Going for the Gold:
Universities Gamble Big-Time on Research

Like compulsive Las Vegas gamblers, many university presidents like to make big bets hoping for large payoffs. And like most gamblers, they usually lose. But they have a big advantage over those going to Vegas: they are gambling with other people’s money.  The most famous form of higher education gambling involves football and basketball, where schools lose vast sums trying, mostly unsuccessfully, to become national sports powerhouses. But there is another form of university gambling that by most measures is quantitatively far more important: spending on research.  It amounts to tens of billions annually, with much of it funded by federal, corporate or other grants.  Because of generous federal overhead provisions, many schools believe research not only advances a legitimate scholarly purpose– the advancement of knowledge–but also institutional prestige, while actually improving school finances. There is some limited justification for this.

But colleges usually think there is second way research can enhance institutional revenues: the licensing of patents arising from university research. According to the Association of University Technology Managers, universities took in $2.6 billion in license fees and royalties on patents last year. To lure this money, schools need not only researchers doing commercially valuable activities, but also offices of technology transfer with experts on licensing, including in-house or external patent attorneys. As a result, there is a burgeoning university research bureaucracy. In the Office of the President of the University of California, for example, there are 29 employees in the technology transfer office, not counting another 32 in the research grant office (important in funding the research leading to patents), or dozens more working on the 10 University of California campuses.

Offices That Lose Money

The University of California holds more patents than any other university in the world. But significant technology transfer offices also exist at far less research-intensive universities. For example, at my school, Ohio University, there are 11 individuals on the Technology Transfer staff, some part-time.  My school is one of the few lucky ones that actually have made some money, ranking fourth in a 2008 Forbes survey on “return on investment” in research, by virtue of researcher John Kopchick’s discovery of the human growth hormone drug Somavert.

But Ohio University is atypical. In a new study for the Brookings Institution, Walter D. Valdivia confirms what I long have suspected: most technology transfer offices (TTOs) lose money. His estimate based on a survey of 155 universities for 2012 is that 130 lost money–84 percent. “What is more, …2012 was a good year because over the last 20 years, on average, 87 percent did not break even.”

While complete national data are not available, it is interesting that legal fees appear to have absorbed 20 percent or so of the $2.6 billion in license revenues. Intellectual property lawyers are expensive. And even at schools where patent/licensing revenues are large, a huge proportion of the funds do not go to aid general university purposes.  Of the $103 million or so generated by the University of California in 2012, only about $39 million filtered down to support the various campuses or  the university’s general fund–less than the share going to inventors who shared in the proceeds of the inventions.

Diversity as a Betting Strategy

While presidents dream of hitting home runs and earning millions annually in patent revenues, at a time of financial stringency for most campuses it seems spending large sums on technology transfer offices is highly dubious, particularly for the vast majority of schools where  there is little history or high prospects for breakthrough inventions. Buying lottery tickets is probably at least as financially remunerative, and requires virtually no bureaucracy.  Actually, Valdivia uses the lottery analogy, and concludes that the current technology transfer approach of striving for research home runs works only for the top 10 or so schools with respect to the amount of research grants received. They have enough diversity of research projects that the probability of big success occasionally occurring is reasonably large.

What should most universities do? Valdivia recommends an alternative, outsourcing approach. Universities should encourage new business start-ups utilizing university-generated technology. University lawyers and bureaucrats are less good at capitalizing on new ideas than private entrepreneurs with some skin in the game themselves. Universities might invest in some of these ventures, but turn the operation over to others incentivized to make inventions commercially successful. My own university has been highly successful using this approach, making me inclined to agree with Valdivia.

The conclusion that research commercialization generally is not viable economically raises a broader issue: is the current tendency of hundreds of schools wanting to be major research institutions a good one? Would we not be better off having, say, 100 institutions doing serious research, reducing research commitments at other institutions in favor of higher teaching loads that might lower instructional costs? The law of diminishing returns applies to research as to nearly everything else. We may well have too many so-so quality researchers addressing topics of marginal importance, with the low-hanging fruit already gathered.

As the transformation of higher education proceeds, the role of research,  so far basically unquestioned, needs greater scrutiny.

Richard Vedder

Richard Vedder

Richard Vedder directed the Center for College Affordability and Productivity and teaches economics at Ohio University. He is also an Adjunct Scholar at the American Enterprise Institute. His new book, "Restoring the Promise: American Higher Education Today," will be published this spring.

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