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Supplement 1 The Evolution and Impact of Federal Government Support for R&D in Broad Outline Today, the Unitect States has the strongest research and clevelopment system in the world. Measured by the total amount of spending for or the number of persons employect in R&D, the U.S. science anct technology enterprise is the largest in the world. it is also the most successful. The U.S. garners the lion's share of the Nobel Prizes in physics, chemistry, medicine or physiology, ant! economics. Our nation sets the worIct stanclarct for advancer! education in nearly every field of science and engineering, and our high-technology firms are responsible for making and commercializing a substantial proportion of the important new technologies of our time. in contrast, before WorIct War II the United States was not as strong as the acivancect countries of Europe in R&D. Private R&D spending was quite limited, university research was supported largely by private foundations and the states, and the fecleral government f~nancecI only about one-f~fth of the nation's R&D.2 Annual fecleral R&D expenditures at the eve of war in 1940 totalect uncier $70 million, 3 or about ~ percent of present-day expenditures, when adjuster! for inflation. Although the remarkable half-century interval from Woric!War IT to the present has been cliscussec! in some detail elsewhere,4 it is outlinect here to provide some perspective on the historical processes that have shaped the current system of support for U.S. R&D. Study of the record reinforces appreciation of the depth and range of discoveries that continue to touch all aspects of our lives (see Box [.5 in Part ~ for a brief indication). It demonstrates that the federal role is essential in stimulating necessary new pleas and shows additional influences of federal govern- ment policy on U.S. science and technology. Strengths of the system will continue to serve national purposes well in the future. We Contemporary Federal R&D Portfolio Resulted from Five Decades of Response to National Crises and Opportunities Prior to WorIct War [l, most of the federal funds for R&D supported mission- orientec! research in agriculture, national defense, and natural resources carried out by government employees in small government laboratories and experimental stations. Such R&D as was supported by the Army and Navy was done in military arsenals. Universities rarely sought fecleral funds for R&D, anti many reacting U.S. scientists obtained their acivancect training in European universities. Inclustry receiver! little government R&D money and looked to universities for technically trained staff and faculty consultants. The evolution of the current system of support for U.S. science and technol- ogy can be outliner! in terms of the following stages and events, among others: Federal support of R&D grew remarkably in size and complexity alluring World War H. Federal expenditures for R&D increased by an orcler of ~1

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42 / SUPPLEMENT 1 magnitude during World War IT, and two important institutional innovations were introduced. First, large numbers of academic researchers were mobilized to work in their own institutions' laboratories on wartime R&D projects, whereas during World War T. scientists working on military projects had been made members of the mili- tary. Second, the R&D contract was devised as a mechanism to pay for private performance of work whose approach and outcome in this case, R&D results could not be specified precisely in advance. importantly, the federal government agreed to compensate university and industry performers for the indirect or over- head costs of R&D done under grants and contracts, in addition to paying for direct expenses. To carry out the vastly increased scale of R&D during World War IT, major investments were made in research laboratories. New government laboratories were created and new administrative mechanisms were devised to oversee their work in the face of a shortage of government employees experienced in managing major R&D programs. A sense of mutual obligation emerged in which the R&D institutions could reasonably expect continued funding in return for producing quality efforts and results from government-f~nanced programs. Federal R&D support was consolidatecI In the immediate postwar periods in his July 1~945 report, Science The Endless Fror~tier,5 Vannevar Bush, WI1O 11~O 1~ U.~. warble Kin carport, provided tne intellectual rationale for federal support of both basic research and research related to national security, industry, and human health and welfare. He sketched a plan for a national research foundation, to be funded by the federal government and led by scientists from the private sector, that would support basic scientific research and education in areas related to medicine, the natural sciences, and new weapons. His plan contributed to legislation adopted in 1950 that established the National Science Foundation (NSF>. By that time, however, the National Institutes of Health (NTH) had estab- lished its control over most health-related research, including university-based biomedical research and training; the Office of Naval Research (ONR) had taken on a major role in supporting academic research in the physical sciences; and the new Atomic Energy Commission had been assigned control of R&D on nuclear weapons and nuclear power. NSF's mission thus focused on supporting fundamental research and related educational activities, and its annual budget was less than $ 10 million until the late 1950s. In contrast, the NTH's annual budget, which had been less than $3 million at the end of the war, grew to more than $50 million by 1950. The scope of federal R&D support grew modestly in the decade after WorId War H. Several additional federal R&D efforts were launched during the late 1940s and early 1950s. Anxiety over the Cold War, and the loss in 1949 of the U.S. monopoly in nuclear weapons, led to expanded R&D programs in the Army and in the newly established Air Force, and to a continuing buildup in support for nuclear weapons R&D in the Atomic Energy Commission. On the civilian side, R&D pro- grams were established or expanded in fields with direct practical importance, such as aeronautics technology, water desalinization, and atmospheric disturbances and weather. However, appropriations for these new civilian R&D efforts remained relatively limited through the mid-1950s. Sputnik provided the impetus for a major expansion of federal support for Rim). The launch of Sputnik by the Soviet Union in 1957 provoked ~r ~ ~ ~ ~ 1_ _ T T fig ~. ~ ~ hi_ few . ~

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SUPPLEMENT 1/ 43 national anxiety about a loss of U.S. technical superiority and led to immediate efforts to expand U.S. R&D, science ant! engineering education, and technology cleployment. Within months, both the National Aeronautics and Space Administra- tion (NASA) and the Advancer! Research Projects Agency (ARPA) were establishect. NASA's core included the aeronautics programs of the NationalAcivisory Committee on aeronautics and some of the space activities of the Department of Defense (DOD); ARPA's purpose was to enable DOD to concluct acivancect R&D to meet military needs and to ensure against future"technological surprise." Federal appro- priations for R&D and for mathematics and science education in the NSF and other government agencies rose rapidly over the next decacle, often at clouble-digit rates in real terms. Growth of fecleral support for health research accelerated rapicIly In the late 1950s. During the early 1950s, growth in fecteral funcling for health re- search slowed considerably from its torrid pace in the immediate postwar years. In the late 1950s, however, several factors converged to give renewed impetus to federal support for biomedical research: key congressional committees with respon- sibility for health-relatect research were chaired by powerful acivocates of increased federal funding. Congress was appealeci to by influential citizen advocates of in- creasec! funding for research to combat specific diseases. The calls for increased funding were supported by a strong NTH director, who couict point to new scientific understancling of disease processes as the basis for anticipating medical break- throughs. The result was the ranict growth of federal funcline for health-relatect . research tnat Has continued nearly unabated to the present as new discoveries, ano the rise of new diseases such as AIDS, have lect to ever-greater commitments to biomeclical research. In the 1970s, new R&D-~ntensive agencies addressed environmental and energy issues. Both the environmental movement and the energy crisis of the 1970s raised some doubts in American society about the wisdom of a national culture committed to consumption and economic growth, and lect also to increased public and private spending on environmental and energy R&D. The energy agen- cies of the federal government were reorganized twice during the decade. in 1975, the Atomic Energy Commission was divided into the Energy Research and Develop- ment Administration and a new regulatory agency, the U.S. Nuclear Regulatory Commission. in 1977, the Energy Research and Development Administration and other fecleral energy-related activities were combined to form the Department of Energy (DOE), which was given major new responsibilities to fund energy-related R&D. in the 1980s, the competitiveness challenge expanded the federal role In R&D and stimulated a new commitment to cooperation among industry, government, and universities in the conduct of R&D. By the early 1980s, the industrializer! world had largely recovered from the effects of World War Il. and key Asian nations were devising new approaches to inclustrial production. The increasing challenges from competition abroad in markets for traditional goods as well as a growing list of goods basect on advanced technological capabili- ties- raiser! new questions regarding the role the federal government should play in assisting U.S. industry to develop ant! use new technology for competitive purposes. This topic remains under active (rebate toclay.

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44 / SUPPLEMENT BOX IT.: ~ OCR for page 41
SUPPLEMENT ~ / 45 ters, ant! the AcivancecITechnology Program and Manufacturing Extension Partner- ships at the Department of Commerce. In acictition, federal policy changes enabled the creation of the cooperative research and development agreement, or CRADA, a mechanism for joint R&D involving companies and federal laboratories. Throughout the rive decades following World War it, federal funds for R&D were recluced substantially In only one period. The costs of the Vietnam War squeezed nonctefense R&D along with other nonclefense discretionary spending. From ~ 966 to ~ 975, federal support for nondefense R&D dropped nearly 22 percent in real terms. The successful conclusion of NASA's Apollo program contributed to the clecline in federal R&D funding cluring that period, as diet skepti- cism about the value of acivancec! technology that was engenclered by the Vietnam War and the contemporaneous environmental movement. Since the micI-1980s, the continuing struggle to control federal budget Solicits has put increasing pressure on fecleral R&D funding. R&D programs have tract to compete for money more directly with other federal activities and have also been affected by the various mechanisms adopted to enforce budget deficit reduction, including the Balanced Budget and Emergency Deficit ControlAct of 1985 (com- monly known as the Gramm-RuUman-Hollings Act) ant! its amendments as well as the Budget Enforcement Act of 1990. Budgetary pressure on fecleral R&D spending is intense tociay. Fecleral funds previously appropriated to support R&D during FiscalYear 1995 have been cut (rescindecl) by nearly $2 billion. Furthermore, much larger cuts in fecleral R&D funding are slated for FiscalYear 1996, and pressures on fecleral discretionary spenct- ing make further cuts in future years likely. Key Roles of the Federal Government In U.S. Research and Development in keeping with national aspirations and the practice of governments of all advanced nations, the fecleral government provides a substantial proportion of the direct financing for R&D done in this country, and it also offers incentives to private interests to support R&D. Many other federal policies affect the performance of R&D and the use of its results some policies stimulate such activity, while others create barriers to it. T*efed;era~government invests in Beijing and strengthening the researc* and development essentia'to pursuing a variety of nationa~goals. Much of the federal science and technology investment is intencled to help build the base of scientific ant! technical knowlecige and expertise uses! by govern- ment and industry to address important national goals, such as national defense, space exploration, economic growth, anti protection of public health and the envi- ronment. The fecleral government has assumed a central responsibility for support- ing graduate education in science and engineering because of its critical importance to the continuing vitality of the nation's innovation system. Most of this support is provided by the funcling of R&D at universities, which offers students the opportu- nity to carry out cutting-ecige research as an integral part of their education.

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46/ SUPPLEMENT ~ Indtirectfe~lera~financia! support encourages a climate of opportunity for R&D in the United States. In addition to granting funds directly to performers of R&D, the federal gov- ernment creates incentives for private spending on R&D in industry and academic institutions: Since its inception in 1790, the U.S. patent system, for example, has pro- vided an incentive to inventors to develop and to disclose, use, and profit from their inventions. Since 1954, industry has been able to deduct the full costs of R&D from income before taxes in the year in which they were incurred, while depreciating the costs of facilities and major equipment. Since passage of the Economic Recov- eryTaxAct of 19~3l, a series of special tax credits have been offered to firms that increase their R&D spending above previous levels. Individuals and corporations that make charitable contributions in support of research in educational institutions also are eligible for tax savings. The Stevenson-Wydier Technology Innovation Act of 1980 opened the federal laboratories to industry, making available not only specialized and unique facilities, but also opportunities for R&D partnerships with joint funding and the use of federally developed technology for profit-making ventures. That same year, Congress passed the Bayh-Dole Act, which conferred ownership of patent rights to universities, small businesses, and nonprofit organizations, thus providing a strong incentive for commercial development. In 1984, the National Cooperative Research Act amended the antitrust statutes to facilitate cooperative R&D among competing : arms. With increasing frequency, the federal government has cost-shared with firms and consortia to underwrite precompetitive technology development projects in such areas as manufacturing technology or technolo~v with a .stron~ notenti~1 for _ ._ . 1 - , ~. ~_ c' ~ , ~ ~ _ ~ ~ ~ ~ ~ apt- ~ repin Defense ana commercial arenas (so-called dual-use technology). By formally and informally identifying areas of technological opportunity and by convening experts from a variety of organizations to address technical top- ics, government leadership helps initiate cooperative R&D ventures that otherwise might not be arranged by competing firms. Many ot*erfederalpo~icies an~lprograms have indirect effects that can foster or impede innovation and affect the environment for RED. Policies in many areas can have dramatic, if indirect, effects on private spend- ing on research and development and, hence, innovation. For example, tax code provisions of the kind mentioned above, such as accelerated depreciation, invest- ment tax credits, and capital gains preferences, can reduce the corporate cost of capital for R&D investments and increase the supply of risk capital to commercialize new technologies. Trade policy can open new markets for high-technology goods. Regulation is centrally important for new drugs and agricultural products. Some public policies, however, can hinder the conduct of R&D in universities, industry, and other private institutions, even though that is not their aim. Adopted

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SUPPLEMENT ~ / 47 I n pursuit of important societal purposes, some, for example, raise the direct and indirect costs of conducting R&D. Private performers of R&D must comply with a host of laws and regulations intended to affect conduct generally, in such areas as antitrust, labor relations, equal opportunity, consumer safety, and environmental protection. Nongovernmental recipients of public R&D funds must comply with additional rules and regulations regarding the procurement process, financial ac- countability, nondiscrimination and affirmative action, preferences for small and minority-owned businesses, "BuyAmerican" requirements, maintaining a drug-free workplace, and so on. Results of 50 Years of Federal R&D Support Investment in R&D *as become an essential element of contemporary governance. A history of successful experiences in mobilizing scientific and technical resources to meet important national needs has contributed to a sense of conf~- dence that U.S. scientific and technical institutions can rise to nearly any occasion and help address important national problems with dispatch. Congress, the Execu- tive Branch, and the American people have come to believe that investment in R&D is a cost-effective mechanism for responding to important national needs. R&D helps ensure our national security, strengthens the performance of our economy, and enhances our quality of life. The United States is not alone in this belief during the twentieth century every industrialized country has made major investments in the foundations of its scientific and technological capabilities through support for R&D and related activi- ties. In fact, support for R&D is now one of the primary tools used by modern governments everywhere to achieve public purposes. Tbe breadth of the federal investments in R&D provides the scientific and technical capita' to respond to new opportunities and crises, which o.flren are unexpected and sometimes are urgent. U.S. strength in a wide range of fields has enabled both creative and pragmatic problem solving on diverse fronts: rapid understanding of the factors related to the onset of AIDS, responses to new forms of warfare, and identification of major envi- ronmental problems such as losses in stratospheric ozone. Diversity, hot* in fun cling sources and in the institutions that do the work, is a great strength of our national science and technology enterprise. Research and development supported by ONR, NSF, NASA, and the U.S. Geo- logical Survey has led to a revolution in our understanding of Earth's structure, its resources, and the impact of geological forces. Similarly, U.S. strength in informa- tion technology has been fostered through the work of DOD, NSF, DOE, and other agencies. Often several agencies have collaborated to create a successful program.

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48/ SUPPLEMENT ~ The support and policies of DOD and NSF, for example, led to the creation of the Tnternet; several agencies have contributed to the U.S. strength in the optical sci- ences. At the same time, one agency may be the primary, if not sole, patron of a field of national importance; for example DOE is the largest sunnorter of academic _ ~: ~ ~ ~ ~ _ ~ _ ~ ~ ~! . ~. . ~ research In nuclear physics. L)(~)L)7S support of computer science and engineering and materials science and engineering enabled the creation of Silicon Valley, and support by NIH facilitated the emergence of modern biotechnology. The federal budget allocation process allows for this diversity of approach in which budgeting is handled mainly by agencies who know well the purpose and content of R&D projects and need their results. Budget decisions are thus specific to programs rather than generalized and across the board, and good science can find sustenance wherever it first arises. Stable and t*ong*tfn! researc* investments can contribute to control~ingfederal costs. Continuing technological superiority enables the United States to maintain a reduced but highly effective military force without compromising national security; new nondestructive testing techniques reduce the costs of maintaining highways; and information technologies help federal agencies, such as the Social Security Administration and the Internal Revenue Service, control the costs of serving very large populations. Through prevention of disease and development of new thera- pies, biomedical research has the potential to reduce .si~nific:nntiv the routs of disease, injury, and health care. ~_ , _ _ ~ ~ Major advances in technology often are based on researc* whose eventual outcomes and applications conld not *aye been predicted. The de facto postwar policy of"poised~ to pounce"- that is, the readiness to respond made possible with support across a wide spectrum of the sciences, complemented by funding targeted to particular opportunities and priorities as they become apparent has worked. Major advances have come from unexpected sources. For example, funciamental work on atomic clocks led to the concept and clevelopment of the global positioning system (Box Il.21; work on the microwave spectrum of ammonia enabled the development of lasers; ant! studies of magnetic moments and nuclear spin were the basis for the clevelopment of magnetic reso- nance imaging and ciramatic new forms of mectical diagnosis. Research on the genetics of bacterial viruses ant! harmless bacteria that live in the human gut con- tributed to advances in biotechnology, and the stucly of large biological molecules by x-ray diffraction has greatly aicled the effort to clesign new drugs. Decacles of separate lines of work in biology, psychology, linguistics, and anatomy have converged to create neuroscience, in which funcIamental work hoists the potential for enormous rewards from better treatments for mental illnesses to improved ways of teaching ant! learning to the design of radical new computer

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SUPPLEMENT ~ / 49 :BOX [~.2 ORIGINS OF THE GLOBE POS=ON=G SYSTEM We global positioning system (GPS), a satelIite-based system enabling remarkably precise pinpointing of one's location on Earth, is a contemporary product of a diverse ROD system. GPS evolved from postwar work on atomic clocks to test aspects of general relativity theory. Their possible value for navigation was recognized by the military, which provided years of "patient federal. capital" to mature the technology. While the military's primary interest in what was to become GPS was to improve the delivery of tactical weapons and to reverse the proliferation of costly new navigation systems, its civilian potential was seen at the outset; that is, early in its development GPS was recognized as a potentia dual-use technology, and in fact the commercial GPS market now overshadows military demand. Several military programs involved in what was to become GPS coalesced in 1972, when the Air Force was given responsibility for developing a navigation system for all military ser- vices as well as civilian users. Concurrently, technologies essential to GPS, including satellites and microelectronics, also were being developed. Experimental GPS satellites were launched in 1978, and proof that GPS could be used for locating one's place on Earth soon followed. Eighteen GPS~satellites were launched by the mated States by 1990. Today's system consists of 24 satellites, each carrying up to four atomic clocks that provide timing and ranging signals. A GPS receiver decodes the signals to determine and display their latitude, longitude, and alti- tude. Differential GPS is the most widely used method for augmenting basic GPS signals and now yields centimeter accuracies over distances of several kilometers. That translates into what is already an incredible array of applications, such as demonstrating new systems for landing aircraft in bad weather (i.e., a fully automatic CAT II aircraft landing); robotic plowing, planting, and fertilizing of fields; monitoring train locations; and tracking and cleaning up oil spills. The 1995 global GPS market is estimated at $2.3 billion today and is projected to reach $11.6 billion by 2ooo.2 Civil production of GPS units is now more than 70,000 per month. Secretary of Defense William J. Perry recently commented that the"GPS system . . .was the key to being able to find and rescue Capt. Scott O' Grady [tine Air Force pilot shot down June 2 and rescued dune 8, 1995] and pull him out of Bosnia....That whole operation would not have been possible except for the fact that Capt. O' Grady had a little GPS receiver on his wrist and the incoming helicopters had a receiver....The consequence they landed essentially at his [Bet, and the total time on the ground was less than two minutes. If they had had to spend a half hour or so searching for him, the results could have been very differer~t."3 tNationalAcademy of Public Administration, The Global Positioning System: Charting me Future CWash- ington, D.C.: National Academy of Public Administration, 1995), pp. 5, 14. National Academy of Public AdlIii{iistration, The Global Positioning System, 1995, p. l5. Prepared remarks of Secretary of Defense William J. Perry to the Economics Engineering Systems Depart- ment graduating class, Stanford University, Stanford, Calif.,June 18, 1995. architectures. The Decacle of the Brain, a lO-year fecieral commitment to exploit the advances of many facets of brain research conciuctecl through multiple departments and agencies, is inherently interdisciplinary. The program has several specific goals that encompass diverse areas of science, anti it incorporates a wicle range of tech nologies used in brain imaging, molecular genetics, and computer analysis of com- plex biological structures.6

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50 / SUPPLEMENT 1 Scientists and engineers whose education and training *aye included opportunities to conduct researc* in universities *aye serve`' the nation well Linking federally funded research and development to the education of scien- tists and engineers has powerfully enhanced both. Universities are the core strength of the U.S. R&D system. They are by far the most important source of men and women eclucated and trained in advanced science and engineering. Such people, as they establish their own university careers, join industry, or start their own companies, are the most effective and efficient agents of technology transfer. Experience demonstrates that the excellence of the next generation of researchers and leaders depends directly on the excellence of graduate education that inclucles first-hanci participation in innovative research and cievelopment. Over the last several clecactes, fecieral support for academic research has been crucial to maintain- ing that linkage. The existing U.S. researc* and development system works wed in periods of continued expansion in missions andfunding but is not as appropriate in periods of static or declining, *whet O O _ The U.S. R&D system is largely the creation of a perioc! of unprecedented! growth in private economic activity and government programs in the United States. The current federal R&D budgeting process evolved to accommodate new missions, and the performing institutions grew to meet the challenge of crowing federal . ~ d . ~ an,, ~ ~ . . ~ ~ expectations and increased appropriations. Flexibility was achieved mainly by building new structures, not by devising means to change oIct ones. The research ant! development system is conditioneci on growth ant! is now challenger! by the new environment that requires downsizing of both missions and budgets. Scientists and engineers can respontlfairly quickly to new researc* opportunities and changes in funding emphases. Similar pexibiiity is more difficu~tfor large researc* institutions to manage. The U.S. research and development system is changing in response to chang- ing national circumstances. DOD has combiner! a number of its R&D facilities ant! has closed others. Many major firms have refocused their corporate long-range R&D . ~ . , . . . , . , ~ . . . . . .. . laboratories on more immediate Justness needs and opportunities. Such changes reflect shifts in the federal research portfolio, which has changed dramatically over the clecacles since the onset of florid War IT, both in launching new programs, such as planetary exploration, ant! in reducing others, such as the breeder reactor pro- gram. But flexibility of project funding in some areas has not been matched by flexibility in large R&D institutions ant! facilities. The nation now carries an excess of facilities, many establisher! during World War TT anct the Coic3 War, whose missions may no longer be appropriate or whose programs may not be as competitive as others. Their continues! support win detract from more effective or more important programs, inhibiting a vigorous research enterprise in an era of limited resources.