4
The Regulatory Regime as a Driver

Regulatory regimes serve a number of purposes: They can govern business and trade, control information of national importance, ensure that inventors own the results of innovation, determine ethical practices, ensure the safety of employees, regulate the migration of workers across international borders, and provide a framework for the execution of international relations.

This report discusses regulatory regimes that may affect the globalization of R&D activities. While international treaties on scientific cooperation can clearly drive new R&D activity—such as increasing the participation of U.S. researchers in European Union (EU)-funded projects, as happened following the completion of the EU-U.S. 1997 Agreement for Scientific and Technological Cooperation—the influence of regimes that regulate exports, taxes, intellectual property, and so on is less clear. This chapter considers some of the regimes likely to influence the corporate decision-making processes that are associated with globalizing R&D. The analysis of the regimes herein is not meant to advocate for or militate against particular regulations; rather, it is intended to show how the regulations might influence globalization decisions.

EXPORT REGULATION AND TECHNOLOGY TRANSFER

Bayh-Dole Act

The Bayh-Dole Act, enacted in 1980 as an amendment to the Patent and Trademark Act, applies to the transfer of university-generated, federally funded



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Globalization of Materials R&D: Time for a National Strategy 4 The Regulatory Regime as a Driver Regulatory regimes serve a number of purposes: They can govern business and trade, control information of national importance, ensure that inventors own the results of innovation, determine ethical practices, ensure the safety of employees, regulate the migration of workers across international borders, and provide a framework for the execution of international relations. This report discusses regulatory regimes that may affect the globalization of R&D activities. While international treaties on scientific cooperation can clearly drive new R&D activity—such as increasing the participation of U.S. researchers in European Union (EU)-funded projects, as happened following the completion of the EU-U.S. 1997 Agreement for Scientific and Technological Cooperation—the influence of regimes that regulate exports, taxes, intellectual property, and so on is less clear. This chapter considers some of the regimes likely to influence the corporate decision-making processes that are associated with globalizing R&D. The analysis of the regimes herein is not meant to advocate for or militate against particular regulations; rather, it is intended to show how the regulations might influence globalization decisions. EXPORT REGULATION AND TECHNOLOGY TRANSFER Bayh-Dole Act The Bayh-Dole Act, enacted in 1980 as an amendment to the Patent and Trademark Act, applies to the transfer of university-generated, federally funded

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Globalization of Materials R&D: Time for a National Strategy inventions to the commercial market. The legislation was designed to address problems with the ownership of technology and inventions resulting from federally funded research performed at colleges and universities and the apparent reluctance on the part of industry to invest in the further development and manufacture of technology that rarely made it to market. The Bayh-Dole Act allows universities and small businesses to take title to the inventions, encouraging further development and manufacture. There are two requirements of the Act. First, the invention must be patented in order for the university or small business to take title to it. Second, any manufacture of the product must be substantially performed in the United States. A waiver to this requirement can be obtained if, after a reasonable search, no manufacturer can be found or if manufacture in the United States is economically unfeasible. These requirements can hinder meaningful international participation, and once the result of the research is patented, the related research is no longer basic. If the technology is subject to export controls, this affects further R&D in the United States, because any students involved would have to be either U.S. citizens or their work covered by an export license or other export authority. More significantly, the Act prohibits manufacture outside the United States, which makes corporations unable to consider offshore outsourcing for technology covered by the legislation. Critics of this aspect of the legislation say it effectively puts potential developers or users of federally funded university research in the same situation they were in before 1980. The end result of these requirements is that industry might be reluctant to engage in federally funded industry-academia alliances in the United States and more favorably inclined to consider such alliances with non-U.S. universities funded by foreign governments, subject to local regulations of course. Export Regulations The primary sources of export regulation—the Department of State’s International Traffic in Arms Regulations (ITAR) and the Department of Commerce’s Export Administration Regulations (EAR)—are considered by some in industry as a barrier to the global conduct of business. To compete in the global market and maintain a comparative advantage, U.S. industry must have access to both domestic and foreign technology, and manufacturing and export controls could be considered as hindering this access. Critics of the current export regulation regime maintain that foreign companies are executing contracts while U.S. companies are still seeking regulatory approval. Over the past 20 years most congressional activity on the export regimes has been to add sanctions and restrictions rather than to substantively review the

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Globalization of Materials R&D: Time for a National Strategy underlying statutes. Following the terrorist attacks of September 11, the ensuing focus on national security, and the further regulation of the transfer of items and technology that could be related to weapons of mass destruction, the emphasis has remained on control of technology rather than on easing its transfer. The two primary sources of regulation provide further insight. International Traffic in Arms Regulations ITAR applies to items on the Munitions Control List—that is, to military end items, components, and the underlying technical data. In all cases a license or other authority is required prior to any export. The origins of the ITAR can be found in the Neutrality Acts of the mid-1930s. The underlying policy, then and now, is control over the transfer of arms and related technology. The Cold War was a major factor in shaping regulations as well as their interpretation. Ongoing multiagency review of the items on the list has resulted in some items being transferred from Department of State jurisdiction to the Department of Commerce. Because the focus is on control, reviews of applications for export license or other export authority have no set time limit. Applications may take four or more months to complete. Approval is by no means assured and may be accompanied by conditions and limitations. The result is that where export approval is required, U.S. industry can find itself unable to plan with certainty, because there is no way of knowing when approval may be granted or how the license provisos may impact planned performance. All of the above must be considered before entering into ITAR-controlled research projects with foreign companies. While ITAR is clearly critical for protecting the nation’s interests in the systems and knowledge it covers, the ITAR regime can lead to schedule uncertainties, cumbersome regulatory requirements, and compliance risks that inhibit international collaboration with U.S. suppliers and partners. Export Administration Regulations EAR applies to commercial and dual-use commodities and their materials, components, software, and technology. Applying EAR is a multistep process. First, it must be determined whether the commodity is controlled under the EAR, no matter whether the commodity or its underlying technology is being exported. Next, the control regimes applicable to the export—national security, nuclear nonproliferation, and so on—must be determined. Finally, it must be determined whether the control regime applies to the country or countries for which the export is intended.

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Globalization of Materials R&D: Time for a National Strategy The underlying statutory authority, the Export Administration Act, dates back to 1979. While that legislation lapsed in 1994 and annual attempts to update and reinstitute the Act have failed, the regime has been kept alive by Executive Order and annual notices. It lapsed again in 2001 but was revived under the International Emergency Economic Powers Act. The 2003 attempt to pass legislation failed in large part because it was deemed to not sufficiently strengthen national security controls on exports. As a result, the Department of Commerce is working to increase administrative controls on knowledge/technology transfer and exports. Critics say that the EAR impedes the collaborative efforts necessary for the conduct of global R&D. Export Regulation and Technology Transfer (Offsets) Industrial participation, or “offset,” is another path for the globalization of R&D. Offset obligations are incurred when an agency of a foreign government purchasing a military or commercial product requires that some reciprocal activity take place to help offset the import/export imbalance created in its country by the purchase. One way to accomplish this is to transfer technology or intellectual property to the purchasing country’s industries. Critics of offsets point out that they can have an adverse impact on domestic U.S. suppliers, which are perceived as being forced to provide foreign companies with their technology, resulting in a loss of domestic business, jobs, and know-how. Any transfer of technology or intellectual property typically occurs in one of two ways. The first is a one-way transfer by which the recipient organization is provided training, data, software, or some other intellectual property that enhances its knowledge and capabilities in a specific technological area. The second way is technology collaboration, a two-way transfer of technology in which the companies typically share intellectual property to develop a specific product or technology. In either case, since technology is being transferred out of the United States and into a foreign country, that technology or intellectual property may be subject to ITAR or EAR. If the technical data are inherently military or can be applied to a military platform in the recipient country, they will be subject to ITAR and their transfer (or their use in a collaboration) will require a review and license from the Department of State. If the technical data are dual-use, military and commercial, then they will typically be subject to EAR and will require a review and license from the Department of Commerce. The type of license required will depend on whether the technical data are a permanent or temporary export/import and whether the service provided constitutes technical or manufacturing assistance. Either set of

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Globalization of Materials R&D: Time for a National Strategy regulations (ITAR or EAR) can impact the extent to which a transfer or collaboration across borders takes place. The greatest impact would be if the transfer or collaboration is denied. A denial might be the result of U.S. government disclosure policy relative to a specific country in which the offset is proposed or of the category in which the technical activity falls, or of a combination thereof. Even if a license is awarded, provisos or limitations are usually placed on the offset activity that can greatly constrain the technology transfer or collaboration. These licenses and provisos can impede global research activities by inhibiting the necessary sharing of intellectual property and results of the research with those in the collaboration. Typically, the process to secure a license through the Department of State or the Department of Commerce is lengthy. This may delay progress and increase costs, squandering the leverage gained by collaboration. In addition, since most of these licenses are very specific about the technical activity that can be performed, any deviation from the description in the license would require another license to be obtained. Critics say that because the path often is not clear when the first step of the R&D is taken, these regulations limit the creativity and robustness generally expected in a vibrant R&D program. Tariffs Free trade agreements, whose proponents extol the benefits of lowering or limiting tariffs to trade, have proliferated over the past few years. It is estimated that several hundred such agreements now exist. U.S. law does not typically impose tariffs on imports of technology. However, to the extent that a U.S. company has assisted a foreign supplier by providing technology or data or services that are integrated into the item to be imported, that “assist” is valued in determining a tariff. In general, however, tariffs are not considered a barrier to the global conduct of R&D as they do not come into play until actual commodities are moved across borders. INTELLECTUAL PROPERTY LAW Intellectual property (IP) rights are government-granted and -protected rights in innovation and creativity. Because IP rights are creatures of geography, that is, they are national in scope, the protection and enforcement afforded can vary considerably from country to country. Performing R&D outside the United States therefore risks that IP created or used in that activity might not be respected, and that the rights in it could not be enforced effectively to the extent that they are under U.S. law. Early international agreements did not resolve these concerns. For

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Globalization of Materials R&D: Time for a National Strategy example, the Paris Convention of 1883 protects against trademark and patent infringement but does not mandate any substantive intellectual property standards in local law. The Berne Convention of 1886, which provides protection against copyright infringement, does not provide any legal remedy for infringements. In recent years, the situation has begun to change. The World Intellectual Property Organization (WIPO) was formed in 1974 as an agency of the United Nations with a charter to promote the protection of intellectual property throughout the world and facilitate the transfer of technology from developed to developing countries. The Trade Related Aspects of Intellectual Property Rights accord (TRIPS), signed on April 5, 1994, provides for a number of protections and obligations relating to intellectual property. Among other things, it (1) incorporates the substance of the Paris and Berne conventions and (2) requires (a) that member countries of the World Trade Organization have certain minimum protections in their local laws and (b) that those protections apply equally to nationals of other member countries. Despite these changes, differences remain, and even in countries with well-established intellectual property regimes, differences in laws can affect the decision whether to do R&D in the United States or abroad. As an example, the laws in various European countries impose compulsory licensing obligations on patent holders who do not “work” an invention—that is, manufacture a patented product or practice a patented process within a certain period after patenting. Similarly, compulsory licenses can be required in certain countries in situations involving dominant, or blocking, patents and where such licenses are deemed to be consistent with the national interest. U.S. law can limit the ability of domestic companies to rely on materials research conducted abroad. One of the main categories of limitations arises under U.S. patent law, Chapter 35 U.S.C. The patent laws generally provide a patentee with the right to exclude others from making, using, offering to sell, or selling any patented invention within the United States or importing into the United States any patented invention.1 There is no exemption under U.S. law for the use of patented materials or processes in R&D connected to commercial activity.2 The fact that research was carried on in a country where the work did not infringe another party’s IP rights3 does not provide an exception to the U.S. patent laws. 1   35 U.S.C. § 271(a). 2   Cases interpreting the patent statutes have established a limited experimental use exception for such use not connected with commercial activity. 3   This would be so, for example, where no patents covering the activity had been issued in that country.

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Globalization of Materials R&D: Time for a National Strategy Therefore, the results of R&D activities conducted abroad in a country where no patent covered such work might still infringe a U.S. patent owner’s rights if the results are utilized in the United States. However, infringement is limited to physical goods manufactured by a patented process and does not extend to information derived from such a patented process. In addition, under U.S. patent law, importation and use of a material made abroad by a process covered by a U.S. patent can itself constitute an infringement of the process patent, regardless of whether the alloy or material itself was a patented composition.4 TAX POLICY The so-called Section 41 R&D tax credit is intended to serve as an incentive for the conduct of certain types of product development research activities and certain basic research. The credit is an incremental credit equal to the sum of 20 percent of the excess of qualified research expenditures for the taxable year over a base amount and 20 percent of basic research payments. Qualified research expenses include in-house expenses for wages paid and supplies used in the conduct of qualified research and 65 percent (75 percent in certain instances) of any contract expenses for qualified research. An alternative three-tiered research tax credit is available to generate higher research credits for companies with dramatically increasing sales figures or otherwise stagnant research expenditures. In 1988, the U.S. Congress supported the Section 41 R&D tax credit when it stated: “Research is the life-blood of our economic progress and effective tax incentives for research and development must be a fundamental element of America’s competitive strategy.”5 Supporters of the tax credit justify it because of the economic growth and productivity gains that come from a combination of technical progress and the associated investments in tangible capital assets, R&D, human capital, and public infrastructure. Under Section 41, only those costs associated with research performed within the United States are eligible for the credit, and the majority of the expenses claimed are for wages paid to U.S. employees. On October 4, 2004, President Bush signed into law the Working Families Tax Relief Act of 2004, which extended the Section 41 R&D tax credit retroactively, from after June 30, 2004, through December 31, 2005. 4   Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent (35 U.S.C. § 271(g)). 5   H.R. Rep. No. 100-1104 (1988), Conference Report on the Technical and Miscellaneous Revenue Act of 1988, at 88.

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Globalization of Materials R&D: Time for a National Strategy OTHER REGULATORY REGIMES The regulatory regimes above are thought to be the regimes most likely to influence corporate decisions related to the globalization of R&D. There are, however, other regulations that impact the execution of R&D. These are summarized below. Immigration Since the terrorist attacks of September 11, 2001, the requirements of entry procedures for foreign visitors and their enforcement have been tightened, with unintended consequences for American science, engineering, and medicine. According to evidence collected from the U.S. scientific community on behalf of the Presidents of the National Academies,6 ongoing research collaborations have been hampered; outstanding young scientists, engineers, and health researchers have been prevented from or delayed in entering this country; and important international conferences have been canceled or negatively impacted. The United States has benefited enormously from the influx over the years of foreign-born scientists and engineers whose talents and energy have driven many of its advances in scientific research and technological development. In addition, the influx of foreign talent has increased the diversity of the U.S. research community, giving it an advantage in terms of identifying and applying new technologies from around the world. Foreign students are essential for much of the federally funded research carried out at academic laboratories. International conferences, collaborative research projects, and the shared use of large experimental facilities are essential for progress at the frontiers of these areas. The ongoing annual shortage of H1-B specialty worker visas is a concern for the high-technology sector. Further, as already seen, the MSE field is heavily reliant on foreign graduate students. Environmental and Safety and Health Standards Assuring environmental and health and safety compliance and the associated risk-reduction efforts is a challenge for U.S. industry.7 Statutes, regulations, and 6   See statement Current Visa Restrictions Interfere with U.S. Science and Engineering Contributions to Important National Needs, Bruce Alberts, President, National Academy of Sciences, Wm. A. Wulf, President, National Academy of Engineering, and Harvey Fineberg, President, Institute of Medicine, December 13, 2002 (revised June 13, 2003). 7   Appendix G provides a brief but detailed overview of environmental, and health and safety regimes described in lesser detail here.

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Globalization of Materials R&D: Time for a National Strategy requirements established by international, federal, state, regional, and local agencies seek increasingly detailed reporting. Regulatory enforcement is also on the rise. Poor environmental and health and safety performance can have a significant impact on the bottom line as well as on customer and public perception. It is important to understand which materials, processes, and equipment are or will be subject to environmental- or health/safety-driven limitations. This is especially critical for proprietary and R&D programs. Environmental regulations may sometimes exempt laboratory operations and R&D activities, but these exemptions typically do not apply when the activity is transitioned to production. In addition, waste, wastewater, air emissions, worker exposure, and so on from these activities must still meet local, state, and federal regulatory requirements and customer requirements. International restrictions are becoming more important as the global market expands and product customers are found throughout the world. The United States is also bound by international treaties such as the Montreal Protocol,8 which may impose additional and, at times, more stringent restrictions than those already in force here. Relevant regimes on the environmental side include the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA), and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Other laws to be aware of include the Emergency Planning and Community Right-to-Know Act (EPCRA), the Superfund Amendments and Reauthorization Act (SARA), the Toxic Substances Control Act (TSCA), and the National Environmental Policy Act (NEPA). On the health and safety side, the Occupational Safety and Health Administration (OSHA) promulgates standards, rules, and regulations for specific activities as well as hazardous and other material usage. For more information on these regulatory regimes, see Appendix G. Product Approval Regulation Materials approval regulation is defined herein as the collective body of documented criteria that dictate acceptability of materials from the standpoint of the product user. Such documentation typically takes the form of a published specification that serves as a common standard. These specifications can establish standards for “form” (composition, shape, and processing used during manufacture) and “function” (performance during intended use). Specifications are generated 8   The Montreal Protocol on Substances That Deplete the Ozone Layer is an international agreement designed to protect the stratospheric ozone layer by controlling the production and consumption of compounds such as chlorofluorocarbons, halons, carbon tetrachloride, and methyl chloroform.

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Globalization of Materials R&D: Time for a National Strategy by corporations, industries, governmental agencies, and international organizations. The materials specifications most relevant to global discussions are those controlled by international organizations, such as the Society for the Advancement of Material and Process Engineering, the Society of Automotive Engineers, the International Organization for Standardization, ASM International, and ASTM International. R&D of materials for use by the U.S. military must consider the acceptance criteria of the end user—one or more branches of the Air Force, Navy, Marines, and Army. These entities have authority over the materials requirements of the weapons systems manufactured by industry. Before either original equipment manufacturers (OEMs) or end users can implement a novel material on a defense product, the materials must be proven to conform to military specifications, commonly denoted by the prefix MIL. OEMs sometimes establish their own material specifications to suit the unique needs of a weapon manufacturer. Both OEM and MIL specifications routinely reference specifications owned by international organizations. Sometimes conformance to an OEM or MIL specification is not required, but industry convention or company demand for standardization will drive the use of materials organization specifications. Materials that successfully meet all stated requirements are generally added to a qualified products list (QPL). Items on the QPL for a given material specification are then deemed acceptable by the end user. The trend with the most far-reaching impact in the context of this report is the increasing reliance upon standards with a more global reach. As multiple tiers of international suppliers work in concert to deliver specialized components for highly sophisticated finished products, common materials specifications are necessary to communicate standards throughout a complex, networked supply chain. Because it would result in fewer total procedures, the standardization of specifications could foster greater efficiency. SUMMARY In summary, this chapter has provided a snapshot of some of the regulatory regimes most relevant to the decision-making process associated with the globalization of R&D. The importance of these regimes as a driver of decisions by industry, government, and academia on locating R&D is likely to vary from decision to decision. It seems clear, however, that questions about the security of IP developed abroad, whether the export license process will hinder the execution of an R&D program, whether workers will be available to carry out the research, and what tax incentives might be in place in the locales under consideration would have to be answered in any thorough decision-making process. It is unlikely, however, that

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Globalization of Materials R&D: Time for a National Strategy any single issue would be the sole determinant of the location of an R&D activity. Nevertheless, it is incumbent on the makers of public policy to make sure that as R&D becomes more global, U.S. researchers are not unreasonably impeded from taking part in international activities of national importance.