13.1 Sources of Funds

Four main sources of capital are available: (I) internal funds of the company; (II) private investors (mainly angel investment, venture capital and private equity); (III) government funds; and (IV) forward selling products (that is, endogenous funding). Very important elements of Figure 13.1 are the two small loops on the right hand side of the diagram, which are expanded in Figure 13.2.

Generally speaking, (I) is only an option for very large firms, and even they seem to prefer to reserve their cash for acquiring small companies with desirable know-how, rather than developing it themselves. For various reasons connected with problems of internal organization and its evolution, large-company research is often (but not, of course, always) inefficient; the problem is that all firms, as they grow, inevitably also proceed along the road to injelititis [5].

These four options are not exhaustive. Another possible route is for the nanotechnology company to enter into a close partnership with a company established in the application area for which the new technology is appropriate. The pooling of complementary interests seems to create a powerful motivation to succeed in the market (see also Chapter 16). Nevertheless, many large companies find it difficult to make a business case for nanomaterials. Typical is the automobile industry's attitude towards advanced composites. It is problematical that it cannot acquire these materials in the manner to which it is used with other raw materials such as steel and aluminium, namely simply placing an order to buy on a commodity exchange. Potential suppliers of nanomaterials lack supply capacity, the finance to acquire it, and visible independent standards. These problems are not new and are solved by commoditizing nanomaterials (Section 13.4).

A novel, but hitherto untried, method of financing would be to exploit the possibilities of the era of social networking: nanotechnology companies that are being financed according to source (II) are networked together in order to hedge underwriting risk. The key problem thereby overcome is that a fledgling nanotechnology company is usually based on a single technology, which makes it a high-risk investment because the technology might suddenly become obsolete. The networked collection of companies (that would, sensibly, share a common market for their products) then forms a basket of shares making up a “virtual” stock, which is what would actually be sold to raise funds.

A more primitive method, also heavily dependent on the Internet, is crowdfunding, in which a project is posted on a website and private individuals are invited to donate small sums, which may be as little as ten dollars, in return for the product once it is made. In essence this is the method that was traditionally used to finance the publication of books that a commercial publisher declined to take on because of uncertainty over the commercial viability. It works well where the proposed book was clearly something of great value to society, such as Schmieder's Bach Werke Verzeichnis (BWV) first published in 1950, and where there is a clearly defined constituency of interested readers; histories of the colleges of the universities of Oxford and Cambridge have been funded in this way. Internet-based crowdfunding has spawned many companies that provide social media platforms on which to advertise the proposed projects and which earn fees from administering the gathering of the funds. Unfortunately, with this sudden plethora it is almost impossible to distinguish honest from dishonest crowdfunding platforms. Even if no funds are actually embezzled, personal data could be misappropriated. Crowdfunding seems to work well for very local campaigns, in which there is no actual product but simply an aim of common interest, such as saving a village pond from being filled in—but then it is hard to see what added value the platform gives, beyond what the campaign organizers could have set up themselves.

For all the sources of funding except (IV), endogenous, a general pitfall is the hyperbole that is employed to a greater or lesser degree in order to persuade the would-be investor to make a commitment. The greater the desired return on the investment, the greater the temptation to ramp up the hyperbole. Anything that concerns the future, which—as commentators as diverse as Yogi Berra and Niels Bohr have pointed out—is always uncertain, is fair game for hyperbole. One should not, of course, make statements that one cannot verify, or which can be easily checked and found to be incorrect, but as far as the future is concerned it is more subtle matter of balancing plausibility with what the interlocutor wants to hear.

13.2 Private Investment

The major investor groups are: (i) angel investors; (ii) venture capitalists and private equity; (iii) strategic investors; (iv) sovereign funds; (v) family offices; (vi) foundations; and (vii) “soft” loans.

Angel investors are “high net worth” individuals typically prepared to invest tens or hundreds of thousands of dollars. Their willingness to invest is typically highly dependent on direct or indirect personal contact. Sometimes they wish to involve themselves in the running of the company they are investing in, which is not always beneficial to the company.

Venture capitalists have gathered (directly and via investment bankers) into a fund the savings of others who expect to receive a good rate of return. They only invest in start-up companies and typically take a majority stake in the companies they invest in. Their focus is on an exit, typically after 3 years.

Since, in recent years, the gathering of funds has become more successful, venture capital funds have become larger, which means that the amounts they are interested in investing have also become concomitantly larger, because the number of start-ups in their portfolios that they can manage has, for practical reasons, remained about the same. For many start-ups, this “unit of minimum investment” has become too large—they do not have the capacity to scale up their activities to enable them to offer a commensurate rate of return.

Strategic investors are large companies in the same branch wishing to externalize some of their research. Ultimately they would hope to acquire majority ownership of the start-up. Their timescales are much longer than those of venture capitalists—decades rather than years. This means that negotiations tend to be complex and lengthy.

Sovereign funds are set up by governments of countries, typically using windfall revenues from the exploitation of raw materials (e.g., Norway and North Sea oil), in order to build up capacity in areas perceived as being of strategic interest, including providing an income for the country after its raw materials have been exhausted.

Family offices are often set up by very rich families and professionally managed. The vision behind any proposed investment may be more important to them than strictly financial criteria.

Foundations are in some ways similar to family offices but the money is no longer owned by the family and some of it at least may be disbursed as grants à fonds perdu; that is, without any hope of financial return, but with some other kind of return measured in terms like the betterment of society. Sometimes these foundations organize competitions for start-ups, or award monetary prizes for entrepreneurs.

Soft loans are low-interest loans, often given by governments as part of their political strategy. China is particularly active in this area. Unless the interest rate is zero, however, it will have to be paid, curtailing the financial resources of the start-up, unlike equity in which investors only get a return when the company starts to make a profit.

Typically funding goes through several stages. It starts with seed capital, which should be used to achieve some kind of viable product and user base. Seed capital is considered high-risk (although the risk be mitigated by schemes such as, in the UK, the Seed Enterprise Investment Scheme (SEIS), which allows, in effect, tax liabilities to be invested under certain conditions). The next stage is known as Series A, which might be ten times greater. The money might come from some of the existing investors, or from traditional venture capital firms. Then comes Series B (“build”), for growing businesses well pass the development stage and expanding market reach. It might be as much as ten times Series A. Once the company is demonstrably successful, it is ready for Series C, which should enable the company to assume a dominant position in its sector. More investors are interested in Series C funding, which might be more than ten times bigger than Series B, such as hedge funds, investment banks, and private equity firms. The money might be used, inter alia, to acquire a competitor. Beyond Series C is the initial public offering (IPO) of shares in the company.

While option (ii) has been hitherto probably the main source of funding for fledgling nanotechnology companies, it has notable disadvantages. For one thing it is chaotically organized, often depending on a chance meeting between the company directors and the investors, and their decision to proceed depends to a large extent on personal factors rather than an objective appraisal of the business. There appears to be an element of luck in finding investors. A social setting (which might be as unpretentious as a college bar) in which would-be investors and technologists mix informally is probably a crucial ingredient. Therefore, it does not seem to be (but nevertheless may be) an “efficient” method of financing. More significantly, investment is inevitably accompanied by a loss of control. The priorities of the investors are different from those of the company founders, and the desire of the former to extract the maximum monetary value from their investment as soon as possible (typically within three years) sometimes militates against building up the competitive strength of the company's core technology.

Venture capitalists usually prefer not to commoditize the products of the companies in which they invest, because they believe that in that way they can charge premium prices, but this is against the long-term interests of the industry and inimical to diversification of the investor base.

13.3 Government Funding

This source is fraught with difficulties. The establishment of extensive state programs to support nanotechnology research and development is presumably based on the premise that nanotechnology is something emerging from fundamental science, implying that there is insufficient interest from industry to fund its development. Government largesse might actually hinder development, however. It has long been a criticism of the European Union “Framework” research and technical development programs that they actually hinder innovation in European industry [6]. Generic weaknesses of government funding programs are: excessive bureaucracy, which not only saps a significant proportion of the available funds, but also involves much unpaid work (peer review) by working scientists, inevitably taking time away from their own research; excessive interference in the thematic direction of the work supported, which almost inevitably leads in the wrong direction, since by definition the officials administering the funds have left the world of active research, hence are removed from the cutting edge, nor are they embedded in the world of industrial exigencies; an excessively leisurely timetable of deciding which work to support—12 months is probably a good estimate of the average time that elapses after submitting a proposal before the final decision is made by the research council, and to this should be added the time taken to prepare the proposal (9 months would be a reasonable estimate), in which an extraordinary level of detail about the proposed work must typically be supplied (to the extent that, in reality, some of the work must already be done in advance in order to be able to provide the requested detail), and further months elapse after approval before the work can actually begin, occupied in recruiting staff and ordering equipment (6 months would be typical). Operating therefore on a timescale of two or more years between having the idea and actually beginning practical work on testing it, it is little wonder that research council proposals tend to be repositories for incremental, even pedestrian work, the main benefit of which are the accompanying so-called overhead payments that help to maintain the central facilities of the proposer's university (companies do not usually receive overheads).

Possibly because of early British efforts (the UK National Initiative in Nanotechnology 1988–93) and the massive US National Nanotechnology Initiative (launched in 2000), nanotechnology appears to have become indissociably linked with government funding, and today there is huge current investment in nanotechnology from the public domain. There are, however, interesting national differences (Table 13.1). A bald comparison of the absolute values is less revealing than key ratios: funding per capita ($F/N$) is indicative of the general level of public interest in pursuing the new technology, and the fraction of GDP spent on nanotechnology ($F/G$) indicates the seriousness of the intention. Despite the weakness of not knowing exactly how F has been determined, several general conclusions are interesting. Japan is clearly the leader, both in interest and intention. The USA follows in interest, and then France and Germany. France's strong interest is in accord with its current image as a powerhouse of high technology (the output of which includes the Ariane spacecraft, the Airbus, and high-speed trains). Switzerland's interest is surprisingly low, given its past lead as a high-technology country (but see Table 13.2). But when it comes to “putting one's money where one's mouth is”, only Japan does creditably well. Switzerland in particular could easily afford to double or triple its expenditure [7]. And, impressive as the USA's contribution looks relative to that of Brazil, for example, it is barely half of the sum allocated to “funds for communities to buy and rehabilitate foreclosed and vacant properties” (taken as a somewhat random example of part of the US federal stimulus plan promulgated in February 2009).

The lower half of the table presents a less encouraging picture. The very low level of activity in Argentina, which formerly had a relatively strong science sector, is indicative of the success of the International Monetary Fund (IMF) in insisting on a substantial downscaling of that sector as part of its economic recovery prescription. In our modern high-technology era, this is simply not how to create the basis for a strong future economy, and reflects the archaic views that still dominate the IMF. Brazil's performance is also disappointing, given its aspirations to become one of the new forces in the world economy. Among these countries, only Malaysia reveals itself as a true Asian “tiger” able to take its place in the world nanotechnology community.

What of the effectiveness of the expenditure? If the main outcome of this kind of funding is papers published in academic journals, the ratio $(P/F)$ of the number of papers P to funding is a measure of effectiveness (Table 13.2). By this measure the big spenders (Japan and the USA) appear to be less effective, and Switzerland's spending appears to be highly effective. This simple calculation of course takes no account of the existing infrastructure (the integral of past expenditure), nor to the extent to which funds result in products rather than papers. One nanotechnology paper costs about 5600 € in France, which seems remarkably cheap, suggesting that expenditure on nanotechnology is underestimated (even if European Union funds are taken into account, it still amounts to less than 8000 €).

In most countries, this public support [8] for research and development covers the entire range of the technology, with little regard for ultimate utility. What is lacking is a proper assessment of which sectors might best benefit from nanotechnology at its current level, frequently updated pari passu with scientific and technical development. Such an assessment would make it possible to appraise the utility of current research, indicating into which sectors investment should be directed towards research, which towards development, and which towards innovation, hence providing a better basis for public investment decisions, as well as being useful for private investors interested in backing nanotechnology-based industry. As it is, politicians are now having doubts about continuing the policy of lavish support because the outcomes have been so meager. Although scientists and technologists continue to clamor for more funding, it will surely be ineffective to merely increase spending on scientific and engineering research without rethinking some of the premises according to which it is carried out; in particular, a much more critical approach to its pursuit and the outcomes is needed.

The rationale for the public funding of scientific research is that it benefits all, hence it is a public good that cannot be monopolized—hence private investors will not pay for it and it will not be done if governments do not pay. In other words, the market price for the research output is too low to incentivize it. In the language of Adam Smith, self-interest cannot sustain universalities. This argument is closely connected with the Baconian “linear” model of wealth generation (Figure 2.1).

What is surprising at the beginning of the 21st century is that this view still persists so strongly after so many examples of its failure as well as empirical studies showing that the policy does not work. A well known example of the superiority of private initiative is the birth of aviation. Samuel Pierpoint Langley benefited from generous federal funds but despite many years of effort he was beaten by the Wright brothers, working on a shoestring with their own (private) resources. There are numerous other examples [9]. An extensive OECD study concluded that “…it is [business-performed R&D] that drives the positive association between total R&D intensity and output growth …the negative results for public R&D …suggest publicly performed R&D crowds out resources that could be alternatively used by the private sector” [10]. An excellent illustration of crowding out is provided as by the history of the Royal National Lifeboat Institution, a private charity founded in 1824 that maintains a network of lifeboats around the coastline of Britain. It is entirely financed by private donations and volunteer work and rescue operations are carried out free of charge. In 1854, however, it ran into some financial difficulty and accepted an annual government subsidy that continued until 1869, when it was stopped, never to be renewed, because the Institution found that private donations diminished and, moreover, the Institution suffered detriment because of the bureaucracy associated with receiving the government funds.

Yet further evidence comes from comparing the economic performance of countries, notably France and Germany, that generously supported scientific education and research starting in the 19th century, creating superb institutions that produced outstanding scientific work, with Great Britain, which did not [11]. Gross domestic product per capita even of Germany remained about 25% below that of Britain's from around 1800 until after World War II. In the USA, federal funding for science and grew enormously (by almost 3 orders of magnitude), starting during World War II, but barely affected the growth of the US economy (as measured by GDP per capita). Considering Japan, government investment in science has been marked by spectacular failures, such as the “fifth generation” supercomputing project and the massive Key-TEC project that, when it was wound up, had achieved a return on investment of about 0.5%. The extraordinary technological sophistication of modern Japanese industry is entirely due to private research.

There is, indeed, good empirical evidence that corporate growth benefits from spending money on research in house [12]. An interesting study of Pray et al. showed that (seed) producers' return on R&D investment was 17%, a perfectly satisfactory figure. 94% of the value accruing from their research benefited a very numerous public (farmers and seedsmen and, ultimately, all consumers of the grains), with only 6% being captured by rival producers (17 major private seed companies in India) [13]. This constitutes a model of how private company R&D benefits both the company and a large number of members of the public.

A major problem of government-funded research is that nowadays, in order to obtain it, one has to go through a long-winded, extremely bureaucratic application process involving a great deal of form-filling, the content of which must seem pointless to most scientists. Furthermore, it has become customary for the proposed research to have to be specified in great detail, to the extent that the major portion of the thinking part of the research has already been done by the time the application is ready to be submitted. If it is successful (i.e., the proposal is funded), the researcher merely needs to execute a detailed series of “workpackages”, pass the specified “milestones”, and produce prespecified results as “deliverables”, enabling the funding agency to tick the appropriate boxes. The investigator receives a contract to carry out work that is the scientific equivalent of “painting by numbers”; in many cases it would surely suffice for a good laboratory technician to execute the “research” plan. Moreover, nowadays it is typical for only about 10% of submitted proposals to be funded. Hence, 90% of the enormous preparation effort is wasted (and many government research agencies, such as Britain's Engineering and Physical Sciences Research Council, do not allow resubmissions). Furthermore, the whole procedure is extremely lengthy: from having the initial idea of the research to actually starting laboratory work (bearing in mind that the great uncertainty regarding the success of the applications means that recruitment of staff and procurement of equipment can only start once news is received that funding will be forthcoming) is typically two years. In any fast-moving field, this might mean that the proposed research has been overtaken by developments elsewhere before it even starts [14].

Yet another problem is that the decisions on what to fund are made by a committee. By definition, the majority of the members of any committee are working in the mainstream of the field, and they will almost certainly vote for research proposals that also fall into the mainstream [15]. Therefore, government-funded research is always biased towards pedestrian investigations. It is a most unfortunate development that private philanthropy, which formerly used to be a very important source of finance for scientific research, has also become organized into formal bureaucracies that demand application procedures similar to those of the government research agencies [16]. Philanthropically funded research has likewise, therefore, evolved into a pedestrian activity. The reason for adopting the committee-based selection of research projects is the desire to avoid funding work that wastes precious public resources. As we have seen, however, the opposite is achieved. Furthermore, surely any real scientist would not wish to spend his or her time on a difficult problem that did not have the potential to change the world if a successful solution were found. A private charity may invite project proposals from the entire population and weeding out is doubtless necessary, but most government research agencies impose strict eligibility criteria on applicants, who must generally be fully qualified scientists with established university positions—with, one would have thought, the ability to decide what research was worth pursuing.

It is worth pointing out that the scientist has far more in common with the mentality of the merchant then with that of the bureaucrat. This is well illustrated by a story of Thales of Miletus, generally considered to have been the world's first scientist [17]. Thales predicted from astronomical observations in the winter that next year's olive crop would be good, so without delay he raised some capital and bought the rights to all the olive presses. After the harvest he rented out the presses at a good profit. In other words: he made an observation (the positions of certain astronomical bodies); he made a hypothesis (that the positions he observed were correlated with conditions that would lead to an excellent olive harvest); he tested the hypothesis (buying the rights to the presses); and he measured the outcome (according to the profit he made). From this we can conclude that commercial practices are by no means inimical to science.

13.4 Endogenous Funding

If both private venture capital and government funding are to be deprecated, what options remain? The answer is to be found in the very well established exchange mechanisms for enabling trade to take place. The operation of the fourth funding source (Section 13.1) is centered on commercial exchanges, such as the Royal Exchange in London (founded in 1565 by Gresham), a similar exchange in Manchester, founded in 1729 to serve the needs of the textile industry, the Baltic Exchange in London, dating from 1744, the Chicago Product Exchange (1874), and so forth, which facilitated not only trade but production wherever investment was needed in advance of the actual delivery of goods. Crucially, there must be prior demand for the goods for the system to work.

Exchanges such as the Chicago Mercantile Exchange and the London Metal Exchange and, in certain respects, stock exchanges around the world all have in common the feature that they allow standardized items to be bought and sold in a standardized fashion. Transaction costs (including those associated with price discovery) are thereby greatly reduced compared with the alternative mode of doing business, namely through bilateral contracts between supplier and buyer. An exchange therefore constitutes the most perfect practical form of a market. A simple fruit and vegetable market, an ancient institution in many English towns, is a rudimentary kind of exchange, with the same qualities of transparency and openness that make the exchange an attractive medium for doing business.

“Standardized items” means that the items (e.g., particular grades of copper or wheat) fulfil published specifications. “Standardized item” is synonymous with “commodity” although a distinction is drawn between a commodity that is “commoditized”—capable of supply from several producers—and one that is produced by a sole or very few sources. An exchange will generally have the means for testing to ensure that items offered for sale on the exchange fulfil the specifications according to which they are offered. In order to ensure smooth running, both sellers and buyers have to register with (i.e., become members of) the exchange. By doing so they agree to abide by its rules (such as the prohibition of “insider trading”, “open interest” disclosures to restrict attempts to corner a market, or restrictions on the size of intraday price fluctuations), which are strict, in order to ensure that both seller and buyer get the best possible deal.

One of the most important commercial innovations ushered in by exchanges was the concept of forward selling, in which the supplier is contractually bound to deliver a certain quantity of the commodity at a certain epoch in the future and the buyer is contractually bound to pay for it. The more sophisticated the technology behind the good, the more important this is, because the preparation of the commodity demands commensurately more time and investment. Forward selling overcomes the often ruinous risk of production in advance of demand. A fisherman, for example, spends all night at sea but he does not know how many fish he will catch, nor does he know, when he returns to land, how many he will sell.

The exchange provides as nearly perfect a mechanism for adjusting supply to demand as is practically possible. If a good X (e.g., a certain grade of nickel) is in short supply relative to the demand, this will be noticed by the suppliers and they will increase the price. The higher prices will attract more suppliers (e.g., those with more expensive means of production who would have been unable to sell at the previously lower price). It will also encourage forward selling, which provides the financial guarantee enabling investment to expand production facilities. (Nowadays, metal is nearly always sold when it is still in the ground as ore; as soon as the sale is agreed the miners rush to dig it out and put it through the extraction and refining processes.) Conversely, if there is a glut the price will fall and suppliers will withdraw until a balance is again achieved.

The alternative mode of business is well illustrated by the chemical industry. There is no exchange, even for the chemicals made in the largest volumes, and the market is typically characterized by enormous price differences between suppliers, excessive temporal price fluctuations, and extreme fluctuations of supply. Business has arranged itself to accommodate this endemic uncertainty, but a huge amount of effort is essentially wasted in the process compared with organizing an exchange, exacerbated by the inertia due to the large capital investment needed for many chemical production facilities. Presumably exchanges have never been organized in the chemical industry because suppliers believe they can command premium prices through the lack of transparency. The semiconductor industry has also traditionally eschewed exchanges for “chips” (very large-scale integrated circuits), perhaps because they were considered to be too sophisticated and special to be labeled “mere” commodities [18]. This viewpoint is, however, based on a fundamental misunderstanding. Just because a good fulfils published specifications and can be traded on an exchange does not preclude it from being sophisticated. (Indeed food products, whether commoditized or not, are, in terms of their internal structure, incredibly sophisticated—so much so that it is still impossible for humans to mimic them artificially.) In fact, “chips” are produced to strict specifications and in effect we have seen the commoditization of a range of microprocessors (e.g., the 386), without which their ubiquitous introduction into domestic appliances, for example, would scarcely have been possible.

The present era of ultrahigh technology provides an interesting challenge to an exchange. It is easy enough to test a batch of gold, or chromium, whether it fulfils its specifications. Similarly with wheat (the testing of which does not, of course, involve detailed structural investigation at the nano level). But the more sophisticated the product, the more difficult it is to specify it and test it for fulfilment.

The main commercial difficulty of nanotechnology at present is that there is a multitude of very small companies (many of them are university spin-outs), each making a different product in small quantities. This makes it extremely difficult for a potential user with a large-scale application (e.g., from the automotive industry) to do business. Take, as an example, carbon nanotubes as an additive for creating conductive polymers. The polymer manufacturer would need large quantities of a uniform specification with regular deliveries guaranteed. At present, no manufacturer is able to provide this. If, however, all the small suppliers joined an exchange and produced their nanotubes according to the exchange's specification, the polymer manufacturer might be able to meet the demands of his customers. Furthermore, through forward buying underwritten by the exchange process, the small suppliers would gain the financial guarantees enabling them to invest to expand their production facilities as needed. This form of financing provides a compelling incentive to the global investment community to support the transaction while ensuring a non-diluting (of ownership) source of capital for the small producer. As well as the direct benefits to both suppliers and buyers for facilitating individual trades, because the exchange could list many specifications, this process would also lead to a general increase in the vitality of the industry, resulting in further growth, etc.

In the absence of an exchange, nanotechnology is likely either to remain an essentially academic activity with little commercial significance (excluding materials such as carbon black, which were traded in large volumes long before the emergence of nanotechnology), or to follow the route adopted by the chemical industry (indeed, many large chemical firms are now actively pursuing nanomaterials, developing them both through their own research and through buying up small innovative companies). In the latter case, the industry will be characterized by the same problems of price and supply fluctuations experienced by the chemical industry. But in the case of nanotechnology, because its products are more sophisticated than chemicals, as nanomaterials become more functional and “smarter” the difference between nanotechnology and the chemical industry will become more marked and the commercial difficulties of coping with the fluctuations might simply become so great that the industry never gains real commercial viability.

Exchange-based trading also solves the problem of arranging insurance cover for nanomaterials and their shipment, since they are produced to published specifications and must satisfy relevant safety, health, and environment (SHE) provisions before they can be traded. Furthermore, every trade is tracked by the exchange and, hence, traceable.

Finally, beyond all such considerations, the exchange clearly reflects a democratic ideal for the equitable organization of human society, in which transparency, openness, and trust are vital elements to ensure universal participation in society. As technology becomes more and more sophisticated and widely diffused, ensuring that all members of society participate and feel that they have a stake in its continuing development appears to be essential to avoid a descent into anarchy.

13.5 Geographical Differences Between Nanotechnology Funding

Despite globalization, the fiscal environment is still a distinctively national characteristic. The three major poles of economic activity (the EU, Japan and the USA) are quite sharply distinguished regarding expenditure on nanotechnology (research and technical development):

Although the total expenditure in each of these three poles is roughly the same (around $4\times {10}^9$ CHF; again, the validity of this statement depends on what is included under “nanotechnology”), its effectiveness differs sharply. There can be no doubt that the Japanese model is the most successful. Solidly successful companies (without any magic immunity from the vagaries of the market) with immense internal resources of expertise have impressive track records in sustainable innovation according to the alternative model (Figure 2.2), but are well placed to develop nanotechnology according to the new model (Figure 2.3). Category II has several successful features, not least the highly effective Small Business Innovative Research (SBIR) grant scheme for funding innovative starting companies, and benefits from enormous military expenditure on research, much of which is channeled into universities. Category III is decidedly weak. There is an overall problem in that the fraction of GDP devoted to research and development in the EU is less than half that found in Japan or the USA. Moreover, what is spent is not well used. Many companies have been running down their own formerly impressive research facilities for decades (the clearest evidence for this is the paucity of top-ranking scientific papers nowadays emerging from European companies). Government policy has tended to encourage these companies to collaborate with universities, enabling government to reduce the level of public funding. Within Europe, there are immense differences between countries. Among the leading countries (Britain, France, Germany) France is in the weakest position. Traditionally anyway weak in the applied sciences, without a strong tradition of university research, and with its admirable network of state research institutes (the CNRS) in the process of being dismantled, there is little ground for optimism. In the UK, the level of innovation had become so poor that the government has virtually forced the universities to become commercial organizations (by patenting inventions and hawking licenses to companies), and insisting on commercial outcomes from projects funded by the state research councils. Although university research is ostensibly much cheaper than company research, most companies seem nevertheless to have unrealistic expectations of how much they can expect to get from a given expenditure, in which they are anyway ungenerous to a fault. The British government avows the linear model (Figure 2.1), and is fond of emphasizing the importance of the research “base” as the foundation on which industrial innovation rests, but paradoxically is extremely mean about paying for this base, whose funds are cut at the slightest excuse, hence one cannot be optimistic about the future (although see Section 13.3 for an alternative view). In Germany, there is a strong Mittelstand of medium-sized engineering firms with many of the characteristics of Japanese companies. Furthermore, the state Fraunhofer institutes of applied science, along with the Max-Planck institutes (the equivalent of the French CNRS) are flourishing centers of real competence. If the EU were only Germany, one could be optimistic. The European Commission (the central administrative service of the European Union) seems to be aware of the problems, and has initiated a large supranational program of research and technical development, but the outcome is remarkably meager relative to the money and effort put into it. The main instrument is the “Framework” research and technical development program, but this is rather bureaucratic, easily influenced by dubious lobbying practices, and hence generally unpopular [20]. The bureaucracy is manifested by excessive controls and reporting requirements, brought in as a result of the generally deplorably high level of fraud in the overall EU budget (including agriculture, regional funds, etc.), which dwarfs the scientific activity per se, but all expenditure is subject to the same rules. There is little wonder that it has been concluded long ago that the “Framework” program actually hinders innovation in European industry [6], with no real evidence for improvement.

Given the outstanding success record of the SBIR grant scheme in the USA, it is astonishing that other countries have not sought to adopt it (Japan has its own very successful mechanisms, but unlike the situation in the USA and Europe as a whole, they are geared towards a far more socially homogeneous environment, which foreigners working in Japan cannot fail to notice). The situation within the European Union is especially depressing, marked as it is by ponderous, highly bureaucratic mechanisms and an overall level of funding running at about one-third of the equivalent in the USA or Japan. Switzerland manages to do better, but could actually easily exceed the (per-capita) effort of the USA and Japan (given that it has the highest per-capita income in the world). It is particularly regrettable that it has failed to maintain its erstwhile lead as a high-technology exporting nation, choosing instead to squander hundreds of milliards of francs on dubious international investments that have been revealed as worthless (in 2008 and 2009)—or, more recently (since 2011), keeping the currency artificially low. One can only wonder what might have been achieved had these same monies been spent instead on building up world-leading nanotechnology research and development facilities.

Rising neo-mercantilism, manifested by a combination of large state subsidies (including low-cost loans—–often granted with little concern for near-term return on investment or overcapacity), national standards, preferential government procurement for national firms (a significant number of which are state-owned), and imposed requirements for technology transfer is used by some countries, notably China and South Korea, to drive the growth of national innovation. The governments of these countries also encourage national enterprises to compete globally in strategic emerging industries with the help of loans and other support. Is this trend damaging to countries that practise an open trade policy? Past experiences of government-sponsored megaprojects (e.g., within the Japanese steel industry) have often turned out to be wasteful and weakening. Should a longer-term view in the open economies be encouraged? It would be regrettable if present trends triggered a general growth of neo-mercantilism. The open policy should be robust enough to withstand such threats, and history suggests that it can be, although clearly the matter needs much more discussion than can be fitted in here.