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OCR for page 39
Policies and Practices
Affecting U.S. Competitiveness
in Aclvancecl Technology
Three conclusions emerge in examining the varying prac-
tices of nations toward advanced technology development
and trade: (1) other nations do indeed have comprehen-
sive national plans supporting technology and trade
objectives; (2) the United States does not take a
cohesive and coordinated look at its policies and
practices and those of our trading partners regarding
advanced technology; and (3) the United States has
available to it tools for addressing the needs of its
advanced technology enterprise, to strengthen both its
capacity for technological innovation and its inter-
national trade competitiveness.
Such tools include federal programs for support of
research and education; governmental policies and prac-
tices with regard to taxes, antitrust, patents,
regulation, and technology exports; and broad national
economic policies.
Clearly many of these policies and practices are
designed to support other national objectives. In the
processes of policymaking and allocation of resources,
however, the nation's technological capacity and inter-
national competitive strength must be highly valued among
national objectives. Furthermore, the variables affecting
the U.S. advanced technology enterprise must be well
understood. This may be accomplished by a high-level
assessment reviewing domestic governmental and private
actions, the industrial and trade policies of other
nations, and the broad global environment. The United
States has no adequate assessment process now. In
consequence, governmental policies evolve without any
broad assessment of how they will affect the strength of
U.S. advanced technology capacity and trade.
39
OCR for page 40
40
One reason for this oversight is that the United
States views technology and trade policies differently
from its competitors. The United States formulates its
trade policy in terms of a process; it sets rules for
competition and lets the private sector operate within
that framework. Some other countries tend to choose a
desired outcome and then define policy accordingly.
Furthermore, the United States views international
competition as having rules defining a "level playing
field" for firms from different countries--the game
should then be left alone. But some other countries,
having decided on desired outcomes of the competition in
terms of, say, market share or employment, feel the rules
allow them to intervene if their national firms are not
doing as well as they would like. This difference in
approach makes negotiation difficult.
The often adversarial relationships of U.S. government
and business, evolved early in the country's history,
also may impair U.S. competitiveness. Industry and
government have to be prepared to work more cooperatively
in order to achieve national goals.
A further problem is that policymakers are rarely
people experienced in the industrial innovation process--
those who through active experience know the difficulties
of creating, producing, and marketing new products and
processes embodying advanced technologies. Maintaining a
continuing expertise, through a highly qualified and
stable governmental career staff, is a corollary
difficulty.
Finally, U.S. companies often see themselves competing
against national systems rather than individual foreign
companies--U.S. aircraft manufacturers see their competi-
tor as a government-supported consortium; individual
semiconductor, robotics, and computer manufacturers here
face a cooperative network of Japanese companies working
with a governmental agency. So mixed an international
trading system complicates international negotiation and
agreement.
GOVERNMENT POLICIES
Macroeconomic Environment
While the depressed worldwide macroeconomic environment
intensifies the pressures we have been describing for
every nation, the effects may be greater in the United
OCR for page 41
41
States than elsewhere. Some of the erosion of the U.S.
lead in advanced technology may be blamed on macroeconomic
factors, particularly the low rate of investment and the
consequent slackening of demand for new technologies.
U.S. macroeconomic policies obviously serve a range of
national needs beyond those of the advanced technology
enterprise, but their impact on U.S. technological devel-
opment should be well understood. Slack domestic demand
reduces the current profits of all firms, their ability
to finance investment, and the expected profitability of
new investments in capital or technology. The problem is
intensified in the advanced technology sector because the
payoff to new investments is more uncertain and comes
after a longer delay than in traditional industries.
Further, advanced technology industry is unusually
vulnerable to high real interest rates that work differ-
entially against long lags in cash flow. The mix of
macroeconomic policy in the United States has caused
interest rates to be high and volatile for a long time.
Apart from the effect already mentioned, this choice has
caused the dollar to appreciate ~--~~~~~ ~''~~ ~
other currencies. The strength
the yen, especially, makes U.S.
suDscantlally against
of the dollar relative to
firms less competitive
precisely in those markets that are endangered for other
reasons. Finally, inflation may have inhibited invest-
ment in long-range planning and new technology.
Antitrust Policy
While U.S. antitrust policy has begun taking international
competition into account, its implementation still fails
to give sufficient weight to international trade consid-
erations. The manner in which antitrust statutes are
interpreted and applied is charged with interfering in
international competitiveness.
For example, firms have
difficulty retaining the benefits of research that are
the product of multifirm collaboration; prospective
"safe-harbor" rulings are not readily available; and
there is a general uncertainty regarding what corporate
actions may elicit legal actions on the basis of anti-
trust legislation.
Because of this uncertainty, management cites anti-
trust policy as creating excessive risk for a range of
activities that may benefit innovation and trade, such as
pooling research efforts, pooling information on the work
of international competitors, or pooling development
OCR for page 42
42
programs whose costs are too large for any one firm in an
industry to undertake. By contrast, foreign governments--
for example, Japan and France--encourage cooperation
among firms through mergers or cooperative programs.
U.S. antitrust policy, however, has successfully
fostered beneficial domestic competition. Any changes
must be carefully considered. But, in the context of the
new era marked by increased relative importance of inter-
national trade, by offshore production and investment, by
the emergence of world-scale markets, and by the differ-
ing policies of other nations, antitrust regulation and
enforcement should be reexamined in the light of the
international context in which U.S. firms must compete.
Capital Supply
Cost and availability of financing are major factors,
both in the start-up and growth of new companies and in
the modernization of established firms. Over the past
decade, capital costs have been 50 to 100 percent higher
in the United States than in Japan.i The supply of
venture capital for new U.S. firms, however, is large and
flexible; that contributes significantly to the abundance
of small advanced technology firms here.
Technological innovation by large established firms
requires both the capital and the incentive to make large-
scale investments. Japan appears to have an advantage
over the United States in this area because the cost of
capital in Japan (in real terms) is lower due to more
thrifty savings habits and superior macroeconomic perfor-
mance. The difference is aggravated by the economic
volatility that has characterized the United States during
the last decade. Also, financing of large firms in Japan
is less dependent on open capital markets than is true
for their American counterparts; thus, Japanese firms'
abilities to invest are not dependent on promises of
short-term results.
To take one example, Japanese semiconductor firms,
some of which are part of large industrial groups that
include banks, tend to be heavily financed from within
the group.2 U.S. firms are competing with foreign
firms that receive their capital at reduced rates from
their governments or from banks encouraged by their
governments.
OCR for page 43
43
Export Policies
Ideally, we would prefer a world without corruption,
without trade restrictions against our allies, without
government financial support for exports. We would like
to expand U.S. trade in a free-market environment. At
the same time, we would like to limit the military tech-
nological development of our potential adversaries. How-
ever, our pursuit of these objectives must be tempered by
our interest in the health of U.S. industry.
U.S. advanced technology firms operate in an increas-
ingly competitive world market. ~
~ ~ ~ ~ .
Americans should be
conscious or the Impact of U.S. policies on U.S. exports
as they help or hinder viability of advanced technology
firms. This competitive environment need not deter
American pursuit of their major objectives, but such
pursuit must acknowledge what is realistically attainable
and may entail compromises with this reality.
For example, some of our leading competitors justify
using official export credits because they protect jobs
and nurture industrial development. Until we can achieve
agreement to minimize government sponsorship of export
credits, we should be prepared to provide similar support
for our own industries as we have done in the past
through the Export-Import Bank.
Similarly, the United States imposes on exports to
currently out-of-favor nations controls for both foreign
policy and national security reasons.
In the East, these
restrictions have been partly based on the questionable
assumption that the United States had an effective monop-
oly in providing the products in question. The conse-
quence may be a loss of U.S. sales, the foreign policy
goals may not be achieved. To be in the best interest of
the nation, the economic and political costs and benefits
of controls must be carefully assessed, and they must be
undertaken multilaterally--consulting and cooperating
with other leading industrial or agricultural countries.
Tax Policy
Because technological progress diffuses throughout the
economy, there is a strong case for special tax treatment
for research and development. Indeed, the Economic
Recovery Tax Act of 1981 offered several incentives to
business investment, including subsidies for a 5-year
period for research and development expenditures and
OCR for page 44
44
accelerated write-offs for capital expenditures. The
United States is not alone in providing tax incentives
for industrial research and development, though many
nations prefer to provide direct subsidies. Sometimes
new and rapidly growing advanced technology firms are
targeted for benefits such as accelerated depreciation
and tax benefits during their start-up phases. Policy
assessments of the effectiveness of current tax policy in
support of research and development (for example, the
actual effect of the 5-year limit mentioned above) would
be welcome.
Regulatory Policy
Health, safety, environmental, and other regulations have
been criticized for raising the costs of product develop-
ment and manufacture, and thus raising prices of American
products. The counterargument is that added costs are
warranted because of their benefit.
There is now a general mood in this country for reex-
amination of regulatory policies. That reexamination
should include consideration of the effect of regulatory
policies on the capacities of U.S. industries to innovate
and to compete in world markets.
PRIVATE SECTOR POLICIES
Nongovernmental variables affecting the advanced tech-
nology enterprise may be influenced by government
policy. These include the nature of corporate manage-
ment, university-industry relationships, and financial
resources.
Management
American industrial management, long regarded as the
standard for excellence, has recently come under criti-
cism. Failure to maintain product quality, searches for
short-term market payoffs, and failure to invest in
long-term technological innovations are some of the
alleged faults. Management has been accused of placing
undue emphasis on short-term financial goals, yet our
system requires companies to fund their own growth--even
and especially in a recessionary period.'
OCR for page 45
45
Short-term financial concerns have come to dominate
many U.S. corporations for various reasons--among them,
the increased size and complexity of corporate structure,
the harsher macroeconomic climate, the uncertainty in
government regulation and policy, and (somewhat ironi-
cally) the intensifying international competition.
Managers equate this near-term emphasis with the need to
survive, yet the result--a reluctance to take long-term
risks--sacrifices major technological innovations. A
blanket indictment of American management is simplistic
and erroneous, of course. Examples abound of techno-
logically astute management willing to take risks and
invest in an innovative future.
Effective application of American styles of management
coupled to a deeper understanding of the critical role of
technological innovation in future economic growth may be
more appropriate than studying Japanese or other manage-
ment models. The rapid evolution of advanced technologies
offers remarkable opportunities for corporate exploita-
tion and growth. Despite the recession, U.S. industry
has seen those opportunities and responded by increasing
its research and development spending by 15 percent in
1981.4
University-Industry Relations
Historically, the federal government has provided the
majority of funds for academic research. Industry has
contributed only modestly--4 percent to 6 percent yearly
of total academic research and development expenditures
from 1960 to 1981.5
University-industry collaborations can be, never-
theless, remarkably effective in improving the transfer
of advanced technology research results to commercial
applications. An obvious example is the influence of MIT
and Stanford University in contributing to the growth and
success of advanced technology enterprises populating
Boston's Route 128 and Palo Alto's Silicon Valley.
New university-industry relationships are emerging in
such fields as biotechnology and electronics. Stanford
University's Center for Integrated Systems and Carnegie-
Mellon University's Robotics Institute have benefited
from corporate support in establishing multimillion
dollar research facilities.
We applaud such efforts, and we encourage universities
and industry to continue to enter into collaborative
OCR for page 46
46
arrangements that may create new knowledge, quicken its
commercial translation, and strengthen components of the
nation's advanced technology capacity. It is crucial,
however, that those involved must ensure that research
findings in the university are generally open and avail-
able to the entire scientific community. Deviations from
this rule should be fully disclosed, should be under
constant scrutiny and review by the universities and
companies themselves, and should be based only on the
most compelling short-term reasons. This need not obviate
targeted industrial research grants to universities con-
sistent with rewards to the sponsor. In addition, such
openness will maintain the concept of free scientific
communication and open university.
GOVERNMENT AND PRIVATE POLIC IE S
The following are areas for which both government and
private sector actions affect national capabilities.
Human Resources
The U.S. educational system, public and private, is
complex. It involves local, state, and federal gover-
nance, and its funding sources range from state subven-
tions to indirect cost charges against research. A
coherent examination of the educational system within a
broader review of policies and practices affecting the
nation's technological capacities would not be easy, but
it is necessary.
A diverse set of human skills is essential to national
technological innovative capacity: a technically come
petent labor force, a first-rate and constantly freshened
basic research force, and well-trained baccalaureate and
graduate engineers, scientists, and technologically
sophisticated managers.
Advanced technologies are powerful tools, but their
power is realized only through individual imagination
applying them in novel ways. This requires that some
technological sophistication be prevalent throughout the
population. To illustrate, about half of research and
development done in the manufacturing sector flows to the
service sector--insurance, banking, utilities, transporta-
tion, education, etc. 6 Such flows--and the economic
gains they provide--occur because of the technological
OCR for page 47
47
understanding and imagination of those working in both
sectors.
The United States still has the Western world's largest
technologically sophisticated population, both absolutely
and in the numbers of scientists and engineers as a pro-
portion of the total work force. Since the early 1910s,
however, it has been adding to its pool of scientists and
engineers more slowly than Japan and West Germany.7
Precollege Education
The American primary and secondary high school system for
teaching science and mathematics is in trouble. State-by-
state statistics show insufficient numbers of qualified
science and mathematics teachers. A 1981 survey revealed
a shortage of high school chemistry teachers in 38 states,
of mathematics teachers in 43 states, and of physics
teachers in 42 states.8 American high school graduates
have quantitative skills and understanding of science and
technology that is today inferior to those of their coun-
terparts in Japan, Germany, and the USSR. The higher
productivity growth of the Japanese economy has been
attributed, in part, to the high quality of Japanese
secondary science and mathematics education.9
University Education and Research
The close coupling of research and graduate education is
the core of the strength of the American research system.
The system is now suffering not only a virtual stasis in
research funding, but also squeezes on endowments of
private universities and diminished governmental support
for state universities.
Total national basic research spending averaged 4.4
percent annual growth from 1975 to 1980, with the federal
government accounting for 70 percent of that increase.~°
Growth has tapered off since then and would be negative
but for increased research spending in defense and space.
The effect on universities of diminished growth in
resource funding is direct, given that they accounted for
half of all basic research expenditures in 1981 and given
that basic research was 69 percent of all academic R&D
expenditures. A direct result of this funding lag
has been a deterioration in the utility and availability
of scientific instrumentation in university research
OCR for page 48
48
laboratories. It is estimated that modernizing univer-
sity equipment alone would cost at least $1 billion. 2
While the federal government historically has dis-
tinguished support of research from support of univer-
sities per se--in contrast to the dual-support systems of
France, West Germany, and the United Kingdom--that dis-
tinction is necessarily somewhat arbitrary in the case of
the research universities.
Engineering Education
Problems in training future scientists and engineers are
apparent in U.S. engineering education. While Japan,
with a population less than one-half of the United States,
graduates more engineers than does the United States,
the deeper issue is the quality of education received by
American engineering students, both at the baccalaureate
and graduate levels. The large number of unfilled engi-
neering faculty positions--estimated in 1980 to be at
least 1,8004--spells serious trouble for the quality
of engineering education, particularly because under-
graduate engineering enrollments are at an all-time
high. The unfilled positions are commonly attributed to
higher salaries in industry than academe. Industry
attracts bachelor-degree engineers in ever greater
numbers--a process that has been aptly termed seating our
seed corn." And, as with the sciences, university
engineering education is beset by deteriorating and
obsolescent instrumentation.
Monitoring International Technology
Many nations have developed mechanisms for monitoring
foreign technological developments and reporting them
back to their domestic industries. Nothing compar-
able exists in this country. Several facets of the issue
might be examined, including any barriers to industrywide
collaboration in acquiring and sharing foreign techno-
logical intelligence and mechanisms for public and
private cooperation in acquiring and disseminating
technical information
OCR for page 49
49
Support of Basic Research and Development
We have emphasized earlier the various approaches that
the United States and other nations take to the support
of research and of various stages of development. The
U.S. federal government has accepted its role as the
patron of basic research in the United States, and the
issue, therefore, is the level of support and the
relative emphasis given to various fields.
Support for development, as well as for applied
research, is a more difficult matter, involving not only
levels of support but even whether support for these
endeavors is a federal responsibility. Development is
supported in defense, many areas of space technology and
aeronautical research, agriculture, and some areas of
energy. Some advocate broadening support to include
advanced technologies; others oppose this on the grounds
that the federal government does poorly in choosing which
technologies to support.
WHAT POLICIES ARE APPROPRIATE?
The traditional U.S. position on the government role in
supporting advanced technology development and trade has
been that governments should restrict their intervention
to basic research and education and leave the other
components (development, production, distribution, etc.)
to the marketplace. Our competitors, however, do not
accept this view; they intervene to support the advanced
technology system at all stages--research through mar-
keting. The traditional U.S. instruments used to foster
technological industrial performance still may be
adequate in the face of the more intrusive policies of
other countries; but they can only be truly effective
with a coordinated and national focus on strengthening
the nation's trade competitiveness and advanced tech-
nology capacity.
Certainly, any change
i
in the use of existing instru-
ments, or the addition of others, means a major departure
in governmental policies toward the industrial economy.
However, given the intervention of other governments in
international competition, such a departure should be
widely debated. For the reasons cited in the first
chapter of this report, the United States must maintain
the strength of its national capacity for technological
innovation. That capacity can be damaged by weak
OCR for page 50
50
domestic policy. It can also be damaged through prac-
tices of our industrialized allies. The problem in
responding is to define policies that maintain our
technological strength and comport with our national
character and values.
NOTES
Iran Assessment of U.S. Competitiveness, n p. 79.
See M. Therese Flaherty, Determinants of Market
Share in International Semiconductor Markets, n a Dre-
sentation to the Panel on Advanced Technology Competition
and the Industrialized Allies, Washington, D.C., February
9, 1982, pp. 1-13.
3 Robert J. Hayes and William J. Abernathy, Managing
Our Way to Economic Decline, n Harvard R',ri n-~.~ D="i "w
July-August 1980, pp. 67-77.
4 National Science Foundation, Nabio=~1 Patterns of
. , _
science and Technology Resources 19 ~ , D.C.:
U.S. Government Printina Office 1 4R1 1 ~ 1 n
sIbid., p. 21.
6 F. M. Scherer, Research and Development, Patenting,
and the Microstructure of Productivity Growth," a report
to the National Science Foundation, June 1981.
7 National so ionic ROA r'1 Cry i "n-= Ton; ~ ~ ~ ~'~ .1 ~ Q fat
p. 4.
, ~ , ~ ~ ~ .r · —~ ~
Paul Hurd, "The State of Precollege Education in
Mathematics and Science, n presentation to a Convocation
on Science and Mathematics in the Schools, National
Academy of Sciences, Washington, D.C., 1982.
9 New York Stock Exchange, Office of Economic
Research, People and Productivity: A Challenge to
. ~
Corporate America (New York: New York Stock Exchange,
Inc., 1982), pp. 10-13.
A Calculated from data on basic research expen-
ditures by source, National Science Board, Science
Indicators 1980, p. 255.
nonnational Science Foundation. Nations] Porn Of
Science and Technology Resources, p. 12.
. ~
~ ~ xT _ ~ _ _, ~ ~ ~ ~ ~ _ _ ~ ~ ~ ~
cowl ^~=dLCIl ~ouncll, Kevltallzlng Laboratory
Instrumentation, the report of a workshop of the Ad Hoc
Working Group on Scientific Instrumentation (Washington,
D.C.: National Academy Press, 1982), p. 1.
13Business-Higher Education Forum, Engineering
Manpower and Education: Foundation for Future
Competitiveness (Washington, D.C.:
Education Forum, 1982), p. 13.
Business-Higher
OCR for page 51
51
Upjohn D. Kemper, "Graduate Enrollments in Engineer-
ing: Meeting National Needs for Productivity and
Innovation" (University of California, Davis, July 1980),
p. 7.
t5For a discussion of some of the mechanisms used by
Japan and Western Europe in the field of computer science,
see National Research Council, International Developments
in Computer Science (Washington, D.C.: National Academy
Press, 1982).
Representative terms from entire chapter:
advanced technologies
