Chapter 4

Recommendations

Many of the specific policy measures suggested below have deep historical roots, building on the steps taken by previous administrations and the Congress to nurture and grow the U.S. economy.1 Taken together, and with adequate and sustained resources, these measures can significantly enhance prospects for the United States to remain a leading center of innovation in the 21st century.2 Recognizing the fiscal constraints facing the country, our recommendations are limited to policies fostering investments that will, in our Committee’s view, repay the expenditures needed many times over.

FOUR CORE GOALS

1. Monitor and learn from what the rest of the world is doing: The United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations. It is generally recognized that there is much to be learned from the rest of the world in science. This

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1 For a review of the national response to the competitive challenge from Japan in the 1970s and 1980s and a call to develop responses to today’s complex challenges, see James Turner, “The Next Innovation Revolution, Laying the Groundwork for the United States,” Innovations, Spring, 2006. Turner notes that the 1979 President’s Industrial Innovation Initiatives, the result of an 18-month Domestic Policy Review, “reflected a strong belief in the free enterprise system and an equally strong belief in the federal government’s responsibility to nurture an environment in which industry, universities, and government can function smoothly together.” Key bi-partisan legislation of that era includes the Bayh-Dole Act, the expansion of the SBIR program, and the clarification of anti-trust policies to encourage collaborative pre-competitive research by the semiconductor industry. Turner notes the importance on building on previous successes but also the need to articulate a new vision around which policymakers can coalesce.

2 The Committee does not specify which agency should act on the particular recommendations made in this chapter; one or several agencies could take appropriate actions, depending on the sector, the policies, and the funding available.



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Chapter 4 Recommendations Many of the specific policy measures suggested below have deep historical roots, building on the steps taken by previous administrations and the Congress to nurture and grow the U.S. economy.1 Taken together, and with adequate and sustained resources, these measures can significantly enhance prospects for the United States to remain a leading center of innovation in the 21st century.2 Recognizing the fiscal constraints facing the country, our recommendations are limited to policies fostering investments that will, in our Committee’s view, repay the expenditures needed many times over. FOUR CORE GOALS 1. Monitor and learn from what the rest of the world is doing: The United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations. It is generally recognized that there is much to be learned from the rest of the world in science. This 1 For a review of the national response to the competitive challenge from Japan in the 1970s and 1980s and a call to develop responses to today’s complex challenges, see James Turner, “The Next Innovation Revolution, Laying the Groundwork for the United States,” Innovations, Spring, 2006. Turner notes that the 1979 President’s Industrial Innovation Initiatives, the result of an 18-month Domestic Policy Review, “reflected a strong belief in the free enterprise system and an equally strong belief in the federal government’s responsibility to nurture an environment in which industry, universities, and government can function smoothly together.” Key bi-partisan legislation of that era includes the Bayh-Dole Act, the expansion of the SBIR program, and the clarification of anti-trust policies to encourage collaborative pre-competitive research by the semiconductor industry. Turner notes the importance on building on previous successes but also the need to articulate a new vision around which policymakers can coalesce. 2 The Committee does not specify which agency should act on the particular recommendations made in this chapter; one or several agencies could take appropriate actions, depending on the sector, the policies, and the funding available. 163

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164 RISING TO THE CHALLENGE is equally true with regard to innovation policy. See Recommendation 1. 2. Reinforce support for U.S. innovation leadership: It is very important that the United States reinforce the policies, programs, and institutions that provide the foundations for our own knowledge-based growth and high value employment. These include measures to strengthen our research universities and national laboratories, renew our infrastructure, and revive our manufacturing base. See Recommendations 2, 3, and 4. 3. Capture greater value from its public investments in research: The United States should improve its ability to capture greater value from its public investments in research. This includes reinforcing cooperative efforts between the private and public sectors that can be grouped under the rubric of public-private partnerships, as well as expanding support for manufacturing. See Recommendations 5 and 6. 4. Cooperate more actively with other nations: In an era of rapid growth in new knowledge that is being generated around the world, the United States should cooperate more actively with other nations to advance innovations that address shared global challenges in energy, health, the environment, and security. See Recommendation 7. This chapter presents the Committee recommendations. There are seven major recommendations, which are further elaborated in sub- recommendations. The organization of these recommendations and sub- recommendations is presented in an outline, below, as a guide to the reader.

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RECOMMENDATIONS 165 OUTLINE OF RECOMMENDATIONS 1. Monitor and Evaluate Investments, Measures, and Innovation Policies of other Nations a. Benchmark best practices b. Engage and cooperate abroad c. Respond and adapt at home 2. Reinforce the traditional pillars of U.S. economic strength and innovation capacity. a. Raise federal support for R&D b. Sustain support for university research i. Stabilize university funding ii. Use dedicated taxes and sources of revenue iii. Incentivize private donations iv. Increase funding of tuition v. Reduce and streamline regulations c. Support innovative small businesses i. Reauthorize and expand proven innovation programs ii. Experiment with and evaluate new initiatives iii. Provide policy support for innovation capital d. Strengthen the skilled workforce i.Support community colleges ii.Encourage worker training iii.Increase funding and opportunities for dislocated workers iv. Create incentives to induce retirees and potential retirees to remain active in contributing to the American economy v. Encourage immigration of scientific and entrepreneurial talent 3. Provide a Competitive Tax Framework a. Benchmark tax and regulatory policy b. Examine the tax code c. Pursue prudent deficit reduction d. Make the Research and Experimentation tax credit permanent

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166 RISING TO THE CHALLENGE 4. Build a 21st Century Innovation Infrastructure a. Build world-class infrastructure b. Expand broadband penetration c. Secure cross-border data flows d. Encourage energy conservation i. Smart grid ii. Innovative financing 5. Adopt specific policy measures to capture greater economic value from America’s public investments in research a. Strengthen university links to the market i. Provide matching seed funds ii. Develop university incubators iii. Expand SBIR support for commercialization of university research iv. Develop additional Centers of Excellence v. Use of innovation prizes vi. Encourage private foundations to take equity positions in start- ups by amending SEC rules b. Strengthen National Laboratories’ links to the market i. Expand use of research parks ii. Expand SBIR to the National Laboratories c. Develop public private partnerships i. New initiatives in early-stage finance ii. Support for industry consortia d. Expand support for manufacturing i. Provide incentives for manufacturing ii. Expand manufacturing support programs e. Sustain federal programs to jump-start new industries f. Create new institutions for applied research g. Open foreign markets to business services h. Expand support for U.S. manufactured exports i. Foster cluster development

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RECOMMENDATIONS 167 i. Assess foreign clusters ii. Support the development of science and research parks j. Leverage government procurement to establish early markets i. Leverage defense procurement ii. Encourage procurement from small businesses 6. Recognize that trade and innovation are closely linked a. Provide a rules-based playing field b. Develop an enforceable international code of conduct 7. Capitalize on the globalization of research and innovation a. Strengthen international cooperation b. Expand exchanges of scholars and students

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168 RISING TO THE CHALLENGE RECOMMENDATIONS 1. Monitor and Evaluate Investments, Measures, and Innovation Policies of other Nations: In a world where other nations are investing very substantial resources to create, attract and retain the industries of today and tomorrow, the United States needs to increase its understanding of the swiftly evolving global innovation environment and learn from the policy successes and failures of other nations.3 a. Benchmark Best Practices: The federal government should support a systematic, ongoing process to monitor and evaluate investments, measures, and policies of other nations aimed at improving their capacity to innovate and compete in the industries of tomorrow. This should include ensuring that U.S. science counselors and research agencies support the collection and analysis of relevant information.4 Foreign innovation programs should be benchmarked against those of the United States. This will require a very substantial investment of dedicated resources across a variety of public and private institutions.5 b. Engage and Cooperate Abroad: The governmental institutions of the United States should increase their cooperation and engagement with policymakers, research institutions, academics, and investors from around the world to both gain from their investments and better understand the rationale and objectives of programs to promote innovation, product commercialization, and development of emerging industries and learn best practices that can be applied to programs in the U.S. c. Respond and Adapt at Home: Knowledge gained from this benchmarking process should be used to inform U.S. policymakers and legislators, and help to shape U.S. innovation programs, R&D investments, and incentives and other policy responses, including, importantly, incentives to encourage investments by industry. 3 See related Finding 7 in Chapter 3. 4 There are initiatives to capture a broader view of foreign government innovation policies and the opportunities they present for cooperation. For example, the Office of Naval Research, in cooperation with its Global component, have launched a series of outreach activities designed to explore best practices in innovation policy and identify cooperative projects. The National Academies Board on Science, Technology, and Economic Policy is launching an Innovation Forum, with the support of ONR, to provide an on-going institutional mechanism to benchmark national innovation policies and to provide a mechanism for regular policy discussions and learning. 5 This recommendation complements Recommendation 10-1 of the National Academy report S&T Strategies of Six Countries. National Academy of Sciences, S&T Strategies of Six Countries, op. cit., p. 95. Recommendation 10-1 calls more generally for “monitoring the transformation from a national to a global S&T innovation environment.”

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RECOMMENDATIONS 169 2. In a dramatically more competitive world, the United States needs to reinforce the traditional pillars of its economic strength and innovation capacity.6 a. Raise Federal Support for R&D: Federal support for R&D should be raised in line with the goal set by President Obama in a 2009 speech before members of the National Academy of Sciences, to increase the combined public and private investment in R&D in the United States to more than 3 percent of the U.S. Gross Domestic Product.7 b. Sustain Support for University Research: Basic research carried out at U.S. research universities and national laboratories is valuable in its own right; it is also the source of the knowledge and insights that drive U.S. innovation and growth. Universities should be provided with the necessary resources to maintain and grow their facilities, attract and retain outstanding faculty and students from around the world, and provide the educational experience necessary to maintain and enhance the innovative capacity that assures America’s position in the world. i. Stabilize University Funding: The federal and state governments should reverse the cyclicality and negative trends in university financing. Steady, sustainable, predictable increases over the long term are needed for universities to plan their own investments in research, and would make federal and state research expenditures more effective and efficient.8 6 See related Finding 2 in Chapter 3. 7 For a transcript of address by President Obama at the annual meeting of the National Academy of Sciences on April 28, 2009, see http://www.issues.org/25.4/obama.html. According to the Congressional Research Service, based on 2008 figures, reaching President Obama’s 3% goal would require an 8.4% real increase in national R&D funding. See CRS, “Federal R&D Funding FY 2012” June 21, 2011. Returns on federal R&D are considered to be very substantial. See Robert Solow, “Technical Change and the Aggregate Production Function,” in The Review of Economics and Statistics, August 1957, 39(3). For a review of the econometric evidence between R&D and productivity, see Zvi Grilliches, “R&D and Productivity,” NBER Monograph, 1998. More recently, the Chairman of the Federal Reserve Board has drawn a close link between government support for R&D and economic growth. See Ben S. Bernanke, “Promoting Research and Development: The Government’s Role” Speech presented at the Conference on New Building Blocks for Jobs and Economic Growth, Washington, DC: May 16, 2011, page 38. For a review of how the impact of federal investments in R&D can be measured, see, National Research Council, Measuring the Impacts of Federal Investments in Research, S. Olson and S. Merrill, rapporteurs, Washington, DC: The National Academies Press, 2011. 8 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for “stable, strong, and effective Federal funding for university-performed

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170 RISING TO THE CHALLENGE ii. Use Dedicated Taxes and Sources of Revenue:9 Dedicated state funds and taxes are potential sources of reliable revenue for research universities.10 Shifting more university research funding from the general state budget to dedicated revenue sources will provide a more reliable funding stream for vital investments in the state’s economic future. 11 iii. Incentivize Private Donations:12 Consider expanding federal tax credits for companies that fund university research in order to stimulate additional funding for universities.13 In addition, R&D so that the nation will have a stream of new knowledge and educated people to power our future, helping us meet national goals and ensure prosperity and security.” 9 See discussion in Chapter 2 section “U.S. Universities Face Financial Challenges.” 10 For a review of the use of dedicated taxes as a means of public finance, see Alan J. Auerbach, “Public Finance in Practice and Theory,” paper prepared as the Richard Musgrave Lecture, CESifo, Munich, May 25, 2009. A growing number of states earmark all or part of taxes on hotels, cigarettes, and alcohol for specific programs, such as road maintenance, schools, and construction of convention centers and sports stadiums. The attraction is that such sources provide recurring revenue streams for important programs, even during times of economic downturn, and are not subject to government budgetary restraints. Other sources of steady, non-tax state income include proceeds from lotteries, casinos, sales of public land, and oil and mineral rights. Notably, the State of Texas uses a Permanent University Fund (PUF), established in its 1876 Constitution, to fund higher education. Currently, PUF land assets deliver proceeds through oil, gas, sulfur, and water royalties, rentals on mineral leases, and gains on fiduciary investments. 11 A handful of states use non-tax revenue to fund activities relating to innovation. A New Mexico, for example, has devoted revenues from oil, gas, and land rights in a private-equity fund that has invested nearly $300 million into local companies in fields ranging from solar power to molecular diagnostics. (Details of New Mexico’s private-equity investments can be found on the State Investment Council Web site, http://www.sic.state.nm.us/investments.htm. Descriptions of specific investments are provided in Sun Mountain Capital, “New Mexico Private Equity Investment Program: Overview and 2010 Review,” June 2011.) Arkansas used a portion of increased cigarette taxes to help fund a campus of the University of Arkansas for Medical Sciences. See John Lyon, “Beebe Signs Tobacco Tax Hike Into Law,” Arkansas News, Feb. 17, 2009. Nebraska invested $106 million received from a 2002 court settlement with tobacco companies to fund medical research at state universities, a move that has generated more than $800 million investment and created nearly 1,800 jobs. See Steve Jordon, “Tobacco Money Gives Nebraska an Economic, Research Lifeline,” Omaha World-Herald, Feb. 3, 2011. Currently, only 20 states earmark some dollars for higher education, and the sums are quite small, according to the American Association of State Colleges and Universities. See Alene Russell, “Dedicated Funding for Higher Education: Alternatives for Tough Economic Times,” American Association of State Colleges and Universities, Higher Education Policy Brief, December 2008. 12 See discussion in Chapter 2 section “U.S. Universities Face Financial Challenges.” 13 Reversing a three-decades-long trend of increasingly strong ties between industry and universities, the absolute value of industrial R&D dollars to academic institutions—funds provided directly to academic institutions for the conduct of research—began to decline beginning in 2002 after reaching a high of $2.2 billion in 2001. Also, industrial R&D support to academia has historically been concentrated in relatively few institutions. See National Science Foundation, “Where has the Money Gone? Declining Industrial Support of Academic R&D,” InfoBrief, NSF 06- 328 September 2006. Leading university and industry leaders have pointed out that U.S. companies increasingly choose to work with foreign rather than U.S. universities, encouraged by the more favorable IP rights that foreign universities offer and the strong incentives for joint industry-

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RECOMMENDATIONS 171 assess the potential for state matches for certain private endowment donations as a way to provide incentives for private donors or foundations to increase their support for research universities.14 iv. Increase Funding of Tuition. Students are borrowing more money to pay for college than ever before, with student debt in this country exceeding the level of credit card debt. 15 Tuitions keep rising.16 No other major economy with which the United States competes places as heavy a financial burden on its students.17 Although co-investment by students plays an important role in motivating students to capitalize on their education, the necessary growth of enrollment and matriculation as a percent of the U.S. population will be choked off in the absence of increased federal, state and private support for tuitions. v. Reduce and Streamline Regulations: The expanding costs of compliance with federal regulations are making it increasingly expensive for universities to conduct research.18 university research that foreign governments provide. GUIRR, “Re-Engineering the Partnership: Summit of the University-Industry Congress,” Meeting of 25 April 2006, Washington, DC. 14 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for the creation of a “R&D tax credit that incentivizes business to develop partnerships with universities (and others as warranted) for research that results in new U.S.-located economic activities.” For an analysis of the impact of financial shocks to a university’s resource base, see Jeffrey R. Brown, et al., “Why I Lost My Secretary: The Effect of Endowment Shocks on University Operations.”NBER, May 29, 2010. 15 Institute for College Access and Success, “Student Debt and the Class of 2010” November 2011. The report notes that two-thirds of college seniors graduated with loans in 2010, and they carried an average of $25,250 in debt. 16 Published tuition has barely increased at two-year colleges (by only $68 over the course of nine years), but has increased substantially at four-year colleges (by $3,004 over the same nine year period). From the 1999-2000 academic year to the 2008-09 academic year, Net Student Tuition actually fell by $849 at two-year colleges, representing a fairly dramatic decrease in net tuition at the two-year level, given that the national average for net tuition was never higher than $900 any single year. In contrast, Net Student Tuition has increased by $1,067 at four-year colleges over the same time span. While this absolute growth in net tuition at four-year institutions may not seem particularly high, keep in mind that per capita income in the U.S. declined by $1,325 from 2000 to 2009. See Andrew Gillen, et al., “Net Tuition and Net Price Trends in the United States (2000- 2009), Washington, DC: Center for College Affordability, November 2011. 17 For a comparative review of “who participates in education, how much is spent on it and how education systems operate,” see OECD: Education at a Glance 2011: OECD Indicators, Paris: OECD, 2012. 18 Tobin L. Smith, Josh Trapani, Antony Decrappeo, and David Kennedy, “Reforming Regulations of Research Universities,” Issues in Science and Technology, Summer 2011. See also the January 21, 2011 filing by the AAU, APLU, and COGR on “Regulatory and Financial Reform of Federal Research Policy.” The document notes that “Rationalizing the Federal regulatory infrastructure is essential to the health of the university-government research partnership and to the efficient and

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172 RISING TO THE CHALLENGE Federal and state policymakers and regulators should review the costs and benefits of federal and state regulations, eliminating those that are redundant, ineffective, inappropriately applied to the higher education sector, or impose costs that outweigh the benefits to society.19 c. Support Innovative Small Businesses: The availability of early stage funding for small entrepreneurial firms and start-ups is crucial for the vitality of the innovation process. There are three elements to address in this regard: public innovation programs, the policy framework and incentives for angel funding, and other measures and incentives to encourage entrepreneurship. i. Reauthorize and Expand Proven Innovation Programs: The U.S. should expand successful innovation programs, as it recently has with the SBIR program, restore funding for NIST’s revamped Technology Innovation Program with its current focus on manufacturing, 20 and consider new programs such as the recently announced Start-up America.21 These early-stage funding programs support the development of new products and help promising small technology companies bring new ideas and products to the market, in part by creating productive use of federal research funding.” Access at www.cogr.edu/viewDoc.cfm?DocID=151794. 19 19 See National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012. The report calls for “a balanced regulatory environment in order to increase the cost- effectiveness of our research universities.” 20 See Chapter 2 of this volume for a discussion of the Advanced Technology Program (ATP) and its successor, the Technology Innovation Program. A National Academies assessment of ATP found it to be “an effective federal partnership program.” National Research Council, The Advanced Technology Program, Assessing Outcomes, C. Wessner, ed., Washington, DC: The National Academies Press, 2001. See also the discussion of SBIR in Chapter 2. A National Academies assessment of SBIR found it to be “sound in principle and effective in practice.” National Research Council, An Assessment of the SBIR Program, Washington, DC: The National Academies Press, 2008. 21 Start Up America, a White House led initiative, is focused on increasing innovation and commercialization and accelerating support for U.S. entrepreneurs though a variety of policies and programs. These efforts are being deployed through federal agencies like the Departments of Energy, Labor, the Small Business Administration and Commerce including the Economic Development Administration. One example of this is the Jobs and Innovation Accelerator Challenge, which according to the EDA is “a multi-agency competition launched in May to support the advancement of 20 high-growth, regional industry clusters. Investments from three federal agencies and technical assistance from 13 additional agencies will promote development in areas such as advanced manufacturing, information technology, aerospace and clean technology, in rural and urban regions in 21 states.” See http://www.eda.gov/InvestmentsGrants/jobsandinnovationchallenge.

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RECOMMENDATIONS 173 new information that investors need.22 In addition, programs that fund collaborations between small businesses, and universities, such as ARPA-E, DARPA, and Energy Efficiency and Renewable Energy (EERE), should be expanded where appropriate and provide sustained support.23 When new ideas and promising technologies are not funded here in the United States, investors overseas may well fill the gap, thus capitalizing on U.S. investments in R&D.24 ii. Experiment with and Evaluate New Initiatives: Recent public-private initiatives such as the Administration's Start-Up America program should be given clear metrics and carefully evaluated in conjunction with programs at state and regional levels. iii. Provide Policy Support for Innovation Capital: Market inefficiencies and a long term shift away from seed stage investments have created a substantial gap between the demand by entrepreneurs for seed and early-stage funding and the supply in the risk capital market. Bridging this gap is essential for sustaining the flow of innovation from U.S. R&D investments and the growth and employment they generate.25 22 See discussion of SBIR in Chapter 1, section on “Public-Private Partnerships” and Chapter 2, section on “Providing Early-Stage Finance.” See the discussion of ATP/TIP in Chapter 2, section on “Providing Early-Stage Finance.” See the discussion of StartUp in Chapter 3, Section 4f. Finally see discussion of EERE in Chapter 1, section on “National Laboratories.” 23 The National Academies 2006 report, Rising Above the Gathering Storm, (op cit.) recommended the establishment of an Advanced Research Projects Agency—Energy (ARPA-E) within the Department of Energy (DOE). The 2007 America COMPETES Act, which implemented many of the recommendations in the National Academies’ report authorized. ARPA-E, but without an initial budget. The new program received $400 million of funding in the 2009 American Recovery and Reinvestment Act. The America COMPETES Reauthorization Act of 2010 made additional changes to ARPA-E’s structure. ARPA-E is modeled after the successful Defense Advanced Research Projects Agency (DARPA). For a review of the history and the distinguishing features of DARPA, see William B. Bonvillian, “The Connected Science Model for Innovation: The DARPA Model,” in National Research Council, 21st Century Innovation Systems for Japan and the United States, Lessons from a Decade of Change, Report of a Symposium, Sadao Nagaoka et al., eds., Washington, DC: The National Academies Press, 2009. For a review of the Energy Efficiency and Renewable Energy program, see National Research Council, Energy Research at DOE: Was It Worth It? Energy Efficiency and Fossil Energy Research 1978 to 2000, Washington, DC: The National Academies Press, 2001. 24 For example, Rusnano, the Russian state technology firm, is seeking to make large investments in U.S. life sciences and technology companies whose products are to be manufactured in Russia. See Megan Davis, “Rusnano, US fund to invest $760 mln in pharma venture,” Reuters, March 6, 2012. 25 A study by Gittell, Sohl, and Tebaldi finds that technology-based entrepreneurship, particularly by small businesses, is a more powerful job creator than entrepreneurship in general. See Gittell, Ross; Sohl, Jeffrey; and Tebaldi, Edinaldo (2010) "Is there a Sweet Spot for U.S. Metropolitan Areas? Exploring the Growth in Employment and Wages in U.S. Entrepreneurship and Technology Centers in Metropolitan Areas over the last Business Cycle, 1991 To 2007, Frontiers of Entrepreneurship Research: Vol. 30: Issue 15, Article 13.

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190 RISING TO THE CHALLENGE devoting substantial policy attention to attracting, nurturing, and growing national manufacturing capability, including industry supply chains and required infrastructure.97 i. Provide Incentives for Manufacturing: The U.S. needs to support the competitiveness of its advanced manufacturing sector by making federal incentive programs permanent and broadening the time horizons of tools such as manufacturing tax credits and loan guarantees so that companies can confidently invest for the long term.98 Regulatory and tax incentives should be considered and expanded where appropriate to drive downstream demand.99 ii. Expand Manufacturing Support Programs: Consideration should also be given to the creation or expansion of programs that directly support manufacturing.100 These programs, in strategies.” The Journal of Technology Transfer, Volume 35, Number 3, 283-333 (2010). Tassey argues that an advanced economy such as the United States needs a strong manufacturing sector and calls for Increasing “the average R&D intensity of the domestic manufacturing sector to 6 percent”; adjusting “the composition of national R&D to emphasis more long-term, breakthrough research and increasing the amount sufficient to fund a diversified portfolio of emerging technologies commensurate with the size of the U.S. economy”; and improving the efficiency of R&D performance and subsequent technology diffusion.” 97 See the discussion in Chapter 2, section on “Strengthening Manufacturing.” 98 The Department of Energy’s loan guarantee programs (through October 2011) committed $35.9 billion in guarantees to 38 projects including renewable and nuclear power generation, renewable energy manufacturing, energy efficiency manufacturing, energy storage, and electric vehicle production.98 This program has now been terminated. 99 Bronwyn Hall and Beethika Khan note that “the regulatory environment and governmental institutions more generally can have a powerful effect on technology adoption, often via the ability of a government to “sponsor” a technology with network effects.” See Bronwyn H. Hall and Beethika Khan, “Adoption of New Technology,” NBER Working Paper 9730, 2003. For an illustrative review of the impact of regulatory provisions for energy efficiency on new federal, state, and local policies, programs, and practices across the U.S., see Robert K. Dixon, Elizabeth McGowan, Ganna Onysko, and Richard M. Scheerb, “US energy conservation and efficiency policies: Challenges and opportunities,” Energy Policy Volume 38, Issue 11, November 2010, Pages 6398-6408. 100 The Hollings Manufacturing Extension Partnership (MEP) was created in 1988 to offer technical, business, and financial support primarily to small and medium-sized manufacturers in all fifty states. The National Research Council currently has an evaluation of the MEP underway. The assessment will document the achievements and challenges of the program. The Advanced Manufacturing Partnership was developed on the recommendation of the President’s Council of Advisors on Science and Technology, which called for a partnership between government, industry, and academia to identify the most pressing challenges and transformative opportunities to improve the technologies, processes and products across multiple manufacturing industries. See President’s Council of Advisors on Science and Technology, “Report to the President on Ensuring American Leadership In Advanced Manufacturing.” Washington, DC: The White House, June 2011. For a comparative perspective on innovation and manufacturing policy, see Philip Shapira, Building capabilities for innovation in SMEs: a cross-country comparison of technology extension policies and programmes,” International Journal of Innovation and Regional Development, Volume 3, Number 3-4/2010.

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RECOMMENDATIONS 191 conjunction with programs at the Department of Defense, offer a substantial framework for encouraging and sustaining U.S.-based manufacturing and developing promising new technologies, such as flexible electronics and additive manufacturing.101 e. Sustain Federal Programs to Jump-start new Industries: Promising federal programs aimed at accelerating commercialization of new technologies, including such areas as photovoltaic cells, advanced batteries, and biomedicine, should be continued with sustainable long-term funding.102 f. Create New Institutions for Applied Research: The recently announced National Network for Manufacturing Innovation (NNMI)—a private-public partnership program aimed at commercializing and manufacturing U.S. developed technologies—should be fully funded.103 NNMI calls for precompetitive consortia to conduct applied research on new technologies and design methodologies. Modeled on Germany’s Fraunhofer-Gesellschaft, NNMI can help improve the 101 “The Department of Defense Manufacturing Technology (ManTech) Program is a joint program of the armed services and the Defense Logistics Agency. The purpose of the ManTech program is to develop manufacturing technologies for the affordable, low-risk development and production of weapons systems.” See National Research Council, Defense Manufacturing in 2010 and Beyond, Washington, DC: The National Academies Press, 1999. See also the discussion in Chapter 2, sections on “Institutional Support for Applied Research,” and “Strengthening Manufacturing.” 102 These include the NSF’s Engineering Research Centers and Industry-University Cooperative Research program. See also Chapter 5 of this report, which provides detailed case studies of the role of federal programs in the development and commercialization of semiconductor, photovoltaic and advanced battery technologies. For example, the $457 million Sunshot Initiative of the Department of Energy “is a collaborative national initiative to make solar energy cost competitive with other forms of energy by the end of the decade. Reducing the installed cost of solar energy systems by about 75% will drive widespread, large-scale adoption of this renewable energy technology and restore U.S. leadership in the global clean energy race.” Department of Energy website: http://www1.eere.energy.gov/solar/sunshot/. 103 “The proposed Network will be composed of up to fifteen Institutes for Manufacturing Innovation (IMIs or Institutes) around the country, each serving as a hub of manufacturing excellence that will help to make United States (U.S.) manufacturing facilities and enterprises more competitive and encourage investment in the U.S. This program was proposed in the President's fiscal year (FY) 2013 budget and was announced by the President on March 9, 2012. The NNMI program will be managed collaboratively by the Department of Defense, Department of Energy, Department of Commerce's NIST, the National Science Foundation, and other agencies. Industry, state, academic and other organizations will co-invest in the Institutes along with the NNMI program.” Federal Register Notice, May 4, 2012. The President's FY 2013 budget requests $1 billion for the NNMI program. See also the discussion in Chapter 2, section on “Institutional Support for Applied Research.”

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192 RISING TO THE CHALLENGE competitiveness of U.S. manufacturers and capture more value from U.S. funded research.104 g. Open Foreign Markets To Business Services. Services are a large and important component of the U.S. economy and the United States has much to offer the world in high value services. To capitalize on this comparative advantage, the U.S. should be pushing aggressively for services trade liberalization, making common cause with the European Union and other advanced economies to encourage the large, fast-growing developing economies to liberalize their service sectors through multilateral negotiations in the General Agreement on Trade in Services and the Government Procurement Agreement. 105 The infrastructure building boom, particularly in Asia, provides an enormous opportunity for U.S. service firms if the proper policies are in place. Increased trade in services might help rebalance U.S. trade, and both advanced and emerging economies would benefit from the productivity-enhancing gains brought by increased trade in services.106 h. Expand Support for U.S. Manufactured Exports: The government and private sector should work together to identify and seize new market opportunities and reduce barriers to U.S. exports for products of industries that use advanced manufacturing including electronics, aerospace, and biotechnology.107 In this regard, resources for export financing should be re-examined to be sure that export financing is fully competitive with foreign export credits.108 In addition the Department of Commerce should substantially expand the U.S. and Foreign Commercial Service in 104 See Chapter 4 of this report for a description of the Fraunhofer Gesellschaft. See also the presentation by Roland Schindler, Executive Director of Fraunhofer CSE, at the National Academies Symposium on Meeting Global Challenges: U.S.-German Innovation Policy, Washington, DC, November 1, 2010. Germany’s Fraunhofer system has established seven research institutes based at U.S. universities, including Michigan State University, Boston University, Massachusetts Institute of Technology, the University of Maryland, the University of Michigan, Johns Hopkins University, and the University of Delaware. These institutes provide research and development services to help translate the fruits of research at U.S. academic institutions into products for the marketplace. 105 J. Bradford Jensen. “Global Trade in Services: Fear, Facts, and Offshoring” Peterson Institute for International Economics, 2011. 106 Ibid. 107 See the discussion in Chapter 2, section on “Strengthening Manufacturing.” 108 Export-Import Bank of the United States, Report to the US Congress on Export Credit Competition and the Export-Import Bank of the United States, June 2010. The U.S. Chamber of Commerce is partnering with the Export-Import Bank of the United States on its Global Access for Small Business initiative to help more than 5,000 small companies export goods and services produced by U.S. workers. For a concise review of the role and performance of the Export-Import Bank in promoting U.S. exports, see Stephen Ezell, “Understanding the Importance of Export Credit Financing to U.S. Competitiveness.” Washington, DC: ITIF, June 2011.

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RECOMMENDATIONS 193 order to capitalize on the rapid growth of markets in China, India, and other emerging economies.109 i. Foster Cluster Development: Recent pilot programs by U.S. federal agencies to align current economic development programs with specific regional innovation cluster initiatives by state and local organizations should be assessed and, where appropriate, provided with greater funding and expanded geographically.110 Efforts should be made to attract, on a competitive basis, more states and regions, while providing best practice guidance and incentives, preferably with reliance on matching funds. i. Assess Foreign Clusters: The scope and scale of efforts by foreign governments to develop clusters in new technology areas are impressive. The U.S. needs to assess and draw policy lessons from these efforts that are helping to shape the global competitive landscape. A similar effort should be undertaken for science and technology parks. ii. Support the Development of Science and Research Parks: In a similar vein, the U.S. should provide competitively awarded federal support to state and regional efforts to develop and sustain modern research parks. These parks can provide valuable means of supporting the missions of national laboratories such as those of the Department of Energy and NASA, national research institutions such as the National Cancer Institute, and university facilities.111 j. Leverage Government Procurement to Establish Early Markets: As it has done previously in industries such as semiconductors, computers, advanced aircraft, and nuclear power, 109 In remarks at the U.S. Chamber of Commerce, U.S. Commerce Secretary John Bryson has called for restructuring the Foreign Commercial Service to intensify focus on markets where U.S. exports have the best potential for continued growth, including China, Brazil, India, Saudi Arabia and Turkey. See Department of Commerce Press Release, “Commerce Secretary John Bryson Lays Out Vision for Department of Commerce.” December 15, 2011. 110 For a review of recent federal and state efforts, see National Research Council, Growing Innovation Clusters for American Prosperity, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011. 111 For a review of the mission and accomplishments of the NASA Ames Research Center, see Simon (Pete) Worden, “NASA Research Park,” in National Research, Understanding Research, Science, and Technology Parks: Global Best Practices, op. cit. For an early review of the role of the NASA Ames Park, see National Research Council, A Review of the New Initiatives at the NASA Ames Research Center, C. Wessner, ed., Washington, DC: The National Academies Press, 2001. For a description of the National Cancer Institute’s plan to bring together much of its technology research and development in a park-like setting in Frederick, Maryland, see John Niederhuber, “The National Cancer Institute and NCI-Frederick,” in, Understanding Research, Science, and Technology Parks. Op. cit.

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194 RISING TO THE CHALLENGE federal agencies can play a key role in helping build domestic markets for important emerging industries such as electric-drive vehicles, solar power, and solid-state lighting through incentive programs and government procurement.112 Overall, procurement programs can enable domestic producers to move up the learning curve, push down the cost curve, and enable them to compete successfully in the U.S. and global markets.113 i. Leverage Defense Procurement: Defense procurement is an important driver of innovation, providing initial markets for products for the military as well as civilian sectors.114 Traditional defense procurement, however, operates within established and complex sets of regulatory and managerial practices. To shift from a culture of compliance to a culture of results based on performance, cost, and schedule, the U.S. should establish “incentives and rewards for innovation in products and processes that result in continuous performance improvements, at lower and lower costs.”115 • Develop a skilled acquisitions workforce: The government should build an expanded workforce of experienced, smart buyers for the military, including experienced people from industry.116 • Incentivize better performance: The U.S. should improve its law and regulations concerning procurement practices and export and import controls in order to 112 For a historical perspective of the impact of federal procurement on innovation in the U.S., see Vernon W. Ruttan, 2006, op. cit. For a review of the academic literature, see Jakob Edler and Luke Gerghiou, (2007). “Public procurement and innovation –Resurrecting the demand side.” Research Policy. 36, 9, 949-963. 113 Note that federal procurement is generally open to foreign suppliers that are signatories of the World Trade Organization’s Government Procurement Agreement. 114 David Mowery identifies three channels through which public investments in defense-related R&D and procurement affect the innovative performance of sectors or the overall economy. First, defense-related R&D investments can support the creation of new knowledge with defense-related and civilian technology applications. Second, in some cases, defense-related R&D investment can lead to ‘‘spinoffs,’’ with civilian and applications. And third, by serving as a ‘‘lead purchaser,’’ for early versions of new technologies, defense procurement can enable supplier firms to reduce the costs of their products and improve their reliability and functionality. See David C. Mowery, “National security and national innovation systems,” Journal of Technology Transfer (2009) 34:455–473. For a contemporary review of the role that Defense procurement can play in advancing new energy technologies, see Ryan Fitzpatrick, Josh Freed, and Mieke Eoyang, “Fighting for Innovation: How DoD Can Advance Clean Energy Technology... And Why It Has To.” Washington, DC: The Third Way, June 2011. 115 Jacques Gansler, “Solving the Nation’s Security Affordability Problem,” in Issues in Science and Technology, Volume XXVII, Number 4, Summer 2011. 116 Ibid.

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RECOMMENDATIONS 195 reward companies that achieve higher performance at lower costs. ii. Encourage Procurement from Small Business: Procurement from small firms, such as through the SBIR program, can diversify the supplier base and accelerate innovation through support for early stage funding while addressing the myriad mission needs of government agencies.117 6. Recognize that Trade and Innovation are Closely Linked:118 a. Provide a Rules-based Playing Field: It is the responsibility of the U.S. government to take an activist approach to enforce agreements and provide a rules-based playing field for its industries engaged in competition with foreign industries. Measures that distort foreign trade and investment should be rooted out or offset, especially when these measures risk having a serious adverse effect on U.S. firms continued ability to innovate119. This will require support from U.S. industry, but ultimately an independent and well-informed judgment on the part of the U.S. government of policy responses that are in the national interest. b. Develop an Enforceable International Code of Conduct: Existing international rules have proved to be ineffective in governing the activities of government enterprises engaged in commercial competition. An enforceable international code of conduct is required. i. Home governments need to be accountable for their support of their government enterprises as well as the conduct of these enterprises where trade and investment patterns are distorted. 117 For a review of the opportunities as well as challenges small innovative businesses face with respect to federal procurement, see National Research Council, An Assessment of the SBIR Program. op. cit., pages 46-49. In recent years, the European Union has sought to expand the use of public procurement to foster innovation, particularly among small and medium sized enterprises. See the Speech of EU Commissioner Geoghegan Quinn to a meeting of IMCO on the role of public procurement policies in supporting EU innovation strategies, 1 February 2011. See also M. Rolfstam W., Phillips, and E. Bakker (2011) “Public procurement and the diffusion of innovations: exploring the role of institutions and institutional coordination.” International Journal of Public Sector Management, 24 (5). 118 See related Finding 5 in Chapter 3. 119 It is far from clear that protectionist measures actually promote innovation in the countries that adopt them.

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196 RISING TO THE CHALLENGE ii. Going forward, every U.S. government international trade or investment agreement should include a comprehensive code of conduct that includes detailed rules governing government owned, government invested and government supported enterprises (e.g. ensuring enforcement of intellectual property and competition laws and policies), transparency, and dispute settlement. 7. Capitalize on the globalization of research and innovation: The United States should capitalize on the globalization of research and innovation to cooperate with other nations to advance innovations that address shared global challenges in energy, environment, health, and security.120 a. Strengthen International Cooperation: The United States needs to better capitalize on the new knowledge that is being generated around the world. As one analyst has recently observed, “Gathered from afar and reintegrated locally, knowledge developed elsewhere can be tapped to stoke U.S. innovation.”121 However, international collaboration is supported by only about 6 percent of federal R&D spending, and the United States has no strategy to find and use knowledge from around the world in this regard. 122 The United States should strengthen and expand opportunities for research collaboration by American scientists and entrepreneurs with their counterparts in growing economies such as China, India, Brazil, as well as those in more established countries such as Japan and South Korea and historical partners such as Germany, France and Italy.123 New initiatives with countries such as Poland, the Czech Republic, Slovakia, Hungary, and Romania should also be undertaken in order to pool resources and talent devoted to solving common challenges in areas such as health, energy, security, and the environment.124 The need for cooperative efforts is great, and 120 See related Finding 7 in Chapter 3. 121 Caroline S. Wagner, “The Shifting Landscape of Science,” Issues in Science and Technology, Volume XXVII, No. 1, Fall 2011. 122 Ibid. 123 For a review of opportunities and challenges for further cooperation with India, see National Research Council, India’s Changing Innovation System, C. Wessner and S. Shivakumar, eds., Washington, DC: The National Academies Press, 2007. For a first hand review of current trends in China’s innovation strategies and challenges, see National Research Council, Building the 21st Century, U.S. China Cooperation in Science, Technology, and Innovation, op. cit. 124 To review opportunities for cooperation on innovation with Poland, the National Academies convened two major symposia on “Rebuilding the Transatlantic Bridge: U.S.-Polish Cooperation on Science, Technology, and Innovation” in 2009 and 2010. The meetings reviewed potential for

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RECOMMENDATIONS 197 the potential benefits are substantial. At the same time, considerable care needs to be devoted to the terms and structure of such cooperation, notably to ensure that contributions are comparable and that the fruits of such cooperation are shared in an equitable and sustainable manner. 125 b. Expand Exchanges of Scholars and Students: Expanding exchanges of scholars and students can benefit “both sending and receiving countries, providing access to leading research and training not available in the home country and creating transnational bridges to cutting-edge research.”126 In this regard, self-organized collaborative networks that are steered more by individual scientists linking together across borders for enhanced knowledge creation are found to more often lead to highly cited research articles.127 This is because researchers are motivated to “compete with each other for collaborations with the most highly visible and productive scientists in their fields, in their own country or abroad. Facilitating this global collaboration could have a considerable impact on knowledge creation and has been promoted, for example, by the EU Framework requirements.”128 Conclusion Innovation—from invention through to commercialization—has a vital role to play in maintaining America’s position of in the world economy and in addressing the major challenges facing the world today in areas such as energy, climate, health and economic development. There is no single measure, nor even a small number of policy measures that can assure success in preserving cooperative activity in a variety of areas including developing clean coal energy technologies, environmental remediation, and cancer research. 125 “The costs, complexity, and risk associated with the development of new technologies provide great opportunities for international cooperation in both the public and private sectors….These powerful drivers of cooperation are at the same time a source of greater system friction.” See HWWA, IfW, and NRC, Conflict and Cooperation in National Competition for High-technology Industry,” Washington, DC: The National Academies Press, 1996, page 46. These challenges include identifying cooperative projects of equal interest to all parties, distributing the costs and benefits in an equitable manner, bridging social and cultural differences and divergent expectations, and ensuring long-term commitment to projects. See page 47. Soundly constructed and effectively managed International cooperation can bring value to all parties; managing expectations and assuring equitable arrangements is often a challenge for national bureaucracies. As the U.S. economic and technological leadership faces increasing competition, we have both greater opportunities for cooperation but greater care is required to ensure that it is mutually beneficial. 126 National Research Council, Policy Implications of International Graduate Students and Postdoctoral Scholars in the United States, Washington, DC: The National Academies Press, 2005. 127 Caroline S. Wagner. “Network structure, self-organization and the growth of international collaboration in Science.” Research Policy Volume 34, Issue 10, December 2005, Pages 1608-1618. 128 National Research Council, Policy Implications of International Graduate Students and Postdoctoral Scholars in the United States, Washington, DC: The National Academies Press, 2005.

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198 RISING TO THE CHALLENGE and enhancing the magnificent record that this country has in innovation. Scientists in industry and government are now accustomed to developing what they call “roadmaps” to identify the challenges that need to be addressed and to bringing forward the next generations of innovative products. Looking abroad to assess what other countries are doing in facing common challenges, this report is designed to contribute to a better understanding of the strengths and weaknesses of the U.S. innovation system. Our purpose is to suggest a path forward. Most importantly, it is essential to understand that this series of cooperative interactions with other countries and efforts to benchmark American policies and measures should be continued in order to help U.S. policymakers improve U.S. performance.

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PART II GLOBAL INNOVATION POLICIES

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