Charles Weiss and William B. Bonvillian

Complex, Established “Legacy” Sectors
The Technology Revolutions That Do Not Happen

Americans pride themselves on the scientific and technological prowess that has
given rise to a steady stream of innovations in information and communications
technology, along with medicine, agriculture, military, aerospace, and many other
fields. For a quarter century, innovation policy in the United States has focused on
the problems encountered by innovations in these and many other areas—espe-
cially on “the valley of death,” the gap in implementing innovation that occurs as
technologies bring new functions to create new markets and innovators move
from research to late-stage development. In contrast, almost no research has
focused on a different but critical problem in innovation: fitting new technologies
into established economic sectors where innovation is needed and potentially
transformational, and where the record of success is much more meager. This is
the problem we confront in this article. Put another way, how do we fit discontin-
uous technologies into established sectoral paradigms?

Complex established “legacy” sectors—like energy, health delivery, the electric
grid, building, and transport—present acute needs for systemwide technological
innovation. Typically, the United States launches new technologies, and the new
functionality they offer, into new territory, creating new economic activities. There
was nothing quite like computing, telecommunications, aviation, electricity, O
railroads before their advent. It is harder to launch innovations into established
sectors occupied by incumbent firms and their aging technologies because they

Charles Weiss is Distinguished Professor of Science, Tecnologia, and International
Affairs at Georgetown University’s Edmund A. Walsh School of Foreign Service, E
formerly chaired its program in Science, Technology and International Affairs. From
1971 A 1986, he was science and technology adviser to the World Bank.

William B. Bonvillian directs MIT’s Washington office and was a senior adviser in the
NOI. Senate. He teaches innovation policy on the adjunct faculties of Georgetown
University and Johns Hopkins School of Advanced International Studies.

In this article, the authors build on discussions of the ideas in their recent book,
Structuring an Energy Technology Revolution (Cambridge, MA: CON Premere, 2009),
and in their fall 2009 Innovations article, “Taking Covered Wagons East: A New
Innovation Theory for Energy and Other Established Technology Sectors.”

© 2011 Charles Weiss and William B. Bonvillian
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resist any change that threatens their business models. Therefore, we tend to incu-
bate the new rather than fix the old, leaving established sectors isolated from inno-
vation, so that they tend to stagnate. That’s why Thomas Edison would be comfort-
able with our electric grid, why we have been working on electronic medical
records for 20 years, why energy losses from our buildings are major contributors
to global warming, and why a cab ride from Kennedy Airport to Manhattan over
potholed highways is something of a Third World experience. The resistance to
innovation in our established sectors becomes a drag on their long-term viability
and on our economic growth.

We tend to incubate the new
rather than fix the old, in partenza
established sectors isolated
from innovation. IL
resistance to innovation
becomes a drag on their long-
term viability and on our
economic growth.

The technological systems in these complex established legacy sectors, Quale
we call CELS, are the result of stable and well-defended technological, economic,
and political paradigms backed
by policies, subsidies, prices,
price structures, standards, regu-
lations, incentives, infrastruc-
ture, political support, expert
communities,
technological
istituzioni, innovation systems,
career paths, and university cur-
ricula that have developed over
decades. This multi-faceted
CELS paradigm—and the tech-
nology lock-in that it ensures—
provides the overall structure
into which any innovation must
be introduced, even though its
original purpose, however justi-
fied it may have been at the time
it evolved, may have long been overtaken by events and become broadly counter-
produttivo. While established sectors will allow advances to existing technologies
that fit within the paradigm, they resist breakthroughs that make fundamental
structural changes. The prominence and obvious importance of this techno/eco-
nomic/political paradigm and the critical social problems that often flow from it
attract the attention of creative individuals and companies, resulting in a substan-
tial supply of promising ideas at various stages of development and small-scale
implementation—just far enough along to give rise to excited stories in the media
and to create major frustration on the part of the innovator, but far short of the
large-scale deployment that would be needed to make a significant dent in the
overall problem.

Our inability to introduce innovation into such CELS ties an anchor to our
economy. Emerging nations climbing toward developed world status tend to have
growth rates two to three times that of the United States because they are starting
afresh and bringing the latest innovation into all sectors. The U.S. growth rate is
based largely on innovating at the frontiers of technology, so it leads new innova-

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The Technology Revolutions That Do Not Happen

tion waves1 that generally recur every four or five decades. If we worked not only
on innovation at the frontier but on innovation in established sectors, both our
growth rate and our quality of life could be significantly enhanced.

In the energy sector, Per esempio, the paradigm supports legacy technologies
based on fossil fuels, a structure that is now backed by the power of huge corpora-
zioni, buttressed by strong and deeply felt public expectations of cheap energy, Quello
mobilize opposition to any proposals for fundamental change.2 The result is a
complex set of interlocking obstacles to the development and market launch of
technologies based on alternatives to fossil fuels. Analogous paradigms exist in
transport, food, health delivery, the electric grid, building, and many other sec-
tors—based, Per esempio, on the strong public support for personal as opposed to
mass transportation, on the political power of industrial agriculture, and on the
inability of our fragmented health-care system to promote innovation and effi-
ciency. These paradigms guide not only investments in existing technology, Ma
also the direction of investments in research, development, and demonstration of
new technologies.

A NEW, INTEGRATIVE ANALYTIC FRAMEWORK

In a book and in previous papers, we have proposed a new analytic framework to
address the problems of fossil fuel-based energy, which we took as a prototype of
a CELS. We used the image of “driving covered wagons east” as a metaphor with
which to capture the difficulties of introducing innovations in complex established
sectors, and suggested that the concepts proposed in our analysis can be applied to
innovations in a larger set of legacy sectors.3 In such sectors, we argued, the chief
obstacles to innovation lie in the problems of market launch, so that policymakers
need to go beyond support to research and development—the traditional focus of
American science and technology policy—and examine the entire innovation
process.4 The obstacles to market launch in these systems are well known to spe-
cialists in particular areas but have not received the attention they deserve from
general innovation theorists.

in questo documento, we extend our earlier analysis to address the obstacles to innova-
tion in a broader set of complex established sectors: the health-delivery system, IL
long-distance electricity grid, the building sector, and air transport. We chose these
sectors to illustrate a variety of techno-economic characteristics and impediments
to innovation. In all of these sectors, the social benefits of a technological revolu-
tion justify public intervention to speed technical change beyond what might be
expected from the ordinary activity of free markets, just as they would in energy.5
We propose an integrative analytic framework that provides common concepts
and vocabulary in order to facilitate the discussion of policies that can stimulate
innovation in these critical and apparently disparate economic sectors. Our central
focus is on the role of market imperfections as they both encourage and pose
obstacles to the development and launch of innovation. Some of the imperfections
in the market for technological innovation reward private investments by making

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Charles Weiss and William B. Bonvillian

it possible to obtain monopoly rents. Others impose obstacles to innovation. Noi
therefore introduce the idea of a “quasi-free market” for technology: a market
whose imperfections affect the development and launch of any innovation.

We then introduce the idea of a technological/economic/political paradigm
that favors existing technology and supports an established complex sector
through subsidies and publicly supported infrastructure that benefit existing tech-
nology, as well as a variety of other market imperfections.6 Innovations in such a
sector that are consistent with and fit into the prevailing paradigm must overcome
the effects of these subsidies; in effect, they must push these innovations up a sub-
stantial hill. Beyond this, they face only the same obstacles as any other innovation.
Innovations that threaten an established paradigm, on the other hand, face
many additional hurdles on their way uphill. They must contend with the regula-
zioni, policies, istituzioni, and market imperfections that protect the “legacy”
technology, as well as non-market opposition from the competitors that benefit
from the established paradigm. To return to our covered wagons metaphor, these
are the conditions that led our technology pioneers to head westward in the first
place.

A dramatic demonstration of the existence of such market imperfections is the
fact that some interventions, for example in the building industry, actually have
positive aggregate financial net present value, in the sense that the sum of the
financial benefits to the various stakeholders that would result from the wide-
spread implementation of the innovation would exceed their aggregate financial
costs.7 In other words, implementing these technologies would not only achieve
social benefits but would actually save money overall. More frequently, Tuttavia,
paradigm-threatening innovations in these sectors are driven by non-market con-
siderations: either externalities (costs that users do not pay directly) involving the
ambiente, public health, or security, or other collective benefits that may be
critically important to the country or the world but will inevitably cost extra
money.

THE “QUASI-FREE” MARKET FOR “STANDARD” INNOVATION

The market in technology is inherently imperfect. Some imperfections work to the
strong advantage of the innovator. First and most important, technological inno-
vators seek to gain economic rents through their monopoly on technology, rein-
forced by the fact that the owner of a technology knows more about it than a
prospective buyer does—an advantage known to economists as “asymmetric infor-
mation.” Second, once their new product has been established in the market, inno-
vators benefit from barriers to the entry of competitors. The innovator benefits
from various first-mover advantages, for example, the fact that consumers are
more likely to identify the new product with the innovator, even after competitors
have appeared on the market.8

Other market imperfections, on the other hand, work to the innovator’s disad-
vantage. These constitute the theoretical justification for specific policy interven-

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tions intended to stimulate research and innovation. Of these imperfections, IL
most important is the fact that the innovator does not keep all of the social bene-
fits of his or her invention, an imperfection known to economists as non-appro-
priability. First of all, (S)he must share the value-added of innovation with a vari-
ety of stakeholders—most obviously with the user, given the rule of thumb that an
innovation must be at least twice as cost-effective as whatever it replaces. Beyond
Questo, technology may “leak” away from its originator by such means as the depar-
ture of key personnel or successful patent infringement, or it may even be stolen
outright. This non-appropriability, or “knowledge spillover,” is the basic policy jus-
tification for public support for research and development, since it implies that
aggregate private investment in innovation will be less than optimum for society,
even ignoring environmental and other externalities.9

We have already mentioned the well-known valley of death between applied
research and the late-stage development of commercial products; from this point
of view, it is an imperfection in the capital markets in the sense that potentially
profitable opportunities fail to attract investors.10 A less obvious market imperfec-
tion affecting all innovations is the difficult link between technology and manage-
ment; for example, a company with excellent technology may suffer from poor
management, and vice versa. This is an imperfection because in an ideal free mar-
ket, technology and management could be “unbundled” from each other, like
design and manufacturing in the semiconductor and other IT sectors.11 The most
famous case of this pattern is the failure of the Xerox Corporation to capitalize on
the seminal inventions of its own Palo Alto Research Center (Xerox PARC), includ-
ing the desktop computer, the graphic interface, the mouse, and the Ethernet
cable.12 This is one aspect of the theoretical policy justification for establishing the
Defense Advanced Projects Research Projects Agency13 and its counterparts in
intelligence (In-Q-Tel)14 and energy (ARPA-E),15 which provide various forms of
support extending into the applied development area to firms with technologies
deemed critical to defense, intelligence, and energy capability, rispettivamente.

The status of first mover involves costs as well as benefits. The innovator must
achieve sufficient economies of scale to be able to introduce the new product into
the market at a cost low enough to be competitive with any existing products.
(S)he must absorb the cost of educating consumers, developing distribution chan-
nels and repair and maintenance capabilities, driving product costs down the price
curve, developing incremental improvements and second-generation products,
and identifying and seeing to the production and marketing of complementary
products.16

We now define a “standard model” innovation as one that is subject to these
particular market imperfections. For want of a better term, we shall call the mar-
ket in which such innovations operate a “quasi-free” market. It is not completely
free, not only because it is affected by market imperfections at the stage of market
launch, but also because innovation benefits from extensive government funding
of early stage research (which greatly exceeds private-sector expenditures at this
stage), and major support of science and technical education. 17

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The term “standard model” does not imply that such innovations face an easy
sentiero; on the contrary, they typically face an uphill struggle. The obstacles faced by
such standard model innovations—and the policy measures needed to help them
overcome these obstacles—have been the near-exclusive focus of the general liter-
ature on innovation theory. These obstacles justify the standard recommendations
for support to research and development, on the need for policies that bridge the
valley of death,18 recommendations that are valid for virtually all innovations.
These standard model innovations include such well-studied phenomena as
induced innovation,19 discontinuous or transformative innovations,20 enabling or
generative innovations,21 and many kinds of disruptive innovations.22 Such inno-
vations may be radical (new functionality), secondary (major improvement of
established functionality), or incremental.23 The organization of the innovation
processi,24 both at the institutional level and at the face-to-face personal level,25 like-
wise presents a profound challenge.

THE COMPLEX ESTABLISHED “LEGACY” SECTOR

We now introduce the concept of the complex established legacy sector, or CELS,
and its accompanying technological/economic/political paradigm, which we
define as displaying four market imperfections:

1. A tilted (non-level) playing field caused by “perverse” subsidies and price
structures that are favorable to existing technologies,26 and that create a mismatch
between the incentives of producers and innovators and the goals of the larger
society

2. An established institutional architecture that imposes regulatory hurdles or
other policy disadvantages favoring existing technology or discouraging new
entrants, accompanied by public support to infrastructure adapted to the require-
ments of existing technology

3. Well-established and politically powerful vested interests, reinforced by pub-
lic support, that defend the paradigm and resist the introduction of technologies
that threaten their business models

4. A set of market imperfections specific to one or more innovations within the

sector, over and above those facing standard model innovations.

These may include the imperfections of network economies, lumpiness, split
incentives (“positive pecuniary externalities,” a form of non-appropriability),
requirements for collective action, and transaction costs.27 We explore them in the
following section.

These paradigms do not inhibit all innovations. On the contrary, innovazioni
that reinforce them constitute the basis of much of the United States’ comparative
advantage in pharmaceuticals and in fossil fuel, agricultural, military, and aero-
space technology. But for innovations that do not fit readily into a given legacy par-
adigm, for example those in organic agriculture, this four-part structure presents
multiple obstacles that inhibit investment at every stage, from research to market
introduction. The structures supporting these paradigms have grown up over the

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The Technology Revolutions That Do Not Happen

years precisely because they fulfill their functions well, at least for a substantial pro-
portion of their stakeholders. Infatti, in many cases there would be no issue at all
if it were not for some overwhelming non-market collective benefit, such as the
ambiente, public health and safety, O (in the case of energy) geopolitics and
national security.

To further complicate matters, policymakers seeking to promote innovation
face the problem of defining and obtaining agreement on a clear and measurable
standard or metric by which to gauge whether the externalities have been over-
come and the social goals have been met, Per esempio, for evidence-based medi-
cine or sustainable agriculture. The same interests that benefit from the existing
paradigm are likely to oppose efforts to define and implement such standards.

OVERCOMING OBSTACLES TO MARKET LAUNCH

We now employ the concepts developed above to identify and classify the obstacles
to market launch in CELS, in order to lay the groundwork for a brief survey of
these obstacles as they apply to innovations in energy, health-care delivery, IL
long-distance electric grid, edifici, and air transport. Policymakers seeking to
encourage such innovations have three objectives: to stimulate a supply of new
ways of doing things, to remove obstacles to launching innovations into wide-
spread use, and to eliminate or at least to lessen the mismatch between incentives
for established technologies and social goals. Each of these objectives may well take
years or even decades to achieve. Ideally, the three should be implemented in par-
allel; in practice, it may well make sense to start with whichever is more politically
practicable at a given moment. Adapting our earlier analysis to this broader can-
vas, we classify innovations according to the obstacles they are likely to face and
discuss the policy interventions best suited to overcoming these obstacles.

Stimulating the supply of new ideas uses the traditional instruments of
American science and technology policy: primarily the financing of research and
development, but also prizes and professional recognition for major discoveries,
and translational research to bridge the valley of death, particularly in the case of
inventions important to national security or public health.28 These measures are
needed for almost all innovations in CELS because the subsidies, market imperfec-
zioni, and institutional impediments typical of such sectors have long discouraged
investment in research in these fields or guided it in inappropriate directions.29

These “supply-side” measures are appropriate to early stage ideas, which are
experimental and require a relatively long period of research, development, E
perhaps demonstration. Analysis of expected obstacles to their market launch and
the interventions needed to overcome them would therefore be premature, since
even technical success (let alone economic feasibility) is far from being assured.
Examples would include the hydrogen economy and fully autonomous robotic
automobiles.

Beyond support to research and development, efforts to stimulate innovation
in these CELS need to address both obstacles that result from the structure of the

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“legacy” sector and others that are specific to particular technology. This typically
means conceptually simple but politically difficult measures to change prices or
price structures, Per esempio, through charging for emissions of carbon dioxide or
paying doctors and hospitals more for preventive and less for procedure-based
medicine, so as to bring producer incentives more in line with social goals. Below
we identify seven categories of barriers to implementing new technology para-
digms in CELS. This is not an exhaustive list, but it aims to identify an initial group
of significant barriers.

Paradigm-Compatible Innovations

These constitute the most manageable cases of a technology category facing a
CELS barrier that may require policy intervention. These innovations can fit into
a market niche that falls within the existing paradigm, and can be profitable rea-
sonably soon after market launch, ideally even despite the subsidies to competing
legacy technologies. Building up a niche, they can, over time, go through engineer-
ing improvements and move down the production cost curve to build momentum
for broader entry into the sector. Here, private market mechanisms are more
important than interventions through public policy. If these innovations become
sufficiently superior to the technologies they replace as to overcome the subsidies
to their competitors, their market adoption can follow the “standard model”
described earlier. Light-emitting diodes (LEDs) provide a good example of this
categoria. This technology began in specialty niche lighting sectors, and went
through cost-cutting and incremental engineering improvements to build up its
market base to a point where the technology may emerge as the dominant lighting
technology.30 In other words, over time LEDs, while displacing existing incandes-
cent lighting, are a technology that is compatible within the existing lighting par-
adigm.

At the beginning, the new technology is likely to be competitive only in special
situations, but it may have the potential to improve and expand into existing mar-
kets and become a disruptive innovation in the sense defined by Christensen.31
This “self-expanding” process could be accelerated by public policy intervention,
including subsidies, regulatory requirements, guaranteed purchases, or other
interventions to encourage scale-up or provide incentives or regulatory require-
ments for adoption by users if this is justified by some environmental or other
social benefit. Examples would include off-grid solar and wind energy, most new
drugs and medical devices, E, as noted, energy-saving LEDs.

Tuttavia, these innovations typically face a series of marketing and design
challenges when they attempt to move from early-adopter niche markets to broad-
er-use markets.32 Impediments include engineering incremental improvements for
the technology, selecting the right target markets, developing a concept of the
“whole product,” positioning the product in the market, formulating a marketing
strategy, finding distribution channels, and pricing for emerging markets. These

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must fit a technology adoption lifecycle,33 with its staged segments of technology
innovators, early adopters, early majority users, late majority users, and laggards.

Market Imperfections Facing Counter-Paradigm Innovations

We now turn to six more market imperfections in CELS that pose obstacles to
counter-paradigm innovations. These innovations cannot be fit into existing par-
adigms and require policy interventions before large-scale market launch can
occur.34

The second of these imperfections concerns innovations that depend on net-
work economies derived from industries organized around national or large-scale
regional networks. As a way to visualize these networked sectors, just picture the
vast system of telephone lines or of wireless cyber connections; examples include
the network dominance of Microsoft’s operating system in computing or the exist-
ing grid system in electricity transmission. Here, a major obstacle is often the
absence of agreed standards that facilitate interoperability within the networks.
Innovations in the air traffic control system, many elements of the smart grid, E
many applications of information and communications technology to the delivery
of health services fit into this category. These innovations require the adoption of
standards, regulatory incentives, or other policies to facilitate the establishment of
such networks and to ensure the interoperability of components and sub-net-
works. If the innovations are purely technical, they may be introduced by agree-
ment among stakeholders, as long as these are consistent with their competing
business strategies. Or they could be imposed by a dominant firm (such as
Microsoft in computer operating systems), or directed by a single health payer
(such as the U.S. Veterans Administration regarding electronic medical records).
The absence of such standards in these networks in effect squanders the advantages
conferred by the huge American mass market. If the required standards cannot be
set by agreement or by a dominant player or product design, federal government
intervention may be necessary, especially if different regulations in different states
have the effect of imposing divergent standards.

A third market imperfection that may impose barriers to innovation is known
as “lumpiness.” This term is applied here to innovations that require a substantial
minimum investment in order to be introduced at full scale against entrenched
competition. In many cases, these must first be the subject of full-sized, expensive,
and risky demonstrations to prove techno-economic feasibility, sicurezza, and envi-
ronmental sustainability, as in the case of enhanced (“hot rocks”) geothermal tech-
nology systems or fourth-generation nuclear power plants. This “lumpiness” prob-
lem may be visualized as a boa constrictor swallowing an elephant. These “ele-
phant” technologies typically require large, expensive, engineering-intensive
installations that may also give rise to issues of ownership rights and legal liability,
as well as of technology. The need for public intervention to promote the introduc-
tion of these technologies is especially acute if they are likely to involve extra costs,
even when fully developed.

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In the energy field, this set of conditions applies directly to carbon capture and
sequestration technology; such major engineering systems, even when fully devel-
oped, will add major new facilities and costs to coal-fired generation plants. Questo
technology will require billion-dollar investments in demonstration projects that
are likely to be funded privately only if investors are reasonably sure that such tech-
nology will eventually be required of them in one way or another. Public-private
partnerships and international collaborations are needed here to share demonstra-
tion costs, to offer financing support, and also to ensure that performance, sicurezza,
and environmental data are collected in a manner consistent with the needs of
eventual private investors.

A fourth kind of market imperfection that may impose barriers is the need to
effectuate economies of scale; Perciò, special intervention may be needed to bring
down unit costs, improve performance, or organize the market for complementa-
ry products and infrastructure. To visualize these economies of scale, one need
only imagine the vast array of resources, suppliers, components, and production
facilities needed to produce a million cars. The cost and complexity—the required
economies of scale—of assembling this vast production system, a “value network”
in Christensen’s terminology, is what makes entry into such sectors as auto or air-
craft production so difficult. This market imperfection is especially important in
the manufacture of hardware, such as aircraft or motor vehicles, or for electronic
components of information systems; for example, a single semiconductor chip
fabrication plant (known as a fab) is a massive production facility requiring a
multi-billion-dollar investment.

Here, public intervention—for example, low-cost financing of capital equip-
ment—is justified if there is an urgent social need to expand production beyond
that required to meet the needs of assured future markets. The federal government
did this to produce aircraft during World War II, and the Japanese government did
it during the 1970s in many areas of manufacturing. A well-tested policy measure
to encourage expansion of production facilities is guaranteed public purchase. For
esempio, the government can issue a public tender for a quantity of solar water
heaters or photovoltaic panels to be installed on military housing, to be awarded
to bidders meeting specified conditions.

A fifth kind of market imperfection that may impose barriers to innovation is
that of non-appropriability. This refers to innovations whose benefits accrue to
someone other than the investor.35 Doctors, Per esempio, may be reluctant to invest
in information systems that benefit patients but whose costs cannot be passed on
to them. In such cases, it is important to devise ways of overcoming these imper-
fections, Per esempio, by a mechanism that finances extra initial costs at favorable
rates. Even so, the practical difficulties of implementing such systems may require
some form of subsidy or regulation, for example, through revisions in building
codes or other standards. This is especially true in situations where the non-appro-
priability was created by government institutions or by regulation. Per esempio, In
the case of the electric grid, state-regulated electricity rates prevent utilities from
recovering the cost of investments that could result in a more reliable and efficient

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national supply of electricity. Alternatively, these innovations may simply be
imposed by fiat by a central paying authority, such as electronic medical records by
the U.S. Veterans Administration, or the national health services of the United
Kingdom and Scandinavian countries in the case of health services delivery.

A sixth kind of market imperfection is requirements for collective action. These
typically involve fragmented industries with many units, none of them large
enough to invest in innovation. Picture the housing construction industry, for
esempio. It is highly decentralized, with thousands of small firms. Few of them
have even a regional, much less a national presence, and only a tiny number have
the capital depth to support R&D for the sector. This sector is risk-averse and
therefore innovation-averse, and is therefore unwilling to implement new
advances until their costs and efficiencies are fully and convincingly proven.
Innovations in such industries can come from suppliers, although these suppliers
face a significant threshold for proving costs and quality for this highly decentral-
ized sector.

Alternatively, such industries may organize themselves for collaborative, pre-
competitive research, sometimes with government help. Picture another example,
the farming sector, where millions of farms cannot implement or finance innova-
tion without the systematic support of the Agriculture Department’s research and
development efforts, or without its dissemination efforts through county exten-
sion agents bringing these innovations to individual farmers, or without its mas-
sive financing programs.36 Another example is Sematech, a public-private partner-
ship that helped to pull together the semiconductor industry with its diverse
equipment suppliers and to bring productivity gains and cost efficiencies to equip-
ment manufacturing processes.37 In the energy sector, the Electric Power Research
Institute supports sector-wide R&D efforts. Such cross-sectoral efforts can suffer
from under-investment due to the free rider problem, in which members of the
industry benefit from collective research without contributing to it.

Many of the market imperfections in the previous discussion arise from a sev-
enth barrier category: governmental and other institutional impediments to innova-
zione. In addition to the long-distance electric grid impediments mentioned earli-
er, prime examples include the control by state and local jurisdictions over the reg-
ulation of energy, and the over-siting of energy facilities and installations, like
wind and solar energy farms and their associated long-distance power lines.
Another example is local control over building codes, which creates an approval
structure that sharply limits the ability to adopt innovations that improve the effi-
ciency of energy use in buildings.

This problem is not restricted to regulatory agencies and may also extend to
research agencies and programs. The organizational structure of the National
Institutes of Health, Per esempio, is decentralized around some 27 institutes and
centers to fulfill the political demands of historical disease groups, a structure that
limits needed cross-cutting research initiatives that could accelerate medical inno-
vation. In other cases, government-directed intervention mandates curtail new
technology, Per esempio, when interest group politics dictated huge subsidies for

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corn-based ethanol, although it is at best a sub-optimal biofuel technology and a
competitor for land used to grow food crops. In another example, the political
demand for manned space exploration has curtailed less expensive and more sci-
entifically rewarding robotic exploration.

THE LEGACY SECTORS

forth

the general structure of

We now summarize the obstacles to innovation in five economic sectors, using the
analytic framework set forth in the above sections. We provide snapshots of these
sectors, briefly noting the technology challenges and the barriers to meeting them.
For each sector, we briefly set
its
economic/political/technological paradigm, together with its successes and the
negative consequences that have led to its being reexamined and the drive to
replace it with a technology revolution. We then set forth the desirable character-
istics of such a revolution and discuss the difficulties involved in achieving them.
We next briefly characterize some of the most prominent possibilities for tech-
nological improvement in the sector and note the obstacles to launching them in
the marketplace, using the concepts set forth in the preceding section: the subsi-
dies and price structures creating a tilted playing field, the market imperfections
and other obstacles for innovation resulting from this paradigm, and the existing
policies, standards, regulations, and economic and political factors that affect the
speed and direction of technological change and innovation. We also note some of
the policy interventions that could lead to a technological shift in the sector.

Energy

The major problem facing innovations in the energy sector is a deeply entrenched,
non-level playing field, backed by powerful companies and strong public support,
in which legacy fossil-fuel technologies benefit from a variety of incentives and tax
advantages much richer than those for carbon-efficient technologies.38 These lega-
cy technologies deliver cost-effective, reliable, and convenient energy to users. As a
result, the driving force for change comes from the serious environmental and
geopolitical externalities of fossil fuels, rather than market demand. The resulting
watchwords are energy security and sustainability—objectives that overlap
although they do not always coincide.

Although investment in energy research and development has been small, con-
sidering the enormous size of the energy economy, it has still given rise to a wide
range of promising alternative energy technologies. These face the gamut of cate-
gories of impediments to innovation we defined earlier: from impediments to
early stage innovation, such as those faced by hydrogen fuel cells and fusion, A
potentially disruptive technologies, like off-grid wind and solar that are already
established in special niches but still face impediments to paradigm-incompatible
innovazioni. The energy sector also includes technologies like solar and wind
farms, carbon capture and sequestration, enhanced geothermal, and next-genera-

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tion nuclear, which must be launched at large scale and thus suffers from innova-
tion impediments due to lumpiness.

Impediments to innovation due to the need for economies of scale create inher-
ent costs and risks and require special intervention, such as hardware manufacture
for electric vehicles, which requires economies of scale and so risks overexpansion
beyond anticipated market needs. Other technologies that face impediments to
innovation due to non-appropriability offer positive aggregate net value but suffer
from market imperfections that make it difficult to translate this into a practical
incentive structure, such as many technologies for conservation and efficient ener-
gy use. The energy sector is also laced with governmental and other institutional
impediments, notably the lack of mechanisms to translate research advances into
scaled technologies. Each of these impediments to innovation requires a strategic
policy response.39 As we shall see in the later section on air transport, the military,
as a major purchaser of fossil fuels, is in a unique position to bridge this gap.

Health-Care Delivery

The existing paradigm of health-care delivery in the United States is a complex sys-
tem of mixed public and private payers, which has given rise to powerful vested
interests—including a rigid system of professions and institutions—that are well
positioned to fight rationalization of the system. Together, they support a tariff
structure that favors sophisticated medical procedures over non-medical measures
to improve public health or promote healthy lifestyles, and a fee-for-service system
that rewards doctors and hospitals for expanding services, especially equipment-
intensive high-tech procedures, rather than for performance.40 Of course, medical
advances have multiplied in recent decades, so a plethora of vital new procedures
and path-breaking medicines are available; therefore the system is also facing a
backlog of innovations it must accommodate, complicating the conflict between
performance and fee-for-service. Since much of the recovery of fees depends on
government entitlements (through Medicare or Medicaid) that guarantee pay-
ment, pricing in the system is relatively unconstrained.

The motivation for reform comes, first, from the fact that the resulting system
provides the United States with relatively poor public health for much of its pop-
ulation: around 15 percent of citizens have limited access to care, and high costs
are straining the capacities of employers and insurance companies to pay. IL
huge medical cost of the baby boom demographic bulge also may eventually
threaten the federal government’s fiscal stability. Market and political motivations
to reform the system are lacking because most people are satisfied with the care
they now receive and are shielded from its cost by the third-party payment system
and by cost-shifting to government. The expense and inefficiencies built into the
health-care delivery system have also become significant motivations for reform. UN
further motivation is the fact that much medical technology has never been sub-
jected to objective tests of effectiveness.41

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A wide range of innovative applications of information technology (IT) A
health-care delivery are at or near techno-economic readiness. These include tech-
nologies for digitizing health care, standardizing medical reporting, improving
communication among different actors in the system, and building databases to
evaluate performance and efficiency. Also in the works are instant transmission of
complete medical histories and of precision digital test data, such as advanced
imaging, and ways to obtain immediate real-time results of many tests, along with
better ways to compare real-time actual performance against standards of care and
best practices, and to perform precision remote robotic surgery through online
connections.

Although the IT innovation wave transformed productivity in a number of
economic sectors, to date, its entry into health-care delivery in the United States
has been limited. In contrasto, IT innovations have been implemented successfully
through the Veterans’ Administration and in single-payer systems in Scandinavia
and the United Kingdom, so we do have information on their potential. In the
stati Uniti, several systems have been implemented at pilot scale or in limited
markets, but full-scale deployment has been hindered by lack of standardization of
reporting formats and harmonization of payment procedures and state regulations
that would make it possible to achieve network economies.

More important, because performance and efficiency are not adequately
rewarded in the existing U.S. fee-for-service model of health-care delivery, institu-
tional and professional resistance to IT-based performance and efficiency reforms
has been significant and ongoing. The incentives for doctor and hospital actors in
the system are tilted toward performing more and more services, systemically driv-
ing up costs and therefore compensation.42 Aside from the lack of performance
incentives, the existing system resists transparent benchmarks for medical out-
comes and efficiency so that medical consumers and employer providers too often
fly blind through the system. An IT-based technology incursion that would enable
a transparent measurement and benchmarking system has not been adopted
because the fee-for-service delivery model does not offer the level of economic
rewards needed to implement it. The situation exemplifies the mismatch between
producer incentives and social goals that is typical of a CELS.

Innovation in the health-care delivery system is impeded by governmental and
other institutional impediments. The federal government funds some 40 percent of
the health-care system through coverage for the elderly (Medicare) and poor
(Medicaid), the two most expensive medical populations. Thus far, it has attempt-
ed partial rationing of innovation by limiting access to some procedures under
Medicare and Medicaid, rather than through cost and performance competition.
Despite occasional forays into reform, the political system has not proved able to
restructure the fee-for-service model that is sustained with political support from
the elderly, hospitals, and medical professions.

IT innovations face another problem: they require investment and therefore
place unsustainable costs on health-care providers, whereas the benefits of these
investments are likely to rebound to their patients and to insurance companies,

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The Technology Revolutions That Do Not Happen

neither of which will accept the costs. This is an impediment to innovation due to
the market imperfection of non-appropriability. Also impeding innovation in the
health sector is the need for network economies that can be achieved only in the
presence of large-scale networks, and that therefore require the adoption of stan-
dards or other requirements to ensure the inter-operability of the sub-networks
through which information is to be communicated.

Unlike the situation for health-care delivery systems, it is tempting to assume,
because the biotech sector appears so successful, that improved pharmaceuticals
and devices for use in hospitals and by physicians can readily overcome impedi-
ments to paradigm-compatible innovations that slot nicely into the existing system
and face only the normal problems of the standard innovation model: the need for
research support and venture capital to bridge the valley of death. The same is true
of technology for digitizing the back-office operations of hospitals and private
physicians. Tuttavia, the picture is more complex when examined closely.

Even paradigm-compatible medical innovation faces a series of hurdles. Primo,
bringing a new drug through development, clinical trials, and Food and Drug
Administration (FDA) approval costs approximately $1 billion.43 This means that biotech and pharma companies must develop drugs and devices that satisfy a sub- stantial market; non-“blockbuster” drugs are problematic, preventing them from being paradigm compatible. Although technological advances promise progress on “personalized” medicine—individualized drugs and devices that will fit individual needs—to date, the existing economic model has hindered rather than incen- tivized this approach. Innovation impediments due to lumpiness also affect drugs for diseases of the developing world, and those that affect small populations, along with vaccines, new contraceptives, and new antibiotics, as well as other remedies that immediately cure a disease or condition or that involve large potential liabili- ties. These categories of drugs do not offer prospects for blockbuster status and therefore do not fit into the existing paradigm.44 Second, although the National Institutes of Health (NIH) is the nation’s largest research and development organization, it is organized around a biological model for drug development, and generally does not support work on innovation for devices, practices, or systems. A growing research model that promises a new gen- eration of medical advance, the “convergence” model of integrated, cross-discipli- nary research combining life, engineering, and physical science research design,45 is limited by organizational problems at NIH and FDA. Neither is well organized to support non-biological research directions, despite their promise; if these oppor- tunities are to be realized, new approaches to peer review, formazione scolastica, and cross- institute and agency collaboration and research processes will need to be tested and adapted by NIH, and the FDA will have to examine and revise its evaluation capabilities and procedures. Thus governmental and other institutional impediments in the area of drug, device, and systems innovation exist in the health sector, even apart from the prob- lems in the health-care delivery system discussed above. Other impediments to innovation arise due to economies of scale: innovations of important but limited innovations / volume 6, number 2 171 Scaricato da http://direct.mit.edu/itgg/article-pdf/6/2/157/704811/inov_a_00075.pdf by guest on 07 settembre 2023 Charles Weiss and William B. Bonvillian reach face limits in their ability to scale up within the current market structure. Other major issues are connected with developing a system of evidence-based medicine and undertaking the research for cost-effectiveness criteria to implement such a system in order to measure and document the successes and failures in meeting public health goals and to start to shift away from a fee-for-service system to performance-based medicine. In summary, although the biotech sector has been a model of successful inno- vation, and medical research has received far more federal research investment than other sectors, there are structural organizational challenges to innovation in both health-care delivery and the next generation of pharmaceuticals and medical devices. The Electric Power Grid The high-voltage, long-distance electric power grid in the United States has been the subject of criticism because of limits on its reliability, its inability to accommo- date renewable power sources, and its inability to adapt to IT advances.46 The recent emphasis on environmental issues has created pressures for increased effi- ciency, as well as measures to facilitate the incorporation of intermittent, renew- able sources of energy, and has stimulated discussion of possible means to over- come the many obstacles created by a fragmented regulatory system. Electricity charges in the United States, to summarize briefly, are largely regu- lated by 50 state commissions. These generally restrict utility revenues to a fixed percentage of investment and are therefore reluctant to permit new investments, since they are likely to result in rate increases that consumers will resist. Different parts of the long-distance electric power grid in the United States are owned by dif- ferent electric utilities, depending on geography, with the result that no single enti- ty feels responsibility for the reliable and cost-effective operation of the whole grid, and no state commission is eager to approve utility investments with that purpose. In any case, the benefits from such an investment would come back to the con- sumer in the form of increased reliability and lower rates, and to the environment in the form of reduced carbon dioxide emissions and other forms of pollution, rather than to the utilities in the form of increased profits—a classic example of environmental externalities and non-appropriability due to split incentives. The result is a grid that has relatively poor reliability, unnecessarily high cost, below-standard efficiency, and consequently a high environmental footprint, specifically high carbon dioxide emissions and contributions to global warming. Underlying these problems is a longstanding under-investment in the long-dis- tance grid and in research and development on ways to improve it. The highly complex process of generating and distributing electricity has three stages—gen- eration, transmission, and distribution—as we describe in more detail in the ensu- ing paragraphs. Così, any effort to restructure the electric grid system runs headlong into a highly balkanized structure, with different jurisdictions controlled by different 172 innovazioni / Meaningful Markets Downloaded from http://direct.mit.edu/itgg/article-pdf/6/2/157/704811/inov_a_00075.pdf by guest on 07 settembre 2023 The Technology Revolutions That Do Not Happen institutions at different levels of government. The number of utility actors involved is startling. “America’s electric power industry is highly fragmented, divided among more than 3,100 separate entities, under a variety of forms of investor and public ownership.”47 Apart from the pricing of generation, transmis- sion, and distribution noted above, “Diverse state regulatory policies predominate regarding electric industry structure, generation adequacy, energy resource mix, transmission siting and cost recovery and retail electricity prices.”48 The pricing and regulation of these stages is not integrated, so that electricity market transactions are divided, as discussed below, based on location and on dis- tribution systems. The Federal Energy Regulatory Commission (FERC) has sole jurisdiction over pricing rates in wholesale high-voltage transmission, but cannot set prices for the local systems that distribute lower-voltage power to end users. FERC has very limited authority over the construction of utility lines; pricing of generation and transmission over local distribution systems is set by state regula- tors under varying state laws. To add to the complexity, the 1990s saw partial and piecemeal deregulation. Some states deregulated, some did so partially, and others didn’t deregulate at all. The generation market therefore contains both deregulat- ed and regulated elements operating under a regulated wholesale high-voltage sys- tem under FERC. The result is a classic example of governmental and other institu- tional impediments that affect a broad range of promising innovations. Reliability oversight of the grid as a whole is the responsibility of the FERC, which delegates some responsibilities to the North America Electric Reliability Corporation or NERC. The latter divides North America into eight regulatory regions, which do not match up with the three major grid “interconnection” regions. Since relatively few high-voltage transmission lines connect any one region to the others, consumers in one region are largely limited to energy gener- ated in that region. Large-scale renewable energy sources—wind and solar farms and geothermal fields—will often be built in areas separated from existing transmission facilities, requiring major new build-out. Tuttavia, the regulatory structure is so divided and generally reluctant to embrace major and costly infrastructure investments that developers face almost insuperable obstacles in obtaining the multiple regulatory approvals needed both for the build-out itself and for absorbing the extra costs that they entail into the rate structure. Inoltre, the business model for most utilities is based on the sale of power, a system that does not reward conservation, efficiency, or reduced fossil fuel use. In other words, the system does not align pro- ducer incentives with social goals. Most state regulators do not require that a por- tion of their energy be generated from renewables (“renewable portfolio stan- dards”). Since renewables are still more costly than coal or gas, accommodating renewables within the existing balkanized structure of the grid is problematic. The next level of grid innovation is even more complex. The “smart grid”— which can integrate IT into the electricity grid—promises information flows that could yield both increased reliability of supply and major efficiency savings.49 The cost of electricity varies widely in the course of a day or an hour, so a technology innovations / volume 6, number 2 173 Scaricato da http://direct.mit.edu/itgg/article-pdf/6/2/157/704811/inov_a_00075.pdf by guest on 07 settembre 2023 Charles Weiss and William B. Bonvillian that allows users to see these varying costs and adjust their consumption to reduce their costs could help level out usage and therefore costs, avoiding peaks in con- sumption and spikes in prices. These technologies could also automatically pro- gram in these efficiencies based on preset user demand choices and preferences. At present, Tuttavia, electricity users are blind to these cost-saving opportunities. A smart grid also offers individual households the ability to move from being simple users to become storage and generation sites, and to sell power into the grid. Such a two-way system would offer dramatic new flexibility, making electric- ity markets and therefore consumption significantly more efficient. Tuttavia, achieving this advance involves overcoming the highly fragmented and decentral- ized system described above, with its many participants with differing interests and many constraints. The two-way features of the smart grid can also play a critical role in enabling the small-scale installation of renewable resources (vento, solare, geothermal, tidal, hydropower) and the widespread use of electric or hybrid vehicles. The current grid system, which long predates interest in renewables, is limited in its ability to incorporate them, despite the need to reduce the amount of electricity derived from burning coal, currently the source of half the electricity the country uses. Many renewable technologies could be introduced at the household or local scale, but these sources are outside the grid and can only serve the particular household or local, not broader needs; a smart grid could be a significant inducement to introducing smaller-scale renewables. A smart grid system would also support the broader introduction of electric and hybrid vehicles. Recharging could take advantage of optimal pricing with cor- responding efficiencies. Once recharged, the storage systems for these vehicles could sell power back into the grid, offsetting charging costs. The grid is also frag- ile, facing threats of blackouts; to avoid these, utilities must always have significant excess capacity. Smart grid technology includes automated information systems that “could mean a self-healing, self-optimizing power-delivery system that antic- ipates and quickly responds to disturbances.”50 Implementation of a new grid will require overcoming obstacles posed by sev- eral market imperfections that are characteristic of CELS. Primo, innovation in the grid is hindered by the need for network economies that can be achieved only through national or large-scale regional networks. These will require the adoption of standards, and of regulatory and incentive policies to assure the interoperabili- ty of components and sub-networks, and to facilitate the establishment of new innovative networks within the established grid network. Secondo, innovation within the grid is impeded by the problem, as noted, of non-appropriability, in which the benefits of innovation accrue to someone other than the investor. While utility investors would have to accommodate and imple- ment smart grid features that could benefit consumers, Per esempio, the power sale business model that underlies price regulation in most states treats such invest- ments as non-recoverable costs. These and other obstacles derive from governmen- tal and other institutional impediments that are largely regulatory, the product of 174 innovazioni / Meaningful Markets Downloaded from http://direct.mit.edu/itgg/article-pdf/6/2/157/704811/inov_a_00075.pdf by guest on 07 settembre 2023 The Technology Revolutions That Do Not Happen historical developments in an earlier technological era, and embedded in entities unwilling to surrender jurisdiction or power. The highly balkanized regulatory structure, divided between state and federal agencies and imposing varying busi- ness models, sharply limits the ability to introduce innovation progress, and cre- ates collective action impediments to innovation. The IT technologies and software that would form the foundation of the smart grid are largely available, although cyber security and other particular R&D chal- lenges still remain to be resolved. Technology implementation is the central prob- lem, requiring, initially, setting of common standards, and establishment of test- beds and demonstrations. The Commerce Department’s National Institute for Standards and Technology (NIST) has begun work on smart grid standards with industry, and the 2009 stimulus legislation51 has provided $4.5 billion for initial
efforts at technology implementation. Tuttavia, the scale of work required to
extend the reach of transmission and to incorporate smart features will require a
financing effort at a much larger scale in this sector, which already has $800 billion in established capital plant and infrastructure. In sum, establishing a grid that is both smart and more efficient will require federal leadership, public and private financing, common standard setting, and a major effort at regulatory harmoniza- tion between state and federal agencies to overcome these structural barriers. Buildings Some 40 percent of U.S. carbon dioxide emissions come from buildings,52 making building technology one of the most important areas for stimulating technologi- cal innovation. Saving carbon dioxide emissions and mitigating global warming is a non-market incentive; but energy is a cost to the occupants of a building and sav- ing it should be a market incentive. UN 2009 study by McKinsey & Company found that investing in energy-efficient buildings (combined with certain other non- transportation efficiency steps) could reduce energy consumption in the United States by 23 percent by 2020.53 This would amount to annual savings totaling $130
billion to $1.2 trillion, with reductions in greenhouse gas emissions of 1.1 gigatons, or a complete “stabilization wedge” in the Pacala-Socolow construct.54 These gains could be achieved largely by using existing efficiency approaches and technologies for an investment of about $50 billion per year over a period of 10 years. IL
McKinsey research found that a comprehensive strategy, executed at scale, could
reduce the annual consumption of non-transportation end-use energy from 36.9
quadrillion BTUs in 2008 A 30.8 quadrillion BTUs in 2020—saving 9.1
quadrillion BTUs relative to a business-as-usual baseline.55

There are significant barriers to achieving these gains. Energy efficiency typi-
cally requires a significant up-front investment in exchange for savings over the
lifetime of the deployed technologies and measures. But the benefits are strewn
across some one hundred million locations and billions of devices used at residen-
tial, commercial, and industrial sites; this dispersal of benefits, plus the transaction
costs involved in choosing and implementing the necessary technology, means that

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efficiency is rarely a leading priority for anyone.56 Non-appropriability is also a sig-
nificant problem in this sector: in many cases the financial benefits go to someone
other than the investor. Why should a builder undertake efficiencies that benefit
the purchaser, or a landlord undertake those that benefit tenants, when they can-
not pass along the extra costs? These environmental benefits go largely to the pub-
lic at large, making them a valuable but non-market incentive.

Other structural barriers abound. The manufacture of hardware and the tech-
nical services involved in many innovations are subject to economies of scale and
therefore may require special intervention to bring down unit costs and improve
performance. Inoltre, the construction sector is highly decentralized, consist-
ing of huge numbers of small, geographically dispersed and under-capitalized
firms that are not well set up for collective action and hence undertake very little
research and development, or indeed experimentation of any kind. Di conseguenza, IL
cost, reliability, and efficiency savings from building efficiency technologies must
be proven at major scale before these firms will take the risk of implementing
them.

Inoltre, the sector is rife with governmental and other institutional imped-
iments to innovation. While building codes could in principle provide a regulato-
ry mechanism for efficiency improvements, these codes are a regional responsibil-
ità, with thousands of jurisdictions involved. Few jurisdictions have an incentive to
take on a national energy goal, since they would have to impose significant new
requirements and costs on construction firm constituents. Besides, the social goal
of energy efficiency is very hard to measure; only the federal government could
likely assemble the expertise and investment required to develop the accurate stan-
dard efficiency metrics needed.

Air Transport

The technological/economic/political paradigm of air transport presents a some-
what different picture. In questo caso, the end of the era of new aircraft designs being
spun off from military to civilian use has been accompanied by a legacy of under-
capitalized, low-margin airlines, which as a group are not organized for collective
action. This limits the ability of manufacturers to undertake major research and
development efforts for new advances on their behalf.

American aviation evolved as a close collaboration between the military and
civilian aircraft firms. For example, in the 1920s and 1930s, the Navy’s aviation
leadership carefully planned and organized its procurement spending to nurture
and build a strong network of aircraft and engine makers to assure the military of
a strong industrial base of aircraft suppliers.57 In the post-Cold War period, how-
ever, military and civilian aircraft markets increasingly diverged. The military
required highly maneuverable supersonic aircraft with advanced avionics and fire
control systems; civilian markets required stable, long-range reliable aircraft of
limited maneuverability. Military jet engines were designed for maximum thrust,
and civilian engines for low fuel consumption. The focus of military aircraft on

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stealth technology found no counterpart in civilian markets. The development of
cruise missiles and precision-strike technologies, first exhibited during the Gulf
War, allowed the military to significantly reduce the number of strike aircraft it
required, further limiting the ability of aircraft makers to shift costs between the
civilian and military sectors.

Even in military transport, the military’s need for short-distance landing capa-
bility (C-17) created a divergence from civilian airliner prototypes that could use
longer runways. Only aircraft types that could be used both for military tankers
and civilian transport seemed readily transferable between the two sectors, Ma
contracts for military tankers have been bogged down in a long-term procurement
battle.58 To be sure, some underlying technologies are transferable between sectors;
composites, “fly by wire” (electronic as opposed to hydraulic controls), GPS navi-
gation, and various engine advances have been shared. Overall, Tuttavia, the close
convergence and mutual support between the military and civilian sectors, Quale
historically was highly productive, has declined significantly.

The aircraft manufacturing industry has consolidated as well. Boeing is the
only remaining U.S. maker of civil aircraft, and there are only two U.S. jet engine
makers. Globally, Europe has one civil aircraft maker and one engine maker, E
those in Russia face financial challenges. There are makers of smaller civil trans-
port aircraft in Canada and Brazil, component makers in Asia, and a potentially
emerging aircraft sector in China. With the U.S. military’s cancellation of the F-22
procurement for another generation of interceptors to replace the F-15, only one
aircraft is now under development for the military: the F-35 Joint Strike Fighter.
This aircraft has been long delayed, requiring a two-decade design and develop-
ment process, and rapidly rising per-unit costs have sharply curtailed the volume
of military purchases.59 Aside from unmanned aerial vehicles (UAVs), which have
limited civilian transferability, no new fixed-wing aircraft are under design in the
United States for either civilian or military needs, probably for the first time in a
century. Boeing is struggling to complete development and enter production for
IL 787 civilian airliners, and the military F-35; the drawing boards are largely
empty.

While incremental advances are being obtained in composite materials and
improved avionics, overall larger-scale innovation is on the decline in air trans-
port. The cause is largely the market imperfection of lumpiness: the requirement of
large-scale, engineering-intensive investments to develop advanced new aircraft
prototypes. While supersonic airliners could cut travel time on long-distance
routes, Per esempio, these time efficiencies cannot be priced high enough to offset
the major development costs and higher operating costs.

Breakthrough innovation is being sought in one area of aviation: developing a
non-petroleum fuel source, essentially an innovation in the energy sector. Come il
military faces both strategic and tactical problems because of its petroleum
dependence, it is working to develop biofuels for operational energy. It is review-
ing applications for its tactical weapon systems, particularly aircraft, but also com-
bat ships and vehicles, and supporting equipment. The Navy has been a leader;

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Navy secretary Ray Mabus has announced plans to operate a carrier task force,
including its aircraft and support ships, on biofuels by 2016, and half of the rest of
the fleet by 2020.60

Fuel constitutes some 40 percent of the civilian airline industry’s costs; volatile
oil prices have brought the industry to the brink of collapse several times in recent
decades. Like the military, it is hungry for an alternative fuel. Tuttavia, the civilian
airline sector is undercapitalized and not equipped for collective action to under-
take a research and development effort. Because of the vast number of existing air-
craft and the low rate of fleet turnover, any alternative fuel that is developed must
operate in existing engines. Engine makers are interested and prepared to cooper-
ate, but are awaiting military research, development, and procurement.

While the civilian sector is ready to cooperate and very interested in the results,
Defense Department (DOD) leadership will be mandatory if progress is to be
made. The department could apply its traditional systems approach to this effort
as it has in many other sectors. It could undertake the research, the development,
the prototyping, the demonstrations, and the test bed analysis, and then create an
initial market for a new technology. This system-wide innovation approach
enabled the department to lead American technology advance in the second half
of the 20th century in such areas as space, nuclear power, computing, and the
Internet. What are the issues facing DOD if it were to undertake such an approach
in biofuels?

The established Fischer-Tropsch methods of processing coal, biomass, or a
combination for biofuels have limited advantages for reducing greenhouse gas
emissions.61 Therefore, interest has shifted to research and development in hydro-
treated renewable jet fuels.62 Among these, algae may be the most promising bio-
fuel candidate, because it has a high oil content and does not require the diversion
of croplands for production. Tuttavia, the research and development in this area
will require considerable time and additional investment; it will need to drive
down production costs to be competitive with oil. A recent RAND study63 has
found that the prospects are uncertain for commercial production of alternative
fuels at a level adequate to meet military goals by 2020. Efforts by the military to
test and certify alternative fuels are ahead of actual commercial development and
new infrastructure for such fuels. The RAND authors also argue, although some in
the military argue otherwise, that DOD goals for alternative fuel use in tactical
weapons systems should be based on potential national benefits because the
department itself can likely continue to access petroleum fuels despite any supply
threat; it can obtain priority access even if it has to pay a premium price.

Air transport faces impediments to innovation due to the requirement for
economies of scale, and therefore may require special intervention to bring down
unit costs, improve performance, or organize the market for complementary prod-
ucts and infrastructure. Questo, combined with the impediment of lumpiness in the
form of the requirement for massive engineering-intensive investments, makes
innovation increasingly difficult. Traditionally, such innovation has evolved
through military support of the sector. But the introduction of new military air-

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craft has dramatically slowed and new civilian air transport aircraft introductions
have slowed in parallel. The most significant area of pending innovation for air-
craft is a shift to biofuels from petroleum fuels. As suggested above, these benefits
are significant: reducing the highly deleterious economic effects on civilian (E
military) air transport of petroleum-only fuel dependence, with the corresponding
societal benefits of a stronger air transport system, as well as aiding in the
externalities problem of reduced CO emissions. Tuttavia, only the military is
equipped to introduce the large-scale and systemic investment required. The civil
transport sector is ready to cooperate, but it remains to be seen whether the mili-
tary will muster the scale of effort required. This constitutes an innovation imped-
iment due to non-appropriability; neither the private nor the governmental avia-
tion sectors may be able to fully realize the societal or economic benefits.

OVERCOMING LEGACY BARRIERS

Innovations in CELS thus call for a somewhat different approach from the “stan-
dard model” innovations that have been the major preoccupation of innovation
theory. In these sectors, policy interventions are essential on both the supply and
the demand sides: on the one side to promote improvements in scientific knowl-
edge and technological performance, and on the other to overcome the advantages
enjoyed by entrenched legacy technologies. Ideally, the two sets of measures should
be put into practice together at more or less the same time, since both are likely to
take some years to have practical effect. In practice, Tuttavia, the vagaries of poli-
tics may dictate that only one or the other of the two—i.e., either research support
or policy change—may turn out to be practicable at any given time. In that case it
would be worthwhile to support the one that shows signs of political support in
the anticipation that the other will gain momentum from the advance of the first.
In previous work, we have set forth categories of policy interventions and
related them to the obstacles faced by different alternative technologies as they
neared market launch. Here we expand and refine this approach by relating each
category to our analysis of the structure of the market for technology. In brief,
“standard model” innovations face the imperfections associated with the “quasi-
free market” for technology, some of which favor innovation while others pose
obstacles to it. “Paradigm-consistent” innovations face additional obstacles due to
perverse incentives that help to entrench the prevailing structure. “Counter-para-
digm” innovations face still further obstacles and may require further analysis to
identify the particular market imperfection or government failure responsible for
these obstacles.

We see five broad categories of policy interventions to encourage innovation.64
The first of these consists of “front-end, supply-side” policy measures that can be
applied to virtually all innovations, whether standard model, paradigm consistent,
or counter-paradigm. These include direct government support for research and
development, technology prototyping, and demonstrations.

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Innovations that seek to penetrate CELS, on the other hand, require demand-
oriented measures to overcome the extra barriers we have discussed in earlier sec-
tions of this paper. This is the case for both paradigm-consistent and counter-par-
adigm innovations. This second category consists of policy changes to level the
playing field, through such measures as halting fossil fuel subsidies and imposing a
carbon charge (for alternative energy) or performance-based medical fees (A
encourage “high-touch” medicine).

Such measures are important long-run elements of any strategy to encourage
innovations that seek to penetrate CELS, including innovations that fit into the rel-
evant paradigms and that therefore have the potential to expand into disruptive
innovations from initial niche markets.65 All of these technologies face well-
defended perverse subsidies or price structures that favor existing technology.
Policy measures to level the playing field therefore threaten a variety of interests
and face considerable political opposition. For this reason, it may be politically
more tractable—although economically less efficient—to provide incentives or
regulatory requirements in order to counter the advantages enjoyed by legacy tech-
nologies.

The third and fourth categories—discussed below—consist of “back-end” or
“demand-side” policy measures. The third category consists of incentives that
encourage the adoption of a technology as it moves to commercialization—on the
“back end” of the innovation system. Such “carrots” can encourage a range of
activities, from secondary or component technologies, to incremental engineering
advances, to fostering manufacturing processes and scale-up. The incentives could
include tax credits of various kinds for new technology products, loan guarantees,
low-cost financing, price guarantees, government procurement programs, buy-
down programs for new products, and shared benefits for encouraging collective
action.66

Of these measures, one of the most powerful is the use of government purchas-
ing power to create a market for a specified technology, or for any technology that
can meet a specified performance standard.67 The Department of Defense is the
nation’s largest owner of buildings and facilities and could specify that a percent-
age of military housing or other buildings must be powered by renewable energy
to meet emissions reduction targets, or that a proportion of military vehicles and
ships must be powered by biofuels. This would assure industry of a market of suf-
ficient scale to justify investment in the necessary research, development, and man-
ufacturing capacity. In tight fiscal periods like the present, this may be the most
effective way to mobilize funds to support innovation. The Defense Department
could also use its facilities as an efficiency test bed, and in effect generate guidelines
available for the entire building sector on efficiency and cost savings for particular
technologies.68

The fourth category of policy measures consists of “back-end” regulatory and
related mandates that create pressure to adopt technologies that are likely to be
opposed by legacy firms in the established sector. These could include, for exam-
ple, standards for particular energy efficiencies for automobiles and appliances, O

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in the building and construction and comparable sectors. Alternatively, it could
involve a straightforward requirement that alternative technologies be used—as in
requirements in many states that a certain percentage of electricity be generated
from renewable energy (“renewable portfolio standards”), or that the use of an
established technology be banned outright, as in the federal legislative ban on
incandescent light bulbs. Demand-side pricing strategies, such as the use of a car-
bon charge, represent another approach, which can be economy-wide rather than
sector-specific.

The fifth category consists of policy measures suitable to overcome the market
imperfections we identified earlier in this paper as specific to counter-paradigm
innovations in CELS. We have already discussed these in connection with the indi-
vidual sectors we reviewed, and we summarize some of them briefly here.
Achievement of network economies can be facilitated by imposition of or agree-
ment on standards for performance and interoperability. Large demonstrations in
lumpy sectors, like those for carbon sequestration, can be funded by public-private
partnerships. Problems of non-appropriability (cioè., split incentives) can be over-
come by schemes to finance the extra installation costs of conservation measures
at favorable rates—a form of subsidy—or information technology for health
informazione. Transaction costs that impede collective action, such as measures of
energy conservation on buildings, can be mitigated by providing information via
publicly funded websites or technical assistance.

In our previous work, we set forth a series of four analytical steps that can be
applied to identify barriers to innovation and the policy measures and institution-
al changes needed to help overcome them. We applied these to the energy sector.69
In the first step of this analysis, we assessed promising technologies that could fos-
ter significant innovation in each sector and classified them into groups that face
the same obstacles to market launch. In the second step, we matched support poli-
cies for encouraging innovation to the technology groupings developed in the first
step of the analysis. in questo documento, we propose applying these steps to other CELS.
In the third step of our energy analysis, we surveyed existing institutional and
organizational mechanisms to support innovation, to determine what kinds of
innovazioni (as classified by the likely impediments in their launch paths) do not
receive federal support at critical stages in the overall innovation system. Questo
could be described as an institutional “gap analysis.” This third step requires analy-
sis in each of the sectors we have reviewed. In the building sector, Per esempio, we
lack institutions that can implement test beds to develop the price and efficiency
data that would enable this highly dispersed sector to implement new efficiency
technologies.

In the fourth step of our energy analysis, we recommended new institutions
and organizational mechanisms to fill the technology gaps identified in the third
step, on both the front and back ends of the innovation system. In the sectors
reviewed in this paper, the gaps might include mechanisms to provide translation-
al research, technology financing, or technology roadmapping. Many sectors lack
an overall collaborative strategy, Per esempio, between the public and private sec-

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Charles Weiss and William B. Bonvillian

tors to develop a strategy and eventually a roadmap of the details involved in devel-
oping and deploying new technologies at scale, in order to overcome the barriers
we have discussed. This step, pure, requires further analysis, sector by sector.

In all the sectors we have discussed, we see major potential advantages to inter-
national collaboration, not only with developed countries or regions like Europe,
Japan, and Australia, but also with “innovative developing countries” like India and
China. Primo, all of these countries are undertaking major investments in research,
development, and innovation, so that we in the United States have much to learn
from them. Infatti, these countries may well out-compete the United States in
these areas in both the short and long run if we do not mount a serious research,
development, and innovation effort. Secondo, the technologies we have been dis-
cussing are not only sources of national competitiveness and employment, but are
also global public goods. We have an interest in the implementation of environ-
mentally sustainable technology all over the world—especially technologies that
mitigate the emission of carbon dioxide into the shared atmosphere. This means
that we must seek a balance between innovation that results in jobs and econom-
ic growth at home—a major incentive for technological progress and implemen-
tation—and the world-wide implementation of carbon-saving technology.

STRUCTURING TECHNOLOGY REVOLUTIONS IN LEGACY SECTORS

The information revolution is the prototype for the American conception of a
technological revolution. Telecommunications, retail, brokerage, publishing, gov-
ernment, even social interactions all have been transformed by this seemingly
unstoppable juggernaut. Yet the fossil-fuel based energy economy, the health-care
delivery system, the long-distance electric grid, the building industry, and air
transport—sectors that are critical to U.S. economic growth and quality of life—
have not undergone comparable transformations, and indeed have successfully
resisted or avoided such major technological change.

The framework we have developed makes it clear that innovations in these
apparently unrelated sectors share common obstacles to market launch, and that
this resemblance exists because such innovations are all attempting to enter one or
another CELS. These obstacles exist in addition to those facing “standard” innova-
tions that do not seek to penetrate this kind of well-defended technological/eco-
nomic/political paradigm.

The obstacles faced by innovations in these sectors are well known to special-
ists in individual fields but have not been studied by more general innovation the-
orists in the United States.70 As a result, policy-makers seeking to promote overall
innovation in the U.S. economy tend to stress the better-studied problems facing
what we have called “standard” innovations. This has its advantages as a political
strategy. It is easier for legislators to vote money for research, development,
demonstration, E (in special cases) even for venture capital, than to tackle the
underlying structure of subsidies, regulations, infrastructure, and other market

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imperfections that favor, Per esempio, fossil fuels, procedure-intensive medicine, O
a fragmented long-distance electric grid.

Ancora, the policies that reinforce the prevailing paradigm—and the political
forces that underlie them—must eventually be addressed. From the strategic point
of view, Inoltre, these measures are consistent with the likely lead time between
support to research and development and the achievement of practical results—a
lead time that may well turn out to be comparable with the time it takes to devel-
op popular and political support for the policy changes needed to allow a technol-
ogy revolution in these sectors.

The common barriers we have identified should make it easier to identify pol-
icy measures suited to the special features of each legacy sector, and to transfer the
lessons of experience from one such sector to another. The four-step strategic
analysis we have set forth may help guide processes to resolve the barriers to the
innovations needed in legacy sectors. To tackle these sectors we must expand our
innovation theory toolset to include not only the technology policy framework of
the past three decades, and the valley of death between research and late stage
development, but also the problem of market launch into established sectors.
Technology revolution in CELS is so essential to future American economic
growth that the special hurdles facing innovation in these fields must be con-
sciously recognized and addressed by innovators and policymakers. Otherwise, we
cannot fully realize the economic and social well-being that we have built in the
past half-century around broad applications of technological innovation.

1. Carlotta Perez, Technological Revolutions and Financial Capital (Cheltenham, UK: Edward Elgar
2002); Robert D. Atkinson, The Past and Future of America’s Economy: Long Waves of Innovation
that Power Cycles of Growth (Cheltenham, UK: Edward Elgar, 2004).

2. Charles Weiss and William B. Bonvillian, Structuring an Energy Technology Revolution

(Cambridge, MA: CON Premere, 2009), 6, 29–30, 38.

3. William B. Bonvillian and Charles Weiss, “Taking Covered Wagons East: A New Innovation
Theory for Energy and Other Established Technology Sectors,” Innovations no. 4 (Autunno 2009),
289–300. The reference is to hypothetical technology pioneers who, having driven their
metaphorical covered wagons westward to the new frontier, go back over the mountains to the
eastern United States whence they came, to insert their technologies into the legacy sectors they
earlier left behind.

4. Weiss and Bonvillian, Structuring an Energy Technology Revolution, 34, 37–55.
5. By public intervention, we mean intervention by any entity not motivated by private profit: cioè.,
government, inter-governmental or non-governmental organizations, private foundations, O
even individual philanthropists.

6. This argument builds on the paradigm concept used by Perez, Technological Revolutions, 15ff.
7. McKinsey & Company, “Unlocking Energy Efficiency in the U.S. Economy” (report, Luglio 2009),
4, 7–15. Available at http://www.mckinsey.com/clientservice/electricpowernaturalgas/down-
loads/US_energy_efficiency_full_report.pdf.

8. Melissa Schilling, Strategic Management of Technological Innovation, 2nd. ed. (New York:

McGraw-Hill, 2005), 86–87.

9. Kenneth Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in The Rate

and Direction of Inventive Activity: Economic and Social Factors (Washington, DC: National
Bureau of Economic Research, Inc., 1962), 609–626. Available at

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http://www.nber.org/chapters/c2144.pdf.

10. Lewis Branscomb and Philip Auerswald, Between Invention and Innovation, An Analysis of

Funding for Early-State Technology Development (NIST GCR 02-841; Washington, DC: NIST,
novembre, 2002), “Part I: Early Stage Development.” Available at
http://www.atp.nist.gov/eao/gcr02-841/contents.htm.

11. Suzanne Berger, How We Compete: What Companies around the World Are Doing to Make it in

Today’s Global Economy (New York: Doubleday Currency, 2005), 59–92, 251–277.

12. Douglas K. Smith and Robert C. Alexander, Fumbling the Future (Lincoln, NE: iUniverse 1999);
Warren Bennis and Patricia Ward Biederman, Organizing Genius: The Secrets of Creative
Collaboration (New York: Basic Books, 1997), 63–86. The only exception was the laser printer,
which Xerox did market.

13. William B. Bonvillian, “The Connected Science Model for Innovation: The DARPA Model,” in
21st Century Innovation Systems for the U.S. and Japan, ed. Sadao Nagaoka, Masayuki Kondo,
Kenneth Flamm, and Charles Wessner (Washington, DC: National Academies Press, 2009),
206–237. Available at http://books.nap.edu/openbook.php?record_id=12194&page=206.
14. Rick E. Yanuzzi, “In-Q-Tel: A New Partnership Between the CIA and the Private Sector,” Defense
Intelligence Journal 9, NO. 1 (2000); Glenn Fong, The “CIA in Silicon Valley: In-Q-Tel & IL
Search for a New Government-Industry Partnership,” paper presented at the annual meeting of
the International Studies Association, Honolulu, Marzo 5, 2005. Available at http://www.allaca-
demic.com/meta/p71327_index.html.

15. William B. Bonvillian, “Will the Search for New Energy Technologies Require a New R&D

Mission Agency?” Bridges 14 (Luglio 2007). Available at
http://www.ostina.org/content/view/2297/721/.

16. Melissa Schilling, Strategic Management of Technological Innovation, 86–97.
17. The military establishes a variation of the quasi-free market when it is the initial customer for
technologies or equipment, including via “fly-offs” between competing designs and “second
sourcing” from competing manufacturers.

18. The pipeline and induced innovation models that govern “standard model” innovations are dis-
cussed at length in Weiss and Bonvillian, Structuring an Energy Technology Revolution, 13–36.
19. Vernon Ruttan, Tecnologia, Growth and Development: An Induced Innovation Perspective (Nuovo

York: Oxford University Press, 2001).

20. Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling Technology Products to Mainstream

Clienti, rev. ed. (New York: Harper Business, 1999).

21. Vernon Ruttan, Is War Necessary for Economic Growth? (New York: Oxford University Press,
2006); Jonathan Zittrain, The Future of the Internet and How to Stop It (Nuovo paradiso, CT: Yale
Stampa universitaria, 2008).

22. Clayton Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail

(Boston, MA.: Harvard Business School Press, 1997). See also footnotes 40, 42, E 65.
23. Frederick Betz, Strategic Technology Management (New York: McGraw-Hill, 1993), 20–22.
24. Weiss and Bonvillian, Structuring an Energy Technology Revolution, 26–28; William B. Bonvillian,
“Power Play: The DARPA Model and U.S. Energy Policy,” The American Interest (Nov.–Dec.,
2006), 40–47.

25. Bennis and Biederman, Organizing Genius, 196–218.
26. A perverse subsidy as originally defined is a subsidy that encourages behavior contrary to pub-
lic policy, Per esempio, for overgrazing or deforestation. See Norman Myers and Jennifer Kent,
Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy
(Washington, DC: Island Press, 2001). These subsidies are technically market imperfections,
since they shift prices, and hence supply and demand, away from what they would be in the
absence of the subsidy.

27. These imperfections may also hinder innovations that do not face the full panoply of a CELS.
Mobile telephony, for example, spread more rapidly in Europe and the Far East than in the
United States in part because the early adoption of agreed technical standards facilitated the
achievement of network economies. For the same reason, radio frequency identification tags

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(RFIDs) required industry-wide standards for their acceptance. Vedere, generally, Rob Atkinson,
“RFID: There’s Nothing to Fear Except Fear Itself,” speech at the 16th Annual Computers,
Freedom and Privacy Conference, May 4, 2006, 3. Available at http://www.itif.org/files/rfid.pdf.
Examples of the need for collective action to support innovation are found in such disparate
industries as organic agriculture, home building design, and municipal garbage collection.
28. For recent efforts at NIH on translational medical research, see Gardiner Harris, “Federal Center
Will Help Develop Medicines,” New York Times, Gennaio 22, 2011. Available at
http://www.nytimes.com/2011/01/23/health/policy/23drug.html?_r=1; Carla Garnett, “Collins
Gives Update on NCATS at Town Hall Meeting,” NIH Record 63 NO. 7, April 1, 2011. Available at
http://nihrecord.od.nih.gov/newsletters/2011/04_01_2011/story1.htm.

29. While innovative sectors like semiconductors, biotechnology, and pharmaceuticals spend 15 per-
cent or more of annual revenues on R&D, and the U.S. industry average as a whole is 2.6 per-
cent, the energy sector average is less than 1 per cento. Gregory Nemet and Daniel Kammen, “U.S.
Energy R&D: Declining Investment, Increasing Need and the Feasibility of Expansion,” Energy
Policy 35 (2007): 747.

30. Weiss and Bonvillian, Structuring an Energy Technology Revolution, 73–79.
31. Christensen, The Innovator’s Dilemma, xviii–xxiv.
32. Moore, Crossing the Chasm.
33. Everett M. Rogers, Diffusion of Innovations (Glencoe, NY: Free Press, 1962).
34. The applicability of this framework need not be limited to complex established sectors. Cell
phones, Per esempio, are an example of a network-enabled innovation, and indeed, their rapid
deployment in Europe can be ascribed to the rapid adoption of a uniform standard.

35. This variant of the market imperfection of non-appropriability is known technically as a “split
incentive” or a “positive pecuniary externality,” an externality where the benefits of an econom-
ic decision accrue to others who are separated from the transaction or investment. Typically
these benefits operate through pricing mechanisms rather than through actual resource or tech-
nical advantages. Vedere, for example, Christiano Antonelli, “Pecuniary Externalities: IL
Convergence of Directed Technological Change and the Emergence of Innovation Systems,"
Bureau of Research on Innovation, Complexity and Knowledge (BRICK) Working Paper #3,
(Febbraio 2008), 1–4. Available at http://www.carloalberto.org/files/brick_03_08.pdf.

36. This well-established paradigm favors input-intensive, industrial agriculture over organic agri-
culture, but this is another story, one worthy of further analysis along the lines of this paper.
37. Larry Browning and Judy Shetler, Sematech: Saving the U.S. Semiconductor Industry (Università

Station, TX: Texas A & M Press, 2000).

38. This theme is explored in depth in Weiss and Bonvillian, Structuring an Energy Technology

Revolution; Bonvillian and Weiss, “Taking Covered Wagons East.”

39. Policy prescriptions in energy are discussed in detail in Weiss and Bonvillian, Structuring an

Energy Technology Revolution, 37-56, 151-190.

40. The problems facing innovations in the American system of health-care delivery are discussed in
detail in Clayton M. Christensen, Jerome H. Grossman, and Jason Hwang, The Innovator’s
Prescription: A Disruptive Solution for Health Care (New York: McGraw Hill, 2009).

41. In 2009, Congress attempted to reform the system through the Patient Protection and Affordable
Care Act of 2010, P.L. 111–148, which was signed into law March 23, 2010. This legislation
passed on party-line votes that threaten the long-term political viability of the reforms. It
expanded the scope of the entitlements in an attempt to resolve a fundamental structural prob-
lem in the system: the forty million people outside the existing system, who face inadequate care
because they lack affordable coverage. This expanded coverage was also included to build polit-
ical support for the legislation. Overall, the legislation focused more on rearranging the system’s
financial plumbing than on confronting the contradictions between fee-for-service and per-
formance and efficiency. Although it included provisions on the effectiveness of health care and
on IT-based records, it did not focus strongly on ways to innovate, either in new medical tech-
nology or delivery systems.

42. Christensen and his colleagues propose a major restructuring and rationalization of the U.S.

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health-care delivery system to bring stakeholder incentives in line with the needs of overall sys-
tem efficiency. Christensen et al., Innovator’s Prescription; see especially chapters 6 E 7, E
“Epilogue.”

43. Food and Drug Administration, Innovation/Stagnation: Challenge and Opportunity on the

Critical Path to New Medical Products (Marzo 2004). Available at
http://www.fda.gov/ScienceResearch/SpecialTopics/CriticalPathInitiative/CriticalPathOpportu
nitiesReports/ucm077262.htm.

44. Infectious Disease Society of America, “Bad Bugs, No Drugs: As Antibiotic Discovery Stagnates,
A Public Health Crisis Brews” (2004), updated in Helen W. Boucher et al., “Bad Bugs, No Drugs:
No Escape” Clinical Infectious Diseases 48 NO. 1 (2009): 1–12; Board on Health Sciences Policy,
New Frontiers in Contraceptive Research (Washington, DC: National Academies, Institute of
Medicine, 2004).

45. MIT, The Third Revolution: The Convergence of the Life Sciences, Physical Sciences, E

Engineering. White Paper, Gennaio 4, 2011. Available at
http://web.mit.edu/dc/Policy/MIT%20White%20Paper%20on%20Convergence.pdf.

46. This summary relies on data and insights from Peter Fox-Penner, Smart Power: Climate Change,
the Smart Grid, and the Future of Electric Utilities (Washington, DC: Island Press, 2010); Yinuo
Geng, “Toward Implementation of the Smart Grid in the United States,” unpublished paper,
SAIS, Johns Hopkins University, ottobre 13, 2010.

47. Mason Willrich, “Electricity Transmission Policy for America: Enabling a Smart Grid, End-to-
End,” MIT-IPC-Energy Innovation Working Paper 09-003, Cambridge MA: MIT Industrial
Performance Center, Luglio 2009, 7. Available at
http://web.mit.edu/ipc/research/energy/pdf/EIP_09-003.pdf.

48. Willrich, “Electricity Transmission.”
49. DOE, Office of Electricity, The Smart Grid, An Introduction (Washington, DC: DOE 2008).
at

Available
http://www.oe.energy.gov/DocumentsandMedia/DOE_SG_Book_Single_Pages(1).pdf.

50. Clark W. Gellings and Kurt E. Yeager, “Transforming the Electric Infrastructure,” Physics Today

57, NO. 12 (Dicembre, 2004): 45–51.

51. American Recovery and Reinvestment Act (ARRA) Di 2009, P.L. 111–5.
52. Energy Information Agency, “Emissions of Greenhouse Gasses in the United States 2001,” Report
Available at

No. DOE/EIA-0573(2001) Washington, DC: EIA, Dicembre, 2002.
http://www.eia.doe.gov/oiaf/1605/archive/gg02rpt/index.html.

53. McKinsey & Company, Unlocking Energy Efficiency in the U.S. Economy, iii–xiv.
54. S. Pacala and R. Socolow, “Stabilization Wedges: Solving the Climate Problem for the Next 50

Years with Current Technologies,” Science 305 (13 agosto 2004), 968–972.

55. The energy efficiency potential cited in the report was divided across three building sectors of
the U.S. economy: industrial (40% of the end-use energy efficiency potential), residential (35%),
and commercial (25%). The savings in energy emissions could be achieved by technical changes
that actually have a positive net present value in purely financial terms, making it an attractive
investment. The discounted cash flow in actual dollars at a reasonable discount rate totaled
approximately $1.2 trillion in present value against an estimated initial up-front total invest- ment of approximately $520 billion. McKinsey & Company, Unlocking Energy Efficiency, vii.

56. McKinsey & Company, Unlocking Energy Efficiency, viii.
57. William F. Trimble, Admiral William A. Moffett: Architect of Naval Aviation (Annapolis, MD:

Naval Institute Press, 2011), 111–199.

58. Peter Cohan, “Boeing’s Big Tanker Contract Has National—and State—Winners and Losers”,

AOL Daily Finance, Febbraio 25, 2011. Available at
http://www.dailyfinance.com/2011/02/25/boeing-airbus-tanker-contract-winners-losers/;
Caroline Brother, “Boeing and Airbus Prepare (Again) for Tanker Battle,” New York Times, Giugno
16, 2009. Available at http://www.nytimes.com/2009/06/17/business/global/17boeing.html.
59. Norm Augustine, former CEO of Lockheed Martin, has estimated that if the current rate of
cost increases for fighter aircraft continues, by 2054 the entire defense budget would be

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The Technology Revolutions That Do Not Happen

required to purchase one F-35 aircraft. The Economist cites “Augustine’s Law” in “Defense
Spending in a Time of Austerity,” August 26, 2010. Available at
http://www.economist.com/node/16886851?story_id=16886851.

60. Secretary Ray Mabus, “Moving the Navy and Marine Corps off Fossil Fuels” (posting, Jan. 24,

2011). Available at
http://www.navy.mil/navydata/people/secnav/Mabus/Other/MovingtheNavyandMarineCorps
OffFossilFuels.pdf . Vedere, generally, the Navy website on energy, ambiente, and climate
change at http://greenfleet.dodlive.mil/; and Matt Hourihan and Matthew Stepp, Lean, Mean
and Clean: Energy Innovation and the Department of Defense (Information Technology and
Innovation Foundation March 2011), 13–22. Available at http://www.itif.org/files/2011-lean-
mean-clean.pdf.

61. For an examination of the lifecycle costs of transport biofuels, see Russell W. Stratton, Hsin Min
Wong, and James I. Hileman, “Quantifying Variability in Life Cycle Greenhouse Gas Inventories
of Alternative Middle Distillate Transportation Fuels,” Environmental Science and Technology
(ACS online ed., April 22, 2011). Available at http://pubs.acs.org/doi/full/10.1021/es102597f.
62. Hydro treated renewable jet (HRJ) fuel is a term used to describe any feedstock or process that
leads to fuel that is chemically identical to crude oil-based kerosene, the standard jet fuel. IL
NOI. Air Force is testing such fuels derived from plant and seed oils, animal fat, and waste oils. UN
50 percent biofuel blend of such oils and petroleum is expected to be approved for all Air Force
jets by 2013.

63. James T. Bartis and Lawrence Van Bibber, Alternative Fuels for Military Applications (Santa

Monica, CA: Rand, 2011), ix–xix. Available at
http://www.rand.org/pubs/monographs/MG969.html.

64. This section expands on our discussions in Weiss and Bonvillian, Structuring an Energy
Technology Revolution, 37–50, 151–191, and Bonvillian and Weiss, “Taking Covered Wagons
East,” 294–299.

65. Christensen and his colleagues, in their study of the U.S. health care delivery system, recommend
that niche markets protected from regulatory obstacles be used as launching points for disrup-
tive innovation. Such niches are valuable when they do exist, but they are likely to be unavail-
able to innovations seeking to penetrate at scale a full-fledged CELS paradigm as we have
defined it. Christensen et al., The Innovator’s Prescription, 385ff.

66. Particular “carrots” and “sticks” may fit one kind of firm but not another. For example, loan
guarantees may work for major utilities building next-generation grid systems, but may not be
as useful to small firms and startups with limited capital access that are deploying smart-grid IT
systems for consumers. Analytical work is needed to evaluate the relative economic efficiency
of particular back-end incentives or regulations.

67. John Alic, Daniel Sarewitz, Charles Weiss, and William Bonvillian, “A New Strategy for Energy

Innovation,” Nature 466 (Luglio 15, 2010): 316–317.

68. The DOD has requested $30m in its FY12 Budget for Installation Energy Testbeds. Vedere
Statement of Dr. Dorothy Robyn, Deputy Under Secretary of Defense (Installations and
Environment) before the Senate Armed Services Committee Subcommittee on Readiness and
Management Support, Marzo 17, 2011, 8–11. Available at http://armed-services.senate.gov/stat-
emnt/2011/03%20March/Robyn%2003-17-11.pdf.

69. Weiss and Bonvillian, Structuring an Energy Technology Revolution, 37–50, 151–191; E

Bonvillian and Weiss, “Taking Covered Wagons East,” 294–299.

70. There is a rich scholarly literature on “socio-technical systems,” typically emphasizing the histor-
ical and social dimensions of technological paradigms. Vedere, Per esempio, Research Policy 39, NO.
4 (May 2010), 435-510 (special section); Knut H. Sorenson and Robin Williams, Shaping
Tecnologia, Guiding Policy: Concepts, Spaces, Tools (Cheltenham, UK: Edward Elgar, 2002).

innovazioni / volume 6, number 2

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