3
Science, Technology, and Innovation in the United States

SUMMARY POINTS

  • The United States gained world leadership in a number of the technologies and industries of the "second industrial revolution "—electrical machinery, automobiles, and steel—through the development of large-scale mass production techniques. World War II spurred several changes in U.S. innovation whose impacts are felt even now: a large federal role in supporting R&D, a focus on defense needs, and the critical role of small entrepreneurial firms in commercializing new technologies.

  • Beginning in the 1960s, a number of US. industries have been severely challenged in international competition. Over the past decade or so US. industry has made great progress in adapting to flexible production systems and linking technology development more effectively to products and markets. However, long-term barriers to sustained growth and productivity gains remain, such as the uneven quality of K-12 education and a low savings rate. The United States remains very strong in innovation, particularly in information technologies and related fields, as well as biotechnology and other newer technologies. With the end of the Cold War and the new challenges of international competition, the role of the federal government in innovation has been hotly debated.

DEVELOPMENTS PRIOR TO WORLD WAR II

Like Japan, many of the key features of technological innovation in the United States are long standing. For example, the inflow of technologies from abroad played a major role in U.S. industrial development, particularly in the late nineteenth century. In contrast to Japan, however, where arms-length licensing and joint ventures have been the preferred mechanisms, technology has often flowed to the United States in the form of immigrant scientific and engineering talent and through foreign investment. During America's early industrialization, immigrant engineer-entrepreneurs played a significant role in technology and enterprise development. 1 Another consistent feature is the role of military needs in pushing innovation. Although the United States has maintained a relatively small military establishment for much of its history, military science and technology often had a major influence on civilian innovation even prior to World War II, including the development of milling machines and the principles of mass production and interchangeable parts at government arsenals in the mid-nineteenth century. 2

1  

John H. Dunning, Multinational Enterprises and the Global Economy (Wokingham, England: Addison-Wesley, 1993).

2  

Harvey Brooks, "National Science Policy and Technological Innovation," in Ralph Landau and Nathan Rosenberg, eds., The Positive Sum Strategy: Harnessing Technology for Economic Growth (Washington, D.C.: National Academy Press, 1986), p. 121.



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Maximizing U.S. Interests in Science and Technology Relations with Japan 3 Science, Technology, and Innovation in the United States SUMMARY POINTS The United States gained world leadership in a number of the technologies and industries of the "second industrial revolution "—electrical machinery, automobiles, and steel—through the development of large-scale mass production techniques. World War II spurred several changes in U.S. innovation whose impacts are felt even now: a large federal role in supporting R&D, a focus on defense needs, and the critical role of small entrepreneurial firms in commercializing new technologies. Beginning in the 1960s, a number of US. industries have been severely challenged in international competition. Over the past decade or so US. industry has made great progress in adapting to flexible production systems and linking technology development more effectively to products and markets. However, long-term barriers to sustained growth and productivity gains remain, such as the uneven quality of K-12 education and a low savings rate. The United States remains very strong in innovation, particularly in information technologies and related fields, as well as biotechnology and other newer technologies. With the end of the Cold War and the new challenges of international competition, the role of the federal government in innovation has been hotly debated. DEVELOPMENTS PRIOR TO WORLD WAR II Like Japan, many of the key features of technological innovation in the United States are long standing. For example, the inflow of technologies from abroad played a major role in U.S. industrial development, particularly in the late nineteenth century. In contrast to Japan, however, where arms-length licensing and joint ventures have been the preferred mechanisms, technology has often flowed to the United States in the form of immigrant scientific and engineering talent and through foreign investment. During America's early industrialization, immigrant engineer-entrepreneurs played a significant role in technology and enterprise development. 1 Another consistent feature is the role of military needs in pushing innovation. Although the United States has maintained a relatively small military establishment for much of its history, military science and technology often had a major influence on civilian innovation even prior to World War II, including the development of milling machines and the principles of mass production and interchangeable parts at government arsenals in the mid-nineteenth century. 2 1   John H. Dunning, Multinational Enterprises and the Global Economy (Wokingham, England: Addison-Wesley, 1993). 2   Harvey Brooks, "National Science Policy and Technological Innovation," in Ralph Landau and Nathan Rosenberg, eds., The Positive Sum Strategy: Harnessing Technology for Economic Growth (Washington, D.C.: National Academy Press, 1986), p. 121.

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Maximizing U.S. Interests in Science and Technology Relations with Japan The half century between the end of the Civil War and the outbreak of World War I was marked by rapid industrialization and economic growth. A number of factors underlying U.S. innovation and growth were similar to those later enjoyed by Japan during the half century following World War II. A favorable U.S. security environment allowed relatively low defense spending. High trade barriers encouraged the growth of domestic manufacturing industries and the inflow of foreign technologies. Just as Japan's access to an integrating global economy in recent decades allowed scale-intensive manufacturing to prosper, rapid population growth and the development of transportation infrastructure gave late nineteenth century America the largest common market in the world. This context favored low-cost, high-volume manufacturers of standardized goods, and U.S. companies responded by developing production systems characterized by capital intensity and specialization in order to minimize costs over long production runs. 3 The challenge of managing a heterogeneous work force was met by dividing operations into narrow, relatively unskilled tasks. U.S. manufacturing was characterized by larger, more efficient mass production operations than those of other countries. By 1913, U.S. productivity and per capita income exceeded those of Great Britain. 4 Innovation during this period did not rely on indigenous scientific research. 5 The U.S. government generally did not see support for science as a legitimate public function in peacetime until after World War II, but it did support the development of technology and innovation directly and indirectly through policies linked to specific national purposes. Policies that supported the growth of key institutions and infrastructure underlying industrial development the railroads and land grant colleges, for example—are well known. The late nineteenth and early twentieth centuries also saw the establishment of government agencies to support the development and diffusion of applied technologies, such as the Agricultural Research Service, National Bureau of Standards, U.S. Geological Survey, and the National Advisory Committee for Aeronautics. 6 As a result of new antitrust laws enacted around the turn of the century, U.S. companies were constrained from utilizing informal price-fixing agreements between firms to control markets. Many turned to horizontal mergers and industrial research and innovation as alternative mechanisms for growth and differentiation. 7 During the first half of the twentieth century, Du Pont, AT&T, General Electric, and other leading companies established research facilities, which expanded from an initial focus on quality control and materials analysis to external technology monitoring and the development of new products and processes. 8 The large corporations that spearheaded the growing utilization of scientists and engineers in corporate research were concentrated in the chemical, petroleum, and electrical machinery sectors. By the end of World War II, the transportation equipment sector also had become a major performer of R&D because of the growth of the automobile and aerospace industries. During the 1930s, federal expenditures for R&D accounted for less than 20 percent of the total national effort, comparable to the situation in Japan today. 9 Industry accounted for two thirds. Scientific and engineering research at universities grew considerably in scale and quality during the first half of the century, supported largely by state governments and private 3   David C. Mowery and Nathan Rosenberg, "The U.S. National Innovation System," in Richard R. Nelson, ed., National Innovation Systems: A Comparative Analysis (New York: Oxford University Press, 1993), p. 31. 4   Ibid. 5   Ibid. 6   Brooks, op. cit., p. 119. 7   Mowery and Rosenberg, op. cit., p. 32. 8   Ibid. 9   Ibid, p. 35. The U.S. Department of Agriculture was the largest federal R&D spender, accounting for 39 percent of the $74.1 million budget in 1940.

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Maximizing U.S. Interests in Science and Technology Relations with Japan foundations. Because the U.S. university system was decentralized and much of it was state supported, new research and academic programs responsive to the needs of local industries flourished. 10 THE ENDLESS FRONTIER World War II and its aftermath brought significant changes in the institutional arrangements underlying U.S. technology development and innovation. The two seminal military R&D efforts of the war—the Manhattan Project and the development of radar—established patterns that continue to exert influence today. The former, which was the largest and most expensive technological enterprise in history, developed the atomic bomb and influenced the structure and management of large postwar government R&D projects in defense, nuclear energy, and space. 11 The Manhattan Project also created a world-class concentration of talent and physical infrastructure in basic and applied engineering in the United States, a capability that evolved into today's system of multi-program national laboratories. The development of radar, in which the Radar Laboratory at the Massachusetts Institute of Technology played the key coordinating role for military users, academic researchers, and industrial manufacturers, demonstrated the potential power of interdisciplinary and cross-sectional linkages. The success of these and other wartime technological efforts led to growing influence in policymaking by the scientists and engineers in charge of them. It seemed natural to some that a continuing large federal role could have a similar beneficial impact on meeting peacetime needs. 12 The onset of the Cold War ensured support and further development of the research establishment built during the war. The key elements in U.S. science and technology policy since that time have included (1) federal funding for half or more of the national R&D enterprise; (2) federal funding focused primarily on defense and secondarily on other agency missions such as space and public health, as well as on maintaining a strong base in basic science; and (3) the bulk of federally-funded R&D performed by industry and universities rather than government-operated laboratories. 13 The large corporations that dominated U.S. industry continued to build on their strong technological foundations following the war. There was a significant long-term expansion in the employment of scientists and engineers by industry, and a number of companies established large central research facilities. During the 1950s and 1960s, many large U.S. companies expanded their horizons to international markets, based on the competitive strength gained in the United States. Emerging U.S.-based multinational corporations did not hesitate to establish production facilities overseas rather than rely on exports when this appeared to make sense in light of economic conditions, such as the strength of the U.S. dollar. 10   A good example is the growth of a specialized chemical engineering discipline in the United States. See Ralph Landau and Nathan Rosenberg, "Successful Commercialization in the Chemical Process Industries," in Nathan Rosenberg, Ralph Landau, and David C. Mowery, eds., Technology and the Wealth of Nations (Stanford, Calif.: Stanford University Press, 1992), pp. 81-82. 11   Robert Teitelman, Profits of Science: The American Marriage of Business and Technology (New York: BasicBooks, 1994), pp. 22-32. 12   Vannevar Bush, et al., Science the Endless Frontier: A Report to the President on a Program for Postwar Scientific Research, July 1945. 13   For example, the Federal government funded about 64 percent of total U.S. R&D in 1960, and about 57 percent in 1970. The Federal share dropped below half in 1978, but held between 45 and 50 percent until 1989. By 1995, the Federal share had fallen to about 35 percent. See National Science Board, Science & Engineering Indicators-1996 (Washington, D.C.: U.S. Government Printing Office, 1996).

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Maximizing U.S. Interests in Science and Technology Relations with Japan Since the 1950s, smaller entrepreneurial firms have played a critical role in developing and commercializing new technologies in the United States, an innovation pattern that is somewhat unique in the world. This trend was directly and indirectly supported by the changing federal role in U.S. innovation. For the first several postwar decades, the impact was greatest on the emerging semiconductor and computer industries. Increased support for basic research at universities meant that many innovations were pioneered in academia, providing opportunities for researchers to start companies in order to commercialize these new technologies. The willingness of the U.S. military to incorporate the products of small inexperienced firms allowed start-ups to grow quickly by focusing their early marketing efforts on this single critical customer. Fundamental technologies developed in larger firms were often made available to newcomers at reasonable terms as a result of U.S. government antitrust policies. As time passed and a number of small companies achieved success, new financial institutions were established to provide patient risk capital to fund start-ups. This complex of entrepreneurial technical talent and a supportive market and financial environment led to the growth of high-technology manufacturing regions, the most significant appearing in Northern California (Silicon Valley) and Massachusetts (Route 128). A similar complex of technical entrepreneurs and institutions for capital formation has more recently supported the development of commercial biotechnology and software. The passage of the Bayh-Dole Act in 1980, which allowed universities to own the results of government-sponsored research, provided further impetus. 14 Military R&D and procurement have had a pronounced impact on postwar innovation in the United States. In some cases this influence has been felt through direct military to commercial spinoffs. A classic example is the jet engine, which was developed in Europe but was more quickly and effectively applied by U.S. companies in both military and commercial aircraft, allowing the United States to establish a leading position in this industry. Military funding supported many of the key innovations in microelectronics and computers, but the product demand from weapons systems probably constituted a larger contribution to the development of these industries than direct R&D support. 15 THE COMPETITIVENESS CRISIS AND RESPONSES During the 1960s and 1970s, many U.S. manufacturing companies and industries began to lose competitiveness in international and domestic markets. In the case of steel, automobiles, and consumer electronics, this loss of competitiveness constitutes the flip side of the Japanese gains made during this period, as described above. In automobiles, for example, U.S. companies did not experience serious foreign competition in the U.S. market for many years, and emphasis on more profitable larger cars left a window of opportunity that the Japanese were able to exploit in the 1970s when gasoline shortages led to a surge in demand for smaller vehicles. Once the fundamental barriers to entry were breached, the flexible production strengths and resulting 14   Although there is some disagreement over the contribution of Bayh-Dole, the task force believes that the favorable case is quite strong, particularly in biotechnology. Since its passage in 1980, university patenting has risen dramatically, as has overall industrial support for university research. Surveys of university administrators and industry have confirmed the value of the legislation in providing a general framework for expanded utilization of the results of federally funded R&D. See Wendy H. Schacht, The Bayh-Dole Act: Patent Policy and the Commercialization of Technology, Congressional Research Service, 1994. 15   John A. Alic, Lewis M. Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World (Boston, Mass.: Harvard Business School Press, 1992), pp. 257-260.

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Maximizing U.S. Interests in Science and Technology Relations with Japan higher-quality vehicles produced by Japanese firms allowed them to rapidly increase market share. 16 In consumer electronics, Japanese productivity and cost advantages led to incremental market share gains and declining profitability for U.S. competitors. U.S. companies gradually ceded control over manufacturing and almost all of the large U.S. consumer electronics companies have now exited the business. The low value of the yen through much of this period helped Japanese companies establish their initial footholds in the U.S. market. The industries in which the United States has experienced the greatest competitiveness problems have tended to be the ones in which the Japanese advantages of flexible production including continuous improvement in manufacturing processes and close interactions between manufacturers and suppliers in product development and production—could be put to work for maximum impact. 17 In the chemical and pharmaceutical industries, where competitiveness is more tightly linked to the generation of product innovations through R&D, U.S. companies have done better in responding to international competition, which has mainly come from Europe rather than Japan. Nevertheless, increasing competition, increased capital costs and an unfavorable macroeconomic environment probably combined to lower the returns to R&D investments, leading to slower growth in U.S. industrial R&D spending during the 1970s. 18 During the 1980s, as U.S. competitiveness problems mounted, U.S. industry and government developed a number of responses. Limited trade protection encouraged investment by foreign manufacturers and spurred business alliances between U.S. and overseas companies. 19 Over time U.S. manufacturers appear to have made substantial progress in modifying and adapting aspects of flexible production, particularly in the automobile industry. Following Japanese challenges in the semiconductor and computer industries and resulting concerns about the U.S. position in high technology, U.S. government and industry have taken a number of initiatives to better link R&D efforts with market needs. In addition to broad initiatives, such as the establishment of engineering research centers by the National Science Foundation and legislation to facilitate and promote commercial application of technologies developed in universities and national laboratories, several programs were aimed specifically at the then-beleaguered semiconductor industry. These included the Semiconductor Research Corporation, a partnership between industry and universities in research and education, and the SEMATECH government-industry collaborative R&D partnership consortium. Some advocated an even more active role for the federal government in civilian technology development. 20 In the 1990s, new programs to support commercially relevant technologies such as the Advanced Technology Program and the Partnership for a New Generation of Vehicles (PNGV) have expanded rapidly, but intense debate continues over the appropriate federal role in commercial technologies. Significant changes are occurring along other dimensions of federal involvement in the U.S. R&D enterprise. Among the traditional public missions, the overall share held by defense has declined in recent years, while spending on life sciences research aimed at advances in public health has grown rapidly. Intramural and extramural research programs of the National Institutes 16   See Dertouzos, et al., op. cit., pp. 171-187. 17   In a number of industries Japanese government-industry approaches to technology acquisition and improvement (see Chapter 2) have also played a role. 18   Mowery and Rosenberg, op. cit., p. 50. 19   One example is the voluntary export restraints (VER) on Japanese auto exports to the United States. There is wide agreement these restraints led to billions of dollars of transfers from U.S. consumers to auto producers, most of which went to Japanese producers. There is also wide agreement that the VER hastened Japanese auto industry investment in the United States. C. Fred Bergsten and Marcus Noland, Reconcilable Differences? United States-Japan Economic Conflict (Washington, D.C.: Institute for International Economics, 1993), pp. 106-107. 20   National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, The Government Role in Civilian Technology: Building a New Alliance (Washington, D.C.: National Academy Press, 1992).

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Maximizing U.S. Interests in Science and Technology Relations with Japan of Health play an important role in sustaining the research base utilized by U.S. pharmaceutical companies. The role of defense R&D and procurement in facilitating the emergence and growth of new commercial technologies has also declined over time, leading some to call for a greater reliance on commercial technologies by the Department of Defense. 21 Cancellation of the Superconducting Supercollider and problems experienced in the development of the space station imply that the future is uncertain for large federal science and technology programs in the mold of the Manhattan Project and the Apollo Program. The future role of the large, multi-program national laboratories also has been increasingly scrutinized and debated. 22 Rapid change continues in U.S. industry as well. In addition to efforts on the part of U.S. companies to adapt and utilize a flexible production paradigm, many large U.S. companies have restructured their R&D organizations to improve efficiency and responsiveness to market needs and have sought to utilize linkages with suppliers, customers, and universities to spread the costs and risks of technology development. 23 Passage of the National Cooperative Research Act in 1984 and its expansion in 1993 to include production joint ventures have created a more favorable environment for intercompany R&D and production linkages; initiatives such as PNGV could not have been launched under previous policies. 24 Strengthened protection and enforcement of intellectual property rights in the United States appear to be allowing savvy U.S. companies to achieve greater returns on their technology investments. 25 Perhaps the most promising trends for U.S. industry are occurring in relation to the development and utilization of information technologies. Continuing leadership in this area appears to bode well for increased U.S. competitiveness in new information-related industries and productivity gains in manufacturing and service sectors throughout the economy. Computers and related equipment now account for a substantial portion of U.S. capital equipment expenditures. Another related trend whose implications have not yet been thoroughly examined is the rapid change in the composition of U.S. industrial R&D spending over the past decade, with R&D performance by nonmanufacturing companies growing rapidly. Much of this investment has been focused on information technologies. An additional factor in the performance of the U.S. economy that merits discussion is capital formation and allocation. In the 1980s, high savings rates among Japanese citizens and long time horizons for Japanese corporate investment appeared to give the Japanese economy a major boost relative to the United States. Certainly, the low savings rate continues to be a long-term problem for the U.S. economy. 26 On the other hand, the open, competitive U.S. market also forces 21   National Economic Council, National Security Council, Office of Science and Technology Policy, Second to None: Preserving America's Military Advantage Through Dual-Use Technology (Washington, D.C.: U.S. Government Printing Office, February 1995). 22   Task Force on Alternative Futures for the Department of Energy National Laboratories, Alternative Futures for the Department of Energy National Laboratories (Washington, D.C.: U.S. Government Printing Office, 1995). 23   National Research Council, Corporate Innovation in the United States and Japan: Report of the US.-Japan Joint Task Force (Washington, D.C.: National Academy Press, forthcoming). 24   Some experts caution that antitrust enforcement has recently become more strict. See Deborah Wince-Smith, "Incentives for Investment in Innovation: The Strategic Role for Government" in Global Innovation/National Competitiveness (Washington, D.C.: Center for Strategic and International Studies, 1996). 25   National Research Council, Corporate Approaches to Protecting Intellectual Property: Implications for U.S.Japan High-Technology Competition (Washington, D.C.: National Academy Press, 1994). 26   These issues are covered in Competitiveness Policy Council, Capital Allocation Subcouncil, Lifting All Boats: Increasing the Payoff from Private Sector Investment in the U.S. Economy (Washington, D.C.: Competitiveness Policy Council, 1995).

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Maximizing U.S. Interests in Science and Technology Relations with Japan businesses to use capital efficiently. In recent years, the U.S. economy has reaped benefits from this efficiency.27 Although recent trends in innovation and competitiveness have been favorable for U.S. companies in a number of industries, there is no guarantee that they will continue or that Japanese and other foreign companies will not be able to adapt U.S. innovations more quickly and effectively. Despite progress by some U.S. companies in meeting the demands of global competition, other important aspects of the manufacturing environment, such as inadequate capital formation caused by low savings rates and stagnant growth in real incomes, remain and are likely to persist. The future federal role in science and technology is still subject to intense debate, particularly federal support for applied research and appropriate modes of government industry partnerships in areas of research that are applied and close to commercialization. What is clear from this examination of overall U.S. and Japanese innovation policies and paradigms is that considerable differences in orientations and capabilities between the two systems remain, despite some measure of evolution and adaptation in each country. 27   World Trade Organization, "Open Markets-Domestic and Worldwide-Remain the Key to U.S. Economic Growth," October 1996.