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OCR for page 70
Supplement 4
Interactions Between Fetteral and Industrial
Funding and the Relationship Between
Basic and Applied Research
Continuing innovation is the only way to foster long-term economic growth
without discovering entirely new resources. Advances in science and technology
are essential to innovation, although innovation also involves many additional fac-
tors. In the last half century, the federal government's role has almost always been
crucial, anti often dominant. The nation has become more clepencient on science
and technology, ant! sustaining a robust capacity for research and development is
more important than ever. Astronauts have walked the face of the moon and re-
turned, and astrophysicists have probed the origins of the universe. The ohvsical
~ 1_~ A__ ~ _ ~ ~ r · ~ ~ . .. .
~s nave a~o Been one source of innumerable Inventions- lasers, microelec-
tronic devices, ant! fiber-optic networks, to name just a few that have in turn
enableci practical applications such as satellite communications, computers, ant!
. . ~ . . . .
gains In productivity throughout the economy. Past revolutionary advances in
biology unraveling the double helical structure of DNA in 1953, discovering re-
combinant DNA technology in the 1970s and touay's exploding molecular genetics
and integrative biology have just begun to illuminate the immense complexity of
life. These fundamentally important discoveries also are linked to the capability to
design new drugs and diagnostic technologies in medicine, new approaches to
problems in agriculture, and technologies for environmental improvement.
The dramatic increase in life expectancy during this century is one indicator
of scientific discovery and technical progress. Figure Il:. ~ ~ shows that in 1900 life
expectancy at birth, even for the richest people' was only ace 55 Yet for ah but the
world's poorest today it is over 70. Every year cluing this century, approximately
2 months have been added to life ex~ectancv. The change has been gradual, almost
~.
1 ~
. . . . . .
, ~,,
. .
unnoticed in daily life, but fundamentally important. Sanitation, nutrition, transpor-
tation, communication, and other technologies have combined with biomedical
research and medical technologies to produce this profound demographic shin.
In the 5 decades following World War IT, the U.S. federal government steadily
increased its support for science and technology. As a result, the Uniter! States
moved into a position of preeminence in virtually all areas. We became the leaders
in high-technology industries such as aircraft, chemicals, computers, software,
pharmaceuticals, and biotechnology. We developed the most effective system in the
world for creating new technology-based businesses.
Our National System of Innovation Depends on Complicated Interactions
Between the Public and Private Sectors
A complex set of institutions and actors contribute to the strength of the U.S.
science and technology base. The examples of important discoveries in medicine
and in computing and communications technologies clepicteo in Figures 11.1 2 and
70
OCR for page 71
SUPPlEMENT 4 / 71
Life expectancy (years)
80
70
60
50
40
5,000 10,000 15,000 20,000 25,000
Income per capita
(1991 international dollars)
FIGURE II.ll Iife expectancy and income
per capita for selected countries and per~odls.
NOTE:"International dollars are derived from
national currencies not by use of exchange rates
but by assessment of purchasing power. The
effect is to raise the relative incomes of poorer
countries, often substantially."
SOURCE: Samuel H. Preston, Nathan Keyf~tz, and
Robert Schoen, Causes of Death: Life Tables for
Natior~al Populations (NewYork: Seminar Press,
1972>, as reprinted in The World Bank, The World
Development Report 1993: Investing in Health
(NewYork: Oxford University Press, 19931.
IT. ~ 3 illustrate how the different parts of our system interact to produce changes
that ultimately leacI to increases in the quality of our lives.
Consider, for example, Figure IT. ~ 2, which illustrates the steps reacting to
reductions in mortality from high blood pressure.) From the 1930s to the 1960s,
research funcled by private nonprofit groups, the Veterans Administration, anct the
National Institutes of Health revealed dietary and behavioral risk factors associates!
with high bloocl pressure. An early and important step was tingling a way to mea-
sure hood pressure quickly and cheaply, and to correlate those measures with
diseases. Rigorous epiciemiological studies conferment suspected! links between high
blooc! pressure, stroke (and later, heart disease), and premature cicath. Parallel
clinical trials demonstrate that treatment for lowering blooct pressure preventeci
stroke, cleath from heart disease, ant! cardiac and renal failure. The National High
Blooct Pressure Education Program, built on these findings, commenced in 1972.
Since then, changing social norms, inctiviclual exercise and diet decisions, ant! better
medical management have recluced the incidence of hypertension by more than a
thircl, and reduced stroke mortality by over 60 percent,2 a remarkable achievement.
For millions of Americans, a broact base of research spanning the full range from
social and behavioral research to molecular biotechnology-has meant the cliffer-
ence between life and death.
As epiclemiological anti behavioral research progressed, a complex web of
biological factors also was uncovered through clinical investigations and basic
biological research. This line of research was funclect preclominantly by the fecieral
government, and supplementecl by hospitals and private sources. Private pharma-
ccutical firms macle investments comparable in magnitude to federal funding, but
focused on narrowing the search for specific agents and clinical testing to prove
their worth. Drugs lower blood pressure by reducing fluid retention (diuretics), by
influencing nerve impulses transmitted to the heart and bloocl vessels (beta-blocking
agents), and by reducing resistance to blood flow in small peripheral arteries (cal
OCR for page 72
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OCR for page 73
~ · 2 ', ~ D _
_ _ ~ ~ ~ ~ ·- Or, ~ _
OCR for page 74
74 / SUPPLEMENT 4
cium antagonists and angiotensin converting enzyme, orACE, inhibitors). The use
of calcium channel blockers came from clinical tests of various compounds that
were first made by pharmaceutical firms. Knowlecige of how these compounds
worked and how they could best be used came years later, mainly through feclerally
funded research. In contrast, the ACE inhibitors were developed by drug companies
through a logical progression of discoveries that built on clecacles of publicly funded
research. Private investment was essential, but fecleral investment was equally
important at many stages, both leading and following privately funded research.
Almost aU the important technical decisions, in both public and private sectors,
were macle by those eclucated in research universities and trained at least in part
through fecleraDy funded research.
The story in information technologies involves different agencies and domains
of science, but the lessons are similar. 3 Lynn Conway of Xerox and Carver MeacI of
the California institute of Technology in the 1970s conceiveci of"silicon foundries,"
where graduate students, their professors, and others couIc! have computer chip
designs fabricates! into integrated circuits. Their idea won fecleral support and
became the heart of the very large scale integrated ~SO circuit program supporter!
by the Acivancect Research Projects Agency in the Defense of Defense. NSF joined
the program, broadening access to VEST fabrication services- the foundries. On a
parallel track, the network that later became the ]:nternet (first asARPANet) was
user! to send designs to the foundries, which then created ant! shipped the chips,
reducing cost and increasing speecl. What once took months now took clays. The
impediments to chip design diminishecI; graduate students felt free to experiment
and innovate; even radical designs for chips became practical.
The foundries ant! other components of ARPA's VEST program hac! spectacular
results: a renaissance in computer clesign, universities creating VEST programs, the
beginnings of three-climensional graphics, and initial efforts in reduced instruction
set computing ~SC), now in use in millions of computers. RISC computing origi-
natecl at IBM but was aclopted only after a period of federally funclet1 research that
made its applications readily apparent, at which point several firms in addition to
IBM invested in it. Several major corporations grew directly out of the VEST pro-
gram.
Decades of fecleral and industrial investments in information technology led to
the creation of the elements from three-dimensional graphics to windows to local
networks- now embedcleci in the way we work, obtain and share information, and
teach our children. The dynamic interactions between federally funded academic
R&D and industrial R&D made the United States dominant in information technol-
ogy, which strengthened the nation's competitiveness and also provided advantages
in other sectors throughout the economy that depend on information technologies,
such as finance, entertainment, communications, education, and transportation (see
Figure II. 131.
As has been detailed in the case of information technology and is evident also
in medicine and in many other fields highly dependent on science, the history of
innovative development with significant social and economic benefits points to
several major conclusions: 4 (~) research has consistently generated large payoffs; (2)
these payoffs often take years or decades to be realized; (3) while the time from
discovery to market may be long, the transition from science to technology is more
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suPPLEMENr ~ / 75
Graphics
GM/IBM, LucasFilm
Networking
Windows
RISC
Ethernet, Pup, Datakit
Alto, Smalltalk
IBM 801
VLSI design
1965 1970 1975
Federally funded R&D
L .
~ Industrially funded R&D
1980 1985 1990 1995
$1 billion business
FIGURE II.13 Technological developments in computing.
Sketchpad, Utah
E&S, SOL
Arpanet, Internet
DECnet, LANs, TCP/IP
Englebart, Rochester
Star, Mac, Microsoft
Berkeley, Stanford
Sun, SOL, IBM, HP
Mead/Conway, Mosis
many
NOTE: The productive and profitable interactions between federally and privately funded ROD are
apparent in this time line of the development of several important computer technologies. These
include computer graphics; networks; use of icons, buttons, and other"user-friendly" methods now
commonly known as "windows"; reduced instruction set computing (RISC), which simplifies and
speeds computer operations; and very large scale integrated (VLSI) circuit design, which has proved
crucial to many manufacturing and design improvements. The institutions at which federally funded
work was begun are noted along the right margin, as are the companies that developed and eventu-
ally commercialized the technologies. In many cases, the federally funded work was conducted at
universities, but some was done in industry. Note that privately funded R&D preceded federal R&D
in the cases of VLSI and RISC, and yet federal funding was nonetheless crucial in enabling the cre-
ation of ideas realized ultimately in commercial applications.
SOURCE: Adapted from Figure ES. 1 in a report by the Computer Science and Telecommunications
Board, National Research Council, Evolving the High Performance Computing and Communica-
tior~s Initiative to Support the Nation's Information Infrastructure (Washington, D.C.: National
Academy Press, 1995), p. 2.
sucicien; (4) unexpected results are often the most important (e.g., electronic mad!
and computer"windows" software methods were not the intencied products of
research programs that spawned them; many drugs used for hypertension were first
developed for other purposes); (5) research stimulates communication and interac-
tion, with complex interactions between industry and academia; (6) research trains
OCR for page 76
76/ SUPPLEMENT 4
people who start new companies, join established firms, and enter crucial positions
in industry and government where their technical background enables better man-
agement decisions; and (7) research entails risks, so that some objectives are not
reached, but new ones-often more important ones replace them.
Practical applications are often impossible to predict from any one scientific
discovery that is nonetheless crucial to the ultimate outcome, and the best path to
the desired use must adjust continually to surprising sources of new knowledge.
Norman Ramsey's Nobel Prize-winning work in physics was seminal in the develop-
ment of atomic clocks that enabled the global positioning system (see Box II.2),
magnetic resonance used for medical imaging, and synchrotron radiation used in the
manufacture of integrated circuit chips. Yet none of these immensely practical
benefits was evident when he did his research. He remarked upon receiving the
1994 Vannevar Bush Award, "I would have had difficulty in justifying most of my
research on the basis of future applications either T or anyone else would have
foreseen."5
The government role in supporting the federal science and technology (FS&T)
base is crucial in almost all the technologies. In some cases and at some stages, it is
the dominant factor. The critical period for federal investment is often, but not
always, at the beginning. Federal support for basic science is often necessary, but
federal support for applied research and fundamental technology development is
also essential. Some new technologies do build logically on scientific discovery
arising from federally funded basic science, but private research and development
often turn up items that pose questions for science or require a period of govern-
ment-supported inquiry before they become appropriate for further development in
the private sector. Federal support often comes from different agencies, at different
times, and for different reasons.
Research and development, and the ensuing innovation system of which they
are essential components, depend not only on the basic science supported by the
National Science Foundation, but also on mission-oriented research and develop-
ment of the National Institutes of Health, Department of Defense, National Aeronau-
tics and Space Administration, Department of Energy, Environmental Protection
Agency, U.S. Department of Agriculture, Department of Commerce, and other
agencies and departments.
The Distinction Between Basic and Applied Science Is Often Difficult to
Make and Is Rarely Decisive in Defining the Federal Role
Historically, the federal government has provided funding for a variety of long-
term, high-risk research and technology development programs. In some cases this
support is motivated by the need to solve specific problems such as developing a
new aircraft, breaking a code, or finding a way to treat specific diseases. The result-
ing activity conventionally is described as applied research. In other cases, govern-
ment support is provided for pure science. Some projects are clearly applied.
Others are clearly basic. Basic research usually is supported in the expectation that
it ultimately will link to practical use; applied research usually is intended to address
a specific problem, although it can spawn new fundamental inquiry.6
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SUPPLEMENT ~ / 77
Some discussions of the differences between basic and applied research
suggest that the process must start with basic research in universities, which pro-
duces new ideas. In this view, private firms apply discoveries to practical problems
and use them to develop commercial products. Sometimes the discovery process
works this way, but often it does not. The flow of people, knowlecige, and"know-
how" between publicly and privately funded research organizations goes both ways,
with different net flows at different times. The typical patterns differ among indus-
trial sectors and scientific disciplines; there is no one template for innovation. For
every case like that of information technology where academic research in com-
puter science ant! engineering lect to the creation of many new firms-one can
point to a counterexample like cligital electronics, where the clevelopment of the
transistor in the private sector causer! an expansion of solid-state physics in universi-
ties. Even when a clear distinction between basic and applier! research can be
macle, therefore, it is often not useful in guiding choices about whether it is a
proper subject for federal support.
A more severe problem is that most federally funded research is at once both
applied and basic. In the standard definition, basic research is the pursuit of knowI-
edge without thought of practical application. The first part is true-that science is
intencied to produce new discoveries- but the implication that this necessarily
entails a sharp separation from thoughts of usefulness is just plain wrong. Some-
times it is true, but far more often it is not, especially in science supported by
mission-oriented agencies. Basic optics is one of the oiliest fields in physics. Thirty
or forty years ago, it was hard to see what applications it might have beyond lens
design for cameras and telescopes. With the unexpected! discovery of the laser and
its application in fiber-optic communications, optics has turned out to be immensely
practical, ant! is essential to modern telecommunications networks. Louis Pasteur's
career was replete with contributions to basic biology as wed as innovations in
medicine, beer brewing, wine making, ant! agriculture. Organic chemistry ant}
analytical chemistry have always been coupled to pharmaceuticals, specialty chemi-
cals, and other inclustrial interests. Basic materials science bears on electronics,
instrumentation, aeronautics, and many domains of manufacturing. Gregor Mencle}
was studying how to improve crops when he discovered the basic laws of genetics,
and characterizing DNA's double helical structure in 1953 led 2 decacles later to
practical applications through recombinant DNA technology, with impacts not only
on biomedical research but also on pharmaceutical manufacturing, agriculture, and
environmental remediation. The practical uses of applied research are generally
more obvious and direct, but basic research also can have foreseeable practical aims.
"There are two kinds of research applied research and not-yet-applied
research." Nobel laureate Lord Porter, former president of the Royal
Society.7
The federal responsibility for basic research is accepted widely. The large
social benefits that can come from federal support for specific kinds of applied
problem solving and exploratory development are not as well recognized. History
OCR for page 78
78 / SUPPlEMENT ~
c ally, a large fraction of feclerally funded research has been directeci at appliecl
problem solving and fundamental technology. For example, when the Department
of Defense ~funcled the creation of computer science as a new academic fielct, it
accurately anticipates! real national security needs. Government support for the
clevelopment of new problem-solving tools ant! technically trained people differs
from the support for basic physics provicled by the National Science Foundation,
but it nonetheless has profound! effects on fulfilling national neecIs, sustaining our
economy' improving our w~v of life ~nc1 r~ntrihiltin~ tic ~11 A of Lift i - ares
ligation.
-c7 ~] ~-~ ~''~ -''''at ~ ~$~ ~ ~1V~O
Government Has Traditionally Supported Enabling
Technology and Education
There is no reason to abandon the historical balance between support for
science on the one hand and enabling technology on the other. Inclustrial funding
builds not only on basic research, but also on fecleraDy funded R&D aimed at govern-
ment ~functions. The productivity of industrial R&D depencis on a balanced fecleral
R&D portfolio that spans a broaci range of applications. A strategy that focuses
fecleral support unduly on basic science risks losing the benefits of applied research
supported by mission agencies, which historically have been important in generat-
ing public benefits. That is one reason that the committee did not distinguish be-
t~veen basic and applier! research when defining the FS&T budget.
In the division of labor between the public sector ant! the private sector, the
private sector ultimately win be responsible for the final stages of commercial
application and product development. On this there is no disagreement. Because
of its efforts in these areas, the private sector will provide more support for applied
research and technology clevelopment than the fecleral government lions now or
coup! at any time in the foreseeable future. But there can be confusion about the
fecleral role in supporting applied research versus its funding of commercial technol-
ogy development in industry, whether through incliviclual firms or in consortia. This
is an area of active controversy that the committee addresses in Part T of this report.
It is important to point out here that the debate about fecieral funcling, or subsidies,
to industry is conceptually different from that about federal support for basic versus
applied research for public missions, to foster enabling technologies, and to educate
leaclers in science ant! engineering.
A distinction between "basic" and "applied generally is not useful as the
decisive criterion that defines a proper federal role, except when the application
area is an existing commercial market where industrial applied research usually will
predominate. Federal lea(iership is indeed essential for basic research, because
industry floes not support it except in a limited way ant! uncler unusual circum-
stances such as near-monopoly positions that are now rapidly disappearing.8 Five
decades of history make clear that the federal government is positioned uniquely to
support the training of people and the cievelopment of new technologies that are
not specific to a particular product or service. Private firms, responding to forces
that operate through the market, will determine what specific products and services
result and win support their final ctevelopment and commercialization.
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SUPPLEMENT ~ / 79
The government also must maintain a core of applied scientists whose work
serves as a bridge between the problem-solving efforts of private firms and the
research efforts of basic scientists. Government can and should sustain those areas
of science and technology that support inherent government missions, such as
national defense, technical standards setting, regulation, or public health. In these
areas, publicly funded scientists and engineers can take a discovery" such as a new
class of high-temperature superconductors" out of the laboratory of a private firm
and move it quickly onto the agenda for inquiry in basic physics. Or they can take a
new technology and use it applying it to nuclear waste cleanup, developing vac-
cines for U.S. troops headed abroad, or defining the exact length of a meter or a
second with the greatest precision available at the time.
Federal funding for science and technology development also helps educate
- -.r .r-~ --~
_ I, be, ~
and train not only those scientists and engineers who continue on to perform re-
search and development in both the public and private sectors, but also those
whose work involves making technically informed management decisions about
corporate strategy and finance. The history of technological advance throughout
this century points to an abiding truth: "The primary function of universities is to
give students the intellectual underpinnings to contribute as professionals in our
society."9
Federal Support for Basic Research Continues to Be Essential
Just as government support for applied science and technology development
remains a wise investment, so also is continuing investment in basic science essen-
tial to future innovation and progress.~° Innovation now occurs too ranidlY for one
~· · · ~
~ ,
player to watt until another s 1°o IS none. Research and development are not sepa-
rate, serial activities, but paraHe! and interdependent. New knowledge is most
useful to people and institutions that see it first and can exploit it quickly, and that
have ready access to those who discover it. The ability to identify technological
opportunities emerging from research is now a principal factor determining success
in many industrial sectors. The increased importance of science in high-growth
areas of the world economy puts a premium on strong linkages between science
and technology, and makes innovation far more difficult without a strong indigenous
science base. This circumstance underscores the importance of federal support for
the science and technology base as the main source of"patient capital" that builds
knowledge and supports an firms. Continuing federal support for basic research is
the foremost recommendation of those in industry itself.
Today, the product cycle is contracting in high-technology sectors throughout
the world. Software applications may be replaced after a year or two, and a com-
puter mode! every three or four years. Private firms are driven by short-term market
needs and demands for quick returns on science and technology investments. They
must focus on improving existing products. Communications and computing were
once the province of monopolies and near-monopolies that no longer exist because
of federal policy and international competition. With a few exceptions, such as
pharmaceuticals where patent protection is strong, support for science and technol-
ogY that win not return benefits quickly is becoming more difficult to justify in the
OCR for page 80
80 / SUPPlEMENT 4
private sector, because stockholders cannot see the immediate benefits of RED
expenditures.
While the time from discovery to market has not shortened nearly as much in
pharmaceuticals as in sollv~are or other sectors, drugs now are replaced more
quickly once they enter the market because new agents are discoverer! that have
stronger action or fewer side effects, and generic drugs are introduceci quickly after
a patent expires. Pharmaceutical firms have concluded that survival depends on
increasing the pace of innovation, introducing more products in less time, and data
show that strong connections to basic research performed outside the firm, as wed
as strong Ram capacity within it, predict success in discovering new drugs. Phar-
maccutical executives report that their products depend more on federally funded
science than any other industrial sector, and patent statistics bear this out.~3 Thus
even in a sector where private firms' R&D investments are high, and encompass
some basic research, the fecteral role remains vital.
In the 1970s and 1980s attention turned to the dramatic technological acI-
vances made in Japan. Success there depended on improving technologies discov-
ered elsewhere more than on.Tapanese science. The Tananese postwar strateQv
~.. . . ,, _
_ J. .L an
followed the Technology first" strategy pursued with equal success by the United
States early in this century. In light of lapan's economic success and U.S. history,
some observers began to question why U.S. taxpayer dollars should support basic
research at an.
The case histories tracing drug discovery and advances in computing and
~__~ · ~ ~ · _~ ~ ~1~ 1~ ·11 , ~ 1 ~ ~ ~ .
~u~ snow anal ~ can srm rake Decades oetore the practical uses of
knowledge arising from disparate fields become apparent. But once commercial
opportunities are apparent, it is a flat-out race from the laboratory to the market. A
"technology first" strategy falters as the time scale from discovery to application
shortens, as the stock of untapped but freely available existing Knowledge is de-
pleted, and as many nations attain technological expertise. As one analysis of links
between patents and citations to scientific literature noted,"The areas which are
leading the inclustrial growth of the West are just those areas that are very science
intensive, and it is hard to imagine sustained industrial growth in any country with-
out a strong competence in the scientific fields which so closely underlie these
modern technologies." i4 Successful nations must not only build and sustain a firm
technological base, but must also in the future make new discoveries and translate
them into new technologies. Such achievements require a broad and deep base of
science and technology, comprising not only those performing it but also those who
monitor and use it. Those with foresight, even in Japan which now lacks a substan-
tial science base, have recognized that neglect of science is a potentially fatal weak-
ness in life on the technological frontier.~5
"Until now Japan has depended primarily on foreign nations for the
creative activities that generate the Knowledge and technology for
innovative nrorl~rt~
_ ~ ~ .... [F]rom now on Japan win have to create, ahead
of other nations, Knowledge and technology that will lead to new prod-
ucts and markets."
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SUPPlEMENT 4 / 81
Today, Japan, several European countries, and many emerging nations can
take advantage of new discoveries, a position the United States occupied alone
several decades ago. Other nations have built technological capacities that rival,
and in some areas surpass, those in the United States. They have strong education
systems and pursue national policies to foster innovation. But none can match the
breadth and depth of U.S. science and the fluidity with which results and people
move back and forth between the university and the private sector. Federal science
and technology, and its connections to a robust private sector, are among this
nation's most important comparative advantages.
Government Support for Scientific and Technical Public Goods
Is Central to Creating National Economic Advantage
Federal funding for basic research, applied research relevant to government
missions, development of technology, and education and training in universities
encourages new firms to enter high-technology areas. Applied academic research
funded by the federal government has helped produce many small high-technology
firms. Students and professors move from the university to existing small firms.
Sometimes they start new firms. Often they join well-established firms and rise
through the ranks to make critically important decisions. New firms may grow into
industrial giants or be swallowed by larger firms that incorporate their technologies.
Patent rights for new discoveries derived from federally funded research go to the
research institutions, giving them financial incentives for commercial application.
Sun Microsystems and Silicon Graphics among computing companies, and Amgen
and Genentech in biotechnology, did not exist ~ 5 years ago. All were started from a
base of academic science. Today they are major firms in their respective industries.
These and other successes well up from the science and technology base supported
by the federal government, which fosters competition and helps introduce new
firms that champion emerging technologies.
A fear that the benefits from federal support for university research wiD flow
immediately to foreigners is misplaced. History suggests instead that where re-
search takes place has a direct effect on where it is put to use. The high-technology
firms clustered along Route 12~3 in Massachusetts, in the Silicon Valley in California,
in suburban Maryland, and inAustin,Texas, ah congregated around major federally
supported university or government research centers. If industrial use and centers
of capital were the decisive factors, the foremost centers for biotechnology and
computer firms should have located instead near Tokyo, Frankfurt, Paris, London, or
New York City.
Representative terms from entire chapter:
privately funded
