Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 305
FEDERAI" Fu1IDI`IG OF RESEARCH ANTI) DE1JELOPME^NT IN TRANSPORTATION:
THE CASE OF AVIATION
David C. Mowery*
Carnegie-flellon University
The U. S . commercial aircraft industry has long beer a maj or
beneficiary of federal research and development (R&D) programs
managed by the National Aeronautics arid Space Ad~ninis Oration (NASA)
and the ensued services. I-his paper discusses the impact of federal
research investment on the technological and economic performance of
the commercial aircraft industry, focusing on the role of such
investment within a policy structure that has affected both the
supply of innovations and the demand for the embodiment o f those
innovations in new aircraft des igns . Government policy in the
aircraft industry not only has supported precommercial research in
civilian and military aircraft technologies, but also has played a
major role in supporting the diffusion of the results of that
research. The focus of this symposium is the nature and measurement
of the economic payoff to the federal government's R&D investment.
Clearly, this payoff is influenced heavily by the structure of the
institutions and policies mediating the expenditure of public funds
on research. Does the policy structure associated with federal
support of innovation in the commercial aircraft industry serve as
useful model for similar federal programs in other industries? Does
NASA represent a prototype of an industrial generic technology
research program? What factors contributed to NASA's success in
supporting technological development within ache aircraft industry
during the past 70 years? The apparent success of the aeronautics
research programs of NASA and its predecessor, the National Advisory
Committee on Aeronautics (NACA), contrasts sharply witch ache results
* Data and other important assistance were provided by Gene
Kingsbury, Department of Commerce; Virginia Lopez, Aerospace
Industries Association Research Center; Joan Winston, Congressional
Research Ser~rica; and Margaret Grucza, National Science Foundation.
This paper draws on research funded by the American Enterprise
Institu~ce and the Cen~cer for Economic Policy Research arc Stanford
Unifiers ity . Mark Kamlet provided useful comments and suggestions,
and Pamela Reyner provided secretarial assistance. None of these
individuals or organizations are respons ible for the errors,
interpretations, or conclus ions of this paper .
- 301 —
OCR for page 306
of the federal go~rernment's attempts to intervene in ache innovation
process in ache U. S. au~comobile industry.
Evaluation of the rote that federal support has played requires
some assessment of the structure of the innovation process wi~c}~in the
commercial aircraft industry. If federal programs are Deco be
successful in supporting incus trial innovation, they must be
sensitive to ache requirements and characteristics of ache innovation
process in specific industries Therefore, this paper incorporates
some discussion of the relationship between the characteristics of
ache innovation process within the aircraft industry and the structure
of federal R&D programs in the incus try .
Technological progress, economic perfo ~ Lance, and inds~s~crial
structure in the commercial aviation industry during the postwar
period are discussed first. What section is followed by an
examination of the sources of technological change in Ache industry,
including a discussion of R&O investment. then, an examination of
"he structure of pa licy toward the commercial aircraft and air
transpor~ca~cion industries considers the role of the Civil Aeronautics
Board, as well as the various public and private sources of R&D
suppor~c, in contributing to technical progress. A brief comparison
of publicly supported research in the automotive and commercial
aircraft industries is followed by a conclusion.
ILN~OVATION AND ECONOMIC PE:RFORMAN7CE
IN lisle U. S . COtMERCIAL AIRCRAFT INDUSTRY
The U.S. commercial aircraft industry has been ir~no~rati~re End
internationally competitive throughout the postwar period. In
1983, total aerospace incus cry sales ~ including missiles and
spacecraft) amounted to nearly $76 billion ($28 billion in 1972
dotiars)! more than 2 percent of the gross national product. Within
this total, sales of military and civilian aircraft, engines, and
parsecs were valued at $41. 2 billion ($15. 2 billion in 1972
dollars ~ . The contribution of aircraft to U. S . foreign trade in
1983 was important as well; exports of aircraft, engines, and parts
equaled $15. ~ billion ($7 billion in 1972 dollars), the largest
single category of U. S . manufactured exports.
The aircraft industry is a maj or investor in research and
development. Expenditures for R&D (nearly 74 percent of which were
financed by federal funds in 1983) amounted to 14 percent of the
value of 1983 shipments, a level exceeded only by the electronics
industry. The aircraft industry also has important links (through
its demand {or components and parts) with other high-technology
industries. Indeed, a central reason for the rapid technological
progress characteristic of this industry is its ability to draw on
and benefit from technological developments in numerous other
industries .4
— 302 -
OCR for page 307
The ability of the commercial aircraft industry to benefit born
technological developments in a wide range of ocher industries
reflects the fact that ~ given aircraft or engine design integrates
number of exceedingly complex subsystems, involving electronics,
hydraulics, and materials technologies. The interaction of these
individually complex systems or components is crucial to the
performance of a design, yet often is extremely difficul~c to
predict . Cons iderable technological uncertainty thus pervades the
development of a new airframe or engine design, rendering the systems
integration and des ign phases critical to the introduction of a
successful new product. Therefore, R&D investment within the
industry is dominated by the integration of components and prototype
design and testing, rather than by basic or fundamental research (see
below for further discuss ion) .
The continually changing character of the market and of
commercial aircraft technology contributes deco the length of the
des in phase in aircraft inno~ra~cion. In an effort to accou=oda~ce the
broadest possible group of purchasers, ma: or firms produce dozens of
"paper airplanes ~ prior to the decision ~co launch the development of
a specific design. S teiner cites
the excruciating pain of trying deco achieve a common denominator
among varying airline requirements. All commercial programs go
through a s imilar process and the engineers mus ~ work wi eh a
great many aired nes, notSjust the few who are most likely to
become launch customers.
In the design of the Boeing 727, this process took two and one-half
years and produced al least nine separate complete designs for the
aircraft. The design definition phase for the Boeing 767 lasted
nearly six years. Once a producer decides to introduce a specific
design, however, speed is essential. 6
Another reason for the tmpor~canca of product des ign in this
industry is ache fact that an ~ircraf~c design is produced for a
remarkably tong time. The Boeing 727 was produced for 20 years, and
the manufacture of the DC-S extended from 1957 through 1972. While
these aircraft were produced over a lengthy period, their designs
were modified in major ways, through "stretching" the fuselage to
accommodate additional passengers, or retrofitting an airframe with
new engines. Producers now devote considerable at~cen~cion to
des igning aircraft that are amenable to such s trenching . The des ign
of aircraft with a high potential. for screeching requires, among
other things, ache development of wing das igns that will allow
significant increases in aircraft payload without major
mod: Cations. In some cases, this feat may intone the substi~cu~ion
of new materials, such as composites or alumin~-lithium alloys, for
older ones in an existing wing design. Production facilities also
must be designed to accommodate variations in fuselage length.
OCR for page 308
The economic significance of stretching an aircraft design is
difficult to overstate. It allows the high fixed costs of design and
development to be defrayed over additional sales in a new market
segment; the incremental costs of stretching an aircraft design
rarely exceed 25 percent of the original development costs. And, it
allows the bulk of the cost reductions from the movement down the
learning curve in the production of the original design to be applied
to an essentially new aircraft. Thus, design decisions influence
both the success of the initial model and its potential for the
stretching that may enable a single aircraft design to serve
additional markets.
Other incremental modifications are made throughout the life of
given aircraft or engine. Such changes rely heavily on information
gained from close monitoring of operating experience after the
introduction of an aircraft. The importance of this monitoring
function and of product support ( spare parts supply and field
service) makes the establishment or existence of a global marketing
and product suppor ~ organization critical to marke ~ acceptance of a
new aircraft des ign . lye need for a global product support and
marketing network alsO7acts as a barrier co entry of new firms into
the aircraft incI~;stry.
Another source of entry barriers is the high and rap idly growing
cost of new product development. Development costs have risen
dramatically, increasing ( is constant dollars ~ at an average annual
rate of nearly 20 percent during ~ 930~1970, considerably greater than
ache average annual rate of growth in aircraft weight of ~ .5 percent.
Development of the Dou'1as DC- 3 in the 1930 ' s cost roughly $3 million
~ sea Miller and Sawers ~ . The DC - 8, introduced in 19 58, cost
nearly $ii2 million, while development of the Boeing 747, production
of which began in the early 1970's, cost $l billion. More recently,
development of the Boeing 767 is estimated to have cost $~.5 billion,
while estimates of the development costs for a new-technology,
150-seat transport range as high as $2 billion. the V2500, a new
h~gh-bypass-ratio engine, is expected to require $~.5 billion for
development. The rapid growth of such costs means that an increasing
proportion of the costs of introducing a new aircraft is incurred
during the phase of greatest uncertainty concerning market prospects
and technical feasibility.
In addition to their sheer magnitude, which is appreciated best
by comparison with total stockholders' equity of a firm such as
Boeing (in 1984, roughly $2. 7 btIlion), these high fixed casts result
in a falling short- run average cost curve . The behavior of costs in
the industry is governed by Two other factors. The first is the
relatively small production runs of most aircraft. Since the
introduction of the commercial jet transport in the early 1950's,
only 4 aircraft designs (the DC-9/MD-80 and the Boeing 707, 727, and
737) out of 23 have sold more than 600 units. The aircraft business
is not one characterized by high throughput. While, typically,
average annual production rates are low, they are subject to wide
- 304 -
OCR for page 309
£1uc~u~ ~ions, pith the peak production rate being as much as eight
.irs~es as large as the trough output rate.
A final dimens ion of cost behavior in the industry is the
importance of reductions in variable posts as a function of
cumulative output- - the well -known learning c:yre, first documented in
the production of airframes in 'world War II. Cost reduction offer
the course of an aircraf~c's production history is dr~atic--most
estimates suggest typic a doubling of output reduces uni~c.costs by as
much as 20 percent.
trHE RECORD OF TECHNICAL PROGRES S
The U. S . air transportation industry is the primary beneficiary of
technological progress in commercial aircraft. Accordingly, one
index of ache rate of technical change in commercial aircraft is the
growth of productivi ty in air ~cranspor~cation . To cal factor
productivi~cy in that industry has grown more rap idly than in
virtually2any other U. S . industry during the postwar period.
Kendrick' concluded that the average annual rate of growth in
tctal factor productivity in air transportation was 8 percent during
1948-1966~ higher than for any ocher industry. Fraumeni and
Jorgenson 3 found ~cha~c total factor productivity growth in air
transportation was exceeded only by that o f telecommunications .
Clearly, such product~vi~cy growth reflects more than innovation
in commercial aircraft Air traffic control improvements,
insertions in ground-based navigational equipment, airfie Id
expansion and moderniza~cion, and other enhancements o f the overall
air transportation network, many of which were financed by the
Federal Anacin Administration (FAA), have played major roles also.
Therefore, analysis of technological progress in commercial aircraft
requires the use of indices of aircraft perfo seance, rather than
coccal factor productivity measures for the tndus fries employing
aircraft.
Two such indices of commercial aircraft perfo~-=anc~ are
available: seats multiplied by cruising Speed (AS*VC), and direct
operating costs per available seat mile. While the two measures
do not translate into an index of total factor productivity, they
have the advantage of being available separately for different
aircraft designs. Table ~ displays the evolution of the two aircraft
performance measures for a sample of piston and jet engine aircraft
during 1938-1983. With the introduction of successive generations of
aircraft, AS*VC has risen, and costs per available seat mile ~ ~ n
1972 dollars) have fallen. the sharp drop in operating cages
represented by the OC-3 can be seen clearly in the table.
Another maj or drop in seat-mile costs came with the introduction of
the wide -body transpor~cs ~ such as the Boeing 747', the Lockheed
L- 101l, and the McDonnell Douglas DC- 10), incorporating large,
- 305 -
OCR for page 310
TABLE 1 Measures of Aircraft Performance. 1938-1983
fat A, ~~ 1
C
~—_47
A. O. ~ .
97. ~11 ars
9_~3,
10. 8
OC-+ ~ t94`j' Foci; ~ t9~9' 7. 47
—,`:? ~19~-) 94,j,j ~ i9=,j,
L7C ( 19~4) _J_tj') · ( 1959) _ Tic
~—7~7 ( thy) 7_~:)`jC, ( 19~9) _. a' ~
—727—I (,Y~) - 13~.
~_, -, - 2,;,,;, ~ IS_ ) ~—,(1t}~;, ~ . &~
~—7_~7 - t'tj ( 199., 4'`;)00
5-747 ( t963. - .) ~1 St~tjO
1 c At:,
B-757 ( 1993) 77-S:,':) ~ . '4.
,
E-767 ~ 198~) 91.~O t. 65
OC-9 ( 1 966 ) I. 68.
OC-9-80 ~ 198~) 6~100 I. 59
~ continued ~
.
.
306 -
OCR for page 311
·.~L~ ~ ~ cornea
l:C3-b' ( 1'78~) 86604
OC-3 ( 1 95~')
1 o SO
20 23*
D121~-10 ( 198-) 131290
10 - 7
L-~1 1-Si`:~O ( t~S ) 11~2t:~O
1.74
-~` ,<~-94 ( 1 9153- ) 84 1 2C,
2. 73
F: rst Year of aperat: an.
Data for pre- 1983 period taken from Rosenberg et al .
Technological Change and Produc~ivi By Growth in the Air Transport
Indusery. NASA Technical Memoranda 78505. Washington, DC:
National Aeronautics and Space Administration, 19 7 8 ~ Data for 19 8 3
taken from Aircraft Operaring Cose and Performance Re?ore, Volume
7 . Washington , 1: C: Civil Aeronautics Board , ~ 9 84 .
2 Data for pre-1983 period taken from R. Miller and 3. Sawers.
The Technical Developmen~c of Modern Aria con. London: RoutI~dge
& Kegan Paul., 1968, Appendix T. Date for 1983 Fallen from Citrti
Board, op. civic., above.
Aeronauts
_ 307
-
OCR for page 312
high-bypass-ratio j et engines . Awhile the latest generation of
aircraft, including the Boeing 757 and 767 and the Airbus A300,
exhibit higher direct operating costs per avail able seat mile than
did the first wide-body aircraft, this is an obvious result of the
fact that fine number of available seats in these aircraft is much
smaller than is true of the early wide-body transports.
Cruis ing speed and capacity (ASPIC ) declined sharp ly with the
introduction of four- engine transports t~ediat~ly after World War
II, and they dropped further still with ache introduction of
j et-powered transports . Typically, speed and capacity gains have
been obtained at the expense of operating costs; only the first
wide-body transports combined major increases- in available seat
Precocity with significant declines in direct operating costs per sea.
mile. This record of performance improvements in commercial aircraft
can be summarized ~n the estimate by Rosenberg et al. 6 that
between the appearance of the monocoque airframe in 19 3 3 and the
introduction of the 747, costs per seat mite dectinet7tenfold, while
passenger capaci~cy and speed rose by ~ factor of 20.
voucher measure of technical progress estimates the resource
savings associated with improved technical performance. A
calculation of the " social savings " resulting from technological
progress in commercial aircraft compares the costs of air
transportation using ache 1983 U. S . fleet in scheduled domestic
service with the costs; associated with the exclusive use of OC-3' s in
that service. lo lathe choice of the DC-3 for comparison is a fairly
conser~rati-ve one, inasmuch as that aircraft was characterized by low
operating cos Is relative deco other. contemporary designs; moreover, by
1939, ache base year for the comparison, operating costs had declined
from the levels experienced immediately after the introduction of the
aircraft in 1933. In 1983, on the other hand, both ache Boeing 767
and 157 were skill relatively new aircraft ~1983 was the first full
year of operation for the 757 ~ and, therefore, exhibited operating
costs above then r long-run level. In additions of course, the
substitution of the 21- seat 1)C- 3 for the current fleet of larger
aircraft almost certainly would produce gridlock at ache nation's
airports due to the huge increase in flights, landings, and takeoffs
chat would be necessary. Moreover, the value of more rapid travel is
ignored in this calculation. lathe calculation may somewhat overstate
ache acted savings, however, inasmuch as the higher real costs of
transporting current traffic toads in a fleet of DC-3's would be
reflected in much higher prices for air transportation and,
consequen~cly, lower levels of demand. Nonetheless, the calculation
suggests that the 1983 dolce of passenger traffic would cost nearly
$24 billion (in 1972 dollars), rather than the current costs of more
than 65. ~ billion (also in 1972 dollars) . According to this measure
of technical progress, then, innovation in commercial aircraf~c has
saved more than 75 percent of the cost of achieving todays Clever s of
domestic air passenger traffic volume with 1939 equipment.
OCR for page 313
An additional feature of technical progress in aircraft Is
revealed in fable 1, which presents operating costs ~ in 1972 dollars
for both ache year of introduction and 198 3 for such aircraft as the
Boeing 727, the DC- 8, and the DC- 9 . An ~ mportant element of
technical change and performance improvement in co~erc ial aircraft
occurs during the operating life of a given airfare design, in the
"best phase' of the i nnovation process ~ see Enos and Rosenberg en
al O for further discuss ton) . For the Boeing 247, the first
monocoque passenger airframe des ign, seat-mile operating costs
decl ined by more than 25 percent during 19 3 3 -1940 . The Lockheed
Electra L- 188, a four-engine turboprop, exhibi~ced an annual rate of
cost decline of roughly 7 percent during tics period of service, while
operatin,2costs for the Boeing 707 declined at an annual rate of 8.7
percent . Successive stretches of the fuselage of the DC- 8, as
well as modifications in the wing design, increased AS*,IC from
6 2 . 50O2 for the original DC - 8/DC - 10 des ign to nearly 90, 000 in
i983. 3 Similarly, direct operating costs for the DC-9 declined by
nearly 50 percent during 1966-1983, due to a succession of stretches
of the fuselage and the employment of new, fuel-efficient engines.
These operating cost reductions reflect modifications in aircraft
des ign and improvements in aircraf ~ utilization and maintenance, bo th
of which incorporate important elements of leaving in use (see
Rosenberg for further discussion). Operating cost reductions
depend heavily on the gradual accumulation of knowledge during flight
operations about the-2erformance characteristics of an airplane and
its components. Fo.r example, it is only through extensive use that
detailed knowledge is developed about engines' maintenance needs,
minims servic ing and overhaul requirements, and the like .
Such learning by using is significant for several additional
reasons. It is not unique to commercial aircraft, but characterizes
a number of complex capital goods and even software technologies. In
addition, it raeans chat ache product support networks of established
producers of airframes and engines are important sources of
innovations. Careful monitoring of aircraft performance is necessary
so that subsequent models of the same design can incorporate the
lessons learned from the operating experiences of early models.
Finally, much of ache learning by us tng in ache aircraft incus try is an
excellent example of the ways in which an industry organizes to take
advan~cage of "user-ac~civen patterns of innovation, as discussed by
von Hippel. 5 Airlines, along with technologically sophisticated
purchasers in other industries, are ma; or sources of suggestions for
changes in aircraft des ign, maintenance, and even production
practices. The integration of after-sales maintenance and marketing
data with design engineering that ache films in this industry have
developed to take advan~cage of their users' experience is an
excellent example of ache ways in which Ache characteristics of this
industry' s product technology have influenced the org~niza~cion of
R&D .
- 309 -
OCR for page 314
R&D I~1EST!£ENT
This section focuses primarily on the support of commercial aircraft
R&D by botch public and private sources. However, eve commercial
aircraft indus~cry' s innovative performance has been aided by
additional factors, including innovations in other industries, such
as materials and en ectronics g and the ability of aircraft firms to
exploit operating experience (nlearning by yoking," noted above) as a
source of incremental technological change. To assess the
significance and composition of the overall federal research
investment in commercial aircraft, this section reviews ache sources
of financial support for aircraft in;'ova~cion, including ~ ndus~ry-
f inanced R&D, military procurement and research funding, and federal
funding for research in civil aeronautics and propulsion
techno] og' es.
DATA SOURCES AND CONSTRUCTION
Analysis of it&l) investment in ache commercial aircraft industry ~ s
hampered by ache absence of consistent time series da~ca. The modest
size of Ale pre-945 R&D investment, the substantial position shift
in the technology of commercial aircraft as piston engines were
replaced by turbojets, and the absence of reliable data for that
period have resulted in the omission of the pre - i945 period from this
discussion. Construction of data on R&1) investment during 194:-1983
relied on two inconsistent sources. R&D expenditures for i945-1969
are well documented in the study by Booz, Allen and Hamilton Applied
Research, Inc., for the joint NASA/Depar~ment of Transportation
analysis ,; technological change in the commercial aircraft
industry. This source is particularly useful because of its
detailed breakdown of aircraft industry R&D expenditures by source,
by research activity (for example, basic versus applied), and by
functional area of research (for example, p~gpuision). The data were
discussed at length in Mower~gand Rosenberg arid were employed in
modified form in Teriecky; 's analysis of productivity growth in
air ~cranspor~catton. The Booz-Allen data also are useful because of
the ir separation of incus try ~ financed research expend) Scores wi Chin
the aircraft industry from expenditures covered by federal
reimbursements for military procurement and development contracts.
Prior to t959, such reimbursements were restric~ced to allowable
overhead charges on military research, de~re3-opment, and procurement
contracts. However, after 1959, reimbursement was allowed for
"independent R&D" (IRKS) as a part of the overhead costs of Military
contracts (see Reddy, Levy and Teriecicy;, and Terieckyj 3 ) .
While it represents an important source of federal support for
industrial research in fines producing commodities for the armed
forces, JR&I) typically is reported by those firms to the National
Science Founda~cior~ (tISF) as industry- financed research investment .
- 310 -
OCR for page 315
Me pus I- 1069 data are less detailed and lack the functional and
o ther disaggregated breakdowns provided in the Booz -Allen study .
Data on the Department of Defense (DOD), NASA, and other federal
research support for aeronautics were taken from Aerospace r aces
and Figures . Industry- financed R&D expenditure data after 1970
were taken from the product field data compiled by NSF on the
"aircraft and parts" industry (SIC 372~. 4 The NSF data have
several problems- - they do not include basic research activity, and
the JR&D reimbursements received by firms in the industry presumably
are reported as industry- financed research investment ~ To deal with
these problems, the reported basic research expenditures for ache
aerospace industry (a broader category than aircraft and parts ~ were
added Taco the figures, after which the sun was deflated by the average
share of reimbursed R&D expenditures for industry- financed and
industry-reimbursed R&D investment for the 1945-1969 period, as
reported in the Booz-Allen study. The excluded portion of
" industry- financed" R&D investment was added to reported militias R&3
expend) Cures .
The result of these various procedures is a time series that is
imperfect but consistent within the 1945-1969 and 1970-1982 periods.
Table 2 and Figure 1, respectively, contain tabl,lar and graphic
representations of these R&D series, which are reported in terms o f
1972 dollars . Estimates of ache c~uiati~re R&D investment from pub kc
and private sources also are reported in Table 2.3 Total R&D
expenditures from all sources rose by more than 224 percent in real
terms, from $963 million in 1945 to roughly S3 ~ billion in 1982.
Bill tary R&D investment grew rapidly in the aftermath of World Car II
and the Korean War mobilization, reaching ~ plateau in the 1950's and
early 1960's. Following 1962-1963, however, military research
funding declined through the late 1960' s. Hili~ca~ research funding
increased from $820 million in 1945 to $2. ~ billion in 19B2--if
anything, this lancer figure may overstate total military research
funding, as a result of ache effor~c to adj use ache pose- 1969 figures
for T R&D . Throughout the pos twar period, the military portion of
total R&D expenditures never fell below 65 percent.
Throughout the postwar period, NASA research funding grew at ~
very modest rate, and it has remained essentially constant since the
late 1960' s . The diminishing importance of NACA research funding in
aircraft also is apparent in Table 2. Whereas, in 1945, NACA
research support exceeded industry- financed industry R&1) investment,
by the mid-1950's, NACA accounted for less than 20 percent of
infuse financed R&D expenditures. By ache late 1970's, however, as
industry-financed R&D Declined in real hems, the relative importance
of NASA funding increased substantially, even as the rate of growth
of that funding declined. Expenditures by the Atomic Energy
Commiss ion supported research on nuclear propuls ion of aircraft and
space vehicles, while the Federal Aviation Administration supported
work on avionics and ache supersonic transport during the 1960' s.
- 311 -
OCR for page 340
NOTES AND REFERENCES
This section draws on discussions in D. C. Mowery and N.
Rosenberg. "=e Commercial Aircraft Industry. ~ In Governmen~c
and Tec.—ice ~ Progress: A Cross-Indus~cry Comparison. Edited
by R. R. Nelson. New York: Pergamon Press, 1982; and 1) . C . Mowery
and N. Rosenberg. Commercial Aircraft: Cooperation and
Competition Between the U. S and Japan, n Cal if ornia Management
Review, (~985~. ~
.2 . Al 1 f igures are from Aerospace Industries Association.
Aerospace Faces and Figures 1984/1983. New York: McGraw-
Hill, 1984.
3. A 1981 study of aeronautics R&D by the Office of Science and
Technology Policy concluded that, ~ . . . the aeronautics industry is
characterized by high research intensity and ~ wide technology
base. That is, aeronautics depends on R&T (Research and
Technology) performed within the aeronautics industry and on R&T
performed by virtually every other high-~cechnology industry.
See Aeronautical Research and Technology Folksy, Volumes I and
II. Washington, DC: Office of Science and Technology Pot icy,
1982, p. V-28.
4. A stray by the Ir~ernational Trade Administration. found that the
aircraft industry ranked third among U.S. manufacturing
industries in 1980 in its level of ~ embodied research intensity,
that is, R&D expenditures incorporated in purchased inputs. The
aircraft industry was exceeded only by missiles, spacecraft, and
electronics in this measure. See U. S. International Trade
Administration, Department of Commerce . An Assessment of U. S .
Compeci riveness In High Te~hno logy Industries . Washington,
DC: U. S . Government Printing Office, 1983, p . 42.
J . E. Steiner. "How Decisions Are `Hade: Ma; or Considerations
for Aircraft Programs. ~ American Institute of Aeronautics and
Astronautics, 1982 Wright Brothers Lectureship in Aeronautics,
Seattle, Washington, August 24, 1982, p. 14.
"Uben tile market is ready, the successful. manufacturer may have
to go. The eventual prize sometimes goes to the company
which is fast on its feet.... Ibid., p. 3l, emphasis in
original.
Moreover, the high fixed costs of supporting such ~ network
create ~ strong incentive for producers to market the widest
possible range of a~rcraf ~ and engines . Potential purchasers are
influenced also by ache lower maintenance cos ts and spare parts
inventories associated wit h standardization around the products
of a s ingle manufacturer of airframes or engines .
- 336 -
OCR for page 341
i. R. d. .~i~ let and D. Sawers. ~,'~e Tec.~ica: Development of
Code Aviaric.~. London: Route edge & Kegan Paul, 1968, p.
267 .
9. Partly in response deco these dramatic increases in development
costs, the subcontracting of production of new aircraft and
engines has grown substantially in recent years, and increas ingly
involves foreign files as partners of ma: or U. S . aircraft and
engine producers. The role of Japanese firms as partners in
recent multinational j oint ventures in airframe and engine
development is discussed in Mowery and Rosenberg, 1985, op. cit.
~ see Reference ~ above ~ .
10. See A. A. Alchi an. "Reliability of Progress Curves in Airframe
Production, " S:conomerrica, (1963~; and A. Hirsch. "Fir
Progress Ratios, " Economerrica, (1956) .
ll. As McCulloch has noted, the high fixed costs that characterize
the aircraft industry' s cost structure, as well as the strong
learning effects, can glare rise to pricing below average costs.
See R. McCulloch. " International Compe~ci~cion in High-Technology
Industries: The Consequences of Alternative Trade Regimes for
Aircraft. ~ Presented at the Na~ciona~ Science Foundation Workshop
an the Economic Implications of Restrictions deco Trade in High-
Technology Goods, "Washington, DC, October 3, 1984. In addition
to such "predatory pricing, n of course, ache presence of s Prong
learning effects means that support or protection of a domestic
market can move domestic farms rapidly down the Or leas fling
curves, effectively operating as export subs idles ~ in the fashion
outlined by Krugman . See P . U . Krugman. n Import Protection as
Export Promotion: Interna~cional Compe~cition in the Presence of
Oligopoly and Economies of Scale." In Mor~opo~ise~c Competition
and InCernational Trade. Edited by H. Kierz~cowsici.
Oxford: Oxford University Press, 1984.
12. J. W. Kendrick. Postwar Productivity Trends in the tanned
Stares 1948-1969. New York: Columbia University Press, 1913.
13 . B. W. Cravens and 1). Jorgenson. "The Role of Capital in U. S .
Economic Growth, 1948-76. n In Capital, Efficiency, and
Growth. Edited by G.~. von Furstenberg. Cambridge, MA:
Bat linger, 1980.
14. These measures are employed by Miller and Sawers, op. cit., and
by N. Rosenberg, A. Thompson, and S. Belsley. Technological
Change and ProducritJicy Growth in the Air Transport Industry.
NASA Technical Hemor~ndum 7 8505 . Washington, DC: National
Aeronautics and Space Administration, 1978.
15 . As Phillips noted, the seat mile costs of the DC- 3 aircraft were
"so much lower than those of aite~ate aircraft that even with a
- 337 -
OCR for page 342
.el~t,-vely low load factor its passenger mile costs were often
lower than those for other planes. 't See A. W. Phil' ips.
Technology and Mariner Struceure. Lexington, MA: Heath,
1971.
16 . Rosenberg, Thompson, and Bels fey, op . cit . ~ see Reference 14
above ~ .
7. Improvements in propulsion technology have been responsible for
much of the progress in aircraft performance. Fuel consumption
per hour per pound of thrust has dropped by at least 30 percent
during the postwar period ~ see Boeing Commercial Airplane
Company, Document B- 7210- 2 -418, 1976 ~ p . 41) . Moreover, as
temperatures have inc. eased and new materials have been employed
the thrust- to-weight ratio of modern turbofan engines has
increased dramatically- -by nearly 50 percent during l960- I98O .
See National Academy of Engineering. The Coruperi rive Scacus of
the U. S. Civil Aircraft Manufacturing Industry. Washington,
DC: National Academy Press, 19 BS ~ p . 123 .
18 . The genera ~ concept of n social savings n is discussed extens ive ty
in R0 W. Fogel. Railroads and American Economic Growth:
Essays in £conometr~c Riscory. Baltimore: Johns Hopkins
University Press, 1964; and critically evaluated in P. A. David.
"Professor Fogy On and Off ache Rails. n In Innovation,
Technica] Choice,- adze Growth. New York: Cartridge University
Press, 197S.
Direct operating costs per seat mile for the OC- 3 in 1939 were
taken from Phillips , op . cit ~ see Reference 15 above); direct
operating costs per seat mile and available seat miles for the
1983 fleet were taken from Citric Aeronautics Board. Aircraft
Operating Cose and Performance Report. Washington, 3)C: U. S .
Go~rers~ment Printing Office, 1966-'984, volumes I-XVII. The
calculations were based on available seat miles, rather than
actual revenue passenger miles flown. Therefore, they tgnora
possible differences in load factors between the 1939 and 1983
aircraft fleets.
20. J. Enos. Petroleum Progress and Profits. Cambridge' MA:
MIT Press, 1962.
21. Rosenberg, Thompson, and Belsley, op . cit . ~ see Reference 14
ate ova ~ .
22 . For additional discussion, see Rosenberg, Thompson, and Belsley,
op . cit . ~ see Reference 14 above) or Mowery and Rosenberg, 1982,
op. cit. (see Reference ~ ablate).
23 . AS*t7C figures for the DC- 8/DC- 10 are taken from Rosenberg,
Thompson, and Belsley, op. cit. (see Reference 14 above); that
for 1983 is from ache Civil Aeronautics Board, op. cit. (see
- 338 -
OCR for page 343
Reference 19 above) . The 3C- 8 airframe has proven to be so
rugged that the original engines recently have been replaced we Ah
fuel-efficient C~S6 engines, reducing the aircraft' s operating
costs and extending its operating life greatly. Indeed, the ease
with which tne DC- 8 can be stretched and re -engined has led some
observers to the conclusion that the decision of McDonnell
Douglas to close the production line and destroy the tooling for
the DC- 8 was exceedingly unfortunate ~ for example, see W. H .
Demisch, C. C. Demisch, and T. L. Concert. The Jetliner
Business. New York: First Boston Corporation, 1984~.
24. Nathan Rosenberg. "Learning by Using.' In Inside the Black
Box: Technology in Economics. Edited by Nathan Rosenberg.
New York: Cambridge University Press, 1982.
25. E. van Hi?pel. The Dominant Role of Users in the Scientific c
Instrument Innovation Process. n Research Policy, (1976) .
26. These sources of technical change are discussed at greater length
in Mowery and Rosenberg, ~ 982, op. cit. (see Reference ~ above) .
21. Boon, Allen and Hamilton Applied Research, Inc. A Historical
Study of the Benefits Derived from Application of Technical
Advances to Cor~ercia] Aviation. Prepared for the j oint
Department of Transportation/Na~cional Aeronautics and Space
Administration Ci-~'il Aviation R&D Policy Study. Washington, DC:
U. S. Government Printing Office, 1971.
28. Mowery and Rosenberg, i982, op. cit. (see Reference ~ above).
29. N. Terieckyj. "The Time Pattern of the Effects of Industrial R&D
on Productivity Growth. ~ Presented at the Conference on
Interindustry Differences in Productivity Growth, American
Enterprise Institute, Washington, DC, October It- 12, 1984 .
30. J. V. Reddy. The IT Program of the Department of Defense.
Peace Studies Program Occasional Paper No . 6 . I thaca: Cornell
Uniters ity, 19 7 ~ .
31. D. W. Levy and N. Teriecky]. "Effects of Government Red) on
Private RED In~restment and Production: A Macroeconomic
Analysis, ~ Be21 Journal of Economics, (1983) .
32. 'reriecky], op. cit.
33 ~ Aerospace Industries Association, op . cit. ~ see Reference 2
above ~ .
34. Chile these product field data also report federally funded
research, the category is restricted to publicly supported R&D
carried out within incus try and, therefore, understates
- 339 -
OCR for page 344
35 .
cons iderably the to Cal public R&D inves-=ment . lathe NSF data are
collected only for alternate years after 1977. =e 1978, 198O,
and la82 entries for industry- financed R&D in Table 2 therefore
were based on linear interpolations.
These "R&D capital stock" estimates were not depreciated for
several reasons . Pres~mab By, the knowledge resul~cing from the
public research investment does not depreciate, nor is its value
subj ect to erosion through spillovers to competitors, as is
assumed frequently in analyses of priorate Ret) tnvesment (see,
for example, H. G. Grabowsict and O. C. Mueller. "Industrial
Research and Development, Intangible Capi~cai Stocks, and Firm
Profit Rates, n Be11 Journal of Economics, (1978) ~ . rhe
physical research plant employed by NASA and the al wed forces
does depreciate prest'mably--however, obtaining a reliable Dime
series for the physical capital portion of this public investment
proved impose ible . As for the private R&D inves tment s Cock, were
this analysis considering the "~&I) capital stock" from the point
of view of an ~ ndi~ridual fine, deprecia~c~on of this stock would
be appropriate . However, inasmuch as this s Cock is be ing seed
across all of ache firms in the industry, ache n sp i iloVer"
j Ossification for depreciation of this component of the R&D
capital stock also seems weak.
36 . R. R. Nelson. "Government S timulus of Technological Progress:
Lessons from Amend can History, " In Government and Technical
Progress: A Cross-Industry Comparison. Edited by R. R.
Nelson. New York: Pergamon Press, 1982 -
37. R. R. Nelson "Assessing Private Enterprise: An Exegesis of
Tangled Doctrtr~e, ~ Be]] Journal of Economics, (198-L) .
3 8 . See ache report o f OS ~P on f ederal ly supported aeronautics R&D,
op . cit . ~ see Reference 3 above) .
3 9 . S tatement of Or . Joseph Ames, NACA Chairman, before the
President's Aircraft Board, 1925.
40. "By a comprehensive survey of the net efficiencies of various
engine nacelle locations, the optimum position in the wing was
found. This N.A.C A. engine location principle, together with
other refinements' had a revolutionary effect on military and
commercial aviate on ache worn' over. It changed military aviation
tactics, made long- range bombers pass ible, and forced the
development of higher speed pursuit planes. In the commercial
field it permitted the speeding up of cruising schedules on the
air lines from i20 miles per hour of ache Fords to the lB0 miles
per hour of the new Douglas planes. The overnight
transcontinental run became possible and the air lines vastly
increased the, r appesi to ache public.. Even in the midst of the
depression, air line traffic boomed. n See J. C. Hunsaker.
- 349
OCR for page 345
Research in Aeronautics. n In ScLtiona~ Resources Placr.ing Board.
.Researcn--A National Resource. Washington, DC: U. S.
Government Prin~cing Office, 1941, p. 139.
41. "The old NACA was s'rictly a research, test, and advisory
organization . I t built, modified, and owned few aircraft and in
the main only tested aircraft submi Ted to it for evaluation, or
'debugging. ' " See Legislative Reference Service. Policy
Planning for Aeronaurical Research and Development. Prepared
for the Senate Committee on Aeronautical and Space Sciences, U. S.
Congress. Washington, DC: U. S. Government Printing Office,
1966, p. 107.
42 . E. W. Cortstan~c. The Cretins of the Tu~boje~c Revolur ~ on .
Baltimore: Johns Hopkins University Press, 1980.
43 .
Me National Research Council' s surveys of industrial research
laboratories before and after World War lI convey some idea of
the scale of the expansion of the aircraft industry' s in-house
research capabilities. The in-house research staff at Douglas
Aircraft grew from 22 in 1940 to ti: in 1946; the research staff
at the Glenn .Mar~cin Company grew from 42 to 76; Loclcheed's grew
from 10 to 314; Consolidated Vultee's grew from 12 to 195; United
Aircraft, which included Pratt and Whitney, Hamilton S tandard,
and Sikorsky, increased its research staff from 80 to 732; and.
Curtiss-Wright expanded its research employment from 14 in 2 940
to lS9 in 1946. These figures are all the more im?ress:,re ~ n
view of the fact that these firms' military aircraft sales,
especial y to Britain and France, had already expanded
considerably by 1940. See National Research Council.
Indus Aria ~ Researc.h Laboratories of cbe lJni ted Stares .
Washington, DC: National Research Council, 1940, 1946.
44. Legislative Reference Service, op . cit ., p . 20 ~ see Reference 41
above ) .
. Committee on NASA Scientific and Technological Program Reviews.
Aeronautics Research and Technology: A Review of Proposed
Reduc Lions in the FY 1983 NASA Program. Washington, DC:
National Research Council, 1982. lye other components of ache
NASA aeronautics budget are "Construction of Facilities " and
"Research and Program Management . n
46 . Miller and Sawers, op . cit ., pp . 255 - 256, described the
Manufacturers' Aviation Association (MAA) licansir~g system as a
system Sunder which all aircraft manufacturers agreed to bet all
their competitors use their patents. No member can have a patent
monopoly on any inventions which his staff can make, or even for
any invention t}~.at he may license from an outs ide inventory . If
he takes an exc lus ive license, the patent has to be available to
the other members of ache MAA; but the original licensee can claim
341 -
OCR for page 346
Chat he should be granted compensation by the other licensees.
Manufacturers apparent' y bell eve that it is a good bargain to
give up their right to a patent monopoly in return for the
protection from litigation wash other companies in the incus try
that the right to use their patents brings " (pp . 2SS - 256 ~ .
Roland discusses the - origins of the cross- 1 icensing agreement.
See A. Rot and. Model Research: The National Advisory
Commi tree for Aeronautics, 1915-58 . Washington, DC: U S .
Government Printing Office, t985, pp . 37-43 .
. J. HirshisifPr. "lathe Private and Social Value of Information and
the Reward to Inno~ra~cion, n American Economic Review, (1971) .
. Nelson, op. cit.
49. See the "Draft Interim Report of the Ad Hoc Tnfo~maL Subcommittee
on NASA Aeronautical Projects," NASA Aeronautics Advisory
Committee, 1983. These estimates should be viewed as
i llustra~c1 ve of general orders of magnitude ~ rather than precise
figures. In addition, of course, any assessment of the net
benefits resulting from the in~restmen~c in NASA research
infrastructure mus ~ consider the returns from alternative
inve s tments o f pub ~ i c funds .
50 Indeed, the 707 airframe design followed that of the KC-135 so
closely that =he -first 707 to be "rolled out" of the Seattle
factory did not have windows in the fuselage.
:l . Miller and Sawers, op . cat., pp . i93- 194.
52. National Academy of Engineering, op. cit., p. 101 (see Reference
' ? above) .
. Ibid. p. 102.
54. For additional discussion of Japanese cooperative R&I) programs,
see D. T. Okimoto. "Pioneer and Pursuer: The Rote of the State
in the Evolution of the Japanese and American Semiconductor
Industries. n Occasional Paper, Northeast Asia-United States
Forum on International Policy, Stanford University, 1983; and IS.
J. Peck and A. Gato. "Technology and Economic Growth: lathe Case
of Japan," Research Policy, (19811. The analogy between U.S.
aeronautics R&D and these Japanese programs is developed in
greater detail in flowery and Rosenberg, 1985, op. cit. (see
Reference ~ above).
55. P. A. Oavid. "Technology Diffusion, Public Policy and Industrial
Competitiveness. ~ Presented at the National Academy of
Engineering Conference on Economics and Technology, S tanford
University, March IB- 20, 1985 .
- 342 -
OCR for page 347
6 . ~ . C . .Mot~ery . " Economic Theory and Government Techno logy
Policy, n Policy Science, ~ ~ 983) .
.
57. The federal government has played a critical rot e in the
evolution of the al rline industry's structure throughout the
industry's history. Divestiture of airlines by aircraft and
engine manufacturers was mandated by law in 19 34, following a
series of congress tonal in~restiga~cions of political influence in
mail contract awards . Those awards during ache 1920' s had been
employed in part to build up large transcontinental carriers,
which in Curie would provide a market for advanced aircraft. For
further details, see Mowery and Rosenberg, 1982, op . cite . ~ see
Reference 1 above ~ .
58 . W. Jordan. Airline Regulation in America . Baltimore: Johns
Hopkins Un_~rersity Press, 1970, ?. S3.
59. T. Keeler; "Airline Regulation and Economic Performance, " Bel
Journal of Economics, (1972), p. 421
60. G. W. Douglas and J. C. Miller. Economic Regulation of
Domes tic Air Transport . Washington , DC: Brookings
Institution, 19 74 .
51 . General Ace ounting Off ic e . Lowe ~ Airy ~ He Cos As Per Passe.~2ge -
Are Possible and Would 2-stllc in Lower r arcs. r-ashirlgton, DC:
IJ. S . Government Printing Office, 1977.
62. Keel er, op. cit.
63. Ibid.
64. Fogel, op. cit. (se" Reference ~ 8 abjure) .
6~. E. Mansfield et al. The Production and Application of New
Industrial Technology. New York: W. A. Norton, 1977.
66. We invaluable Civil Aeronautics Board series begins only in
196S .
6 7 . R. C . Len=, J . A . Machnic, and A . W . Elkins . l.he influence of
Aeronautical R&D Expenditures lJpon Ohm Productivity of Air
Transportation. Dayton: University of Dayton Research
Institute, 198~
68. Mansfield et at., op. cit.
69. General Accounting Office, op. cit.
70. Mansfield et al., op. cit.
— 343 —
OCR for page 348
7i -
4.e adapts tion and application of military research inves Moment to
commercial aircraft also requires a substantial investment in
incus Cry - f inane ed res earch .
72. Terleckyj, op. cat. Terlec~rj 's analysis fails deco account for
publicly financed research not performed in industry. In
addict on, in view of the fact that his estimates of the
embodiment lag were computed for the 1959~1976 period, one during
which CAB regulation presumably minimized such lags, his
estimates icky be Coo low for the post- 1978 period.
3 . The study by Phillips, op. cit., of the demand by trunk airlines
for transports found that controlling for other performance
characteris tics, regardless of the national identity of the
producer, foreign commercial ~cranspor~cs were less attractive than
those manufactured in ache United States to the U. S . domestic
airlines during the postwar period (p . 102 ~ .
74 . Krugman, op . cite . (see Reference t: above ~ .
Once again, the similarities wi Oh Japanese industrial policy,
which in many industries has worked initially to develop
competitive firms serving domestic markets that are formally- or
informally protected, followed by the movement of such firms co
international export markets, are very strong, an argument
developed further in Mowery arid Rosenberg, 1985, op. cit. (see
Reference ~ above ~ .
76. flowery, t983, op. cit.
77. Ibid.
78. D. C. Mowery. "Firm Structure, Government Policy, and eke
Organization of Industrial Research: Great Britain and the
United States, 1900 1950, n Business Sorer Review, (] 984) .
79. The unusual combination of high concentration and occasional
dramatic changes in the market shares of firms in ache commercial
aircraft industry noted by Phillips, op. cit., also may reflect
ache existence of an indus~cry-wide knowledge base that was
accessible by a number of different fines. Rather than a single
firm establishing on unchallengeable technological lead, ache
industry has witnessed recurrent technological "leapfrogging" of
one firm by another. While Phillips attributes this tendency to
the existence of a substantial exogenous research effort funded
by NASA and the military, the ease with which incumbent finds
could tap that external knowledge pool also has been important.
80. Teriecicyj, op. cit., suggests that this absorption function of
self - financed research investment within the industry may explain
ache apparent lack of sta~cist~cal significance for publicly funded
· 346 _
OCR for page 349
research ~ r.vestment in explaining productivity growth in the air
transportation industry: "It is also possible that ache private
R&D expenditure es made to adapt the results of government R&D Deco
private products already incorporate the effects of governmen~c
R&D. The military R&D which is represented in the government and
to a large degree in the total R&D expenditure for aircraft and
parts by itself does not produce products sufficiently developed
for private use . " (p . 32 ~ .
8 ~ . W . M . Cohen and D . Le~rinthal . " The Endo gene ~ ty ~ f
Appropriability and Red) Investment. n forking paper,
Carnegie -Mellon L'ni~rers i By, 19 8 S .
32. Rosenberg, op. cite.
8 3 . S . J . Kline and N . Rosenberg . "An O~rerv~ew of Innovation . n
Presented at the National Academy of Engineering Conference on
Economics and Technology, Stanford University, March 18-20, 1985.
84. L. J. Bite. "The Motor Vehicle Industry. n In Government and
Technical Progress: A Cross-Induscry Anai~sis. Edi ted by R.
Nelson. New York: Perg~mon Press, 1982.
. L. J. Chide. ~.Au~omobile Emissions Control Policy: Success
Story or wrongheaded Regulations? " In Government, Technology,
and the Feature of ire Automobile . Evinced by ~ . H. Ginsburg and
W. J . Abernathy. New York: McGraw-Hill, 1980.
. Ibid.
a
8 7 . n ~ T ~ he standards approach encourages coil us ion among the
companies. Though the incentives facing the individual company
might lead it to make an all-out effort, it is clear that the
incentives for the industry jointly are to delay. To the
extent that the industry presents a united front and says that
the technology is not available, brinicsmanship becomes yet
easier, delays in standards enforcement become yet more certain,
and public relations advantages become yet greater. The
policymakers and ache public are dependent to a great extent on
the companies Co inform them as to the state of technology and
its feasibility.... Delaying the development of emissions-control
technology and delaying the reporting of information about that
techno~ ogy are clearly in the industry' s j oint interests . n
Ib id., p . 406, er~phas is in original .
88. lathe recent report of the Office of Science and Technology Policy,
op. cit. (see Reference 3 above), adopts this view of NASA's
. role.
34-
OCR for page 350
89. `ToT1 and Owen suggest Chat economic analyses of the
dis tributional and efficiency impacts of regulation p rayed a
maj or role in a number of deregulatory policy episodes of the
1970's. See Roger G. Noll and Bruce M. Owen. "The Political
Economy of Deregulation: An Over''iew. " In The Political
Economy of lDeregula~ion. Edited by Roger G. Noll and Bruce M.
Owen. Washington, DC: American Enterprise Institute i 1983 .
346 -
Representative terms from entire chapter:
aircraft industry
