, . - . „ . . - - . , . _ -r-s^ ' o 1, 19S1 I l i E C H A N U J N G T I D E : F E U E U A L SUPt-oBT OF CI V I L i A N - S f c C T C n 1, AND D (Sew yoi. k U n i v . ) 151 p iiC A C o / H F A01 CSCL 05A N82-1 '4< -Je5 Kerb«f 5 f. Ceni «f tor tdtn€ m «mt? W«w Vbrfc Un»v«f , and to stimulate better working relations between the two sectors. Not every industrial research organization chooses to become a partner, but enough have done so to augur well for continuation at o reasonable level. An industrial energy conservation program in the Department of Energy has demonstrated modest benefits for both public objectives (saving energy) and private benefits (reducing costs). Results were reasonable, though not dramatic, and the program demonstrated an incremental ap- proach: the private benefits did not justify the total R&D investment required, but the anticipated public benefits could be obtained by adding funds of the federal government to the private funds. Many themes emerge from the materials and analyses used for this study. A number are discussed in detail in Chapter V. . -viii- One obvious and pervasive thema is the r^ed to achieve proper and constructive linkages between the federal agencies and the industrial community. The con- version of technical advances to new products, processes, and services occurs within the private sector. Decisions about investment, manufacturing, and distribution are made in the private sector. Thus, federal programs to support civilian-sector R&D require private inputs for planning and setting priorities, and must obtain participation in some form to smooth the conduct of R&D and the ultimate transfer to use. Clearly, a preferred situation is for the ;private sector to identify a desired federal activity in advance, something' that was demonstrably lacking in_the CARP and COGENT programs. : • . I '..'•• There is widespread agreement that the primary federal ;role in civilian R&D is to strengthen the technical infra- structure —training, basic research, and generic technologies. Here, too, the specific mechanisms are ;...^ ort- ant. Universities play the major third-party role between ;federal funding and eventual civilian-sector use. Appropriate 'linkages with the r^ivate sector are critical to be sure that the universities are aware of the basic scientific and engin- eering needs of industry; to encourage industry adaptation of university research; and _o provide exposure of graduates to career opportunities. A principal factor in the successful pursuit and even- tual use of any technical advance is the existence of a technical community possessing the range of knowledge and skills needed to implement that advance. Federal programs, wh'ich can develop all needed skills in public-sector missions, cannot control this availability for programs in the civilian sector. Further, private sector involvement is needed to provide judgments on feasibility and timeliness of technologies potentially available for economic conversion. -ix- Indirect actions cf the federal government can have considerable influence on technical change — regulations, tax policies, and, j^articularly, procurement. Thus, federal R&D programs of an applied nature can be most effective when coupled with some specific federal mission. In public-sector areas — e.g., defense and space, in which the government is the customer -- federal applied R&D has been extremely successful. There is some indication that this combination can also work to various extents in areas where the government is no_t the principal user, such as solar energy, electronics, •*nd agriculture. As the case of federal involvement in synthetic fuels suggests, of course, such federal procurement- cum-R&D ir not therefore automatically desirable. An important side-interest in this study is the by- product effect in many industry sectors of public-sector R&D.; There continues to be disappointment and over-expectation : i about direct "spin-off," i.e., the easy conversion of products and processes developed for defense or space objectives into,; economic civilian use. But there has probably been an under- estimation of the broad economic value of the stronger base 11:'-. of science and technology this public research provided — a . • base that has helped generate new industries, expand existing ones, and contribute to increased productivity generally. ? A major trend that should oe encouraged is the ii increased willingness and ability of particular industries ;. to act collectively to strengthen their scientific and technological base. This has been shown in recent efforts of the electric: power, gas, and other industries. It is also being shown in new initiatives by the chemical and semiconductor industries. To date, these efforts have focused on basic research, and may thus have considerable influence on related programs of the federal government in university research. These actions are in strict confornance with anti-trust laws. Our growing concern with international competitiveness may lead to opportunities for collective action in more applied artas. Such initiatives call for consideration of possible modification of anti-trust law and policy. Suggested Criteria for Future Policy The following is a distillation of our findings. We hope these points can serve as, broadly speaking, a set of guidelines for future policy toward civilian-sector 1UD. Nature of Contents Federal support for technical activities intended for tl'.e civilian sector, whether direct or indirect, should he specific to the industrial sector in question. TYie principal emphasis of. federal support for civilian-sector 1UD should go towards strengthen- ing the technical infrastructure ami encouraging generic science and technology, but with careful attention to those methods of implementation most compatible with needs of the civilian technical community. Federal procurement of goods and services (and sometimes other federal actions) justified by a mandate and supported by a constituency can often have salutary effects on civilian technology when such procurement, is Jinked to federal K&D on the' technologies or products being bought. A balance of technical resources should be main- tained by providing a level of federal support for undirected basic research adequate to ensure objectivity and independence of direction in the research community. -xi- Federal support for applied research and directed basic research should be guided by specific arguments about particular technologies and types of projects "undersupported" by the private sector not by general arguments about the overall inadequacy of private IUD spending. And any proposals for programs to intervene in civilian- sector R&D should have .a clc^i and specific institutional structure in mind to allocate the research dollars. Nature of Mechanisms Cooperative RSO programs initiated and conducted by industry should be encouraged by both direct and indirect support of appropriate federal agencies. Federal support for directed basic research intended for the civilian sector should include specific mechanisms for linkages between industry and any third-party institutions conducting such research, whether government or academic. Federal support for applied research intended for the civilian sector should include specific mechanisms to obtain industry inputs, cooperation, and, where appropriate, • participation.. Federal actions in the civilian sector should flow from private initiatives whenever possible: mechanisms should he developed to encourage private sector initiatives in identifying technical needs, rc'commcnd ing appropriate roles for government relative to those needs, and in suggesting techniques for transfer of the results. Public sector R'fiD, e.g., defense and space, should be conducted so as tc- encourage linkages with the civilian s.ector in areas of basic science and generic technologies, when appropriate, during the planning and conduct of research. Linkages among unxversity-industry-government programs should be promoted, to strengthen the general technical Infrastructure, improve the flow ol information concerning technical advances and needs, and expedite transfer of sv-ch advances. -xi i - I. THE CHANGING TIDE. In 1971, President Nixon assigned Mr. William M. Magruder, an experienced aerospace executive, the task of developing a list of major technical activities, to be sup- ported in soma degree by the federal government, which would serve to utilize available technical manpower and knowledge in programs that could support and stimulate economic growth. This was referred to as the New Technology Opportunities Program (NTOP). In hindsight,- this initiative appears as a tangible divider between two eras in federal R&D policy. From 1940 to 1970, federal support of R&D was growing; but that sup- port was directed largely toward defense, atomic energy and space — areas in which the government was itself the final;; customer for the R&D and the new technologies it product.J. J : Other sectors benefited through "spin-offs." After 1970, ;M however, federal R&D support was used increasingly as a way! of supporting and stimulating the general economy -- in areas such as transportation, housing, communication, and*, energy;. !: Mr. Magruder's assignment came at a time of slow-down: in the military R&D spending, so that unemployment among • • . ; certain high-technology personnel, notably aerospace engirt- : eers, became an unwelcome new phenomenon in the United : . States. Concurrently, an economic recession in the early 1970s focused attention on industrial needs and on mechanisms that might revive a lagging economy. An approach that would appear to address both problems had obvious appeal. But wr.ile the dimly perceived issues of both policy and prac- tice were slowly being formulated and discussed, the economy revived, technical specialists were absorbed (possibly -1- involving conversion of skills) and the plan for major government involvement in support of civilian-sector R&D was filed away. From this first aborted step contemplating broad action, there followed a growing series of specific federal programs, each motivated by some particular problem concern- ing an industry sector — e.g., energy or automotive — or an element in our general industrial base — e.g., materials availability or adequate long-range research. By the late 1970s, federal agencies were conducting a wide range of acti- vities, and there were new legislative proposals to add more. : Like all questions of public policy, analzying the role ;and; effectiveness of government involvement in civilian- sector RiD cannot be accomplished in an intellectual or poli- tical vacuum. Such an analysis must necessarily start with the premises —oft^n unarticulated — that accompany the political and institutional structures it assumes. Until very recently, the premises upon which government policy toward civilian-sector R&D rested were developing in a fairly clear and seemingly constant direction: greater government involvement. One indication of this tendency is apparent from the numbers. In constant 1972 dollars, federal R&D spending on defense declined from $11.9 billion to $8.5 billion between the years 1967 to 1980, while the component devoted to civilian- sector interests rose over that same period from $4.9 billion to $7.2 billion. But the trend is not merely quantitative. Government involvement in civilian RSD changed in character, T7Willis H. Shapley and Don I. Phillips, Research and Development: AAAS Report IV, Washington, D.C.: American Association for the Advancement of Science, 1979, p.26, and Shapley, ct. al., Research and Development; AAAS Report VI, Washington, D.C.: American Association for the Advancement of Science, 1981, p. 17. moving from a regime in which the support of basic research and the molding of technological infrastructure was itself the goal to one in which the support of R&D was an announced means to various social goals — notably the goal of techno- logical superiority in international trade. As such, this conception of federal R&D policy toward the civilian sector was only one manifestation of what all political persuasions agree to have been an increasingly interventionist development of general government after World War II. This is not to say that the altered and enlarged federal role in R&D evolved smoothly or without incident; in fact, as we will try to document below, the premises of federal R&D policy reigning in October, 1980, were the legacy of a very episodic history. Technology policy in the last few decades was shaped by at least three periods of policy activism which, although failures politically, were ulti- mately victories intellectually — at least in the sense that until recently they set the tone for Executive Branch policy. This study was commissioned and begun during the last of the activist periods, that of the departed Carter Administration. As a result, the study started out from what we might call a "pragmatic" base. Given the increasing government support of civilian-sector R&D, we asked, what criteria should the policy-maker use to extract optimum effectiveness from the various government R&D programs? There.were two sources of material from which to develop such criteria. First, there is historical experience in each industry relevant to understanding the sources of technical change; the conditions for its introduction and use; and the. impact of federal policies upon it. In our view, it is important to recognize that each industry is unique in its needs and conditions —a.fact far top often overlooked in -3- discussions of federal civilian-sector R&D policies. There- fore, there is much to be gained by a review and analysis of the factors influencing technical change in each of a number of industries differing in, for example, their R&D intensity and the degree of federally funded R&D. Second, the expanding federal R&D activity in the past ten vears that was intended to support or stimulate specific industrial sectors has given rise to considerable empirical data and experiences, viz., (a) new program initiatives put forward by the government to explore various mechanisms for interactions with industry — e.g., the Cooperative Automo- tive Research Program (CARP) — and (b) a group of government and industry executives who have devoted increasing amounts of time to working with these me«:rianisms and with each other, taking into account the combined government-industry technical efforts in planning their own activities for creating techni-. eal change. Discussions with these executives aboi>. the :effectiveness of both the newer exploratory programs and the older, established programs could provide a rich base of ^judgments on the role and workability of federal R&D support. The material for this study did indeed draw upon these two principal sources, and this report is based primarily on them, on other published references, and on the judgments and interpretations of the authors. A group of knowledgeable economists has prepared a set of studies on the history of technical change in seven major industries affected in vary- ing degree by federal actions. An overview of these analyses is presented in Chapter III, and the complete set is appearing as a separate publication. Thes^ provide references and perspectives for much of this present report. Chapter IV describes, categorizes, and analyzes several of the new initiatives proposed during the Carter term. -4- We also did in fact interview and meet with many industry and government officials both individually and at several special seminars. But, although this study has its roots in the ground of the last administration, its fruit ripened in the climate of the present administration. This has influenced in a critical Wciy the questions and emphases that govern the con- clusions o:: this study. i There is a strong case to be made that the last few months have seen the beginning of a reversal in the post- war trend in federal policy toward civilian-sector R&D. To put it somewhat crudely, the first question raised nowa- days is: is there any appropriate role for direct federal R&D support in the area under consideration? Only when and if the answer is "yes" does a concern with the "what" and Vhow" arise. •; This changing tide affects the emphasis of this study, even though it arrives during the last third of the time allocated. Discussions with government and industry execu- tives brought out sharply the increasing priority on philosophy -- on the question of "why?" -- that has lately replaced the earlier question of "how?" • All of this, of course, required considerable attention by the authors to the reordering and re-evaluation of the material already in hand. For example, government initiatives that were studied as possible exarr iles of future growth now become historical examples of largely intellectual interest. But this shifting of premises is not so much-a problem for the study as it is a challenge and an opportunity. With one foot in each of two very different realms, we perhaps -5- gain a perspective that is not confined by any particular set of narrow premises. At the very least, the study offers an element of continuity in a time of change, and should therefore provide a useful bridge between past and future science and technology policy. -6- II. R&D POLICIES IN PERSPECTIVE. In order to fill in some of the vacuum that normally surrounds discussions of federal R&D policy, this chapter attempts to place the relevant issues in a proper (a) histor- ical, (b) practical, and (c) tneoretical context. We need to begin with some definitions. . 1. The participation of the government in an area of technical activity can be active or passive with regard to its role in directing the allocation of technical resources towards specific ends. Thus, government support for the general scientific and technical base of the country -- the programs of the National Bureau of Standards, the basic j • research objectives of the National Science Foundation, ;; :: fellowship grants for university study — can be considered passive. An example of an active intervention, by contrast, might be the government commitment to titanium development;, : dating from the late 1940s, that specifically sought the ;;;.'•.'; development of light-weight metals for military aircraft;. ; (The term "active" is not intended to describe the physical ; intensity of the R&D effort, but rather to distinguish the specificity and goal-directedness of the government , ; involvement.) ; i • 2. The mechanisms used by the federal government to influence civilian-sector R&D may be direct or indirecj:. The specific allocation of money to fund a desired technical program like solar cells, whether in government laboratories or by outside contracts, is direct R&D support. The provi- sion of tax credits for the installation of solar collectors -7- is an indirect mechanism to stimulate a market for such devices, and thereby to create incentives for private R&D efforts. The former method specifies the conduct of an R&D program approved by the government; the latter provides incentives for moving in a certain direction, but does not mandate R&D or specify its type or extent. .Other indirect mechanisms would include general tax and subsidy policies, tariffs, regulation — both economic regulation and the newer "social" regulation — and even macroeconomic policies. A. Historical Perspective. In the 19th and early 20th centuries, the direct efforts of the ifederal government in civilian R&D were fundamentally passive. ; jA patent system was specified in the U.S. Constitution and the Patent Office was the earliest federal presence in R&D. Indeed, it is the Patent Office that was largely res- ponsible, in 1839, for originating the most significant direct federal efforts of the 19th century: agricultural research. By 1860, several states had already established agricultural colleges; and 1862 saw the establishment of the Agriculture Department as well as the Land Grant College Act, which pro- vided funds for agricultural colleges in every state. These early educational efforts were focused on practical training far more than on research; but the Hatch Act of 1887 provided each state with funds specifically for research. 1. See Robert Evenson, "Technical Change in U.S. Agriculture," in R.R. Nelson, ed., Technical Change in U.S. Industry; A Cross-Industry Analysis, New York: Center for Science and Technology Policy, 1981. [Hereinafter cited as Nelson (1981)] As noted above, -this companion volume to the present report contains detailed analyses of technical change in seven major areas of U.S. industry. The study's conclusions are summarized more fully below in Chapter III. -8- Federal funding of agriculture could be considered active in the limited sense that such research was seen as a means for spurring improvement in a particular industrial rector. Yet, these efforts were entirely passive in the sense that the federal government did not — and still does not ~ have a strong influence on the direction of the re- 2 search or the selection of projects. Another passive government aid to science and techno- logy was the creation of the National Bureau of Standards. - Begun in 1901 as the successor to the Office of Weights and Measures, the NBS before World War II largely confined it- self to setting standards and conducting research directly related to standards and measurement. In the 20th century, the most characteristic influence of federal action on civilian R&D has been the "spin-off" effect from non-civilian — usually military — federal research. A good example of this is the comi.iercial aircraft incastry, where developments in airframes and (especially) engines for military aircraft found direct application in civilian aviation. The National Advisory Committee on Avia- tion (NACA — the forerunner of present-day NASA) was set up in 1915 with explicitly military goals — although, until about 1935, its laboratories provided important empirical and technological information that was as useful in civilian 4 applications as in military. 2. Evenson, Op. Cit. 3. See Weights and Measures Administration, National Bureau of Standards Handbook, 82, U.S. Department of Commerce, 1962. 4. David Mowery and Nathan Rosenberg, "Government Policy and Innovation in the Commercial Aircraft Industry, 1925-75," in Nelson (1981) ; pjg. Cit. -9- This pattern of influence was not unique to aviation; much the same story can be told about such industries as computers and semiconductors by merely translating a few decades forward in time. In other areas, though, indust- rial development was influenced only negligibly by direct federal R&D efforts, whether spun-off or otherwise. In such areas as railroads, automobiles and housing, the extent and direction of technical change was influenced solely by indirect federal actions until the 1960s. In the case of automobiles, for example, federal tax policy and the subsidization of a massive highway system — not federal R&D • shaped the modern American car. It is only after World War II -- and, for the most part, not until the 1960s — that we begin to find government involvement in civilian-sector R&D that is both direct and active. The period in U.S. history from 1945 through the 1960s (and beyond) was characterized by a number of generally agreed-upon attributes. Politically, there was a slowly decreasing resistance to the enlargement of government and to its extension into the civilian sphere. Furthermore, public attitudes toward science and technology were extremely favorable, with widespread confidence in the ability of those disciplines to solve problems and produce results. Public anxiety had other causes; a growing recognition of U.S. pre- eminence in world affairs, coupled with the sentiments and intuitions-of the cold war, led to an attitude of "gappism" that called out in alarm whenever the U.S. was seen to be "lagging" in aggregate statistics of one kind or another. See Barbara Katz and Almarin Phillips, "Government Technological Opportunities, and the Structure of the • Computer Industry, 1946-61," as well as Richard Levin, "The Government and Technical Change in the Semiconductor Industry," in Nelson (1981), Op..Cit. -10- It is probably not too surprising that these factors should have combined to yield programs to use government- funded R&D as a "control variable" to effect national civi- lian objectives — notably the prevention or elimination of a "technology gap" relative to other developed countries. By 1980, the desirability of such progress was virtually a given in national science and technology .policy. This is not to say that this opinion was or is unani- mous or that its dominance in policy circles cane gradually and uneventfully. In fact, the premises of science policy feigning in Washington at the time this study began were the product of at least three distinct and identifiable periods of government activism. i ; The first of these periods came in the early years of I the Kennedy administration — a time when, in the view of ;nia.ny scholars, the governing attitude in the White House ;was that public policy is no longer a matter of ideology but of dispassionate technocratic management. The Commerce Department created the post of assistant secretary for science and technology; and J. Herbert Hollomon, then head of GE's Engineering Laboratory, was named to fill it. Hollomon's major project was to initiate a Civilian Industrial Technology Program (CIT). The program would have (a) provided funds for university personnel to work on indus- trial research; (b) attempted to stimulate industry to under- take more risky or expensive R&D; (c) developed an Agriculture- like university-industry extension service; and (d) provided services for collecting and disseminating technical information. 6. See, e.g., Arthur Schlesinger, A Thousand Days, 1965, p. 644. 7. D.S. Greenberg, "Civilian Technology: Concern Over Pace of Growth Inspires Program for Rese..;.ch and Development Effort," Science, Vol. 139, February 5, 1963, p. 576. -11- The raison d'Sfcre of CIT was the perceived "gap" in industrial technology, apparently measured not by a compari- son of technological outputs but the proportion of inputs devoted to civilian technology relative to other industrial- Q ized countries. Hollcmon saw many U.S. industries as "lag- ging" in the application of science and technology to production, a view he expressed with what the science press of the day Q termed a singular lack of diplomacy. Industry officials, with the help of labor, quickly succeeded in killing the pro- gram. Congress eventually approved the "extension service" part — and then killed even that in 1969. The idea of an industrial R&D effort lay dormant during the Johnson years, although spending on non-military R&D rose as the line agencies of the Great Society channeled resources into areas like health, education and housing. The :. : ; Nixon administration initially displayed a lack of enthusiasm : ; i for an industrial technology program; indeed, the incumbent ; ; ' • ; successor to Hollomon as assistant Commerce secretary resigned; in quiet despair over the administration's technology efforts.;.^ But, within a matter of months, the winds shifted. l\:' :.'- Partly be- ~e the economy, overheated by budget deficits and!.!;:' • monetary inflation during the Vietnam War. was beginning to ::: - : " 8. Ibid. . ' • ; ; ; 9. D.S. Greenberg, "Civilian Technology: Program, to Boost Industrial Research Heavily Slashed in House," Science Vol. 140, June 28, 1963, p. 1380. 10. D.S. Creenberg, "Civilian Technology: Opposition in Congress and Industry Leads vo Major P.eaJignment of Program," Science, Vol. 143, February 14, 1964, p. 660. 11. Andrew Hamilton, "State Technical Services Act: Congress Swings the Axe," Science, Vol. 166, December 26, 1968, p. 1606. 12. John Walsh, "Myron Tribus, Top Science Official, Resigns,' Science, Vol. 170, December 4, 1970, p. 1065. turn down, and partly because the imminent end of the Apollo program was creating unemployment in the science and engineering community, the Nixon administration, as part of its economic policy, suddenly became very interested in fosucrinq industrial technology." This time, the initiative came not at the assistant- secretary level but at the level of the White House staff. Nixon brought in William Magruder — fresh from heading the administration's ill-fated SST effort -« to organize the New Technology Opportunities Program (i^ T".j>) ,15 a four-month executive-branch policy study completed in January, 1972. As a practical matter, this initatives program got little further than its predecessor in the 1960s. There was initially much talk about tax incentives for private R&D; large increases in federal spending for applied cix'ilian research; changes in the anti-trust laws; and even a reorgan- ization on the federal R&D policy and management organization 13. Initially, the administration's position had been that it would not try to stimulate R&D as a way of reducing unemployment among technologists, relying instead on special retraining and information programs. Sec Philip M. Boffey, "Unemployment: What Nixon Is/Isn't Doing to Help Jobless Scientists," Science, Vol. 171, March 12, 1971, p. 985. 14. Nicholas Wade, "Nixon's New Economic Policy: Hints of : a Resurgence for R&D," Science, Vol. 173, August 27, 1971, p. 794. On the Now Economic Policy generally, see Herbert Stein, "Remembering the Fifteenth of August," The Wall Street Journal, August 14, 1981. 15. Deborah Shaplcy, "Magruder in the White House: SST Man Plans New Technology Take Off," Science, Vol. 174, October 22, 1971, p. 386. 16. See Claude E. Barfield, "High-Tech.jology Package Focuses on Domestic Needs, U.S. Trade Balance," National Journal, October 23, 1971, p. 2114; Claude E. Darfield, "High- Technology Research Program May include Tax and Antitrust Proposals," National Journal, October 31, 1971, p.2156; and Deborah Shapley, "Technology Initiatives: Hints on the Magruder Effort," Science, Vol. 175> January 21, 1972, P. 279. There was also considerable effort put into the preparation of plans for major civilian-oriented R&D programs. But when the program reached Congress, it contained only modest increases in spending on goal-di-ected research for social concerns and a $40 million cooperative program under which the National Science Foundation and the National Bureau of Standards would jointly "test incentives to stimulate R&D." These funds were promptly impounded by the Office of Manage- 18 'inert and Budget (OMB) . On another level, though, the Magruder effort was a success. For it signalled the ideological victory within a Republican administration of the proposition that civilian- sector R&D is a lever that, in the hands of the government, can affect the macroeconomic problems of productivity and international trade. No less a figure than then-Commerce secretary Maurice Stans testified before Congress to the administration's faith in this proposition. The candor with which Stans presented the case is almost startling. He cited figures — based, evidently, on the neo- mercantilist analyses of an enterprising Commerce economist 17. Fred H. Zerkel, "White House Shapes Strategic Approach to R&D," Chemical and Engineering News March 20, 1972, p. 24. 18. Robert Gillette, "Technological Initiatives: NBS Funds in Holding Pattern," Science, Vol. 179, Jan. 12,1973, p. 163. 19.. Maurice Stans, "Science, Technology and the Economy," State- ment before the House Subcommittee on Science, Research and Development, July 27, 1971, reprinted in NBS Technical News Bulletin, November 1971, p. 270. 20. See Phillip M. Boffey, "Technology and World Trade: Is There Cause for Al-irm?" Science, Vol. 172, April 2, 1971, p. 37, and Deborah Shapley, "Technology and Trade Crisis: Salvation Through a New Policy," Science, Vol. 179, March 2, 1973, p. 88i.. The concern with a "trade gap" was also voiced in the popular press. See "Making U.S. Technology More Compe- titive," Business Week, Jan. 15, 1972, p. 44. For a more balanced contemporary view, see Harvey Brooks, "What's Happening to the U.S. Lead in Technology?" Harvard Business Review, Vol. 50, No. 3, May-June 1972, p. 110. linking an unfavorable trade balance with inadequate spend- ing on civilian R&D. Then, listing fill the other factors conventionally thought to govern a nation's trade position — inflation, exchange rates, tariffs, quotas, etc. — Stans argued that the only variable the government could really control is "technological development" (read: civilian R&D) . "(T)he major clement which we can influence decisively for the long-run," he told the House Science, Research and Development Subcommittee, "is the level of technological development. It may be our only hope of maintaining a future trade position adequate to support our balance of payments in the years to come.'"' The only dissent seemed to come from that perennial spoil-sport, OMB.22 Watergate and its aftermath put the question of civilian R&D initiatives on the back burner at top administrative -: . levels. Only at the lower echelons of the civilian agencies did the pot continue to simmer. IN ; In May, 1978, President Carter called for a domestic; :: policy review (DPR) on innovation. This review, completed': ; in 1979 under the direction of Jordan Baruch, the most recent assistant Commerce secretary for science and technology, ^ pro- duced a more specific and more ambitious set of proposals ; thar did its predecessors. Analyzing this third initiative' and its proposals is the topic of Chapter IV below. :; ; . ' : 21. Stans, Op. Crt. 22. Wade (August 27, 1971), O£. Cjjb. p. 795. -15- B. Functions and Role of Industrial Research. In order tt understand the significance of the Carter initiatives, though, more than a historical background is necessary. One also needs a background on the principles and procedures by which science and technology relate to civilian objectives. In particular, one needs to know some- 23thing about industrial research and how it operates. The activity in society likely to be most important to an effective federal role in civilian-sector R&D is industrial research itself. The industrial research sector is the principal instrument for integrating science and technology into the U.S. industrial system, which in turn is the instru- ment by which the resulting products, processes and services are; introduced into the economy. : Thus, the effectiveness of federal efforts intended to support civiliaa-soctor R&D depends very critically on inter- actions with industrial research. It is at the loo.ut a vital part of the transfer process between any federal program and the ultimate user, and it can be a major source of inputs and assistance for such programs. The evaluation of past federal actions and suggestions for future guidelines call for some comprehension of the principal functions of industrial research and how these are carried out. Without in any way attempting to describe the history of industrial research, this section will set forth simply those specific aspects which must be understood and considered in the development and implementation of a national 23. For a fuller treatment in a slightly different context, see Herbert I. Fusfeid, Perspectives on U.S. Industrial Innovation, New York: Center for Science and Technology Policy, January, 1981. This publication also contains an annotated bibliography by Theodore W. Schlie, of which see especially pp. 7-13. -16- science policy. This rests to some extent on understanding the role of the private sector itself.' The characteristics of the private sector relevant to our discussion are: 1. It decentralizes decision-making. Each individual firm makes decisions on the allocation of those resources within its control. 2. Each firm trios to allocate its resources so as to produce maximum return on investment consistent with long-term growth and stability. 3. The profit motive (or profit constraint) creates an internal pressure within each firm to maintain a proper balance among its resources. Now, consider the role and characteristics of industrial research in this environment. It is not an independent acti- vity, set apart, feeding occasional ideas and technical breakthroughs along a one-way communication link to an eager and waiting production line. It is, and must be, very much a part of the whole industrial system. Thus, the firm has to make plans for: 1. Technical programs and/or areas relevant to the business strategy of the firm; 2 The level of technical effort compatible with the needs and abilities of the firm; and 3. Mechanisms for conversion to use of successful R&D programs. The key to all these activities is balance. This is both qualitative, as in the case of business strategy and management capabilities, and quantitative, as in the use of available funds and manpower in light of probable return. The process by which one arrives at these judgments must con- sider the cost and technical feasibility of adapting successful R&D to workable manufacturing processes using economically available materials to give satisfactory: performance in use. -17- There are, in short, certain disciplines that, make up industrial research. This is why otherwise identical technical projects concerned with (say) removing sulphur from coal would have fundamentally different attributes when conducted by an industry, a university, or a government environment. Among these attributes are: 1. Consideration of the system which will be used to develop manufacturing processes and arrange distribution. 2. Consideration of all technical characteristics of a final product or process as defined by the needs and constraints of the user. 3. Consideration of the interactions among market demands, cost, investment, and technical perfor- mance of the product or process. : 4. Consideraton of perceived options to meet the broad needs of the potential user with regard to a specific mission-oriented objective, either through competitive technical approaches, substi- tutes, or non-technical approaches (e.g., use of economic incentives or penalties). The industrial research community, particularly the research manager, is the bridge between science and the user and must account for the transfer process between the two. The research manager is aware that the function of R&D is to provide options — for solutions to problems or for investments — that are acceptable economically to society. The R&D activities are integrated with a complete manufactur- ing and distribution system, and all parts of the system are involved in the earliest planning and the ultimate use. These are, of course, precisely the approaches required to answer the questions raised regarding an active science policy in the civilian sector: how to decide on priorities among technical programs and how to provide for effective transfer. The mechanisms for both reside within industrial research. The problem is how to couple this know-how with government programs. -1ft- Those federal policies that recognize and make use of the characteristics of industrial research will be most likely to improve the effectiveness of civilian-sector R&D. Those that do not, either through lack of understanding of those mechanisms or because of the pressure of other national objectives, will lower this effectiveness. These comments are valid for the range of federal interactions with the private sector in the. R&D field. These include the direct efforts where federal funding may support Rj.0 conducted within industry, or where some form of cooperative efforts between government and industry is the mechanism. It obviously holds for such indirect effort as tax incentives. In any instance, the unique aspect of industrial research is the integration of the R&D organization with the other resources ot" each individual corporation, not simply the R&D capability as an isolated resource. This summary of the nature of industrial research can be made more complete for the purposes of this study by add- ing a few comments about specific operating characteristics. The most important feature is that each industry iz unique with regard to such factors as: * Whether competition is atomistic or rivalrous; '* The sizes and size-distribution of firms; * The ease of entry for new firms; * The R&D policies of the firms; * . The nature of the customers and their innovative ':" behavior; * The proprietary characteristics of the knowledge produced by R&D in the industry; and * The nature and extent of government regulation. There are others. What comes through sharply in this list is that the reaction of industry to an,y federal effort in R&D will be different for each industry —indeed for each company. -19- Thus, there is considerable variation among industries in the linkages with, and dependence upon, outside sources of technical change. These diverse links include coopera- tive plans with universities, joint ventures with other companies, liaison activities with technical organizations internationally. In the broadest sense, then, there are several princi- ples concerning federal support of civilian-sector R&D that emerge from considerations of industrial research: * First, thi* effectiveness of a program will be related to the extent of "tailoring" to the characteristics of the industry or industries affected. * Second, there must be a clear appreciation of the strategic planning taking place in each industry for the integration of technical change in its economic growth. * Third, the value of direct vs. indirect federal actions is dependent upon each industry. C. R&D and Productivity Growth, and the Roles of Public R&D Funding. • Economic analyses sometimes lead, and sometimes lag, policy deliberations. In the case of government policy toward industrial innovation, economic analysis ran ahead of general policy discussions. During the 1960s, th3re was Considerable support within the professional economic community for the proposition that government ought to play an active role in industrial innova- tion. That support rested on two separate lines of analysis. First, several studies during the 195.0s led economists to believe that technological advance accounted for. the.lion's -20- share of the high productivity growth then being experi- enced, and that research and development expenditures were an important source of technological advance. Second, a variety of theoretical arguments suggested that, in general, profit maximizing activity by business firms operating in competitive markets leads to a level of spending less than the "social optimum." In recent years, economists have learned that the relationships between R&D and productivity growth — and the kinds of roles that government fruitfully can play in industrial innovation — are more subtle and complex than these earlier formulations had indicated. But the development of these earlier theories strongly influenced the direction of policy; and the intellectual history of those analyses is directly relevant to understanding the history of government ' 24 •• -:'-:- • • -policy toward civilian-sector R&D. :; . There has been a long tradition in economics of research on productivity growth. Adam Smith was interested in that topic, and he assigned much of the credit for the rapid pro- ductivity growth then occurring in England to what now would be called industrial innovation. He noted several sources ; of innovation, including what we would now call "learning: :: curves," and he recognized the background role of basic ' * science. Many economists since Smith have speculated on ; 24. For a comprehensive review of earlier scholarly thinking on R&D and innovation, see Richard R. Nelson, Merton Peck, and Edward Kalachck, Technology, Economic Growth and Public Policy, Washington, D.C.: The Brookings Institution, 1967. For a more recent viewpoint (by one of the same authors) on the economics of innovation and R&D, see Nelson and Sidney Winter, "In Search of a Use- ful Theory of Innovation," Research Policy, Vol. 6, (1977) , p. .36. : -21- the sources of productivity growth and industrial innovation. In the 1950s, economists at the National Bureau of Economic Research began systematic studies to identify the sources of experienced productivity growth. As a result of their work (and that of Robert Solow and Edward Denison) economists, by 1960, were in accord that only a small fraction of the growth of output per worker experienced in the United States could be attributed simply-to increases in machinery or other materie.: inputs per worker. Most of the productivity advance showed up as a disembodied increase in the capability to pro- duce goods and services from given inputs; the country's economists associated this increase with technological advance. During the early and middle 1960s, many scholars noted that the technological advance, measured as an increase of the productivity of all inputs, seemed to have accelerated significantly in the post-war years. It was recognized that R&D spending had increased greatly as well, and many scholars drew the obvious connections. i At roughly the same time, a number of scholars were inquiring into the determinants of R&D spending by business firms and exploring, within the context of various models, whether the magnitude and allocation of R&D spending most profitable for business firms is also "optimal" from a social point of view. The results of these inquiries led economists to argue that a more active government role in stimulating industrial R&D would be in the social interest. There were several arguments in the economists' quiver. First, it was argued, R&D expenditures often yield "externalities": the returns to one firm's R&D flow in part to other parties and are therefore only partially capturable by the firm that bears the R&D expense. A second argument was that efforts to achieve significant technological breakthroughs inevitably involve considerable uncertainty; when uncertainties are very large, business investment is likely to be deterred even if -22- the expected gain is reasonably high. Both of these argu- ments suggested that, when judged from a social point of view, private investment in R&D is necessarily insufficient; and this pointed toward federal policies to supplement private R&D spending, it seemed plausible that federal funds should go into the kinds of R&D and the industries where the externalities and uncertainties were greatest. In addition, many economists were arguing, when industry structure is fragmented, the firms tend to be too small to mount an effi- cient R&D effort. Special federal programs for such indust- ries ought to be considered. These theoretical arguments were supported by a few quantitative studies of the social returns to particular R&D investments. These studies showed such returns to be very high. Studies of federal R&D support, particularly in agriculture, showed past government involvements to have been excellent social investments. Taken together, the economists' findings about the important role of technological advance in economic growth and their arguments about a tendency of private business firms to under-fund R£,D provided strong intellectual support for those within -- and outside — government who believed in a more active federal presence. The economists' arguments were presented in the 1962 annual Economic Report of the President in support of the then-developing civilian industrial technology program (CIT) mentioned earlier. They have also been used, in one way or another, in all later discussions about the appropriate government role. Economists now understand that the relationships between S&D spending and productivity growth are.more complicated than they earlier believed. During both the Magruder exercise, and the more recent Domestic Policy Review on innovation,25 25. Cf. Chapter II.A. above. - . ' • • ' • • - - - -23- ' the erosion in the American technological lead was a topic of considerable concern. Government stimulus of R&D was put forth as a means to halt the relative decline. However, a number of recent studies have shown that the differences among the industrialized nations in their rates of producti- vity growth are not well correlated with their R&D spending, either in volume or as a function of GNP. Indeed, the two countries which in the 1950s and early 1960s had the highest ratio of R&D to GNP — the United Statss and Great Britain — experienced among the lowest productivity growth rates. It has been noted that both the U.S. and Britain allocated an unusually large share of their R&D to defense purposes. In any case, productivity growth among nations has been much better correlated with physical investment as a fraction of GNP than with R&D as a fraction of GNP, whether defense R&D is counted or not. ;i ; Once one recognizes the relative ease with which . s; technological knowledge flows across national boundaries, Hr this conclusion should not be particularly surprising. f\. '• Certainly in the 1950s and 1960s, the European countries I ^ •• and Japan were benefiting greatly from their ability to M i! adopt technology developed or employed earlier in the United I ll:l I States. There is evidence (for example in the form of patentf;^ licensing statistics) that, as technological levels among ; ; • : : . countries have come closer together in the 1970s, the United :i ' • ' ' States is beginning to benefit from technology developed in I : - ' ' . other countries. This suggests a more subtle connection between a country's overall R&D effort and its relative productivity growth performance. So long as their physical investment rates are substantial, countries with productivity levels and technologies well below the frontier can probably achieve rapid productivity growth even if their R&D spending is modest. -24- A country's R&D effort becomes more important when it is close to or striving toward the frontier, or trying to hold a position at the frontier. For countries in this position, a strong R&D effort is necessary for rapid productivity growth, even though it may not be sufficient. Just as differences in countrie^' productivity growtn rates have not been strongly correlated with differences in :their R&D spending, variations in a country's economic :growth rate over time are not well associated with variations iin its overall R&D spending rate. In particular, it is unlikely that the worsened productivity growth experienced ;in most countries after 1973 was caused by a fall in their R&D spending. What .is true is that the surge of productivity :growth that the United States, Western Europe, and Japan enjoyed during the 1960s came at a time whan, by historical 'standards, all of these countries were investing heavily in ;;R&D. But the slowdown of productivity growth since 1973 has ibeen ubiquitous.' Only in the United States and France was :the productivity growth deceleration foreshadowed by any islowdown in R&D expenditure. And in those countries, the bulk of that R&D decline has been in government R&D spending .on defense and space — not in industrial R&D spending on industrial innovation. . Again, a more subtle analysis seems called for. Even for a country close to the frontiers of technology, it will take time before variations in R&D spending affect productivity growth; and it matters what kind of R&D spending is advancing or declining. Nonetheless, it probably is true that a country cannot long stay at the forefront if it allows the level of its industrial R&D focused on new products and processes con- tinually to erode. The connections between R&D spending and productivity growth show up more sharply when one considers the differences -25- in measured rates of productivity growth and technical advance among sectors and industries. Almost invariably, industries experiencing rapid productivity growth either spend a considerable amount themselves on R&D or have equip- ment or material suppliers who spend a considerable amount on R&D. Those who spend little themselves on R&D, and who are not fortunate enough to have technologically progressive suppliers, have experienced very slow productivity growth. The question of why there are such great differences across industries and sectors in the R&D attention they are attract- ing is interesting, important, and at present not well answered. One possible answer is that R&D on the technologies in some industries is not very fruitful, and the lack of R&D attention simply reflects this. Another possible answer, consistent with the theoretical arguments that private firms spend too little on R&D, is that a variety of institutional factors render R&D privately unprofitable in circumstances j in which it would be socially fruitful. And no government :. policies have yet aaen devised to remedy the situation. ; The question is particularly germane to this report, ;: since government programs in support of civilian applied R&D .: inevitably will.-- and should -- differ from Factor to sector.:; What makes sense for agriculture may make little sense for 'si Pharmaceuticals. Government policies to stimulate industrial innovation in general can make use of across-the-board instru- ments like the new tax credit for (increments to) R&D spending: or various mechanisms to facilitate fruitful university- industry interaction. Support of academic basic research conducted at universities is also a general-purpose tocl, oven though its effects (as -that of tax credits) ure likely to vary significantly from industry to industry. When the focus is on direct support of R&D aimed at advancing technological understanding or capability, it is essential to recognize that particular programs inevitably will be targeted on parti- cular industries or industry groups. What is appropriate for one industry may not be for another. What are the appropriate roles for the federal govern- ment in stimulating and guiding applied R&D spending? In particular,,what kind of R&D should the federal government itself finance? What industries and technologies especially warrant government R&D support? Economists once thought they knew the answers to these questions. But, as economists began to recognize more clearly the complexities of the rela- tionships between R&D spending and productivity growth, the simple arguments that had once seemed to provide support and guidance for an active federal role in civilian-sector R&D began suddenly to unravel. The situation is now recognized to be more complicated — and directions for policy to be more uncertain. In the first place, when a competitive firm's inventions are protected to some degree by prtents or secrecy, there are incentives for the firm to do R&D that, in effect, duplicates or "invents around" already available technology. Although "externalities" may lead firms to underinvest in R&D from a social point of view, these incentives to duplicate or "invent around" pull in the opposite direction. While it is still clear that the allocation of R&D resources generated in a competitive industry by profit incentives may not be "socially optimal," the problem is not easily characterized in terms of under-spending. Also, it is not obvious what, if anything, federal policy can do to improve the allocation of R&D spend- ing, particularly when firms are reluctant to disclose their own R&D programs to public view. Similarly, the implications of that considerable uncer- tainty which attends endeavors to advance a technology signi- ficantly now are understood to be far more complex and subtle than was once thought. Under conditions of technological uncertainty, the appropriate strategy from a social point of view would appear to involve the exploration of a number of different, alternatives, rather than a "big push" in one direction or another. The aborted federal attempt to fund development of a supersonic transport illustrates the pro- blem in paradigmatic fashion. The argument that a federal role is particularly war- ranted in industries where firms are small also began to come apart. It was noticed that in some industries, technical progress was slow despite the fact that firms were large, and in some industries where technological progress was rapid, new and small firms were important sources of the key inven- tions. The experience with Operation Breakthrough vividly illustrated the dangers of applying the agriculture model indiscriminately. Even if the experience of agricultural policy is applicable to other industries with a similar, "fragmented" structure, the necessary institutional arrange- ments remain complex and hard-to-put-together in a political setting. . . At .'•.he same time, analysts have also come more fully to realize that government-supported R&D associated with procurement, and government-funded research undertaken at universities but tailored to particular social needs or technologies, have contributed to civilian innovation in a number of industries. In considering government R&D support to spur industrial innovation, it may be a mistake not to consider very carefully procurement-related R&D and support of R&D at universities. The federal government has a choice about whether and the extent to which it funds R&D on the products it procures. Similarly, there is considerable room for discretion regarding the range of research topics that the government can support in a university setting with the research results treated as non-proprietary'. These considerations suggest some guidelines- for the role of the federal government. We think it apparent that the R&D allocation generated by market incentives is not necessarily "optimal." But federal policies to improve that allocation will have to be subtle, and formal theoretical reasoning does not take us very far toward understanding which kinds of policies will work. Thus, the question of appropriate federal policies is largely an empirical one, not a theore- tical one. The research we have undertaken on the history of federal involvement in seven American industries — reported below in Chapter III — and on recent federal technical initiatives in the civilian sector -- discussed in Chapter IV — is a start on such empirical research. D. Perceptions of Government Action: Inputs from Executives in Government.and Industry. : If, as we have suggested, understanding the process i:. of technical change in industry -- and the involvement of ;i j government in that process — is a rather subtle and complex institutional problem, then it becomes clear that any ]: federal efforts in the service of civilian technology must: recognize the institutional problem and work within its Ji constraints. ; .-:: In particular, the message of the foregcing sections, is in large part that effective government R£D efforts in ; the civilian sector must understand and utilize effectively [ the knowledge and incentives of private industry. Further- more, as history suggests, the political success of such a program depends crucially upon the development and main- tenance of a constituency for its support. This immediately implies that successful federal involve- ment in civilian R&D requires a non-confrontational interactiof with industry -- that government support depends for its -29- effectiveness on the understanding, cooperation, and involvement of the industrial research esacutives and senior government officials who must set policies and make decisions on technical programs. With this in mind, it seeme-i to us essential to examine the views of decision-maker — both in industry and in govern- ment — who have been involved in public-private interactions in civilian-sector R&D. And an important aspect of this study thus has been to engage such individuals in discussion about the government role in civilian-sector R&D; about specific program initiatives; and about specific mechanisms for ^ implementing government objectives. These discussions occurred partly in throe workshops of abouv 20 to 25 people each, and partly in individual discussions. There were two principal purposes served. .. U •; First, these key personnel provided critical perspec- tives concerning the subjects examined in this study. These value-judgments and anecdotal experiences were helpful in the task of extracting lessons from the material assembled, and were undoubtedly responsible in large part for the gen- erally pragmatic tone reflected throughout this report. Second, the commentaries and perceptions of senior executives provided an important base for developing the general themes summarized in Chapter V and for suggesting the criteria to guide future policy actions. The accompanying industry studies, the recent government initiatives, and the historical evolution of public- and private-sector R&D offer a large number of specific examples of good and bad interactions; but the selection of simply stated criteria * that might serve as a mere general guide was aided by the experienced judgments we received. Many of these inputs have already been woven into the analyses of the preceding chapters, and also in Chapters III -30- and IV. There are some themes present in the perceptions of those interviewed, however, that should be emphasized by presenting them here as.general lines of thought, without thinking of them only in the context of a particular industry or program. One somewhat unexpected observation was the general agreement between government and industry executives on major approaches to government-industry interactions. The simple concept that effective government involvement in civilian-sector R&D called for private-sector linkages in planning, in conducting R&D, and in converting results to use emerged from both sectors. The need for guidance based on market considerations was axiomatic to all with regard to technology that could lead to products and processes integrated into the civilian economy. There was equal comparability in discussions as to what factors could justify government activity in civilian- sector R&D -- questions of important public interest, disaggregated industry structure, general needs for support- ing the technical infrastructure. This should not imply complete agreement, but remarkably similar listings emerged from government and industry representatives. Clearly, our discussions were with operating executives of both sides, not ideologues. These were thoughtful people who had spent their professional careers in addressing the question of generating and using technical change. The similarity seemed to override the adversary tendency one often expects to encounter in government-industry dialogues on economic or social questions. Thus, industry representatives provided examples for constructive government activities, not arguments for a complete withdrawal from government intervention. Their -31- views mirrored to a lar^e extent the conclusions of the economic histories described in II C (above). There was a general consensus on these broad points: * The government should fund basic scientific research and support generic technologies. * The government should stay out of applied research whenever it is not itself the final customer for the products involved. * Cooperative research among companies — or among companies and government — is possible in a rivalrous industry only on matters "peripheral" to the industry's main concerns. * The government should support scientific and technical infrastructure — facilities, teaching, and especially manpower training. In a similar manner, government representatives suggested a need for the sorts of interactions that have long been advocated by industry. Among these are: * Involvement of industry perssonel to help set priorities and to inform planning based upon market developments and general business plans. * Cooperation with active industry R&D programs in relevant areas. * Desirability of exclusive licensing for optimum exploitation of government-supported R&D when appropriate. * Exposure to industry needs in underlying scientific and eingineering fields. An important substantive issue surrounds the fact that, historically, government R&D activity evolved from strictly public-sector areas. This set certain precedents for contract instruments, accountability of funds, and dis- tinctions between grants and contracts. The general — and perhaps unfortunate — thrust has been to treat federal funding of even civilian-sector R&D as "procurement" rather -32- than as assistance. 26 It is not critical to review the details of these issues here. Major reviews have been carried out by OTA and 27OMB, among others. The important point to note is that the issues are being approached by government agencies with the intent of improving the conduct and transfer of R&D, and to stimulate interactions with the private sector. Thus, a first optimistic conclusion from these inputs is that, at a very broad level, responsible personnel in the public and private sectors have a similar appreciation of the factors entering into the process of technical change in industry. This is not a trivial asset in creating a future system for the effective use of our total technical resources. The allocation of federal R&D resources intended to benefit the civilian sector appears to require at least two conditions: support within industry and understanding within government. Doth rely upon a corps of senior execu- tives who approach the issues in a professional and rational manner. The existence of these individuals in government and industry is an important basis for improved effectiveness in future activities. 26. This view is also expressed in a report by the Office of Technology Assessment, Applications of R&D, Washington, D.C., June, 1978. 27. The Federal Grant and Cooperative Agreement Act of 1977 mandated a comprehensive two-year program of federal assistance to be conducted by the 'jffice of Management and Budget, Office of Federal Procurement Policy. For part of this review see OMB, Toward a Uniform Procure- ment System, Washington, D.C., July, 1980. -33- III. GOVERNMENT POLICY AND TECHNICAL CHANGE; LESSONS FROM HISTORY. A. Analyzing a Complete Historical Record. This chapter is an attempt to summarize and interpret the results of this study's principal analytic project: historical case studies of technical change in seven major industrial sectors. The studies themselves, along with a more detailed analysis, are available separately as the second volume of this report. The studies describe — in some cases in considerable detail — what the most important government policies have been, the reasons ;or those policies, and (albeit often in qualitative terms) how those policies have influenced technological change. . Most analytic attempts at understanding the implications of government involvement in technical change —including those prefatory to launching new government programs to stim- ulate such technical change in industry -- have tried to begin de novo. -Sometimes they have attached themselves to one .or another, economic theory relating R&D to economic growth; often they, have looked about for industries potentially in Th2 case studies and their authors are: agriculture (Robert Evenson); automobiles (Lawrence J. White); coranercial aviation (David Mcwery and Nathan Rosenberg); computers (Barbara Katz and. Almarin Phillips); housing v'.Tohn Quigley) ; Pharmaceuticals (Henry Grabowski and John Vernon); and semiconductors (Richard Levin). Richard.R. Nelson, .ed., Technical Change in U.S. Industry: A Cross-Industry Analysis, New York: Center for Science and Technology Policy, 1981. (Forthcoming, in 1982 .from Per'gamon Press.) -34- need of a stimulus to innovation. But few studies have recognized that government involvement in industrial innova- tion is a process with a long history, one rich in clues for those who seek the path of successful government policy. The imperatives of theory and history are always at odds. Theory simplifies; history complicates. But a theory disciplined by history is likely to be a robust one, one attentive to idiosyncrasy and detail. The U.S. policy exper- ience in industrial innovation — as captured in our seven industrial studies — reveals a good deal of complex detail demanding our attention. 1. A Brief Review. :;.; From the beginnings of the industry, the federal govern- ment has been a major stimulator and support of technological ;advance in aircraft. Military procurement has, at virtually :all times, accounted for a significant fraction of total sales :of the industry. Direct government support of R&D has taken •several forms. During the heyday of NACA, government funds supported R&D and testing relating to aircraft in general; during this time the generic aspects of military and commer- cial technologies were relatively undifferentiated, and advances in understanding or design principles relevant to one usually wuri? relevant to the other as we'll. Of course, • jj the government funded R&D on airframes and components intended :: for specific.military needs, although in many cases the com- panies invested their own funds in hopes of winning a procure- ment contract. Since World War II, government R&D monies have gone largely into work with specific military applications in mind. It has turned out that a good portion of military technology con'tinues also to be applicable to civilian aviation, although recently these technologies have been drawing apart. -35- The post-war era was also marked by a government attempt to instigate and support the development of a commercial supersonic transport — an experience that ended as an expensive abort. CAB regulation of the airlines, and the constraints on vertical integration imposed by the Airmail Act of 1934, also have been important influences on the way civil aircraft technology has evolved. There has also been a strong military, and space, interest in computer and semi-conductor technology. In '• • semi-conductors, most of the early work that laid the found- ations for the industry was privately financed. Government • . • R&D funding came later. By contrast, much of the early . • : exploratory research on computers was done under government I contracts. Government procurement accounted for a large ;percentage of the sales of both industries in the early days. iWhile, as the industries began to tap commercial markets, :government procurement and R&D funding came to play smaller • . . . . ;rol(?s, the government market continues to be significant in ^both industries. Public monies have continued to support advanced education and university-based research relevant to these industries. Anti-trust considerations have played an important role in the evolution of both industries. Had Boll Laboratories and Western Electric gone into commercial production of semi-conductors, the industry likely would have taken on a shape very different than it did. Anti-trust controversy seems to swirl continuously around IBM because of the dominant position it has achieved in the commercial computer market. For many years, public funds have supported applied and basic research, higher education, and extension services for agriculture. Unlike the stiuation in the three industries mentioned above, in the case of agriculture there has been no major public procurement interest. However, the farmers of -36- f^gg^ ^^ ., the United States have formed a strong political constitu- ency demanding., and to some extent guiding, government R&D support. The public R&D system has been operated largely through the agricultural colleges and experimentation sta- .tions of the state universities.. Decision-making in R£D allocation has been largely decentralized to the individual stations, which depend on their state legislatures for a hefty portion of their funding. In Pharmaceuticals, as in agriculture, significant federal monies have gone into basic research, and into the establishment and maintenance of programs to train scien- tists. However, federal funds fcr pharmaceutical applied research and development have been fenced into the are of "orphan drugs" for which the commercial market is likely to be small. It is apparent that there exists a strong political constituency for basic research funding; at the same time, there are strong political constraints against significant federal encroachment into the proprietary domains staked out by the pharmaceutical companies. Pharmaceuticals is .also an industry marked by a complicated regulatory regime that affects the cost of R&D significantly. The automobile and residential construction industries, have-experienced neither significant federal procurement nor much federal R&D support for either basic or applied work. Regulatory regimes, however, have strongly influenced techno- logical advance in both sectors. Both sectors have seen federal attempts to launch an R&D support program. But poli- tical support for these has been weak; and where programs were initiated they were not sustained. -37- 2. The Analytic Problem. How can lessons be drawn from the rich experience described in the case studies and from other studies? In principle, we want to draw up a matrix. The rows would delineate various policy instruments; the columns would enumerate various industry characteristics; and the entries would measure the feasibility and effectiveness of a policy under a particular set of industry characteristics. The task, so defined, remains impossible. Simply classi- fying the policies and the relevant industry characteristics is a challenging task; tracing cause-and-effect relationships is extraordinarily difficult. In general, a wide variety of policies have impinged on each economic sector and each policy has been complex and changing ovar time. In both aviation and agriculture, govern- ment funds have gone into support of applied R&D; but the programs and the objectives are very different in these two cases. Regulation has meant different things in automobiles and in Pharmaceuticals. And there is no obvious "list" of policy instruments one can think of to define the rows of the matrix. Indeed, simply describing and broadly characterizing the various government policies employed is itself a compli- I cated and worthwhile research endeavor. ; What are the industry characteristics that determine J the feasibility and likely effectiveness of various policy { instruments (assuming these can be well described)? Why has major government R&D support proved feasible and effective in aviation, but not in residential construction? The ques- tion suggests that one important industry characteristic is the presence or absence of a well-defined procurement interest. Perhaps so; but government R&D support has been feasible and -38- effective in agriculture. What differentiates agriculture from housing? Simply identifying the key industry character- istics that seem to explain these differences is a challeng- ing analytical task. Even if we could lay out the rows and columns in an objective manner, cause-and-effeet relationships are not easy to di"scern; technological progress in an industry might be fast or slow and take the particular directions that it did for any of a wide variety of reasons. Given the current :state of knowledge, it is not possible to estimate a policy's effect with any precision. To what extent did public JR&D money simply replace private R&D monies in the early days of •the computer industry? In aviation? Has public R&D support •really made a difference lately in semi-conductors? To what ^extent has regulation deterred pharmaceutical innovation? These are very difficult questions. : In short, it is very hard to tease out .from the histor- ical record clear-cut lessons that are applicable to future policy decisions. But let's try anyway. Much of what follows will obviously be judgmental. We will be presenting, in effect, a set of hypotheses about the kinds of policies that are feasible and effective in various contexts. While we believe they are consistent with the his- torical record as revealed in the case studies — and with other evidence -- this theory, like any theory that fits a 'fragment of evidence, may prove quite wrong in a number of places or even .in a broad scope. We are interested ultimately in understanding the sources of variation. Different policies have been applied in different industries. Some have been smashing successes; others have been ineffective or worse. However, in order to sort out the characteristics, reasons for, and effects of -39- variation, it is important to get hold of the conunon elements. There are several general characteristics of technological advance that are apparent in all the case studies. One is the apparent inherent uncertainty .involved in technological advance. A second is the central, but often myopic and strongly context-dependent, role of producers and consumers in the generation and screening of technological advance. The third is the important role played by nori-rnrket elements (as well as market ones) in the institutional structure influ- encing technological advance. All of the case studies reveal that technological ad- vance involves considerable uncertainty. When a person or organization begins the quest for a new product or a process, it is never clear exactly what the precise outcome will be. Design configurations and solutions take shape only gradually; and the ultimate success — or failure — of the quest is revealed only after the fact. The uncertainties take on a somewhat different form in each technology. Thus Grabowski and Vernon describe the hunt for a new pharmaceutical as, literally, a search. Katz and Phillips discuss the consider- able uncertainty during the 1950s regarding which new techno- logy was going to replace the old vacuum tube in computer design. Nowery and Rosenberg point out that, in the design of civil aircraft, theoretical calculations resolve only a ; small portion of the uncertainties. Some of the semi- ;; conductor companies placed their bets heavily on integrated ;; circuits; others hung back. . Technological uncertainties are compounded by market uncertainties -- which future technologies will be useful, and which will be bought at a profitable volume and price? Just as different individuals and R&D organizations lay their bets differently about which technological paths are the most promising, so th?y tend to differ in their assessment of the market. A nunbcr of compani.es that developed stro.ig tech- nological capabilities for the design of computers failed to anticipate a large business market. IBM made a bet that such a market existed at the same time that it acquired the technological capabilities to cover the bet. The American automobile companies had little reason to believe that con- sumer denand would swing sharply towards smaller more fuel efficient vehicles, brt it did. Thr.r, , while the details differ from industry to industry, in none of the cases do R&D and follow-on techno- logical work appear to be activities that are "plannable" in any neat and tidy sense. The uncertainties seem to be innate. Fro.n a social point of view, effective pursuit f technological advance seems to call for the exploration of a wide variety of alternatives and the selective screening of these after their characteristics hava been better -'•"- revealed -- a process that seems wasteful with the wonderful vision of hindsight. As the supersonic transport case indi- cates, however, hindsight may be much clearer than foresight. All of the case studies also reveal the central role of the producer-provider (usually private enterprise) or the demander-user (who may be private or public) in che generating and screening of technological advances. The producer.- and the user, each have certain informational and motivational advantages over other parties. Producers live with the pre- vailing process and product technology, and know things abouir it — its strengths, its weaknesses, certain potentialities for change — that people and organiza* ~ons without that ex- perience cannot know. Users have siirilar special knowledge about the products and services they employ. It is natural, and essential, that this special knowledge and immediate motivation for improvement play a central role in inducing and guiding the innovation process. Moreover, in a market setting it is users who ultimately will determine whether a product will be demanded, and producers whether it will be produced and how; . This said, it should be recognized that the vision may be narrow, and that motivation is very context-dependent. Both the computer and semi-conductor case studies reveal companies reluctant to move away from technologies with which they were familiar to try radically different ones. In the semi-conductor case, it is interesting that new com- panies, not the old tube producers, were the key innovators. Similarly, user-consumers, like producers, fall into comfor- table habits. Had IBM waited for potential users of business computers to articulate a.clear-cut demand for them before deciding that a market likely existed, the advent of the computer age would have been significantly delayed. The. motivation of the producer and user is strongly .influenced by the details of the technologies involved, and by the particular institutional and legal setting. There is little gain for a for-profit seed vendor to develop better self^propagating seeds. (It does pay the seed vendor to develop better hybrid seeds since the farmer has to go back to the source each year; he cannot create next year's seeds from this year's plants.) It was a delicate, and not inevi- table, legal decision that ruled that antibiotics, although natural substances, were patehtable. while patents don't carry much force in the semi-conductor industry, and innova- tions, are quickly imitated, the advantages of a head-start are still significant enough that firms have motive to innovate.. Government regulation, much more than expressed consumer demand, has pulled innovation towards safer and less environmentally harmful automobile designs. CAB regulation, in the form pf constraints .on air fares, tilted airline competition toward providing more attractive service, and stimulated the market for faster and more comfortable planes. It was a governmental -42- market, not a private market, that made it profitable for Texas Instruments and IBM to invest in semi-conductor and computer R&D. Both building codes and fluctuations in the demand for housing signi-icantly dampen incentives for innovation in building construction. In sum, while producers and consumers play central roles in the innovation process — and they should — their informational advantages may also be associated with myopia. Their motivations are strongly influenced by special techno- logical circumstances and the particular legal and institu- tional setting and by public as well as private demands. More generally, it is important to recognize that tech- nological change involves non-market as well as market elements. In all of the industry studies presented in the accompanying volume, there was a "public interest ," expressed through public policies, in certain aspects of the performance of the industries. There were elements of cooperation as ; well as competition in research and development. i; !'••'•• In aviation, computers, and in semi-conductors, there was, for obvious reasons, a public interest in .how the .tech- nologies and the industries evolved that transcended tlioi : ; interest of particular private purchasers or producers |:Of : the products. In these cases, the public interest was mani- fested in a governmental demand for goods and services of ;a quite specialized variety and in policies associated with procurement. ; In the other four industries studied, there was no such important procurement interest. However, a public interest in certain aspects of industry performance shows up in other policies. In the case of pharmace.Uticals, automobiles, h ing, and agriculture (as well as aircraft) a public interest in safety, environmental protection, and in ensuring certaij -43- general standards was made manifest in regulations. Several of these industries also arc marked by various forms of subsidy to producers or consumers. Citizens and scholars may divide on the merits and demerits of these regulations and subsidies. But this makes it no less a fact that public policies to constrain or supplement market mechanisms pervade the American economy. And the workings of these policies sig- nificantly influence the environment for industrial innovation. Further, the R40 systems of most industries involve both competitive and cooperative elements, the latter often university-based. In all of the industries surveyed, for- prpfit firms creating and taking a proprietary interest in certain technologies are a large part of the stcry. But in al-1 pf the industries one can also observe a system of R&D cooperation and the exchange of technological information, in some cases, government policy has played a large role in building and supporting this cooperative system; in other caes, a smaller role. With these common elements laid out, we. can now explore the differences in policicv , in industry characteristics, and in the apparent viability and effectiveness of policies, revealed by our case studies. (In what follows, we also draw, where appropriate, on other studies.) As stated at the outset, one cannot directly lay out a matrix. But there are several alternative paths to follow. We could try to assess what in- dustries are success stories in some sense and discuss the policies and structures associated with these -- and then go on to discuss the failures. We could also divide the indus- tries according to some kind of structural characteristics. It has proved more straightforward to try to classify policies (instruments) and proceed to consider where they were and were not employed and why, and how effective they have been in var- ious contexts. 3. A Road Mag. One rough division among instruments places those that involve direct government funding of R&D in one category and those that indirectly influence R&D or other activities involved in industrial innovation in another. While this division is plausible on its face, notice that the lines between the categories are blurred, not sharp. How does one treat, for example, procurement contracts that cover the cost of R&D incurred earlier by a company who anticipated the subsequent contract? How does one treat special tax credits for R&D? These problems notwithstanding, we shall hazard such a break. The objective here will be to categorize meaningfully the various kinds of government R&D support programs revealed in our case studies — to analyze the reasons tor the signi- ficant differences in such policies across industries and to make judgments as to which kinds of programs worked and which didn.'t. 'We should distinguish among four kinds of government R&D support programs: (1) those associated with public pro- curement or other well-defined.public objectives; (2) those that involve.an extension of support of scientific basic research to support of research to advance generic technolo- gical knowledge; (3) programs that are aimed at meeting reasonably well-defined clientele demands; and (4) the policy of.picking or supporting "winners" in commercial competition. . . In Section C below, we will consider a wide range of government policies that do not involve direct R&D support -- procurement regulation both old sty.le and new, anti-trust', policy regarding patents -- to name only the central ones. But simply listing these, as instruments covers up some funda- mental problems. Regulation,.for example, has meant fundamen- tally, different things in different industries; the thrust of -45- antitrust policies also have been different; etc. Relatedly and equally importantly, the central purpose of these policies often has little to do with spurring or guiding industrial innovation. There are serious questions as to whether they should be regarded as promising instruments for that purpose. B. Government Support of Research and Development. The case studies reveal sj -nificant differences among the industries in the extent and kind of federal R&D support. The government has been an important source of both applied and basic research funding in the evolution of aviation, computer, and semi-conductor technologies. The government has also productively supported both applied and basic res- earch in agriculture. While the government has been ^n important supporter of basic research relevant to pharmaceu-, ; ; ticals, public funding of applied research and development ill; ; has been mostly constrained to "orphan drugs." The government never has been able to mount a sustained R&D program relevant : to the housing and automobile industries. ? : . - . : It is not easy to measure the efficacy of the various -III:-I government R&D support programs. In the three defense-related industries, they certainly have bought us technological pri-; : . macy. Critics have argued both that much of the bought- s ; technology has not been necessary for national security but;, rather has inflamed the arms race, and that many of the R&D programs have been inordinately expensive and wasteful. It should be noted that .contributions to the advance of civilian technology made by defense and space programs, while not the focus of our case studies, has been a "spill over" and certainly not the.principal.intent of these programs. The advance of civi- lian technology was the central purpose of the government R&D support programs in agriculture, anu of basic bio-medical -46- research. The rate of return on the public investment in RSD for agriculture undoubtedly has been very high. Quanti- tative estimates are more difficult with respect to the returns from support of bio-medical research; however, this too is generally regarded as a very successful research program. The case studies also reveal two expensive fiascos — the supersonic transport project and "Operation Breakthrough" in the housing industry. How can one make intellectual order out cf this varied experience? It is important to distinguish among the follow- ing categories of government R&D support programs. First, R&D support aimed to achieve a v/ell-defined government pur- jpose — such as the procurement of a new weapon system or the solution to the automobile emissions problem. Second, ; support of basic or generic research relevant to a particular :technology or technologies and not pointed toward achieving iany particular product or process — such as research on the •nutritional needs of wheat or the properties of certain exotic materials. Third, support of applied research and development on products and processes that serve civilian, not governmental, purposes and whose acceptance depends in large part on market calculations made by .-.on-governmental L -tors. This last cate- gory ought to be further divided, perhaps, into programs in which the potential users have a considerable influence on allocation and program in which a government agency has rela- tively free-handed control over the setting of goals and priorities. Programs obviously differ in the range of indus- tries for which they are politically feasible and in the kinds of circumstances in which they are likely to be effective. -47- 1. R&p Support Associated with Procurers t Needs or Other We 11-uefined Purpose^. ~: •-, in three of our case studies — aviation, computers, and semi-conductors - there was a strong and recognized governmental demand for the products produced by the industry, which led to a particular and focused public interest in certain kinds of technological advances. A recognized public sector demand for certain types of technological improvement lends two important features to the policy conte.xt. First, it means that the government (or the relevant government agent) is in a position to define technological targets according to its own criteria and that it has (or at least has the motivation to have) some expertise about the techno- logies in question, second, the recognised governmental need lends legitimacy to government attempts to stimulate and guide the evolution of the relevant technologies. One should note that public procurement:does not inevi- tably lead to active public-sector effort to mold or stimulate technological advance. The federal government procures type- writers, office calculators, automobiles, and a wide variety of products that are identical (or virtually so) with those purchased by non-governmental users. In these cases, the federal government usually has chosen simply to act as an informed shopper. Even in cases in which government demands are somewhat special, the government has not always stepped in with a special procurement contract for the creation of a product-tailored :to its use or even strongly advertised its special interest through an implicit promise of procurement. In the three industries in question, however, the relevant government agencies deliberately tried to.induce the develop- ment of products that.were .suited for their purposes. The vehicles employed included procurement contracts written so as to cover the IUD cost's of the particular design (.a dis- guised form of R&D support), direct R&D support associated , -49- with a procurement contract, and support of basic and generic research. If pub lie-sec to_- needs and private-sector needs differ sharply, the procurement and applied research and develop- ;'- ment funding aspects of such policies would not facilitate the evolution of technology for the private sector. At | least three cases suggest, however, that government efforts to advance technology for public sector purposes can also i enhance technological capabilities to meet private needs. , In the early days of these technologies, R&D aimed at a j governmental purpose almost always had some commercial spill- I over. As these technologies matured, the governmental i (military) market and the civilian market began to separate, | ; i with the civilian market becoming increasingly important to certain companies. Governments-financed applied research and i J development associated with public procurement became in- ;; : ';,•:.: creasingly distinct in form from R&D financed by th'e cs dangerous to any particular portion of the industry. Such proprietary knowledge is not needed to guia. *• . cc«tion; mechanisms can be established to allocate resources sensibly. However, this must be done without disruption to planned private research if it is to be supportive. -55- The key question is the efficacy of such programs. In the industry studies we have conducted, the verdict is positive. Where private companies support little generic research, the case for public support seems specially strong. Where private companies support such research, the case for public funding is diminished, but certainly not eliminated. Thus in the computer industry and in semi-conductors, where the companies themselves do engage in significant funding of generic research, there is advocacy of, not opposition to, government funding of research at universities. (There is, of course, a risk that public funds in such cases largely replace private funds rather than adding to them.) Perhaps, then, programs like the Cooperative Automotive Research Program (CARP) and the Cooperative Generic Techno- logy Program (COGENT) proposed during the Carter administra- tion, are not entirely misguided in concept. "Generic1' research programs might well be.an appropriate topic.of discussion during the next resurgence of concern within policy circles for boosting industrial innovation. 3. Support of'Clientele-Oriented Applied Research. Public support of basic and generic research does not require program officers to form judgments about which par- ticular technological developments would be most valuable. Rather, the objective is to enhance understanding of rela- tively basic principles or to .explore certain potentially widely applicable technological routes. Furthermore, this . kind of research seldom, poses an immediate perceived threat 3. Cf. Chapter IV below. ; . -56- to the proprietary interests of particular groups or firms. In contrast, government programs of support of applied research and development for an industry whose products are evaluated largely on commercial markets requires a mechanism for making commercial judgments and may provide some signi- ficant perceived threats to particular firms. The case of public support of applied research and development for agriculture indicates that, even with these constraints, a feasible government program may be effective. It is interesting to consider which aspects of the inrlustry, and the program, have permitted an effective program. In the first place, farming is an atomistic industry, and farmers are not in rivalrous competition with each other. Differential access to certain kinds of technological knowledge, or property rights in certain technologies, are 5: not important to individual farmers. This fact at once means; that farmers have little incentive to engage in R&D on their; own behalf and opens the possibility that the farming comnm-;;;: nity itself would provide a political constituency for publip: support of R&D. . lll; : The federal/state agricultural experimentation system, |ij:! established under the Hatch and subsequent acts, marshalled J ;:; that support and put the farmers in a position of evaluating and influencing the publicly funded applied R&D. The systerri is highly decentralized. The regional nature of agricultural technology means that farmers in individual states see it to theiL advantage that their particular technologies be advanced as rapidly as possible. Where private companies are funding . significant amounts.of innovative work and the industry is reasonably competitive, it is in the interest of the farmers, as well as the companies, that public R&D money be allocated to other things. As Evenson describes it, a reasonably well- -57- defined division of labor has emerged between publicly funded and privately funded applied research. Even son and ether historians of technical change in agriculture have argued that the applied research and development efforts of the experimentation stations did not yield particularly high rates of return until a body of more scientific and technological understanding was developed. It was this combination of an evolving set of agricultural sciences based in the universities and supported publicly, and applied research and development also publicly funded but monitored politically by the farming community, that has made public support of agricultural technology as successful as iit has been. ; ; :•• Can the experience in agriculture be duplicated else- where? It is apparent that man;; people have seen housing and agriculture as quite similar. Henry Wallace, who earlier served as Roosevelt's Secretary of Agriculture, clearly drew the analogy when, after the war, he tried (and failed) as Secretary of Commerce to initiate a major program of federal funding of building research. The efforts to revive that idea under the Kennedy administration also were explicitly based on the agricultural analogy. The analogy was also drawn in "Operation Breakthrough." It is obvious that there are i important differences. • ; In the first place, while the building industry is atomistic, construction markets are local and therefore builders are, to some extent, in rivalrous competition with one another. However, since individual builders possess little in the way of proprietary knowledge, this was not a particularly important obstacle. What was more important was that suppliers of inputs and equipment to builders pro- duce different, and rivalrous, products. Direct qovcrnment support, of applied research and development was viewed by '''^ many of them as potentially threateniny. Had the builders of houses formed a strong constituency for government . support of R&D, these resistances of input suppliers might have been overcome. However, no such constituency developed. Unlike the case in agriculture where farmers saw it to their competitive advantage (as a group) to have their technologies advanced relative to the technologies employed by farmers in other regions, builders apparently saw no such advantages for them. . Nor did there exist in housing, as there came to exist in agriculture, a scientific community that could point per- suasively to promising areas for applied research and develop- ment. Residential construction lacks a broad scientific bas;? from which to mount applied research and development endeavor. Thus agriculture had both a constituency .interested in getting applied research and .development relevant to their needs 'undertaken and, ultimately at least, a sound .scientific basis beneath its technologies. Residential construction has neither. One may conjecture that programs in support of residential construction technology will not be politically feasible until the clientele Js established to support and guard them, and will not be effective.in the absence of some sort of underlying scientific base. It probably is the case, therefore, that the agricultural model of pub.lic support of applied R&D is not readily extond- ible to many, other industries. There may be a few, however, to which such a program is applicable. Again, the key ingred- ients would appear to be (1) a group of users of a technology who are not in rivalrous competition with each other.but who,. together, have a significant interest in getting their techno-, logics advanced and (2) a scientific base strong enough that -59- applied research and development can be fruitful. One might also note that these ctre the conditions under which one. might think of establishing industry "cooperative" research and development laboratories. Indeed, the agricul- tural experimentation.stations might be regarded as just that — except for one important difference. Much of the policy discussions about cooperative research and develop- ment has presumed that public funds should account for only a small portion of total R&D monies, and that the industry should contribute the bulk of the funds save for, perhaps, the first few years of the program. Under such terms, it has proved hard to get much cooperative R&D underway and sustained. The agricultural case suggests that the require- ment for industry financing may be a mistake. In industries - like agriculture — where such programs are plausible, prices tend to follow costs. The returns to successful R&D go largely to consumers, not to producers. The difficulty with ':; extending the agricultural model is not that the public at large would not benefit, but that the conditions under which ; this model is applicable would appear to be rather special, j: 4. Government-Guided Applied R&D with Commercial Ends. I I; In Operation Breakthrough and the Supersonic Transport ;=; Project, the government got itself into the business of :: trying to identify or develop products that would sell well :i . on complex commercial markets. In Operation Breakthrough, --\•;' the Department of Housing and Urban Development was neither : itself a major builder of houses nor a buyer of non-subsidised housing. It thus did not have any particular expertise for judging what types of designs .would be most promising, let alone which, would.likely sell or rent. Thus it was easy for the Department -- and Congress -- to lose track of the objec- tives as the program was debated politically. Similarly, the -60- FAA was not in the business of building, or procuring, commercial airlines. The commercial airlines were singu- larly discouraging when asked about their interest in a supersonic transport. The aircraft producers showed no particular interest in designing and building such a vehicle until the subsidies grew very large. Very few of the housing designs created through Opera- tion Breakthrough proved viable commercially, nor did they serve as a significant basis f;or follow-up design work. The British/French experience with their supersonic transport indicates how fortunate the United States was that the prog- ram was stopped before it resulted in a technologically (though not commercially) viable aircraft. ; The lesson here is not particular to these two cases; it is a general onef There are many other studied cases, most of these European, in which the government has tried to identify and support particular products they hoped .would ultimately prove to be commercial successes. While ithere were a few successes, the batting average has been very low except where the government in question has been .willing to subsidize, or require the procurement of, the com- 4 pleted product as well as the R&D on it. This should not be surprising. In many of the indus- tries in which this has been attempted (in Europe), the private companies also were investing in R&D, and the government was in a position either of duplicating private effort; subsidizing that effort and probably therefore 4. See, generally, K. Pavitt and W. Walker., "Government policies Toward Industrial Innovation: A Review," Research Policy, Vol. 5, No. 1, January, 1976. -61- replacing private RiD monies; or investing in a design that the privatt; companies had decided to leave alone. In the last case, it might be argued, there is a legitimate public role in supporting work on designs that are a gener- ation ahead of those that the companies themselves are exploring. However, as the supersonic transport and a number of other like examples indicates, the sensible way to explore the next generation of technologies is through doing generic research, building and studying prototypes, etc. The appropriate research program is one modeled after NACA, not one modeled after the supersonic transport project. If the United States were to drop its anti-trust laws, and the objective of preserving intra-U.S. competition that those laws are supposed to embody, then it might be possible to mount a policy to help industry search for "winners." In various of the European countries —• and Japan — compe- tition is viewed not so much in terms of rivalry among domestic companies but in terms of competition from abroad. In these circumstances, it is possible for a government to work with [industry as a whole, and to participate in laying the bets, and in dividing of the market. As the law exists in the United States, much • >f the information needed to guide a government program to help industry find and support "winners" is proprietary, not shared among firmsi and not accessible to a governmental body. The experience of the European governments in trying to pick winners indicates the costs of these American constraints are not severe; con- straints are looser in Europe and the record of public policies to help industry identify and support winners is not .encour- aging. The experience in Japan, may or may not be different. As the present time not enough is known about what the Japanese actually do to make a judgment on this. In any case, modes of government-industry cooperation in Japan are so radically different from those in the United States that it is doubtful -62- we can learn much of use to us from the Japanese experience. It is a shame that so much of the discussion about government support of industrial R&D in the United States has swirled around the question: should the government try to pick winners? The evidence from our case studies answers that question with a resounding no. However, the experience a1so shows that there are many other potentially fruitful ways that the government can support industrial research and development. C. Policy Affecting the Climate for Private R&D. Much of the preceding section was spent disentangling various kinds of government R&D support, attempting to identify the reasons why such support has taken different form in. different industries, and hazarding guesses as to •••:.; the effects. The same kinds of analytical challenges face ji us in. this section, which is concerned with a variety of ;; =. government policies that hava influenced the climate for |;: private R&D and innovation but which do not involve direct Lp governmental support of RiD. Regulation, for example, has ;; meant very different things in the various industries |-, studied. ' s-\f The fact that the policies considered here do not involve, direct R&D support may not be the most important J difference between these policies and those considered in i: the preceding section. The policies discussed above were, obv.ously intended to influence technological advance. However, many of the policies considered here were put in place for quite other purposes. It is not clear whether, or to what extent, they realistically can be regarded as instru- ments that .might be consciously employed to influence innovation. -63- Put another way, the problem is this. Virtually every policy of government influences the clima;.-3 for innovation in some way, in greater or lesser degree. For only a few is the influence on innovation a major factor considered in design and implementation of the policies. Which policies should be considered explicitly here? Presumably those whose influence is significant and whose design might be improved through evidence about the policy's impact on innovation. Unfortunately, evidence of magnitude of impact is hard to come by. Therefore, the focus must, and should, be on policies widely regarded — whether correctly or not -- as having a significant effect and as subject to modification to make that effect more positive or less negative. Since the case studies contain relatively rich material on them, we shall focus on four ;such classes of policy: procurement; regulation; anti- !trust; and patent and other policies affecting property !rights on inventions. And we conclude this section by idiscussing why it may not be particularly fruitful to view imost of these instruments as capable of playing a pc«ei.r-j.l role in policy packages designed for the express purpose of stimulating industrial innovation. 1• Procurement. In undertaking its many and varied activities, the federal government buys a wide range of products. If one also considers the state and local government activities that the federal government helps to finance — riot to men- tion the regulatory and other objectives of government — it becomes clear that the government is a direct or indirect purchaser of virtually everything. But the range of products for which the government has actively and consciously at- tempted to spur technological advances to enable it to -64- achieve its objectives more effectively or in a less costly manner is actually quite limited. .We argued above that there might be a high payoff to extending the range of such products considerably. Such an extension would enhance the capability of government to meet accepted public sector needs, while at the same time contributing to the advance of techno- : logics for products sold and bought on commercial markets. ' As the case studies show, there are a number of ways in which the government can attempt to draw forth technplo- i gical advances. At one extreme, it. can itself undertake or i contract for virtually all of the R&D in the area. At the | . other extreme, it can advertise its interest in products i . with certain characteristics, and entice and support private 1 R&D efforts through.its procurement policies, with only limited direct public funding of R&D. i ! . • . J Much has bsen said about the role of government in I . ."making a market" for certain kinds of technological ad- l vances -- usually with the implicit assumption that this I is a kind of policy very different from that of government ' . R&D support for the work leading to those advances. In : . fact, the distinction :is actually quite a fuzzy one. When- ' ever the government tries to "make a market" for a new i . . . . . . technology, it. inevitably and appropriately will be drawn into some R&D support. Conversely, government R&D support of public-sector technologies does not make sense in the absence of aggressive procurement policies which, in turn, . will almost inevitably induce certain privately financed efforts. In short, "making a market" for technological advances and R&D funding to facilitate those•advances are closely tied together, with the mix of R&D inducement and R£D support a.matter.of tactics not strategy. Aggressive procurement is one aspect of a policy designed to draw forth better .technologies that have both public-sector and non- governmental applications. Such procurement policies are -65- ^a complement— not a substitute — for government R&D support policies in such areas. ' 2. Regulation. », K '• If the reader approaches this study with any strong, ( simple ideas of the effect of regulation on technologicalchange in industry, a reading of the case studies may quickly disabuse him of these. The studies reveal how diverse regu- I lation is and how complex and subtle its influences sometimes } are. • . The automobile industry and, to a lesser extent, residential construction reveal what has been called "new \ style" regulation at work. (As the housing example testifies, ;J new style regulation is not so new.) Regulation here amounted :.; to the imposition of certain requirements on the products j ; ; produced or the technology employed with the objective of •-;'. I assuring certain standards of quality, or safety, .or protect-s ; ; •; ing the environment, etc. However, regulation, has had quite ;j ;;• ; different purposes in the two cases, and has had different il ;: ; consequences for technological advance. . • ji ;;; ' ' ' " \'. '• ' :'. In the housing case, regulation has been conservative. ;!;;.: Building codes and standards have stuck pretty close to !;;;': prevailing techniques and materials, or simple modifications; :: thereof. Far from being aimed at drawing forth new mater- ;• ials and methods, housing regulation has tried to monitor |j-/ and screen these and, in fact, has made significant inno- .: vation expensive if not downright impossible. In contrast, regulation in the automobiles case has been used aggressively to pull forth now technologies. When the regulations were . imposed, it was well understood that prevailing technologies could not meet the standards. One can argue about whether -66- regulation was the most appropriate or efficient method to pull forth the desired innovations. White and other scholars believe that the route has been inefficient and expensive. Although this regulation strategy may have led the government to neglect direct R&D funding, it is certainly not the case that regulation has deterred innovation. Pharmaceutical regulation is something else again. Originally concerned with maintaining purity standards and safety, in the 1960s regulation began to try to assure effi- cacy as well and to constrain and monitor the safety of the R&D process itself. There are very real questions about whether the post-1960.s regulatory environment has actually increased the' efficacy of the new drugs that reach .the market or guarded the safety of .patients and experimental ;--ubjects to any significantly enhanced degree. As Grabowski and'Verncii argua, it is not easy to pin down and separate the effect of U.S. pharmaceutical regulation on the flow of new'pharnaceuticals into the cornucopia. It is clear, how- ever, that regulatii i has significantly increased R&D costs, and delayed the introduction of new drugs compared to the date of introduction in countries with different regulatory regimes. The effects of new-style regulation show up less strikingly in the other industry studies. However, environ- mental and safety regulation has in recent years come to play a significant role in influencing.the fertilizers and pesticides that farmers are allowed to use and, relatedly, the tests and hurdles a new agricultural substance must over- come before it can be introduced to the market. No study of the effect of such regulations on the flow of fertilizers and pesticides comparable to the studies of the effects of regulations on the introduction of new Pharmaceuticals has ever been made. In our case studies, civil aviation appears as the industry most strongly influenced by what has been called "old style" public uti lity regulation -- regulation aimed at constraining prices and requiring certain standards of service delivery. In this particular case, the airlines, while regulated, were in rivalrous competition with each other. Further, the industry doing most of the relevant R&D — the airframe industry — was not regulated. The consequences of regulation undoubtedly was to spur innovation. As hc;s been the case in other regulated but rivc.ii.ous industries -- for example, railroads — regulation in the aircraft industry must be understood as setting floors under prices as well as establishing ceilings. In the airline case, the result wa;> that, since rate competition was blocked on lucrative competitive runs, the airlines' competitiveness spilled over into the providing o2 better services and seats on more attractive aircraft. The consequence was that the •;;;:{:• airlines provided a strong, indeed eager, market for n^'v s | •• •: aircraft. It has been often argued that old-style public 1M: utility regulation stifles innovation; this most emphati- ? : • ; . : call}- was not the case here. This is not to argue that the;:H regulation of air transport was a desirvbit; policy from a f v ' ; social point of view or ever that the stimulus provided LyN'iK.! regulation for the development of transport aircraft was "•'•'•'.' socially de:3irable. It. s .imply is to warn against th=3 sii;;:.l; ;••- ; minded .notion that regulation cf^nerally deters all kinas oi^.',; innovation . : : . ' Tr .• ew of the diversity of regulation and its impact, 'c' ition or regulatory reform means different thinys in different industries. For the airlines, it has meant the abandonment of rate regulation and the relaxation of CAB control on routes. While the new regime of aircraft compe-r tit ion may provide strong demand for new aircraft, it is -68- hard to argue that the demand will be any stronger than it was under the old regulated regime, although the pattern of demand may be different. Airline deregulation is part and parcel of the deregulation movement for industries which, in the past, have been treated as public utilities despite t-.he fact that their structure permitted consider- able competition. Reform of environmental and safety regulation involves ,a different set of issues and strategies. There is a move- 'ment "nowadays to create regulation-setting machinery that will consider costs as well as benefits; toward using per- formance standards rather than prescribing particular technologies; and (in some cases) toward the use of fees or marketable licenses rather than quantitative restrictions. ;_V-'.v..h a reformed regulatory regime would quite likely provide ;a -. ettv.i., if not necessarily a stronger, environment for the general..; --, jf technological advances that respect environ- mental and safe1 " ;'alues. However, what is needed here is more sophisticated regulation, not "deregulation." Unfor- tunately, much'of the apparent thrust toward modification of "new style" regulation is toward abandonment rather than reform. For the pharmaceutical industry, regulatory reform largely means simplifying and speeding up the evaluation precedures for new drugs. Grabowski and Vernon argue the current, regulatory regime has significantly retarded and increased the cost of pharmaceutical innovation in the United States, and that the most effective available vehicle for spurring innovation is regulatory reform. However, of the industries studied in this report, pharmaceuticals probably is unique in this respect. -G9- 3. Anti-trust. Just. .* with regulation, nany people carry around in their heads an over.-simplif ied and distorted view of what anti-trust has meant for technological advance. The case studies reveal quite complicated and varied stories. The pharma. ..aticai and automobile industries have been traditional targets of anti-trust prosecution. Usually, however, the anti-trust cases have not involved innovation, or R&D, directly, but rather have been concerned with such old-fashioned matters as price fixing or other "conspiracies in the restraint of trade." In the pharmaceutical industry, a'few of these have involved* patent licensing and other rela- ted issues. However, neither the Grabowski and Vernon study, nor other studies of the pharmaceutical industry, have- argued that anti-trust has had much of an infliiei^o on innovation in the industry, one way or anothe< . In the automobile industry, it is. quite possible, that concern about anti-trust action has deterred General' Motors from being as aggressive technologically as it might have been. On.a few occasions anti-trust has touched directly on issues relating to K.sO and technological advance. The restrictions on patent pooling and on certain forms ot" co- operative R&D were noted in White's .case study. The lawyers for the automobile company certainly had misgivings about what the anti-trust division would do if they joined tho proposed Cooperative Automotive Research Program. However, present anti-trust guidelines, which permit .coopox-at ive Rf.D if the results are not treated as proprietary, would appear to leave room for programs of this sort and for most fruitful kinds of government-industry cooperative programs -- provided, of course, that the industry is persuaded that such guidelines are a suitable.guarantee of futiire Justice Department behavior. -70- The computer industry is an interesting case for think- ing through certain conundrums about anti-trust and industrial innovation. The history presented in the case study stops at just about the time that IBM achieved the dominance which it now has maintained for close to twenty years. As Katz and Phillips show, IBM was successful in part because it guessed right technologically and in part because it judged the market correctly. Other scholars have remarked that its previous dominance in the punch-card .calculator business gave IBM a special advantage in the sale of computers to business users. Scholars and lawyers may argue whether it was techno- logical leadership, shrewd judging of the market, effective marketing, taking advantage of old ties, or behavior subject to prosecution under the anti-trust laws that have enabled IBM to preserve its dominance in large scale civilian compu- ters. Nonetheless, the anti-trust cases have involved, in an essential way, complaints about the way IBM go^s about;;, designing and. introducing new computers, and the remedies'; :.; proposed include some that would significantly limit the ? - \ freedom of action of IBM regarding R&D and innovation. !;!;. •; The case studies reveal at least two striking instances whore anti-trust and other structural policies preserved;;or; created a competitive market structure with apparent saluH;; tary effects on industrial .innovation. Although some scholars maintain that AT&T had no interest in going into production for sale of transistors anyhow, the 1956 consent decree {• I legally foreclosed that option. The evolution of the semi- conductor industry might have been different had AT&T decided to get into the commercial market. One might also note that the consent decree, while most visible in our semi-conductor study, stopped AT&T from going into any commercial market not directly connected witn the telephone service. The evolution of the commercial computer industry might have been signifi- cantly different absent the restraints on Bell Labs and WestcJIi -71- Electric.. As this report is written, Congress and the Administration are debating proposals to relax constraints on AT&T. A second example of government policies that influenced an industry's structure in a way that had a profound effect on technological advance is the revised Airmail Act of 1934. This fret broke up vertical integration among airlines, air- line manufacturers, and engine manufacturers, and left a more open and competitive structure. Again, it is difficult to judge what would have happened if the industry had re- mained vertically integrated, but it is hard to imagine that technological advance would have been any faster than it was. 14:.!. Patent and Related Policies. . ; ? ;" How about public policies that affect. patenting and, more generally, the ability of the company to appropriate the returns to an invention it makes? Again, the-picture is mixed and complex., . . . . . . In the pharmaceutical industry, it is apparent that the ability to patent, a new drug is virtually essential "if.that drug is to be profitable for the company that creates it. Indeed, the whole history of the pharmaceutical industry would likely have been different had the courts ruled that antibiotics, as natural substances, cculd not be patented. However, in Pharmaceuticals the question of the effective duration of a proprietary market hinges not only on patent life but on the decisions of physicians and pharmacists and on laws impinging on these decisions (e.g., regarding whether to prescribe and give out a "generic" or brand-name drug when, the former is available). .Arguments against generic See, for example, Ernest Holsendolph, "Senate Passes AT&T Decontrol," The New York Times, October 8, 1981, p. A-l. . -72- prescription are, in effect, arguments that protection provided by a patent ought to extend beyond its legal limit. Of course, the effective life of a patent in the pharmaceut- ical industry depends on the relationship between the date of patenting and the date of commercial introduction of the product. The testing:-and licensing requirements mean that there is .Often a very considerable -.ag. between patent application and commercialization. Returns to invention in the pharmaceutical industry clearly depend on a wider set of variables than the strength of th't patents. For many of the other industries studied, legal pro- tection of proprietary rights seems to be less important than in Pharmaceuticals. Key patents have played a role in the evolution of mechanical machinery in agriculture, and in inducing new chemical compounds like fertilizers and pesti- cides. However, while hybrids were judged patentable, it is not apparent that a patent adds much to the protection a seed company has for its particular hybrid. .A potential competitor cannot really discern the exact nature of that crossing that led to the particular hybrid seed. In this case the patent may.be a minor rather than a major element in assuring appropriability. . In semi-conductors, while firms, patent .their new devices, these patents do not have much.force. Sometimes producers of new devices are able to hide their design from potential competitors by "potting.." But in this industry imitation is generally quick. Indeed, the insistence of government and other purchasers of seiii-conductors on "second sourcing" requires in effect that a firm's new design be pro- duced by another firm as well as the innovator. The profits to a successful innovator in this industry would appear to reside largely in. the .head start that provides a short period during which the innovating firm is the sole Supplier and an -73- ability to mo^e down the learning curve before other firms get into production. With a few interesting exceptions, patents appear not to have played a particularly important role in inducing, or making profitable, innovation in automobiles or civil aircraft. Indeed, in both industries there has been a tradition of relatively easy patent licensing, or even patent pooling. The reason for the lack of interest in a particular patent would appear to be that automobiles and aircraft are complex systems, and that particular patentable components do not really play much of a role in determining the attractiveness of the overall system. It is the general overall engineering of the product that counts, and that is not readily patentable. Much the same situation seems to apply in computers. While patent suits marked the early history of the industry, IBM's prominent position does not rest on its patent holdings. 5. General Purpose Instruments, More Generally_. It would be easy to draw on the case studies and other material to extend tho list of government policies that in- fluence the climate for industrial innovation. Some of these policies are broad in scope, although their influence differs from industry to industry. While the influence of the tax ; code is pervasive, particular features, like the treatment:: : of capital gains, appear to be particularly important to - 1 ; . . certain industries. Thus it has been argued that the higher taxation of capital gains that came with the tax bills of the early '70s had an especially strong negative effect on funds to finance innovation in the semi-conductor industry. It is unlikely that, these statute changes had a comparable effect on aviation. While monetary policy is cross-cutting, our -74- particular monetary institutions segregate.the housing i.iaustry and make that industry bear the brunt of the economic fluctuations to a great extent. Some policies are aimed at particular industries. Special price support programs certainly have influenced technological advance in agriculture. The trade agreement with Japan regardi"~ the importation of television sets especially affected the U.S. semi-conductor industry. One could go on. However, if our search is for instruments that can be considered powerful tools for a policy to stimulate, industrial innova- tion, such extended listing and analysis is not likely to ".. ' j be fruitful. There are several reasons. :; First, the broad policies in question have been put in place for a variety of reasons. Arguments about their ;• effect on industrial innovation will carry only limited •weight in influencing the debate about their reform. This ;is not to say that such arguments have no influence. A •tax credit for R&D was proposed by several groups as an • important instrument to spur innovation, and such a tax ;credit was part of the recent Reagan tax .modification package. :But an R&D tax credit was only a small part of that bill, and it is unlikely that the particular proposal would have . been heeded had there not been a general thrust toward tax reductions of various kinds. Second, the broad policies in question often differ in the particulars of their application from sector to sector. Therefore, it is virtually impossible to identify any general rules for reform of any of these instruments for the purpose of spurring industrial innovation. Rather, the most salient proposals would appear to be industry-specific -- for example, particular reforms of pharmaceutical regulation. Third, while undoubtedly in some cases there is a trade- off between stimulus of industrial innovation and other policy -75- objectives, our perusal of the case studies suggests that, in most instances, the reforms that make sense as a stimulus to the .right kind of. innovation makes sense in terms of more general criteria as well. Thus, while regulatory reform is not a broad panacea for stimulating .faster or better- directed technological advance, the kinds of reforms that scholars long have proposed on grounds of general economic efficiency for .pharmaceutical regulation and auto emissions control probably would affect innovation in the right direc- tion. Our case studies reveal a few instances where anti- trust may be acting as a restraint on certain types of industrial innovation, but they certainly provide no general indictment of anti-rtrust policy on these grounds. .The anti- trust issues involved in the suits against IBM or AT&T are complicated.. As a general rule, however, it does not appear that anti-trust is hobbling innovation by business. Simi- larly, there appears to be no general magic in reform of the patent law or in the patent policies of particular government agencies that fund R&D. " • Let us not be misunderstood. It may well be that estab- lishment of a generally supportive climate for industrial R&D is the most important thing the government can do to facilitate industrial innovation. We would put particular stress on. the importance of strong aggregate demand, rela- tively stable demand growth, and predictable prices. When business conditions are good, and incomes and demand are growing.rapidly and predictably,'business firms can anticipate an expanded market .and make their investment and R&D plans accordingly. When demand is stagnant -- or uncertain -- investment in new plant and equipment is deterred, and R&D aimed to tap new markets may look like n very'risky proposition, Of the industries studied in this -76- report , housing is the one that is most noticeably influ- enced by changing macroeconomic conditions. Quigley and others have argued that the cyclical sensitivity of residen- tial construction is an important factor explaining the structure of the industry and the limited incentives for innovation associated with investment in durable equipment. However, virtually all industry is'subject to some cyclical influences. The demand of farmers for new agricultural implements is cyclically sensitive. A non-triv.iaJ proportion of the demand for semi-conductors is cyclically sensitive. Economic slumps hurt the airlines, diminish their ability and incentive to invest in new equipment, and reduce returns to the design and development of new aircraft. However, even if there were no Affects on innovation, it would be the objective of macroeconomic policy to achieve a sustained growth, high employment, steady prices. As with regulatory and ani.i-trust policy, the objective of stimular-^.';' ; •ting innovation carries no particular implications for fiscal and monetary policies. i:; : It seems to be like this in general. If the specif ic" ;;• :. interest is in stimulating innovation, it is a mistake to/;••;/ look largely to general-purpose policies. The design of • | ;j'. ; them can be influenced only marginally by concerns about f;';;'.; innovation, and often concern for innovation does not point: to departures from policies that are sensible on more general grounds. If "innovation" policy is to have any meaning, :• '..'• search for one must be focused on more specialized instruments. -77- D. A Brief Summing Up. In the preceding section, we identified a wide range of government policies that defined the .climate, influenced incentives for, and imposed constraints on industrial .research and development. In virtually all of our case studies, one or more of these government policies was an: important part of the story. However,, the most important such policies differed from industry to industry. While it is apparent that a number of specific.reforms might have significant benefits, the case studies dp not seem to reveal any general and powerful guidelines for regulatory or anti- trust or patent policy reform. .If a serious mandate re- emerges to find and implement government policies ..that will significantly spur industrial innovation, debate should try ito avoid the understandable temptation to look to modifica- tions in these general instruments to do the trick. There, isn't much leverage there. Moreover, the kinds of improve- ments in macroeconomic and other policies that make most sense for stimulating the right kind of innovation make good sense in terms of other criteria as well. If government must look specifically for policies that may have a significant stimulating effect on industrial innovation, the place to look is in the bag of R&D support policies. This chapter has not attempted to give a general rationale or justification for active government support of R&D nor to draw up fine theoretical arguments to guide such policies. A decade or so ago, economists had much clearer and more pointed theoretical views about these matters. The externalities from R&D and the uncertainties involved led, according to the theoretical perspective prominent at that time, to a divergence between the quantity of R&D expenditure that, firms would find most profitable and the quantity that -78- was optimal from ?. "social" point of view. The firms would spend too little. Public support or subsidy therefore was warranted and ought to be focused on those kinds of R&D and on those industries where the.externalities and ;tne.uncer- tainties were the greatest. Subsequent theoretical work has led economists to draw a more complicated picture. A competitive regime in which firms gain property rights on certain of their technologies draws forth some R&P that is socially wasteful. Major technological- uncertainties call for a variety of approaches with open knowledge of routes being explored and what is being found along the way, and not a big push along one particular road. The problem with market-induced industrial R&D allocation lies in the port- folio—the allocation of resources -- rather than in a total magnitude of effort. But if the problem is not simply.characterizable as "too little" research and development, the design of appropriate government policies requires mechanisms to identify the particular kinds of research,, and sometimes the particular projects, that are being under-funded. Therein lies the problem. Government agencies are seriously constrained in the information they are able to marshal directly or indirectly to guide the allocation.of public R&D monies. The historical experience canvassed in this study sug- gests that there are three routes that can be followed. One is to associate government. R&D support with- procurement or another well-defined public objective. A second is to. define and fund arenas of non-proprietary research and allow the appropriate scientific community to guide R&D allocation. The third.is to develop mechanisms whereby potential users guide the allocation of applied research and development -79- ^^I I • funds. A fourth kind of policy, in which government i officials try themselves to identify the kinds of projects that are likely to be winners in a commercial market compe- .tition, is seductive, — but the evidence collected in this volume and other studies suggests that it is a strategy to be avoided. : ' These are qualitative judgments drawn from qualitative' and.impressionistic case studies. While we can provide some reasoning to make them plausible, we can provide no tidy and powerful general theoretical justification for them. Perhaps the lesson that economists should .draw from . their earlier attempts to base prescription for government .R&D policy on theoretical arguments is that this is a. dangerous game. Economic reality is too complicated to be fit well by any simple theory. More complicated theories generally point in differen.. p""' > -y directions, spending on the quantitative magni !;;;»• .i in key parameters. ' The design, of good nc.' . ''His or ..id empirical research, and not simply on • . i . _ . i ) :. v.-.'St.ining, There arc i v.-o major weaknesses v;irh cue evidence provide-'.: in L i s i . , study support 11. ; tho ai^ve propOKj. I j.or. 5 ,• about policJC'S. First, tho evident' •• .:•.!•:• . .-"-lely from = scuoies of r.t".'-'1:! I'.s. (••;'•.'••;! s ies. .- . nul, i. no < ••/> Jf.ice is I qualitative j"ul jud^n.-.-n*. ;i '.:•••- c-.viantJ tative and toadily ver i f iablo . ;• Ths.s first weaV.MQSS is riot as serious as it might seem, • although this study v/ould have been enriched had coverage been wider. There are available a number of other industry studies, some of the United States, some of Europe. There are also several across-the-board evaluations of government policies in support of industrial innovation, particularly -80- policies of European countries. The conclusions drawn in this chapter were influenced not only by the case studies but also by this other evidence, and are consistent by ;-.nd '' large with both bodies of data. The second weakness is more serious. One can try to l avoid having to base conclusions largely on qualitative and impressionistic evidence by constructing formal models : and hypotheses and.estimating and testing these • ith stati:- ; tics. To some extent this kind of work has been dc:vj for ^agriculture. But such quantitative conclusions are no better than the models and the data on which they are based, and -these contain large elements of the subjective and judgmental ; ; : ; We are more concerned about thu :a.it.h that lay perse, s. 1 ; impolicy makers, and even scholars often show in quantitative i • : : ; conclusions drawn from shaky mode? s and data than about . i. ^conclusions that are explicitly qualitative and judgmental. • : When Our knowledge is stronger, when we understand things : : :well enough to have confidence in the basic form of the . . : _ . • ' - • models we write down, when we have data that are more con- ' formable with our operating models than they now are, then quantitative studies can play a greater role. We would : , argue, however, that, at the present time, the most promisinr i . route towards such stronger knowledge is to pursue case studies of the sort reviewed here and the kind of qualil: t.; »i, i judgmental analysis developed in this chapter. -81- IV. RECENT FEDERAL INITIATIVES IN CIVILIAN SECTOR. The last chapter examined the history of t. :. Ci_t. , pp. 7-8. 24. The economic models from which this risk-aversion argument derive are closely related in for.n and assumptions to the appropriability-externality models discussod. in Section II.C. above. See especially Kenneth Arrow and Robert Lind, "Uncertainty and the Evaluation of Public Investment," American Economic Review, Juno, J970. 25. See U.S. Department of Energy, Office of Conservation and Solar Applications, "Industrial Energy Conservation Program Project Evaluation-Threshold Analysis." Washington, D.C. mimeo. •24 • i slv"?.d get involved whenever risk-aversion ia suspected. j This pMlosophy of intervention was formalized by DOE in a •{,. 25 • computerized project-selection technique, which calculated j the expected return.and riskiness of each project; DOE would ;i funJ only projects with an acceptable rate of return who.»e ; riskiness placed them outside the domain of likely private j sponsorship. The probabilities employed in this procedure • were estimated by DOE on the basis of technical, commercial, ] and institutional factors. Each applicant was also required '1 to assert that it would not have carried out the projec'c in j • i 5question in the absence of government assistance. • ; '. ' - t i : . ' . i The program included no provision for the beneficiary . " j of the P.&D support to repay DOE in the event of "a successful | project. ;The federal share in projects was typically 30 ; percent. Program budget obligations were $21.7 million in ; fiscal 1978 and $36.3 million in 1979. The program's goal ' •'• - ;; " : • * was a 3.2 quadrillion Etu/year energy saving in 1985. Like; CARP, the DOE program wa& also arguably based on : an older ir.odel of government intervention, one which, despite its partial:focus on the "generic," ultimately involved the government, in "picking winners" and evaluating particular ; research projects. Nonetheless, the DOE program seams by all indications to have been an effective program, in that it was embraced and utilized by the private sector. -95- k* The National Science foundation Programs. In the years immediately.after World War II, some 12 percent of university research was funded by industry. The figure today is closer to 3 or 3V percent (although it is increasing). This signals a breakdown in communication bet- ween business and academe, according to Dr. Jack Sanderson, Assistant Director for Engineering and Applied Science at NSF." (This directorate has since been renamed the Engineering Directorate.) In 1972, NSF began establishing industry/university cooperative research centers* Examples in operation include the polymer center at MIT, the "submicron"- center at Cornell, and the rather ill-fated furniture center in North Carolina. The main difference between these centers and those proposed for COGENT seemed to be that NSF centers are affiliated with universities. . A slightly different kind of center funded by NSF is an "innovation center" aimed at teaching entrepreneurial skills to engineering students. There is evidently a project 26. Remarks at our October 29, 1980, meeting. 27. For a fuller discussion of NSF1s cooperative research program, see Neal H. Brodsky, Harold Kaufman^ and John . Tooker, University/Industry Cooperation, New York: Center for Science and Technology Policy, 1980, pp. 34-41 -96- A primary reason for the program's success seems to be its concentration on process innovation, which limited the uncertainties primarily to technological and engineering- economic — as oppop..jd to commercial 6r marketing — areas. Competent manageme.it and a low profile were undoubtedly j important ingredients A S well. - ' • - . . ' j along these lines in operation at the University of Utah. NSF also retains a small-business project, in which firms with an innovative idea in need of development can receive support. An important requirement of the program is that applicants have venture capital already lined up to finance the developed idea if it proves successful. NSF was also to have been involved in the CARP program (it was to allocate 40 percent of the funds initially)/ lend- ing its expertise in university research matters to the Department of Transportation, which was ultimately to have taken full charge of CARP. Another NSF venture" is a project to refit the infamous Glomar Explorer for experimental oil drilling in the deep ocean and Continental Margin areas. Sanderson also mentioned projects in robotics and fluid-bed combustion. : ; Another part of NSF attempting to increase communica- tion between the academic and the industrial is the Joint University-Industry Research Program. Frederick Betz, who heads the program, described himself as a sort of "banker" with a pot o: money for research projects jointly undertaken ' • "* 8by university and industrial scientists.'' The procedure isithis. A proposal involving joint efforts of both industry and university is submitted to the segment of NSF appropriate to the project's topic; the proposal then undergoes peer review; successful proposals then go to Detz for funding under this program. (NSF funds only the university share; industry picks up the tab for its researchers.): This is now being changed, The program was funded at a level of $5 million in FY78, increasing to $7 million in 1979. Unlike CARP, COGENT, and the DOE industrial program, the NSF programs were not cut completely by the Reagan administration. 28. Remarks at our October 29, 1.980, meeting, -97r V. CONCLUDING COMMENTS ON MAJOR THEMES. What type of conclusions does one derive from a study based largely upon anecdotal experiences and judgments? A nurober of important themes have emerged from our study of recent federal initiatives, from a number of the industry studies, and from the comments of industry and/or government executives. They have surfaced in the analyses of both government science policy and industrial research. Thus, a primary type of "conclusion" is the identification and signi- ficance of ;these important themes, placed in a perspective that permits us to take them into proper account for the form- ulation of future policies and the initiation of future programs.; ;= ; . There is a second type of "conclusion" one can draw from these common themes and from the anecdotal data of this study. We: can set down statements about the interactions of public and private sectors that appear to characters ze desirable or effective relationships for federal support of civilian R&D — statements that can serve as criteria to guide future actions. The perspectives derived from this study consist of a number of fairly simple principles or observations drawn from the evolution of, and recent experiences in, public- and private- sector interactions, along with evaluations of the several principal themes. We ivill therefore consider the general principles that apply to the present status of civilian-sector R&D as one theme, and address separately the other individual topics, although some of the general principles will refer briefly to subjects discussed more fully as specific themes. -98- A. General Principles for Public- and Private-Sector R&D Interactions It is important to state first those aspects of the ! civilian-sector R&D structure that are most critical to the , | effectiveness of federal activity. Every Western industrialized •: country has developed a pattern of government involvement in ( •i civilian-sector P.&D. But there are two factors which, taken ! . . ! together, apply to the situation in the United States to a ! far greater degree than to the other countries of the OECD j (Organization for Economic Cooperation and Development): . ; . • ' • • - • ' . - . . . • ' . • • . . . . ' . . . .'••: ' 1. The private sector has the responsibility in '' almost all areas, subject to boundary conditions , set by government, for the.manufacture and dis- tribution of goods and services for the civilian sector. It thus has the primary responsibility . for investment and marketing decisions related to the exploitation of technical change. 2. Industrial research funded by the private . sector constitutes a very sizable resource in absolute terms ($33.9 billion in 1981) and as a percent of the total national R&D expenditures (49 percent in 1981). The amount of R&D conducted within industry — both industry and government-supported.-- is far more substan- tial ($49.2 billion and 71 percent of the total in 1981) .L • • . We therefore have a picture of the private sector in the U:S. as relatively self-sufficient in its ability to generate the R&D it requires for growth. The industrial research conducted within the private sector is surrounded by a wealth of technical activities throughout the world that are not necessarily intended for its support, and by a number of federally-funded activities that are. The linkages through which the private sector extracts benefits from this broad technical reservoir are generally loose and informal,. 1. Willis H. Shapley, ef. al., eds., Research and Development: AAAS Report VI, Washington: American Association f.or the Advancement of Science, 1981, p. 87. -99- based more on professional interactions than on mechanisms set.up for deliberate exchanges. It is in this broad context that we must consider the actions of the federal government and the reactions of the' private sector. When we consider federal support of civilian- sector R&D, there is the implicit assumption that the technical activity supported is expected to be converted to use, i.e., it will be integrated by some mechanism into the operations I i i of the private sectort emerging in the form of new products, ! i processes, and services. This is why the question of improving the effective- ness: of federal support for civilian-sector R&D turns upon | i theimore fundamental question of whether the federal ! : government should engage in a specific area, .particularly ; ; ; : : : : • - , > . when the private sector is relatively self-sufficient and • ; • ; ! must balance technical change with financial and marketing •• I -5 resources. Given the implicit desire for conversion to use, j ;;.' ; an action that should not be engaged in by the federal j;.;;;. ' government by this judgment will very probably not turn out i H i : to b-? an effective action. That, in fact, is a principal M;:: • historical observation emerging from the analysis of industry JHN and individual experiences during this study. 5 : This provides a working model with which to extract ; ; . ' • ; some general principles from the material assembled in this / h : study. Federal support of civilian-sector R&D must develop appropriate linkages with the private sector so that our economy can derive the benefits from that support. On this basis, we can now set down a number of general principles illustrated by these materials. * The economic basis for government involvement in civilian-sector R&D should be seen as involving more than merely an assessment of the "social returns" to various levels of R&D funding. -100- Economic theory in recent years has begun to realize j that the process of technical change in industry is a com-. . j plex one, and that the rationale for government involvement is more than a simple matter of the sufficiency or insuffi- ciency of private R&D funding. The important problem — economists are increasingly recognizing —is the identifi-. cation of which technologies and types of projects are insufficiently supported by the private sector. And programs for government involvement in R&D thus must be attentive to the mechanism proposed for the allocation of federal resources t o R&D. ' • ' . . , *'•'•. There must be widespread support for the need for a federal role in supporting a specific ; •' program of civilian-sector R&D. ;This is the common-sense doctrine stated at the beginning of this section. For any proposed policy of action,! there must be a logic as to the propriety for the particular action by the federal government. Further, there should be a reasonable agreement as to this need on the part of all interested parties. * Technical change in almost every industry sector can be influenced by some federal action. There is not, and has not been, a neat separation between the private-sector pursuit of technical change and the actions of the federal government. The amount of feder- ally funded R&D conducted by each industry may vary, but this is not the main principle at issue here. The point is that the range of federal actions, including procurement and tax policies as well as the direct support of R&D, is so wide that it has been a factor in technical change throughout industry at many times in our history. The image of an in- dustry planning, conducting, and exploiting all the technical change it requires independently of any interaction with the -101- .•iJ federal government is not a realistic picture of the actual growth of U.S. industrial technology. * Effective federal R&D involvement is related to a federal role as user or supplier. • • v -' ' ' 5 Selecting the highest-priority research programs, j setting the most realistic objectives, and integrating the ? results in the manufacture and use of a product or process -- j all of these functions are expedited by some familiarity j with product specifications or market needs. The familiarity j is possessed by those who buy and use it. Thus, the out- standing successes of federal R&D activities during and after World War II were in those fields in which the federal govern- ment itself was the customer. * Support for civilian-sector R&D should be ; '. industry-specific. ' ' - . " . . . • ' • . - . ' . ' . ' ' The varying characteristics of each industry (cf. j Chapter II.B.) define the relative importance of technical j change in the growth and Competitive relations for that ; industry. They also indicate which category of research / may be lacking, whether there is .a role for government to fill a void, and whether the capabilities and opportunities for exploiting technical change are present. The use of : direct or indirect instruments of government support will : depend critically on these characteristics. Federal suppott for R&D in the metal and mining industry, for example, should be radically different from any such support in microelec- tronics. . ' • • . ' * Federal R&D activity is most effective and least controversial in strengthening the infrastructure • /- • of science and technology. There is reasonable consensus and a sound rational argument for the federal government to be concerned with the health of the national technical enterprise. Such con- sensus and rationale disappear quickly when federal support -102- for R&D turns to specific missions, even to specific industries, which call for considerations of economic and market factors, and can disrupt the competitive actions within the industry in both domestic and international markets. * Federal support for civilian-sector applied research is more likely to be effective when coupled with some indirect federal action, ; such as procurement. ii The fundamental weakness in federal support for civilian- : sector R&D is the lack of coupling to the manufacture and 1i use of products or processes derived from technical change. j Thus, government agencies are at a disadvantage in assigning j priorities, setting specifications, and achieving successful « transfer of the results. But when there is an overriding national objective that justifies government procurement of i: ' various civilian goods and technologies, the government is •; : '\ ' " ' , ' • • • • * \ ' • ' • - . \ in;a much better position to understand the technical and |:| ; ; market parameters; and government R&D support coupled to |i-' .; . this procurement can help spur technical change in the civi- • l\'\ : lian sector while serving its own procurement goals. M ; ; : ' . * Civilian-sector R&D derives benefits from l^-I the stronger technical infrastructure and ji ;;':; increased reservoir of science and technology ••'. \ provided by public-sector R&D. ; Programs conducted by and for the civilian-sector — ;; . pur very considerable body of industrial research — have access to a higher level of science and technology because of the continuing public-sector technical efforts, e.g., by NASA and Department of Defense. Thus, the technical efforts of the civilian sector itself -is more effective for those personnel engaged in its research. The level of knowledge for new graduates, particularly those with graduate degrees who have experienced some research op«rations, is higher in part because of public-sector R&D. -103- * Federal support of. civilian-sector R&D is more effective when there is reasonable involvement of the industry sector concerned. This is the fundamental rule for coupling government i efforts to the system which must integrate and convert j technical activities to useful products, processes, and \ ]• services. The nature of the programs and of the national '] objectives may justify government involvement, but industry inputs and activities can be a critical factor in planning, condticti-ng, and transferring R&D. When national objectives appear to preclude such government-industry cooperation, the results will surely be less effective and more expensive. * i Successful federal support of mission-oriented civilian-sector R&D must be compatible with . , existing technical community. , Success implies transfer to use. Construction of a final prototype or pilot plant resulting from a major program, the ability to manufacture something economically -- these things require a particular level of technical capabilities in fields of materials, controls, chemical engineering, and so on. Federal efforts in a public-sector mission can and do finance the parallel programs required to implement R&D. Federal efforts in a civilian-sector mission must rely upon the existence of the appropriate technical skills in industry. The appropriate balance of knowledge and capabilities is a critical factor in any program, and one that is normally not within the control of the federal government in civilian- sector missions. B. Support for Infrastructure of Science and Technology. The most pervasive, acceptable and effective form of federal support for civilian-sector R&D is strengthening of -104- n V ; ' • ' • • . • . • • . : ' . • - - , . ! ! the technical infrastructure. This means: 1. Support of mechanisms to provide trained technical graduates. 2. Increasing the reservoir of-science and technology. These activities ara conducted typically in non- industrial institutions. Our comments thus are focussed primarily on universities and government laboratories. However, new forms of mission-oriented research institutes or other mechanisms have been considered for pursuit of broad generic technologies, e.g., welding, and these could r be established as independent institutions, possibly with \ ties to universities. . ''•-•'.' Any federal involvement in civilian-sector R&D repre- sents a separation between the funding source and the user. Support of basic research or generic technology creates a further separation between the general nature of R&D being conducted and the specific needs of product and process requirements within industry. Thus, particular issues arise concerning priorities for research programs and transfer of results. . . There is general consensus within industry and, indeed, within the entire technical community that a proper govern- ment role exists for supporting infrastructure R&D. There is no consensus on mechanisms; on criteria for establishing priorities; on relations among funding agency, R&D producer, and user; on provisions for proprietary positions; on trans- fer mechanisms. Public consensus about the role may mask serious differences about approaches and effectiveness, ; These issues raise questions and potential conflicts for the university. Our data base for this subject arises -105- ! .1 partly from the interviews within this study, and even more from a parallel study on university-industry research cooperation by the NYU Center for Science and Technology Policy. Anecdotal and quantitative data are contained in j j a report currently being submitted to the National Science j ! Foundation under Contract No. NS3-80-24731, titled University- Industry Cooperation; The Examination of Existing Mechanisms. MThe emphasis of universities on basic research, and - ] ; i the fact that the university is a third-party-in any • 1 ; government-indrstry interaction, define the strengths and weaknesses of the university as a component in civilian- sector R&D. Let us consider this three-way system in more deta i1. ;•; There is a clear consensus among universities, industry, and the federal government that university research is strong- ! est and most compatible with the functions and obligations j of; a university when it is devoted to basic research. There j! have been no substantial considerations from within the ? university or industrial communities to move the university I systems toward applied research. But there !ias been some | evidence of misunderstanding within the leJeral rjovernment i; and of concern within tha university community about the various expressions of interest in "supporting" industrial ;i needs, in providing new ideas to stimulate "innovation," ;j ; that have .arisen in recent years. There have indeed been several attempts within the history of the National Science Foundation, for example, to establish programs that would support applied research, most of which would i.ave been conducted at universities. To the extent that such activities were addressed to some need in our national technical effort, they are within the legitimate mission of the Foundation. However, to the extent that such : -106- activities are perceived to be a response to the needs and desires of industry, such efforts are e. misunderstanding of the preferred relationships between university and industry. When they -^.re articulated at all, expressions.of. industry preferences for changes in traditional university procedures fall loosely into two categories. One is a desire to strengthen basic engineering sciences in addition to the basic physical sciences. The other is a wish to strengthen interactions in general so that university basic research can be planned with at least a knowledge of'those areas of science in which industry can indentify a need for more effort, h" . ' ! " . ' ' . ' . ' ' . ' . •' . Thus, any actions of the federal government to support civilian-sector R&D through funding of basic research at universities would be in line with the expectations and understanding of industry. Having stated this, it is also clear that there are strong opinions within industry and universities as to how such actions can be most effective. These separate ccnmunities are not in complete agreement on the most desirable conditions, but the area of disagree- ment may not be as wide £s the caricatures of university and industry approaches might suggest, and there are indi- cations that such disagreements are lessening. There are clear examples of this within the university structure. Many of these issues that appear disturbing to the basic physical sciences have long been resolved in those departments and schools which have a tradition of partner- ship with associated industries. Thus, agricultural research and medical research have had important linkages with the relevant components of the -107- food and pharmaceutical industries. Engineering depart- ments in general have close research ties with the chemical, mechanical, and electrical industries. There appears to be an accepted equilibrium among research support from industry, graduate training, and freedor. of research. Probably the simplest comment of this section would be that the universities themselves would profit by studying the mechanisms used by the professional schools in developing relationships with the users of their research and their education. . » . .. ' - At the start of this section, we suggested that both strength and weakness are inherent in these two university characteristics: (1) that the emphasis is on basic research and (2) that the university is a third party in any program of federal support of civilian-sector R&D; These statements should be clarified. The strengths are obvious. It is valuable to have an institution which can pursue new frontiers of knowledge with some continuity without an imperative for near-term payoffs. The limitations inherent in strongly mission- oriented institutions could inhibit the pursuit of new directions and militate against longer-term commitments and risk-taking. The third-party independence of universi- ties is some insurance of objectivity, thus minimizing considerations of past commitments or biases related to traditional procedures that could influence the choice of technical options. But characteristics that provide strength in the. independent pursuit of new knowledge can be sources of weakness for the integration of technical progress into social and economic systems, i.e., the civilian-sector. There are finite resources available for any activity, including basic research. Thus choices are being made constant?, y on allocations to fields of research, to depart- ments, to specific projects, and so on. These allocations s are made at many decision levels: within a university, | within a federal agency, within a private corporation, ; indeed within the mind of an individual researcher. < .< Stated simply, not all areas of basic research are equally likely to be of value to all technical needs of the civilian sector. Any advance in basic science or engineer- ing can lead to further advances and future benefits, unex- ( . . . • j pected.; And serendipity is a valid fact of oasic research, given that unplanned application of results can follow any research effort. Nevertheless, the current need to develop alternate secure economic sources of raw materials, including . - pursuit of ocean mining, is more likely to be aided by basic research in process metallurgy and geophysics than by basic research in the atomic structure of alloys, to take an example from the materials field. How dc we achieve greater compatibility between the distribution of basic research within universities and the needs of the civilian sector for basic science and engineer- ing? Should wa try to influence this distribution .in ordar to derive the optimum value for society from such activities? The answer, presumably, is that there is no reason to select either the extreme of pure randomness for university research or of a completely detailed allocation system by fields and projects. There can obviously be a realistic balance between (1) undirected basic research, supported principally on the criteria of good research, growth of a field, and quality of the researcher; and (2) directed basic research, supported on these criteria plus the relevance of subject matter to needs of society, in practice, to the : objectives of the sponsoring organization. j -109- To achieve such a balance requires, in addition to mai«y intellectual capacities, a healthy communication system that brings university researchers in reasonable contact -I with the system for integration of technical change into > the civilian-sector. It i-; here that .the third-party nature j of universities, a fundamental requirement for freedom of inquiry and independent action, can be a barrier to the necessary linkages that should exist between university research and those institutions which can extract benefits from it. The challenge lies in overcoming the inherent disadvantages of non-involvement while preserving the inher- . ... ent virtues of independence and objectivity. This is of particular importance to the specific subject of this study. That is, when the federal government funds university research as a means of strengthening civilian-sector R&D, there is a particular obligation to develop appropriate linkages among all three sectors. Great interest is evident today in university-industry research cooperation. While much of this interest derives from pos- .sible misunderstandings as to who needs whom and for what, there is a solid legitimate function that such interaction fulfills. At the very least, it is an important factor in ] achieving the allocation of national efforts in basic . ! research that will accomodate both the traditional indepe'nd- 3 once of university research and the needs of the civilian sector as represented by industry. Details on all of these issues are provided in the study referred to for the National Science Foundation. There is a continuing and, we believe, healthy period of experimentation and self-examination now underway within universities and within the external institutions concerned with university research, namely, federal agencies and indus- trial research. The objective is to help universities', to -no- . - : ; • '• • • ' -J provide the optimum contribution to the technical progress of society. It calls for interdisciplinary research when all .the incentives of the university system are in opposi- '_ tion. It calls for close relations with industry even though the traditional university researcher considers "relevance" to be irrelevant, if not improper. It calls for federal funds to shore up the financial structure of universities when there is equal concern for the independence of university actions. • . . • - - • • • • • • • • • • . . - . . There is no fundamental incompatibility among the legitimate scientific and technical interests and objectives of the three sectors. There is a genuine concern on the part of both government and industry executives to achieve improved linkages with university research without damage to .;lts true strength for individual research, for explora- tory efforts in new directions, for independent action. r The many initiatives being considered and tried will broaden :!; '•• the; exposure and thinking of all groups. That alone will ;; be ;a major step to increase the effectiveness of university fj: research with regard to the civilian-sector. ji !; i The broad agreement on "infrastructure R&D" follows H a general belief that the government's role is most effective j ;| and legitimate when it does indeed strengthen the infra- . j : structure of science and technology. it is most ineffective ;: • and questionable the more it touches on design, on conversion ;: to use, and on issues involving econom rs and markets. It :• is not so much the simple distinction between basic research and product development. Rather, it is more an issue of providing a stronger base for advances by many interests without favoring any one. The more basic -- the less the research is related to .specific end items -- the more willingness there is for -111- priorities to be set by the research scientist and the funding agency. The more applied — the more the research relates to an identifiable need for understanding and data — the greater the desire for participation by the. user. Thus, the theme that government should support basic or generic programs is tempered by the caution that the precise subject matter should suggest the best mechanisms ] and conditions of such support. That, in part, is the j lesson of COGENT. \ '. •• ' C. Role of Indirect Fedex'al Actions. This : study was focused upon direct federal support of civilian-sector R&D. Yet, as the accompanying industry studies have reminded us, federal, influence on technical change is ^ exerted through a wide range of indirect instru- ments of federal policy. The particular observation we wish to emphasize here is the effectiveness of federal R&D programs when coupled with indirect actions of the federal government. The classic instrument is procurement, and the great success stories lie in the public sector. These provide lessons to support observations from the industry studies and from individuals interviewed that can be instructive for the civilian-sector. It is clear from our experiences from World War II to the present that federal R&D programs in areas where the government is the final customer have been very effective in technical achievement, transfer, and use. The two prin- cipal factors for this success are: 1. Minimum uncertainty regarding market acceptance and financial resources for conversion and use. -112- 2- Sufficient familiarity with the user needs to • ! guide technical specifications and set priority • for technical program. • ; These are guidelines for any successful R&D program. They are often lacking in federal R&D programs intended to support the civilian sector. Nevertheless, they have been | present in some areas with positive results. . The examples most commonly and properly referred to are in aircraft and electronics. Federal support for R&D. coupled with procurement for government use led to consider- able technical change in those industries. " The success in achieving useful technical change derived classically from government familiarity based upon government needs, plus the economic underpinning provided by procurement. The nature of these industries, which were able to commercialize advances at the leading edge of their technologies, permitted ^ effective transfer. • The-example'of synthetic fuels points up the possible conflict between effectiveness and desirability. Federal R&D programs in synthetic fuels can be made more effective when procurement of a plant or of output is involved. Whether in fact the synthetic fuel program is a desirable national objective must be addressed as a separate issue. Certainly, procurement should not be used simply to increase effectiveness of federal support for RiD, thought it miaht well have that result. A program not analyzed in this study, but relevant, is the former Experimental Technology Incentive Program (ETIP) within the Department of Commerce. Experiments conducted within ETIP demonstrated clearly that federal procurement, operating in part to create demand, in part . to establish specifications, could indeed lead to desired technical change. It is a powerful tool when used cons- tructively. • - • ' • • . • ' -113- ' • ' ' . • " ' ' ' • . • • • • • The interesting point that emerges, therefore, is that federal support for R&D when coupled with procurement can be effective in generating technical change in areas where the government is not the principal user. It is reasonable to expect a similar conclusions for the combined use of other indirect mechanisms as, for example, regulations. Again, we should not confuse effectiveness with desirability. Nevertheless, a current major study being This study is focused on actions of the federal government in supporting R&D intended for the civilian-sector. We have not been concerned with indirect mechanisms or with !indirect technology transfer. : Nevertheless, our ultimate underlying interest is with the forces that produce technical change in the civilian sector, and with their relative effectiveness. The companion set of industry studies contained many examples of the role of indirect federal mechanisms such as procurement, regula- tion, and taxes. For the sake of completeness in discussing important factors — but with no pretense of depth — we would like to present some perspectives concerning the role of federal support of R&D not intended for the civilian sector. These emerge both from the industry studies and from the discussions with government and industry executives throughout this study. -114- The principal areas of public sector R&D are in defense, space and, at least in an oarlier period, atomic energy. Defense and space R&D constitute more than 60 per- cent of all federal R&D expenditures in 1980. Hence, there has been a continuing concern from many quarters about "spin-off" cr "fall-out" or "technology transfer." These concerns go back at least to the end of World War II, when the sheer magnitude of federal R&D programs stimulated inter- est in deriving further benefits beyond that of national security.: j This has led to two extreme schools of thought. One is that the hundreds of billions of federal R&D dollars spent since 1950 in public sector areas constitute a gold mine of technical leads, of products and processes, of patents ; that could feed into the civilian-sector if only we would process ;the ore. The other is that R&D conducted for public- ; sector objectives without regard to civilian-sector specifi- j • : • i cations is inherently of little immediate value for transfer, requiring more effort to convert and adapt for civilian pur- , poses than to develop the desired technologies from scratch. ; A corollary to this second school is that the fraction of national R&D efforts devoted to public-sector programs ; constitutes a drag on the availability of technical options to improve productivity, economic growth, and international competitiveness. The common-sense observations derived from careful review of different industry sectors is that the answer is a bit of both. If anything, somewhat more value should be attributed to the role of public-sector R&D than has been accepted as "common knowledge" in recent years. To expand on this, let us consider the several categories in which we can view potential impact on the civilian-sector from these activities. 2. Shapley, et. al. , Op_. Cit. , p. 17. -115- •=«*** The following is somewhat oversimplified in order to provide a brief overvitw of this broad subject. We can consider the imj/act of public-sector R&D on the civilian-sector in these three areas: 1. Technical developments that support certain specific industry sectors. The role of NASA . and DOD has been critical,- and of great but not easily calculable economic value, to electronics, aircraft, and communications. 2. Wide-spread strengthening of the scientific and engineering infrastructure of the nation. This includes (a) advances in knowledge throughput the technical spectrum of basic sciences, electronics materials, structures, energy conversion, and so on; (b) expansion of university capabilities in both faculty and facilities; (c) c\dvances in the tools of science and technology — instrumentation, standards, automation, computers. 3. Specific output of new materials, products> instrumentation or processes that can "spin- off" into civilian-sector applications. It is this third item that has received primary atten- tion as a potential source of considerable value for industry adaptation to civilian-sector use, and which has been consis- tently disappointing to those who considered such conversion to be easy or cheap. Conversely, the first and second items, while appreciated and taken for granted, have.probably been somewhat underestimated with regard to their pervasive and long-term economic values. . These issues take on more critical importance in the current situation in which direct federal support for civilian-sector R&D is being de-emphasized while R&D related to defense.is being increased. There will surely be poten- tial economic benefits from the increased reservoir of technical advances and technical personnel plus the specific contributions to technical change from programs such as -116- VHSIC (Very High Speed Integrated Circuits). There will be sonie changes in overall industrial productivity, some new product innovation, and some effects on the balance of international trade. Will changes be more positive because of these public-sector programs than would have occurred if a greater fraction of such federal support had been ear- marked for the civilian-sector? No easy quantitative answer is possible. It may well be that the value of the public-sector programs for the private sector, while largely indirect, has been under- estimated, at least within the United States. This point should be studied in more depth. Personal observations of the authors are that European analysts tend to assign great credit to our defense and space programs for much of the overall industrial progress of the United States in recent years. Presumably the primary source of these benefits derives from one or more of the following: hi 1. There have bten significant technical advances ;: in micro-electronics, computers, telecommunications . i : (including satellites) and so on, which have ; provided the opportunity for the development ; : of new businesses and the growth of c-ome existing businesses. 2. Industrial research is made more productive and can advance further in developing new products and processes by drawing upon the added technical advances in materials and scientific procedures as, for example, computer sciences, analytical and measurement techniques, and physical processes such as lasers and plasma. 3. The productivity of industrial operations are improved by the advances in computers and data handling, controls and automation, sophisticated inspection and production equipment, inventory control systems, and so on. 4. Technical graduates entering industrial research or operations come with a broader competence in electronics, advanced materials, measurement and control techniques as a result of the stronger and more advanced university base. -117- These are advantages for the civilian-sector. Nevertheless, there have been disadvantages even in the general support for R&D. A principal concern in the period -, ' ' ' - ~i •.••'-" . just prior to 1970 was the emphasis on university research on technical problems related to the challenges of defense I and space — such as materials science — with an apparent i lessening of interest in the more mundane needs of the 1 civilian-sector — such as process metallurgy. An immediate \ • - - . , . . . - . t . . . . | consequence was a perceived parallel decline in the interest I of technical graduates in industrial careers. This percep- ! tion is undoubtedly complicated by the general period of unrest at/universities in the 1960s, and does not follow simply from:federal funding of university research. The point is that federal support of public sector R&D does affect the civilian-sector in complex ways — mostly positive, certainly not negligible, and not easily susceptible to cost-benefit analysis. Can any measures be taken to improve the effectiveness of this effect? Earlier in this section, we suggested that "spin-off" receives recurring attention and is very largely disappointing. One fundamental basis for such disappointment is that "technology transfer" normally takes place after the R&D is completed to the specification of the public-sector need. This is hardly unexpected, since the public sector provided the funds. Suggestions have been made within NASA and DOD that some consideration to private-sector needs be given much earlier in the R&D process, while program plans are still being formulated. Thus, for example, an alloy development which could have commercial implications might proceed with joint participation by one or more interested companies. The private firms would pay incremental costs for the added R&D required to meet civilian-sector needs, and the final output would be more easily convertible to economic use. There are difficulties in such procedures given the urgency of defense needs, the mixing of public and private funds, and the .necessary incentives for both parties. But the concept of early dialogue and involvement in R&D planning does contain possibility for smoothing some of the mis-match between public-sector and private-sector needs, hence increas- ing th'> probability of deriving added value. We should also point out that the opportunities for strengthening civilian-sector R&D through the indirect mechanism of public-sector R&D are very dependent on the ] technical field and on the nature of the work performed. Since the bulk of R&D expenditures for both defense and space are devoted to engineering activities and hardware, *• only a modest portion of these funds car. be credited with raising the general reservoir of scientific and engineering knowledge;. For example, four percent of DOD and 11 percent of NASA expenditures are considered to be in the'area of basic research. . . Nevertheless, public-sector R&D has provided a reser- voir of professionals across a broad spectrum of sophisticated technical disciplines. And a very large amount of money in the past 30 years from these sources has increased our level of scientific and engineering knowledge. This has diminished the number of technical people and funds that could have been devoted to direct support of civilian-sector. R&D. But those engaged in industrial research and in related activities funded by government were able to draw upon a stronger technical base. Since we are dealing 3. Shapley, et. aJL. , Oo. Cit. , pp. 22 and 48. . . -119- . • ' • - . - : ' here with questions of creativity, of technical ingenuity, . and of the complex process by which we create and use i technical change, there is no quantitative estimate possible \ to compare our industrial and economic position today with what might have been. Would more people devoted to civilian- sector R&D drawing upon a lower technical base have put us in a better position than we are in today? The issue is not calculable, but some judgments are clear. Civilian-sector R&D has undoubtedly been strengthened by public-sector R&D. The U.S. is in a strong technical position today, a leader in many fields, and with a growing capacity to generate new technology. Once the commitments are made to public-sector objectives, any civilian-sector benefits are a bonus. And the bonus in R&D has been consid- erable. Ei; : Importance of Existing Technical Community. An important factor in the initiation and conduct of any research program is the existence of technical personnel in the area of interest. This is the essential element in basic research, and it is a critical factor in the effective- ness of applied research and development. The effectiveness of R&D intended for the civilian sector is often dependent on the existence of a broad range of available technologies and related technical specialists throughout the scientific and engineering spectrum. The conduct and integration of a large-scale R&D activity into a complex industrial system normally requires contributions from a range of disciplines and is often dependent on parallel technical advances in relevant fields. The history of technology contains many examples of developments that were ! .1 "timely" or "premature." This is due very largely to the existence or non-e::istence of the required technical system to render the new development compatible with the potential applications. In comparing tha cases of agriculture and housing, for example, we saw that the much-remarked-upon level of technical progress in the former case and its equally notice- able absence in the latter are partly traceable to the well- developed community of agriculture scientists as compared to the relative lack of any network of technical specialists in theibuilding trades. Furthermore, we saw in many cases -- including aircraft arid computers -•- that the development of one .technology involves a dovetailing with advancing technology in related support areas. As the Russians discovered, getting to the moon is as much a problem of computer technology as of rocket technology. The point is that there is a critical difference between public-sector areas, e.g., national security, and civilian- sector areas. A federal program in which the government is the final customer can attempt to identify and support all the necessary technologies required for the complete develop- ment and application of the technical program in question. Two of the clearest examples of such efforts in recent years are the Manhattan Project during World War II and the space prcgram of the 1960s. In contrast, federal support of R&D intended for the civilian sector is dependent for its effective transfer and integration into economic use on either (1) the ready avail- ability of appropriate technologies or (2) activities in the private sector that can eventually develop such technolo- gies in parallt-. While the federal government can provide for a particular technical advance, the economic application may call for simultaneous advances in many related materials or methods of manufacture. - . • • • ' "• " .' It is the function of the market to coordinate much of the raquired activity. But the judgments and initiatives required to account for all these factors in civilian-sector R&D also call for the existence of a technical community possessing the range of .technologies required, This community can-.be developed, to some extent and with great effort, by government funds in public-sector programs. It must be an existing and participating force for effective civilian- sector activities. The .considerations discussed above refer to the limi- tations of government programs and agencies in providin9 and controlling the mix of technologies required for technical advances in the civilian sector. In principle, there is every reason to assume that any such deficiencies would be recognized and taken into account prior to initiation of a given program. . . There is another aspect, however, which calls for more detailed interactions between federal R&D programs and the industry affected. This is the question of technologies • and skills required for the economic design and manufacture • of products and processes that would normally follow a successful R&D program. Effective industrial research requires reasonable coupling between the R&D process and the manufacturing.pro- cess. Knowledge of availably materials that'are suitable for the processes called for, and an understanding of the nature of those manufacturing techniques suitable for appli- cation to the technical advances under consideration, can be critical to the complete innovation process. " 1 Thus, the existence of an appropriate technical com- ' munity in the materials, components, and processes of ; manufacturing reij •'red for the conversion of R&L) is essential to the effectiveness of any overall program in the civilian sector. And familiarity with these factors, difficult enough j witnin an industrial research organization, becomes far more elusive when we consider fodera.l R&D efforts. t '• ' For all these reasons, the existence of an appropriate technical community is critical, and the detailed knowledge about that community can come only from reasonable participa- tion of industry in the program. This was an important lesson in the development of titanium for aircraft, involving close partnership between government and industry. It is critical < in current advances in microelectronics, where production is inseparable front R&D. But the principle is applicable well beyond these areas of high technology, and is a major consi- deration for improved effectiveness of federal support for civilian-sector R&D. F. Cooperative Industrial Research. When the federal government supports R&D, it Is acting collectively for the general public. Yet we have seen that the federal government acting in the civilian sector can be inefficient without the involvement of private corporations responsible for the ultimate investment, manufacturing, and distribution. There are indications that some forms of collective action by the private sector can substitute for government programs and 3imultaneously provide a mechanism for involving the judgments and cooperation of the industrial research -123- community. Where this approach can be pursued effectively, it is indeed one to be encouraged. . There is increased activity by a number of industries to set up a formal organization which will collect funds and use them to support both infrastructure R&D for that industry and, in some sectors, specific developments that can advance the non-competitive interests of the industry. The two largest are probably the Electric Power Research Institute (EPRI) and the Gas Research Institute. EPRI was initiated in 1973, and has current annual R&D expenditures of $217 million. GRI was initiated in 1976, vrith current '• . ' • • . - 4 annual R&D expenditures of $83.7 million. Two new efforts now being organized are in the chemical and the semiconductor industries. Both are planning annual expenditures in the $20 to $30 million range. In general, research Uono by trade associations has been more substantive and productive in Europe than in the U.S." Basic research funded by trade associations in the U.S., performed usually at universities, ha.^ been very modest. Thus, the changes represented by the recent trade association programs are along two lines: 1. These are sizable commitments by a number of industries to produce technical advances basic .. to those industries. 2. They are deliberate efforts, .particularly by the . chemical and electronic industries, to influonce the direction of public funds and of university efforts by indicating those areas of basic science, and basic engineering of relevance to industry- and by strengthening particular programs. . 4. Figures are from the 1S80 annual reports of EPRI and GRI, 5. For a balanced view of trade association research in Britain, see P.S. Johnson, Co-operative Research in Industry, New York: John.Wiley, 1973. . . -124- All of these efforts are being pursued with strict attention to the guidelines for acceptable cooperative programs among companies that have evolved from anti-trust considerations by the Justice Department. Thus, these collective research efforts emphasize basic infrastructure R4D or, at most, developments that can be available on non- exclusive license to all comers. This presents somewhat of a paradox in recent concerns about the international competitive position of the United States. Japanese technology-based products, particularly in consumer electronics but increasingly in a broad range of advanced products and systems, appear to demonstrate a capa- city for rapid and economic adaptation of new scientific advances. Federal initiatives in stimulating university- industry or government-industry cooperation, or even coopera- tive industry efforts compatible with Justice Department guidelines, have been motivated in part by the desire to strengthen our technical position vis-a-vis foreign competi- tors, particularly Japan. Yet these efforts, emphasizing primarily basic research, publishable results, open licenses all Jin accord with accepted anti-trust practices —• are of almost as much benefit to a foreign competitor as to the U.S. In;fact, if one really believes that Japan is superior to the U.S. in the ability to adapt and exploit scientific advances, then such efforts could diminish our competitive position. We do not accept that extreme interpretation. But there is a point, raised by several of those interviewed in this study, that our international competition might be improved by some forms of collective industrial actions that would call for some re-appraisal of anti-trust guidelines. These would lean towards more emphasis on specific developments, possible restrictions on licensing, and so on. The intent would be to expedite technical advances while spreading the -125- cost and risk, but collective action could presumably be justified only when it would not lessen our criteria for domestic competition. To our knowledge, no good study has been made of the economic benefits and costs that would be incurred if there were more joint ventures in applied R&D, nor is the current legal stance completely clear. We make no legal recommenda- tions. The topic here, we think, calls for serious study. There may also be a gray area creating opportunities, for collective industry actions in applied research and developments, without calling for a business arrangement for exploitation by the partners. This might help our international competitive position or simply substitute effective private initiatives to replace less effective federal actions. In either case, there is good reascn to call for serious consideration by appropriate federa^. agencies a* to whether laws and regulations intended for domestic objectives can be modified to accomplish new international objectives without affecting adversely the original intent. G. Concluding Remarks. . We would like to close with what perhaps should have been the opening. Our concern has been with the "effective- ness" of federal R&D programs intended for the civilian sector. By this, we refer to the effective allocations of technical resources measured by conversion to use within the economy. And this economy is one in which goods and services are produced and distributed by the private sector. We have not considered any social or economic theory other than this. That is to say, we did not address such -126- questions as to whether a particular federal action or inaction has an effect on the relative distribution of small companies versus large companies within an industry; on competition within an industry; on the distribution of the future work-force in terms of skills.and education; and so on. Other objectives are implied by such questions, and there are inevitably inherent conflicts in almost any set of national objectives. . . Effective science and technology policy means many things. In the broadest sense, however, it means two: first, that we are providing for the health of our national technical enterprise; second, that we are taking those actions and adopting those policies which make the optimum use.of our j total technical resources in achieving a broad range of na- ; tional objectives. j - • • • . • - " . . . " ' . . ' " ' . - ' - - • -r This study focused on one aspect of science and techno- j ... I logy policy, namely, actions of the federal government to j support R&D intended to help the civilian sector. We were not j concerned with support of public-sector R&D, with indirect j actions of the federal government, or with the industrial research activities funded by industry. Thus, on the one hand, we did not seek or obtain a • complete picture of technical change in the civilian sector. ; We were, however, made acutely conscious of the major factors that influence this change and the interactions they have : with each other. We have attempted to bring these perspec- tives to bear upon the one factor that was our objective: direct R&D support by the federal government. ; • ' . ' ' ii Hence, a simple overriding guideline for such direct • federal actions is that they must be taken with full know- j ledge of the other factors influencing technical change, and j -127- with the conscious effort to develop mechanisms that link j the factors together. Our discussion of general principles j and specific underlying themes presented in this final I chapter spell out many of the implications of this statement. ; ' - • j And when should the federal government become involved in supporting civilian-sector R&D? The answer is essentially a political one. We have chosen to take "effectiveness" as ! a basis for the answer, and to measure this in terms of our economic system wherein the private sector is responsible'for the ultimate manufacture and sale of economic goods derived from technical change. Any other measure for economic or social reasons would pay some price in cost or time or opLi- mum allocation of technical resources. :We have not provided a set of recommended direct actions, but rather a set of recommended indirect guidelines. s This;is not a solution to the question of how and when the :; federal government should provide for the most effective sup- -..! port of civilian-sector R&D. It is, however, a suggested 5 road ;map towards that solution. I -128- BIBLIOGRAPHY Anonymous, "Making U.S. Technology More Competitive," • _ ' Business Week, January 15, 1972, p. 44. j Arrow, Kenneth J. and Robert Lind, "Uncertainty and the Evaluation of Public Investments," American Economic : ' Review, June, 1970. . j Barfield, Claude E., "High-Technology Package:Focuses on : Domestic Needs, U.S. Trade Balance," National Journal, October 23, 1971, p. 2114. ; Barfield, Claude E., "High-Technology Research Program ; May Include Tax and Anti-trust Proposals," National i • Journal, October 31, 1971, p. 2156. . ( . Bazell, Robert J., "NSF: Is Applied Research at the Take- off Point?" Science, vol. 172, June 25, 1971, p. 1315. Boffey, Phillip M., "Technology and World Trade: Is there Cause: for Alarm?" Science, vol. 172, April 2, 1971, p. 37. ;••;;/.• ••;•'" " ; " - ' " '• " ' . • Boffey, Phillip M., "Unemployment: What Nixon Is/Isn't Doing to Help Jobless Scientists," Science, vol. 171, March 12, .1971, p. 985. Brodsky, Neal H., Harold Kaufman, and John Tooker, University/Industry Cooperation, New York: Center For Science and Technology Policy, 1980. Brooks, Harvey, "What's Happening to the U.S. Lead in Technology?" Harvard Business Review, vol. 50, no. 3, May-June, 1972, p. 110. Cooperative Automotive Research Program, "Technical Framework: Research Area Working Groups," in Congressional Record, Senate, November 18, 1980, pp. S12813-S12834. Eads, George, "U.S. Government Support for Civilian Technology: Economic Theory Versus Political Practice," Research Policy, vol. 3, 1974, p. 2. Fusfeld, Herbert I., Perspectives on U.S. Industrial Innovation, New York: Center for Science and Technology Policy, 1981. (With an annotated bibliography by Theodore W. Schlie.) -129- Gillette, Robert, "Technological Initiatives: NBS Funds In Holding Pattern," Science, vol. 179, January 12, 1973, p. 163. Greenberg, D.S., "Civilian Technology: Concern Over Pace of Growth Inspires Program for Research and Development Effort," Science, vol. 139, February 5, 1963, p. 576. Greenberg, D.S., "Civilian Technology: Opposition in Congress and Industry Leads to Major Realignment of .Program," Sjcience, .vol.- 143, February 14y 1964, p. 660. Greenberg, D.S., "Civilian Technology: Program to Boost Industrial Research Heavily Slashed in House," Science, vol. 140, June 28, 1963, p. 1380. Hamilton, Andrew, "State Technical Services Act: Congress Swings the Axe," Science, vol. 166, December 26, 1968, p. 1606. Hammond, Allen L., "Federal R&D: Domestic Problems Get New Efforts But Little. Money," Science, vol. 171, February 19, 1971, p. 657. Holsendolph, Ernest, "Senate Passes AT&T Decontrol," The New York Times, October 8, 1981, p. A-l. Industrial Research Institute Research Corporation, "Cooperative Technology Program: Evaluation of Nine Candidate Areas for Industry Participation and Support," Revised Version, December 16, 1979. Large, Arlen J. , "A 'Monument' Industry Innovation Lav/ Crumbles," The Wall Street Journal, July 15, 1981, p. 34. Nelson, Bryce, "Technological Innovation: Panel Stresses Role of Small Firms," Science, vol. 155, March 10, 1967, p. 1229. Nelson, Richard R., Merton Peck and Edward Kalachek, Technology, Economic Growth, and Public Policy, Washington, D.C.: The Brookings Institution, 1967. Nelson, Richard R. and Sidney Winter, "In Search of a Useful Theory of Innovation," Research Policy, vol. 6, 1977, p. 36. Pavitt, K. and W. Walker, "Government Policies Toward Industrial Innovation: A Review," Research Policy, vol. 5, no. 1, January, 1976. .-130- Peters, Lois and others, University-Industry Cooperation; The Examination of Existing Mechanisms, New York: Center for Science and Technology Policy, October, 1981. Rosenberg, Nathan, Perspectives on Technology, Cambridge: Cambridge University Press, 1976. Shapley, Deborah, "Magiruder in White House: SST Man Plans New Technology Toke-off," Science, vol. 174, October 22, 1971, p. 386. Shapley, Deborah, "Technology and the trade Crisis: Salvation Through a New Policy," Science, vol. 179, March 2, 1973, p. 881. Shapley, Deborah, "Technology Incentives: NSF Gropes for Relevance," Science, vol. 179, March 16, 1973, p. 1105. Shapley, Deborah, "Technology Initiatives: Hints on the Magruder Effort," Science, vol. 175, January 21, 1972, ! p. 279. Shapley, Willis H. , Albert H.. Teich. snd Gail J. Breslow, i Research and Development; AAAS Report VI, Washington, ! D.C.: American Association for the Advancement of i Science, 1981. Smith, Philip M., Testimony before the Subcommittee on Science, Technology, and Space, Committee on Commerce, Science and Transportation, U.S. Senate, mimeograph, iApril 30, 1980. Stans, Maurice, "Science, Technology, and the Economy," Statement before the House Subcommittee on Science, Research, and Development," July 27, 1971, reprinted in NBS Technical News Bulletin, November, 1971, p. 270. U.S. Department of Commerce, "Cooperative Generic Technology Program Procedures," Federal Register, vol. 45, no. 159, August 14, 1980, pp. 54028-54031. U.S. Department of Commerce, Office of Cooperative Technology, "Cooperative Technology Program: Key to Industrial Innovation," Revised Draft, January 24, 1980. U.S. Department of Energy, Office of Conservation and Solar Applications, The DOE Industrial Conservation Program; A Partnership in Saving Energy, Washington, p.C., no date. -131- U.S. Department of Energy/ Office of Conservation and Solar Applications/ "Industrial Energy Conservation Program Threshold Analysis," Washington, D.C., mimeo., ; , : no date. . - • - . - ; |--'.- -j t j U.S. General Accounting Office, Major Science and Technology ! { Issues, PAD^-81-35, Washington, D.C., January, 1981. , ; I. U.S. Office of Management and Budget, Toward a Uniform Procurement System,.Task Group 3 Project Report, : : - July 25, 1930. ." ' -. . ' . .• . ' - . . '.:..: -..I ;..V.." .• •'". -.-..•:.'. .-•'•:.• "'„• "•,;,•••' •';'..V'/\: U.S. Senate, "National Technology Innovation Act of .1979," 96th Congressy Second Session, Report No. 96-781, May 15, 1980. . ' . " ' . '.' , ; Wade, Nicholas, "Nixon's New Economic Policy: Hints of a Resurgence for R&D," Science, vol., 173, August 27, 1981, p. 794. '! ; . • ' Walsh, John,:"Myron Tribus, Top Science Official, Resign?," Science,: vol.. 170, December 4, 1970, p. 1065. Zerkel, Fred H., "White House Shapes Strategic Approach to R&D,"; Chemical and Engineering News, March 20, 1972, p. 24. ! -132- APPENDIX; INDIVIDUALS CONSULTED BY INTERVIEW OR AT MEETINGS. | • ' . • ' . • ' • • - . • • ' • ' - • . . " . . . " ' • . "" ' " ." •• ; 4 Leonard A.Ault, Acting Chief, Dissemination & Analysis Branch, National Aeronautics and Space Administration... • ' ) Thomas Baron> President, Shell Development Company. | Arden L. Bement, .Jr. - Act ing Deputy Undersecretary of ;; • : - - ! Defense for Research and Engineering (Research and ! Advanced Technology) Department of Defense (now Vice j President, Technical Resources, Science and Technology., . ; ;_'.-*'" TRW/ inc.-) ';' -•••" -. • '•- -' • '-'.•.'..•'•'"••- .-'-" -.. •'," "C'-.-v...: / '-•. • '. •'••:-•: ;; , ;•.•'.• .;-.;•.'•••}•'. Frederick Betz.-. Indus.try/University Cooperative Research, . j Industrial Science and Technological Innovation Division, "i ; j National Science Foundation. ' \ . - - - ' ' i ' • • ' • • - - • ' - " • ' ' - - - ' ' ' . ' • ' . ' I Frank E. Block - Deputy Director for .Minerals Research, | U.S.. Bureau of Mines. | I Paul C. Bogiages - Project Development Manager, Corporate ' .!• Research and Development, General Electric Company. Myles Boylan, Policy Analyst, Policy Research Analysis Division, National Science Foundation. J Alfred E. Brown - Director, Scientific Affairs, : Celanese Corporation. Arthur Bueche - Senior Vice President, Corporate Technology, The General Electric Company. John D. Caplan, Executive Director, Research Laboratories, General Motors Corporation. . . Will D. Carpenter, Director of Environmental Operations, Monsanto Agricultural Products Company. J. Hoyt Chaloud, Manager, Research and Development Coordination - International, Procter & Gamble. Paul F. Chenea, Vice President, Research Laboratories, General Motors Corporation. F. A. Cleveland - Vice President of Engineering, Lockheed Corporation. Donald W. Collier - Senior Vice President, Corporate Strategy, Borg-Warner Corporation. . George de Stevens - Research Professor of Chemistry, College of Liberal Arts, Drew University. (Formerly Executive Vice .; President, Pharmaceuticals Div., Ciba-Geigy Corporation.) -133- . 1 Fred H; Dietrich - Associate Administrator, Office of Management and Budget, Office of Federal Procurement • • •• Policy'. ' ' " • . ' ' " • ' ' ' . • : ' " " ' " . . . " '•' • . ' " . • ' " Lewis W.Eckert - Assistant Director of Research Armstrong Cork Company. Lansing Felker--As.sis.tant Director, Office,.of Cooperative .. . .Technology, Department of Commerce. . . :. . : : George Gamota - Assistant for Research, Research and Advanced Technology, Office of Under Secretary of Defense for • Research and 'Engineering. : . . v :;;; ;.. . Felix J. Germino - Vice President, Research and Development, .Human Poods, The Quaker Oats Company. Thomas Glennah - The Rand Corporation. RalphGomory - Vice President and Director of Research, International Business Machines Corporation. N. Bruce Hannay - Vice President, Research and Patents, Bell Laboratories. Walter L. Hardy - Director, Research and Development, The Richardson Company. Douglas Harvey - Acting Deputy Assistant Secretary, Department of Energy. Gregory T, Haugan - Director, Research and Special Programs Administration, Transportation Programs Bureau, Department of Transportation. George F. hausmann - Associate Director of Research for Program Development, United Technologies Corporation. Thomas Honrie - Chief Scientist, U.S. Bureau of Mines. Henry Hertzfeld -- Economist, National Aeronautics and Space Administration. John Holmfeld - Science Consultant, Subcommittee on Science, Research and Technology, Committee on Science and Technology U.S. House of Representatives. - Ralph J. Johnson - Vice President, National Association of Home Builders Research Foundation. Charles B. Ktnahan - Deputy Director - Minerals Research, U.S. Bureau of Mines. -134- Andrew Kenopensky: •'-Automotive '.Coordinator', International Association of Machinsts and Aerospace Workers. - Paul D. Klimstra - Vice President, Pre-clinical Research • and Development, C. D. Searle & Co. . . : Lawrence Kushner - Senior Staff.Associate, : National Bureau of Standards 'Don'aXd N. Lahger-berg - Deputy Director, The National Science Foundation M. A. Manganelli - Technical and Budget Advisor, Mobil Research and Development Corporation. L. G. Maury - Vice President, Development Hercules Incorporated. Stephen A; Merrill - Subcommittee en Science, Technology, and Space, Committee on Commerce, Science and Transportation. Richard Meserve — Senior Policy Analyst, Office of Scier.ce and Technology.Policy, Executive Office of the President. Robert Newton - Senior Staff Associate, Director of Grants and Contracts, National Science Foundation. Warren D. Niederhauser - Director of Pioneering Research, Rohm and Haas Company. Alfred H. Nissan - Vice President (Retired), Westvaco Corporation. Nat C. Robertson - Director and Scientific Advisor, Marion Laboratories Joel Snow - Senior Science associate, Office of Energy Research, U.S. Department of Energy. Donald E. Stitzenberg - Director of Corporate Planning, Merck & Co., Inc. Edward S. Tabb - Manager, Industrial Utilization Research, Gas Research Institute. Gregory Tassey - Planning Office, National Bureau of Standards. John E. Tessieri - Vice President, Research and Technical Development, Texaco, Inc. -135- Louis Tornatzky - Head,'Innovation Processes, Policy Research Analysis Division, National Science Foundation. , j. William-Rubin - Director, Research Division, ' .•'.-. ... .• i Sperry Rand Corporation. . .! I . Jack Sanderson - Assistant Director> Engineering Directorate, j National Science Foundation. ..... . . - . Joseph Sherman - Director, Division of Energy, Building Technology and Standards Research, Department of Housing and Urban Development. . Hedvah L. Shuchmar. - The Futures Group. . - . . : . . . A. E. Smick - Professional Staff Member, Subcommittee on Science. Technology and Space, Committee on Commerce, Science and Transportation, U. S. Senate. Guenther O. Wilhelm - Manager of Coordination and Planning, Exxon.Research and Engineering Company. Richard Woldin - Science Fellow, Subcommittee on Energy Research and Development, Committee on Energy and Natural Resources, Congress of .the United States. John H. Young - Office of Technology Assessment, Congress of the United States. ~s r—— -~*«^ M**.^ K»>^PK\ r. \\ ~i H .^ J: U I i i I D . .__-

Science, technology, and the national posture note no. 1

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Science, technology, and the national posture note no. 1

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