1
The Environment For Technology Development

This report focuses on an important part of the competitive dynamic of any industrialized nation: the role and responsibility of the federal government, in cooperation with private sector firms, to facilitate technological progress. It is important, in any assessment of this subject, to begin with a brief overview of U.S. economic performance and the context in which government-industry cooperation in technology takes place.

Economic advance, of which technological innovation is a key component, is characterized by the ability of a nation to create and produce goods and services that meet global market needs, while at the same time supporting growth in real domestic incomes. The forces that drive economic growth and increases in domestic living standards depend in turn on many interrelated scientific, technological, managerial, social, and economic factors. These include continued improvements in productivity in both the manufacturing and the service sectors, and a stable macroeconomic environment. A skilled, motivated, and mobile work force and management; a strong research, development, and technology base; and progress in incremental advances in product and process technologies are also important. The ability of the public and private sectors to invest in R&D and physical capital, including infrastructure, is a fundamental part of economic advance, as well.1

There are indications that compared with previous postwar periods, the performance of the U.S. economy may have declined during the past 20 years. The fundamental problem facing the United States is the slow rate of



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The Government Role in Civilian Technology: Building a New Alliance 1 The Environment For Technology Development This report focuses on an important part of the competitive dynamic of any industrialized nation: the role and responsibility of the federal government, in cooperation with private sector firms, to facilitate technological progress. It is important, in any assessment of this subject, to begin with a brief overview of U.S. economic performance and the context in which government-industry cooperation in technology takes place. Economic advance, of which technological innovation is a key component, is characterized by the ability of a nation to create and produce goods and services that meet global market needs, while at the same time supporting growth in real domestic incomes. The forces that drive economic growth and increases in domestic living standards depend in turn on many interrelated scientific, technological, managerial, social, and economic factors. These include continued improvements in productivity in both the manufacturing and the service sectors, and a stable macroeconomic environment. A skilled, motivated, and mobile work force and management; a strong research, development, and technology base; and progress in incremental advances in product and process technologies are also important. The ability of the public and private sectors to invest in R&D and physical capital, including infrastructure, is a fundamental part of economic advance, as well.1 There are indications that compared with previous postwar periods, the performance of the U.S. economy may have declined during the past 20 years. The fundamental problem facing the United States is the slow rate of

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The Government Role in Civilian Technology: Building a New Alliance productivity growth. Growth in productivity is important for a number of reasons. Most importantly, it determines, in large part, national standards of living. A country that enjoys strong real growth in productivity over time can expect a corresponding increase in wages and income for its citizens. Nations with increasing productivity also have the capacity to support investment in programs that affect the quality of life for society as a whole. At the individual firm level, productivity growth rates determine, in part, the ability to compete effectively in global markets. The rate of growth in labor productivity in the private, nonfarm business sector in the United States, which averaged 3.3 percent annually during 1948–1965, declined to roughly 1.2 percent after 1970. The slowdown in productivity growth has important implications for growth in domestic income. Had labor productivity growth maintained its pre-1965 average annual rate, by 1985 the total U.S. output would have been 45 percent higher than it actually was. Since 1973, labor productivity growth rates have dropped significantly, as has growth in real hourly earnings. Hourly compensation, which includes fringe benefits, has grown at only 0.8 percent annually since then. There has been strong growth in per capita personal income, however, which includes not only wages and fringe benefits, but also dividends, rents, and transfers to compensation. Much of the divergence between the growth in per capita income and stagnant compensation growth rates appears to be due to rapid expansion of labor participation, growth in income from nonlabor sources, and a decline in real hourly wage rates of nonsupervisory (production) workers.2 Lower rates of growth in productivity and compensation also mean that the generation of workers entering the work force during the past 10 to 15 years—particularly production workers in positions that are usually associated with lower levels of skill, training, and education—faces the prospect of lifetime earnings and living standards lower than those of its parents. This is a risk as long as real compensation growth remains stagnant over time for these workers. This report examines an important part of U.S. productivity growth and long-term standards of living: the development, commercialization, and adoption of new technologies. Based on our analysis of this subject, the panel has concluded that U.S. policy, as it relates to civilian technologies, requires change. The structure of postwar U.S. science and technology policy was in many important ways a response to the Cold War. With the passing of the Cold War and other developments in the international economic, political, and technological environments, modifications in U.S. policy toward civilian technology development are justified. Modifications in U.S. technology policy, however, will be insufficient by themselves to reverse the trends in U.S. productivity and income growth

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The Government Role in Civilian Technology: Building a New Alliance evident over the past two decades. Without complementary revisions in macroeconomic policy (particularly increasing public and private savings rates), strengthening of the public educational system, improvements in the performance of U.S. managers, and higher standards of manufacturing quality, design, and engineering, this report's recommendations for change in civilian technology policy will be less effective and possibly futile. This chapter summarizes trends in recent U.S. economic performance and assesses the relationship between these trends and U.S. technological performance. A brief description of the technology creation, commercialization, and adoption process follow this discussion. The analysis presented in this chapter and subsequent material in Chapters 2 and 3 will show that there is a legitimate federal role in pre-commercial R&D and technology development. The United States can construct a technology policy that facilitates investment in these areas. It can strengthen current federal programs and implement new ones that leverage U.S. strengths in science and technological innovation. PRODUCTIVITY GROWTH It is important to note that an objective assessment of national economic and technological performance will show areas of both strength and weakness. Some analyses and public policy statements issued the past decade on U.S. performance have focused exclusively either on dramatic deficiencies in one sector of the U.S. economy or, in contrast, on areas of significant strength. In many cases, conclusions on the performance of the U.S. economy, in comparison to the nation's competitors, have been drawn from a few select examples and have failed to acknowledge the wide areas of broad strength in the nation's performance. The following discussion outlines, in summary fashion, areas of both concern and strength in the United States. As noted, the single greatest weakness in recent U.S. economic performance is the disappointing rate of growth in labor productivity since the early 1970s. There are economic forces that serve to reinforce productivity growth, as well as those that amplify declines in growth rates. In addition to contributing to earnings and household incomes, higher productivity growth rates can provide for higher levels of private sector investment in science and technology-related assets. Strong productivity performance also supports higher levels of public investment in infrastructure and human capital (education, training, and skill enhancement). Recent declines in labor productivity growth are not confined to the United States. Productivity performance in most of the member countries of the Organization for Economic Cooperation and Development has been poor since the mid-1970s, relative to growth rates from 1950 to 1974.3 Moreover, although U.S. productivity growth has slowed in recent years,

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The Government Role in Civilian Technology: Building a New Alliance TABLE 1-1 Real Gross Domestic Product Per Capita Based on Purchasing-Power-Parity Exchange Rates Country 1950 1960 1970 1980 1985 1987 1988 1989 1990 United States 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Canada 69.5 72.0 78.1 92.1 93.2 94.1 94.5 94.2 93.9 Japan 16.1 28.8 55.8 66.1 71.2 71.9 73.1 74.9 80.7 Korea NA 9.5 12.9 20.9 26.4 31.1 33.2 34.4 38.1 France 44.4 54.4 65.8 73.1 70.7 69.8 69.5 70.1 73.7 Germany 36.0 61.1 67.9 74.3 73.0 72.5 72.3 72.8 74.5 Italy 31.7 44.9 57.3 67.1 65.9 66.2 66.6 67.3 69.0 United Kingdom 60.4 66.5 64.9 66.2 66.4 68.4 68.7 68.6 69.8 NOTE: NA = Not available. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Office of Productivity and Technology, July 1991.

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The Government Role in Civilian Technology: Building a New Alliance the level of U.S. labor productivity remains the highest in the world. The United States, as shown in Table 1-1, continues to outperform other countries in real gross domestic product (GDP) per capita. The measured rates of productivity growth for U.S. manufacturing, in particular, have improved significantly compared to the very low growth rates of the 1970s and early 1980s. (Some portion of this improvement, however, may be the result of changes in the measurement of manufacturing output in such high-technology industries as computers, as well as changes in the organization of manufacturing establishments.) Although manufacturing productivity growth in the United States has improved in recent years, current data may overstate this improvement somewhat. Likewise, poor productivity growth in the nonmanufacturing (service) sector of the U.S. economy may reflect the lack of up-to-date data and the difficulty of measuring productivity growth. These difficulties have been compounded by underinvestment by federal agencies in data collection. Measurement of productivity in the service sector has clearly not kept pace with changes in the economy in recent decades.4 As shown in Table 1-2, average annual labor productivity growth in the U.S. nonfarm business sector slowed from a rate of 2.2 percent during 1960 TABLE 1-2 Productivity Growth for Selected OECD Countries (percentage changes at annual rate)   1960-1973 1973-1979 1979-1990 Total factor productivitya       United States 1.6 -0.4 0.3 Japan 5.9 1.4 2.0 Germany 2.7 1.8 0.8 United Kingdom 2.3 0.6 1.6 OECD Europe 3.3 1.4 1.3 OECD 2.8 0.5 0.9 Labor productivityb       United States 2.2 0.0 0.7 Japan 8.6 2.9 3.0 Germany 4.6 3.1 1.6 United Kingdom 3.6 1.6 2.1 OECD Europe 5.0 2.7 2.0 OECD 4.1 1.4 1.5 a Total factor productivity is equal to a weighted average of the growth in labor and capital productivity. The sample-period averages for capital and labor shares are used as weights. b Output per employed person. SOURCE: Adapted from Organization for Economic Cooperation and Development, OECD Economic Outlook #50, 1991, Table 48.

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The Government Role in Civilian Technology: Building a New Alliance to 1973, to no growth from 1973 to 1979. It rose an average of only 0.7 percent per year from 1979 to 1990. Labor productivity in Japan, Germany, and other nations followed a similar, even steeper pattern of declining rates of growth. In Japan, annual productivity growth fell from an average of 8.6 percent during 1960 to 1973 to a rate of 2.9 percent in 1973 to 1979, for example. Surprisingly, despite considerable research, economists have yet to develop a widely accepted explanation for the post-1973 global decline in productivity growth. Most scholars nonetheless agree that declines in rates and changes in the nature of capital formation, changes in the composition of the labor force, the energy price increases of the 1970s, and lower rates of growth of R&D investment contributed to this decline. Each of these factors is examined, in brief, in the following pages. Capital Investment International comparisons of productivity growth rates show a strong correlation between higher growth of capital input per worker (or higher levels of investment) and higher productivity growth rates. One reason for this relationship is the fact that technological advances are often embodied in new physical capital (plant and equipment). In order to reap the benefits of robotics technologies, for example, a firm must invest in new production equipment. One study of postwar economic growth in five industrialized nations found that the benefits of technological progress are ''capital-augmenting.''5 In other words, it is possible to show that technical progress is biased toward capital investment and that capital and technical progress are complementary. The benefits of technical progress are larger with larger capital stocks (total level of plant and equipment in an economy). Other scholars have estimated that "capital-labor" substitution, or replacing labor (hours worked) with capital equipment, contributed 19 percent of U.S. productivity growth from 1947 to 1985 and 13 percent of growth from 1979 to 1985.6 Another recent survey of the contribution of capital investment to productivity growth found that increased capital quality contributed 28 percent of U.S. productivity growth from 1947 to 1985 in the United States, with a 30 percent contribution to overall growth in 1979 to 1985.7 Declines in the rate of capital formation in the United States, therefore, may have contributed to the recent productivity slowdown. An examination of the 1970s, however, does not show lower rates of gross investment in physical capital in the United States relative to previous periods. Gross investment was sustained at historic levels during the 1970s and continues to grow today. The rate of growth in capital input, however, has not kept pace with expansion of the labor force, especially during the 1970s.8 Thus, productive capital available per worker has declined. Moreover, the com-

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The Government Role in Civilian Technology: Building a New Alliance position of the capital investment of the 1980s shifted slightly to favor greater investment in real estate and less in physical plant and equipment.9 Demographic Shifts Changes in the demographics of the U.S. work force may also have contributed to lower rates of productivity growth after 1973. The U.S. work force grew rapidly during the 1970s, as the baby-boom generation entered the workplace. The ability of the U.S. economy to absorb this large expansion in workers without sharp and sustained increases in unemployment rates is itself a remarkable achievement. Many Western European economies have fared less well in absorbing their baby-boom generations and women into their domestic work forces, which has contributed to the relatively high and sustained unemployment rates in Western European economies since the mid-1970s. In the United States, rapid expansion of the work force during the 1970s and 1980s made it far more difficult to maintain historic levels of labor productivity growth. In addition, the changing composition of the work force associated with the entry of baby boomers and the increase in labor force participation rates of women meant an expansion in less experienced workers as a share of the total work force. As one estimate of changes in the work force suggested, the U.S. shift of labor resources to lower-productivity workers between 1970 and 1983 decreased average productivity growth (based on 1979 employment shares) by 0.2 percent.10 Other widely cited studies have also found that changing demographics in the United States, especially since the late 1960s, have contributed to lower productivity.11 Since the U.S. labor force now is growing more slowly and is forecast to grow roughly one-half as rapidly through much of the 1990s as it did during the 1980s, this source of downward pressure on productivity growth rates should be reduced, at least for the intermediate term. Rising Energy Prices Disruptions in world oil markets also played a role in the productivity slowdown. Dramatic increases in energy prices during the 1970s may have accelerated the rate of obsolescence of existing plants and equipment, thus increasing the levels of capital investment required to maintain previous levels of productivity growth. World energy prices quadrupled in 1974 after the Organization of Petroleum Exporting Countries set benchmark prices for crude oil, and they rose again in 1979 and 1980. These sharp rises in energy prices caused serious disruptions in the economy, contributed to inflationary pressures, and quickly made much of the existing stock of plant and capital equipment, as well as other energy-inefficient investments, ob-

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The Government Role in Civilian Technology: Building a New Alliance solete. Increases in energy prices, therefore, contributed to lower rates of growth in labor productivity, although higher prices did direct investment to energy-saving structures and equipment, with great improvements in energy efficiency. Slowdown in Research and Development Spending Spending on research and development also contributes to productivity growth. A number of studies have found a link between industrially funded R&D investment and productivity growth at both the individual firm and the industry levels. Most of these studies also suggest that industrially financed R&D does not affect productivity for at least three to six years. This delayed effect, which is even longer for basic research expenditures, reflects the time needed to commercialize and adopt innovations based on R&D investment. Therefore, the slowdown in industrial R&D expenditure growth in the U.S. economy during the early 1970s may well have had an impact on labor productivity growth rates into the 1980s. The resumption of growth in industrial R&D expenditures after 1975 would have similarly delayed effects, as will the recent (1988–1991) declines in growth in industrial R&D expenditures. The reasons for the change in the growth rates in industrially funded R&D expenditures in the United States during the 1970s and 1980s are not well understood. Nonetheless, there is little doubt that U.S. industry for some years has been investing less of its own funds in R&D (measured as a share of gross national product) than has Japanese or German industry. Since 1970, domestic U.S. industrially funded R&D has accounted for a smaller share of U.S. gross national product (GNP) than have Japanese or German industrially funded R&D expenditures (measured as a share of Japanese and German GNPs, respectively). When comparing nondefense R&D expenditures as a percentage of GNP from all sources (industry and government), the United States has also invested less than other nations. In 1971, for example, the United States, Japan, and Germany spent 1.7, 1.9, and 2.0 percent of GNP on nondefense R&D, respectively. The U.S. investment in R&D has now fallen well behind that of its industrial competitors. In 1987, the U.S. share was still 1.7 percent, whereas Japan and Germany had shares of 2.8 and 2.6 percent, respectively.12 As noted below, U.S. federal R&D expenditures are largely devoted to defense-related work. This fact, combined with the sizable portion of U.S. national R&D investment that is funded from public sources (which substantially exceeds the proportion in Japan and Germany), means that U.S. nondefense R&D expenditures (from public and private sources) account for a smaller share of GNP than do Japanese and German nondefense R&D.

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The Government Role in Civilian Technology: Building a New Alliance TECHNOLOGY CREATION, COMMERCIALIZATION, ADOPTION AND TRANSFER The economic performance of the United States during the last decade combines areas of strength and weakness. The United States does, however, retain global dominance in scientific research and "innovation" (defined below), as revealed in Nobel Prizes and citations of papers published by U.S. scholars, among other indicators. The innovative capacity of the United States, relative to its past performance, we believe, has not declined. The panel has concluded, however, that the nation requires a better-balanced technology policy that includes support not only for basic research but also for pre-commercial R&D and technology adoption. The United States can leverage its strengths in science and invention to increase the rate of technology commercialization in the economy. The environment for technology development has changed. This has contributed, in part, to changes in the circumstances through which the economic returns to research and technology are captured. To illuminate this assertion and lay the groundwork for an analysis of changes in the environment for technology development, we now turn to a discussion of the processes through which technologies are created and yield economic returns. Technology Creation The creation and realization of economic benefits associated with new technology involve a number of phases that interact with one another and frequently extend over a lengthy period of time. The initial phase, the creation of new technology, is often referred to as "invention," and typically involves fundamental scientific and engineering research that demonstrates a basic concept or proves the feasibility of a specific solution to a problem. This first phase of the technology development process often involves basic research efforts. In the United States, a significant portion of this "upstream" research in both industry and universities has been supported by the government. (During 1985 to 1988, roughly two-thirds of all basic research performed in the United States was supported by federal funds.) In many cases, results from the invention phase lead to the publication of scientific papers or applications for patents. The results of this phase, however, are rarely translated into commercial sales or large profits.13 Commercialization Invention is followed by "innovation," or commercialization. This phase involves the translation of a scientific or technological advance into a commercial product. The focus of the vast majority of industrial R&D expendi-

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The Government Role in Civilian Technology: Building a New Alliance tures is not on research (the "R" of R&D) but on development, an activity that includes the technical components of commercialization of new scientific or technological advances. It also may involve the improvement of existing products or processes through the application of such advances. In many instances, innovation requires the combination of a number of technological or scientific advances in an improved version of an older product. In other cases, it requires a very large investment of resources in the "scaling up" of production facilities to manufacture commercial volumes or to ''debug'' devices that have been proved to operate in the laboratory. Those involved in translating a new scientific or technological advance into a commercial product often are not the same individuals responsible for the underlying invention or discovery. Moreover, the time lag between invention and innovation may be quite long, and much of the "science" that underpins contemporary technological innovation may in fact be based on research performed decades earlier. Nevertheless, the invention and innovation phases of the creation of a new technology are not strictly sequential, but often interact with one another. Problems encountered in translating new science into new products often feed back into the scientific research process. The development of radioastronomy, for example, originated in efforts to reduce background noise in long-distance telephone communications. Almost always, manufacturing processes, as well as consumer preference and product development requirements, are key elements of the development process. Successful innovation results in a new process or product that may yield large profits to the firm or individual responsible for the innovation. This requires investment in a wide range of "complementary" activities that extend well beyond narrowly defined scientific inquiry or engineering work. Improvements in production processes, for example, are often required to manufacture a new product at the lowest possible cost. The commercialization of a new product may also require significant investments in distribution and marketing networks. Moreover, the magnitude and importance of these investments often mean that individuals or firms that first introduce a new process or product may not capture much of the profits from it. Rivals are often able to quickly imitate or duplicate technological advances. The economic returns of new technology assume two forms: (1) profits to the individual innovator (or shareholders of a corporation), along with higher wages and compensation for workers; and (2) benefits to the economy channeled through the adoption of new products and processes by other firms. The latter also includes benefits to consumers through a wider range of product choices that better satisfy human needs. The commercial introduction of a new product or the application of new technologies to improve an established product (e.g., automobiles) often produces large sales at a high price, yielding significant profits to the innovating firm or entrepre-

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The Government Role in Civilian Technology: Building a New Alliance neur responsible for successful commercialization or improvement. These profits in turn are distributed to shareholders. In many instances they are reflected as well in above-average wages and salaries in the firm or industry responsible for successful innovations. Some portion of the U.S. economy's ability to pay high wages, relative to other nations during the postwar era, clearly reflects the successful commercialization of a stream of new products and processes by U.S. firms. If U.S. ability to successfully and rapidly commercialize new technologies declines, this source of competitive advantage and above-average wages and salaries will also decline. Product innovations and improvements are extremely difficult to measure with conventional economic statistics. Their benefits often are not captured by conventional measures of productivity growth. Recent efforts by the Bureau of Economic Analysis of the Department of Commerce to adjust the data on the computer industry to reflect improvements in product quality (adjustments with important implications for measured productivity growth) have proved difficult and controversial. Such measurement problems are widespread in manufacturing. They are even more serious in the nonmanufacturing sector. This is true, in particular, because large numbers of new products that advanced information technologies have made possible go largely unmeasured in national income and productivity data. In both the manufacturing and the nonmanufacturing sectors, therefore, the productivity and output statistics often do not take into account the results of product innovation and improvement. Nevertheless, it is clear that the magnitude of the productivity slowdown is a problem for the United States. Adoption A second channel through which the economic benefits of new technologies are realized is their adoption by other firms within an economy. Firms that rapidly and effectively incorporate new process and product technologies into the production of goods and services often improve productivity and competitive advantage in ways that (at least in principle) are captured by conventional measures of labor productivity. The adoption of new technologies is a costly and often knowledge-intensive process. It involves investments in worker training, new capital equipment and plants, information collection, and product and process debugging. Indeed, many of the skills and capabilities necessary to be an effective innovator or creator of technology are also indispensable for the successful adoption of new technologies. The adoption of a computer-integrated work cell, or work station, for example, requires extensive customized software and the removal of special defects at the installation site. In addition, the technology undergoes modification and improvement during the adoption process, as the

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The Government Role in Civilian Technology: Building a New Alliance TABLE 1-7 U.S. Receipts and Payments of Royalties and Fees Associated with Unaffiliated Foreign Residents, 1972-1988 (millions of dollars) Year All Countries West Germany United Kingdom Japan Receipts         1972 655 56 63 240 1973 712 63 75 273 1974 751 78 71 249 1975 757 81 79 219 1976 822 83 72 246 1977 1,037 92 82 275 1978 1,180 119 93 343 1979 1,204 109 102 343 1980 1,305 145 113 403 1981 1,490 101 119 423 1982 1,669 105 122 502 1983 1,679 136 134 523 1984 1,709 127 133 549 1985 1,899 112 126 606 1986 1,842 114 112 679 1987 2,170 135 111 875 1988 2,416 126 127 1,016 Payments         1972 139 29 44 6 1973 176 37 53 13 1974 186 34 67 12 1975 186 32 76 9 1976 189 34 77 13 1977 262 31 72 16 1978 277 27 84 15 1979 309 40 93 15 1980 297 61 96 20 1981 289 43 99 37 1982 292 35 94 31 1983 318 35 90 53 1984 359 59 85 63 1985 425 47 123 66 1986 460 87 76 113 1987 522 108 97 104 1988 1,080 131 143 112

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The Government Role in Civilian Technology: Building a New Alliance Year All Countries West Germany United Kingdom Japan Balance         1972 516 27 19 234 1973 536 26 22 260 1974 565 44 4 237 1975 571 49 3 210 1976 633 49 (5) 233 1977 775 61 10 259 1978 903 92 9 328 1979 895 69 9 328 1980 1,008 84 17 383 1981 1,201 58 20 386 1982 1,377 70 28 471 1983 1,361 101 44 470 1984 1,350 68 48 486 1985 1,474 65 3 540 1986 1,382 27 36 519 1987 1,648 27 14 750 1988 1,336 (5) (16) 904   SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis data, as reported in International Science and Technology Data Update: 1991, National Science Foundation, Special Report, NSF 91-309, p. 117. petitive capabilities of foreign firms is by no means a negative development. Indeed, by improving the quality of products and processes available to U.S. consumers (which include U.S. industrial firms that utilize foreign-source technologies and components), this development will improve U.S. standards of living, not erode them. As incomes rise overseas with increased technical, manufacturing, and export competence, aggregate levels of income in the United States rise, and demand for the nation's goods and services also increase. Moreover, rising standards of living overseas reflect the success of postwar U.S. policies that supported reconstruction and economic development. The U.S. economy benefits from innovations wherever they are generated. If, however, we can devise policies and programs that serve to improve U.S. performance, our standards of living will benefit more than if we do not act. Moreover, if the nation's capacity to commercialize and market goods and services (particularly high-technology manufactures) is improved from its current performance, it will benefit the economy over the long-term.

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The Government Role in Civilian Technology: Building a New Alliance In sum, the developments in recent years that, in the panel's view, form a basis for carefully reviewing federal policy toward civilian technologies are (1) the increased exposure of U.S. firms to more intense international competition from more capable foreign firms, as well as their expanded opportunities in foreign markets; and (2) some decline in the ability of U.S. firms to derive economic benefits from the large federal investment in basic and defense-related R&D. These developments may, we believe, have reduced the technological lead of U.S. firms in terms of their ability to apply and adopt new technologies. These developments also may have increased the difficulties faced by U.S. firms in capturing high returns on investments in technology creation and commercialization. OTHER POLICY ISSUES A central theme of this report is the need to recognize the breadth of the array of policies and factors that influence technological performance. Many of these policies lie outside the group of instruments typically associated with science and technology policy. For example, capital requirements of technology creation, commercialization, and adoption are such that the domestic economic environment for capital formation is an important influence on technological performance. A cost of capital to U.S. firms that greatly exceeds the cost faced by foreign competitors would, over time, have a significant influence on investment decisions. These in turn will affect the processes of technology creation (through diminished expenditures on research, the returns from which may not be realized for many years), commercialization (reduced expenditures on development, plant, and equipment, etc.), and adoption (reduced investments in capital goods that embody new technologies). To the extent that the cost of capital facing U.S. corporations may now exceed costs overseas (a point on which there is currently a lack of consensus), it suggests differences between the United States and other countries in a number of areas, including interest rates, tax structures, and operation of financial markets. A detailed examination of these factors is beyond the scope of this report; however, the apparent short-term focus of U.S. managers on investments in physical capital and R&D (whatever its causes) is a central concern.44 Moreover, for the recommendations of this panel to have any impact, U.S. firms must improve their management of technological assets. In the context of current public policies, U.S. managers have, in some cases, failed to manage these resources carefully or effectively. In other instances, they have failed to respond adequately to international competition and have been inattentive to technological and scientific advances not invented in their own firms. In addition, internal compensation and incentive practices have rarely rewarded managers who pursued careers in engi-

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The Government Role in Civilian Technology: Building a New Alliance neering design and production. Compensation is greatest for those in marketing, finance, and even research and development. Given the current environment in which managers operate, they should seek to create an atmosphere within their firms that supports long-term investment. Investments should focus on R&D, improving manufacturing performance, and enhancing employee skills. Senior managers of U.S. firms can no longer assume that they can compete in today's global economy without a deep understanding of the technological strengths, weaknesses, and needs of their firms, as well as domestic and foreign competitors. Management and engineering schools in the United States must also improve their performance in educating students on technology management and manufacturing issues. Another area in which U.S. public policy and private investment decisions appear to be handicapping its technological performance is investment in the skills of the work force. This is true for both those entering the labor force and workers currently employed (or displaced). The U.S. higher education system remains strong, despite growing financial pressures on U.S. universities. The same cannot be said, however, of U.S. public primary and secondary education. The U.S. system appears to perform less well than educational systems in other industrial and some industrializing economies, particularly in equipping entrants to the work force with basic abilities in literacy, numeracy, science, and mathematics. Job-related proficiency in many industries now centers on these abilities. In addition, they are often the foundation necessary for workers to make the transition to new jobs or to work with new technologies. The public and private institutions that support the transition from secondary school to the workplace in the U.S. economy are unequal, we believe, to the task. Programs to improve the skills of the employed work force and workers facing displacement also are considerably weaker in the United States than in Japan and Germany.45 In Japan, the central government and industrial firms emphasize programs that encourage all new engineers to begin training cycles on the shop floor. In Germany, apprentice systems allow workers to move into higher skill-based jobs, and the federal government supports the training of technicians. Both countries have undoubtedly benefitted from these and other efforts to enhance work force skills and training. Improvements in U.S. technological performance will require steps by the private sector and by federal, state, and local governments to improve public primary and secondary education, with a strong emphasis on basic skills—literacy and numeracy. Investment in the skills of the employed work force, and investment in retraining the unemployed or imminently unemployed worker, are also important to the long-term technological performance of U.S. firms.

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The Government Role in Civilian Technology: Building a New Alliance A final area in which public agencies carry an especially significant burden is in the provision of the physical infrastructure necessary to support highly productive economic activities. Here, too, the performance of federal, state, and local governments in recent years has been poor. Data on trends in U.S. investment in infrastructure show declining rates of investment during the 1970s and 1980s, relative to past decades. Not only has the rate of growth in the value of capital stock declined, particularly in the nonmilitary sector, but recent assessments show a reduced federal role in investments in infrastructure. From 1960 to 1987, federal support for capital investments, operations, and maintenance in infrastructure fell from 31 to 24 percent of total federal government expenditures.46 During the same period, the proportion of all government spending in the United States (federal, state, and local) allocated to public works projects in infrastructure fell from 12 to 7 percent. Evidence for a relationship between investment in infrastructure and economic development is both intuitive and analytical. Moreover, the relationship is an interactive one—slower productivity growth implies slower growth in national income and reduced rates of growth in public revenues to support these expenditures. It seems evident that the growth of industry sectors such as automobiles and air transportation rested in large part on massive public investments in highways, airports, and air safety. Conversely, crumbling roads, collapsed bridges, and congested airports today seem to threaten afflicted regions with economic disruption. The panel supports efforts to increase levels of investment in the physical infrastructure of the U.S. economy. SUMMARY AND CONCLUSIONS The poor U.S. performance in improving measured productivity growth rates is a central cause for concern. This is particularly true when considering the economic environment for technology development in the United States. As we have seen, investment in physical capital and civilian research and development are important components of strong productivity growth rates. These are areas to which we must devote greater attention in the future. In addition, we have found that the innovative capacity of the United States through the development stage has remained strong relative to the nation's performance over the past several decades. There are many indications of continuing U.S. strengths as they relate to innovation and technology development, including a strong university system and basic research enterprise, U.S. dominance in generating technologies with potential commercial value, and strong real rates of growth in output of the manufacturing sector. Nonetheless, the economic and technological challenge posed by our

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The Government Role in Civilian Technology: Building a New Alliance major competitors has increased dramatically over the past two decades. U.S. firms can improve their performance in moving technology into the now global commercial marketplace (technology commercialization), where they face this challenge, and speed the transfer and adoption of new technologies throughout the economy. Federal government policy can affect industrial performance in these areas. In addition, problems associated with design for manufacturability, incremental improvements in product and process technology, relations between suppliers and customers, and quality control require attention. These problems have little to do with the commercialization of new, innovative technologies, but progress in raising U.S. performance in these areas is critical to long-term economic advance. The time required to go from product design to commercialization in some important U.S. industries significantly exceeds that of foreign competitors, for example. The new competitive environment for technology development means that continuous improvements by U.S. firms in manufacturing process technology will be necessary. Progress here remains primarily a private sector responsibility. The panel believes, however, that modifications in federal technology policies can also strengthen national performance in civilian technology and enhance long-term economic growth. The U.S. performance (relative to its past) in technology is being challenged more strongly than ever before in the postwar period. The United States can strengthen technology commercialization, at a stage prior to that at which private firms invest in commercialization activities, through federal action to facilitate pre-commercial R&D. There is a legitimate federal role in this area. The science and technology enterprise is not characterized by a linear model of development, as we have seen. It is an intense, interactive process whereby investment in pre-commercial activities can help promote commercialization and thereby support productivity growth. The United States can construct a technology policy (and design a program) that avoids direct subsidies for firms and industries, while at the same time supporting and leveraging U.S. comparative advantages in technological innovation. NOTES 1.   For an overview of productivity and investment see, John Wilson, ''The Contribution of Infrastructure, Human and Physical Capital, and R&D Investments to Productivity Growth'' (Paper prepared for the Science, Technology, and Economic Policy Board, National Research Council, Washington, D.C., March 1991). 2.   Eugene Kroch, "Recent Real Income and Wage Trends in the United States," Federal Reserve Bank of New York Quarterly Review 16 (Summer 1991):36-39. 3.   Steven Englander and Axel Mittelstadt, Total Factor Productivity (Paris: Organization for Economic Cooperation and Development, 1988), 8. 4.   The administration has requested $26 million in fiscal year 1992 for a new program to improve the collection and analysis of economic statistics/data by the federal government.

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The Government Role in Civilian Technology: Building a New Alliance 5.   Michael J. Boskin and Lawrence J. Lau, "Post-War Economic Growth in the Group of Five Countries: A New Analysis" (Working papers, Department of Economics, Stanford University, 1990). 6.   Dale W. Jorgenson, Frank M. Gollop, and Barbara M. Fraumeni, Productivity and U.S. Economic Growth (Cambridge, Mass.: Harvard University Press, 1987). 7.   Dale W. Jorgenson, "Investing in Productivity Growth," in Technology and Economics (Washington, D.C.: National Academy of Engineering, 1991), 59. 8.   Studies that attribute flat capital-labor ratios to the productivity slowdown include Otto Eckstein, "Core Inflation, Productivity, Capital Supply, and Demand Management," in The Economy and The President: 1980 and Beyond, ed. Walter E. Hoadley (Englewood Cliffs, N.J.: Prentice-Hall, 1980); Richard W. Kopcke, "Capital Accumulation and Potential Growth," in The Decline in Productivity Growth (Boston: Federal Reserve Bank of Boston, 1980); M. Ishaq Nadiri, "Sectoral Productivity Slowdown,'' American Economic Review, no.2 (May 1980):349-352; and Peter K. Clark, "Capital Formation and the Recent Productivity Slowdown," (Paper presented to the American Economic Association and the American Finance Association, December 30, 1977), among others. See also Edward F. Denison, ''Discussion," in The Decline in Productivity Growth (Boston: Federal Reserve Bank of Boston, 1980) and Edward Wolff, "The Composition of Output and the Productivity Growth Slowdown of 1967-76" (New York University, Department of Economics, 1981, Mimeographed), who have argued that capital formation was not a prime factor in productivity growth slowing. 9.   See Council of Economic Advisors, Economic Report of the President 1990 (Washington, D.C.: U.S. Government Printing Office, 1991). 10.   Englander and Mittelstadt, Total Factor Productivity. 11.   G. Perry, "Potential Output and Productivity," Brookings Papers on Economic Activity, No. 1 (Washington, D.C.: The Brookings Institution, 1987), 11-47; and Martin Neil Baily, Brookings Papers on Economic Activity, No. 1 (Washington, D.C.: The Brookings Institution, 1981). 12.   National Science Foundation, International Science and Technology Data Update: 1988 (Washington, D.C.: National Science Foundation, 1989), 8; and National Science Foundation, National Patterns of R&D Resources:1989 (Washington, D.C.: National Science Foundation, 1989). 13.   See Government-University-Industry Research Roundtable, National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Industrial Perspectives on Innovation and Interactions with Universities (Washington, D.C.: National Academy Press, 1991) for further discussion of this point. 14.   Stephen J. Kline, "Research, Invention, Innovation, and Production: Models and Reality" (Stanford, Calif.: Stanford University, February 1985), 23; and Ralph E. Gomory, "From the 'Ladder of Science' to the Product Development Cycle," Harvard Business Review 67 (November-December 1989):99-105. 15.   See, for example, Ralph E. Gomory, "Technology Development," Science 220 (May 6, 1983):577. 16.   See analysis contained in the following working papers of the MIT Commission on Industrial Productivity (Cambridge, Mass.: MIT Press, 1989): Kirkor Bozdogan, "The Transformation of the U.S. Chemical Industry," vol. I, 1-41 and Artemis March, "The U.S. Commercial Aircraft Industry and Its Foreign Competitors, vol. I, 1-51, for example. 17.   See, for example, Massachusetts Institute of Technology (MIT), Commission Working Group on Consumer Electronics Industries, "The Decline of U.S. Consumer Electronics Manufacturing: History, Hypotheses, and Remedies," MIT Commission on Industrial Productivity Working Papers, vol. I (Cambridge, Mass.: MIT Press, 1989), 76; Artemis March, "The U.S. Machine Tool Industry and Its Foreign Competitors," MIT Commission on Industrial Productivity Working Papers, vol. II (Cambridge, Mass.: MIT Press, 1989), 1-109; and Commission Working Group on the Materials Industry, "The Future of the U.S. Steel Industry in the

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The Government Role in Civilian Technology: Building a New Alliance     International Marketplace," MIT Commission on Industrial Productivity Working Papers, vol. II (Cambridge, Mass.: MIT Press, 1989), 1-49. 18.   The source for much of the information in this section is the National Science Board, Science and Engineering Indicators-1991 (Washington, D.C.: U.S. Government Printing Office, 1991). 19.   There are problems associated with using data on patents as an absolute indicator of the strength of national technical output. In industries such as computers, telecommunications, and other technology-intensive sectors, many of which are still in the formative stages, patents are less important for protection of intellectual property rights (IPR) than other instruments. (For an overview of intellectual property rights issues, including a discussion of the evolving forms of IPR protection, see Robert P. Benko, Protecting Intellectual Property Rights (Washington, D.C.: American Enterprise Institute, 1987).) In addition, there are problems associated with interpreting data produced by the U.S. Patent Office. The Patent Office has been subject to budget constraints, shrinking resources devoted to patent applications during the 1980s, and perhaps other special inefficiencies in the granting process. See Zvi Griliches, "Patents: Recent Trends and Puzzles," in Brookings Papers on Economic Activity, Microeconomics , eds. Martin Neil Baily and Clifford Winston (Washington, D.C.: The Brookings Institution, 1989), 291-319. 20.   Source: National Science Foundation data, as based on Department of Commerce, Bureau of Economic Analysis data and unpublished data. 21.   Source: U.S. Department of Labor, Bureau of Labor Statistics data. 22.   Other indications of the strength of U.S. manufacturing include data on exports, although a more accurate picture of the relative strength of an industry sector over time rests in part on growth in real output. Nonetheless, manufactured exports, at least over the past decade, which are now increasingly important to U.S. economic growth, grew from $200 billion in 1987 (1982 constant dollars) to $315.7 billion in 1990. This represented a 27.8 percent rise from 1987 to 1988, a 12.3 percent rise from 1988 to 1989, and a 10 percent rise from 1989 to 1990. 23.   The U.S. Department of Commerce (DOC) ranks products by their R&D intensity and defines those with above-average intensities as technology-intensive. This identification is known as the DOC-2 definition of high-technology products. The DOC-2 industries, together with their standard industrial classification (SIC) codes, are electrical transmission and distribution equipment (SIC 361, 362, 366, and 367); aircraft and parts (SIC 372); office, computing, and accounting machines (SIC 357); drugs and medicines (SIC 283); industrial inorganic chemicals (SIC 281); professional and scientific instruments (SIC 381 and 382); engines, turbines, and parts (SIC 351); plastic materials and synthetic resins, rubber, and fibers (SIC 282); radio-and TV-receiving equipment (SIC 365); agricultural chemicals (SIC 287); and optical and medical instruments (SIC 383-387). DOC identifies high-technology products as those having significantly higher ratios of direct and indirect R&D expenditures to shipments than other product groups. One method used by DOC is an input-output table to allocate the applied R&D expenditures of intermediate goods producers among the final goods producers. This allocation, when normalized by shipments, permits identification of those groups of products whose total R&D intensity is significantly higher than that of other products. These product groups are known collectively as the DOC-3 high-technology products. These industries, together with their SIC codes are guided missiles and spacecraft (SIC 376); communication equipment and electronic components (SIC 365-367); aircraft and parts (SIC 372); office, computing, and accounting machines (SIC 357); ordnance and accessories (SIC 348); drugs and medicines (SIC 283); industrial inorganic chemicals (SIC 281); professional and scientific instruments (SIC 381 excluding 3825); engines, turbines, and parts (SIC 351); and plastic materials and synthetic resins, rubber, and fibers (SIC 282). The DOC-2 definitions encompasses a wider number of product groups than DOC-3.

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The Government Role in Civilian Technology: Building a New Alliance 24.   National Science Foundation, as based on U.S. Department of Commerce, International Trade Administration data. 25.   Council of Economic Advisors, Economic Report of the President, 1990 (Washington, D.C.: U.S. Government Printing Office, 1991), 91; as based on data supplied by the Board of Governors of the Federal Reserve System. 26.   See R. Jaikumar, "Postindustrial Manufacturing," Harvard Business Review (November-December, 1986), 69. Jaikumar argues that "Rather than narrowing the competitive gap with Japan, the technology of automation is widening it further . . . . With few exceptions, the flexible manufacturing systems installed in the United States show an astonishing lack of flexibility. In many cases, they perform worse than the conventional technology they replace." 27.   See MIT Commission Working Group on the Materials Industry, "The Future of the U.S. Steel Industry in the International Marketplace," MIT Commission on Industrial Productivity Working Papers, vol. II (Cambridge, Mass.: MIT Press, 1989), 12-18, and Artemis March, "The U.S. Machine Tool Industry and Its Foreign Competitors," MIT Commission on Industrial Productivity Working Papers, vol. II (Cambridge, Mass.: MIT Press, 1989), 27; Maryellen R. Kelley and Harvey Brooks, The State of Computerized Automation in U.S. Manufacturing (Center for Business and Government, Harvard University, October 1988); and Kenneth Flamm, "The Changing Pattern of Industrial Robot Use," in The Impact of Technological Change on Employment and Economic Growth, eds. R. M. Cyert and D. C. Mowery (Washington, D.C.: National Academy Press, 1988); Charles Edquist and Staffan Jacobsson, Flexible Automation (Cambridge, Mass.: Blackwell, 1988); and John F. Krafcik and John Paul MacDuffie, Explaining High-Performance Manufacturing (Cambridge, Mass.: MIT Press, 1989). 28.   John Rees and Raymond Oakey, "The Adoption of New Technology in the American Machinery Industry," Regional Studies 18(1984):489-504. Similar findings are in Kelley and Brooks, "The State of Computerized Automation in U.S. Manufacturing"; and Martin Neil Baily and Alok K. Chakrabarti, Innovation and the Productivity Crisis (Washington, D.C.: Brookings Institution, 1988), 71-77. 29.   The MIT Commission on Industrial Productivity established a set of characteristics held by "best-practice" firms, namely, (1) simultaneous improvements in cost, quality, and delivery, as opposed to trading off one attribute against the other; (2) tight linkages to customers to enable quick response to changes in market demand; (3) tight links to suppliers; (4) integration of technology into multiple aspects of the business environment such as marketing and human resources, as opposed to use of technology for its own sake; (5) fewer levels of bureaucratic hierarchy together with functional integration of corporate divisions; and (6) human resource programs to foster continuous improvements and worker participation and flexibility. Michael L. Dertouzos and Richard K. Lester, Made in America: Regaining the Productive Edge (New York: Harper Collins, 1990), 118-128. 30.   There is a lack of data and comprehensive analyses of relative rates of technology commercialization in the United States and other industrialized nations. Many expert committees in the United States have, however, produced reports that have identified weaknesses in U.S. performance in technology commercialization and adoption. Expert committee reports that have examined relative U.S. performance in technology, include Dertouzos and Lester, Made in America, as well as The Working Papers of the MIT Commission on Industrial Productivity , vol. I and II (Cambridge, Mass: MIT Press, 1989); see also Carnegie Commission on Science, Technology, and Government, Technology and Economic Performance: Organizing the Executive Branch for a Stronger National Technology Base (New York: Carnegie Commission, 1991). For further discussion of technology adoption, see Kim B. Clark and Takahiro Fujimoto, Product Development Performance (Boston: Harvard Business School Press Publishers, 1991); Edwin Mansfield, "Technical Change in Robotics," Managerial and Decision Economics Special Issue (Spring 1989):19-25; and C. H. Uyehara, "Appraising Japanese Science and Technology," Japan's Economic Challenge: Hearings Before the Joint Economic

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The Government Role in Civilian Technology: Building a New Alliance     Committee, 101st Congress, 2nd Session (Washington, D.C.: U.S. Government Printing Office, 1990), 299-305. 31.   See Dertouzos and Lester, Made in America. 32.   See Gomory, "From the 'Ladder of Science'" and Clark and Fujimoto, Product Development Performance. 33.   See David C. Mowery, "The Challenge of International Trade and Investment to U.S. Technology Policy" (Paper presented at the National Academy of Engineering symposium on Linking Trade and Technology Policies, Washington, D.C., June 10-11, 1991). 34.   Drawn, in part, on David Mowery, "The Challenge of International Trade to U.S. Technology Policy," in Linking Trade and Technology Policy: International Consequences, National Academy of Engineering (Washington, D.C.: National Academy Press, forthcoming). 35.   See H. Ergas, "Does Technology Policy Matter?" in Technology and Global Industry: Companies and Nations in the World Economy, eds. Harvey Brooks and Bruce Guile (Washington, D.C.: National Academy Press, 1987). 36.   Office of the U.S. Trade Representative, Executive Office of the President, Export Growth and the Importance of Fast Track (Washington, D.C.: Office of the U.S. Trade Representative, 1991). 37.   Office of the U.S. Trade Representative, Executive Office of the President. 38.   One indication of the rapid growth in the internationalization of R&D is spending by firms on R&D in foreign countries. Data collected by the OECD show, for example, that such spending grew in all OECD countries, except Germany, from 1979 to 1988. By using 1978 to 1979 as a benchmark (1978-1979 = 1.0), expenditures rose to 18 in Italy (due in part to the acquisition of foreign firms), 8.5 in Canada, 4.4 in the United Kingdom, and 2.7 in Japan by 1987-1988. U.S. firms were on the forefront of this trend and accounted for a large part of total R&D spending of foreign firms in OECD countries. Expenditures by U.S. firms rose from $3.2 billion to $6.2 billion from 1980 to 1988. A comparison of spending by foreign companies versus spending by domestic firms on R&D in the home country (foreign as a percentage of domestic expenditures) also shows the rapid expansion of global R&D. For the United States, spending abroad by U.S. industry was 10.5 percent of domestic expenditures by 1988. Firms have located R&D facilities abroad to capture the benefits of technology scanning and sourcing of foreign scientific and engineering talent. For example, Japanese firms moved rapidly during the 1980s to invest and acquire R&D facilities outside Japan, contributing, in part, to their success in global markets. During the years 1987 to 1990, 33 new R&D centers were established by 20 of the top Japanese firms in the United States (21), Asia (6), and Europe (6). 39.   As cited in U.S. Department of Commerce, Advisory Council on Federal Participation in SEMATECH, SEMATECH, 1990 (Washington, D.C.: U.S. Government Printing Office, May 1990). 40.   This changing economic and technological relationship also has increased the economic burden imposed on many U.S. firms by national security export controls, as the National Academy of Sciences, National Academy of Engineering, and Institute of Medicine point out in their report Finding Common Ground (Washington, D.C.: National Academy Press, 1991). Similar conclusions were reached in the National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Balancing the National Interest (Washington, D.C.: National Academy Press, 1987). 41.   Indeed, the impressive economic performance of the United States during 1900 to 1940, when scientific research in this nation lagged behind that of a number of European countries, suggests that the link between scientific prowess and national competitiveness may be weaker than generally thought. See Richard R. Nelson, "U.S. International Competitiveness: Where Did It Come From and Where Did It Go?" Research Policy 19 (April 1990):117-132.

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The Government Role in Civilian Technology: Building a New Alliance 42.   National Science Foundation, International Science and Technology Update: 1988. 43.   U.S. Department of Commerce, Bureau of Economic Analysis. 44.   For a more detailed examination of corporate time horizons and technology development, see National Academy of Engineering, Time Horizons and Technology Investments (Washington, D.C.: National Academy Press, 1992). 45.   Precisely because of the slower projected future growth of the U.S. labor force, efforts to improve U.S. workers' skills cannot focus exclusively on primary and secondary education. Entrants to the work force will constitute a much smaller share of the labor force over the next 5 to 10 years. 46.   U.S. Congress, Office of Technology Assessment, Rebuilding the Foundations: State and Local Public Works Financing and Management (Washington, D.C.: U.S. Government Printing Office, March 1990) 36, 40.