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