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Executive Summary This report examines the recent growth of involvement by foreign nation- alscompanies and individuals in U.S.-based research and development (R&D). It assesses the consequences of this trend for U.S. economic perfor- mance and national security, draws conclusions, and recommends specific pub- lic- and private-sector actions to minimize the potential liabilities and maximize the potential benefits of increasing foreign participation in the nation's R&D en- terprise. Proceeding from a belief that foreign participation in publicly funded U.S. R&D is governed by a different political-economic logic than foreign in- volvement in privately funded U.S. R&D, the report evaluates separately these two integrally related halves of the trend. ASSESSING FOREIGN PARTICIPATION IN U.S. R&D The recent growth of foreign participation in U.S.-based R&D should be viewed in the context of two broad trends in the international economy. The first is a move toward deeper integration of the world's major national innovation systems2 through the activities of multinational companies and individual scien- tists and engineers. The second, its corollary, is a convergence of the industrial and technological capabilities of industrialized countries. The committee is con- vinced that these trends, which have fueled the recent growth of foreign participa- tion in U.S. R&D, will continue apace into the next century. Many U.S. trading partners have long had significant levels of foreign corpo- rate involvement in their domestic R&D activities. Indeed, U.S.-owned multina- tional companies have been the leading foreign participants in many of these

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2 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT countries' national innovation systems. By contrast, the United States has had relatively less foreign participation in its domestic R&D enterprise. To be sure, foreign companies, scientists, and engineers have been attracted to the United States for decades, drawn by the size, wealth, and sophistication of the U.S. do- mestic market, by the strength of the U.S. basic research enterprise, and by the United States' unrivaled capacity for spawning new industries and products. Only recently, however, have a growing number of America's trading partners acquired the technical and economic capabilities needed for their citizens (companies and individuals) to participate on a significant scale in the U.S. research system. R&D AND ECONOMIC PERFORMANCE To assess the consequences of foreign participation in the U.S. R&D enter- prise, it is essential to understand both the nature of R&D activity and how it contributes to economic development. First, R&D activity yields many valuable outputs, and the benefits associated with them accrue to many individuals other than those who perform the R&D or own the intellectual property. Second, in spite of the global communications revolution and the expansion of multinational enterprises, effective transfer of knowledge and technology- both within and among institutionscontinues to demand the intensive and on- going face-to-face interaction of highly trained scientists and engineers. Third, because of the many barriers that impede the transfer of knowledge and technolo~v R&D activities tend to cluster ~en~ranhicallv and a large share --Cal 7 ~ - =__~_~r----~--~ ~ ~~~~ of the benefits of R&D appear to be highly localized. Fourth, in order to draw effectively upon advanced technological capabilities and R&D outputs beyond its institutional boundaries, a company generally needs to be performing R&D at a level commensurate with that of the organizations whose R&D activities it hopes to exploit. Finally, neither R&D capability nor technological wealth is in and of itself a reliable indicator of the economic or competitive strength of a company or a nation. Rather, economic and competitive strength are determined by how effec- tively technology is used and managed in combination with other factors of pro- duction and marketing, such as labor, capital, and managerial and organizational capabilities. Similarly, the economic or other societal returns a nation may gain from a particular R&D investment depend on whether its innovation system can foster widespread diffusion and effective use of the outputs generated. These factors are, in turn, influenced by the quality (skill level) of a nation's work force, by the size, wealth, and technological sophistication of its domestic market, and increasingly by the ability of firms within its borders to access markets and tech- nology abroad. What these observations suggest is that for foreign nationals, the task of appropriating the many valuable outputs of U.S.-based R&D activity is signifi-

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cantly more complex and discuss than is generally assumed. Thereby, ~reign- owned Ins ~1 wish to e~cOvely employ advanced technology and knowledge generated in me United States must esl~bsb a signiOc-~ technologically so- phishc~ed presence here lo do so. Moreover, increases in Reign p~icip=~' level of technological sophi~ic~ion and c~aci~ lo extract benehls Tom Ameh- can technology bang concomit=1 increases in me potential for reciprocal trans- ~rs of knowledge Id technology to me United States. Finally, these obse^~- dons suggest that under most circum~=ces, any count, including the United Sages, should welcome RED activity within as borders regardless of He nation- ~- ~ me RED pa. ~ a lie ~ ~ me as ~ RED if are captured by Dose proximate 101he RED activity, Id these retums He indeed considered desh~le, clearly ~ is better 10 have RED pegged within ore's borders than beyond dam. 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4 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT Switzerland France 9.3 Other Europe 10.1 Germany _ 14.4 .. , ..~ ~.~ ~.~, ~ . ~~.~ ~- .~.~.~.~ ~~.~.~ ~~ S S A i - . . IS . -. . . i- i. i ~~-.~. . ~ ~? Hi- IS Hi- ~ - . ... ~ i .................. S - ~ .- ........... S S S ~ .? . AS i ~ ~ :: :::::.::::. ::::.:::::::: :::::: :::::: a:: :::: ::::::::: ::::: ::::::::: :.::::::::: :::: ::: ::::::::::.:: ::..:::::.::::.:: ::::::::::: ::. ::::.:: :: ::: r ...,:: .:'~,'.':2 .''-.S'.'2:,.~-':.~:,.,:~: iS,,: S i:.: S: -:::~:::S'::,::.:~::~S::-:::~: : :. : : :.,: : A:.: :.: :,:: .. :. I? :...-- . . :..: - ~ .:~:.:~-: -:-:: :.:,. :S ::::: :::::::::-::..:: ::::::::::::::::::::::::: ::::::::::: ,.-,.:,.~.2,, ..-2,'2-:::'. . 'I,: ,,'~: :::::::::: ~ ,.. ,.. ::...::~:,:~:::~! _ :::: :::::.: ::.-: :::: :::~:: :::~::, Canada 15.7 Japan 12.1 Other 6.8 United Kingdom 15.9 FIGURE ES-2 R&D spending by U.S. affiliates of foreign-owned firms, percent of total, by nationality of owner, 1992. SOURCE: U.S. Department of Commerce (1995~. country dominates the field of foreign investors in U.S. privately funded R&D. However, since the mid-1980s, the U.S. affiliates4 of Japanese-owned companies have increased their share of R&D spending more rapidly than the affiliates of any other major investing country (Figure ES-2. Nearly two-thirds of all for- eign-funded industrial R&D in the United States is concentrated in a small num- ber of high-technology industriesS (Figure ES-3. For the most part, foreign parent companies have invested in U.S.-based high- technology in areas in which they have a strong export position or perceived competitive advantage. Foreigners become involved in American privately funded R&D for two basic reasons: to serve customers in this country better and to gain better access to American scientific and technological expertise. Most major foreign-owned R&D facilities are located near major U.S. centers of R&D activity, and most affiliate R&D performed in the United States appears designed to meet the immediate technical needs of U.S.-based production facilities. Com- parative surveys of U.S.- and foreign-owned multinational companies suggest that the motives for engaging in R&D in foreign markets and the type of R&D activity vary by industry but are not significantly influenced by the nationality of the company.

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EXECUTIVE SUMMARY Audio, video, and communications 8.4 Instruments and related products 4.4 Wholesale and retail trade 6.7 as Primary and fabricated metals Computer and 2.5 office equipment 5.5 Electronic components\ ~ A-. ,.,,,~,~.~,,~,,..,,~,.,,,~.,.,~........ 2 0 \ / - - ~-~ ~.~ ~ ~ Services ~ 4.6 / Petroleum / 4.2 / All other non manufacturing 1.1 , ............. ......... \ Food and All other kindred products manufacturing 17.0 Pharmaceuticals 24.8 '~ Industrial chemicals 17.0 FIGURE ES-3 R&D spending by U.S. affiliates of foreign-owned firms, percent of total, by industry, 1992. SOURCE: U.S. Department of Commerce (1995~. Consequences for the United States Growing foreign involvement in the nation's industrial R&D base brings with it costs and risks as well as benefits and opportunities for U.S. citizens. The Quid Pro Quo It is not possible to say definitively whether foreign companies take away more technology and associated economic value than they contribute to the United States through their participation in U.S. industrial R&D. Overall, however, with some variation among industries, the data suggest that the U.S. affiliates of for- eign-owned firms import significantly more codified technology from their par- ent companies than they export to them or to unaffiliated firms abroad. In some cases, foreign acquisition of U.S. high-technology companies has undoubtedly resulted in lost opportunities and foregone wealth for U.S. citizens. The same may be said of situations in which foreign firms establish new high-tech facilities in the United States. Yet, in other cases, these two modes of foreign direct invest- ment have created opportunity and wealth for Americans. On balance, the com- mittee considers the growth of foreign direct investment in the United States and the proliferation of transnational corporate alliances to be positive trendsdevel-

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6 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT opments that enhance the productivity and wealth of the United States and its overseas trade and investment partners. Furthermore, the committee believes that foreign participation in privately funded U.S. R&D cannot be separated mean- ingfully from the larger trends in which it is embedded, particularly the interna- tionalization of industrial production, in which the U.S. multinationals have played a leading role. Asymmetries of Access The difficulties U.S. companies have experienced trying to access markets and innovation systems abroad have had a profound effect on public perceptions and federal policies related to foreign participation in R&D. Direct investment is the most important way U.S. companies can gain access to privately funded R&D activities abroad. During the past decade, the policies of America's trade part- ners that govern such investment have come to resemble the more liberal policies of the United States. Nevertheless, barriers to access remain in some major econo- mies. Threats to National Security Current U.S. security regulations and procedures appear to prevent most ille- gal transfers of militarily sensitive U.S. technology abroad by foreign-owned com- panies. However, they are less effective at addressing the medium- to long-term risks of delayed or denied access to militarily critical technologies posed by for- eign direct investment, or mergers and acquisitions in general. The federal gov- ernment lacks clearly defined, agreed-upon criteria to determine whether the tech- nological capabilities of a company are militarily critical. This makes it very difficult to identify niche sectors where the risks of delayed or denied access may be particularly high. Furthermore, monitoring efforts and methodologies used to enforce U.S. antitrust laws may be inadequate to address the monopoly threat posed by mergers, acquisitions, and corporate alliances in niche defense markets, whether instigated by foreign- or U.S.-owned companies. The Threat of Technological Monopolies There is little evidence to suggest that growing foreign involvement in U.S. industrial R&D through direct investment and allianceshas had a significant deleterious effect on the ability of U.S.-based companies to obtain key technolo- gies, components, and subsystems required to make internationally competitive products. Many high-technology industries are already highly concentrated at the national and global levels. Hence, some of the many recent mergers, acquisi- tions, and alliances have probably fostered anticompetitive behavior in particular civilian high-technology industries. Here again, current enforcement of U.S. an-

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EXECUTIVE SUMMARY 7 titrust law may be inadequate to address attendant monopoly risks in particular industries. However, at present, there is no evidence to suggest that foreign firms are any more likely to engage in anticompetitive activity in the United States than their U.S.-owned counterparts. FOREIGN PARTICIPATION IN PRIVATELY FUNDED U.S. R&D: RECOMMENDATIONS The principal policy questions raised by foreign direct investment in U.S. industrial R&D cannot be separated from the nation's broader foreign economic policy agenda. The committee's first two recommendations recognize this link- age. 1. In the absence of clear threats to national security, Congress should avoid legislating restrictions on foreign participation in privately funded U.S. R&D. The committee believes that discriminatory treatment of foreign-owned firms, except in situations where national security is threatened, imposes signifi- cant economic costs and risks on Americans. Such behavior discourages foreign direct investment in the United States and undermines longtime efforts by the United States to secure nondiscriminatory, or "national," treatment of its compa- nies in foreign markets. The committee also cautions the federal government against invoking without good cause national security as a justification for re- stricting foreign participation in the nation's industrial R&D enterprise. 2. The federal government should continue to seek to open foreign markets to U.S. trade and investment through negotiation in bilateral and multilat- eral forums. The United States should hold itself and its trading partners accountable to existing international agreements and should redouble its efforts to negotiate more comprehensive, internationally enforceable rules on monopoly formation, foreign direct investment, technical standards, envi- ronmental regulations, and intellectual property rights. Above all, the United States should reaffirm its long-standing commitment to the principles of na- tional treatment and transparency, or full disclosure of terms, in policies that influence international investment and trade flows. Barriers to investment that result from structural- and policy-related differ- ences among national economies remain a source of friction between the United States and some of its major trading partners. Negotiations to reduce these ob- stacles have been difficult and slow. Nevertheless, the committee believes that the United States' commitment to address these issues in international forums continues to serve the nation's best economic interests. Unilateral measures that contradict the principles of nondiscrimination and transparency are, in the opin- ion of the committee, likely to do more harm than good by discouraging more

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8 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT "good" foreign investment in the United States than "bad" and undercutting rather than strengthening the position of the United States in bilateral and multilateral negotiations. Therefore, the committee urges the federal government to resist pressures to force the pace of these negotiations with aggressive unilateral actions beyond those currently provided for in U.S. law. FOREIGN PARTICIPATION IN PUBLICLY FUNDED U.S. R&D: FINDINGS Foreign involvement in publicly funded U.S. R&D has also grown in recent years. Government surveys of the number of foreign graduate students, post- doctoral researchers, and other visiting researchers at U.S. universities and fed- eral laboratories document a significant increase in the level of foreign participa- tion since the mid-1970s (Figure ES-41. At the same time, meaningful data on the scope, growth, and nature of foreign institutions' involvement in publicly funded U.S. research is fragmentary, dated, and scarce. Available information suggests that foreign institutions account for a very small share (less than 2 percent) of all sponsored research at U.S. universities and federal laboratories and that invest- ment is concentrated in a small number of U.S. institutions. As of the mid-1980s, 100 - 90 - 80 - 70 - 60 - 50 - o w~ 40 lo ~ 30- au n 20 - 10 0 Postdocs Doctorate recipients Graduate students ~ ~r- or _~ . ~ ' ' ' ' ~ I I 1 1 1 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 FIGURE ES-4 Foreign graduate students, postdocs, and doctorate recipients in science and engineering. SOURCE: National Science Foundation (1993a).

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EXECUTIVE SUMMARY 9 most foreign-sponsored research at U.S. universities was funded by not-for-profit institutions and was mostly in agriculture, medicine, and geology. There are no recent aggregate data on the current magnitude, disciplinary focus, and national shares of foreign-sponsored research at U.S. universities and federal laboratories. Nevertheless, recent survey data and anecdotal evidence indicate that Japanese companies are more diligent than their U.S. or European counterparts with regard to accessing, monitoring, and drawing upon the research capabilities of these institutions. Foreign participation has been minimal in recent federally supported industrial R&D initiatives, such as the Department of Commerce's Advanced Technology Program. Consequences for the United States As with privately funded U.S. R&D, the involvement of foreign firms and individuals in R&D sponsored by the federal government carries both risks and opportunities for the United States. The Quid Pro Quo The committee believes that the extensive presence of foreign graduate stu- dents, postdoctoral researchers, and other long-term foreign visiting researchers at U.S. universities and federal laboratories has, on balance, yielded significant benefits to the U.S. economy and its innovation system. At the same time, although it could identify various costs and benefits of foreign institutional involvement in publicly supported U.S. research institutions, the committee was unable to determine their net economic impact. Its analysis found examples in which foreign-owned firms have profited, at times at the ex- pense of U.S. firms and stakeholders. However numerous cases also confirm that foreign firms have contributed both material support, technology, and intel- lectual resources to research universities and federal laboratories. Indeed, many if not most foreign-owned companies with extensive ties to U.S. publicly funded research institutions tend to have U.S.-based manufacturing and R&D operations. These operations employ Americans, buy from U.S. suppliers and equipment vendors, import and generate technology and know-how that is applied within the U.S. economy, and pay U.S. taxes. Asymmetries of Access Access by U.S. institutions and individuals to publicly funded R&D in other nations varies considerably. U.S. government, academic, and industrial research- ers appear to have few problems accessing publicly funded research capabilities and activities within academic and government-operated laboratories abroad. Fur- thermore, access by U.S.-owned companies to government-funded industrial re-

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10 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT search consortia in Europe appears to be comparable to that extended foreign-owned firms in the United States. Japan, however, has restricted foreign participation in its publicly funded industrial R&D consortia to a greater extent than either the United States or the European Community. International Burden-Sharing in Basic Research The committee believes there needs to be a more equitable global distribu- tion of support for basic research. International comparisons of R&D expendi- tures confirm that compared to the United States, most of America's advanced industrialized trading partners invest an equal if not larger share of their gross domestic product in basic research. Japan, however, despite recent efforts to expand its basic research capabilities, spends a smaller share of its gross domestic product in this area than the United States (and nearly half as much per capita). FOREIGN PARTICIPATION IN PUBLICLY FUNDED U.S. R&D: RECOMMENDATIONS Foreign participation in R&D funded by the U.S. government is regulated by a patchwork of confusing- and at times contradictory bilateral intergovernmen- tal agreements, eligibility requirements in recent federal R&D legislation, and agency directives. In the committee's judgment, leading U.S. research universi- ties and federal laboratories have generally made good faith efforts to comply with federally mandated economic performance and reciprocity requirements. Nevertheless, the committee believes that these requirements may impede the ability of agencies to perform their primary missions as well as diminish the contribution of federal R&D programs to U.S. economic performance and com- petitiveness. Even worse, they may impose significant economic costs on the United States. Recommendations 3 through 5, directed at the federal govern- ment, are aimed at reducing the risks of these adverse outcomes and laying the foundation for more effective, mutually beneficial management of foreign par- ticipation in government-funded R&D in all industrialized countries. Institutions that conduct R&D supported by the federal government should recognize that concerns about foreign involvement are more than a public rela- tions problem. The actions of a limited number of American institutions have evoked legitimate concerns about the fairness and economic logic of certain types of foreign participation in publicly subsidized U.S. R&D activity. The commit- tee urges universities and other performers of publicly funded research to address these concerns. Recommendations 6 through 8, directed at the performers of publicly funded U.S. R&D, outline steps these institutions might take to both become more credible and effective spokesmen for the costs and benefits of for- eign participation and to make a larger, more constructive contribution to the public policy debate on this issue.

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EXECUTIVE SUMMARY 11 3. Federal agencies charged with administering public R&D resources should be empowered and encouraged to implement with greaser flexibility the economic performance requirements embodied in recent federal R&D legislation. This should be done in a manner that is consistent with the core missions of the agencies involved, the realities of competitive corporate R&D practice, and the principles of national treatment and transparency. Mission agencies now are being called upon to contribute more directly to U.S. economic growth and competitiveness through their R&D activities. To be successful, these agencies must become more adept at balancing this new charge with their core missions in a manner that is consistent with the opportunities and constraints of an increasingly interdependent world economy. This imperative demands strong interagency policy guidance. Such guidance should remind policymakers and the general public of the complex, highly case-specific calcu- lus involved in the implementation of economic performance requirements. The need for flexibility, discretion, and decentralized decisionmaking in the imple- mentation process should be emphasized. 4. Congress should strike reciprocity requirements from existing laws gov- erning federal R&D spending and exclude them from future R&D legisla- tion. Instead, the federal government should pursue more aggressively re- ciprocal access to publicly and privately funded R&D activities abroad through U.S. trade and antitrust laws, existing bilateral and multilateral trade and technology agreements, and the negotiation of more comprehen- sive bilateral and multilateral agreements. The committee considers the potential benefits of reciprocity requirements to be small and more than offset by the costs and risks they entail. Such require- ments contradict stated U.S. foreign economic policy objectives, undercut U.S. efforts to persuade other nations to move toward unconditional nondiscrimina- tory treatment, and encourage U.S. trading partners to introduce similar require- ments. The lack of clear compliance standards makes these requirements very difficult to administer and exposes federal agencies and foreign companies alike to political and legal challenges. The committee believes that there are more promising unilateral, bilateral, and multilateral avenues for increasing U.S. ac- cess to both publicly and privately funded R&D in other nations. To strengthen the hand of U.S. negotiators at the international level as well as facilitate enforce- ment of existing international agreements concerning mutual access to govern- ment-funded R&D, an agency of the federal government should be tasked by Congress with monitoring and periodically reporting on U.S. access to govern- ment-sponsored R&D in other nations. 5. The federal government should continue to seek more equitable interna- tional sharing of the basic research burden through the negotiation of bilat- eral science and technology agreements, the development of government-to-

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2 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT government international research consortia, and other mechanisms thatfos- ter international R&D collaboration. The U.S. government should continue to encourage Japan and other nations to assume roles in the global basic research enterprise that are commensurate with their industrial, technological, economic, and diplomatic standing in the world. To facilitate this process, the U.S. government should expand its support of international public- and private-sector collaboration in areas of basic and pre- competitive applied research. This can be done through bilateral science and technology agreements and through international research programs such as the Human Genome Project and the Intelligent Manufacturing Systems Initiative. Furthermore, the committee is convinced that the strength of the U.S. basic re- search system is closely linked to its openness. Efforts to restrict or artificially increase the cost of foreign access to U.S. basic research capabilities that might damage the U.S. research enterprise should be avoided. 6. The National Academies' Government-University-Industry Research Roundtable (GUIRRJ should take the lead in promoting the exchange of in- formation and "good practices" among the nation's leading research uni- versities concerning their relations with foreign-owned firms, foreign gov- ernments, and other foreign institutions. 7. All institutions that perform federally funded R&D should have adequate procedures in place to manage electively intellectual property resulting from publicly funded R&D. To assist U.S. universities and the federal government in this regard, the National Academies' Government-University-Industry Re- search Roundtable (GUIRRJ should work with the Association of University Technology Managers (AUTM' and other appropriate organizations to de- velop and distribute good practices and general guidelines for the nation's academic research enterprise. 8. U.S. research universities andiederal laboratories should expand efforts to establish quid pro quo with all foreign institutions that perform R&D. This might include increased exchange of scientific and engineering personnel. CHANGING PERCEPTIONS AND THEIR IMPLICATIONS It is the sense of the committee that many of the circumstances that have helped skew public discourse and policy in the United States toward a near-ex- clusive focus on the costs, risks, and asymmetries of foreign participation in the U.S. R&D enterprise over the last decade are changing. The widespread percep- tion of the mid- to late 1980s that many American companies were less effective than their foreign competitors at harnessing the output of research generated in this country for commercial advantage is giving way to a more balanced view.

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EXECUTIVE SUMMARY 13 There is now a spirit of cautious optimism about the continuously improving technology management and competitive capabilities of many U.S. industries. Recent state, federal, and university initiatives fostering R&D collaboration and more effective use and diffusion of technology and know-how relevant to indus- try may have also contributed to a more positive view of the nation's industrial future. At the same time, new concerns are emerging: the weak growth of industrial R&D in the United States, the contraction of basic and long-tenn applied research based in industry, and the implications of defense conversion for the nation's R&D system. It is uncertain how these concerns or the nascent optimism regard- ing U.S. competitiveness will influence how the public regards foreign participa- tion in U.S. R&D. Regardless of how public perceptions evolve, in the com- mittee's view, the conclusions and recommendations contained in this report will remain a useful guide to policy-making. NOTES 1. Although some R&D activities in the United States are supported by a mix of public- and private-sector funding (both direct and indirect), the vast majority are financed predominantly through either public- or private-sector sources. Privately funded R&D is directed at the generation, assimilation, and application of knowl- edge and technology to advance the economic interests of stakeholders in the company making the investment. In market economies, it is generally accepted that under most circumstances, private companies should be allowed to dispose of the products of their R&D investments as they see fit. In contrast, publicly funded R&D and its proprietary and nonproprietary outputs are viewed as public property to be used to advance specific U.S. national interests. For the most part, institutions that conduct or use the outputs of publicly funded R&D are subjected to greater public scrutiny than those that conduct or use the outputs of privately funded R&D. Since only a small fraction of privately funded U.S. R&D is accounted for by private noncom- mercial/nonprofit organizations, the term "privately funded R&D" is used throughout the report as a synonym for company-funded R&D. 2. A national innovation system is defined by Patel and Pavitt (1994) as "the national institu- tions, their incentive structures and their competencies, that determine the rate and direction of tech- nological learning (or the volume and composition of change-generating activities) in a country." 3. The U.S. government defines foreign direct investment as the ownership by a foreign person or business of 10 percent or more of the voting equity of a company located in the United States. A 10 percent or more equity interest is considered evidence of a long-term interest in, and a measure of influence over, the management of the company. New foreign direct investment can take two forms- the acquisition of an existing company or the establishment of a new company. (U.S. Department of Commerce, 1991) 4. A U.S. affiliate of a foreign-owned firm is a company located in the United States in which a foreign person or business has a "controlling" stake (i.e., 10 percent or more of the company's voting equity). 5. There are several legitimate methods for identifying high-technology industries. All rely on some calculation of R&D intensity (typically, R&D expenditures and/or numbers of technical people divided by industry value added or sales). This report draws on data gathered by the U.S. Department of Commerce and the Organization for Economic Cooperation and Development (OECD). The two organizations use different yet comparable definitions of high-technology industries.

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14 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT The OECD classification of "high-intensity technology products" relies on directly applied R&D expenditures and includes those products with above-average R&D intensities. Direct R&D expenditures are those made by the firms in the product group. The OECD classifies the following industries as high tech: drugs and medicines (ISIC 3522); office machinery, computers (ISIC 3825); electrical machinery (ISIC 383 less 3832); electronic components (ISIC 3832); aerospace (ISIC 3845); and scientific instruments (ISIC 385). The Department of Commerce definition of high-technology products (DOC-3 high-technol- ogy products) includes products that have significantly higher ratios of direct and indirect R&D ex- penditures to shipments than do other product groups. Direct R&D expenditures are those made by the firms in the product group. Indirect R&D describes the R&D content of input products. The DOC-3 industries include 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 38 less 3825); engines, turbines, and parts (SIC 351); and plastic materials and synthetic resins, rubber, and fibers (SIC 282). Comparisons of U.S. production data for high-intensity technology products, as reported to the OECD, with U.S. total shipment data for high-technology products as reported to the Depart- ment of Commerce, according to DOC-3 definition show that the OECD data represented 96 per- cent and 100 percent of the DOC-3 data in 1980 and 1986, respectively (National Science Board, 1989).