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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 congressmanSilicon 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

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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

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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.

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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 soonerit 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.

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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 governmentto 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.

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