giants, and venture capitalists—and play a major role in facilitating the production and spread of TI. The twenty-first century merits policies affecting a range of organizational forms, that explicitly take account of the effects of these structures on the production, dissemination, and utilization of TI.

Recognizing the importance of webs of relationships (8, 19) to R&D development suggests that regions, or industries, blessed with social capital (22) —trust, norms, and networks— will have substantial advantages, as Silicon Valley and Route 128 make evident. In recent years, Europe has made explicit efforts to build cooperative approaches to R&D among natural competitors, relying on substantial government subsidies and coordination on research directions (23).

The R&D problem is often framed as one of providing public goods, with Federal funding as the implicit solution. Yet federal funding as a proportion of industrial R&D has fallen precipitously from the 1960s, when it exceeded company spending, to the 1990s, when it has been <40% as large.w Given contemporary political and budget realities, generosity in government funding, whatever its theoretical merits, is unlikely to guarantee the efficient production of R&D.

The second major government function in R&D production is its accepted role as definer and enforcer of property rights. However, bold new frontiers are being crossed in defining technological realities—witness the Internet and genetic engineering. In such unfamiliar territory, appropriate property delineations are much harder to define. This is particularly true since other salient values, such as freedom of speech, privacy, and the sanctity of life, are deeply involved with technological advance.

The nature of TI, I have argued here, severely impedes its purchase and sale. When such inefficiencies are great, the struggle for second best outcomes will lead to new organizational forms to facilitate contracting. This implies that the vast increase in the role of TI, beyond any direct effects in expanding production possibilities, will transform the structure of industry in developed nations, dramatically altering patterns of competition and cooperation.

Chang-Yang Lee provided skilled research assistance. Zvi Griliches, James Hines, Louis Kaplow, Alan Schwartz, and participants in the October 1995 National Academy of Sciences Colloquium on Science, Technology, and the Economy made helpful comments.


In 1991, excluding aircraft and missiles, Federal funds comprised 18% (671/3807) of basic research and 22% [(4918–471)/(24,084–3248)] of applied research (ref. 13, pp. 3, 24–25).

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