TECHNOLOGY POLICY AND INDUSTRIAL INNOVATION
The Federal Government's Role
A White Paper from the
NATIONAL ACADEMY OF SCIENCES
NATIONAL ACADEMY OF ENGINEERING
INSTITUTE OF MEDICINE
February 1993
As we approach the 21st century, national welfare will depend increasingly on federal policies that build on U.S. strengths in science and technology. Rapid economic growth, increased productivity, and improved standards of living require investments that leverage our comparative advantage in high technology. The federal government has a legitimate role in this process. At the same time, government policies must continue to safeguard the competitive dynamic and industrial efficiencies that market forces nurture.1
THE RATIONALE FOR CHANGE
By many measures, the United States remains strong in technology and continues to exhibit considerable industrial strength. We are the most productive nation in the world. Manufacturing output is increasing at a rapid rate. U.S. exports of high-technology manufactured goods are growing. As measured by indicators such as patents awarded and the balance of trade in high-technology goods and services, the innovative capacity of the United States remains unsurpassed.
Although the nation's technological performance is strong, this does not mean that U.S. policy should continue unaltered. The most important reason for a new technology policy, one that builds on our comparative strength in research and innovation, centers on productivity. The United States needs to improve its performance in all areas that promote productivity and long
term economic growth. Investment in R&D to achieve higher rates of technology commercialization and adoption should be a central part of the new administration's technology policy.
There is a sound economic rationale to support implementation of a federal strategy to facilitate industrial innovation. Government needs to create incentives for private investment in pre-commercial R&D beyond basic research in areas where firms cannot appropriate (capture) the economic benefits of investment. Just as the government acts to prevent underinvestment in basic research through federal funding, policymakers must recognize and should alleviate market failure downstream in pre-commercial R&D, as well.
STRENGTHENING CURRENT GOVERNMENT PROGRAMS
The first step in building a new alliance between government and industry in civilian technology is action to strengthen federal programs that facilitate private sector R&D, and the transfer or adoption of technology. Specifically,
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the Defense Advanced Research Projects Agency's role in dual-use technology development—especially in the area of information technology—should be reaffirmed;
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only a small number of the 700 federal laboratories, those which are most appropriately qualified, should be selected to work with private firms in an effort to enhance technology transfer;
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the scope of selected mission agency R&D programs should be enlarged to include pre-commercial projects;
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funding for the Small Business Innovation Research program should be increased;
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the Department of Commerce's Advanced Technology Program has had a promising start. It should be evaluated, by an independent group, to determine the desirable size of the program, and;
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current industrial extension services provided by the Commerce Department should be expanded to speed technology adoption in industry.
PROMOTING INVESTMENT IN PRE-COMMERCIAL R&D
A new technology strategy for the post-Cold War era must include more than revisions in current federal programs. The government should act to correct the failure of private markets
to support pre-commercial R&D. Moreover, the ability of U.S. companies to adopt new technologies, an important part of economic growth, is weak. As in the case of pre-commercial R&D, private markets fail to provide sufficient levels of investment at this stage of the technology development process.
In basic science there is a clear need for federal funding. Companies have little incentive to invest in basic R&D, because in many cases research results are widely available and firms cannot capture the economic benefits of basic science investments.
Beyond basic research, there is an area of science and engineering work that precedes product-or process-specific, applied R&D. At this pre-commercial stage, private sector estimates of commercial market potential are uncertain and appropriability of the fruits of investment are unclear. Technical obstacles in moving to the applied research or prototype development stage are present as well. Pre-commercial R&D is also often characterized by spillovers into the general knowledge base, where other firms can appropriate the economic benefits of another firm's investments. This R&D constitutes a public good, one that merits government financial support. To be effective, government-industry R&D ventures with public sector support should be guided by a set of principles which should include:
(1) Cost-Sharing Provisions
Cost sharing is especially important in pre-commercial R&D programs. Cooperative R&D projects between government and industry should ensure that public funds are used to build on corporate strengths in technology. Direct, 100 percent government subsidies to private firms for R&D projects run the risk of redirecting scarce resources, both financial and human, into unproductive channels. To ensure the commercial relevance of R&D funded by the government through cooperative ventures, private sector firms or institutions should cover at least 50 percent of total project costs.
(2) Project Initiation and Design by Private Firms
The long-term objective of any government financial commitment to pre-commercial R&D should be to enhance private sector productivity. To do this, R&D must be linked to commercial markets and channeled into areas with the potential for wide industrial application. Collaborative R&D ventures funded through government-industry partnerships should be proposed and structured by industry.
(3) Insulation from Political Concerns
To minimize improper political influence in the allocation of government funds, projects to be supported by government should be based on technical and economic assessments of the merits of each project. Evaluations of competing R&D proposals should be conducted by
independent experts in the relevant scientific, technological, and economic areas. Political considerations should not influence technical output, the location of R&D facilities, or the management of research projects.
(4) A diversified Set of R&D Objectives
A broad portfolio of investments in a wide range of technical fields, including the biomedical sciences and biotechnology, materials sciences, manufacturing product and process technologies, and computer and telecommunications-related technologies, among others, is important to the success of any technology strategy. A broad-based technology program will help to ensure that government-sponsored R&D does not become captive to the interests of a particular technology champion or a set of companies.
(5) Rigorous Project Evaluations and Review
Detailed technical and economic evaluations are essential to any technology program, especially in pre-commercial R&D. Independent evaluation should be undertaken by non-governmental experts, including those with technical, managerial, and economic experience, in any new federal technology efforts. Current efforts to review government R&D programs are impeded, in some cases, because reports to Congress and president are often conducted by mission agency employees. These officials have a direct interest in ensuring the continuation of projects that they evaluate.
If the original objectives of a joint R&D venture sponsored with federal financial assistance are reached, or the results of a program do not justify the resources expended, programs should be automatically terminated. Federal agency officials and Congress should, as a matter of policy, follow recommendations by review panels, either to terminate or to extend a project.
(6) Projects Open to Foreign Firms Characterized by a SubstantialContribution to U.S. Gross Domestic Product (GDP)
Government should encourage the flow of technology and production capabilities of the most up-to-date and competitive kind to both U.S. and foreign corporations located within U.S. borders. There are significant benefits that accrue to the economy through the training, education, and skill enhancement offered by foreign-based corporations with U.S. affiliates, for example. Foreign-owned corporations located in the U.S. contribute directly to our national economic growth in other ways as well. One increasingly important contribution is through cooperative R&D work with U.S. firms.
Public policies that seek to close domestic markets to foreign goods and services, limit technology flows, or restrict foreign participation in government technology programs, therefore, damage U.S. economic interests. They serve to isolate the economy from scientific and
technological advances made in other industrialized nations. Finally, it is important that U.S. firms gain access to foreign collaborative R&D programs and the benefits of participation in these ventures.
A CIVILIAN TECHNOLOGY CORPORATION
Many proposals have been introduced for organizing and managing federal technology investments in pre-commercial R&D. These include the creation of a new executive branch agency, or simply increasing current funding levels in existing agency budgets. Existing agency budgets should be selectively increased at agencies that have had success in past programs aimed at promoting commercial technology development efforts. This might include, for example, DARPA, the Department of Energy's support for energy research, and the National Institutes of Health.
Creation of a civilian technology agency, however, has several serious disadvantages. A technology agency would likely be dwarfed in size, budget, status, and influence by existing federal departments. Its establishment would face opposition from agencies and congressional committees anxious to guard prerogatives over technology areas. Unless its purpose were clearly defined and its authority affirmed, a new agency would add to the federal bureaucracy without achieving many concrete results. Moreover, a government technology agency would be subject to federal procurement guidelines, and civil service hiring rules, both of which would severely limit its effectiveness.
The most serious disadvantage of a civilian agency is its placement in the executive branch. This would increase the likelihood that support of projects would be influenced by special interest groups and parochial political concerns. An agency of the federal government, whether housed in an existing organization or independently controlled, would be a central part of the political process.
One effective way to promote substantial federal investment in pre-commercial R&D is through creation of a Civilian Technology Corporation (CTC). The goal of a CTC would be to increase the rate at which products and processes are commercialized in the U.S. This objective can be met by stimulating investment in the pre-commercial stage of technology development with high social rates of return, but where firms cannot appropriate sufficient benefits of R&D work. Higher levels of investment at this stage of the innovation process will, over the long term, translate into stronger U.S. performance in technology commercialization.
The CTC would be a quasi-governmental organization, funded through a one-time $5 billion congressional appropriation. A board of directors, appointed by the President and subject to Senate confirmation, would manage the corporation. The performance and operation of the CTC would undergo an independent review after the fourth and tenth years of operation.