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Session 7
Research, Economic Growth, and Competitiveness

Moderator:

Ozzie Silverman, Government of Canada

CHARLES WESSNER: I am pleased to introduce Ozzie Silverman, who will moderate this session on the role of research in the economy. Dr. Silverman has had a distinguished career in both the private sector and with the Canadian federal government. He is currently the Director General for Science Strategy in Industry Canada. He is also very active in the OECD, which has the task of working through a number of these issues.

OZZIE SILVERMAN: The title of this session is an amalgam of ideas that are central to the policy agenda of every country—a grouping now commonly addressed under the broad rubric of innovation policy. It is a particularly active area of government policy interest and one with the potential to give rise to serious friction among national economic systems.

In almost every country, government policies for the support of innovation are in a state of transition. They are evolving and being refined to respond to powerful forces as well as to new ideas about the sources of economic growth, particularly of the so-called knowledge-based economy. By way of introduction, I would submit that there are four major factors driving changes and innovation policies. They are both domestic and international.

First, the dynamics of technological change has itself changed. Among other things, technological change is now driven by science to an extent not seen or previously experienced.

The second factor is trade liberalization and the internationalization of production systems that are forcing governments to develop policies that take account of the fact that R&D and production can be shifted from one country to another.



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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Session 7 Research, Economic Growth, and Competitiveness Moderator: Ozzie Silverman, Government of Canada CHARLES WESSNER: I am pleased to introduce Ozzie Silverman, who will moderate this session on the role of research in the economy. Dr. Silverman has had a distinguished career in both the private sector and with the Canadian federal government. He is currently the Director General for Science Strategy in Industry Canada. He is also very active in the OECD, which has the task of working through a number of these issues. OZZIE SILVERMAN: The title of this session is an amalgam of ideas that are central to the policy agenda of every country—a grouping now commonly addressed under the broad rubric of innovation policy. It is a particularly active area of government policy interest and one with the potential to give rise to serious friction among national economic systems. In almost every country, government policies for the support of innovation are in a state of transition. They are evolving and being refined to respond to powerful forces as well as to new ideas about the sources of economic growth, particularly of the so-called knowledge-based economy. By way of introduction, I would submit that there are four major factors driving changes and innovation policies. They are both domestic and international. First, the dynamics of technological change has itself changed. Among other things, technological change is now driven by science to an extent not seen or previously experienced. The second factor is trade liberalization and the internationalization of production systems that are forcing governments to develop policies that take account of the fact that R&D and production can be shifted from one country to another.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings A third factor is the recognition that there are limitations in the carrying capacity of global ecosystems. And this is giving rise, a bit slowly, to the need to reshape production, energy, transportation, and other systems to achieve sustainability. And the fourth factor is the end of the Cold War and the implications for the defense industry, as well as the traditional sources of research funding for the university system. Adding to these driving forces is the continuing view of governments that they have a role to play in engineering new comparative advantages for their economies. This view has given rise to a variety of public policies that may be the basis of frictions between countries. Friction is not a new phenomenon. It has been going on since the early 1980s. A number of years ago, Sylvia Ostry wrote a paper on the policy-induced recession in the early 1980s. That was the time when a number of governments came to the view that all new emerging science and technology could be the basis of economic growth in the future, and that they should be positioning their countries to capture future markets for high-technology products. This is how technology came to be viewed as a strategic asset in global trade competition. Of course, that brings with it a cascading effect—when one country takes action to mobilize national resources, other countries follow. For example, when Japan launched the fifth-generation project, the United States came out with the Strategic Computing Initiative, and Britain launched the Alvey Program. This session will deal with three aspects of this new paradigm, and we have a very distinguished panel which balances public and private sectors. The defense research area will be addressed by Anita Jones, Director of Defense Research and Engineering at the U.S. Department of Defense. The subject of public funding of research will be addressed by Charles Curtis, Undersecretary of the U.S. Department of Energy [DoE]. The role of other countries in sustaining the U.S. domestic research base will be addressed by Knut Merten, president and CEO of Siemens Corporate Research. Defense Research and Technological Superiority Anita K. Jones, Department of Defense I would like to tackle the subject of research, economic growth, and competitiveness by discussing the two ends of it: defense research and military competitiveness. Most of the discussions at this conference have revolved around economic competitiveness in which the metric is the bottom line in corporate and national strength. At Defense Research and Engineering we are the national security mission agency for the United States, and our report card for competitiveness success is written on the battlefield or the site where a security mission is executed.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings We had a great deal of technological success in Operation Desert Storm. Technology was not the sole enabler, but it was a necessary enabler for the type of success in that operation. If we look at the technologies that made the most difference—stealth, precision strike, night vision, and an increased battlefield information awareness—the majority of these technologies today are military technologies for which there is not a very large commercial market. Possibly there will be a commercial market for them in the future. Affordability is a large issue, and some challenges have to be met before affordability is achieved. These technologies started life as military-dominated technologies. So when we talk about defense leveraging commercial industry, we have to look at that quite carefully: when and where we do it and what it means to leverage commercial industry. It is not merely buying components off the shelf; that is the least of the challenges in this arena. To a first approximation, there are five agencies in the federal government that are concerned with long-term technological research. Health and Human Services has a third of the long-term budget. There are four other agencies that have, at the back of the envelope level, about the same amount of budget: NASA, the DoE, the DoD, and the National Science Foundation. All of these agencies have different missions, and their investment differs dramatically. The DoD receives 16 percent of the $28 billion U.S. government investment in long-term technology activity. The objective of the DoD science and technology program is to enable military superiority based on technology. So the DoD invests where the greatest promise is for enabling that type of military superiority. Today that investment is in electronics, in information technology, and in materials. These are some of the high-priority areas, but certainly not all. If you look at the U.S. federal investment in these areas for the long term—not at the entire $70 billion R&D budget, but the $28 billion that is in the long-term investment—the DoD dominates the electronics investment, particularly the electrical engineering investment. Defense also invests heavily in mechanical engineering and materials. Collectively, the DoD is a major, if not the major, investor in information technologies. Again, this is just the federal investment, not the industries investment, which for all R&D is certainly larger. Defense is also a very heavy investor in engineering. The DoD builds a lot of systems, and they have to operate under very severe environments, and they have to operate over the long term. So the DoD invests approximately 40 percent of what the federal government invests in long-term engineering technologies. Government investment has been made over the decades to enable technological breakthroughs, such as time sharing, networks that have given us the Internet today, and the National Information Infrastructure for tomorrow. Government investment in decade-long investments is crucial. The interplay of government and industry investment is very complex. Many people today believe that we should let industry do all the R&D. I certainly hear this from some of the

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings four-star generals at the DoD because the DoD has a budget that is down 40 percent over the past decade. However, for defense purposes, industry cannot do it all. Their dominant investments are for the short-term, measured in three to five years. Global competition is forcing down the industrial investment dramatically. There are good reasons to recognize in this financial climate, in this global competition, why it is prudent that industry cannot and will not make that long-term investment. In this changing world, we are breaking some of the paradigms of the past and are asking how to best invest to ensure access to the technology that will enable technological superiority for the military. First of all, the DoD seeks unique military advantage. And quite bluntly and frankly, where we can keep it solely to ourselves, we are going to invest to do so. Where there are really new breakthrough technologies, we need to invest, particularly in military-unique areas, where no one else will. This is the investment that the DoD will protect in the science and technology area as budgets go down. Second, DoD needs to leverage wherever it can find good ideas. In the DoD there is a more outward-looking policy in the science and technology community. There are a number of very early collaborative science and mid-stage technology projects with nations all across the globe. For example, the Russians have a very good ejection seat, suitable for use in fighter aircraft. And so we have a collaborative project with the Russians to do an evaluation of that technology. So leveraging whoever is smart and whoever has a good idea is an appropriate strategy for defense. And in the very early science arena, one wants to work with the best on the globe. And that is a strategy that the DoD is executing. The third approach is to leverage commercial assets, where there is commercial advantage to be had and where it can be leveraged in a way that we are assured we will be able to use it for defense systems. We are talking with our long-time international partners to look creatively for opportunities in which we can collectively afford to pursue something that the United States cannot afford to do alone. There is another force that has come to bear on what defense does, and that is that there is a strong voice among the war fighters who will fight in partnership with our allies, with our coalition partners, and we want these partners to be well equipped. So it is in our own self-interest that we work cooperatively with our allies and that we go into a mission with all partners well equipped. That is a major change from the past. In the past decade the DoD has been looking actively for cooperative ways to work. As a result, a number of consortia have been formed. Many of you may think of these consortia as U.S. companies but, in fact, in many cases these are companies that have very strong international markets. Some of these are cooperative cost-share consortia. They have grown over time because working through consortia was believed by the DoD and NASA to be a smart way to do more with scarce dollars. The objectives are jointly arrived at by the industrial partners and the government.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings DoD deliberately enters into co-development, coexploration, coproduction projects internationally. Let me give you as one example, an experimental craft called the X3 1, which we jointly developed through ARPA in the United States and Germany. Daimler Vince Aerospace was the German corporation, and Rockwell was the American corporation. The challenge was to have a tailless aircraft that used thrust veins to vector the gases as the means for controlling the aircraft. This project showed that you can fly supersonic and do this. This was indeed a joint project. The pilots were both German and American. This has been a successful project and is a good example of an early-stage technology exploration that was executed in a joint way with one of our allies. I have gone through a set of four different ways that we cooperate. There is no one solution. The United States and all the countries that I have had direct interaction with are looking for creative ways to leverage their funds, to gain access to technology in one way or another, and there are many ways to cast a mutually beneficial international cooperation. One size does not fit all. I will highlight a point that Daniel Goldin made this morning. This country must continue to invest in a stable way in long-term science and technology. We must nurture the infrastructure, both in universities, which are the long-term corporate memory for science, and in industry, which is the long-term memory for technology and production. We must invest for technology breakthroughs. It is scary to hear people talk about dramatic reductions in the R&D budget, because you cannot achieve breakthroughs without decades of stable investments. We are aggressively looking to cooperate, but it is with an eye to the United States getting the advantage. We are being more open, and we see a tremendous advantage in cooperating with our allies to exploit technology as rapidly as possible. ERHARD KANTZENBACH: You mentioned that American investor firms do the bulk of their investment in short-term investments. Is this the result of some financial institutions on the American capital market, that these firms feel that they have to defend themselves against the threat of takeovers? In other industrial countries we do not have this phenomenon, especially in Japan and in continental Europe. ANITA JONES: There are a number of reasons, but the financial community structure in this country is a major one. For publicly held corporations, the equivalent of 100 percent of their stock turns over between 12 and 24 months. That is why boards of directors have a strong fiduciary responsibility to pay attention to the short term. That is not the only reason, but that is a major reason. Another reason is that global competition has heated up. There are less funds available to be directed to long-term research. We are impatient in America and often look for short-term return. We want an answer now.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Culturally, we are less patient than other countries across the globe. Research is difficult to predict, so it is high risk. You might get a product that others are in a better position to exploit. Your sales force may not be educated in this area, they might not have the right contacts. You may produce technology or products that are entirely outside of your corporation's expertise and not be able to get the benefit of the corporate long-term investment. And since our corporations operate solo, there is no leverage if you develop a technology that your corporation cannot use. You can sell it but probably not at good return on investment. Public Funding of Research: A Strategic Imperative? Charles Curtis, Department of Energy At no time since World War II has the threat to this nation's R&D base been so apparent or serious. My talk here today speaks to this threat as it is embodied in the proposed budget cuts; why the direction of cuts within the R&D budget is particularly harmful for economic growth and for our mission accomplishment. I will offer comments about what we are doing at the Department of Energy [DoE] to manage our piece of the nation's R&D enterprise more effectively, and will make a few comments on the implications of these budgetary changes for our capacity to engage in international ventures. CUTS IN THE R&D BUDGET First, let me focus on the budget cuts. In its attempt to balance the budget, Congress so far has failed to distinguish between spending that is truly discretionary and might safely be curtailed or postponed, and spending that represents good investments with real future payoffs to government's essential functions—its missions—and payoffs to society and industry in the form of enhanced capacity for innovation. Much of this nation's R&D expenditure claims to provide high rates of return of this type. To retrench on this investment is a false economy. Despite this, the House Budget Resolution appears to reduce civilian federal R&D spending by more than 11 percent by the year 2002; assuming a modest inflation rate, this would represent a real dollar cut in seven years of one-third against the base. As great a concern is where these cuts are targeted. The new Congress appears to be using a dated ''linear" model of innovation in deciding where to target their R&D cuts. For much of the postwar period, it was widely held that the government had two appropriate roles in supporting R&D. Government should support basic research and it should support R&D for the government' s own missions, of which defense was foremost. Why should government support basic research? Because the payoffs are real, but diffuse and long enough into the future that only

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings government—acting as our representative—can recapture its benefits for our society. A linear model: The conceptual model for innovation involved a "linear" process. Government would support basic research, and the private sector's role was to take that knowledge generated from government-supported basic research and do the additional work needed to develop commercial products. In recent decades, of course, it has become clear that this "linear" innovation model is overly simplistic. Although basic research sometimes does lead to the creation of new industries, such as biotechnology, there are many other innovation mechanisms. Sometimes it is new technology that leads to new science, either by showing where new knowledge is needed or by providing the tools to create new knowledge. For example, some believe that thermodynamics owes more to the invention of the steam engine than the other way around. Another example concerns one of our main functions at the DoE: that of developing new scientific instruments—such as accelerators, light sources, electron microscopes, and gene sequencers—which in time make new scientific discoveries possible. New technologies also can be created by the fusion of other technologies. Some examples include optoelectronics from the marriage of optics and electronics and robotics from the marriage of electronics and mechanical engineering. Another way innovation occurs has been suggested by Ralph Gomory, the president of the Sloan Foundation. He has pointed out that much innovation occurs as rapid incremental improvements to existing products, drawing on both science and other technologies. In other cases it is the technology moving from one field to another that creates the new opportunity. The Lawrence Livermore National Laboratory recently invented a radar that can be put on a chip. This technology came out of the laser program at Livermore, but with refinements it can be applied to finding construction studs in houses or to providing collision warning systems in cars. Furthermore, it is clear that the private sector often cannot fund all the longterm applied R&D needed to bring a breakthrough to the market. A current example is high-temperature superconductivity. Since the breakthrough work by IBM in 1986, a large amount of applied research has been under way to make it practical. Many companies that were interested initially backed out because they could not justify the long-term investment. A few weeks ago the Los Alamos National Laboratory made a major breakthrough by figuring out how to make high-temperature superconducting materials into a bendable wire that can carry high currents. The research expenditure required to bring this about had fallen to government; the individual companies would not, and perhaps could not, support it. Perhaps a better model for envisioning how research leads to economic growth is to see the science and technology enterprise as a complex network rather than a linear process. The Internet serves as a good analogy for the connec-

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings tions between universities, federal laboratories, and companies. Just as it is hard to trace the path of an e-mail message across the country, it is hard to trace or predict how new knowledge and technologies come together to create new technologies. What is clear is that if you take out the key linkages, the network will generate less value. Over the past decade, a consensus had built up in industry, government, and academic circles that key parts of this network—in particular the linkages between industry and government—were weak in the United States relative to other countries, a consensus that is breaking down in the political environment of today. It was, and is, though, a cardinal principle of this administration that strengthening these linkages was crucial to generating more economic value in the United States from research. And a companion view of this administration is to see the innovation process as more complex and interactive—requiring nurturing of all of its parts—a policy that honors and seeks to expand on the government's traditional investment role in basic research, but does not attempt to draw bright line distinctions in the continuum between fundamental and applied research. The new Congress, however, has a different view. The House Science Committee, in its "views and estimates" states: In many cases, we have neither the luxury nor is it a wise use of resources, to continue steering taxpayer dollars in the direction of applied research, which can, and should, be market-driven and conducted by the private sector. This statement and the priorities now reflected in the budget clearly reflect the old linear R&D model. They assume that if government simply puts money into basic research, the market will automatically provide the economic benefits. Not surprisingly, the House has focused its budget cuts, with the precision and subtlety of a hand grenade, on what the Committee sees as applied research of the "corporate welfare" character. They would continue to support what they see as worthy fundamental research, but take out programs that build linkages between companies, universities, and national laboratories. As Xerox CEO Paul Allaire and Cornell University President Frank Rhodes recently wrote: Creative new R&D partnerships across the sectors need to be embraced even if they challenge prevailing assumptions about the nature of research or government activity. Unfortunately, the House budget cuts go against this prudent advice. DOE's ROLE IN RESEARCH To understand the import of this mistaken action in the case of the DoE, I will say a few words about the DoE's role within the U.S. science and technology network. The DoE funds a major part of the nation's basic research. In FY 1995, DoE will support $2.8 billion of basic research—nearly 20 percent of the total federal support, second only to the National Institutes of Health. For example, we support major physics facilities, such as the international team at Fermi Lab

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings that recently found experimental evidence for the existence of the elusive "top quark," as well as extensive work in materials and in the life sciences. In FY 1995, the DoE will provide 9 percent of the total federal support for R&D, or 20 percent of federal nondefense R&D. In fact, almost 40 percent of DoE's FY 95 budget is considered federal R&D. We operate many scientific user facilities—used by some 15,000 industry, university, and government scientists each year. We receive requests for twice the amount of time that is available. Each request goes through a peer review process, which ensures scientific merit and that the use requires the DoE's unique capabilities. We support nearly $850 million of university research. The loss of any significant part of this will be hard to make up from other sources. For example, the funds spent with MIT alone total nearly $70 million. That represents a lot of tuitions. The proposals to eliminate the DoE, and the budget cuts proposed by the House Budget Resolution, are a clear threat to this science and technology network. Let me explain what is at stake in ascending order of threat. Our High Energy and Nuclear Physics Research Program, totaling nearly $1 billion in FY 1995, would fare relatively well because it would be cut by only 9 percent by FY 1998. But the resolution would totally prohibit the restoration of funding called for in the Drell report, reflecting the community' s expert judgment of what is required to maintain world leadership in this field. Our Energy Supply R&D programs, totaling $3.3 billion in FY 1995—which include basic research in materials and in the life sciences, as well as research on renewable energy resources and fusion, among others—would be cut by 35 percent by FY 2000. Our Energy Conservation R&D programs, totaling nearly $450 million in FY 1995, which fund some of our important successes—such as superconductivity work and advances in energy-efficient lighting that have paid for themselves many times over—would be cut 79 percent by FY 2000. Our natural gas, oil, and coal R&D programs, totaling nearly $450 million in FY 1995, would be cut 77 percent by FY 2000. This appears especially shortsighted in view of recent forecasts that world dependence on Persian Gulf oil exports will double over the next 15 years. These cuts, of course, are greater in real terms because they do not reflect the effect of inflation, which we now estimate will reduce a dollar' s purchasing power by approximately 25 percent in the next seven years. SCALPELS, NOT BLUNT INSTRUMENTS Of course some cuts can be made, and the innovation system can always be improved. But changes need to be made in a way that carefully preserves the core research and strengthens the linkages through which the research provides value to the nation. Blunt instruments will not do a job requiring scalpels. At the DoE over the last few years we have been doing a more careful pruning of the R&D bush.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings We are engaged in a major new effort, begun at the outset of this administration to: focus our efforts where we can contribute the most, cut overhead costs out of our laboratory system, make the DoE and its laboratories work together better as a system, and improve the integration of the DoE with the rest of the R&D system. We began by developing a strategic plan to determine the areas in which the DoE provides the most value to the nation. We have started reforming our contracts with the organizations that manage our laboratories, to give them greater incentives to cut costs and improve their efficiency. We recently released our Strategic Alignment Plan, which will ultimately result in a reduction of 27 percent of our federal employees. We also asked Bob Galvin, former chairman of Motorola, to head a task force to examine the missions of our national laboratories. We asked Dan Yergin, the energy industry expert and author of The Prize, to head a task force that will help evaluate and set priorities for our applied energy R&D programs. And we are now implementing the changes in response to the recommendations made by the Galvin Task Force. Let me highlight a few of the changes: We are committed to cutting overhead cost out of the laboratory system. Al MacLachlan, the former Dupont chief technical officer who helped cut cost out of Dupont's R&D system and is now my deputy, is leading an effort to help accomplish the same for the DoE. We are reducing the DoE's audits and are allowing the laboratories to follow commercial practices in the procurements. Over the years, our laboratories have had to follow more and more federally imposed rules. We are reversing years of regulatory creep and freeing them up. We have formed a Laboratory Operating Board, with both DoE and external members, to help our laboratories work together better as a system, with defined centers of excellence, operating under processes that draw on talents throughout the system. Out of this effort will come a leaner, more cost-effective DoE and one that works together in a more tightly integrated way. We also are working to improve the way DoE works with the rest of the U.S. R&D enterprise. For example, we are working with other agencies through the National Science and Technology Council, and we are working much more closely with industry. We have Memoranda of Understanding with the Departments of Defense, Commerce, Agriculture, and with NIH. We have more than 1,200 Cooperative R&D Agreements with industry, involving more than $1 billion in industrial contributions, essentially triple the number of two years ago. This work not only benefits industry, but benefits the various DoE missions. Our labs can accomplish their goals more effectively working with industry than working alone.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings This would be an ambitious set of activities for a private company. They are even more challenging for a government agency. But we are making progress, and we will accomplish these tasks. IMPLICATIONS FOR INTERNATIONAL COOPERATION Let me conclude with a few comments on the implications of these budgetary changes on the larger theme of international friction and collaboration. The first point is that there is a very large degree of uncertainty about both the future of our organization and the funding for individual activities. It is difficult to predict how this will affect international collaboration. It is possible that budget cuts will force us to collaborate more; we certainly would like to improve our collaboration. Unfortunately, it is more likely that budget cuts will prevent us from collaborating. Take for example our fusion program. Under an ideal budget, we would like to support our own fusion machine, the TPX, and participate in the international thermonuclear experimental reactor [ITER]. Our capacity to engage in activities that require long-term commitment is put into question by this budgetary turmoil. To sustain these activities will require a high-level presidential commitment and political consensus in the Congress that is able to sustain the required investment over a 25-year period. Toward that end, the President's Council of Advisers for Science and Technology [PCAST] is reviewing options for the fusion program. Our capacity to make this investment is now very much in question. In general, we are approaching international collaboration in the same way we approach other partnerships. We are looking for win-win solutions. First and foremost, we are looking for benefits for the U.S. taxpayer, but we recognize that any successful collaboration must make sense to our partners as well. In some cases we will want to share the cost of major science facilities or welcome foreign scientists to our facilities. In other cases we will want to ensure that the technology we develop with an industrial partner will provide substantial benefits to the U.S. taxpayer. And in still others, we will directly support scientists and engineers from other countries, such as scientists from the former Soviet Union, if it would support our nuclear nonproliferation goals. It is difficult to define precise rules concerning these activities. The best we can do is to use our judgment about what makes sense for the American taxpayer and for our specific missions while acting within a framework of congressionally directed preferences, and, in some cases, restrictions. I have focussed my discussion on the DoE because it provides a compelling illustration of the dilemmas before us. Other agencies, however, are facing similar challenges in trying to maintain the integrity of their research programs and their linkages to economic growth and competitiveness. Other agencies also are facing similar challenges in maintaining their international collaborations in this budget climate. But the fundamental and first-order challenge is to inform the congressional

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings judgment, to teach it to discriminate, to take a broader view of the innovation process, and to learn what is at stake. In this, you have as much of a role as I. It is a considerable challenge, and we will need your help and support. WILLIAM SPENCER: Would you comment about your view on how basic research will be funded in our national labs versus universities, and perhaps the changes you are taking in an approach to international collaboration that will save us from digging another $8 billion hole in Wachsahatchee, Texas, and then offering to sell part of it to our foreign participants. CHARLES CURTIS: Dr. Spencer is referring to the superconducting supercollider investment that envisioned an international contribution, and obviously represents a failed enterprise on the part of government because the super-collider lost its capacity to sustain the necessary political consensus to fund that project over time. You can talk about cost overruns and the redesign of the program, which basically changed the economic parameters, but at least in my judgment the fundamental problem was the inability to sustain a political consensus to support that investment over time. What we are doing about that is illustrated in my reference to the PCAST related to the fusion program. The fusion program involves a major international collaboration in the ITER that, incidentally, is expected to cost $10 billion to construct and $10 billion to operate over its expected operating period. The reason that we examined the PCAST was to determine if we could develop a high-level presidential commitment to that program, which is necessary for sustainable financial support, as well as to engage Congress in something more than an annual appropriations act. I suggest that this is very much in jeopardy. International collaboration requires a presidential commitment and a way of engaging Congress in making an investment over time and committing to it on an eyes-open, fully evaluated, analyzed basis. This is what we will try to evolve out of the PCAST process. It may be the only answer to getting international projects properly funded, and I am very skeptical whether it is possible in our current political environment. With respect to questions about the locus of basic research dollars—that is, the tradeoff between investments in our national laboratories and in the university system—the answer is that the DoE does both. There is always the parochial first-preference claim of our national laboratories, or at least the suspicion that there was a first-preference claim. This is a fair criticism of the DoE's practice in the past, because it sees the maintenance of the national laboratories' core competencies as essential to its mission accomplishment. In the future, however, the DoE will be more disciplined as to where it puts that investment dollar, and it will present better opportunities for university basic research. The DoE is now establishing a Laboratory Operating Board. One of its first missions will be to develop a strategic plan for the laboratories as a system, out of which the DoE will identify centers of excellence and also will lead laboratories for

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings various work. By default, this will also define areas in which centers of excellence do not exist in DoE laboratories, but where they do exist in universities. RICHARD BRADSHAW: I have heard a great deal of speculation on the part of the Republican leadership that the DoE laboratories could be sold or privatized. Even if one were to assume that that would be true, there are some implications, specifically the national research capability, that have to do with preferential treatment of customers, partnerships, or alliances. Could you address and speculate what the implications might be to the U.S. R&D base if so much of our capabilities were, indeed, privatized? CHARLES CURTIS: I am not aware of any analytic basis on which such an assumption could be grounded. There is a great variety of capacity and character to the DoE laboratories, but quite obviously to the extent that they house facilities that are important to materials science research, for example, acquiring control over the use of those facilities against competitors would be a valuable competitive tool. To that extent, there are certainly some facilities that could be privatized or that would be very attractive to private industry. But then there are all sorts of questions concerning the conditions upon which privatization might occur that are designed to assure, in essence, a fair field of access to the facilities in industry. If I might use an analogy to the electric utility industry, it has not worked out very well when you have, in essence, one competitor maintaining ownership of an essential means of competition, even under rules that were designed to provide fair and full access to those facilities. Foreign Contributions to the U.S. Research Base Knut Merten, Siemens Corporate Research I am from the Princeton Research Laboratories, but today I represent Siemen' s Corporate Research as a whole. We have three locations worldwide for corporate research: Erlangen and Munich, Germany, and Princeton, New Jersey. I offer to you today what I know best: how Siemens is organized in the United States in terms of R&D and what it does here. AN OVERVIEW OF SIEMENS Siemens is an electronics company and has been in the business for many years. Currently, it has 380,000 employees worldwide, which is a drop of over 5 percent since 1993-1994. It is Europe's largest private employer and the second largest employer worldwide. Sales are now a little over $60 billion annually. Regionally, in terms of sales, Siemens is quite strong in Germany. If you include Europe and Germany together, three-fourths of our sales are Europeanbased. Thirteen percent of our sales are in the United States, 9 percent are in

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Asia. Siemens's strategic mission is to grow further in the United States and in East Asia. Siemens came to the United States in 1970. At that time, the company had already been in business for 135 years. Before World War II, there was an agreement between Westinghouse and Siemens that they would not go into each other's territory, so Siemens did not begin business in the United States until after World War II. Currently, Siemens has over 46,000 employees and 75 manufacturing assembly locations in the United States. Geographically, Siemens is quite diversified. The apprenticeship program: Siemens has also implemented an apprenticeship program in the United States that is quite successful and has been widely recognized and discussed. For example, Siemens has apprentice programs located in Raleigh, North Carolina; Lake Marion, Florida; at Potter & Brumfield in Princeton, Indiana; Franklin, Kentucky; and Newport News, Virginia. If you compare Siemens with other foreign-owned companies in the United States, it ranks third. Siemens is the biggest foreign-owned manufacturing company in terms of U.S. employees. U.S. content: The domestic content of Siemens's U.S. sales is approximately $6 billion. Imports are $1.4 billion. Most important, however, worldwide exports out of the United States are now more than $1 billion, a figure that is above average compared with other U.S. companies. Siemens's overall U.S. R&D is somewhere between $600 million and $700 million, which is equal to the share we have in Germany. The bigger portion is in the operating divisions, not in central R&D. The biggest spender in R&D in the United States is Siemens Public Network Switching, headquartered in Boca Raton, Florida. They are the third biggest supplier after AT&T and Northern Telecom in the United States. Siemens's corporate R&D budget this year was $21 million. University funding: Cooperation with American universities is always viewed positively in the company. Approximately 60-70 million German marks have funded university research here and in Europe. Ten percent of this is spent in the United States. Princeton University is given the biggest share of these research dollars because we are geographically close to the university. Siemens Corporate research in Princeton has approximately 150 employees. The budget is $21 million to $22 million. Siemens's R&D mission: Siemens has a worldwide responsibility for selected R&D topics; it does research in the United States for our operating companies throughout the world. We have approximately 40 people working in imaging and visualization. Our artificial intelligence activities employ 20 people. We are also growing in multimedia, and at the end of the year we will probably have 20 to 25 people in that area. These are our core technologies at Princeton. If someone in a lab in Germany had a problem in software testing, they would be directed to Princeton. This is exactly how Siemens has changed. Before 1991, we did research for our operating companies.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Funding level: In regard to funding, we have roughly the same funding scheme as our German departments. Fifty percent is funded by the divisions, 35 percent is funded out of a central budget, and 15 percent is public funding. The funding scheme for Princeton is 50/50, because I do not receive any funding from federal agencies. We are writing some proposals and hope to win some federal contracts. Siemens Corporate Research is handled like a department, but from a legal point of view, it is a company. It has worldwide responsibility for certain Siemens core technologies. Siemens is also integrated in our innovation activities. For example, Siemens Corporate Research is responsible for the innovation field of health care. This is just looking for new opportunities in terms of market and in terms of technology over the long term. From the headquarters' point of view we are totally integrated. The overall Siemens budget for corporate R&D is 400 million German marks. This is roughly 5 percent of the overall R&D spending. Again, 10 percent of sales is devoted to R&D. Out of this 10 percent, 5 percent is corporate, so that brings it down to 400 million. Ten percent of this is here in the United States. To summarize, I am responsible for an R&D organization, and I must say we should not forget that R&D also has to do with fun, with excitement, with good people. That is the reason why I would like to tell you about a specific project, an example, of a project that we are currently working on. We have taken an inexpensive induction motor, and have tried to make some failure predictions—to indicate in advance when the motor is breaking down. This has been a successful experiment. We have implemented a very complex neural network that can only predict approximately 90-95 percent of all the cases of breakdown and separate between good motors and bad motors. It takes into account such factors as weight and how the motor is mounted. This is one of the technologies that I believe are important for the future. So we are happy to have such projects at Princeton. Thank you.