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OCR for page 535
Goverrunent Policies for
Innovation arid Growth
ED ZSCHAU
The proper role of government zrz technological advancement and
economic growth is not to target specific companies, industries, or
technologies, but to target the process by which those industries,
technologies, arm companies are fostered the process of innova-
non. That is, governments proper role is to establish a set of policies
that create an environment in the United States in which new ideas
awl new enterprises are likely to f ourzsh.
When I arrived in Washington, D.C., in 1983 I found that there was
intense interest in the area Hat ~ represent as a congressman—Silicon Valley,
California. Everyone wanted to be associated with high technology. There
was a group called He "Atari Democrats" (although they are frantically
searching for a new name since Atan has fallen on harder tunes), and when
was asked to chair the Republican Task Force on High Technology Initia-
tives, 138 of the 167 lonely House Republicans joined He task force, which
indicates the level of interest in technological issues.
Unfortunately, any hot political topic spawns a lot of bad ideas about how
government can help out. High-tech was no exception. Many people thought
that to sumulate science and technology in this country we needed a "higl,-
tech planning board,' bureaucrats who would look into He future and
determine where the opportunities are, where scientific advances should come
from, and what He industries of choice might be. Hey would dip into an
$~.5 billion fund that Congress would have voted for their disposal and invest
in He technologies and companies Hey had identified. But it is pure folly
to suppose Hat government can identify in advance where the opportunities
and technological advances will come from. Technology, science, and en-
~eprenenuship are not driven by government decision making.
535
OCR for page 536
536
ED ZSCHA U
Why were these ideas proposed? Well, Japan has a Ministry of International
Trade and Industry (MITI), and since the Japanese do pretty well when it
comes to technology, some have assumed that MITI is the reason for that
country's success. However, even the Japanese are beginning to question
this kind of approach. The dean of the Namura School of Advanced Man-
agement in Tokyo recently observed that the Japanese structure is too in-
flexible to meet the challenges of a changing world. He recommended that
in the future the Japanese look, for their model, to "entrepreneurs like those
in Silicon Valley." It seems to me the height of irony, although not unusual,
that Washington politicians are talking about copying something the Japanese
are doing while the Japanese are trying to emulate something in our own
backyard!
It cannot be denied that government plays a role in technological advance-
ment and economic growth, but we must determine govemment's proper
role. It seems to me that rather than targeting specific companies, specific
industnes, or specific technologies, the proper role of government is to target
the process by which those industnes, those technologies, and those com-
panies are fostered the process of innovation. That is, government's proper
role is to create in this country an environment in which new ideas and new
enterprises are likely to flounsh.
The Republican Task Force, which I chair, has identified four prerequisites
for an environment in which innovation will flourish. We suggest that all
policies of the federal government for example, those related to research,
taxes, fiscal and monetary matters, education, trade, antitrust matters, and
procurement be evaluated in terms of whether they strengthen these pre-
requisites for an environment for innovation or whether they are detrimental
to it. Policies that are detrimental or that are not as stimulative as they might
be should be modified accordingly.
The prerequisites for innovation identified by the task force are well known.
First is a commitment to basic research. Year in and year out, in good years
and bad, we should conduct basic research of the kind done in colleges and
universities. This fundamental research is not product-driven. It is a search
for knowledge, a quest to find out how the world works. From basic research
comes the foundation for future technologies, future products, and future
companies.
A commitment to basic research means adequate federal funding. It means
incentives for industry to fund research in research institutes. It means eval-
uating the role of the federal laboratories and detaining whether that role
could be improved or whether federal laboratory research ought to be red~-
rected. It means changing the antitrust laws, as was done in 1984, to permit
R&D joint ventures to be formed by corporations so Hat more fundamental
research programs those that would not normally be undertaken because
of their great expense or high nsks~an be pursued by the corporations. A
OCR for page 537
GOVERNMENT POLICIES FOR INNOVATION ED GROWTH
537
commitment to basic research applies not just to science, but also to research
in basic en~ineenng and technology practices, specifically, manufacturing
technology.
The second prerequisite for a healthy environment for innovation is in-
centives for risk taking. There are many failures for every great success,
which suggests that we need incentives for risk taking in this country. Reg-
ulatory and tax policies are the primary means of encouraging risk taking.
If the regulations that must be complied with are too extensive, people will
not experiment with new ideas. The R&D tax credit that encourages com-
panies to invest in more research and development and stock options that
enable young companies to attract key people to set entrepreneurial activity
in motion are government mechanisms to encourage risk taking. The capital
gains tax reduction in 1978 was very important for stimulating nsk-capital
investments. And, finally, other incentives for investing in long-term R&D
projects include patent policies that protect the inventions that require so
much risk to develop. All of these incentives for risk taking by investors,
by entrepreneurs, by innovators, engineers, and corporations are important
to an environment for innovation.
Let me voice my concern here that in seeking "simplicity" and "fairness"
in our tax system we might unwittingly destroy some of the incentives for
capital formation, research, and risk taking in this country. The Treasury
Department's tax reform proposal aimed at what I consider to be Me elusive
objectives of simplicity and fairness would reduce the distinction between
ordinary income taxation and capital gains taxation. It would also make it
less attractive to invest in new plant and equipment. Without capital-forma-
tion incentives, the United States will lack the productivity growth and eco-
nomic growth it needs.
The third prerequisite, in addition to commitment to basic research and
incentives for risk taking, is an adequate supply of trained technical people.
Since Joseph Petiit (in this volume) discusses engineering education issues,
I will simply mention that I think the federal government has a role here,
too, at least a limited role. Through proper tax credits, the federal government
can encourage corporations to contribute equipment and funds to colleges
and universities for educational purposes as well as for research.
The last of the four prerequisites is ample market opportunities. Since
people will not take the risks associated with new-product development unless
they can sell those products in sufficient volume, we need an aggressive
trade policy that breaks down trade barriers in other countries and enables
us to participate in world markets. We also need a domestic economic policy
that reduces our enormous federal deficits. Also, we need balanced export-
control policies. Sometimes in our zealousness to control He export of sen-
sitive technologies to prevent their getting to the Eastern bloc, we make it
unnecessarily more difficult for our exporters to compete in Western markets.
OCR for page 538
538
ED ZSCHAU
Let me elaborate briefly on the deficit issue. All of the policies of the
federal government and all of the changes that we might make in them to
improve the environment for innovation in this country will be squandered
if we in the federal government continue to spend far more than the tax
revenue we collect. If we do not cut spending significantly now, deficits in
the future will increase dramatically, growing rather than decreasing in a
tune of rapid economic growth.
My experience win my own company, System Industnes, provides an
analogy. The company was "growing like gangbusters" at one time, but it
was losing money. I said, "This is as good as it gets. If we can't make
money when things are going good, we're going to be in real trouble when
things slow down!" So I sold off a couple of divisions, eliminated some
product lines, cut back on overhead, and got the company to He point where
it could make money at a lower level of sales. I later realized Hat ~ should
have made those decisions much sooner—it was just good business to do
so. Our country is now In exactly the same position that my company was
in during those times. The United States has accumulated a set of spending
activities that are driving up He deficit even as He economy is growing. If
we cannot reduce He deficit In good economic times, we will have no chance
to do so when He economic grown subsides.
How did we get here? Let me illustrate. You may not know who I am.
Many people don't. So I "carry an American Express card." However, I
also have another card, a better one He voting card of the House of Rep-
resentatives. When He bells ring In the House to call members for a vote,
I have 15 minutes to run up, pull out my card, and stick it in the voting
machine. If ~ push He green button to vote yes, I can spend $5 billion just
like that. Or $350 million, if it's a slow day. Or, as we did in October 1984,
on the last day of the session, $500 billion in one vote. After voting, ~ put
this card I call it my "American Distress" card back in my wallet and
go back to the office. Then He phones start ringing and the mail comes in.
My constituents say, "Thanks, Ed, for supporting my program." And I say,
`'1t was noting!" Which is true. It didn't cost me a dime. You see, the
Amencan Distress card is much better Han the Amencan Express card be-
cause I get the credit but you get the bill.
That is why we have budget deficits the constant and unbalanced pressure
to spend more money. I hope that He Amencan people understand that
continued deficit spending is a clear and present danger. Congress must act
and act now. All spending, every program in the federal budget, must be
scrutinized for savings. We must freeze spending across He board, but we
must do more Han that. We must eliminate programs that have outlived their
usefulness or, despite laudable objectives, cannot be justified when deficit
spending is putting our economic future at nsk. Moreover, for those programs
that are retained, we must make them more effective and efficient, just as
we would if we were a business.
OCR for page 539
GOVERNMENT POLICIES FOR INNOVATION ID GROWTH
539
In conclusion, let me reiterate that the proper role of government in ad-
vancing technology and economic growth in this county is not to target
specific industries, technologies, or companies. Rather, it Is to have a set of
policies that stimulate the environment for innovation so that the private
sector can operate as it is supposed to. This concept was implicit in the
recommendations of the President's Commission on Industrial Competitive-
ness, chaired by John Young (for discussion of recommendations, see "Global
Competition The New Reality," in this volume).
Finally, we should recognize that this debate on the role of government
in fostering technological advancement can be reduced to some fundamental
questions: Who is responsible for creating jobs in this country? Who is
responsible for advancing technology? Who is responsible for creating eco-
nomic growth, exports, and new ideas? Some people believe that those are
the government's job and that is why we have jobs programs and industrial
policy advocates. But I say that those in academia and industry are responsible
for creating jobs and for technological advances. And it is our jo~those
of us in government—to create an environment in which people in academia
and industry can do their jobs in the future as well as they have done them
in He past.
OCR for page 540
Representative terms from entire chapter:
proper role
