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Government-Industry Partnerships for the Development of New Technologies IV FEDERAL PARTNERSHIPS WITH INDUSTRY: PAST, PRESENT, AND FUTURE
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Government-Industry Partnerships for the Development of New Technologies Federal Partnerships with Industry: Past, Present, and Future A BRIEF HISTORY OF FEDERAL SUPPORT1 The earliest articulation of the government’s nurturing role with regard to the composition of the economy was Alexander Hamilton’s 1791 Report on Manufacture, in which he urged an activist approach by the federal government. At that time, Hamilton’s emphasis on industrial development was controversial, although subsequent U.S. policy has largely reflected his belief in the need for an active federal role in the development of the U.S. economy.2 In fact, driven by the exigencies of national defense and the requirements of transportation and communication across the North American Continent, the federal government in that same decade played an instrumental role in developing new production techniques and technologies by turning to individual entrepreneurs with innovative ideas. Most notably the federal government in 1798 aided the foundation of the first 1 See Vernon W. Ruttan, Technology, Growth and Development: An Induced Innovation Perspective. New York: Cambridge University Press, 2001, page 588. See also Audretsch et al., “The Economics of Science and Technology,” op cit. pp. 158-164, for additional historical background of U.S. policy in the area of science and technology. 2 The rejection of Hamilton’s report, though often portrayed as a reluctance on the part of the new federal government to promote development, reflected the decision of the political leadership of the time to place priority on agricultural rather than industrial development. The exception to this was in the area of military procurement, with the contract to Eli Whitney’s Springfield Arsenal. See William Diebold, Jr., “Past and Future Industrial Policy in the United States,” in J. Pinder, ed., National Industrial Strategies and the World Economy, London: Allanheld, Osmun & Co., 1980.
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Government-Industry Partnerships for the Development of New Technologies machine tool industry with a contract to the inventor Eli Whitney for interchangeable musket parts.3 A few decades later, in 1842, Congress appropriated funds to demonstrate the feasibility of Samuel Morse’s telegraph.4 Both Whitney and Morse fostered significant innovations that led to completely new industries. Indeed, Morse’s innovation was the first step on the road to today’s networked planet. The support for Morse was not an isolated case. The federal government increasingly saw economic development as central to its responsibilities. During the nineteenth century, the federal government played an instrumental role in developing the U.S. railway network through the Pacific Railroad Act of 1862 and the Union Pacific Act of 1864.5 While not without abuse, these acts provided very substantial financial incentives to the development of the U.S. rail network. The federal 3 The 1798 contract with Eli Whitney was an early example of high-technology procurement. Whitney missed his first delivery date for the arms and encountered substantial cost overruns, a set of events that is still familiar. However, his focus on the concept of interchangeable parts and the machine tools to make them was prescient. David A. Hounshell, in his excellent analysis of the development of manufacturing technology in the United States, suggests that Simeon North was in fact the one who succeeded in achieving interchangeability and the production of components by special-purpose machinery. See From the American System to Mass Production, 1800-1932, Baltimore: Johns Hopkins University Press, 1985, pp. 25-32. By the 1850s the United States had begun to export specialized machine tools to the Enfield Arsenal in Great Britain. The British described the large-scale production of firearms, made with interchangeable parts, as “the American system of manufacturers.” See David C. Mowery and Nathan Rosenberg, Paths of Innovation: Technological Change in 20th Century America, New York: Cambridge University Press, 1998, p. 6. Whitney’s concept of interchangeable parts and the machine tools to make them was in the end successful. 4 For a discussion of Samuel Morse’s 1837 application for a grant and the congressional debate, see Irwin Lebow, Information Highways and Byways. New York: Institute of Electrical and Electronics Engineers, 1995, pp. 9-12. For a more detailed account, see Robert Luther Thompson, Wiring a Continent: The History of the Telegraph Industry in the United States 1823-1836. Princeton, N.J.: Princeton University Press, 1947. 5 For an economic history of the transcontinental railroad, see Robert W. Fogel, Railroads and American Economic Growth: Essays in Econometric History, Baltimore: Johns Hopkins University Press, 1964. See also Alfred P. Chandler, Strategy and Structure: Chapters in History of the Industrial Enterprise, Cambridge, MA: MIT Press, 1962. For a popular historical account, see Stephen Ambrose, Nothing Like It in the World: The Men Who Built the Transcontinental Railroad 1863-1869, New York: Simon and Schuster, 2000. In the midst of the Civil War, Abraham Lincoln signed the Pacific Railroad Act of 1862 providing the necessary standards and substantial incentives to launch the first transcontinental railroad. Financial aid to the railroads was provided in the form of government bonds at $16,000 to $48,000 per mile depending on terrain, as well as land grants for stations, machine shops, etc. In addition, right of way was to extend 200 feet on both sides of the road. The Pacific Railroad Act was supplemented in 1864 by the Union Pacific Act, which did not increase government funding but allowed the railroad companies to issue their own first-mortgage bonds. This act also allowed President Lincoln to set the “standard gauge” at 4 feet, 8 1/2 inches. As with fiber-optic investments today, there was some overbuilding, but the fundamental policy objectives of national unity and economic growth were achieved. From 30,000 miles of railway in 1860, rail mileage grew to more than 201,000 by 1900, linking the nation together.
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Government-Industry Partnerships for the Development of New Technologies government also played a key role in developing the farm sector through the 1862 Morrill Act,6 which established state agricultural and engineering colleges; the 1889 Hatch Act, which established state agricultural experiment stations; and the 1914 Smith Lever Act, which added state agricultural extension services.7 The Union Pacific act made it possible to build one of the world’s great transportation systems. It was also for its time a major partnership, both because market incentives were not sufficient and because the government provided major financial inducement to encourage this massive undertaking. The inducements were on the scale of the enterprise—and not without abuse—but the fundamental policy objectives of economic growth and national unity were achieved. There were also major benefits in terms of management, organization, and market scale for many other American firms—what economists today would call positive externalities—created by the extension of a national railroad network. Alfred Chandler has observed that As the first private enterprises in the United States with modern administrative structures, the railroads provided industrialists with useful precedents for organization building . . . . More than this, the building of the railroads, more than any other single factor, made possible this growth of the great industrial enterprise. By speedily enlarging the market for American manufacturing, mining, and marketing firms, the railroads permitted and, in fact, often required that these enterprises expand and subdivide their activities.8 This support continued and expanded into the twentieth century. In 1901, the federal government established the National Bureau of Standards to coordinate a patchwork of locally and regionally applied standards, which often arbitrary, were a source of confusion in commerce and a hazard to consumers. Later the federal government provided special backing for the development of (what we now call) dual-use industries, such as aircraft frames and engines and radio, seen as important to the nation’s security and commerce. The National Advisory Committee for Aeronautics, formed in 1915, contributed to the development of the U.S. aircraft industry, a role the government still plays.9 Similarly, the Navy was instru- 6 The Morrill Act of 1862 established the land grant college system. It charged each state with establishing at least one college in the agricultural and mechanical sciences. Each state was given 30,000 acres of federal land per member of Congress. 7 See Robert E. Evanson and Wallace E. Huffman, Science for Agriculture: A Long-term Perspective, Ames: Iowa State University Press, 1993. See Richard Bingham, Industrial Policy American Style: From Hamilton to HDTV, New York: M.E. Sharpe, 1998 for a broader review. 8 Alfred D. Chandler, Strategy and Structure, op cit, p. 21. 9 See D. Mowery and N. Rosenberg, Technology and the Pursuit of Economic Growth, New York: Cambridge University Press, 1989, Chapter 7, especially pp. 181-194. The authors note that the commercial aircraft industry is unique among manufacturing industries in that a federal research organization, the National Advisory Committee on Aeronautics (NACA, founded in 1915 and absorbed by
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Government-Industry Partnerships for the Development of New Technologies mental in launching the U.S. radio industry by encouraging patent pooling and by direct participation in the Radio Corporation of America (RCA).10 The unprecedented challenges of World War II generated huge increases in the level of government procurement and support for high-technology industries.11 Today’s computing industry has its origins in the government’s wartime support for a program that resulted in the creation of the ENIAC, one of the earliest electronic digital computers, and the government’s steady encouragement of that fledgling industry in the postwar period.12 Following World War II the federal government began to fund basic research at universities on a significant scale. This was done first through the Office of Naval Research and later through the National Science Foundation.13 These activities were complemented by aggressive procurement efforts during the Cold War, when the government continued to emphasize technological superiority as a means of ensuring U.S. security. Government funds and cost-plus NASA in 1958), conducted and funded research on airframe and propulsion technologies. Before World War II NACA operated primarily as a test center for civilian and military users. NACA made a series of remarkable contributions regarding engine nacelle locations and the NACA cowl for radial air-cooled engines. These innovations, together with improvements in engine fillets based on discov-eries at Caltech and the development of monocoque construction, had a revolutionary effect on com-mercial and military aviation. These inventions made the long-range bomber possible, forced the development of high-speed fighter aircraft, and vastly increased the appeal of commercial aviation. See Lebow, Information Highways and Byways, op. cit.; and Alexander Flax, National Academy of Engineering, personal communication, September 1999. See also Roger E. Bilstein, A History of the NACA and NASA, 1915-1990, Washington, D.C.: National Aeronautics and Space Administration Office of Management Scientific and Technical Information Division,1989. 10 Josephus Daniels, Secretary of the Navy during the Wilson Administration, appeared to feel that monopoly was inherent to the wireless industry, and if that were the case, he believed the monopoly should be American. By pooling patents, providing equity, and encouraging General Electric’s participation, the Navy helped to create the Radio Corporation of America. See Irwin Lebow, Information Highways and Byways: From the Telegraph to the 21st Century, New York: IEEE Press, 1995, pp. 97-98 and Chapter 12. See also Michael Borrus and Jay Stowsky, “Technology Policy and Economic Growth,” BRIE Working Paper 97, April 1997. 11 See David Mowery, “Collaborative R&D: How Effective Is It?” Issues in Science and Technology, 15(1): 37, 1998. 12 See Kenneth Flamm, Creating the Computer. Washington, D.C.: Brookings, 1988, Chapters 1-3. 13 The National Science Foundation (NSF) was initially seen as the agency that would fund basic scientific research at universities after World War II. Disagreements over the degree of Executive Branch control over the NSF delayed passage of its authorizing legislation until 1950, even though the concept for the agency was first put forth in 1945 in Vannevar Bush’s report, Science: The Endless Frontier. The Office of Naval Research bridged the gap in basic research funding during those years. For an account of the politics of the NSF’s creation, see G. Paschal Zachary, Endless Frontier: Vannevar Bush, Engineer of the American Century, New York: The Free Press, 1997, p. 231. See also Daniel Lee Kleinman, Politics on the Endless Frontier: Postwar Research Policy in the United States, Durham, N.C.: Duke University Press, 1995.
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Government-Industry Partnerships for the Development of New Technologies contracts helped to support enabling technologies, such as semiconductors, new materials, radar, jet engines, missiles, and computer hardware and software.14 In the post-Cold War period the evolution of the U.S. economy continues to be marked by the interaction of government-funded research and procurement and the activities of innovative entrepreneurs and leading corporations. In the last decade of the twentieth century government support was essential to progress in such areas as microelectronics, robotics, biotechnology, nanotechnologies, and the investigation of the human genome. Patient government support also played a critical role in the development of the Internet (whose forerunners were funded by the Defense Department and the NSF).15 Together these technologies make up the foundation of the modern economy. As Vernon W. Ruttan has observed, “Government has played an important role in technology development and transfer in almost every U.S. industry that has become competitive on a global scale.”16 Importantly, the U.S. economy continues to be distinguished by the extent to which individual entrepreneurs and researchers take the lead in developing innovations and starting new businesses. Yet in doing so they often harvest crops sown on fields made fertile by the government’s long-term investments in research and development.17 CURRENT TRENDS IN FEDERAL SUPPORT The federal government’s role in supporting innovation through funding of R&D remains significant although non-federal entities have increased their share of national funding for R&D from 60 percent to 74 percent between 1990 and 2000 (see Figure 1). Federal funding still supports a substantial component, 27 percent, of the nation’s total research expenditures.18 Significantly, federal expenditures constitute 49 percent of basic research spending. In addition, federal funding for research tends to be more stable and based on a longer time horizon than funding from other sources. Commitment of federal research spending is therefore an essential component of the U.S. innovation system. 14 For an excellent review of the role of government support in developing the computer industry and the Internet, see National Research Council, Funding a Revolution: Government Support for Computing Research, Washington, D.C.: National Academy Press, 1999. 15 Ibid. See, particularly, chapter 7. 16 See Vernon W. Ruttan, Technology, Growth and Development: An Induced Innovation Perspective, op. cit. 17 David B. Audretsch and Roy Thurik, Innovation, Industry, Evolution, and Employment, Cambridge, UK: Cambridge University Press, 1999. 18 See National Research Council, Trends in Federal Support of Research and Graduate Education, Washington, D.C.: National Academy Press, 2001, p. 4.
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Government-Industry Partnerships for the Development of New Technologies FIGURE 1 Total real R&D expenditures by source of funds, 1960-2000. Source: U.S. National Science Foundation, National Patterns of R&D Resources. Changing Priorities and Funding Shifts in the composition of federal research support therefore remain important both in their own right and for the impact these shifts may have on the future development of our most innovative industries, such as biotechnology and computers, which promise to be a source of substantial innovation and growth. In both cases the role and impact of federal R&D funding is of great importance. In the case of biomedicine the promise of better health, and the tangible benefits it represents has prompted a rapid expansion of federal support for the National Institutes of Health.19 By the late part of the 1990s this trend had steadily gained momentum, resulting in congressional agreement to double the funding for the National Institutes of Health (NIH) over five years. This agreement has led, through two administrations, to major yearly increases in federal funding for biomedical research. This has raised concerns, even among the NIH leadership,20 that other areas of 19 Progress in biomedicine and drug research, the development of such diagnostic tools as magnetic resonance imaging, and the rapidly expanding understanding of the human genome give credence to this promise. Biotechnology also promises to enhance information technology. The Economist, “Protein Based Computer Memories, Data Harvest,” December 22, 2001, reports on one possibility in this regard. 20 See Harold Varmus, “The Impact of Physics on Biology and Medicine.” Plenary talk, Centennial Meeting of the American Physical Society, Atlanta, March 22, 1999.
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Government-Industry Partnerships for the Development of New Technologies Box C. Federal Support of Biomedical and Information Technology Research The source of strength in the U.S. innovation system is the diversity in its funding sources, mechanisms, and missions. While it has had many successes, it is also true that the U.S. innovation system has alwys had imperfections with regard to the commercialization of promising ideas. In this context there are major challenges to achieving the promises of biomedical research. From a systemic perspective the main challenge is that the welcome increase in support for biomedical research has not been matched by increases in the supporting technologies required to effectively capitalize on the results of biomedical research. At the same time not only has support for the disciplines that drive progress in semiconductors, computers, and other key technologies not increased but has also seen reductions in real terms over a sustained period. In the view of leading figures from both the biomedical and information technology communities, this state of affairs puts at risk our ability to fully capitalize on the increasing investments in biomedical research, while equally putting at risk the economic growth that generates the revenue base for these R&D investments. Adapted from, National Research Council, Capitalizing on New Needs and New Opportunities: Government-Industry Partnerships in Biotechnology and Information Technologies, C. Wessner, ed., Washington, D.C.: National Academy Press, 2002. promising research that directly contribute to the development of medical technologies are suffering from relative neglect.21 As noted in Box C, shifts in federal spending for R&D are a cause for serious concern. There are two main issues: The first relates to the absolute amounts and allocations of spending. The second concerns the ability of the U.S. economy to capitalize on these investments. Each point is addressed below. 21 For a discussion of these shifts, see Michael McGeary, “Recent Trends in the Federal Funding of Research and Development Related to Health and Information Technology,” in National Research Council, Capitalizing on New Needs and New Opportunities: Government-Industry Partnerships in Biotechnology and Information Technologies, op. cit.
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Government-Industry Partnerships for the Development of New Technologies Shifts in Composition of Private Sector Research Concerning the first point, there is a growing concern that the United States is not investing enough and broadly enough in research and development. In the private sector the demise of large industrial laboratories, such as IBM’s Yorktown facility and Bell Laboratories, has reduced the amount of basic research conducted by private companies.22 Hank Chesbrough, for instance, notes that large corporations “are shifting their resources away from basic discovery-oriented research to applied mission-oriented work. At the same time, … outsourcing more of their basic research work to small startups, independent research houses and contract research organizations, while also partnering with universities and national laboratories.”23 In light of these developments, the role of partnerships gains additional relevance. Private equity markets also influence the level and distribution of investment. While the equity market in the United States is among the most dynamic in the world, it does not equally address all phases of the innovation process. In fact, current trends in the venture industry—particularly the increase in deal size—make certain types of small, early-stage financing less likely, despite the overall increase in venture funding.24 Although private sector R&D has steadily increased in the United States in recent years, almost all of it has been product oriented rather than geared to basic research.25 In addition, the increase in corporate spending on research is concentrated in such sectors as the pharmaceutical industry and information technology. Within those sectors much of the R&D effort is necessarily distributed to product development, rather than to the more basic research questions. Stagnation and Decline in Key Disciplines The second area of concern regards the allocation of federal research funds, specifically, the unplanned shifts in the level of federal support within the U.S. 22 See Richard Rosenbloom and William Spencer, Engines of Innovation: U.S. Industrial Research at the End of an Era, Boston: Harvard Business School Press, 1996. 23 See Hank Chesbrough, “Is the Central R&D Lab Obsolete?” Technology Review, April 24, 2001. 24 Venture capital funding has fallen off sharply from 1999 highs but overall fund size has increased substantially. This means that venture capital investments have recently been larger but fewer, rising from an average of $2.7 billion in 1994 to $25.4 billion in 2000. For a broad overview of the early-stage equity market for high-growth ventures in the U.S., see Jeffrey Sohl, “The Early-Stage Equity Market in the USA,” Venture Capital 1(2): 101-20, 1999. 25 See Charles F. Larson, “The Boom in Industry Research,” Issues in Science and Technology, Summer 2000, p. 27. With the exception of pharmaceuticals, only a small fraction (for example, less than 4 percent in computers and semiconductors) of corporate R&D is classified as basic research. See National Research Council, Trends in Federal Support of Research and Graduate Education, Washington, D.C.: National Academy Press, 2001, p. 4.
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Government-Industry Partnerships for the Development of New Technologies public R&D portfolio. As highlighted in a recent National Research Council report,26 the United States has experienced a largely unplanned shift in the allocation of public R&D.27 The end of the Cold War and a political consensus to reduce the federal budget deficit has resulted in reductions in federal R&D funding in real terms for some disciplines. In practice, for example, the decline of the defense budget corresponded with a slowdown in real terms of military support for research in physics, chemistry, mathematics, and most fields of engineering. This STEP Board study showed that in 1997 several agencies were spending substantially less on research than in 1993, even though the overall level of federal research spending was nearly the same as it was in 1993. The Department of Defense dropped 27.5 percent, the Department of the Interior was down by 13.3 percent, and the Department of Energy had declined by 5.6 percent.28 Declines in funding for the Departments of Defense and Energy are significant because traditionally these agencies have provided the majority of federal funding for research in electrical engineering, mechanical engineering, materials engineering, physics, and computer science.29 After five years of stagnation federal funding for R&D did recover in FY1998. In 1999 total expenditures were up 11.7 percent over the 1993 level. These changes were driven mainly by the increases in the NIH appropriations. Breakthroughs in biotechnology and the promise of effective new medical treatments have resulted in a substantial increase in funding for the NIH, which is slated for further increases by the current administration.30 26 See Michael McGeary, “Recent Trends in the Federal Funding of Research and Development Related to Health and Information Technology,” 2002, op. cit. 27 See Stephen A. Merrill and Michael McGeary, “Who’s Balancing the Federal Research Portfolio and How?” Science, vol. 285, September 10, 1999, pp. 1679-1680. For a more recent analysis, see National Research Council, Trends in Federal Support of Research and Graduate Education, op. cit. For the impact of these shifts, see National Research Council, Capitalizing on New Needs and New Opportunities: Government-Industry Partnerships in Biotechnology and Information Technologies, op. cit. 28 See Michael McGeary, “Recent Trends in the Federal Funding of Research and Development Related to Health and Information Technology,” 2002, op. cit. 29 Ibid. 30 See American Association for the Advancement of Science, “AAAS Preliminary Analysis of R&D in FY 2003 Budget,” February 8, 2002, <www.aaas.org/spp/R&D>. The AAAS notes that under President Bush’s proposed budget “[n]on-defense R&D would increase by 7.8 percent or $3.8 billion. NIH would make up almost half of the entire non-defense R&D portfolio with another large increase, the fifth and final installment of a plan to double the NIH budget in the five years to FY2003. Excluding NIH, however, all other non-defense R&D would fall by 0.4 percent to $26.7 billion.” See also, National Research Council, Trends in Federal Support of Research and Graduate Education, op. cit., p. 2.
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Government-Industry Partnerships for the Development of New Technologies the consortium, which in part reflected the belief that the Japanese cooperative programs had been instrumental in the success of Japanese producers.54 The SEMATECH consortium represented a significant new experiment for government-industry cooperation in technology development. Conceived and funded under the Reagan administration, the consortium represented an unusual collaborative effort, both for the U.S. government and for the fiercely competitive U.S. semiconductor industry.55 The Silicon Valley entrepreneurs hesitated about cooperating with each other and were even more hesitant about cooperating with the government—an attitude mirrored in some quarters in Washington.56 Industry Leadership From the outset, the industry took a leading role in setting its objectives, managing its resources, and measuring its accomplishments.57 The consortium showed substantial flexibility in its early years as its members and leadership struggled to define where it could make the maximum impact. After an early focus on developing a manufacturing facility to help solve production problems (rather than rely on a lab), the consortium eventually focused on three goals which involved improving: Manufacturing processes; Factory management; and Industry infrastructure, especially the supply base of equipment and materials.58 54 See Larry D. Browning and Judy C. Shetler, SEMATECH, Saving the U.S. Semiconductor Industry, op. cit., Chapter 1, p. vv. 55 As Hedrick Smith noted “the mere formation of SEMATECH required a radically new mind-set at some of America’s leading high-tech corporations.” See Hedrick Smith, Rethinking America, New York: Random House, 1995, p. 385. In particular, Charlie Sporck, then CEO of National Semiconductor, and Bob Noyce, Intel Co-founder, played a decisive role in garnering the political and industrial support for the formation of the consortium. 56 See Larry D. Browning and Judy C. Shetler, SEMATECH, Saving the U.S. Semiconductor Industry, op. cit, pp. 21-23. Browning and Shetler record that the Treasury and Council of Economic Advisors were adamantly opposed to government funding of a consortium; the Departments of Defense and Commerce were supportive. Ibid, p. 24. 57 SEMATECH’s industry-driven structure and innovative management approach to identifying and achieving its objectives have been credited with contributing to its effectiveness. See Larry D. Browning and Judy C. Shetler, SEMATECH: Saving the U.S. Semiconductor Industry, op. cit., p. 206, 210. Defense officials were closely consulted on technical direction, then the consortium management was left in charge of implementation. A similar observation about SEMATECH’s flexible approach is made in Peter Grindley, David C. Mowery, and Brian Silverman, “SEMATECH and Collaborative Research: Lessons in the Design of High-Technology Consortia,” Journal of Policy Analysis and Management, 13(4), 1996. 58 See Larry D. Browning and Judy C. Shetler, SEMATECH, Saving the U.S. Semiconductor Industry, op. cit, p. 205.
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Government-Industry Partnerships for the Development of New Technologies The formation of SEMATECH thus provided an opportunity to bring together leading U.S. producers to focus initially on product quality. During this period, the U.S. industry also increased its capital expenditure and improved its ability to manage the development and introduction of new process technologies into high-volume manufacturing.59 The industry was aided in this process through its collaboration on common challenges under the auspices of SEMATECH. The Impact of SEMATECH While many factors affected the recovery of the U.S. industry, the public policy initiatives in trade and cooperative research were key among elements in the industry’s revival—contributing respectively to the restoration of financial health and product quality.60 The stronger performance of U.S. producers was revealed in gains in global market share that rested in part on improvements in product quality and manufacturing process yields, areas in which SEMATECH played a contributing role. As Flamm and Wang observe, though there are “a few vocal exceptions,” SEMATECH has been credited, within the industry, as playing some part in the “resurgence among U.S. semiconductor producers in the 1990s.”61 Perhaps the most compelling affirmation of the value of the consortium is the willingness of most of SEMATECH’s corporate members to continue participating in the consortium and to continue with this cooperation even after federal funding ceased.62 Other economists knowledgeable about the industry reach similar conclusions. For example, Macher, Mowery, and Hodges note that continued industry participation represents “a strong signal that industry managers believe that the consortium has produced important benefits.”63 59 Ibid, p. 262. See also D.C. Mowery and N. Hatch, ”Managing the Development and Introduction of New Manufacturing Processes in the Global Semiconductor Industry,” in G. Dosi, R. Nelson, and S. Winter, eds., The Nature and Dynamics of Organizational Capabilities, New York: Oxford University Press, 2002. 60 See Jeffrey T. Macher, David C. Mowery, and David A. Hodges, “Semiconductors,” op. cit. pp. 266-267 and 277. 61 See Kenneth Flamm and Qifei Wang, Sematech Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D. in this volume. Economists share this view. As Flamm notes, “Economists generally view the program as the preeminent model of a cooperative government-industry joint R&D venture.” See the presentation by Kenneth Flamm in National Research Council, Regional and National Programs to Support the Semiconductor Industry, op cit. For the views of a frequent critic, see T.J. Rodgers, “Silicon Valley Versus Corporate Welfare,” CATO Institute Briefing Papers, Briefing Paper No. 37, April 27, 1998. 62 At a meeting in 1994, The SEMATECH Board of Directors reasoned that the U.S. semiconductor industry had regained strength in both the device-making and supplier markets, and thus voted to seek an end to matching federal funding after 1996. For a brief timeline and history of SEMATECH, see <http://www.sematech.org/public/corporate/history/history.htm>. 63 See Jeffrey T. Macher, David C. Mowery, and David A. Hodges, “Semiconductors,” op. cit., p. 272.
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Government-Industry Partnerships for the Development of New Technologies Perspectives from Abroad The positive perception of the consortium has influenced the creation and structure of consortia abroad. Kenneth Flamm points out that the consortium is perceived as a success in Japan, directly influencing the formation and design of the ASET and SELETE programs (see Box B).64 SEMATECH appears also to have had a similar influence on the initiation and operation of European programs such as MEDEA and IMEC.65 An informed perspective on the positive model of the U.S. partnership is offered by Hitachi’s Toshiaki Masuhara who observes that there has been a good balance of support in the United States by government and industry for research through the universities. This has included “a very good balance between design and processing.” He adds that the overall success of U.S. industry appears to have come from the contributions of five overlapping efforts. These include: The SIA roadmap to determine the direction of research; Planning of resource allocation by SIA and SRC; Allocation of federal funding through Department of Defense, National Science Foundation, and the Defense Advanced Research Projects Agency; The success of SEMATECH and International SEMATECH in supporting research on process, technology, design, and testing; and The Focus Center Research Project.66 In addition to these informed opinions, the willingness of new firms such as Infineon (Germany), Philips (the Netherlands), and ST Thompson (France) to join International SEMATECH is a further affirmation of the perceived value of the consortium’s research and related activities. 64 As a leading Japanese industrialist observed, “A major factor contributing to the U.S. semiconductor industry’s recovery from this perilous situation [in the 1980s] was a U.S. national policy based around cooperation between industry, government, and academia.” Hajime Susaki, Chairman of NEC Corporation, “Japanese Semiconductor Industry’s Competitiveness: LSI Industry in Jeopardy,” Nikkei Microdevices, December 2000. 65 IMEC, headquartered in Leuven, Belgium, is Europe’s leading independent research center for the development and licensing of microelectronics, and information and communication technologies (ICT). IMEC’s activities concentrate on design of integrated information and communication systems; silicon process technology; silicon technology and device integration; microsystems, components and packaging; and advanced training in microelectronics. For more information on IMEC, see <http://www.imec.be/>. SEMATECH was emulated in the U.S. as well. For example, NEMI (The National Electronics Manufacturing Initiative) was formed in 1993 to focus on strategic electronic components and electronics manufacturing systems. NEMI is an industry-led consortium with fifty members. 66 See the presentation by Toshiaki Masuhara in National Research Council, Regional and National Programs to Support the Semiconductor Industry, op cit.
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Government-Industry Partnerships for the Development of New Technologies These positive views from leading figures in the industry, in both the U.S. and abroad, underscore Flamm and Wang’s observation that SEMATECH was thought to be a “privately productive and worthwhile activity.”67 Researchers such as Macher, Mowery, and Hodges, support Flamm, finding that “government initiatives, ranging from trade policy to financial support to university research and R&D consortia, played a role in the industry’s revival,” while adding, as do Flamm and Wang, that the “specific links between undertakings such as SEMATECH and improved manufacturing performance are difficult to measure.”68 Challenges of measurement notwithstanding, those most closely involved (i.e. leading figures in the industry) are thus positive in their overall assessment of the consortium.69 A Positive Policy Framework This unprecedented level of cooperation, and the important corresponding collaborative activity among the semiconductor materials and equipment suppliers, thus appear to have contributed to a resurgence in the quality of U.S. products and indirectly to the resurgence of the industry.70 The collective accomplishments and impact of the consortium may well have been an essential element contributing to the recovery of the U.S. industry, though it should be underscored that its contribution and other public policy initiatives were by no means suffi 67 See Kenneth Flamm and Qifei Wang, Sematech Revisited: Assessing Consortium Impacts on Semiconductor industry R&D, op. cit. 68 See Jeffrey T. Macher, David C. Mowery, and David A. Hodges, “Semiconductors,” op. cit., p. 247. 69 There are corporate critics of SEMATECH. T.J. Rodgers of Cypress Semiconductors is a frequent critic. For a comprehensive statement of his views, see “Silicon Valley Versus Corporate Welfare,” CATO Institute Briefing Papers, Briefing Paper No. 37, April 27, 1998. Rodgers notes that “My battles with Sematech started when our engineers were denied access to an advanced piece of wafer-making equipment, a chemical-mechanical polisher (CMP) machine manufactured by an Arizona company [that]…SEMATECH [had] contracted…to develop….Cypress was denied access to that critical piece of wafer-making equipment, which could have differentiated between winners and losers in the next-generation technology. At that point I became a vocal critic of SEMATECH….” (p.9). Rodgers also objected to the SEMATECH dues structure, finding the $1 million minimum to be onerous for a relatively small semiconductor-producing firm. He adds “I believe that if SEMATECH had been formed as a private consortium with a smaller budget, it would have come to its current, more efficient model of operation much more quickly.” (p. 10). 70 As a research consortium, SEMATECH’s contributions were necessarily indirect. As Browning and Shetler observe, “any effects caused by SEMATECH would, of course, be indirect because as a member firm, executives are disposed to point out, it was ultimately the member companies’ factory production that led to the increased U.S. semiconductor market share. SEMATECH’s role has been to develop new manufacturing technologies and methods and transfer them to its member companies, which in turn manufacture and sell improved chips. SEMATECH’s precise contribution to the market recovery is therefore difficult to directly assess.” See Larry Browning and Judy Shetler, SEMATECH: Saving the U.S. Semiconductor Industry, op. cit., p. 208.
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Government-Industry Partnerships for the Development of New Technologies cient to ensure the industry’s recovery. Essentially, these public policy initiatives can be understood as having collectively provided positive framework conditions for private action by U.S. semiconductor producers.71 Technical Challenges, Competitive Challenges, and Capacity Constraints For more than 30 years the growth of the semiconductor industry has been largely associated with the ability of researchers to shrink the transistor steadily and quickly and thereby increase its speed, without commensurate increases in costs (Moore’s Law). If Moore’s Law is indeed to be maintained, then a continuation of productivity increases will likely depend on the ongoing benefits associated with the process of “scaling” in microelectronics.72 There are, however, physical limits to miniaturization, including odd and undesirable quantum effects that appear under extreme miniaturization.73 The semiconductor industry also faces the challenge of soaring chip-manufacturing costs. When Intel was founded in 1968, a single machine used to produce semiconductor chips cost roughly $12,000. Today a chip-fabricating plant costs billions of dollars, and the expense is expected to continue to rise as chips become ever more complex. Adding to this concern is the realization that capital costs are rising far faster than revenue.74 In 2000, for example, average total expenditures for a six-inch equivalent “wafer” were $3,110, an increase of 117 percent over the average total costs for a six-inch wafer in 1989, and a 390 percent increase since 1978.75 71 Many factors contributed to the recovery of the U.S. industry. It is unlikely that any one factor would have proved sufficient independently. Trade policy, no matter how innovative, could not have met the requirement to improve U.S. product quality. On the other hand, by their long-term nature, even effective industry-government partnerships can be rendered useless in a market unprotected against dumping by foreign rivals. Most importantly, neither trade nor technology policy can succeed in the absence of adaptable, adequately capitalized, effectively managed, technologically innovative companies. 72 See Bill Spencer’s discussion of semiconductors in: Measuring and Sustaining the New Economy, op. cit. 73 See Paul A. Packan, “Pushing the Limits: Integrated Circuits Run into Limits Due to Transistors,” Science, September 24, 1999. Packan notes that “these fundamental issues have not previously limited the scaling of transistors and represent a considerable challenge for the semiconductor industry. There are currently no known solutions to these problems. To continue the performance trends of the past 20 years and maintain Moore’s Law of improvement will be the most difficult challenge the semiconductor industry has ever faced.” 74 See Charles C. Mann, “The End of Moore’s Law?” Technology Review, May/June 2000, at <http://www.technologyreview.com/magazine/may00/mann.asp>. 75 These statistics originate from the Semiconductor Industry Association’s 2001 Annual Databook: Review of Global and U.S. Semiconductor Competitive Trends, 1978-2000. A wafer is a thinly sliced (less than 1 millimeter) circular piece of semiconductor material that is used to make semiconductor devices and integrated circuits.
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Government-Industry Partnerships for the Development of New Technologies The consensus in the engineering community is that improvements, both large and small, will continue to uphold Moore’s Law for another decade or so, even as scaling brings the industry very close to the theoretical minimum size of silicon-based circuits.76 To the extent that physical constraints or cost pressures limit the continued growth of the industry they will necessarily influence the role of the industry in stimulating productivity growth in the broader economy. As capital costs rise, as worldwide fabrication capacity increases, and as alternative business models (such as the foundry system) gain prominence, the competitive position of U.S. firms may be challenged.77 The unprecedented technical challenges faced by the industry underscore the need for talented individuals—the architects of the future—to devise new solutions to these technical challenges.78 The simple and perhaps alarming fact is that this pool of available skilled and qualified labor is shrinking. Historically the U.S. government has supported human resources through its system of funding basic research at universities, whereby the work and training of graduate students and postdoctoral scholars are supported by research grants to principal investigators. However, the rapid growth in demand for skilled engineers, scientists, and technicians is creating challenges on several fronts. This trend has been aggravated in recent years by the steep decline in federal funding for university research in the sciences relevant to information technologies, such as mathematics, physics, and engineering. As we noted in the previous section, these declines are the unintended result of unplanned shifts in the level of federal support within the U.S. public R&D portfolio. Challenges to U.S. Public Policy While federal funding for SEMATECH ended after 1996 at the industry’s initiation, the debate has continued in Congress and succeeding administrations as to whether and to what extent the U.S. government should continue to invest federal funds in supporting R&D in microelectronics.79 Some observers argue 76 See discussion by Bob Doering of Texas Instruments on “Physical Limits of Silicon CMOS and Semiconductor Roadmap Predictions,” in Measuring and Sustaining the New Economy, op. cit. 77 See remarks by George Scalise, President of the Semiconductor Industry Association, at the Symposium Productivity and Cyclicality in the Semiconductor Industry, organized by Harvard University. 78 David Tennenhouse, Vice-president and Director of Research and Development at Intel, emphasized this point in his presentation at the joint Strategic Assessments Group and Defense Advanced Research Projects Agency conference The Global Computer Industry Beyond Moore’s Law: A Technical, Economic, and National Security Perspective, January 14-15, 2002, Herndon, VA. 79 At a meeting in 1994 the SEMATECH Board of Directors reasoned that the U.S. semiconductor industry had regained strength in both the device-making and supplier markets, and voted to seek an end to matching federal funding after 1996. For a brief timeline and history of SEMATECH, see <http://www.sematech.org/public/corporate/history/history.htm>.
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Government-Industry Partnerships for the Development of New Technologies that the role of the government should be curtailed, asserting that federal programs in microelectronics represent “corporate welfare.”80 Advocates of R&D cooperation among universities, industry, and government to advance knowledge and the nation’s capacity to produce microelectronics argue that such support is justified, not only for this technology’s relevance to many national missions (not least defense), but also for its benefits to the national economy and society as a whole. 81 In fact, no consensus exists on this point or on appropriate mechanisms or levels of support for research. Discussions of the need for such programs have often been dogged by doctrinaire views as to the appropriateness of government support for industry R&D and domestic politics (e.g., balancing the federal budget) that have generated uncertainty about this form of cooperation, especially at the federal level.82 An effect of this irresolution has been a passive federal role in addressing the technical uncertainties central to the continued rapid evolution of information technologies. DARPA’s annual funding of microelectronics R&D—the principal channel of direct federal financial support—has declined, and is projected to decline further (See Figure 3).83 As noted above, this trend runs counter to those in Europe and East Asia, where governments are providing substantial direct and indirect funding in this sector. The declines in U.S. federal funding for research are of particular concern to U.S. industry. 80 See T.J. Rodgers, “Silicon Valley Versus Corporate Welfare,” op. cit. 81 Policy debates on public-private partnerships have often suffered from sloganeering, with no clear resolution. One side claims that the market is efficient and will therefore sort itself out without the involvement of government. The other side counters that markets are imperfect and that, in any event, government missions cannot depend on markets alone, nor wait for the appropriate price signals to emerge. Therefore public policy has a role—and always has. The contribution of this analysis, and others in the series, is to document current cooperative activity and redirect attention away from this abstract rhetoric and demonstrate that carefully crafted partnerships can help accelerate innovation. 82 See David M. Hart, Forged Consensus: Science, Technology, and Economic Policy in the United States, 1921-1953, Princeton: Princeton University Press, 1998, p. 230. For a broader review of these differing perspectives, see Richard Bingham, Industrial Policy American Style: From Hamilton to HDTV, New York: M.E. Sharpe, 1998. See also I. Lebow, Information Highways and Byways: From the Telegraph to the 21st Century, New York: Institute of Electrical and Electronics Engineers, 1995. For a global perspective, see J. Fallows, Looking into the Sun: The Rise of the New East Asian Economic and Political System, New York: Pantheon Books, 1994; and J.A. Brander and B.J. Spencer, “International R&D Rivalry and Industrial Strategy,” Review of Economic Studies, 50(4):707-722, 1983. There is much less ambivalence at the state level. See Christopher Coburn and Dan Berglund, Partnerships: A Compendium of State and Federal Cooperative Technology Programs. Columbus, OH: Battelle Press, 1995. 83 This presentation understates the declines. Support for lithography, for example, fell from $54.4 million in FY2001 to $32.6 in FY2002 and is projected to stabilize at $25 million in FY2003. Some reports suggest that overall support for microelectronics research actually fell from about $350 mil
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Government-Industry Partnerships for the Development of New Technologies FIGURE 3 Defense Advanced Research Projects Agency’s annual funding of microelectronics R&D. SOURCE: DARPA 2001-05 President’s Budget R-1 Exhibit Addressing the R&D Gap: The Focus Center Programs Reflecting this concern, the industry has initiated several new programs to strengthen the research capability of U.S. universities. The largest of these is the Focus Center Research program (FCRP), through which the U.S. semiconductor industry, the federal government, and universities work cooperatively on cutting-edge research deemed critical to the continued growth of the industry. This program is operated by the Semiconductor Research Corporation, which funds and operates university-based research centers in microelectronics.84 In cooperation with the government and leading universities, the industry plans to eventually establish six national focus centers and channel $60 million per year into new research activities. However, the recent sharp downturn in the industry has put in question this commitment. lion in the early 1990s to about $55 million in 2000. See Scott Nance, “Broad Federal Research Required to Keep Semiconductors on Track,” New Technology Week, October 30, 2000. Sonny Maynard, Semiconductor Research Corporation, cited in presentation by Dr. Michael Polcari, “Cur-rent Challenges: A U.S. and Global Perspective,” National Research Council, Symposium on National Programs to Support the Semiconductor Industry (October 2000). 84 The FCRP is part of MARCO, the Microelectronics Advanced Research Corporation within the Semiconductor Research Corporation (SRC). See MARCO Web site, <http://marco.fcrp.org>. MARCO has its own management personnel but uses the infrastructure and resources of the SRC.
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Government-Industry Partnerships for the Development of New Technologies In addition, International SEMATECH continues to promote greater cooperation among major firms and now includes international members, though this initiative appears to have been set back by the recent downturn in the industry. Still, there are some promising signs. The most recent budgets for the NSF and the Department of Defense include increases in some important semiconductor areas that had been reduced during the 1990s. These developments only emphasize the limitations of private-sector support, the risks of lag effects in the R&D pipeline, and the disconnect between research needs and resources. These industry-university initiatives are valuable and merit additional support. The committee accordingly believes it is important to increase support for basic research in the sciences related to information technologies.85 MEETING NEW CHALLENGES—COUNTERING TERRORISM For the current war on terrorism, partnerships have a demonstrated capacity to marshal the ingenuity of industry to meet new needs for national security. Because they are flexible and can be organized on an ad hoc basis, partnerships are an effective means to focus diverse expertise and innovative technologies rapidly to help counter new threats. As a recent report of the National Academy of Sciences notes, “For the government and private sector to work together on increasing homeland security, effective public-private partnerships and cooperative projects must occur. There are many models for government-industry collaboration—cooperative research and development agreements, the NIST Advanced Technology Program, and the Small Business Research Innovation Program, to cite a few.”86 Indeed, programs such as SBIR are being harnessed to bring new technologies to address urgent national missions. For example, the National Institute of Allergies and Infectious Diseases at the National Institutes of Health has rapidly expanded its efforts in support of research on possible bio-terrorism in response to recent threats and attacks. Specifically, NIAID has expanded research and development countermeasures—including vaccines, therapeutics, and diagnostic tests—needed to counter and control the release of agents of bio-terrorism.87 Appropriately structured partnerships can also serve as a policy instrument that aligns the incentives of private firms to achieve national missions without compelling them to do so. As the National Academy of Sciences report cited above further notes, “A more effective approach is to give the private sector the 85 See National Research Council, Capitalizing on New Needs and New Opportunities: Government-Industry Partnerships in Biotechnology and Information Technologies, op. cit. 86 National Research Council, Making the Nation Safer—The Role of Science and Technology in Countering Terrorism. op. cit., 2002. 87 See NIAID FY2003 Budget Justification Narrative at <http://www.niaid.nih.gov/director/congress/2002/cj >.
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Government-Industry Partnerships for the Development of New Technologies widest possible latitude for innovation and, where appropriate, to design R&D strategies in which commercial uses of technologies rest on a common base of investment. Companies then have the potential to address vulnerabilities while increasing the robustness of public and private infrastructure against unintended and natural failures, improving the reliability of systems and quality of service, and in some cases, increasing productivity.” Dual-use strategies can play key roles in meeting critical short-term mission goals, as well as in developing over the longer term, more effective and lower-cost technologies.88 Additionally, joint interagency design and execution programs—with a single source of funds and joint decisions on each dollar to be spent—constitute one approach to address critically important national initiatives collaboratively. Partnerships, when properly structured and managed, can achieve more positive results than separately channeled funding. 88 The case of the Technology Reinvestment Project (TRP) illustrates the potential for positive collaborations between defense contractors and commercial firms for dual-use technology development. See J. Stowsky, “Politics and Policy: The Technology Reinvestment Program and the Dilemmas of Dual Use,” Mimeo, University of California. See also Linda R. Cohen, “Dual-Use and the Technology Reinvestment Project,” in Investing in Innovation, Lewis M. Branscomb and James H. Keller, eds., Cambridge, MA: MIT Press, 1999.
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Representative terms from entire chapter: