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I
PREFACE
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Preface
Dnven both by the exigencies of national defense and the requirements of
transportation and communication across the American continent, the federal
government has played an instrumental role in the development of new produc-
tion techniques and technologies from the earliest years of the republic. To do so,
the government has often turned to individual entrepreneurs with innovative ideas.
For example, in 1798, the federal government laid the foundation for the first
machine tool industry with a contract to the inventor, Eli Whitney, for inter-
changeable musket parts.) A few decades later, in 1842, a hesitant Congress
appropriated funds to demonstrate the feasibility of Samuel Morse's telegraphy
Both men fostered significant innovations which led to whole new industnes.
Despite Whitney's ultimate success and the enormous consequences of
Morse's ground-breaking innovation, the appropriate role of the government in
~ Whitney missed his first delivery date and encountered substantial cost overruns. However, his
invention of interchangeable parts, and the machine tools to make them, was ultimately successful.
The muskets were delivered and the foundation of a new industry was in place. As early as the 1850s,
the United States had begun to export specialized machine tools to the Enfield Arsenal in Great
Britain. The British described the large-scale production of firearms, made with interchangeable
parts, as "the American system of manufacturers" David C. Mowery and Nathan Rosenberg, Paths of
Innovation: Technological Change in 20th Century America. Cambridge University Press, New York,
1998,p6.
2 For a discussion of Samuel Morse's 1837 application for a grant and the congressional debate, see
Irwin Lebow, Information Highways and Byways. Institute of Electrical and Electronics Engineers,
New York, 1995, pp. 9-12. For a more detailed account, see Robert Luther Thompson, Wiring a
Continent: The History of the Telegraph Industry in the United States 1823-1836. Princeton Univer-
sity Press, Princeton, N.J., 1947.
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4
PREFACE
the economy has remained a source of debate and discussion in the United States
to this day. Perhaps the earliest articulation of the government's nurturing role
with regard to the composition of the economy was Alexander Ham~lton's 1791
Report on Manufacturers in which he urged an activist approach by the federal
government. At the time, Hamilton' s views were controversial, although subse-
quent U.S. policy has largely reflected his beliefs.
Dunng both the nineteenth and twentieth centunes, the federal government
has had an enormous impact on the structure and composition of the economy
through infrastructure development, regulation, procurement, and a vast array of
policies to support industrial and agricultural development.3 Between World
War I and World War II, these policies included support for the development of
key industnes, which we would now call dual-use, such as radio and aircraft
frames and engines. The requirements of World War II generated a huge increase
in government procurement and support for high-technology industnes. At the
industrial level, there were "major collaborative initiatives in pharmaceutical
manufactunng, petrochemicals, synthetic rubber, and atomic weapons."4 An
impressive array of weapons based on new technologies was developed during
the war, ranging from radar and improved aircraft, to missiles and, not least, the
atomic bomb. The government also played a central role in the creation of the
first electronic digital computer, the ENIAC.5 Following the war, the federal
government began to fund basic research at universities on a significant scale,
first through the Office of Naval Research and later through the National Science
Foundation.6
Dunng the Cold War, the United States continued to emphasize technological
superiority as a means of ensuring U.S. secunty. Government funds and costplus
contracts helped to support systems and enabling technologies such as semi-
conductors and new matenals, radar, jet engines, missiles, and computer hard
3 Examples abound. The government played a key role in the development of the U.S. railway
network, growth of agriculture through the Morrill Act (1862) and the agricultural extension service,
and support of industry through the National Bureau of Standards (1901). See Richard gingham,
Industrial Policy American Style: From Hamilton to HDTV. New York: M.E. Sharpe, 1998 for a
. . .
comprehensive review.
4 David Mowery, "Collaborative R&D: how effective is it?" Issues in Science and Technology.
1998, p. 37.
5 Kenneth Flamm, Creating the Computer. Washington, DC: The Brookings Institution, 1988,
chapters 1-3.
6 The National Science Foundation was initially seen as the agency that would fund basic scientific
research at universities after World War II. However, disagreements over the degree of Executive
Branch control over the NSF delayed passage of its authorizing legislation until 1950, even though the
concept for the agency was first put forth in 1945 in Vannevar Bush's report Science: The Endless
Frontier. The Office of Naval Research bridged the gap in basic research funding during these years.
For an account of the politics of the NSF's creation, see G. Pascal Zachary, Endless Frontier:
Vannevar Bush, Engineer of the American Century, New York: The Free Press, 1997, pp. 231. See
also Daniel Lee Kleinman, Politics on the Endless Frontier: Postwar Research Policy in the United
States, Durham, NC: Duke University Press, 1995.
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PREFACE
s
ware and software.7 In the post-Cold War period, the evolution of the American
economy continues to be profoundly marked by the interaction of government-
funded research and innovative entrepreneurs. Government support in areas such
as microelectronics, robotics, biotechnology, the human genome, and the devel-
opment of ARPANET, the forerunner of today' s Internet, are providing the un-
derpinnings of a new economy. Individual entrepreneurs and researchers often
played leading roles in developing new approaches and new businesses to exploit
these research investments.8
Despite the important role the U.S. government has played in the develop-
ment of the American economy, there is little consensus concerning the principle
of government participation and there is often considerable debate about the ap-
propriate mechanisms of participation. At the same time, in light of the rising
costs, substantial risks and the breadth of potential applications of new technolo-
gies, some believe that a supportive policy framework by the government is nec-
essary if new, welfare-enhancing and wealth-generating technologies are to be
developed and brought to the market.
Since 1991 the National Research Council's Board on Science, Technology,
and Economic Policy (STEP) has undertaken a program of activities to improve
policy makers' understanding of the interconnections of science, technology, and
economic policy and their importance for the American economy and its inter-
national competitive position. The Board's activities have corresponded with
increased policy recognition of the importance of technology to economic growth.
The new economic growth theory emphasizes the role of technology creation,
which is believed to be characterized by significant growth externalities.9 A con-
sequence of the renewed appreciation of growth externalities is recognition of the
economic geography of economic development. With growth externalities com-
ing about in part from the exchanges of knowledge among innovators, certain
regions become centers for particular types of high growth activities. Innovators
are able to take advantage of the tacit knowledge available in such centers to
address technology and other business development issues.~°
In addition, some economists have suggested limitations to traditional trade
theory, particularly with respect to the reality of imperfect international competi
7 For an excellent review of the role of government support in nurturing the computer industry, see
National Research Council, Funding a Revolution: Government Support for Computing Research,
National Academies Press, Washington, D.C., 1999.
~ David B. Audretsch and Roy Thurik, Innovation, Industry, Evolution, and Employment. Cam-
bridge University Press, 1999.
9 Paul Romer, "Endogenous technological change," Journal of Political Economy, Vol. 98, 1990,
p. 71-102. See also Gene Grossman and Elhanan Helpman, Innovation and Growth in the Global
Economy, Cambridge, Mass., MIT Press, 1993.
is Paul Krugman, Geography and Trade, Cambridge, Mass., MIT Press, 1991, p . 23, points out
how the British economist Alfred Marshall initially observed in his classic Principles of Economics
how geographic clusters of specific economic activities arose from the exchange of "tacit" knowledge
among business people.
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6
PREFACE
tion.l1 Recent economic analysis suggests that high-technology is often char-
actenzed by increasing rather than decreasing returns, justifying to some the propo-
sition that governments can capture permanent advantage in key industries by pro-
viding relatively small, but potentially decisive support to bring national industries
up the leaning curve and down the cost curve. The increasing recognition of the
dynamic element of technological innovation, in particular its cumulative nature, has
provided an intellectual underpinning for strategic trade concepts that emphasize the
dynamic nature of international competition in high-technology industnes.l2
PROJECT ORIGINS
The growth in government programs to support high technology industry
within national economies and their impact on international science and technol-
ogy cooperation and on the multilateral trading system are of considerable inter-
est worldwide. Accordingly, these topics were taken up by STEP in a study
earned out in conjunction with the Hamburg Institute for Economic Research and
the Institute for World Economics in Kiel which produced the 1996 report, Con-
flict and Cooperation in National Competition for High-Technology Industry.
One of the principal recommendations for further work emerging from that study
was a call for an analysis of the principles of effective cooperation in technology
development, to include lessons from national and international consortia, in-
cluding eligibility standards and assessments of what new cooperative mecha-
nisms might be developed to meet the challenges of international cooperation in
high-technology products.~3
In many high-technology industnes, the burgeoning development costs for
new technologies, the dispersal of technological expertise, and the growing
importance of regulatory and environmental issues have provided powerful in-
centives for public-pnvate cooperation. Notwithstanding the unsettled policy
environment in Washington, collaborative programs have steadily expanded.~4
ii Paul Krugman, Rethinking International Trade, Cambridge, Mass., MIT Press, 1990.
i2 For a discussion of governments' efforts to capture new technologies and the industries they
spawn for their national economies, see National Research Council, Conflict and Cooperation in
National Competition for High-Technology Industry, National Academy Press, Washington, D.C.
1996, pp. 28-40. For a critique of these efforts, see Paul Krugman, Peddling Prosperity: Economic
Sense and Nonsense in an Age of Diminished Expectations. New York: W.W. Norton, 1995.
i3 The summary report of the project (National Research Council, op.cit.) recommends further
analytical work concerning principles for effective cooperation in technology development (see Rec-
ommendation 24, p. 8). More recently, David Mowery has noted the rapid expansion of collaborative
activities and emphasized the need for comprehensive assessment. David Mowery, "Collaborative
R&D: how effective is it?" op. cit., p. 44.
i4 In addition to programs such as SBIR, SEMATECH, and ATP, other legislative initiatives sought
to encourage cooperation and improve the payoff from federal R&D. Examples include the Stevenson-
Wydler Technology Innovation Act (1980), the Bayh-Dole University and Small Business Patent Act
(1980), the National Cooperative Research Act (1984), and the Federal Technology Transfer Act (1986).
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PREFACE
7
Dunng the Reagan administration, the Small Business Innovation Research pro-
gram (SBIR) was created as a way to use the innovative capacity of small business
as a means of using federal R&D dollars more effectively. To meet unprec-
edented challenges in the semiconductor industry, the SEMATECH consortium
was established, although only after much debate.~5 In the Bush administration,
Congress first funded the Advanced Technology Program (ATP) in the National
Institute of Standards and Technology and the Advanced Battery Consortium was
created. The Clinton administration came to office with an emphasis on civilian
technology programs, substantially expanding the ATP and creating the Technol-
ogy Reinvestment Program (TRP), and the Partnership for the Next Generation
Vehicle (PNGV).~6 The rapid expansion of these cooperative programs encoun-
tered significant opposition, rekindling the national debate on the appropriate role
of the government in fostering new technologies. Indeed, broader philosophical
questions about the appropriate role for government in collaborating with indus-
try have tended to obscure the need for policy makers to draw lessons from current
and previous collaborative efforts.
Given the considerable change in federal research and development budgets
since the end of the Cold War, and the reduced role of many centralized laborato-
nes in the private sector, government-industry collaboration is of growing impor-
tance, yet it has seen remarkably little objective analysis. At one level, analysis
may contribute to a better appreciation of the role of collaboration between
government and industry in the development of the U.S. economy. Wnting
twenty years ago, one well-known American economist observed that Americans
are still remarkably uninformed about their long history of policies aimed at stimu-
lating innovation.~7 Today, many Americans appreciate the contribution of tech
i5 For a review of SEMATECH, see the National Research Council, 1996, op.cit., pp. 141-151.
For one of the most comprehensive assessments of SEMATECH, see John B. Horrigan, "Cooperating
Competitors: A Comparison of MCC and SEMATECH," monograph, National Research Council,
Washington, D.C. forthcoming.
is For an analysis of ATP, see Christopher T. Hill, "The Advanced Technology Program: opportu-
nities for enhancement," in Lewis Branscomb and James Keller, eds. Investing in Innovation: Creat-
ing a Research and Innovation Policy. Cambridge, Mass., MIT Press, 1998, pp. 143-173. For an
excellent analysis of the TRP, see Jay Stowsky, "Politics and Policy: The Technology Reinvestment
Program and the Dilemmas of Dual Use." Mimeo, University of California, 1996. See also, Linda R.
Cohen, "Dual-use and the Technology Reinvestment Project." in Branscomb and Keller, op.cit., pp.
174- 193. For PNGV, see National Research Council, Review of the Research Program of the Partner-
ship for a New Generation of Vehicles: Third Report. Washington, D.C.: The National Academy
Press, 1997. See Effectiveness of the United States Advanced Battery Consortium as a Government-
Industry Partnership, National Academy Press, Washington, D.C. 1998.
i7 Otis L. Graham, Losing Time: The Industrial Policy Debate. Harvard University Press, Cam-
bridge, Mass., 1992, p. 250. Graham cites Richard Nelson's observations at the end of the Carter
Administration. The situation may not have improved. Writing in 1994, James Fallows makes a
similar observation (see Looking into the Sun: The Rise of the New East Asian Economic and Political
System. New York: Pantheon Books, 1994, p. 196). See also Thomas McCraw's "Mercantilism and
the market: antecedents of American industrial policy," in The Politics of Industrial Policy, Claude E.
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8
PREFACE
nology to the current period of robust economic growth. Yet there is little
evidence that Americans are aware of the key contributions of federal support for
technological innovation, from radio to the Internet.
Leaving aside the desirability of having a better understanding of the role of
partnerships in fostering new technologies, one compelling argument for assess-
ment is the simple fact that government intervention in the market is fraught with
nsk. There are cases of major success, such as federal support to the computer or
semiconductor industnes, where the Department of Defense served as a source of
R&D and as a reliable, early buyer of products.~9 There are also cases of major
frustration. Landmarks would include projects such as the Supersonic Transport
and the Synfuels Corporation.20 Regular assessment is vital to ensure continued
technical viability, though cost-shanng requirements can be an effective safe-
guard. Assessment can also help avoid "political capture" of projects, especially
large commercial demonstration efforts.2i Even successful collaborations face
the challenge of adapting programs to rapidly changing technologies.22 Assess-
ment thus becomes a means of keeping programs relevant. Assessment can also
have the virtue of reminding policymakers of the need for humility before the
"black box" of innovation. As one observer notes, "expenence argues for hedged
commitments, constant reappraisal, maintenance of options, pluralism of advice
and decision makers."23
From an international perspective, understanding the benefits and challenges
Barfield and William A. Schambra, eds., American Enterprise Institute for Public Policy Research,
Washington, D.C., 1986, pp. 33-62.
i~ For a review of support for computing and the Internet, see National Research Council, Funding
a Revolution: Government Support for Computing Research, National Academies Press, Washing-
ton, D.C., 1999, op. cit. Chapter 7.
i9 Ibid. See also Graham, op.cit., p. 2.
20See Linda R. Cohen and Roger G. Noll, The Technology Pork Barrel, The Brookings Institu-
tion, Washington, D.C., 1991, pp. 97, 178, 259-320, 217-258. An interesting review of technology
development programs, mainly from the 1970s, the analysis is less negative than the title suggests.
Indeed, the volume identifies some successful R&D projects such as the photovoltaic electricity pro-
gram. The recent analyses by the Academies of government support for the computing also provide
a valuable perspective on the importance and success of sustained government support.
21 Cohen and Noll stress that political capture by distributive congressional politics and industrial
interests are one of the principal risks for government-supported commercialization projects. In cases
such as the Supersonic Transport project, they extensively document the disconnect between declin-
ing technical feasibility and increasing political support (see op.cit., p. VII and pp. 242-257.
22 One of the strengths of SEMATECH was its ability to redefine goals in the face of changing
conditions. See National Research Council, 1996, Conflict and Cooperation, p. 148. See also
Grindley, et. al., "SEMATECH and collaborative research: lessons in the design of high-technology
consortia." Journal of Policy Analysis and Management, 1994, p. 724 and Peter Grindley and Will-
iam Spencer, "SEMATECH after five years: high-tech consortia and U.S. competitiveness," Califor-
nia Management Review. Vol. 35, no. 4, pp. 9-33 and Horrigan, "Cooperating Competitors," op. cit.
23 Otis Graham, op.cit., p. 251. Graham is referring to work by Richard R. Nelson in Government
and Technological Progress, Pergamon Press, New York, 1982, p. 454-455.
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PREFACE
9
of these programs is also important insofar as they have been, and remain, a
central element in the national development strategies of both industrial and
industrializing countries. Governments have shown a great deal of imagination
in their choice of mechanisms designed to support industry. They have adopted a
wide range of policies from trade regulations designed to protect domestic
products from foreign competition to tax rebates intended to stimulate the export
of selected domestic products. They provide government R&D funding for
enterprises of particular interest, and sometimes give overt support through direct
grants, loans, and equity investments or more opaque support through mecha-
nisms such as tax deferral.24 Data collected by the Paris-based Organization for
Economic Cooperation and Development (OECD) suggest that worldwide gov-
ernment expenditures on support for high-technology industries involve signifi-
cant resources and are increasingly focused on what policy makers consider to be
strategic industries.25
The United States is an active, if unavowed, participant in this global compe-
tition, at both the state and the federal level. Indeed, the United States has a
remarkably wide range of public-private partnerships in high-technology sec-
tors.26 In addition to the well-known cases mentioned above, there are public-
private consortia of many types. They can be classified in a number of ways,
such as by the economic objective of the partnership, that is, to leverage the social
benefits associated with federal R&D activity, to enhance the position of a na-
tional industry, or to deploy industrial R&D to meet military or other government
missions.27 The program taken up in this symposium, the Small Business Inno-
vation Research Program (SBIR), falls under the latter category.
PROJECT STEERING COMMITTEE
The continual importance of government-industry collaboration underscores
the need for better understanding of the opportunities and limitations of these
programs and the conditions most likely to ensure success. Reflecting the interest
of policy makers in this topic, the STEP Board initiated the project on "Govern-
ment-Industry Partnerships for the Development of New Technologies," which
24 National Research Council, 1996, op.cit., Box B., pp. 39-40.
25 Ibid. Concerning support for small business, the OECD gives a positive review of U.S. pro-
grams. See OECD, Technology, Productivity, and Job Creation: Best Policy Practices., Paris: OECD,
1997. P. 21.
26 See Chris Coburn and Dan Bergland, Partnerships. Batelle Press, Columbus, Ohio, 1995.
27 See Albert Link, "Public/Private Partnerships as a Tool to Support Industrial R&D: Experiences
in the United States." Paper prepared for the working group on Innovation and Technology Policy of
the OECD Committee for Science and Technology Policy, Paris, 1998, p. 20. Partnerships can also
be differentiated by the nature of public support. Some partnerships involve a direct transfer of funds
to an industry consortium. Others focus on the shared use of infrastructure, such as laboratory
facilities.
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10
PREFACE
has benefited from broad support among federal agencies. These include the U.S.
Department of Defense, the U.S. Department of Energy, the National Science
Foundation, the National Cancer Institute, the National Aeronautics and Space
Administration, the National Institute of Standards and Technology, as well as a
diverse group of private corporations. To carry out this analysis, the STEP Board
has assembled a distinguished multidisciplinary steering committee for govern-
ment-industry partnerships, listed in the front of this report. The comm~ttee's
principal tasks are to provide overall direction and relevant expertise in the as-
sessment of the issues raised by the project. At the conclusion of the project, the
steering committee will develop a consensus report outlining their findings and
recommendations on the issues reviewed by the project.
As a basis for the consensus report, the steering committee has undertaken to
commission research and convene a series of fact-finding meetings in the form of
workshops, symposia, and conferences as a means of informing its deliberations.
This symposium, and the proceedings reported here, represent one element of this
fact finding effort. It was the first in a series of fact-finding meetings convened
under the auspices of the STEP Board and under the direction of the steering
committee.
A number of distinguished individuals deserve recognition for their willing-
ness to review this report. These individuals were chosen for their diverse per-
spectives and technical expertise, in accordance with procedures approved by the
NRC' s Report Review Committee. The purpose of this independent review is to
provide candid and critical comments that will assist the institution in making the
published report as sound as possible and to ensure that the report meets institu-
tional standards for objectivity, evidence, and responsiveness to the study charge.
The review comments and draft manuscript remain confidential to protect the
integrity of the deliberative process. We wish to thank the reviewers for their
participation in the review process: James Turner, House Science Committee;
Robert B. Archibald, The College of William and Mary; David B. Audretsch,
Indiana University; Albert N. Link, University of North Carolina at Greensboro;
John T. Scott, Dartmouth College; and Peter Cahill, BTRTC. We are especially
grateful for the contributions of the Review Coordinator, Gerald Dinneen. A1-
though these individuals have provided constructive comments and suggestions,
it must be emphasized that responsibility for the final content of this report rests
entirely with the STEP Board and the NRC.
28 Other volumes in this series include a companion volume on SBIR entitled The Small Business
Innovation Research Program: An Assessment of DoD's Fast Track Initiative, National Academy
Press, Washington, D.C., 1999; A Review of the Sandia Science and Technology Park Initiative.
National Academy Press, Washington, D.C., 1999; and The Advanced Technology Program: Chal-
lenges and Opportunities, National Academy Press, 1999. With respect to international cooperation,
the series includes New Vistas in Transatlantic Science and Technology Cooperation, National
Academy Press, Washington, D.C., 1999.
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PREFACE
11
Given the quality and number of presentations at this symposium, summariz-
ing the proceedings was a challenge. Every effort was made to capture the main
points made during presentations and ensuing discussions, within the constraints
imposed by the nature of a symposium summary. We apologize in advance for
inadvertent errors and omissions in the summary. We also take this opportunity
to thank our speakers and participants for making their experience and expertise
available to the Academies and our project. Finally, we emphasize that the pro-
ceedings that follow do not make findings or recommendations; rather, they seek
to capture the different perspectives of the participants and observers of the SBIR
program.
Charles W. Wessner
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Representative terms from entire chapter:
business innovation
