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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment 5 Findings and Recommendations The U.S. information technology (IT) research and development ecosystem was the envy of the world in 1995, and it remains unquestionably the strongest today. However, this position of leadership is not a birthright. U.S. leadership has been under pressure on several fronts, and leadership cannot be sustained without renewal.1 In recent years, the rapid globalization of markets, labor pools, and capital flows has helped enable the rise of many strong national competitors. It has created tremendous new opportunities, but globalization also means that the United States will have to work even harder to remain the world leader in IT R&D. Meanwhile, national policies have not always risen to the challenge (such as in IT education and federal funding for research) or have generated unintentional side effects that have reduced the IT R&D ecosystem’s effectiveness (for example, as a result of regulations that affect the corporate overhead and competitiveness of innovative IT companies). Thus, the need has never been greater for the nation to recommit itself to providing 1 These observations are corroborated by a recent report by the RAND Corporation that compares claims of a decline in U.S. global science and technology (S&T) leadership in recent literature with relevant data up to 2006. The RAND report concludes that the United States continues to perform “at or near the top in many measures of S&T leadership, [but that] this leadership must not be taken for granted” and recommends that institutions and incentives integral to the creation and performance of S&T discoveries be sustained and, when necessary, adapted to the changing global economy. See Titus Galama and James Hosek, U.S. Competitiveness in Science and Technology, RAND Corporation, Santa Monica, Calif., 2008, p. xxiv, available at http://www.rand.org/pubs/monographs/MG674/; accessed November 20, 2008.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment the resources needed to fuel U.S. IT innovation, to mitigate unintended negative consequences from laws and regulations, and to continue to be a nation of lead innovators and users of IT. The findings and recommendations of the committee presented in the sections below are organized according to four broad objectives. The numbering of the objectives and the related numbering of the findings and recommendations reflect the logical flow of the arguments, not necessarily temporal or other priorities. The objectives are as follows: Objective 1. Strengthen the effectiveness and impact of federally funded information technology research. Objective 2. Remain the strongest generator of and magnet for technical talent. Objective 3. Reduce friction that harms the effectiveness of the U.S. information technology R&D ecosystem, while maintaining other important political and economic objectives. Objective 4. Ensure that the United States has an infrastructure for communications, computing, applications, and services that can enable U.S. information technology users and innovators to lead the world. OBJECTIVE 1. STRENGTHEN THE EFFECTIVENESS AND IMPACT OF FEDERALLY FUNDED INFORMATION TECHNOLOGY RESEARCH Advances in information technology have transformed our lives, powered our economy, and changed the conduct of science and engineering (see Chapter 2). The field of IT is relatively nascent, however, and even greater opportunities lie ahead—provided that IT research is adequately funded. The federal government plays a key role in this regard (see Chapter 4). The importance of federal investment in scientific research was underscored emphatically in a recent report of the National Academies, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future,2 which was followed by the administration’s American Competitiveness Initiative and passage of the America COMPETES Act of 2007.3 A strong case has also been made over the years for investment in IT in particular. A 1995 report of the National Research Council’s (NRC’s) 2 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, The National Academies Press, Washington, D.C., 2007. 3 The America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act (America COMPETES Act) became Public Law 110-69 on August 9, 2007.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment Computer Science and Telecommunications Board (CSTB), Evolving the High Performance Computing and Communications Initiative to Support the Nation’s Information Infrastructure, concluded that “federal investment in information technology research has played a key role in the U.S. capability to maintain its international lead in information technology.”4 The “tire tracks” diagram used in that report (and updated in CSTB’s 2003 Innovation in Information Technology5), reproduced as Figure 2.1 in Chapter 2 of this report, compellingly illustrates the critical role that government-funded research, in combination with industry R&D, has played in the establishment of U.S. industries with annual revenues of over $1 billion. Federal investment in fundamental research in information technology has been crucial to the development of the billion-dollar industries that maintain America’s leadership in this critical field.6 Finding 1.1. A robust program of federally sponsored research and development (R&D) in information technology (IT) is vital to the nation. Advances in information technology and its applications have played a central role in fueling the success of U.S. scientific, engineering, business, and governmental communities in the past 50 years. Information technology has transformed and continues to transform all aspects of life in the United States: commerce, education, employment, health care, manufacturing, government, national security, communications, entertainment, science, and engineering. Information technology also drives the U.S. economy—both directly (the IT sector itself) and indirectly (other sectors that are “powered” by advances in IT). In short, leadership in information technology is vital to our nation. A number of reports of the NRC’s Computer Science and Telecommunications Board have examined the U.S. IT innovation system. Their 4 National Research Council, Evolving the High Performance Computing and Communications Initiative to Support the Nation’s Information Infrastructure, National Academy Press, Washington, D.C., 1995, p. 3. 5 National Research Council, Innovation in Information Technology, The National Academies Press, Washington, D.C., 2003. 6 See National Research Council, Evolving the High Performance Computing and Communications Initiative to Support the Nation’s Information Infrastructure, National Academy Press, Washington, D.C., 1995; and National Research Council, Innovation in Information Technology, The National Academies Press, Washington, D.C., 2003. Note that the federal R&D investment is only a fraction of the total R&D investment required to launch a new product, market, or industry, but it provides essential, high-risk seed money. In return, although returns to any individual investment are by no means guaranteed, the tax income to the federal government from billion-dollar industries can vastly exceed the federal research investment.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment key findings were recapped in the 2003 report Innovation in Information Technology, which contained the following observations: America’s international leadership in IT—leadership that is vital to the nation—springs from a deep tradition of research…. The success of the IT research enterprise reflects a complex partnership among government, industry, and universities…. The federal government has had and will continue to have an essential role in sponsoring fundamental research in IT—largely university-based—because it does what industry does not and cannot do…. Industrial and governmental investments in research reflect different motivations, resulting in differences in style, focus, and time horizon…. Past returns on federal investments in IT research have been extraordinary for both U.S. society and the U.S. economy…. Priming that pump for tomorrow is today’s challenge.7 Finding 1.2. The level of federal investment in fundamental research in information technology continues to be inadequate. As noted in Chapter 4, the 1999 report of the President’s Information Technology Advisory Committee (PITAC), Information Technology Research: Investing in Our Future,8 described the level of federal investment in IT R&D at that time as “dangerously inadequate” and argued for a doubling of that investment over a period of 5 years. Through efforts coordinated by the National Coordination Office for Networking and Information Technology Research and Development (NITRD), the federal government set out to achieve that goal. However, funding by the NITRD participating agencies soon fell short of the annual targets set by PITAC and 9 years later has not reached the recommended doubling of the IT R&D budget.9 7 National Research Council, Innovation in Information Technology, The National Academies Press, Washington, D.C., 2003, pp. 2-4. 8 President’s Information Technology Advisory Committee (PITAC), Information Technology Research: Investing in Our Future, Report to the President, February 24, 1999, “Executive Summary,” available at http://www.nitrd.gov/pitac/report/exec_summary.html, accessed June 27, 2007; see also from the same report: Section V, “Creating an Effective Management Structure for Federal IT R&D,” available at http://www.nitrd.gov/pitac/report/section_5.html; accessed June 27, 2007. 9 As noted in Chapter 4, this pattern mirrors a broader underinvestment in the physical sciences and engineering highlighted in two recent National Academies studies: National Academy of Engineering, Engineering Research and America’s Future: Meeting the Challenges of a Global Economy, The National Academies Press, Washington, D.C., 2005; and National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, The National Academies Press, Washington, D.C., 2007.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment The committee believes that the level of federal investment in information technology research remains inadequate. Indeed, in the 9 years since the PITAC report, the role of IT in all aspects of the life of this nation—from entertainment to commerce to health care to national security—has grown dramatically. At the same time, globalization has expanded dramatically, leading to increasing specialization and pushing the United States to move higher up the value chain, a position that is more R&D-intensive. Short-term competitive pressures on U.S. IT firms have increased dramatically, with the result that few companies are investing in long-term R&D and most high-impact industrial research laboratories are gone. Recommendation 1.1. As the federal government increases its investment in long-term basic research in the physical sciences, engineering, mathematics, and information sciences, it should carefully assess the level of investment in IT R&D, mindful of the economic return, societal impact, enablement of discovery across science and engineering, and other benefits of additional effort in IT, and should ensure that appropriate advisory mechanisms are in place to guide investment within the IT R&D portfolio. The committee’s analysis of the opportunities in the expanding IT economy, the global competition faced by the United States, and the critical foundation that the federal investment in IT R&D provides for a broad range of economically and socially important IT applications convinced it that the nation’s research base is inadequate and that additional investment is needed. It is difficult to estimate how much should be invested in IT R&D, in part because that estimate must take into account the alternatives for that investment. Looking more broadly at federal R&D investment, the 2007 study Rising Above the Gathering Storm made the following recommendation: Increase the federal investment in long-term basic research by 10 percent each year over the next seven years through reallocation of existing funds, or, if necessary, through the investment of new funds. Special attention should go to the physical sciences, engineering, mathematics, and information sciences and to Department of Defense (DOD) basic-research funding.10 10 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, The National Academies Press, Washington, D.C., 2007, pp. 136-137.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment A detailed discussion of the rationale and supporting evidence for the recommendation are presented in that report.11 Looking at how to establish priorities within the federal research portfolio, the 1993 study Science, Technology, and the Federal Government: National Goals for a New Era argued that “the United States should be among the world leaders in all major areas of science” but that some differentiation was necessary: in some fields it was sufficient to be “among the world leaders,” but in others “the United States should maintain clear leadership.” The 1993 study went on to note criteria that would call for clear leadership in a field: The field is demonstrably and tightly coupled to national objectives that can be met only if U.S. research performers are clear leaders. For example, the field of condensed-matter physics drives technological advances in such industrial sectors as microelectronics, advanced materials, and sensors. The field so captures the imagination that it is of broad interest to society. An example in astronomy is the recent detection of differences in the cosmic background radiation related to the creation of the universe. The field affects other areas of science disproportionately and therefore has a multiplicative effect on other scientific advances, especially those where clear leadership is the objective. For example, molecular biology is critical to advances in health care, biotechnology, agriculture, and industrial processes.12 Building on the 1993 study, the 2005 National Academy of Engineering study Engineering Research and America’s Future: Meeting the Challenges of a Global Economy included the following recommendation: The committee strongly recommends that the federal R&D portfolio be rebalanced by increasing funding for research in engineering and physical science to levels sufficient to support the nation’s most urgent priorities, such as national defense, homeland security, health care, energy security, and economic competitiveness. Allocations of federal funds should be determined by a strategic analysis to identify areas of research in engineering and science that support these priorities….13 The Committee on Assessing the Impacts of Changes in the Infor- 11 Ibid., Ch. 6, especially pp. 136-143. 12 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Science, Technology, and the Federal Government: National Goals for a New Era, National Academy Press, Washington, D.C., 1993, pp. 18-20. 13 National Academy of Engineering, Engineering Research and America’s Future: Meeting the Challenges of a Global Economy, The National Academies Press, Washington, D.C., 2005, p. 4.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment mation Technology Research and Development Ecosystem is persuaded that an evaluation of the government’s research priorities, which will be required to implement the research investment growth recommended in Rising Above the Gathering Storm, will show that the economic return and other benefits of additional effort in IT justify a significant increase in this field. This evaluation merits the attention of first-tier scientists and engineers from academia, industry, and government. The mechanism for capturing and conveying such advice also merits attention. The High-Performance Computing Act of 1991 (Public Law 102-194) was enacted to “provide for a coordinated Federal program to ensure continued United States leadership in high-performance computing,” reflecting information technology’s vital role in the economy, national security, and science. Among its provisions is the establishment of a high-performance computing advisory committee to provide an independent assessment of the program, including “whether the research and development undertaken pursuant to the program is helping to maintain the United States leadership in computing technology.” That advisory committee was first convened in 1997 and named the President’s Information Technology Advisory Committee. Its charter was augmented by the Next Generation Internet Research Act of 1998 (Public Law 105-305). In 2005, instead of reauthorizing PITAC, the administration decided that the PITAC mission would be assumed by the President’s Council of Advisors on Science and Technology (PCAST), which established a 12-member subcommittee to consider networking and IT. Should the executive and/or legislative branches concur that an increased (or retargeted) focus on IT R&D investment is warranted, reconsideration of what federal advisory mechanisms would be most useful may also be warranted. The committee believes that it would be important to include first-tier IT researchers from academia and industry in any future advisory group. OBJECTIVE 2. REMAIN THE STRONGEST GENERATOR OF AND MAGNET FOR TECHNICAL TALENT The IT professions are fast-paced, highly creative, and challenging; they often require specialized skills and advanced education. Although strong demand for IT workers is projected in the United States, there is growing concern about the development of IT talent.14 Despite the 14 The recent RAND report on U.S. competitiveness identified similar concerns, noting weaknesses in the U.S. kindergarten through grade 12 education system with respect to preparing students in the area of science and technology or attracting sufficient numbers of U.S. students to scientific careers in research or industry. See Titus Galama and James Hosek, U.S. Competitiveness in Science and Technology, RAND Corporation, Santa Monica, Calif., 2008, p. xxiii, available at http://www.rand.org/pubs/monographs/MG674/; accessed November 20, 2008.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment demand for IT workers, the number of students specifying an intention to major in computing and information sciences has dropped significantly in the past 6 years.15 The composition of the IT workforce is also a cause for concern. The participation of women, persons with disabilities, and certain minorities such as African-Americans, Hispanics, and Native Americans is rising overall in other science, technology, engineering, and mathematics fields. In computing, however, the participation of underrepresented groups is especially low, and is even declining.16 The trends described above have a direct effect on employers’ ability to hire IT professionals—with some IT professional areas, such as senior programmers and systems analysts, being of more concern than others.17 An excess demand for talent is also felt, perhaps most acutely, in federal agencies such as the Department of Defense that have specialized IT needs and requirements for particular personnel (for example, people who can be granted security clearances).18 Finding 2.1. Rebuilding the computing education pipeline at all levels requires overcoming numerous obstacles, which in turn portends significant challenges for the development of future U.S. IT workforce talent. Concerns about the generation of talent are exacerbated by the poor state of the U.S. IT/computing education system for kindergarten through grade 12 (K-12). In its report The New Educational Imperative: Improving High School Computer Science Education, the Computer Science Teachers Association correctly assesses the situation as one in which knowledge of computer science is as essential as knowledge of any of the traditional sci- 15 National Center for Women and Information Technology data, as derived from the College Board, 2006 College Bound Seniors: Total Group Profile Report, 2006, available at http://www.collegeboard.com/prod_downloads/about/news_info/cbsenior/yr2006/national-report.pdf; accessed July 2, 2007. 16 The National Science Foundation (NSF) Broadening Participation in Computing program intends to increase the number of U.S. citizens and permanent residents receiving postsecondary degrees in computing disciplines, with emphasis on students from communities (women, persons with disabilities, and selected minorities) with “longstanding underrepresentation.” Information is available at http://www.nsf.gov/funding/pgm_summ.jsp?pims_id=13510&org=NSF&sel_org=NSF&from=fund; accessed March 27, 2008. 17 National Center for Women and Information Technology data, as derived from Society for Information Management, The Information Technology Workforce: Trends and Implications 2005-2008. 18 See, for example, the discussions of shortfalls in software expertise in National Research Council, Summary of a Workshop on Software-Intensive Systems and Uncertainty at Scale, The National Academies Press, Washington, D.C., 2007.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment ences, but in which curriculums, leadership, funding, professional development for teachers, and fluency objectives for students are all deficient (see the discussion in Chapter 4, in the subsection entitled “Concerns About K-12 IT/Computing Education and Talent Generation”).19 Enrollment is dropping because students, parents, guardians, and school counselors do not understand that computing is a discipline focused on solving real problems, nor that computing is a foundational and broad science. In addition, in most public schools, computing is an elective—students (especially advanced placement and college-bound students) have packed schedules and often do not have the time to take electives. It is likely that the recent emphasis on standardized testing in core areas is also pulling funding and teachers away from computing. Finding 2.2. The participation in IT of women, people with disabilities, and certain minorities, including African-Americans, Hispanics, and Native Americans, is especially low and is declining. This low level of participation will affect the ability of the United States to meet its workforce needs and place it at a competitive disadvantage by not allowing it to capitalize on the innovative thinking of half of its population. The National Academies’ Rising Above the Gathering Storm included the following recommendation: Make the United States the most attractive setting in which to study and perform research so that we can develop, recruit, and retain the best and brightest students, scientists, and engineers from within the United States and throughout the world.20 The committee supports this general recommendation. It further believes for the following reasons that IT warrants special emphasis within the broad science, technology, engineering, and mathematics (STEM) umbrella as the federal agencies begin to implement the America COMPETES Act of 2007: 19 Computer Science Teachers Association, The New Educational Imperative: Improving High School Computer Science Education, available at http://csta.acm.org/; accessed August 27, 2007. For an early assessment of fluency issues, see National Research Council, Being Fluent with Information Technology, National Academy Press, Washington, D.C., 1999. 20 National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, The National Academies Press, Washington, D.C., 2007, p. 9.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment Computing is a foundational science to all other STEM disciplines. Computing is foundational to recent U.S. productivity gains. Computing is increasingly a critical business infrastructure of most major corporations. There is a growing demand for IT workers. Further, as indicated below, the K-16 computing education pipeline is showing signs of significant stress: Enrollments in postsecondary 4-year degree programs have been dropping over the past 6 years. Unlike most STEM disciplines, computing is an elective in almost all K-12 curriculums, causing students to leave high school with little or no exposure to the discipline; they may have mastered computing literacy (or usage) but not fluency. Computing has one of lowest rates of participation by underrepresented groups of any of the STEM disciplines. Against this backdrop, the committee makes the following recommendation, focusing specifically on information technology: Recommendation 2.1. To build the skilled workforce that it will need to retain high-value IT industries, the United States should invest more in education and outreach initiatives to nurture and increase its IT talent pool. The America COMPETES Act of 2007 contains a number of initiatives to create and bolster a diversity of STEM education programs in the United States. This is good news if the initiatives are funded and carried out effectively. However, too often the “T” (technology) component of STEM with respect to IT can be misunderstood as signifying merely teaching students to use computers, or making sure that schools are wired for the 21st century. Agencies implementing this legislation should take special care to ensure that computer science and IT instruction are not overlooked in favor of those disciplines that the broader population better understands.21 There has been much debate over how many U.S. IT jobs (and U.S. jobs more generally) can and will be sent offshore. Methodologies for such studies are complex and inconsistent—they use different data sets, differ- 21 With respect to implementation processes, a useful resource might be the comprehensive look at science education standards found in National Research Council, National Science Education Standards, National Academy Press, Washington, D.C., 1996.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment ent views of what IT practitioners and researchers do (and hence what can be compartmentalized and offshored), and different time frames. Trying to match projected “offshorable” jobs to suitable labor supply in developing countries is like gazing into a crystal ball. A recent report that focused on the globalization and offshoring of software concluded: While offshoring will increase, determining the specifics of this increase [is] difficult given the current quantity, quality, and objectivity of data available. Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations.22 One thing is clear—the global search for talent in IT is a fact of life, and it is changing the way that firms innovate, the way that firms staff IT development teams, and the overall nature of the U.S. workforce. In fact, viewing the dynamic IT R&D ecosystem as merely one of outflows and inflows may be too limiting.23 It does not really matter if one subscribes to the view that offshoring will have an evolutionary rather than a revolutionary effect on the United States or the view that offshoring’s negative impact in the United States will quickly escalate. The United States cannot be complacent about offshoring or about declining enrollments in IT-related fields. Finding 2.3. Although some IT professional jobs will be offshored, there are more IT jobs in the United States than at any time during the dot-com boom, even in the face of corporate offshoring trends. Many have pointed out a recent surge in the number of U.S. computer science doctorates awarded. On closer examination, it becomes clear that this otherwise encouraging phenomenon is almost entirely due to increases in the number of degrees awarded to non-U.S. students.24 Many 22 Association for Computing Machinery Job Migration Task Force, Globalization and Offshoring of Software: A Report of the ACM Job Migration Task Force, W. Aspray, F. Mayadas, and M. Vardi eds., Association for Computing Machinery, New York, N.Y., 2006. 23 AnnaLee Saxenian argues that we should look at this search for talent as “brain circulation” and not “brain drain.” She believes that a new type of global talent, which she calls the new “Argonauts,” is undermining the old pattern of one-way flows of talent. These “Argonauts” go where they can participate in the best educational or wealth creation opportunities; they are creating a richer and decentralized flow of skill, capital, and technology. See AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy, Harvard University Press, Cambridge, Mass., 2006. 24 National Science Foundation (NSF) Division of Science Resources Statistics (SRS), “S&E [Science and Engineering] Doctorate Awards: 2005,” available at http://www.nsf.gov/statistics/nsf07305/; accessed November 20, 2008.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment of these students go on to apply for work visas in the United States or for green cards. Many are turned away because of immigration policies and quotas, despite the fact that the United States has already invested large amounts of money and resources toward their education. In addition, many IT employers have expressed frustration about this state of affairs. Immigrants have been especially significant in high-technology entrepreneurship; for at least one-quarter of the U.S. engineering and technology companies started between 1995 and 2005, mostly in software and innovation/manufacturing-related services (“electronics, computer and hardware design and service companies in addition to engineering services, research and testing”),25 at least one of the key founders was born outside the United States (see Chapter 1). Recommendation 2.2. The United States should increase the availability and facilitate the issuance of work and residency visas to foreign students who graduate with advanced IT degrees from U.S. educational institutions. OBJECTIVE 3. REDUCE FRICTION THAT HARMS THE EFFECTIVENESS OF THE U.S. INFORMATION TECHNOLOGY R&D ECOSYSTEM An emerging pattern of inefficiencies in the U.S. IT R&D ecosystem could, over time, hurt the health and competitiveness of the U.S. ecosystem. Symptoms of frictions can be found by examining the data on technology company initial public offerings (IPOs), technology company mergers and acquisitions (M&As), and overall venture capital activity during the 1995-2007 period. There has been a meaningful decline in the numbers of technology IPOs in the United States and a trend toward M&As as the preferred exit strategy for start-up firms (see in Chapter 4 the section entitled “Frictions in the U.S. IT R&D Ecosystem”). While M&As have become the preferred exit of U.S. IT companies, the M&A environment for IT companies has been stable, but flat. As a consequence of fewer IPOs and a shift toward M&A exits, the returns to venture capital funds from their IT investments have declined sharply over the period examined in this study. Finding 3.1. Fewer young, innovative IT companies are gaining access to U.S. public equity markets. 25 Vivek Wadhwa, AnnaLee Saxenian, Ben Rissing, and Gary Gereffi, “America’s New Immigrant Entrepreneurs: Part 1,” Duke Science, Innovation, and Technology Paper No. 23, January 4, 2007, p. 19, available at http://ssrn.com/abstract=990152; accessed December 26, 2007.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment The reasons that may explain this decline in technology IPOs and in returns from IT venture investments are multiple and hard to quantify. Nevertheless, the committee believes that they are, at least in part, symptoms of an added friction in the U.S. IT R&D ecosystem. There is no way to interpret in a favorable light the sharp decline in the number of IT companies reaching the IPO milestone. Although reaching an IPO is not a guarantee of long-term future success, IT companies that do not have the opportunity to tap public equity markets will not have the capital required to grow into major industry players and to contribute meaningfully to the creation of high-quality jobs in the United States. Over the years, new laws and regulations have been introduced that appear to have had negative, unanticipated, and unwanted side effects on the effectiveness of the U.S. IT R&D ecosystem. Moreover, there are indications that older laws and regulations have not been fully adapted to the changing realities of a globalized IT environment that is based on new technological platforms and new innovation methods. As one example, a major source of friction for young IT companies is the current U.S. patent system. Patents have been more actively acquired and vigorously enforced in recent years.26 Firms are facing dramatically increased hazards of litigation as plaintiffs and even more rapidly increasing hazards as defendants (see Chapter 4).27 The sharply increased probability of being sued implies an increase in the “tax” per R&D dollar that litigation imposes on innovation. Small firms face much higher marginal enforcement costs and marginal taxes on R&D. As the U.S. IT R&D ecosystem has become far more contentious, the cost of protecting and defending intellectual property is undergoing rapid inflation. The long-term effects of this phenomenon may be more pernicious, in terms of the costs of protecting an invention, the costs of defending against an infringement claim, and the size of damages awarded, relative to the contribution of an infringed patent. Taken together, these trends may have a stifling effect on young IT companies, especially those just bringing products to market, that have limited funds and no patent portfolios for use in cross-licensing agreements or as the basis for countersuits. These companies run a greater 26 National Research Council, A Patent System for the 21st Century, The National Academies Press, Washington, D.C., 2004, p. 19. 27 According to Bessen and Meurer, the number of patent lawsuits filed annually in the United States doubled during the 1990s, from almost 800 in 1990 to almost 1,600 in 1999; their research also “suggests that patent litigation can affect innovation incentives.” James Bessen and Michael Meurer, “The Patent Litigation Explosion,” paper presented at the American Law and Economics Association Annual Meeting, 2005, p. 1, available at http://papers.ssrn.com/sol13/Papers.cfm?abstract_id=831685#PaperDownload; accessed March 6, 2008. For litigation hazard findings, see ibid., Table 2.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment risk today of never acquiring sufficient intellectual property protection and mustering enough legal resources to withstand costly and lengthy litigation. Key elements of a successful reform of the U.S. patent litigation system might include the following: Clear standards for forum selection that curtail the ability of plaintiffs to file infringement actions in “plaintiff-friendly” jurisdictions; Reforms that direct courts to calculate the awards of royalties or damages on the basis of the proportionate value of the patentee’s contribution to the product in question rather than on the full value of the entire product; Provisions of current law that have never been interpreted to permit the recovery of worldwide damages in U.S. courts; Standards governing awards of multiple damages for willfulness; and Additional reforms, as necessary, to curtail practices that are a drain on innovation. Another source of friction is that corporate-governance reform legislation has had unexpected consequences for start-up firms. Historically, initial public offerings have been one of the important exits for venture firms. The Sarbanes-Oxley Act of 2002 (Public Law 107-204), called SOX, and in particular its Section 404, were passed in response to corporate scandals at several large companies, in order to improve the quality of corporate governance among U.S. publicly traded companies and to reduce the risks of financial fraud. However, the type of firm for which SOX was designed was a multi-billion-dollar, multinational corporation listed on U.S. exchanges—not a sub-$100 million technology company seeking to grow rapidly. Yet under SOX, these smaller firms are subject to the same regulations created for the large firms, and the costs of compliance are disproportionate. As a result, it is harder for new, small firms to grow into new major industry players by tapping public equity markets. Recommendation 3.1. Congress and federal agencies such as the Securities and Exchange Commission and the Patent and Trademark Office should consider the impact of both current and proposed policies and regulations on the IT ecosystem—and especially on young, innovative IT businesses—and consider measures to mitigate these where appropriate.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment OBJECTIVE 4. ENSURE THAT THE UNITED STATES HAS AN INFRASTRUCTURE THAT CAN ENABLE U.S. INFORMATION TECHNOLOGY USERS AND INNOVATORS TO LEAD THE WORLD IT innovation no longer happens only in university or corporate laboratories. Customer-created value is increasingly prominent: IT consumers are leveraging research, innovating, and creating value by combining networking hardware, software, and devices into novel solutions and businesses (see Chapter 3). In the mid-1990s, supplier-created value through technological product innovations in information technology predominated. However, this pattern has been changing, as customers are increasingly creating value through IT application innovations in industries including health care, professional services, financial services, manufacturing, retail, media and publishing, and education.28 Similarly, an explosion of Web- and Internet-delivered content and services, many of which feature user-generated content, has led to increasing end-user-driven innovation. Finding 4.1. The most dynamic IT sector is likely to be in the country with the most demanding IT customers and consumers. An environment of leading-edge users of technology creates the essential context for technology’s next wave and its effective application. In such an environment, all sectors of society, including consumers, businesses, and governments, exploit and make the best use of advanced information technology. However, if a nation’s IT users are not global lead users—requiring and using the most advanced IT functionalities—then in the areas where demand lags, that nation’s user-driven IT innovation will also lag. Access to broadband, which provides the high-speed communications links in the “last mile” to connect homes and organizations to the Internet, is one especially important ingredient. The current telecommunications market environment in the United States has yielded many consumer benefits compared with the more highly regulated environment of past decades. However, despite broadband being frequently cited as a national and local imperative, the nation continues to strive for affordable, ubiquitous, and high-performance broadband. Notably, there is significant geographical variation in the availability of broadband service and the degree of market competition. Moreover, although there have been 28 David Moschella, Leading Edge Forum, “Aligning R&D with Industry Change,” presentation to the committee, Boston, Mass., April 19, 2007.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment promising recent developments, such as announcements of large fiber-to-the-home deployments by AT&T and Verizon, an enhanced-performance standard for cable modem service (Data Over Cable Service Interface Specifications 3.0), and deployment of increasingly capable wireless services, the extent to which such enhanced facilities and other performance improvements will be deployed nationwide is uncertain.29 In contrast, many other nations have been carrying out successful national programs to deploy high-speed, low-cost broadband. As a result, although the United States had an early lead in broadband deployment and remains a world leader in computer usage, it finds itself today lagging a number of other nations—notably Japan and Korea—in broadband connectivity. Finding 4.2. In terms of nationwide availability, use, and speed of broadband, the United States—the inventor of broadband technology—has been losing ground compared with other nations. A fundamental step toward being the world leader in information technology use is for the United States to deploy world-class broadband connectivity aggressively over the next decade. A number of groups have cited the availability of broadband as an important goal. For example, in January 2002, TechNet, a group of Silicon Valley chief executive officers, proposed that the President and policy makers “make broadband a national priority and set a goal of making an affordable 100-megabits per second broadband connection available to 100 million American homes and small businesses by 2010.”30 More recently, in January 2008, the California Broadband Task Force (CBTF) recommended the building out of “high speed” broadband infrastructure for all Californians and the promotion of innovative uses of broadband technology. The CBTF’s working definition of broadband includes a basic minimum speed, expected to increase over time, of 512 kbps.31 In the United States, a complex system of federal, state, and local governance and regulations can present numerous bottlenecks to pursuing ubiquitous, higher-speed, more-affordable broadband. 29 National Research Council, Broadband: Bringing Home the Bits, National Academy Press, Washington, D.C., 2002; discussion of findings on pp. 13, 18, and 21. 30 See TechNet, A National Imperative: Universal Availability of Broadband by 2010, January 15, 2002, available at http://www.technet.org/resources.dyn/2002-01-15.64.pdf; accessed June 27, 2007. 31 California Broadband Task Force, The State of Connectivity: Building Innovation Through Broadband, January 2008, available at http://www.calink.ca.gov/taskforcereport/; accessed March 17, 2008.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment Recommendation 4.1. The United States should establish an ambitious target for regaining and holding a decisive lead in the broad deployment of affordable gigabit broadband services. Federal and state regulators should explore models and approaches that reduce regulatory and jurisdictional bottlenecks and should increase incentives for investment in these services. Setting—and reaching—a highly ambitious target such as the one proposed by TechNet would enable the United States to leap well ahead and hold that lead.32 However, this committee has chosen to follow the lead of the Committee on Broadband Last Mile Technology, which in its 2002 NRC report Broadband: Bringing Home the Bits, deliberately chose not to establish specific bandwidth targets for policy makers (see in Chapter 3 the subsection entitled “Broadband Speeds and Capabilities”). What constitutes “fast enough” has been and will continue to be a moving target. An effective policy regime would ensure that the capabilities of what is available at an affordable price would continue to improve in performance commensurate with application needs and would provide sufficient “headroom” to provide an opportunity for additional innovation. Historically, the U.S. government has played a strong role (as an R&D funder and as a lead customer) in establishing U.S. IT demand leadership. Although its total share of the IT market is much smaller than it once was, the U.S. government nonetheless can play an important role as demand leader in the increasingly competitive, global IT markets of today—and tomorrow. This implies a role of broadly fostering research and commercial innovation and also, where appropriate, sponsoring R&D to help meet particular government demands. The federal government has a natural leadership role in certain sectors, such as defense and homeland security (especially in the area of cyberphysical systems), in which federal agencies’ requirements are particular to their missions and commercial analogues are scarce.33 Recommendation 4.2. Government (federal, state, and local) should foster commercial innovation and itself make strategic investments 32 This bandwidth target is more ambitious than TechNet’s proposal for accelerating broadband deployment and demand, which called for 100-megabit-per-second connectivity by 2010; available at http://www.technet.org/issues/broadband/; accessed September 7, 2007. A goal of gigabit connectivity would be useful in helping the United States leapfrog Japan and other nations now moving ahead in broadband deployment. 33 For analyses of specific areas where government R&D leadership in software is needed to ensure timely innovation to meet defense needs, see National Research Council, Preliminary Observations on DoD Software Research Needs and Priorities: A Letter Report, The National Academies Press, Washington, D.C., 2008.
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Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment in IT R&D and deployment so that the United States can retain a global lead position in areas where it has particular mission requirements. CONCLUSION The globalization of the world’s economy is a fact that cannot be ignored. The global IT R&D landscape now is quite different from what it was in 1995. To thrive in this new environment, the United States should play to its strengths, notably its continued leadership in conceptualizing the idea-intensive new concepts, products, and services that the rest of the world desires. This is the area in which the greatest increments of value added are captured. Toward this end, it is necessary for the United States to have the best-funded and most-creative research institutions; to develop and attract the best technical and entrepreneurial talent among its own people as well as from around the world; to make its economy the world’s most attractive for forming new ventures and growing small, innovative firms; and to create the environment to ensure the deployment of the most advanced technology infrastructure, applications, and services here in the United States for the benefit of our people, institutions, and firms. The committee trusts that this report will be useful to policy makers and the public in helping the nation achieve these goals and in fostering a vibrant and thriving U.S. IT R&D ecosystem for many decades to come.