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The Positive Sum Tracy Harnessing Technologyfor Economic Growth Ralph Mu and Nathan Rosenberg, editors NATIONAL ACADEMY PRESS Washington, D.C. 1986

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National Academy Press ~ 2101 Constitution Avenue, NVV ~ Washington, DC 20418 This volume is the result of work sponsored by the National Academy of Engineering, the Center for Economic Policy Research at Stanford University, and the Departments of Chemistry and Chem- ical Engineenug at Stanford University. The National Academy of Engineering is described on the following page. The Center for Economic Policy Research (CEPR) fosters a more rational and infonned approach to economic policy. CEPR pursues four interrelated goals in support of this mission: (1) stimulating research on economic policy; (2) broad dissemination of its research findings; (3) building a com- munity of scholars conducting research on policy issues; and (4) linking the policy community at Stanford with decision makers from business, government, and academia. In addition to a general research seed grant program, CEPR has developed and supports research programs in tax policy, regulation, energy and natural resources, electronics/inforTnaion industries, and the economics of technological innovation. The Departments of Chemistry and Chemical Engineering at Stanford, in 1969, organized an Industrial Affiliates Program. The primary purpose of the program, which sponsors conferences and exchanges between industry and the Chemistry and Chemical Engineering faculty, is to serge as a forum for communication between faculty, students, and representatives of industry. We views expressed in this volume are those of the authors and editors and are not presented as the views of the organizations with which they are affiliated. Library of Congress Cataloging in Publication Data The positive sum strategy. Bibliography: p. Includes index. 1. Technological innovations United States- Congresses. 2. United States Economic conditions Congresses. I. Landau' Ralph. II. Rosenberg, Nathan, 1927- T173.8.P67 1986 ISBN 0-309~3630-5 m. National Academy of Engineering. 338.9'26 85-21713 Copyright ~ 1986 by the National Academy of Sciences No part of this book may be reproduced by any mechanical, photographic, or electronic process, or In the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise copied for public or private 1lse, without written permission from the publisher, except for the purposes of official use by tile United States Government. Printed in the United States of America First Pnnting, December 1985 Second Printing, February 1989

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The National Academy Press was created by the National Academy of Sciences to publish the reports issued by the National Academy of Sciences, the National Academy of Engineering, the Institute of Medicine, and the National Research Council. This volume is published under the auspices of the National Academy of Engineering (NAE). The National Academy of Engineenng is a private organization established in 1964. It shares in the responsibility given the National Academy of Sciences under a congressional charter granted in 1863 to advise the federal government on questions of science and technology. This collaboration is implemented primarily through the National Research Council. The National Academy of Engineering also recognizes distinguished engineers, sponsors engineering pro- grarns aimed at meeting national needs, and encourages education and research. The President of the National Academy of Engineering is responsible for the decision to publish an NAE manuscript through the National Academy Press. In reviewing publications that include papers signed by individuals, the President considers the competence, accuracy, objectivity, and balance of the work as a whole. In reaching his decision, the President is advised by such reviewers as he deems necessary on any aspect of the material treated in the papers. Publication of signed work signifies that it is judged a competent and useful contribution worthy of public consideration, but it does not imply endorsement of conclusions or recommendations by the NAE. The interpretations and con- clusions in such publications are those of the authors and do not purport to represent the views of the council, officers, or staff of the National Academy of Engineenng.

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hn~oduction RALPH LANDAU and NATHAN ROSENBERG Why this volume? We start from the premise Hat engineers and economists share a common interest in technology and technological change. They do, however, approach He subject from different vantage points, and the ver, differences in these vantage points have been intensified by the inevitable increase in specialization that has characterized industrial societies. Specialization has been not only He source of well-known benefits in economic activity but also He source of spectacular advances in He pro- duction of knowledge. However, increased specialization of disciplines has fostered compamnentalizaiion and fragmentation of knowledge about pir- ticular subjects that can, in some instances, prove to be dysfunctional and therefore costly. This occurs when one group of specialists no longer has even minimal comprehension of bodies of information that are highly relevant to He successful performance of some of its responsibilities. We have prepared this book because we believe that we are now at such a juncture in our understanding of He determinants of successful technolog- ical innovation. We believe that engineers and economists can benefit from a dialogue in which each group of specialists acquires a deeper understanding of He concerns, prionties, insights, and methods of He over. Thus, this volume presents chapters by engineers who are knowledgeable about technologies and by economists who are knowledgeable about the functioning of markets. ~ A fruitful exchange of views between these groups *Much of the material contained in this volume was originally presented in somewhat different folly, at the Symposium on Economics and Technology held at Stanford University on March 17- 19, 1985, which we cochaired. To bung out the various perspectives and to make the most of the opportunity for dialogue among notable thinkers and doers, the design of the symposium called for some authors to address, as discussants, the presentations of other authors. And so, while shorter chapters in this volume could have been expanded by their authors into more lengthy and formal presentations, the symposium discussants graciously accepted their role, as reflected in their briefer comments. v

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v! INTRODUCTION of specialists should lead to a better understanding of the conditions under which technological innovation can be made to function more effectively in the generation of economic grown. WHY DIALOGUE IS NEEDED Technology has been the critical factor in the long-term economic growth of modern industrial societies. But it functions successfully only within a larger social environment that provides an effective combination of incentives and complementary inputs into the innovation process. Tech- nology may be thought of as an extroverted activity: it involves a search for workable solutions to problems (the practice of technological inno- vation). When it finds solutions that are workable and effective, it does not pursue the "Why?" question very hard. Moreover, the output of technological activities is a product or a service that must eventually stand the test of the marketplace. Science, by contrast, is an introverted activity. It studies problems that are usually generated internallye.g., by logical discrepancies or internal inconsistencies or by anomalous observations that cannot be accounted for within the present intellectual framework. As technologies have be- come increasingly sophisticated and complex over the past century, the innovation process has become increasingly dependent on the findings and methodology of science, which has been flourishing in the post-World War II era. Markets are the basic institutional framework within which new tech- nologies are evaluated. Long-term economic growth must, in large mea- sure, be understood in terms of the performance of new technologies within this framework. The functioning of the market has been the specialized concern of the discipline of economics. Why Should Technologists Be Concerned About Economics? Just as technological change is related to and operates within Be framework of physical science, so the discipline of economics is related to politics. The political sphere establishes the larger societal framework (including the legal structure) within which technological change and economic grown take place. This includes: 1. The macroenvironment flowing from monetary and fiscal policies. 2. The microenvironment resulting from the effects of specific government tax and spending policies, for example. 3. The larger environment established by a changing legal framework; by regulations directed at such problems as heals, pollution, and safety; and by foreign made, anutn~st, and other policies.

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INTRODU=lON . . All It is this economic environment, and the political forces that shape it, that in turn determines the effectiveness of the incentives that society provides to the activities of technologists. The poor performance of the U.S. economy in the past 15 years or so points forcefully to the limitations of economic knowledge, especially as it pertains to the forces that encourage technological innovation and economic growth. As a result, there are sharp differences within the economics profes- sion over how best to provide a stable environment for continued grown within a framework that simultaneously provides for low levels of inflation and unemployment. It is at least arguable that government policies have, in this period of uncertainty and confusion, exacerbated rather than improved matters. The disagreement among economists inevitably has led to improv- isation by politicians conscious of the election cycle, with inadequate regard for the economic consequences of political decisions. It is therefore time for the intellectual stocktaking that this book represents, by which technologists can be offered guidance on what economists know and on the limits of knowledge on how economic forces shape the environ- ment for technological innovation. Itis important, at the same time, to recognize that the intellectual disarray in economics is only partial. There are broad areas of consensus among economists on matters of vital importance to the ongoing activities of tech- nologists. These need to be identified and emphasized. For example, suc- cessful technological innovation always involves more Man purely technological considerations. Successful innovation involves the fulfillment of needs as they are expressed in the marketplace, where considerations of cost and adaptation to specific needs and determination of appropriate trade-offs be- tween price and performance are likely to be critical. Thus, from a purely technological point of view, the Concorde was a more spectacular innovation than the Boeing 747. From a commercial point of view, however, the Con- corde was a failure, whereas the 747 looks quite different. It is itself an interesting commentary on the commercial uncertainties associated with in- novation in some industries that, although the 747 has been in service for more than a decade, it is still hard to judge whether it will be a commercial success. Thus, successful new product design and manufacture are tightly linked to economic variables. Indeed, good engineering design is close, concep- n~ally, to microeconomics. In both cases a central activity consists of opti- m~zin~,, subject to certain constraints. Technologists need to participate more in setting, the stage for their own specialized efforts, but in order to do so they must understand better the advice that economists are giving, to policymakers and the probable economic consequences of political actions.

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INTRODUCTION LX diffusion of new technologies that will otherwise remain poorly understood by economists. A carefully structured, selective, and discriminating inter- change of infonnation between economists and engineers such as takes place in this volume should, we believe, prove beneficial to both groups and therefore also, ultimately, to policymakers. THEMES OF THIS VOLUME The overarching themes that the authors were invited to consider in pre- paring their contributions to this volume were: I. How technological innovation in the United States actually works in different industries and different forms of organizations and what future trends might be recognized. 2. How the United States' innovative process compares with that of its principal competitors, especially Japan. 3. The comparative role of the educational, financial, and over key infra- structures in United States and competitors' economies as they affect inno- vation. 4. The impact of government on innovation, particularly from the stand- point of macroeconomic and microeconomic policies of the past and with regard to options for the future. 5. The competitive position of the United States in the light of the pre- ceding analyses, and how economics and technology might work more con- s~uctively together to further this position and encourage healthy economic growth. The first chapter, the "Editors' Overview," presents a selective discussion as we see it of some of the points made in much greater detail by the authors of He individual chapters, who are responsible for their own views. The authors themselves did not participate in He writing of the Overview, so that it represents solely- our perceptions of some of He significant themes that were touched on at various times by the different authors and is not to be considered as any kind of consensus reached by the authors. Nor does it reflect any positions or views of the sponsoring organizations; we alone are responsible for this Introduction and for He Overview, which are intended as a preliminary guide to the reader in examining the individual chapters. While the papers can be read individually, we encourage He reader to look at the book as a complex whole, and hope the Overview may be of assistance in this regard. Although many individuals deserve our sincerest thanks for their assistance throughout the preparations for the symposium and this volume, we wish

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p~cul~y 10 express ok ~~ci~on beg ~ He hems of me sensing o~=iz~ons: Dr. Robed H. Lie, ~~m of me Onions Academy of Eng~eedug; Dr. James L. Sweeney, Di~c~r of He Center far Economic Policy Re- se~h ~ S~ Unive~i~; Dr. Sahel Boud=, Pm~ssor of Chemical Eng~oedng ~ Sacs, who Has ~ ~~ alias -~ ~ Saga Off ad Of EngiDeedng Deponents.

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Contents EDITORS OVERVIEW ............ Ralph Landau and Nathan Rosenberg TECHNOLOGY AND THE DYNAMICS OF ECONOMIC GROWTH THE IMPACT OF TECHNOLOGICAL INNOVATION: A HISTORICAL VIEW ....................... Nathan Rosenberg MACROECONOMICS, TECHNOLOGY, AND ECONOMIC GROWTH: AN INTr(oDucrIoN TO SOME IMPORTANT ISSUES ..... Michael ]. Boskin MICROECONOMICS AND PRODucrivrry ............. Date W. Jorgenson DYNAMIC COMPETITION AND PRODUCTIVE ADVANCES Burton H. Klein THE EFFECT OF RECENT MACROECONOMIC POLICE:S ON INNOVATION AND pRoDuc-~Ivrn ............ Charles B. Reeder MACROREAEPrES OF THE INFORMATION ECONOMY Stephen S. Roach x' 17 . . . 33 .. 57 77 .. 89 .. 93

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. . xI! HARNESSING TECHNOLOGY FOR GROW rH Robert Malpas POLICY, LAW, SCIENCE:, AND EDUCATION: THE FRAMEWORK OF TECHNOLOGICAL CHANGE TECHNOLOGY AND ITS ROLE IN MODERN SOCIETY Stephen D. Bechtet, Jr. NATIONAL SCIENCE POLICY AND TECHNOLOGICAL INNOVATION Harvey Brooks THE ROLE OF THE LEGAL SYSTEM IN TECHNOLOGICAL INNOVATION AND ECONOMIC GROWTH Milton Katz THE BHOPAEIZATION OF AMERICAN TORT LAW Peter W. Huber FROM UNDERSTANDING TO MANIPULATING DNA James D. Watson THE PHYSICAL SCIENCES AS THE BASIS FOR MODERN TECHNOLOGY William 0. Baker TECHNO! OGICAE EDUCATION Joseph M. Pettit . BASIC RESEARCH IN THE UNIVERSI1-~HS: HOW MUCH UTILrrY? Donald Kennedy IIIE ECONOMICS OF INNOVATION AN OVERVIEW OF INNOVATION ........... Stephen J. Kline and Nathan Rosenberg MICROECONOMICS OF TECHNOLOGICAL INNOVATION Edwin Mansfield MACROECONOMICS AND MICROECONOMICS OF INNOVATION: THE ROLE OF THE TECHNOLOGICAL ENVIRONMENT . . . Ann F. Friedlaender CONTENTS 105 115 119 169 191 213 227 255 . . . 263 275 .. 307 327

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CONTENTS TECHNICAL CHANGE AND INNOVATION IN AGRICULTURE Vernon W. Ruttan TECHNOLOGY ADOPTION: THE SERVICES INDUSTRIES James Brian Quinn TECHNOLOGY DIFFUSION, PUBLIC POLICY, AND INDUSTRIAL COMPETrrIVENESS Paul A. David DETERMINANTS OF INNOVATIVE ACTIVITY Keith L. R. Paviu THE ORGANIZATION OF TECHNOLOGICAL ADVANCE: ENTREPRENEURSHIP AND THE MANAGEMENT OF INNOVATION PROGRAMMED INNOVATION STRATEGY FOR SUCCESS H. W. Coover THE CHEMICAL INDUSTRY: CHALLENGES, RISKS, AND REWARDS Edwin C. Holmer ENTREPRENEURSHIP AND INNOVATION: THE EEEC1KONICS INDUSTRY Gordon E. Moore ENTREPRENEURSHIP AND INNOVATION: BIOTECHNOLOGY Robert A. Swanson IMPACT OF ENTREPRENEURSHIP AND INNOVATION ON THE DISTRIBErrION OF PERSONAE COMPU rERs David A. Norman MAKING THE TRANSITION FROM ENTREPRENEUR TO LARGE COMPANY William R. Hewlett FINANCING INNOVATION CULTIVATING TECHNOLOGICAL INNOVATION William J. Perry . . . bitt 333 357 373 393 399 417 423 429 437 441 443

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All CONTENTS THE Rot E OF LARGE BANKS N FINANCING INNOVATION ... ... 453 John S. Reed and Glen R. Moreno A VIEW FROM WALL STREET Robert H. B. Baldwin . . . . . . . . TRENDS IN FINANCING INNOVATION James D. Marver ........ 467 TECHNOLOGY AND INTERNATIONAL ECONOMIC COMPETITION TECHNOLOGY AND TRADE: A STUDY OF U.S. COMPETITIVENESS IN SEVEN INDUSTRIES 479 N. Bruce Hannay GLOBAL COMPEI-rTION THE NEW REALITY: RESULTS OF THE PRESIDENT S COMMISSION ON INDUSTRIAL COMP~IVENESS . . 501 John A. Young THE NEED FOR NATIONAL CONSENSUS TO IMPROVE COMP~TmVENESS Albert Bowers . . . . . . . . . INNOVATION, JOB CREATION, AND COMPk-~-~-IVENESS . Ruben F. Mettler DANGERS ~ U.S. EFFORTS TO PROMOTE INTERNATIONAL COMPETITIVENESS George C. Eads GOVERNMENT POLICIES FOR INNOVATION AND GROWTH Ed Zschau THE JAPANESE CHAT LENGE IN HIGH TECHNOLOGY Daniel I. Okimoto THE MACROECONOMIC BACKGROUND FOR HIGH-TECH INDUSTMAL=ATION ~ JAPAN Masahiko Aoki . . . . . . . . . CAPITAL FORMATION IN THE UNDED STATES AND JAPAN . . . Ralph landau and! George N. Hatsopoutos CON~3UTORS LNDEX . . . . . . . . . . . .. 511 ... 517 . . . 527 535 . 541 . 569 . 583 623

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Positive Sum Squatly

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