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The Government Role in Civilian Technology: Building a New Alliance comparative advantages in technology creation, much of which has been built through federal support, to strengthen private sector capacities. Current government programs that support and finance pre-commercial R&D, although in certain cases adequate to meet the past needs of private sector technology efforts, are inadequate to meet the nation’s needs in today’s competitive environment in key technology areas. Incentives can be provided by the government to achieve higher rates of technology commercialization in the private sector over the long-term. A new federal role in pre-commercial R&D is necessary, and in the panel’s judgment, the U.S. government is capable of executing this mission. It has proved effective in stimulating technology commercialization in the civil sector in the past. As outlined in Chapter 2, the U.S. government played an important role in facilitating investment, stimulating R&D and technology generation, and promoting technology adoption in sectors such as commercial aerospace, agriculture, energy, and health care. By financial support for investment in pre-commercial R&D and technology adoption, the federal government, in many instances through public-private cooperative ventures, provided support beyond funding of basic science. Federal agencies, such as the Department of Agriculture, National Institutes of Health, Department of Defense, and National Advisory Committee for Aeronautics contributed to technology commercialization and the adoption of new technology in private firms. Indeed, in aircraft, high-performance computers, and agriculture, the federal government had a direct role in the creation of industries that today dominate world commerce and generate export surpluses for the United States. Although the government has assumed a direct role in civilian technology in the past, the current framework that defines the federal role in technology is weak in several respects. It is characterized by the underfunding of pre-commercial R&D and technology adoption projects, and by a political process that determines, to a great extent, those projects that are to be funded in pre-commercial R&D. In addition, we believe a reliance on broad tax measures to stimulate investment in R&D, although helpful, is insufficient in the absence of other measures to meet the needs of improving U.S. performance in technology. The justification for federal investment in basic research rests on the fact that the private market fails and that the returns to private firms from investment in basic research are insufficient to induce them to fund it from society’s perspective. Market failure is also evident, however, in the stages of technology development that lie ''downstream'' from basic research and are closer to technology application. Basic research rarely yields results that can be translated swiftly and at low cost into commercial technologies. As noted in Chapter 1, investments are often needed in pre-commercial R&D to improve understanding, explore applications, and evaluate designs. The federal government should participate in this activity.
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The Government Role in Civilian Technology: Building a New Alliance The federal government should invest in the pre-commercial area of R&D between basic research and narrow, focused commercial application.1 Pre-commercial technology often involves a probability of success too low for a commercial venture to risk. The appropriability gap stems, in part, from the difficulties associated with refining technology development and inventions for new concepts to make them manufacturable and to incorporate innovations into products. The problem of “nonappropriability,” which has long been accepted as a rationale for public support of basic research, also applies to the transfer and utilization of new scientific or technological information. Much of the organization of R&D in industry is influenced by the costs and complexities of technology transfer and utilization. Public support for technology, therefore, should include a role in supporting its utilization and diffusion, as well as the creation of technological knowledge. It is important to note that an expanded role for the federal government in funding of pre-commercial R&D should focus only on technologies that the private sector would not develop on its own. An expanded role for government should center on R&D and technology development projects whose size, scope, or expected return on investment falls outside what a venture capital firm might fund. We do not believe that the federal role in civilian technology should extend to funding R&D projects that are sufficiently viable technically and economically to attract capital funding in private markets (venture capital). The United States has a strong venture capital industry that has supported investments in high-technology firms with near-to-market commercial technologies. Venture capital firms do not, however, make investments in or provide assistance for R&D in areas where there are ill-defined potential markets. This is true even if strong, economy-wide potential applications for the technology exist. Venture capital firms also do not fund technology development projects where it is unlikely that the economic benefits of innovation are appropriable to the firm. Moreover, these firms seek an average annual return on capital of 20 percent or more. An expanded federal role in R&D, therefore, would not compete with venture capital firms, but rather would center on projects with widely applicable “generic” technologies that do not involve firm-specific incentives or the commercial needs of an individual firm. The process by which initiatives in pre-commercial R&D and technology are proposed and funded by the federal government also requires reassessment and improvement. Federal financial support for R&D and technology is not coordinated; indeed, it does not exist in a manner that would allow selection of investments in areas of high risk and high potential payback to support U.S. comparative advantages. At the same time, there are indications that support for civilian R&D and technology development will
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The Government Role in Civilian Technology: Building a New Alliance continue to be proposed by industry groups and established largely through a political process that is seriously flawed. The political process through which pre-commercial programs are often initiated is not the most efficient and equitable method of allocating federal resources or building new government programs. This is true even when considering the potential future merits of these projects. There will most likely be increasing pressure for the U.S. government to make investment decisions on funding for R&D in a wide range of technology areas. Some of these projects may be beneficial to the nation’s comparative advantage and leverage its technological strengths. Tax incentives for R&D are often mentioned as a preferred method of promoting higher levels of industrial R&D activity in the United States. The Economic Recovery Tax Act of 1981 (P.L. 97–34) provided an initial 25 percent credit for incremental increases in corporate R&D spending. The law was later amended in the Tax Reform Act of 1986 to reduce the credit to 20 percent and revised again to include start-up ventures in the Budget Reconciliation Act of 1989.2 The credit for R&D is set to expire in June 1992. There remains some uncertainty over the precise effect of R&D tax credits on spending for research in industry.3 There is, however, likely some benefits associated with tax credits for R&D investments as well as costs associated with any tax credit that lowers federal revenue, particularly for firms in high-technology sectors with large and growing R&D budgets (as a percentage of sales) over a number of years. Higher levels of private investment should follow the lowering of any tax, including lower costs to firms anticipating R&D tax credits in future years.4 One assessment of increased corporate R&D spending as a result of the credit indicated that in 1989, for example, $701 million more was spent on R&D in the United States.5 Although there are potential long-term benefits to R&D tax credits, we believe that these credits alone are insufficient to achieve the objective of higher overall rates of technological performance in the United States. Because R&D tax credits have not been made a permanent part of U.S. tax law, businesses are unable to plan their R&D investments with certainty. The credit may be extended or terminated every few years. Another problem with the R&D tax credit is that incentives are not available to all firms engaged in R&D activity. For example, under the law, no credit is given if current R&D spending is below a calculated base-level average over a four-year period. In addition, the possibility of selecting socially beneficial projects in pre-commercial areas is absent in measures such as the R&D tax credit. The panel does not advocate targeting specific sectors or firms for special government financial subsidies. The United States, however, needs a mechanism to bring a higher degree of specificity than tax policy changes
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The Government Role in Civilian Technology: Building a New Alliance can induce to channel R&D resources to socially beneficial projects and to allocate funds under a new federal role in technology that is outlined in this report. Simply stated, tax or regulatory changes to promote commercialization lack selectivity. They are—whatever their general merit—a blunt policy tool. Finally, improvements in macroeconomic conditions, such as further reductions in the federal budget deficit or other measures to reduce federal dissavings and promote investment—although probably crucial in improving the long-term competitiveness of U.S. industry—will do little over the next decade to enhance pre-commercial R&D investments and technology commercialization efforts by U.S. firms. A frequent and serious objection to government involvement in private sector R&D or technology commercialization efforts is that government should avoid promoting one technology area, industry sector, or individual firm over another. It is well established that private markets perform best in allocating resources and “selecting winners” in the commercial marketplace. Political pressures in a constituent-oriented democracy tend to favor losers, not winners. To a great extent, decisions on whether to engage in particular fields of commercial development should be the domain of industry. The panel believes that this framework for decision making has substantial validity when considering R&D investments far downstream of basic research and ones that center on choices for product development in the civilian sector. The objections to government direction of private sector activity are especially valid when technology policy is reflected in programs that provide subsidies to specific industries or firms. Some industrialized nations employ a wide range of technology and trade policy tools to ensure domestic capacities in high-technology industries. There are significant costs associated with direct subsidization by governments for “research and development” work on applied R&D in specific industry sectors or when markets are closed to international competition to protect domestic producers. Strong, continuing political pressures from special interest groups, especially in the United States but also in other nations, encourage direct government subsidies to industries that are not competitive in global markets. The United States can construct a technology policy that avoids industrial policy and does not protect industries and firms. We can accomplish this while, at the same time, supporting and leveraging U.S. comparative advantages in technological innovation. Although the innovative capacity of the United States remains strong, we believe that the ability of U.S. firms and citizens to capture the benefits of innovation may have declined over the past several decades. The federal government’s focus in technology policy should be altered from one that emphasizes support for basic research to one that includes incentives for pre-commercial R&D and the adoption of new technologies.
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The Government Role in Civilian Technology: Building a New Alliance Based on an assessment of past government intervention in private markets and the changed technological environment, it is reasonable to conclude that the government can, under certain circumstances, act as a catalyst in promoting private sector R&D. This is particularly true as it relates to funding of pre-commercial R&D in partnership with industry through collaborative projects. The government can provide financial support for R&D efforts judged promising by industrial firms and technologists by making investments that will benefit U.S. industrial performance and enhance long-term productivity growth and the welfare of U.S. citizens. An important reason for the success of the Defense Advanced Research Projects Agency (DARPA) and the National Advisory Committee on Aeronautics, in several areas, was their clear-cut mission (development of advanced dual-use and military technologies and of civil aeronautic technologies, respectively). Support for civilian technology is a more difficult task than supporting specific technologies for which the government is the funder, the customer, and the end user.6 An obstacle for new federal initiatives in pre-commercial technology is the lack of a well-defined focus that links to end users provide. This complicates priority setting and decision making about funding. The panel believes, however, that federal investment in pre-commercial R&D can be effective if the guidelines detailed below are followed closely. Investments in infrastructure-related technologies or facilities for new manufacturing technologies with wide industrial applications, for example, have the potential to generate significant public returns to federal investment and can stimulate productivity and long-term economic growth. As outlined in Chapter 2, current efforts by mission agencies to stimulate R&D and technology may be useful in specific cases. They are inadequate, however, to meet the objective of strengthening government-industry cooperation in R&D and pre-commercial technology. This is true for programs such as the Advanced Technology Program at its likely future level of funding. Mission agency funding of R&D of this nature is neither sufficiently broad in its coverage of fields nor, in most instances, at the necessary level of continuing funding to affect technology commercialization efforts in a substantial manner. An expanded government role in cooperation with the private sector is inevitable for several reasons. First, recent experience suggests that the government will continue to finance R&D in pre-commercial areas. Concerns about national security, economic growth, and the behavior of foreign governments have provided the motivation for these projects. Several initiatives in pre-commercial R&D have been established as much through political pressure and private sector special interest lobbying as for their potential technical merit. A more rational, balanced, and organized method for the government to respond to such initiatives is needed.
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The Government Role in Civilian Technology: Building a New Alliance Second, as outlined in Chapters 1 and 2, heightened international competition and the strength of our competitors' technological competence will drive costs and risks of investment in pre-commercial R&D higher. In some cases, these costs and risks are beyond the ability of individual firms or groups of firms engaged in R&D programs. For cases in which there are high expected social benefits, large externalities and spillovers in other sectors, and appropriability problems for private firms, these costs will fuel pressure for federal action. Finally, there is the growing dependence of U.S. jobs and living standard on international trade. This makes investments in pre-commercial R&D and technology, which may lead to commercializable products and processes, more important today than in the past. The growth of U.S. exports over the past several years, especially the success of many high-technology capital goods producers and service sector companies (which rely on continued advances in R&D) in international markets should be built upon by leveraging the nation's strengths. One way to do this is to facilitate pre-commercial R&D. Government moves to fund pre-commercial R&D, as evidenced in the establishment of the Advanced Technology Program, the Semiconductor Manufacturing Technology Research Corporation (SEMATECH), the National Center for Manufacturing Sciences (NCMS), and other federally sponsored R&D organizations, are in part a result of these factors. The panel believes such a move is appropriate. The challenge, therefore, is to design a framework for ensuring that the federal government's technology policy operates in the most rational and effective manner. This chapter outlines options for shaping a new federal role in pre-commercial R&D and technology. Extending federal support for pre-commercial R&D is only one of a range of policy tools that may enhance technology as a U.S. comparative advantage. Many factors contribute to technological innovation, including skill enhancement of the work force, stability of global macroeconomic environment, and public and private rates of savings. Although we do not provide a comprehensive set of recommendations to bolster U.S. competitiveness, the panel does offer a focused set of options to affect U.S. performance in technology, the subject of the academies' request from Congress for this report. This chapter outlines several important methods to strengthen U.S. technology policy and complements the recommendations on the establishment of an Industrial Extension Service at the Department of Commerce, the reinforcement of DARPA's role in dual-use technology, and recommendations on reforming policy on technology transfer from the federal laboratories found in Chapter 2. In this chapter we consider the expansion of mission agency support for pre-commercial R&D, as well as the possibility of two new organizations, a
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The Government Role in Civilian Technology: Building a New Alliance Civilian Technology Agency (CTA) and a quasi-governmental Civilian Technology Corporation (CTC). Both the CTA and the CTC might, in theory, be established to provide financial assistance to firms for pre-commercial R&D. The advantages and disadvantages of each of these options is outlined below. Although an agency within the federal government, such as the CTA, may have some merit, the panel has concluded that this approach has significant drawbacks. Establishment of a CTC is the preferred option. This chapter will also provide general principles under which any plan to formalize government-industry cooperation should proceed. The guidelines for organizing and rationalizing the process through which federal investment in R&D is undertaken can help ensure a more efficient and rational approach to federal investments in pre-commercial areas. GUIDING PRINCIPLES The congressional request for this report included the mandate to recommend methods to strengthen government-industry cooperation in civilian technology. In particular, the law directed the academies to examine ways in which R&D cooperation might be structured to enhance the technological performance of U.S. industry. The following guidelines present an important framework for Congress and the executive branch as they design future cooperative ventures between government and industry and modify existing programs. There is a long history of federal involvement in cooperative R&D and civilian technology development, as noted in Chapter 2.7 In particular, over the past two decades, Congress and the President have attempted to stimulate commercially relevant R&D through the establishment of a variety of initiatives. Examples of this include the formation of inter-agency working groups on civilian technology development and cooperative R&D, a proposal to the create a Civilian Industrial Technology Program (under the Kennedy administration), and the New Technological Opportunities program (under the Nixon administration) designed to stimulate private sector R&D in areas where market forces were inadequate to foster investment. The Industrial Innovation Initiatives program, announced in 1979 by President Carter, was aimed at both support for university-industry cooperative R&D and support for generic, applied R&D through government-industry cooperative R&D projects. During the Reagan administration, SEMATECH, the NCMS, and other publicly funded joint ventures were established. Many of these programs were established in response to concern over the defense industrial base, although much of the work in these programs may also have beneficial impacts on civilian technology development. One factor that limited the potential for success in several of these agency-sponsored efforts (at least those proposed or established prior to the 1980s) in
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The Government Role in Civilian Technology: Building a New Alliance pre-commercial R&D is that they lacked guidelines on a common framework and rationale for organizing federal investments and financial support. To provide the analytical framework for any future government initiatives in this area, the panel has developed a set of guidelines that should be followed. Each of the specific options reviewed by the panel for supporting pre-commercial R&D could, in theory, serve to strengthen U.S. comparative advantages in global markets. There are methods that can build on the driving forces of competition operating in a market-oriented economy and help to ensure that R&D investments will be made while minimizing the damaging influences of political or special interest group manipulation of federal programs. These guidelines, in part, serve to meet this important objective. Whichever mechanism is eventually adopted by the federal government, the operational guidelines to be followed in each option should be consistent with the following principles to ensure effective administration of financial assistance in R&D and technology. Principle 1: Cost Sharing A primary goal of any federal program that provides financial assistance to private firms should be to ensure that public funds are used to leverage corporate strengths in technology. The government should not attempt to override private market signals on the direction of development of promising technologies. Direct and unmatched government subsidies or grants to private firms for R&D or technology development projects can redirect scarce resources, both financial and human, into unproductive channels. To ensure the market relevance of R&D funded by the government in cooperative ventures, participating private sector firms or institutions (except nonprofit organizations) should bear a significant share of program costs. In most cases, this would involve private firms covering on the order of 50 percent of the total program costs of any pre-commercial R&D or technology project. There are several reasons why cost sharing is important. Cost sharing helps provide the private market incentives necessary for efficient allocation of scarce federal and private resources. It also ensures that projects undertaken match, as closely as practical, commercially relevant R&D.8 Federal efforts to support technology development clearly show the impact of cost sharing on private sector participation in joint R&D programs. There are many examples of federal experiments in R&D and technology that have lacked provisions on cost sharing. Most have been less than successful due to this deficiency in program design. Lack of a link to market-oriented incentives, established when a firm risks its own financial resources, leads to suboptimal performance. This fact was particularly apparent in
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The Government Role in Civilian Technology: Building a New Alliance the Department of Energy's (DOE) attempt to develop alternative energy demonstration programs during the late 1970s. There were many problems associated with DOE efforts in renewable and alternative energy R&D. One reason that attempts to support new energy technologies were less than successful was that the government assumed all costs associated with the R&D projects. A strong link to private sector R&D agendas and commercial markets was missing. These and other initiatives demonstrate that in order to avoid subsidizing technologies with little chance of success in the commercial marketplace, federal programs must include cost sharing. A legitimate concern is whether cost-sharing arrangements will merely subsidize industry's lower-priority technology development projects. There is that risk. The provision of a stable, multiyear federal contribution, as well as collaboration between several firms under federal sponsorship, however, should encourage longer-range projects that now tend to suffer from the short-term horizons of corporate management. Cost-sharing requirements strengthen the link between R&D and commercial applications. Several federal R&D programs now include cost-sharing provisions: Cooperative Research and Development Agreements between federal laboratories and industry; the Commerce Department's Advanced Technology Program (ATP); and the Small Business Innovation Research (SBIR) program, administered by the Small Business Administration, for example. Principle 2: Industry Involvement in Project Initiation and Design The long-term objective of extending the government's financial commitment to pre-commercial R&D is to enhance U.S. productivity and raise its standard of living. To do this, support for R&D should be closely linked to commercial markets, as well as being in areas with the potential for wide industrial application. Projects to stimulate collaborative R&D ventures funded through government-industry partnerships should be proposed and structured by industry. The private sector should be responsible for technical designs and the building of research agendas in any expanded federal program in pre-commercial R&D. SEMATECH and the National Center for Manufacturing Sciences, for example, were created in large part due to industry-led efforts to initiate the projects and to design the research frameworks. To the extent that these efforts are successful, early private sector proposals for technical design of the R&D work and control over the projects will have helped to ensure that success. Allowing private market signals to act as the signal for government action increases the possibility of success in high-risk R&D projects. Industry is in close contact with private markets, much more so than govern-
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The Government Role in Civilian Technology: Building a New Alliance ment. Private industry should be relied on for its judgment and expertise in these matters. Industry initiation and design of research programs and of the framework for R&D collaborative ventures will help government avoid directing product and process technology development. Principle 3: Insulation from Political Concerns The choice of R&D projects under an expanded federal program to support pre-commercial ventures should be based on technical and economic assessments of the merits of a specific R&D program. Evaluations of competing R&D proposals—either by a single firm or by groups of firms in a collaborative venture—that might be sponsored under an expanded federal program should be conducted by independent experts in the relevant scientific, technological, and economic areas. Political considerations should not influence R&D programs' technical output, the location of R&D facilities, or the management of R&D projects. Although this is a generally desirable goal, the complete removal of political factors from decisions on R&D investments is unlikely in most situations. The danger of close connection between R&D agendas and political concerns is real. Efforts should be made to avoid special interest politics in these programs. Pressures from special interest groups working through the political process can result in at least three less-than-optimal outcomes in federal decision making on investments in R&D. First, funding or site selection can be targeted to help local political constituents, regional interests, or agency bureaucracies. Second, research and development programs work best under conditions of relative autonomy and long-term funding commitments. Intervention by the political process—which repeatedly seeks to micromanage R&D projects—is potentially disruptive and costly. Finally, support based on political as opposed to technical considerations is likely to lead to wasteful, open-ended subsidies of inefficient, uncompetitive firms and industries. Principle 4: Diversification of Investments Projects funded under an expanded federal program should complement and not compete or interfere with pre-commercial R&D and technology development activities under way elsewhere in the federal government. This is especially true in programs that have been successful in meeting mission requirements or that currently have close technology links with the commercial marketplace. Examples include work at the National Institutes of Health in biomedical R&D and biotechnology, at the National Institute of Standards and Technology (NIST) in advanced manufacturing techniques and automated manufacturing technologies, and at the Department of Ener-
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The Government Role in Civilian Technology: Building a New Alliance gy in combustion engineering R&D. Pre-commercial R&D programs can address deficiencies in the commercial marketplace in technologies with the potential for widespread industry application and long-term significance to the U.S. economy. The decentralized nature of most government technology programs, which can serve to diversify federal investment in R&D, also increases the likelihood that uncoordinated programs will duplicate activities already under way in other federal agencies. In some cases, duplication of pre-commercial R&D projects is beneficial. Projects funded in a new program should not, however, duplicate related programs, particularly in the applied, mission-related R&D projects under way in federal agencies. Diversification across projects by technology area is also essential to the success of an expanded federal program. A broad portfolio of investments in technical fields, including the biomedical sciences and biotechnology, materials sciences, manufacturing product and process technologies, and computer and telecommunications-related technologies, should help ensure that an expanded government role in pre-commercial R&D does not become captive to the interests of a particular technology champion or a set of companies. Principle 5: Projects Open to Foreign Firms Characterized by Substantial Contribution to U.S. Gross Domestic Product (GDP) Collaborative projects in pre-commercial R&D supported by the government under an expanded federal program should be open to foreign firms that contribute in a substantial manner to the U.S. gross domestic product (GDP). Barriers to foreign participation in U.S. government-funded cooperative R&D projects have recently been put in place. Foreign participation is restricted in collaborative R&D projects sponsored by NIST's Advanced Technology Program, as well as those undertaken by the National Center for Manufacturing Sciences, and SEMATECH, for example.9 In most instances where restrictions have been put in place, a U.S. firm is defined as one under the control of U.S. citizens or incorporated in the United States. In a few cases, such as the ATP program, foreign firms may participate if the project under consideration would enhance U.S. competitiveness over the long-term more than if foreign firms were excluded. In an interconnected global economy where goods and services flow rapidly across national boundaries, the U.S. government should seek to ensure that technology and production capability of the most up-to-date and competitive kind flows to U.S.-based development and manufacturing facilities. There are significant benefits that accrue to the U.S. economy through the training, education, and skill enhancement offered by foreign-based corporations with U.S. affiliates. Many of the foreign-owned corporations
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The Government Role in Civilian Technology: Building a New Alliance billion per year would be sufficient to significantly affect commercialization efforts in a broad range of high-risk technologies through pre-commercial R&D funding. As noted in Chapter 2, current programs in the mission agencies that focus on pre-commercial R&D are not funded at a level that impacts private sector markets in a significant, measurable way. Funding of $5 billion would enable the CTC to make the necessary investments to affect technology commercialization rates in the United States in a wide range of sectors. The CTC would be required to submit to Congress and the President a report on its activities after four years and again when the review begins—no later than the tenth year of operation. Depending on the results of the review, funding for the CTC might be augmented. Because it would be an experiment, if an independent review panel found that the corporation failed in its objectives, the corporation would be dissolved. This feature provides another important advantage over housing such an organization within the executive branch structure. Once agencies are created they are rarely dismantled, even when their mission or utility in meeting program objectives has diminished significantly. Organization and Structure The CTC would operate outside the existing government agency structure. The corporation, aimed at providing financial support to industry under the guidelines for all three options listed above, would also be insulated (to the extent possible) from overt political direction by either Congress or the executive branch. It would be guided by a board of directors, comprised of private citizens nominated by the President, and subject to confirmation by the Senate. This organizational structure offers several benefits, specifically when measured against the operation and real-time oversight of an executive branch agency. The CTC, by being separate from both the executive branch and Congress, would be closer to a "customer" in industry or to a potential adopter of the resulting R&D and technology results of projects conducted under its sponsorship. The board would operate in the same manner as any private board of directors. It would choose a chief executive and would approve the selection of CTC projects. The CTC would be staffed by individuals with technical, business, and administrative expertise in civil research and technology development. It would also include a strong economics staff. The board would be called to consult frequently with officials of executive branch agencies, including the director of the Office of Management and Budget, the secretaries of energy and defense, the director of the National Science Foundation, and the director of the Office of Science and Technology Policy. Close consultation with these officials would help a CTC avoid dupli-
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The Government Role in Civilian Technology: Building a New Alliance cation of ongoing agency research efforts. An advisory panel, similar to that established for the U.S. Trade Representative to conduct trade and policy negotiations, would be put in place. Advisory committees, focused on both technology and industry issues, would have monitors from industry, labor, and federal agencies. Operation, Instructions, and Performance As previously noted, distance from the political process is important to successful execution of R&D programs. We recognize that it is impossible and inappropriate to remove politics completely from the nation's R&D and technology investment programs. In the panel's judgment, however, it is possible and appropriate to limit these influences in R&D programs. A primary advantage of the CTC is its distance from the constituent-oriented political process. It would clearly be more distant from the political process than either a new agency of the federal government or a new department in an existing agency. An independent, quasi-governmental entity would increase the chance that decisions to invest in commercially relevant technologies are based on technical and economic grounds. Notably, in contrast to either an expanded program for mission agency funding of R&D or the creation of a new Civilian Technology Agency, a CTC would avoid the political pressures and discontinuity inherent in the annual appropriation process. Placed outside government, the CTC would also have the advantage of flexibility in choice of investment. The corporation would have the latitude to choose which investment vehicles to use to support industry efforts in pre-commercial technology development. The CTC modes of support might include financing university R&D consortia (not subject to cost-sharing provisions), industry, and national laboratories or other projects related to technology and R&D. If the cost-sharing provisions outlined above cannot be satisfied by small companies, equity positions or venture arrangements could be established by the CTC board to facilitate their participation. On a case-by-case basis, CTC also would be able to recover cost-plus profit earned by technologies developed with CTC financing. Finally, companies that do not participate in CTC-supported projects would be able to license any CTC-financed technologies for a fee, after project participants have had a chance to exercise a right to an exclusive license. The CTC's business objective would be to encourage cooperative R&D ventures in pre-commercial areas. These projects should have high expected social rates of return in areas in which individual firms (or groups of firms) are unlikely to invest because of the low probability of economic returns. A primary goal of the CTC would be to improve selectivity in the choice of R&D projects with high social returns on investment and signifi-
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The Government Role in Civilian Technology: Building a New Alliance cant externalities for the economy. This would likely provide a greater channeling of federal funds to potentially useful projects than the types of tax policy incentives discussed above, for example. If successful, the CTC would provide for higher levels of R&D investment in pre-commercial areas in the United States and, over time, for a larger number of successful technology commercialization projects in the private sector. The government can affect technology commercialization rates to the benefit not only of a single firm or industry but also of the economy and welfare of the nation. What types of investment might comprise the initial portfolio for the CTC? We believe that details on specific investment examples for the CTC should be determined by those directly responsible for the organization in consultation with specialists in science, technology, and economics. Investments made by the CTC would be in pre-commercial areas where the social rate of return on investments would be significantly higher than the initial, expected rate of return in the private sector. As noted in previous chapters, these areas would be identified by the existence of great initial externalities in projected benefits of successful R&D efforts to other sectors of the economy and might include, for example, energy R&D projects with the potential for enhancing productivity and long-term economic growth. In addition, CTC investments should be in projects initiated by industry. The frequent failure of previous government technology efforts suggests that industry commitment in the initial stages of project design and through all subsequent phases is a critical factor in promoting success. The panel has considered several possible areas for initial investment by the CTC. These include advanced materials such as ceramics; environmental and energy-related technologies outside DOE's investments; microelectronics (to the extent that DARPA does not assume the leading role in this area); applied biotechnology such as protein separation and fermentation; information-processing technologies such as massive parallel processing, flat panel displays, and artificial intelligence (to the extent that DARPA does not assume this role); machine tools, such as computer-numerically controlled machine tools; nanostructures and nanomachines; technologies related to the construction of an Intelligent Vehicle Highway System; and technologies associated with the establishment of the National Research and Education Network (NREN) and High Performance Computer network, of which NREN is a part (to the extent they are not already being pursued by mission agencies of the federal government). Evaluation of CTC's success in promoting pre-commercial R&D in U.S. firms, in areas such as those outlined above, is an important element of this type of experiment. The CTC would have the flexibility to invest in either consortia, private firms with promising research agendas, or university-based R&D projects. As such, there should be no expectation that a diverse project portfolio, spread
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The Government Role in Civilian Technology: Building a New Alliance across different investment vehicles and technology areas, would produce a set rate of return. In any case, returns should not be expected to exceed those in private venture capital markets or even in corporate investment portfolios. Evaluating the success of the CTC should not, therefore, be based primarily on the corporation's overall rate of financial return on investments. The most important criterion—long-term social (including overall economic) return—will be much harder to judge. After no more than 10 years, an evaluation of the CTC, conducted by an independent review panel of experts, might take into consideration the following: whether the CTC has had an overall positive impact on the ability of U.S. industry to commercialize and adopt new technologies; whether it has invested in projects that exhibited a high potential social rate of return if successful; and whether the CTC has elicited strong, continuing support in the private sector, particularly as reflected in the willingness of firms to fund cooperative R&D projects under its sponsorship. Among the important advantages of the CTC are its freedom from operating under civil service guidelines. A highly skilled, motivated, and flexible staff is essential to any organization. The CTC, as an independent corporation, would be able to hire qualified scientists, engineers, business managers, academics, and administrative personnel by using competitive compensation packages. Clearly, a federal agency devoted to civilian technology would not be able to operate in this manner, pay nonfederal wages, and offer flexible, competitive benefit packages to attract the most highly qualified staff from the broadest possible labor pool. The CTC would be free of complex, slow, litigation-prone government procurement regulations. The CTC, unlike a new federal agency, would also be able to make direct loans and grants to ventures under terms acceptable to the board of directors. The CTC would have the flexibility to take direct equity ownership in R&D cooperative ventures, something not possible under current federal guidelines. Finally, a CTC would be an efficient method of facilitating R&D investments by the federal government, over and above an across-the-board R&D tax credit. There are benefits associated with this tax credit, as noted above. Lowering the effective tax burden for corporations engaged in research and development is, however, insufficient to meet the objective of facilitating pre-commercial R&D in a wide range of technology areas and of increasing the rate of technology adoption by U.S. industry. An organization to stimulate pre-commercial R&D investments would impact technology commercialization rates in a more systematic manner than current tax incentives for R&D. The board of the CTC would be charged with making investment decisions that narrow the possible portfolio of R&D projects in a manner that changes in the tax code cannot. In
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The Government Role in Civilian Technology: Building a New Alliance effect, corporations would have to meet a higher threshold or standard than simply investment in research and development. Moreover, the objectives of the CTC would be to stimulate investments in pre-commercial R&D to bolster the capacity of U.S. industry to commercialize technology. The R&D tax credit, in contrast, does not offer the flexibility of aiding firms that do not engage in R&D: incentives in the tax code are available only to firms that currently perform R&D. In theory, the CTC would operate to encourage at least some firms with limited financial resources that are just beginning R&D work. If increased R&D activity in pre-commercial areas is to be part of a changed U.S. technology strategy, it most likely will be more efficient to allocate funds directly for this purpose, through a mechanism like the CTC. Finally, tax credits have limited potential to affect rates of technology adoption or the diffusion of innovative technologies through specific programs tailored to meet this objective. Disadvantages of the CTC One disadvantage of the CTC (and of any similar, new organization) is that it cannot possibly be free of political influences. There would, very likely, be congressional and executive branch pressures on the CTC board and staff to fund projects with significance to political objectives and special interest lobbying. This important potential problem would be eased, however, by the involvement of both Congress and the executive branch in selecting the CTC board, by the lack of annual congressional appropriations, and by independent evaluation of the program content on a schedule such as the one outlined above. Another potential disadvantage of the CTC (or any other federal program in pre-commercial R&D) involves the uncertainty and risk associated with investment in areas where there are no clear market signals. The type of investments the CTC would make are, by definition, high-risk ventures, and the success or failure of its portfolio would depend, to a great extent, on the wisdom and judgment of the CTC board of directors and staff. A key issue here is how to evaluate the success or failure of projects in which a CTC might invest. The lack of a large number of commercial products resulting from CTC-funded ventures, even up to the 10-year review deadline, would not necessarily signify failure. In fact, projects funded by the CTC might meet the broad objectives of enhanced flow of information on technologies, speeding the rate of adoption of new technologies, and other benefits of R&D not captured in measurements that account only for commercial payback. The CTC should not be required to show a positive real rate of return on its investments. Zero or slightly positive real rate of return could, however, reduce the need for additional CTC appropriations, which would be a sig-
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The Government Role in Civilian Technology: Building a New Alliance nificant advantage. Finally, a high rate of commercial success for CTC-funded ventures might signal that the projects were too close to commercialization at their outset. Some failures are to be expected in these types of investments; if there are none, it signifies that the choices could have been funded commercially. Risk borne completely by the private sector, in investments made by venture capital firms, is arguably different from that shared by the public. This would be the case with a CTC funded through congressional appropriations. Even in a CTC, there will be criticism of any failure. For example, Congress often expects that R&D funds will be allocated only to successful scientific experiments, which is clearly neither possible nor desirable, and should not be expected. We believe that the safeguards and guidelines outlined above would ensure that the CTC's projects include those that promise high social rates of return and merit the risk of investing public funds. The CTC would clearly be one step removed from potential customers in the private sector. Its risk of project failure, therefore, would be higher than that of a venture capital firm. As noted in Chapter 2, tight links between the performer of R&D and potential customers increase the chances for success of any technology program. The CTC, unless endowed with a substantial first-time appropriation by Congress, might be subject to political pressure to alter its project portfolio in order to offset a potentially high failure rate. In sum, acceptance of failures is an important part of any high-risk investment venture, even as successes provide payback to the nation's technology base. There are also problems (evident with the CTA as well) associated with providing an organization with a mandate to support pre-commercial technology, without also providing guidelines on what specific areas constitute pre-commercial R&D. In theory, the CTC board might be able to draw on the expertise of outside groups of experts in an advisory capacity. Without a broad, industry-wide list of pre-commercial R&D areas to draw on however, and without specific understanding of investments that by definition are somewhat removed from the product stage of commercial markets, there remains—at least in the short term—reasonable doubt about the CTC's ability to guide its portfolio. Although various ''critical'' technology lists exist, the panel believes that they are too broad (and comprehensive) and insufficiently prioritized to provide a solid basis for specific investment decisions. The technologies cited in the growing number of "critical" technology lists would have to be narrowed by the CTC board. The final selection of projects may or may not be based on these lists. SUMMARY AND CONCLUSIONS This report has examined government-industry cooperation in civilian technology, with particular emphasis on analyzing methods to improve the
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The Government Role in Civilian Technology: Building a New Alliance technological performance of the U.S. economy. We have set out a series of recommendations to strengthen technology transfer from the federal laboratories and to increase the rate of technology adoption in U.S. industry (see Chapter 2). In this chapter, we propose guidelines to frame future R&D cooperation between government and industry, as well as possible structures to shape a new federal role in pre-commercial R&D support. These recommendations should not be viewed as a comprehensive plan to address U.S. industrial competitiveness. This report has specifically focused on the issues included in the panel's charge from Congress: U.S. performance in civil technology and the appropriate government role in this process. The panel has considered options for a mechanism through which the federal government might extend its role in civilian technology. We believe that a very few of the existing mission agency's R&D programs should be extended to include pre-commercial research and technology commercialization. We have also concluded that this alone is inadequate to meet the objective of supporting technology commercialization over the long term. Funding under a plan of this nature would, most likely, not reach the levels necessary to affect commercial markets on an economy-wide basis. Moreover, a government program to encourage pre-commercial R&D and technology development requires distance from existing agency agendas and from continuing budget and political pressures. Financial support for pre-commercial R&D, channeled through mission agencies, has little chance of competing with long-standing basic research or technology needs of the direct objectives of mission agencies. Even if available resources were guaranteed a reasonable chance of successfully competing with existing programs in the budgeting process, it is unlikely that a decentralized approach to support for R&D on problems that require choices of important technologies would result in identifiable, long-term benefits to U.S. performance. Finally, support for pre-commercial R&D to reach commercial objectives would clearly suffer in a program under the direction of agencies buffeted by political concern. The panel has concluded that there is a legitimate role for the federal government in financing and organizing investments in pre-commercial R&D. We recommend creation of a Civilian Technology Corporation (CTC) as the most appropriate new mechanism for any further substantial federal investment in pre-commercial technology. The details of how CTC would operate are best left to those individuals with responsibility for science, technology, and economic policy in government and industry. We do believe, however, that the CTC would offer a means to rationalize federal investments in nonmilitary technologies in a systematic fashion. The CTC would provide a mechanism for designing and implementing an organized approach to financing projects in sectors
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The Government Role in Civilian Technology: Building a New Alliance essential to the nation's technological base and its long-term economic advance. Separation of the CTC from mission agencies would further facilitate its work and distance it from political considerations and control. The partial success of DARPA, under somewhat similar conditions, suggests that a CTC has some likelihood of success, providing industry helps to formulate R&D projects and participates in cost sharing. Specific advantages of the CTC include its freedom from civil service guidelines. The CTC, as an independent corporation, would be able to hire qualified personnel by using competitive compensation packages to compete in private labor markets. The CTC, unlike a new federal agency, would also have the flexibility to make direct loans and grants for pre-commercial R&D under terms acceptable to its board of directors. This includes the ability to take equity position in R&D cooperative ventures, something not possible under current federal guidelines. NOTES 1. Kenneth Flamm and Thomas McNaugher, "Rationalizing Technology Investments," in Restructuring American Foreign Policy, ed. John D. Steinbruner (Washington, D.C.: Brookings Institution, 1989), 135-136. 2. William A. Cox, Productivity, Competitiveness, and U.S. Living Standards (Paper prepared for the Congressional Research Service, Library of Congress, Washington, D.C., 1991), 9. 3. The results of research and analysis on the effect of the R&D tax credit on industry's response to incentives are mixed. For example see Edwin Mansfield, "Studies of Tax Policy, Innovation, and Patents: A Final Report" (Paper prepared for National Science Foundation, Division of Policy Analysis and Research, October 1985) and Robert Eisner, Steven Albert, and Martin Sullivan, "The New Incremental Tax Credit for R&D: Incentive or Disincentive?" National Tax Journal (June 1984):171-183. The study by Mansfield found that firms would have reduced spending in the absence of a credit in the years 1981-1983, on average 1.2 percent lower in 1983, for example. The study also found that some firms might have reclassified activities that were categorized as R&D related (in the absence of a credit) or, in order to qualify for the credit, changed the composition of activities reported. Another study reported in Eisner et al. (1984) indicated that some of the positive response to the credit among firms may be associated with the substitution of one type of R&D for another. See Joseph Cordes, "A Survey of Research Findings on the R&D Tax Credit," in The R&D Tax Credit: Issues in Tax Policy and Industrial Innovation, ed. Kenneth M. Brown (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1984). See also Joseph J. Cordes, ''The Effect of Tax Policy on the Creation of New Technical Knowledge: An Assessment of the Evidence," in Impact of Technological Change on Employment and Economic Growth, eds. Richard M. Cyert and David C. Mowery (New York: Harper Business, 1988). 4. One study estimated, for example, that for every 1 percent reduction in the cost of R&D to firms, there is a corresponding increase in R&D spending of between 0.2 and 1.0 percent. Charles River Associates, An Assessment of Options for Restructuring the R&D Tax Credit to Reduce Dilution of its Marginal Incentive, Report Number 820.05, as cited in Martin N. Baily and Robert Z. Lawrence, The Incentive Effects of the New R&E Tax Credit (Washington, D.C.: Brookings Institution, July 1990), 3.
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The Government Role in Civilian Technology: Building a New Alliance 5. Baily and Lawrence, Incentive Effects, 3-4. 6. John A. Alic and Dorothy Robyn, "Designing a Civilian DARPA," Optics and Photonics News 1 (May 1990): 19-20. 7. See Albert H. Teich, Federal Support of Applied Research and Development: A Review of the United States Experience (Paper commissioned for a Workshop on the Federal Role in Research and Development, Committee on Science, Engineering, and Public Policy, National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and The Academy Industry Program, Washington, D.C., November 21-22, 1985). 8. Flamm and McNaugher, "Rationalizing Technology Investments," 154. 9. SEMATECH restricts participation in its R&D activities to companies incorporated in the United States. Companies applying for ATP grants must have research and manufacturing operations in the United States or must have stockholding arrangements in which a majority of stocks are U.S. owned. NCMS requires permission to transfer technology developed under its sponsorship to foreign companies and to foreign subsidiaries of participating firms. (Canadian firms are excepted.) 10. S. 1978, 101st Cong., 2nd sess., 1990; H.R. 3833, 101st Cong., 2nd sess., 1990. 11. H.R. 4715, 101st Cong., 2nd sess., 1990. 12. S. 2765, 101st Cong., 2nd sess., 1990. 13. See, for example, The Trade and Technology Promotion Act, S. 1978, 101st Cong., 2nd sess., 1990; and The Technology Corporation of America Act, H.R. 4715, 101st Cong., 2nd sess., 1990. 14. See Burton I. Edelson and Robert L. Stern, The Operations of DARPA and Its Utility as A Model for a Civilian ARPA (The Paul H. Nitze School for Advanced International Studies, The Johns Hopkins Foreign Policy Institute, Washington, D.C., 1989). 15. Alic and Robyn, "Designing a Civilian DARPA," 20. 16. Some of the problems involved in creating a new federal agency are discussed in National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Finding Common Ground (Washington, D.C.: National Academy Press, 1991), 144-145. 17. Alic and Robyn, "Designing a Civilian DARPA," 21.
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The Government Role in Civilian Technology: Building a New Alliance Appendixes
Representative terms from entire chapter: