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The Contribution of R&D to
U.S. Economic Development
To assess the economic consequences of foreign participation in U.S. R&D,
it is essential to understand what activities comprise research and development,
how the processes of R&D function, and how readily the outputs of R&D are
diffused internationally. At the same time, it is necessary to examine how R&D
may affect national economic development and to consider some of the limita-
tions on our understanding of this process. The chapter provides a brief overview
of these issues.
RESEARCH AND DEVELOPMENT: A SIMPLIFIED TAXONOMY
The term "research and development" encompasses a range of organized
activities directed at the discovery, assimilation, transfer, or application of knowl-
edge. The National Science Foundation (NSF) classifies research and develop-
ment into three categories: basic research, applied research, and development.
Basic research seeks to advance scientific or technical knowledge or understand-
ing of a particular phenomenon or subject without specific applications in mind.
In contrast, applied research recognizes a specific need and seeks new knowledge
or understanding in order to meet that need. NSF defines development as "the
systematic use of the knowledge or understanding gained from research directed
toward the production of useful materials, devices, systems, or methods, includ-
ing design and development of prototypes and processes" (National Science
Board, 19939.
In practice, the boundaries between these three broad categories of organized
R&D activity are often blurred. In addition, the three are interrelated through
29
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FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT
complex feedback loops. Sometimes the R&D process moves in a linear fashion,
from basic research to applied research to development. Basic research may
yield new knowledge that can be usefully applied. In addition, it may enable new
applications of existing knowledge as well as suggest new directions for applied
research and development. Basic research may also nourish and enhance applied
R&D in ways that cannot be traced to a discrete piece of new knowledge. Just as
often, however, applied research and development provides the impetus for pur-
suing new directions in basic research. As noted by Brooks (1994), "Problems
arising in industrial development are frequently a rich source of challenging basic
science problems which are first picked up with a specific technological problem
in mind, but then pursued by a related basic research community well beyond the
immediate requirements of the original technological application that motivated
them." For example, efforts to understand materials processes and properties
critical to the quality and performance of semiconductor devices were largely
responsible for the emergence of materials science as a field of academic re-
search.
The role of serendipity in research and development should not be underes-
timated. Often, major advances in knowledge and new applications of existing
knowledge are entirely unexpected by those who fund or perform R&D. Basic
and applied research directed at the discovery or application of knowledge in a
particular field or industry may yield findings that advance fundamental knowl-
edge in disciplines unrelated to that of the R&D performer or suggest applica-
tions of knowledge that are unrelated to the researcher's original objectives.)
THE MULTIPLICITY OF R&D OUTPUTS
R&D can have many different outputs, including codified knowledge, know-
how or techniques, highly skilled human capital, instrumentation, and technol-
ogy.2 However, as the NSF definitions suggest, each type of R&D activity tends
to result in particular types of outputs. For example, with the exception of certain
fields where direct transfers of knowledge from basic science to technology are
frequent (such as in chemistry and molecular biology), basic research yields
chiefly new knowledge, new methods, and skilled scientists and engineers—out-
puts that contribute indirectly to the development and application of technology.
By contrast, applied research and development, while creating new knowledge,
know-how, and skills, are generally more directly implicated in the generation
and application of technology.
Another useful way of classifying R&D outputs is to consider who "owns"
them. Some R&D outputs are essentially nonproprietary, or public goods. That
is, their use by one party does not diminish their value or utility to others, and
they can be exploited freely by anyone possessing the requisite technical capa-
bilities. Much of R&D conducted to advance explicit government missions, such
as national defense or the cure of disease, falls into this category. Most of the
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THE CONTRIBUTION OF R&D TO U.S. ECONOMIC DEVELOPMENT
31
products of basic research and generic applied research and development, such as
new knowledge, know-how and techniques, skilled scientists and engineers, and
generic technology (e.g., standards, metrics, manufacturing practices) can also be
classified as nonproprietary.
The vast majority of these R&D activities are funded, though not necessarily
performed, by the government. The federal government supports roughly 40
percent of applied research and an equal proportion of development work in the
United States, most of which is performed by private companies. The govern-
ment also funds over two-thirds of U.S. basic research. Virtually all publicly
funded basic research and over 80 percent of all U.S. publicly and privately funded
basic research is performed by not-for-profit institutions, predominantly univer-
sities and colleges (National Science Board, 1993~.
Other R&D outputs, such as patents, copyrights, and trade secrets, are pro-
prietary in nature. Most proprietary R&D (predominantly applied research and
development) tends to be both funded and performed by private companies. U.S.
industry supports more than half and performs more than two-thirds of all applied
research conducted in the United States. Moreover, industry funds 60 percent
and performs nearly 90 percent of all development work in the United States
(National Science Board, 1993~.
Publicly and privately funded R&D yield both proprietary and nonpropri-
etary outputs. Research universities and federal laboratories, although focused
primarily on nonproprietary research, also generate intellectual property that they
sell or license to private firms. Collaborative R&D involving publicly funded
institutions and private companies also can yield proprietary outputs. Moreover,
when federal agencies fund R&D performed by private companies in service of
national missions, such as defense, these public investments often enable private
companies to develop proprietary technology that confers competitive advantages
in commercial and noncommercial markets. At the same time, the private R&D
investments of companies yield new knowledge, know-how, skills, and generic
technology that are often broadly diffused without direct compensation to the
it&D-performing company.3
THE POLITICAL-ECONOMIC LOGIC OF PUBLICLY
AND PRIVATELY FUNDED R&D
As the preceding discussion suggests, the differences between publicly and
privately funded R&D and their respective outputs are clearer in theory than in
practice. It is nevertheless useful to distinguish between the two types of R&D,
since, within the United States at least, each is shaped by a distinct political-
economic logic. Privately funded R&D is directed at the generation, assimila-
tion, and application of knowledge and technology to advance the economic in-
terests of stakeholders in the company making the investment. In market
economies, it is generally accepted that, under most circumstances, private com-
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FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT
panics should be allowed to dispose of the outputs of their R&D investments as
they see fit. It is assumed that such firms will pursue their individual economic
self-interest with vigilance and, in so doing, collectively advance the interests of
the nation as a whole.4
In contrast, publicly funded R&D and its proprietary and nonproprietary out-
puts 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 pub-
licly funded R&D are subjected to greater public scrutiny than those that conduct
or use the outputs of privately funded R&D. This is particularly true with regard
to how and where the R&D outputs are used, and how the associated public and
private benefits are distributed nationally and internationally. Research universi-
ties, federal laboratories, and other not-for-profit institutions that perform the
majority of publicly funded basic research do not generally commercialize tech-
nology or produce products for commercial markets. This has led some observ-
ers to question whether these institutions are adequately equipped to assess, let
alone capture the true market value of the intellectual property they generate and
manage with public money (U.S. Congress, House, 1989, 19931.
R&D, INNOVATION, AND 1!iATIONAL ECONOMIC DEVELOPMENT
R&D activities are a critical, yet relatively small, subset of the many comple-
mentary activities and capabilities that contribute to technological innovation,
which has been defined as "the processes by which firms master and get into
practice product for process! designs that are new to them, whether or not they
are new to the universe, or even to the nation" (Nelson and Rosenberg, 1993~.
These processes integrate multiple functions, including organized R&D, design,
production engineering, manufacturing, marketing, and other value-adding ac-
tivities in a complex web containing multiple feedback loops (Kline, 1990; Kline
and Rosenberg, 1986~.5 Thus, organized R&D activity is not the only source of
innovative technology. Much technology, particularly process technology, is
generated by other value-adding activities, such as production engineering or
manufacturing.
Neither R&D capabilities nor the possession of technology is by itself a reli-
able indicator 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. National
economic development occurs when these multiple resources are committed and
used in a way that causes the value of the economy's output to rise faster than the
cost of inputs. This results in profits, however measured, which can be reinvested
to the benefit of the nation's citizens.
R&D contributes to a nation's economic development in many ways. The
multiple outputs of basic research, applied research, and development yield new
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THE CONTRIBUTION OF R&D TO U.S. ECONOMIC DEVELOPMENT
33
products, processes, and industries, as well as improvements in existing products
and processes, all of which may contribute to economic growth, rising standards
of living, and higher quality of life. These outputs can also provide the infrastruc-
ture knowledge base, human capital, instrumentation for maintaining and up-
grading a nation's capabilities to generate, assimilate, and apply knowledge and
skills.
Numerous industry analyses indicate that R&D expenditures have yielded
high marginal as well as high median rates of return.6 Many private-sector in-
vestments in R&D yield significant "spillovers" benefits to society beyond those
captured by the individual R&D performer or investor. Therefore, it is generally
assumed that the social rate of return (or the return to society as a whole) from
private-sector R&D expenditures is substantially higher than the private rate of
return to the firms carrying out the R&D. Indeed, estimates of the median social
rate of return from private-sector investments in innovations originating from a
broad spectrum of industries range from 40 to 99 percent roughly two to four
times the estimated median private rate of return on these investments.7
Ultimately, economic returns from R&D investments depend on the comple-
mentary assets and competencies of the particular firm or nation. In the case of
the individual company, these assets include not only such things as design, pro-
duction, and marketing, but also the broader technological and economic infra-
structure that supports the firm within a given nation. Similarly, the economic or
societal returns a nation may gain from a particular R&D investment depends on
whether its innovation system can foster the 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 so-
phistication of its domestic market; and, increasingly, by the ability of firms within
its borders to access markets and technology abroad.8
Different types of R&D make different contributions to economic develop-
ment. For example, basic research contributes to technological advance and eco-
nomic growth both directly (through the generation and transfer of commercial-
izable knowledge or technology) and indirectly (by providing generic knowledge
and access to skills, methods, and instruments). Only occasionally do the outputs
of basic research have intrinsic economic valued Rather, they feed into other
investment processes that yield additional research findings and, at times, inno-
vation. Hence, basic and applied research are linked by a complex, recurring
cycle of interactions that increase the productivity of both (David et al., 1992;
Pavitt, 1991~.
For example, as graduate students perform academic research, they develop
research skills. Subsequently, many shift from basic to applied work, to which
they bring not only knowledge, but also skills, methods, and a web of profes-
sional contacts—all developed during their basic research training. This carryover
from basic research is important, since instrumentation used in that setting is
frequently applied in engineering and more applied disciplines, such as clinical
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FOREIGN PARTICIPATION IN U.S. RESEARCH ED DEVELOPMENT
medicine and industrial processes and operations (Brooks, 1994; Nelson and
Levin, 1986; Pavitt, 1991; Rosenberg and Nelson, 19941.
Applied research and development generate specific proprietary product or
process technologies and innovations. This represents their most obvious and
substantial contribution to economic development. At the same time, these ac-
tivities also yield new knowledge, know-how, skills, and generic technology,
some of which are widely, if not freely, diffused throughout a given industrial
sector, technological field, or national innovation system. However, most ap-
plied R&D takes place in private companies or the nation's defense laboratories,
rather than in the more open environment of research universities.
It is possible to describe the contributions of different types of R&D activity
to a nation's economy as well as to arrive at very rough estimates of the rate of
return to society of aggregate R&D investments or specific innovations in par-
ticular sectors. It is virtually impossible to anticipate or trace after the fact the
aggregate economic impact of a particular R&D investment. The economic con-
tribution of a particular R&D activity is conditioned by various market, scientific,
and technological forces, and certain types of R&D may have much higher value
to society than others at a given time. Yet, any attempt to trace the precise roots
of a particular economic benefit or stream of benefits from the customer's needs
back through marketing, production, and finally to the germinal R&D is bound
to underestimate the importance of seemingly ancillary research and develop-
ment and more downstream innovation activities. Add to this the high degree of
uncertainty and serendipity involved in R&D and technological innovation gen-
erally, and it is virtually impossible to predict which avenues of R&D will yield
the greatest returns to society over the long term.
HOW THE BENEFITS OF R&D ARE DISTRIBUTED AT
THE NATIONAL AND INTERNATIONAL LEVEL
Every R&D output has multiple beneficiaries. While this observation is gen-
erally accepted with regard to the outputs of nonproprietary or public-goods R&D,
its validity for the intellectual property generated by private companies is insuffi-
ciently appreciated. In fact, the proprietary outputs of R&D, regardless of where
it is performed or how it is funded, yield benefits far beyond those that accrue
solely to the individual or institution that owns or controls them. For example,
the benefits of proprietary product or process innovations that improve the qual-
ity and performance of goods and services, or reduce their costs, are widely dis-
tributed within national or global economies. Thus, the benefits associated with
a firm's proprietary R&D outputs are shared by the company's customers, suppli-
ers, competitors, and the general public (Graham, 19921.
Many factors influence how benefits are distributed among various economic
actors within a national economy or among national economies. These include
the location of R&D activity, the level of competition, and the relative capacity
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THE CONTRIBUTION OF R&D TO U.S. ECONOMIC DEVELOPMENT
35
that a firm, region, or nation has to absorb and make use of R&D outputs. These
capacities, in turn, depend on the level, intensity, and sophistication of existing
R&D activity and on complementary capabilities and assets.~°
To understand how each of these factors affects the distribution of benefits,
it is useful to consider some of what is currently known about the complex pro-
cesses of technology and knowledge transfer. In spite of the many advances in
communications and information technology, there continue to be significant
barriers to the movement of scientific and technological knowledge across na-
tional boundaries and among organizations. To be sure, certain types of R&D
output, including highly codified knowledge, can be readily transferred long-dis-
tance within a firm or between different R&D players. However, most observers
agree that the majority of R&D outputs are transferred most efficiently through
face-to-face interactions among those who perform R&D and those who apply its
results. Indeed, the transfer of knowledge usually involves human interaction in
the form of personal contacts, movements among institutions, and participation
in national and international networks (David et al., 1992; Gomory, 1989; Pavitt,
19911.
For these reasons, even with the internationalization of industry, R&D ac-
tivities still tend to occur in proximity to each other, which allows researchers to
draw more efficiently on the work of their counterparts in other institutions. Simi-
larly, the economic benefits of R&D activity tend to be much more localized than
is commonly assumed. The importance of proximity for capturing R&D outputs
has been underscored by recent research on patent licensing and other forms of
technology transfer involving research universities and private U.S. companies
(Jaffe et al., 1993~.
Finally, there is broad consensus among those who study and conduct tech-
nology transfer that, in many high-tech sectors, an organization's capacity for
absorbing new knowledge and technology depends to a large degree on the level
and quality of R&D occurring in that organization. In other words, in order to
understand, interpret, and evaluate readily accessible new knowledge generated
elsewhere, the recipient organization generally needs to be performing R&D at a
level commensurate with that of the organization whose R&D activities it hopes
to exploitll (Brooks, 1994~. Or, as Pavitt (1991) notes, "the most effective way to
remain plugged in to the scientific network is to be a participant in the research
process."
IMPLICATIONS FOR THE ASSESSMENT OF
FOREIGN PARTICIPATION IN U.S. R&D
In earlier decades, the United States occupied a position of global techno-
logical and industrial superiority. Many of the issues that today inform debate on
foreign access to U.S. R&D and technology were not central. There was little
question that Americans would reap most of the economic and technological ben-
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FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT
efits generated by investment in R&D and other types of technologically innova-
tive activity. Through publications, scholarly exchanges, the activities of U.S.-
owned multinational companies, and bilateral agreements the United States ex-
ported more new knowledge and technology than any other nation. Nevertheless,
the American public generally viewed this predominately one-way transfer of
technology and know-how as consistent with both the short- and long-term eco-
nomic, political, and national security interests of the United States. Moreover, at
the time, the research activities of U.S. universities and federal laboratories were
not seen as contributing much to the technology strategies and competitive suc-
cess of American industry. Hence, there was little concern about the relatively
limited efforts of foreign entities to gain increased access to these publicly funded
R&D activities.
While the United States remains a leader in the generation of new knowledge
and technology, its position today is better characterized as first among equals;
the gap that once separated the United States from potential competitors has
closed. Recent decades have brought increasing convergence in the technologi-
cal capabilities of industrialized nations as well as growing cross-penetration of
national innovation systems through foreign direct investment and transnational
industrial alliances. Other shifts have accompanied this convergence. Changes
have taken place in the organization and management of R&D, and new links
have been forged between different performers of R&D. These changes have
included increased emphasis on R&D as a tool for scanning for and exploiting
knowledge generated or applied beyond both institutional and national bound-
aries, as well as closer integration of R&D with activities farther downstream in
the value-added process of firms (Kash and Rycroft, 1992; Kodarna, 1991; Na-
tional Academy of Engineering, 1993; Roberts, 1995a).
With these changes have come new questions about the consequences of the
continuing net outflow of U.S. technology and know-how and about the growing
involvement of foreign nationals in publicly and privately funded U.S.-based
R&D. There are both structural and policy reasons that the U.S. innovation sys-
tem is more accessible than that of most of its foreign counterparts. Therefore,
one concern is that foreign nationals may be taking out more knowledge, know-
how, and technology and associated economic benefit activity than they return.
Growing foreign involvement in U.S. R&D also heightens concerns about na-
tional security. For example, military security might be compromised by the
unauthorized transfer of certain highly sensitive knowledge or technology. Secu-
rity may also be threatened if the U.S. government is denied timely access to
advanced technology that is controlled by foreign-owned firms.
CONCLUSION
The preceding discussion of R&D activity, technology transfer, and the ways
R&D contributes to economic development does not by itself provide clear an-
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THE CONTRIBUTION OF R&D TO U.S. ECONOMIC DEVELOPMENT
37
swers to the many questions that have been raised about the consequences of
growing foreign participation in the U.S. research system. It does suggest, how-
ever, that the task of appropriating the many valuable outputs of U.S.-based R&D
activity is significantly more complex and difficult for foreign nationals than is
generally assumed.
Foreign-owned firms that wish to effectively exploit U.S. technology and
R&D outputs must establish a significant, technologically sophisticated presence
in the United States to do so. Moreover, as the technological sophistication of
foreign companies and their home countries increases, so too does the potential
for reciprocal transfers of technology and knowledge into the United States. Fi-
nally, this discussion suggests that under most circumstances, any county, in-
cluding the United States, should welcome R&D activity within its borders, re-
gardless of the nationality of the R&D performer. If a large share of the returns
to R&D investments is captured by those proximate to the R&D activity, and
these returns are beneficial, clearly it is better to have R&D performed within
one's borders than beyond them.
The two chapters that follow examine in some detail the causes, scope, and
character of foreign involvement in U.S.-based R&D in an attempt to address
questions about the costs and benefits to the United States of such participation.
Proceeding from a belief that foreign involvement in publicly funded U.S. R&D
is governed by a different political-economic logic than is foreign participation in
privately funded U.S. R&D, the committee evaluates these two intertwined halves
of the nation's R&D enterprise in separate chapters. The distinction between
these two types of R&Dis in many instances artificial at least some of the R&D
activities of both private companies and not-for-profit institutions are sustained
by both public and private monies. Still, the committee believes that separating
the two helps clarify and delineate the public-policy issues that are involved.
NOTES
1. Summarizing Rosenberg (1990), Brooks (1994) notes that, "[l]aboratory techniques or ana-
lytical methods used in basic research, particularly in physics, often find their way either directly, or
indirectly via other disciplines, into industrial processes and process controls largely unrelated either
to their original use or to the concepts and results of the research for which they were originally
devised."
2. Expanding on Nelson's (1992) working definition, Brooks (1994) defines technology "both as
'specific designs and practices' and as 'generic understanding that provides knowledge of how and
why things work' . . . and what are the most promising approaches to further advances."
3. For further discussion of the complex relationships between publicly and privately funded
R&D and their proprietary and nonproprietary outputs, see Committee on Science, Engineering, and
Public Policy (1992); Kash (1989); Mansfield (1986); and Nelson (1989).
4. Indeed, the very concept of intellectual property rights is premised on the assumptions that
technological innovation yields significant benefits to society and that without the promise of tempo-
rary monopoly rights, individuals and institutions would have insufficient incentive to invest or en-
gage in R&D activity and technological innovation more broadly.
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FOREIGN PARTICIPATION IN U.S. RESEARCH AND DEVELOPMENT
5. Characterizing a representative allocation of effort in the introduction of a new product, a
seminal study of the management of technological innovation sponsored by the U.S. Department of
Commerce in 1967 (known as the Charpie report) estimated that product conception and the associ-
ated generation of primary knowledge (research, advanced development, basic invention) accounted
for roughly 5 to 10 percent of the total effort. The remaining effort was devoted to "downstream"
activities, including product design and engineering (10 to 20 percent); production layout, tooling,
and process design (40 to 60 percent); manufacturing start-up and debugging (5 to 15 percent); and
marketing start-up (10 to 20 percent). (See U.S. Department of Commerce, 1967, chart 7, p. 9.)
Commenting on the Commerce study, Brooks (1994) notes that since many of the projects
launched never get beyond the it&D/product-conception phase, and even a smaller share of total
project launches make it all the way to marketing start-up, the 5 to 10 percent estimate probably
understates the amount of activity devoted to R&D. Indeed, most companies engaged in R&D also
conduct background research unrelated to any particular product.
6. The marginal rate of return is the rate of return from an additional dollar spent on R&D.
Evaluating the rate of return on a number of industrial innovations and then calculating the median
provides the median rate of return.
7. Mansfield (1986) compares the results of several independent studies, including his own re-
search, of the median and marginal rates of return on private investment in particular innovations. He
notes that the marginal social rate of return for private-sector investments in R&D is estimated to be
in excess of 30 percent.
8. For further discussion of the concept of a national innovation system and the many factors that
influence its performance, see Lundvall (1992) and Nelson (1993).
9. The extent to which knowledge is transferred directly from basic to applied science varies
according to the economic sector and scientific field. In the development of chemicals and drugs,
knowledge gained through basic research frequently results directly in industrially useful technology,
including intellectual property. In transport and mechanical technologies, however, the link between
basic science and technology is relatively weak (Pavitt, 1991).
10. Many factors play a role in the allocation of benefits among nations, including the quality of
interaction and exchange between the various public- and private-sector it&D-performing institu-
tions, the quality of the education system, the size and wealth of the domestic market, and other
structural and regulatory factors.
11. Clearly, a company does not need to be doing advanced R&D (or any R&D for that matter) to
exploit technology developed by somebody else very effectively and profitably. However, effective
assimilation and use of a technology that is already developed, or "stabilized" (in effect, "codified"),
requires a much lower level of technical sophistication on the part of the acquirer than does the
assimilation and use of advanced R&D outputs (i.e., new knowledge, know-how, or technology in the
making). In the recent past, the Japanese have proved themselves world leaders in reverse engineer-
ing products and commercializing technology developed abroad. The new dimension of the Japanese
challenge is their growing ability to access and use the fruits of U.S. basic and long-term applied
research to both develop and commercialize new technology more competitively than U.S.-based
companies.
12. For further discussion of the relative openness of the U.S. innovation system, see Chapter 3,
pp. 70-74, and Chapter 4, pp. 90-91, 124-126.
Representative terms from entire chapter:
private companies
