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Advanced Technology: Its Nature and Importance to the United States The nation's capacity for technological innovation is an essential national resource that permeates and strengthens the entire economy. Advanced technology products and processes are central to a range of domestic economic activities and serve to increase productivity. In addition, advanced technology is vital to the military security of the United States and, thus, to the defense of the Western Alliance. WHAT IS ADVANCED TECHNOLOGY? Examples of advanced technology industries are extensive, yet changing. They include microelectronics, computers, new materials, robotics, telecommunications, aerospace, and biotechnology. The list of technologies deemed "advanced" changes over time. A new list may supersede this one in a decade or two. Integrated circuit chips perhaps best illustrate advanced technology's broad impact. Their role is to process data and signals--and hence information, a capacity that is critical not only to all scientific and technological fields, but increasingly to all economic sectors. Microelectronics has become a primary component of technological advance. It is misleading, however, to describe advanced tech- nology through its products--the computer or the laser. The essential national resource is the capacity for technological innovation--the ability to continuously discover, refine, and produce frontier technologies and to use those technologies throughout the industrial, agricultural, and military enterprises. 20

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21 The Innovation Process The capacity for technological innovation is manifested in the innovation process, an integrated complex system. Competition in advanced technology is not simply a matter of generating the best ideas. New ideas are only one essential part--among several crucial components--of what is necessary for a nation to be technologically competi- tive. The innovation process includes not only research and development, but also manufacture, marketing, and distribution. It may be described roughly in four parts: Research--whether in a university setting, in research institutes, government laboratories, or in industry-- generates new scientific knowledge and new ideas for application. One innovation leads to another by sug- gesting new directions for further technological invest- ment. In industry, company interests usually dictate research; in universities and research institutes, individual scientists choose whatever scientific leads they deem both important and capable of attracting financial support. Development translates a new discovery or idea into a usable product aimed at a defined market demand. It encompasses the steps between research and completion of the design of a product. It includes a validation phase, where elements emerge from a research environment to one having risk low enough to be used in a product, and an application phase which integrates such elements into a product design suitable for production. The former frequently proceeds before the application product is known, and certainly long before it is defined. The latter phase, application, occurs after the product is known. It can include prototype or pilot scale tests on either product or process. Development responds both to research results and to feedback from the marketplace. Manufacturing or production takes the product or process from a single prototype to quantity production that promises the consumer reliable Quality and con- trolled cost. The line between development and manu- f acturing is expressed in the comment that it's always possible to make one of anything; regular production demands reliability, competitive costs, serviceability, often retooling of the manufacturing plants, setting and enforcing criteria for suppliers, and more. Distribution entails marketing, delivery, customer training, and support services. It addresses the require- ments of the consumer in using the product.

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22 The innovation process is a dynamic and intricately interrelated system: there are interactions and feedbacks among the four stages. Early efforts in development, for example, may reveal gaps in basic knowledge that require the launching of a new research effort, or user experience with a new product may call for redesign at the develop- ment level to better adapt the product to consumer needs. Thus successful innovation is characterized by constant rethinking, adaptation, and organizational learning; only rarely is there an orderly, logical process that can be completely foreseen in advance. Indeed, the difference between success and failure often depends precisely on sufficient flexibility and "fast footwork" in changing course to respond to new information. WHY I S ADVANCED TECHNOLOGY IMPORTANT TO THE UNITED STATES? Advanced technology has been called the n fuel" of the economy. New technologies--such as microelectronics, computer-aided design, computer-aided manufacturing, robotics, and advanced computer capabilities--spark a surge of economic growth by increasing worker produc- tivity. Military security relies on pioneering tech- nologies for defense systems and for verification of limitations on weapons systems specified in arms control agreements. Advanced technology is perceived as a strong part of our national self image: the United States is thought to excel through "Yankee ingenuity. Advanced Technology and National Security National defense relies on advanced technology products for sophisticated military hardware. Technologies used in defense systems can often be exploited for commercial purposes. Very-high-speed integrated circuits, digital telecommunications, and new high-performance materials all were developed for defense or space purposes yet now have commercial spin-offs. New processing and fabrication methods may also apply to both military and civilian efforts. A goal of the manufacturing technology program of the Air Force was to demonstrate that computers can reduce cost in all phases of manufacturing aircraft and thereby enhance manufac- turing flexibility. The driving force behind this program

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23 was the high cost of relatively small production runs typical of military aircraft, but civilian aircraft manufacture benefited as welled The Defense Depart- ment's Very-High-Speed Integrated Circuit Program (VHSIC) 92 designed to produce electronic devices that are faster and more reliable than circuits now in use, is being developed for the military but is expected to have important commercial uses.3 Military sources of R&D support, however, do carry some disadvantages for the commercial sector. Classifica- tions, export controls, and rigid criteria for research, as well as the drawing away by the military of scientific and engineering personnel, sometimes inhibit, rather than promote, commercial developments. Advantages flow from commercial research to the mili- tary as well. The military's ability to obtain the tech- nology and hardware it requires often stems from the development and production strength that contractor com- panies have derived from competition in civilian markets. Healthy competition among companies selling semiconduc- tors, lasers, commercial aircraft, computers, and other advanced technology products to a mass market, for example, sped the development of useful military applica- tions of these products. The greater the civilian sales, the lower the per-unit R&D cost for both civilian and military requirements. The nation must retain both excellence and self- sufficiency in military technology. To that end, a strong domestic technological enterprise is essential. Advanced Technology and Trade A U.S. positive trade balance in technology-intensive products and services contributes not only to employment, but also to the general health of the nation's economy. In 1980, advanced technology products showed a positive trade balance of $31 billion, compared to a deficit of more than $50 billion for all other manufactured goods.` The U.S. currently holds the highest market share of the industrialized countries' exports of high-technology products. That share declined, however, from 30 percent in 1962 to 22 percent in 1978 and has increased only marginally since.S Figure 1 shows that, in absolute terms, the U.S. trade balance in high-technology products increased over eightfold from 1962 to 1980. The statistic is less heartening when compared to the trade balances of

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24 `,, 70 ~ 60 J O 50 u,. 40 ~ 30 o oh On Z Ho o J 10 J m O u' 70 CC ~ 60 J TO 50 ~ 40 o 30 Corn 20 o J 10 J m O UNITED STATES ~ _ \_ ~ Surplus > .......... . `F .... .. ... .~ ,., ..... ,' _~ : ,.,~ K ' '.'2'2' '.' 22"2'2'"22''''N ~ ~ i' I mports , . . ,,, - ~ _ =1~ ~ 'a I 1 1 WEST GERMANY A.., _ _ _ - _ _ _ _._ ,...... Exports by. Surplus ,'.~,.., :..... ~ ,% : do.. I. I.. ~ ok " '2 ' . . ::. ~ , Imports 1 1 JAPAN A........ Exports ~ : ~ ~ ... JO Surplus an.. .... . .... ... .... ... , : >~F.2.2 ,,- - ~ ~ I mports FRANCE Exports A' >~~ Surplus - ~~ I mports 1962 1965 1970 1975 1980 1962 1965 1970 1975 1980 YEAR YEAR FIGURE 1 Relative changes in the balance of trade in high-technology products: United States, Japan, West Germany, and France, 1962 to 1980. SOURCE: U.S. Department of Commerce, International Trade Administration, from U.N. Series D Trade Data, as reported in "An Assessment of U.S. Competitiveness in High- Technology Industries, n a study prepared for the Working Group on High-Technology Industries of the Cabinet Council on Commerce and Trade, final draft, May 19, 1982. Japan and West Germany during the same period. Their positive balances increased more than two-hundredfold and ninefold, respectively, starting from a much lower 1962 base. Advanced Technologies--Core Technologies in the Economy The benefits of advanced technologies extend beyond the military and trade spheres to virtually all sectors of the American economy, including the service sector, manu-

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25 factoring, and agriculture. Electronics is one core technology arena in the form of integrated circuitry of increasingly higher density, digital devices for communi- cation, an enlarging array of computers, and increasing sophistication in "user-friendly" software. Another emerging core technology, embraced by the umbrella term of biotechnology, includes not only modern-day fermenta- tion techniques using recombinant DNA methodology, but also new biological techniques for the manufacture of hormones and drugs. Core technologies have far-reaching influence upon the state of the American economy. The rapidly improving performance and falling costs of these advanced technology products are key to rising productivity. In 10 years, productivity in advanced technology industries has risen 5.6 percent, compared to 0.9 percent for business generally--a sixfold difference.6 In addition, produc- tivity in mature industries may be increased through the application of advanced technology throughout the manu- facturing and distribution processes. Also, seemingly low-technology industries such as ceramics or glassware have components that are at the forefront of technical advance. The diffusion of advanced technologies throughout the economy can be subtle. For example, the service sector in America is growing. Employment in service industries (banking, health care, insurance, transportation, util- ities, etc.) between 1940 and 1980 grew from 46 percent of total employment to 68 percent. 7 Pressured by the need to improve productivity and to serve a growing population, service industries draw increasingly on new technologies: electronic tellers, word processors, and small stand-alone computers have become commonplace only a few years after their introduction. NEED FOR NATIONAL ATTENTION The advanced technology enterprise has special characteristics that strengthen its claim to national attention. Even small companies can be technologically innovative and economically viable, but a new innovative product is subject to cumulatively increasing returns to scale over time, that is, with research and production experience there is a reduction in average cost. On the other hand, temporary setbacks, if severe, can cripple

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26 future efficiency by starving the scientific and tech- nological roots of the innovation process. It is easier to stay at the frontier than to achieve it. Were the United States to lose its capacity to inno- vate core technologies, it might still benefit from foreign innovations, just as other countries have bene- fited from advanced technologies originating in the United States. It is the innovating country, however, that has the best access to new technologies and, thus, the best opportunities to use them. The rapidity of change in many important technological fields requires knowledge of technological innovation in progress and immediate access to new technologies. Without that knowledge and access, a country's capacity to plan for new products would lag those of the innovating country. The effects of such a lag could be felt throughout the U.S. economy, affecting not only advanced technology industries, but also others that require the products of these industries for advancement, including the now widespread service industries. ADVANCED TECHNOLOGY AND THE NATION ' S FUTURE The social fabric of a nation is knitted by its citizens' common purposes and widely shared beliefs in the integrity and stature of their country and in the belief in a strong future. Throughout our history, Americans have believed in the capacity of the United States to adapt to new cir- cumstances, to use native skills and resourcefulness-- "Yankee ingenuity"--to create practical objects of commercial value. That belief endures as a national assumption that the country will continue to expand tech- nological frontiers and thus ensure the well-being of its people. The capacity of Americans to innovate and to adapt to change is thus important to sustain, as much for the national optimism, as for the technological benefits that flow from technological prowess.

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27 NOTES See National Research Council, Innovation and Transfer of U.S. Air Force Manufacturing Technology: Three Case Studies (Washington, D.C.: National Academy Press, 1981), pp. 6-18. 2 For descriptions of the scope and goals of the VHSIC program, see Jim Martin, "Very-High-Speed Integrated Circuits--Into the Second Generation, Part I The Birth of a Program," Military Electronics/Counter- measures, December 1981, pp. 52-58, 71-73. - ~National Research Council, An Assessment of the Impact of the Department of Defense Very-High-Speed Integrated Circuit Program (Washington, D.C.: National Academy Press, 1982), p. 13. 4 "An Assessment of U.S. Competitiveness," p. 44. sIbid., p. A-38. 6 Ibid., p. 45. 7 Service sector is defined in the broadest sense to encompass all enterprises not engaged in the production of goods. Unpublished data from the Department of Labor, Bureau of Labor Statistics.