of the innovation process is deemed optimal, it is also sensible to evaluate ways to increase technology innovation by assisting private investors in seeing projects through intermediate stages of the innovation sequence, which will bring innovations closer to commercialization and diffusion.
Keywords: Valley of Death, Innovation, Innovation Sequence, Basic Research, Funding Gap
JEL Classification: H50, H59, O31, O33, O38, O39
Suggested Citation: Suggested Citation