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5 Findings and Recommendations In the decades immediately following World War II, the United States occu- pied a position of global technological and industrial preeminence. There was little question that Americans would reap most of the economic and technological benefits generated by public and private investments in R&D and in other types of technologically innovative activity. The American public generally viewed the predominately one-way transfer of technology and know-how out of the United States as a way to increase both short- and long-term economic, political, and national security returns on these investments. Recent decades have brought increasing convergence in the technological capabilities of industrialized nations as well as growing cross-penetration of na- tional innovation systems through foreign direct investment and transnational industrial alliances. The United States remains a leader in the generation of new knowledge and technology, but its position today is better characterized as first among equals. Similarly, the technological and economic autonomy of the United States has given way to deepening international interdependence. Accompany- ing these trends, changes have taken place in the organization and management of R&D within the United States, and new links have been forged between different U.S.-based it&D-performing institutions. These changes have given rise to new questions about the consequences of the growing involvement of foreign nationals in publicly and privately funded U.S.-based R&D activity. Are foreign nationals receiving more knowledge, know-how, technology, and associated economic benefits than they are contrib- uting to the United States? Does increasing foreign participation in U.S. R&D pose a threat to the nation's military or economic security? 140

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FINDINGS AND RECOMMENDATIONS R&D AND ECONOMIC PERFORMANCE 141 Understanding the nature of R&D activity, technology transfer, and the ways R&D contributes to corporate and national economic performance is vital to any attempt to assess the consequences of growing foreign participation for the United States. The following observations are of particular relevance to the emerging policy debate: R&D activity is a critical, yet relatively small, subset of the many inter- locking activities and capabilities that malice up the complex process of techno- logical innovation, the iterative process by which new knowledge and technology are generated or acquired and developed so that they may be incorporated into useful products or services; R&D activity yields many different economically valuable outputs. Among them are codified knowledge, know-how or techniques, highly skilled human capital, instrumentation, and technology; A variety of individuals and institutions may benefit from a given R&D activity. Many of the outputs of publicly and privately funded R&D are "public goods" usable by one party without diminishing their value to others and are accessible to anyone with the technical skills to absorb them. Even where R&D outputs are proprietary in nature (i.e., patents, copyrights, and trade secrets), they yield economic benefits to many entities, including customers, suppliers, and competitors, beyond those who hold title; There are significant barriers to the movement of scientific and techno- logical knowledge across national boundaries and even between organizations or regional centers with technological competence in specific fields. Technology transfereven in an era of global telecommunicationsremains a "contact sport" that demands the ongoing, intensive, face-to-face interaction of individual scien- tists and engineers. Therefore, R&D activity continues to cluster geographically, and much of the economically valuable outputs of publicly and privately funded R&D tend to be highly localized; In order for a company to draw effectively on advanced technological capabilities and R&D outputs beyond its own walls, that firm generally needs to be performing R&D at a level commensurate with that of the organizations whose R&D activities it hopes to exploit; and Neither R&D capabilities nor ownership of technology alone are reliable indicators of the economic or competitive strength of a company or a nation. Rather, economic and competitive strength are determined by how effectively technology is used and managed in combination with other factors of production, 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 depends on whether its innovation system can foster widespread dif- fusion and effective use of the outputs generated. These factors are, in turn, influenced by the skill level of a nation's work force, by the size, wealth, and

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42 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT technological sophistication of its domestic market, and, increasingly, by the abil- ity of firms within its borders to access markets and technology abroad. These observations suggest that the task of appropriating the many valuable outputs of U.S.-based R&D activity is significantly more complex and difficult than is generally assumed. They imply also that foreign-owned firms wishing to effectively exploit technology and knowledge generated in the United States must establish a significant, technologically sophisticated presence here to do so. Moreover, as the level of technological sophistication and extractive capabilities of foreign participants and their home countries increase, so too does the potential for reciprocal transfers of knowledge and technology into the United States. Under most circumstances, then, any country, including the United States, should welcome R&D activity within its borders regardless of the nationality of the R&D performer. If a large share of the returns to R&D investments are captured by those proximate to the R&D activity, and these returns are considered desirable, it is clearly better to have R&D performed within one's borders than beyond them. FOREIGN PARTICIPATION IN PRIVATELY FUNDED U.S. R&D: FINDINGS The past decade has brought a significant increase in foreign participation in privately funded R&D in the United States. This participation has taken the form of both direct investment and intercorporate technical alliances. In 1992, U.S. affiliates of foreign-owned firms accounted for nearly a fifth of all R&D spend- ing by U.S. high-technology companies. Affiliate shares of U.S. industrial R&D were particularly large in three manufacturing industries: industrial chemicals (47.5 percent); pharmaceuticals (42.7 percent); and audio, video, and communi- cations equipment (33 percent). In general, foreign parent companies invest in U.S. high-technology assets in areas in which they have a strong export position or perceived competitive advantage. No single country dominates the field of foreign investors in privately funded U.S. R&D. Roughly two-thirds of affiliate R&D spending in the United States is accounted for by companies based in Canada, the United Kingdom, Germany, Switzerland, and Japan. Since the mid-1980s, Japanese-owned affiliates have increased their share of affiliate R&D activity more rapidly than any other major investing country. Foreign companies cite two principal motives for establishing a U.S.-based R&D presence: to help the local manufacturing affiliate and the parent company meet the demands of U.S. customers more effectively and to improve access to the scientific and technical talent in established U.S. centers of technology and innovation. Both motives are reflected in the activities and locations of a major- ity of affiliate facilities. Comparative surveys of U.S.- and foreign-owned multi-

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FINDINGS AND RECOMMENDATIONS 143 national companies in a variety of industries suggest that both the motives for engaging in R&D in foreign markets and the type of R&D activity vary by indus- try as well as among firms with the same industry. However, for the most part, there is considerably less variation in motive and R&D type among companies of different nationality within the same industry. The committee concludes that the strength and momentum of the trends that have fueled the growth of foreign involvement in privately funded U.S. R&D will continue into the next century. Regardless of what individual nations do to slow or otherwise modify these trends, global technological and economic capabilities will become increasingly distributed among an expanding population of industri- alized countries, and competition and innovation in most manufacturing and ser- vice industries will become increasingly internationalized. The Quid Pro Quo Growing foreign involvement in the nation's industrial R&D base is accom- panied by both costs and benefits. The question of whether foreign nationals take away more technology and associated economic value than they contribute to the United States cannot be definitively answered. The few quantitative measures available indicate, however, that the U.S.-based affiliates of foreign-owned firms import significantly more codified technology from their parent companies than they export to them or to unaffiliated firms abroad. Case studies show that for- eign-owned companies, especially Japanese firms, have in several industries im- ported significant amounts of advanced production technology and methodolo- gies into the United States. Thus, while in some cases foreign involvement in U.S.-based industrial R&D has resulted in lost opportunities for U.S.-owned firms and foregone wealth for their U.S.-based stakeholders, in many others foreign firms have created opportunities and wealth for Americans and American firms by transferring technology, know-how, capital, and other assets to the United States. On balance, the committee believes that the growth of foreign direct invest- ment is a positive-sum trend, one that enhances the productivity and wealth of the United States and its trading and investing partners overseas. The same finding holds for the proliferation of transnational corporate alliances. Furthermore, the committee believes that foreign participation in privately funded U.S. R&D can- not be separated meaningfully from the larger trends of which it is part. Asymmetries of Access Limits on American access to various non-U.S. economies and innovation systems have had a profound effect on public perceptions and federal policies related to foreign involvement in R&D in this country. Over the last 10 years, U.S. trading partners have modified their policies on foreign direct investment-

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44 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT the most important avenue of access to privately funded R&D activities abroad. In doing so, they have moved significantly toward the more liberal policies of the United States. Nevertheless, the committee found that important impediments to U.S. access remain in some major economies. Arising from structural barriers, government policies, or collusive or discriminatory corporate practices, these lin- gering barriers have led to calls for unilateral U.S. action to force the pace of liberalization abroad. While appealing to one's sense of fairness and equity, many of these unilateral measures would pose significant risks and costs for the United States. In the committee's judgment, many of the proposed policy changes, such as placing additional restrictions or reporting requirements on foreign direct invest- ment in U.S. high-tech industries are unlikely to advance the short- or long-term interests of U.S. citizens. Such measures risk discouraging more "good" foreign direct investment with its many associated benefits to the United States than "bad." They also risk undercutting the United States' credibility as it negotiates the further opening of foreign markets to international trade and investment. In addition, unilateral measures by the United States still the world's largest na- tional economy risk encouraging other nations to backslide in their treatment of foreign direct investment, potentially at significant cost to U.S. multinationals and their U.S.-based stakeholders. Threats to National Security Concerns over the risk to national security posed by foreign involvement in the U.S. research enterprise have focused on growing foreign participation in particular it&D-intensive industries, whether through investment or industrial alliances. The committee found that current national security regulations and procedures minimize the chances that militarily sensitive U.S. technology will be transferred to foreign-owned companies. These regulations and procedures, how- ever, may not be as effective in addressing the medium-to-long-term risks of delayed or denied access to militarily critical technological capabilities posed by foreign direct investment, or mergers and acquisitions generally. In addition, current monitoring efforts and methodologies associated with U.S. antitrust law enforcement may be inadequate to address the monopoly risks posed by mergers and acquisitions in niche defense markets, whether instigated by foreign- or U.S.-owned companies. Further complicating the situation, the federal government has no clearly defined, agreed-upon criteria or procedures for deciding whether a given company's technological capabilities have critical mili- tary implications. This makes it difficult to identify vulnerable niche sectors. At the same time, little consideration has been given to the costs and risks to national security posed by existing procurement regulations that discourage for- eign-owned firms from contracting directly with the Department of Defense or investing in existing U.S.-based defense contractors. The committee believes

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FINDINGS AND RECOMMENDATIONS 145 such risks should be accorded greater weight given the current relatively high level of U.S. dependence on foreign sources of component technology, the grow- ing importance to the nation's military of technologies that have both civilian and military applications, and the increasing strength of foreign-owned firms in many of these dual-use technologies. The Threat of Technological Monopolies At the national and global levels, many high-technology industries are al- ready highly concentrated. Consequently, at least some of the many recent merg- ers and acquisitions have probably diminished competition in particular civilian high-technology industries. However, there is no evidence to suggest that for- eign-owned firms are any more likely to engage in anticompetitive activity in the United States than are their U.S.-owned counterparts. Growing foreign involve- ment in U.S. industrial R&D appears to be causing little if any damage to U.S. economic security, as measured by the ability of U.S.-based companies to access key technologies, components, and subsystems required to produce goods com- petitive with those made by foreign companies. FOREIGN PARTICIPATION IN PRIVATELY FUNDED U.S. R&D: RECOMMENDATIONS The central policy challenges facing the U.S. government with respect to foreign participation in privately funded U.S. R&D are inseparable from the nation's broader foreign economic policy agenda, particularly as it relates to for- eign direct investment and international trade. As a first step toward meeting these challenges, the committee makes two closely related recommendations. 1. In the absence of clear threats to national security, the Congress should avoid legislating restrictions onforeign participation in privatelyfunded U.S. R&D. The committee concludes that the risks posed by growing foreign involve- ment in privately funded U.S. R&D do not in and of themselves warrant special regulation of foreign direct investment in the United States or of transnational corporate alliances involving U.S.-owned firms, except in the area of national military security. Moreover, the committee believes that discriminatory treat- ment of foreign-owned firms beyond what may be required to protect U.S. mili- tary security imposes economic costs on U.S. citizens. Such treatment discour- ages foreign direct investment in the United States and undermines long-standing U.S. efforts to secure national treatment of U.S.-owned companies in foreign markets. The committee also cautions against invoking concerns about military secu- rity as justification for excluding foreign participation in the nation's industrial .

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146 FOREIGN PARTICIPATION IN U.S. RESEARCH ED DEVELOPMENT R&D enterprise. The nation's military security will be served more effectively once the federal government develops more sophisticated capabilities for both assessing and addressing the risks and capitalizing on the opportunities presented by the growth of foreign involvement in the nation's dual-use industrial technol- ogy base. In particular, the committee calls upon the Department of Defense to define clearly criteria and procedures for identifying militarily critical techno- logical assets and to broaden its portfolio of strategies for managing inevitable U.S. dependence on certain foreign technologies. 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 regulation, and intellectual property rights. Above all, the United States should reaffirm its long-standing commitment to the principles of non- discrimination (national treatments and transparency (full disclosure of terms) in policies that influence international investment and trade flows. The committee believes it is essential that the federal government continue to seek to reduce policy- and business practice-induced barriers that impede U.S.- owned companies' access to foreign markets and private R&D assets located abroad. The United States has long championed the worldwide opening of mar- kets to the free flow of goods, services, investment, and technology based on internationally agreed-upon principles and rules of conduct. Thanks in large part to U.S. leadership in this area, there has been significant progress in recent years in liberalizing national foreign direct investment policies. Structural and policy- induced barriers to investment are a source of continuing friction in U.S. relations with some of its major trading partners, and negotiations to reduce these remain- ing barriers have been difficult and progress has been slow. Nevertheless, the committee believes that U.S. advocacy of liberal treatment of foreign direct in- vestment through multilateral agreements continues to serve well the nation's economic interests. The committee also 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. In the opinion of the committee, unilateral measures aimed at eliminating asymmetries of access particularly those which contradict the principles of nondiscrimination and transparency risk discourag- ing more "good" foreign investment in the United States than "bad," undercutting rather than strengthening the position of the United States in bilateral and multi- lateral negotiations, and inviting retaliation by U.S. trading partners all at signifi- cant cost to U.S. citizens.

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FINDINGS AND RECOMMENDATIONS FOREIGN PARTICIPATION IN PUBLICLY FUNDED U.S. R&D: FINDINGS 147 During the past 15 years, participation in U.S. publicly funded R&D activi- ties by individual foreign students and researchers as well as foreign corporations has grown sufficiently to capture the attention of the American public. National and institution-specific data on foreign graduate students, postdoctoral research- ers, and long-term visiting researchers (who stay in the United States for at least 12 months) indicate that these groups participate extensively in research at U.S. universities and federal laboratories. Although no aggregate data are available on foreign researchers who work at U.S. publicly funded research facilities for short periods (fewer than 12 months), anecdotal evidence from various institutions sug- gests that their numbers may be significant as well. There is little good information on the scope and nature of foreign institu- tional involvement in publicly funded R&D in the United States. Apparently, such support represents a relatively small share (1 to 2 percent) of total sponsored research and is concentrated in a small number of U.S. institutions. As of the late 1980s, a majority of foreign-sponsored research was funded by not-for-profit in- stitutions and was concentrated in agriculture, medicine, and geology. However, at select U.S. research universities, such as the Massachusetts Institute of Tech- nology and the University of Wisconsin, a majority of foreign-sponsored research is accounted for by private companies. As of 1986, Japanese institutions spon- sored more U.S. university-based R&D than did those of any other nationality. More recent data indicate that Japanese-owned multinational companies rely more heavily on U.S. research universities for training company personnel and col- laborative research than do their U.S. or European counterparts (Roberts, 1995a). Foreign-owned companies that opt to participate in U.S. publicly supported R&D may do so in any number of ways, including via sponsored research, patent licensing, university industrial liaison programs, or by employing university fac- ulty and recent graduates from science and engineering doctoral programs. A paucity of data makes it difficult to say much about the aggregate magnitude, disciplinary focus, and national shares of foreign corporate involvement. Anec- dotal evidence suggests that Japanese companies may be the most diligent of all foreign-owned firms in monitoring the research activities of U.S. federal labora- tories. To date, few foreign firms have participated in the recently established federal industrial R&D programs, such as the Advanced Technology Program at the Department of Commerce. The Quid Pro Quo The committee believes that the extensive involvement of foreign graduate students, postdoctoral researchers, and other long-term visiting researchers in publicly funded U.S. research institutions has, on balance, significantly benefited

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148 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT the U.S. economy and national innovation system. By contrast, the committee believes that foreign visiting researchers who stay in this country for less than 1 year gain more than they contribute from their work in U.S. research universities and federal laboratories. Evidence concerning the scope and nature of participa- tion by these short-term visiting researchers is mostly anecdotal. The committee believes further study of this category of foreign visiting researcher is warranted. The costs and benefits of foreign corporate involvement in U.S. government- funded research institutions are readily identifiable, but it is impossible either to quantify them or determine their net economic impact. Through their participa- tion in the research activities of U.S. universities and federal laboratories, foreign corporations undoubtedly extract more knowledge and intellectual property from the United States than they would in the absence of such ties. It is equally certain, in the view of the committee, that foreign-owned firms and their stakeholders abroad have garnered extensive benefits, in some cases at the expense of Ameri- can firms and stakeholders, through their access to U.S. publicly funded R&D activities and institutions. At the same time, the committee firmly believes that knowledge and technol- ogy flows between foreign firms and U.S. universities and federal laboratories are far from unidirectional and that foreign firms through their R&D participation also return economic value to U.S. citizens in many different ways. Numerous examples confirm that foreign-owned firms have contributed material support as well as intellectual resources to U.S. research universities and federal laborato- ries, enhancing the productivity and quality of these institutions' research efforts and strengthening the nation's research infrastructure. Furthermore, whether or not foreign companies acquire more intellectual property and knowledge from U.S. universities and federal laboratories than they bring to them says very little, in and of itself, about the impact of foreign corpo- rate research participation on the welfare of U.S. citizens. Many if not most of the foreign-owned companies that have extensive ties to U.S. publicly funded research institutions also tend to have significant U.S.-based manufacturing and R&D operationsoperations that employ U.S. citizens, buy from U.S.-based suppliers and equipment vendors, import as well as generate technology and know-how that is applied within the U.S. economy, and pay U.S. taxes. Even if foreign companies go abroad to exploit intellectual property licensed from U.S. publicly funded research institutions, their gain does not automatically represent a loss for the United States. It is true that in some instances, foreign firms have acquired or licensed technology generated with U.S. government funds only to develop and commercialize the technology overseas. Yet, the committee also believes that many foreign-based licensees have enabled publicly supported U.S. research institutions to earn revenues on technology that otherwise would not have been commercialized. By doing so, foreign firms have in some in- stances supplied Americans with higher-performance or lower-cost goods or ser- vices embodying the licensed technology.

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FINDINGS AND RECOMMENDATIONS 149 American research universities and the nation's federal laboratories, in the committee's judgment, have generally extended preferences to U.S.-based firms and made good-faith efforts to comply with the federally mandated economic performance requirements in their dealings with both U.S.- and foreign-owned companies. In general, foreign-owned firms are buyers or licensees of last resort for technology owned by U.S. universities and federal laboratories. That is, these institutions are licensing to foreign entities technology that no U.S.-owned com- pany wants to invest in. In a few well-publicized cases, publicly funded institutions have seemed to be unwilling or unable to negotiate deals with foreign firms (or U.S.-owned firms for that matter) that are in the best interest of the United States. However, the committee believes these to be the exception, not the norm. Indeed, most U.S. universities and federal laboratories appear to be very aware of the need to affirm their service to the nation's economic welfare. They are also cognizant of the highly volatile public relations hazards associated with foreign corporate involve- ment in publicly funded research, as are foreign firms themselves. The sharply critical public response to the few highly controversial cases of foreign participa- tion in U.S. R&D has, in the committee's opinion, had a distinct chilling effect on the willingness of some foreign firms to enter into closer working relationships with publicly funded U.S. research institutions. At the same time, the manner in which some federal agencies have imple- mented the performance requirements embodied in recent technology transfer legislation suggests that they may be overreaching in their efforts to contain the economic benefits of public R&D spending within the United States. Some agen- cies have developed economic performance criteria and procedures for imple- menting them that are fundamentally at odds with the competitive R&D and tech- nology management practices of multinational companies, strongly discourage foreign corporate involvement, and are at times in conflict with the core missions of the agencies themselves. In order to engage U.S.-owned multinational compa- nies in cooperative research and development agreements (CRADAs) and other forms of collaborative R&D, some agencies have developed procedures that al- low for a broader, case-by-case interpretation of what constitutes an adequate economic quid pro quo. Nevertheless, extensive restrictions on private-sector use of publicly subsidized intellectual property, invoked in the name of U.S. eco- nomic interests, continue to discourage many leading U.S.-owned high-technol- ogy companies from collaborating with federal laboratories. With respect to foreign-owned firms, the interpretation and implementation of economic performance requirements by various federal agencies appear to be particularly vulnerable to political and legal challenges. Thus, as currently imple- mented by some agencies, these requirements serve as a major disincentive to foreign-owned firms that might otherwise participate in publicly funded U.S. R&D. Given the growth of technical competence overseas and the prominent role of U.S.- and foreign-owned multinational companies in R&D and technol-

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150 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT ogy areas of direct relevance to the core missions of U.S. federal agencies, it is worth asking whether economic performance requirements as currently adminis- tered are serving the nation's best interests. Asymmetries of Access U.S. government, academic, and industrial researchers appear to have few problems accessing publicly funded research capabilities and activities within academic and government-operated laboratories abroad. Furthermore, at least on paper, access by U.S.-owned companies to government-funded industrial research consortia in Europe is apparently equal to if not greater than the access that the United States extends to foreign-owned firms in this country. Japan, however, has restricted foreign participation in its publicly funded industrial R&D consor- tia to a greater extent than either the United States or the European Community. Given differences in the organization, scale, and sophistication of publicly funded R&D activities among countries, the value to Americans of reciprocal access to publicly funded R&D abroad is not always clear. In some cases, the lack of reciprocal access may hurt the international competitiveness of U.S.- owned firms with negative consequences for their U.S.-based stakeholders. How- ever, its greatest impact may be the extent to which it offends the American sense of fairness, thereby undermining public support for efforts to negotiate remedies to these asymmetries. In the committee's judgment, recent U.S. government efforts to address in- ternational asymmetries of access to publicly funded R&D through the introduc- tion of reciprocity requirements have proved problematic. Indeed, even more than economic performance rules, reciprocity requirements present liabilities and hazards for the United States. First, by requiring that foreign firms' home gov- ernments comply with U.S. laws before the firms may expect nondiscriminatory treatment, the United States is violating its long-standing adherence to uncondi- tional national treatment of multinational enterprises. Some evidence suggests that the U.S. move toward reciprocity requirements has encouraged a few major U.S. trading partners to consider imposing similar conditions. Second, multiple agencies must be involved in the process of assessing whether a particular firm's home country is in compliance with each of the various reciprocity requirements, making the process cumbersome, time consuming, and difficult to administer. Federal agencies must also make decisions in situations in which it is often diffi- cult to determine just what constitutes "comparable investment opportunities" or "adequate protection of U.S. intellectual property." These vagaries have encour- aged some U.S. companies to challenge both the eligibility of particular foreign firms to participate in U.S. R&D and the way federal agencies implement the eligibility requirements. The committee believes that these challenges, in turn, have discouraged many foreign-owned firms from even applying for access to U.S. publicly funded R&D initiatives.

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FINDINGS AND RECOMMENDATIONS International Burden-Sharing in Basic Research 151 The argument that basic research should be more equitably distributed among nations is directed primarily at Japan. International comparisons of R&D expen- ditures confirm that most of America's advanced industrialized trading partners invest as much if not more of their gross national product in basic research than does the United States. Japan, however, despite recent efforts to expand its basic research capabilities, spends a smaller share of its gross domestic product and nearly half as much per capita as the United States on basic research. 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 intergovernmental science and technology agreements, federal agency directives, and guidelines based on recent federal legislation. In the committee's judgment, leading U.S. research universities and federal laboratories generally have made good-faith efforts to comply with federally mandated economic performance and reciprocity require- ments. Nevertheless, the committee believes that at the very least these require- ments risk impeding the ability of agencies to perform their primary missions as well as diminishing the contribution of federal R&D programs to U.S. economic performance and competitiveness. At worst, these requirements risk imposing significant economic costs on the United States. Recommendations 1 through 3, directed at the federal government, are intended to minimize these risks to the United States as well as lay the foundation for more effective, mutually beneficial management of foreign participation in government-funded R&D in all industri- alized countries. Private-sector institutions that conduct or otherwise benefit from R&D activ- ity supported by the U.S. government should recognize that concerns about for- eign involvement are more than a public relations problem. The actions of a limited number of institutions have evoked legitimate worries regarding the fair- ness and economic logic of certain types of private-company involvement in pub- licly subsidized R&D. The committee does not believe that increased restrictions on foreign corporate participation are the necessary political price to pay for avoiding further public criticism. Rather, the committee calls upon universities and other performers of publicly funded research to communicate more effec- tively the costs and benefits of foreign participation in U.S. R&D. Recommenda- tions 4 through 6, aimed at the performers of publicly funded U.S. R&D, outline steps these institutions might take to become more constructive participants in the public debate. 1. U.S. federal agencies charged with administering public R&D resources should be empowered and encouraged to implement with greater flexibility

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52 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT and discretion 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 nondiscrimination (national treatments and transparency (full disclosure of terms). As mission agencies are called upon to contribute more directly to U.S. eco- nomic growth and competitiveness through their R&D activities, they must be- come more adept at balancing this new role with their core missions in a manner that is consistent with the opportunities and constraints of an increasingly interde- pendent world economy. Most private companies in a position to make signifi- cant technological contributions to federal agency missions or to successfully commercialize technology developed with public funds will balk at rules that limit the transfer or commercial application of publicly-subsidized intellectual property beyond U.S. borders. For that matter, the very existence of such ex- treme restrictions sends a signal to potential foreign participants that they need not apply. In addition to more flexible implementation, there needs to be strong inter- agency policy guidance that explicitly reconciles economic performance require- ments with the demands of agency core missions, the nature of multinational R&D and technology practice, and the long-standing U.S. commitment to na- tional treatment of all companies operating in the United States.i Federal policy guidance in this area should make it clear that there will be circumstances in which agency missions and the more immediate economic ob- jectives of these requirements will not overlap and may even diverge. Such guid- ance should recognize that there are many direct and indirect ways as a lic- ensee, contractor, or collaborator that a firm's involvement in publicly funded R&D can contribute to the economic welfare of the United States. It should acknowledge the existence of highly specialized technical competence overseas and the dominant role of multinational companies (both U.S.- and foreign- owned) in areas of R&D and technology that are critical both to the core missions of U.S. agencies and the broader economic interests of the nation. Finally, policy guidance should inform policymakers and the general public of the complex, highly case-specific calculus involved in implementing economic performance requirements and emphasize the need for flexibility, discretion, and decentralized decision-making in that process. The committee believes that in most instances, determining whether or not licensing a technology to a foreign-owned company or including a foreign firm in a CRADA or government R&D contract advances the nation's economic interest requires the consideration of a number of highly case-specific factors. These factors are generally best understood, explained, and, if need be, justified by the institutions performing the R&D. Therefore, to the extent possible, federal agen- cies should devolve responsibility for implementing economic performance re-

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FINDINGS AND RECOMMENDATIONS 153 quirement to these "front-line" institutions, which would remain accountable to their respective sponsor agencies and should be prepared to justify their decisions within the context of the agencies' policy guidance. Such an approach would be far superior, in the committee's judgment, to the current situation, in which some agencies have attempted to reduce general statutory language regarding "substan- tial manufacturing presence" and "national economic interest" to highly detailed regulations. Ultimately, strong federal policy guidance is a prerequisite to more flexible and discretionary implementation of statutory economic performance require- ments. Such guidance would provide federal agencies and front-line R&D-per- forming institutions with the authority and legitimacy they need to implement the requirement. In the process, it would provide those responsible for assessing compliance with some shelter from unwarranted political interference. 2. 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 law, existing bilateral and multilateral trade and technology agreements, and the negotiation of more comprehensive bi- lateral and multilateral agreements. Although the committee understands the logic that led to reciprocity require- ments, it does not believe that these requirements serve U.S. interests. Admit- tedly, such requirements appeal to a collective sense of fair play. Moreover, the history of recent U.S. trade policy suggests that highly specific "tit-for-tat" reci- procity requirements (i.e., those that make access by foreign companies to U.S. goveInment-supported R&D contingent upon reciprocal access by U.S.-owned firms to comparable publicly funded R&D abroad) may help force foreign gov- ernments to reduce access barriers.2 Nevertheless, the committee considers the potential benefits of such requirements to be marginal and more than offset by their potential costs and risks. First, nondiscriminatory, or national, treatment of multinational companies is a fundamental tenet of post-World War II U.S. foreign economic policy. It has been codified with certain exceptions based on concerns for national security and public order in numerous bilateral and multilateral investment treaties to which the United States is a signatory. It is also a central element of the federal government's investment policy agenda within multilateral forums, including the General Agreement on Tariffs and Trade (GATT), the Organization for Economic Cooperation and Development (OECD), and the Asian-Pacific Economic Coop- eration (APEC) Forum. The committee believes this commitment has served and continues to serve U.S. national interests very effectively, even though it has yet to be embraced fully by several of the United States' major trading partners. Reciprocity requirements in federal R&D legislation make nondiscriminatory

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154 FOREIGN PARTICIPATION IN U.S. RESEARCH ED DEVELOPMENT treatment of foreign-owned companies conditional on foreign-government com- pliance with U.S. laws in areas in which no international agreement exists. Such requirements contradict stated U.S. foreign economic policy objectives, undercut U.S. efforts to persuade other nations to move toward unconditional nondiscrimi- natory treatment, and even encourage U.S. trading partners to introduce into their laws similar reciprocity requirements. Second, implementation of these requirements is cumbersome and time con- suming, involving the cooperation of multiple federal agencies that must render judgments in areas of policy where compliance is extremely difficult to define. The absence of international standards or rules to measure the compliance of foreign host countries with reciprocity requirements has encouraged some U.S.- owned companies and members of Congress to challenge the eligibility of par- ticular foreign firms (as well as the implementation processes of some federal agencies). The committee believes that these challenges have had a chilling ef- fect on the interest of foreign-owned firms that might otherwise have sought to participate in federally funded R&D initiatives. No doubt they have also served as a political "shot across the bow" for federal agencies and their mission labora- tories in their dealings with foreign-owned companies. To the extent that reci- procity requirements discourage foreign-owned firms from applying to partici- pate in federal R&D programs, they deny agencies access to potentially valuable information contained in the proposals of would-be foreign applicants. Of course, any potential technical and economic contributions these firms might make to the United States are also lost. Finally, the committee believes that there are more promising approaches for increasing U.S. access to publicly and privately funded R&D in other nations. These include greater insistence on mutual accountability in existing or renegoti- ated bilateral science and technology agreements, negotiation of new rules at the multilateral level (such as within the OECD, GATT, APEC, and the North Ameri- can Free Trade Agreement), and more rigorous enforcement of existing U.S. trade laws and international trade and investment agreements or treaties.3 To strengthen the hand of U.S. negotiators at the international level as well as facilitate enforcement of existing international agreements concerning mutual access to government-funded R&D, the committee also recommends that Con- gress charge an agency of the federal government with monitoring and periodi- cally reporting on U.S. access to government-sponsored R&D abroad.4 3. The federal government should continue to seek more equitable interna- tional sharing of the basic research burden through moral suasion, the nego- tiation of bilateral science and technology agreements, the development of government-to-government international research consortia, and other mechanisms that foster international R&D collaboration. The committee believes strongly that U.S. citizens and foreign citizens would benefit from having other wealthy nations, Japan in particular, carry their fair

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FINDINGS AND RECOMMENDATIONS 155 share of the global burden of basic research. Therefore, the federal government should continue to encourage Japan and other nations to assume a role within the global basic research community that is truly 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 precompetitive applied re- search through bilateral science and technology agreements and through interna- tional research programs, such as the Human Genome Project and the Intelligent Manufacturing Systems Initiative. The committee believes it is essential that the federal government continue to work to enhance U.S. access to both publicly and privately funded basic re- search abroad through bilateral and multilateral negotiation and cooperation. At the same time, the committee believes that the federal government should ac- knowledge the existence and legitimacy of differences in the structure, organiza- tion, and comparative advantage of national R&D systems, and it should not expect other nations to reshape their innovation systems to fit the American model. For example, U.S. access to privately funded basic research in Japan would be improved if the United States could negotiate a reduction in barriers to U.S. foreign direct investment in Japan. However, the committee does not be- lieve that the U.S. government should expect Japanese corporations to open their laboratories to U.S. researchers as a quid pro quo for Japanese access to U.S. publicly supported basic research activities. In spite of the internationalization of industry and R&D, the United States continues to derive important competitive advantages from its large investment in basic research. In the eyes of the committee, these advantages would exist whether or not foreign companies and countries took advantage of the U.S. in- vestment in basic research. The committee believes that the strength of the U.S. basic research enterprise is closely linked to its openness and permeability. There- fore, any efforts to restrict or artificially increase the cost of access by foreign companies and foreign governments to this resource might damage the research enterprise in the process and should be avoided. 4. The National Academies' Government-University-Industry Research Roundtable (GUIRR J should take the lead in promoting the exchange of in- formation and "good practices" among the nation's leading research uni- versities concerning relations with foreign-owned firms, foreign govern- ments, and other foreign institutions. Recognizing the diversity of institutions that constitute the nation's academic research enterprise, the committee believes that the GUIRR should move aggres- sively to identify and highlight examples of good practice with regard to univer- sity relationships with foreign entities and to develop channels for U.S. research universities to share with each other their experiences working with such entities. Building on this process, the GUIRR might formulate guidelines for good prac-

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156 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT lice concerning industrial liaison programs, contract research, standards of con- duct for foreign researchers in U.S. publicly supported research institutions, and other measures to ensure reciprocal access for U.S. researchers to the laboratories and know-how of the foreign sponsoring organizations. s. all institutions that perform federally funded R&D should have proce- dures in place to manage effectively intellectual property resulting from pub- licly 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 disseminate to the nation's academic research enterprise good practices and general guidelines related to the management of intellectual property. While most of the major research universities appear to have established adequate capabilities for insuring compliance with the requirements of the 1980 Bayh-Dole Act, universities with more modest research activities may not be devoting sufficient resources to this task. In the committee's judgment, collabo- ration among the GUIRR, AUTM, and other appropriate organizations to develop and disseminate to the nation's research universities good practices and general guidelines addressing this concern would be a useful step. 6. U.S. research universities and federal laboratories should expand their efforts to establish quid-pro-quo relationships with all foreign institutions that perform R&D. Among other things, this might include the increased exchange of engineering and scientific personnel. CHANGING PERCEPTIONS AND THEIR IMPLICATIONS Given trends in the global economy, the openness of the U.S. economy, and the comparative strengths of the U.S. innovation system, the committee considers it inevitable that foreign participation in U.S.-based R&D activity will grow in the coming decades, as will U.S. involvement in the markets and R&D systems of its trading partners. Furthermore, these trends will continue to produce costs and risks as well as benefits and opportunities for the United States. In this environ- ment, effective policy responses from U.S. public- and private-sector players will be needed if the interests of U.S. citizens are to be defended and advanced. Nev- ertheless, the committee believes that efforts to stop, reverse, or otherwise sig- nificantly impede these trends are unlikely to succeed in the long term and are very likely to impose unacceptably high costs on U.S. citizens. It is the sense of the committee that many of the circumstances that have focused the attention of the public and of policymakers on the costs, risks, and asymmetries of foreign R&D participation during the past decade are changing in

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FINDINGS AND RECOMMENDATIONS 157 ways likely to foster a more balanced response in the coming decade. In particu- lar, the widespread perception of the mid- to late 1980s that many U.S.-owned companies were far less effective at harnessing the output of U.S. research for commercial advantage than were their foreign competitors is giving way to cau- tious optimism regarding the continuously improving technology management and competitive capabilities of U.S.-owned firms across a range of industnes. Although still in their infancy, recent federal, state, and university initiatives de- signed to foster collaborative R&D and more effective use and diffusion of indus- trially relevant technology and know-how throughout the U.S. economy have also contributed to a more positive outlook on the nation's industrial future. Admittedly, new concerns are emerging regarding the tepid growth of U.S. industrial R&D, the contraction of industry-based basic and long-term applied research, and the implications of defense conversion for the nation's R&D sys- tem. However, the committee believes that these concerns, unlike the recent preoccupation with the nation's weaknesses in technology commercialization and use, are likely to have a more balanced and constructive influence on the way the American public looks upon foreign participation in publicly and privately funded U.S. R&D. NOTES 1. In response to a request by the National Institutes of Health (NIH) for guidance on these issues raised by the Bayh-Dole Act of 1980, an ad hoc consultant panel to the Advisory Committee to the Director of NIH made the following observations and recommendations: The [Bayh-Dole] Act permits agencies to grant waivers to its explicit U.S. manufacturing re- quirement. The Panel recognizes that grantees are obligated to require their exclusive licensees to agree that any products embodying licensed inventions that will be used or sold in the United States must be substantially manufactured in the United States. However, other economic benefits should be regarded when considering waivers of the U.S. manufacturing requirement. The Panel urges NIH officials to continue to implement a flexible policy for fulfilling this part of the law, since in the biomedical area it is not always feasible to manufacture substantially in the United States. More- over, important public health and other economic benefits could by lost if product development is delayed because of rigid enforcement of this provision. The Panel adds that because national bound- anes are increasingly ignored as science and science-based industries become more global in focus, it is becoming increasingly difficult to distinguish foreign and domestic entities. Moreover, these distinctions can be muddled further when a so-called U.S. corporation chooses to manufacture cer- tain products in offshore facilities or when a foreign corporation manufactures its products at a U.S. subsidiary. Because grantees are more familiar with the licensed technology capabilities of the licensee and the market for a particular product, they are far better suited than NIH to undertake the primary responsibility of overseeing the utilization requirement of the Act or ensuring that federally sup- ported research is being licensed and made available and useful to the public. The Panel indicates that the use and active enforcement of performance benchmark and diligence requirements would greatly enhance grantees' capabilities to meet this oversight responsibility. (National Institutes of Health, 1994b) In the spring of 1994, NIH (1994a) issued a "Final Report and Analysis of Selected Sponsored Research Agreements" as part of its efforts to develop guidelines to assist universities that receive NIH funding in their relationship with private industry. In November 1994, NIH published its state- ment of policy guidance in the Federal Register (1994). An ad hoc committee of the Advisory Panel to the National Institute of Standards and Tech-

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158 FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT nology (NIST) is currently reviewing the institute's policies concerning relationships with private industry, including implementation of mandated economic performance requirements. (Phone con- versation between Bruce Mattson, NIST, and Proctor Reid, NAE, March 31, 1995) 2. By contrast, the recent history of U.S. foreign economic policy offers precious little evidence to suggest that more broad-based "linked" reciprocity requirements (e.g., those that make a foreign- owned firm's participation contingent upon the equivalent treatment of U.S.-owned firms by its home government in broader areas of foreign economic policy, such as intellectual property rights or invest- ment) will yield any advantage whatsoever for the United States in its effort to achieve greater access to publicly funded R&D activities abroad. For an instructive review of arguments both for and against reciprocity see Bayard and Elliott (1994), which assesses all section 301 cases brought and concluded under U.S. trade law between 1975 and 1993. See also Chapter 3, note 43. 3. See, for example, the National Research Council (1995) proposals for achieving greater reci- procity between the United States and Japan in the exchange of defense-related technology. 4. Since late 1993, the State Department has been examining U.S. access to publicly funded research abroad as part of an ad hoc interagency working group chaired by the Council of Economic Advisors that is evaluating U.S. policy governing foreign access to U.S. publicly funded research. Conceivably, the working group could periodically evaluate the status of U.S. access to publicly funded R&D overseas.