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2
THE WHITE HOUSE
WASHINGTON
April 9, 1991
MEMORANDUM FOR THE VICE PRESIDENT
THE SECRETARY OF STATE
THE SECRETARY OF DEFENSE
THE SECRETARY OF AGRICULTURE
THE SECRETARY OF COMMERCE
THE SECRETARY OF LABOR
THE SECRETARY OF TRANSPORTATION
THE SECRETARY OF ENERGY
THE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
THE UNITED STATES TRADE REPRESENTATIVE
THE CHIEF OF STAFF TO THE PRESIDENT
THE ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS
THE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS
THE ASSISTANT TO THE PRESIDENT FOR ECONOMIC AND
DOMESTIC AFFAIRS
THE ASSISTANT TO THE PRESIDENT FOR SCIENCE
AND TECHNOLOGY
SUBJECT:
Working Group on Science and Technology
The economic performance of the United States is closely tied to
increases in productivity through innovation and the development
and application of new technologies. The President has
continually demonstrated his commitment to a vigorous research
and development agenda, most recently in the FY 1992 budget
submission to Congress.
To support the Administration's leadership on research and
development issues, the Economic Policy Council (EPC) Working
Group on Research, Development, Technology and Innovation is
being re-established. This group will be called the Working
Group on Science and Technology. The Assistant to the President
for Science and Technology will assume the role of chairman.
The Working Group will provide a forum for developing
Administration policy on significant science and technology
issues that affect U.S. economic performance. As initial tasks,
the Working Group will review the policy approach of the federal
government toward implementation of the networking aspects of the
high performance computing and communications initiative and
various joint industry-government cost-sharing consortia
contemplated by the recent Administration initiatives.
The Working Group should include representatives from the Office
of the Vice President, Departments of State, the Treasury,
- 2 -
Defense, USTR, Commerce, Energy, Office of Management and Budget,
Council of Economic Advisers, Office of Policy Development, and
Office of Science and Technology Policy. The members of the
Working Group should be at the Assistant Secretary level or
above.
As the Working Group focuses on specific issues, representatives
of appropriate Executive Branch agencies will be invited to
participate.
The chairman of the Working Group should coordinate its
activities with the Executive Secretary to the EPC.
Thank you very much for your cooperation.
health x sus
Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
THE WHITE HOUSE
WASHINGTON
April 9, 1991
MEMORANDUM FOR THE VICE PRESIDENT
THE SECRETARY OF STATE
THE SECRETARY OF DEFENSE
THE SECRETARY OF AGRICULTURE
THE SECRETARY OF COMMERCE
THE SECRETARY OF LABOR
THE SECRETARY OF TRANSPORTATION
THE SECRETARY OF ENERGY
THE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
THE UNITED STATES TRADE REPRESENTATIVE
THE CHIEF OF STAFF TO THE PRESIDENT
THE ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS
THE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS
THE ASSISTANT TO THE PRESIDENT FOR ECONOMIC AND
DOMESTIC AFFAIRS
THE ASSISTANT TO THE PRESIDENT FOR SCIENCE
AND TECHNOLOGY
SUBJECT:
Working Group on Science and Technology
The economic performance of the United States is closely tied to
increases in productivity through innovation and the development
and application of new technologies. The President has
continually demonstrated his commitment to a vigorous research
and development agenda, most recently in the FY 1992 budget
submission to Congress.
To support the Administration's leadership on research and
development issues, the Economic Policy Council (EPC) Working
Group on Research, Development, Technology and Innovation is
being re-established. This group will be called the Working
Group on Science and Technology. The Assistant to the President
for Science and Technology will assume the role of chairman.
The Working Group will provide a forum for developing
Administration policy on significant science and technology
issues that affect U.S. economic performance. As initial tasks,
the Working Group will review the policy approach of the federal
government toward implementation of the networking aspects of the
high performance computing and communications initiative and
various joint industry-government cost-sharing consortia
contemplated by the recent Administration initiatives.
The Working Group should include representatives from the Office
of the Vice President, Departments of State, the Treasury,
- 2 -
Defense, USTR, Commerce, Energy, Office of Management and Budget,
Council of Economic Advisers, Office of Policy Development, and
Office of Science and Technology Policy. The members of the
Working Group should be at the Assistant Secretary level or
above.
As the Working Group focuses on specific issues, representatives
of appropriate Executive Branch agencies will be invited to
participate.
The chairman of the Working Group should coordinate its
activities with the Executive Secretary to the EPC.
Thank you very much for your cooperation.
health 7 sus
Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
Document Originally
Attached to
Following Page
To Olin Wethington
From Blair Downing
1
FYI
91-98566
WER-UNITED AMERICA SEITES OF
RIMENT OF ENERGY.
The Secretary of Energy
Washington, DC 20585
May 7, 1991
MEMORANDUM FOR THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
SUBJECT:
Economic Policy Council Working Group on
Science and Technology
Thank you for inviting representation from the Department of
Energy on the Economic Policy Council Working Group on Science and
Technology. Linda G. Stuntz, Deputy Under Secretary for Policy,
Planning, and Analysis, will serve as the Department's
representative to the Working Group, with support from the
Department's technical organizations as appropriate.
Jian James D. wath Watkins
Admiral, U.S. Navy (Retired)
CC: The Honorable D. Allan Bromley
file; 5&T Work Group
Document Originally
Attached to
Following
Booklet entitled
"Toward a us Technology Strategy"
NATIONAL ACADEMY OF ENGINEERING
NATIONAL ACADEMY OF SCIENCES
Compliments of the
Manufacturing Forum
Sh: S&T W.G
TOWARD
A
U.S. TECHNOLOGY
STRATEGY
Enhancing Manufacturing
Competitiveness
Discussion Paper Number 1
Erich Bloch
TOWARD A U.S. TECHNOLOGY STRATEGY
ENHANCING MANUFACTURING COMPETITIVENESS
By
Erich Bloch
Discussion Paper Number 1
February 1991
This paper has been prepared by the author for the Manufacturing
Forum and is published and distributed by the Forum as a public
service. Its publication implies no endorsement of its conclusions or
recommendations by the National Academy of Sciences, the
National Academy of Engineering, the Institute of Medicine, or the
Manufacturing Forum, nor by any of their members.
THE MANUFACTURING FORUM
National Academy of Engineering
National Academy of Sciences
NATIONAL ACADEMY PRESS
Washington, D.C.
THE MANUFACTURING FORUM
The Manufacturing Forum was established in 1990 by the National Acad-
emy of Engineering and the National Academy of Sciences to provide a means
by which policymakers from government, industry, and universities can meet to
discuss issues that influence the competitiveness of manufacturing industries.
The Forum is based on the recognition that future challenges to the performance
of U.S. manufacturing industries from increased foreign competition, from
developments in new technology, and from changes in our domestic economic
and societal climates can only be effectively met by a concerted effort on the
part of industry, government, and academia.
The Manufacturing Forum is a device for improving communications
among its members and to the larger community. It does not conduct studies,
provide advice, or make recommendations on specific issues or policies.
cover photo courtesy TRW Inc.
iii
MEMBERSHIP OF THE MANUFACTURING FORUM
RUBEN F. METTLER (Chairman), TRW Inc. (retired)
DONALD R. BEALL, Rockwell International Corporation
PHILIP E. BENTON, JR., Ford Motor Company
ELWOOD P. BLANCHARD, JR., E. I. du Pont de Nemours & Co., Inc.
ERICH BLOCH, National Science Foundation (formerly)
MICHAEL J. BOSKIN, Council of Economic Advisers
D. ALLAN BROMLEY, Office of Science and Technology Policy
W. DALE COMPTON, Purdue University
RODERICK A. DcARMENT, U.S. Department of Labor
JAMES J. DUDERSTADT, University of Michigan
DONALD F. EPHLIN, United Auto Workers (retired)
JAMES F. GIBBONS, Stanford University
PAUL E. GRAY, Massachusetts Institute of Technology
JERRY R. JUNKINS, Texas Instruments Inc.
FRANK W. LUERSSEN, Inland Steel Industries, Inc.
W. HENSON MOORE, U.S. Department of Energy
THOMAS J. MURRIN, Duquesne University
ROBERT A. PRITZKER, The Marmon Group, Inc.
JOHN S. REED, Citicorp
JOHN E. ROBSON, U.S. Department of the Treasury
MORRIS TANENBAUM, AT&T
RICHARD H. TRULY, National Aeronautics and Space Administration
ROBERT M. WHITE, U.S. Department of Commerce
S. LINN WILLIAMS, Office of the U.S. Trade Representative
Ex Officio Members
FRANK PRESS, National Academy of Sciences
ROBERT M. WHITE, National Academy of Engineering
Manufacturing Forum Staff
CHRISTOPHER T. HILL, Executive Director
PENELOPE GIBBS, Administrative Assistant
iv
ACKNOWLEDGEMENT
The author wishes to acknowledge Dr. T. Samantha Solomon, Solomon
Associates, for her invaluable assistance in the researching, writing, and editing
of this report to the Manufacturing Forum.
He also wishes to thank the many members of the community who re-
viewed this report in draft and made valuable suggestions for its improvement.
V
FOREWORD
The Manufacturing Forum has identified many issues that need to be ad-
dressed and many opportunities that need to be grasped on the way to improving
the future performance and competitiveness of U.S. manufacturing industries,
including changes in management practices, changes in the climate for invest-
ment, upgrading of the manufacturing workforce at all levels, and changes in a
host of public policies intended to facilitate and/or constrain our manufacturing
industries.
To facilitate its consideration of specific manufacturing issues, the Forum
commissions experts in a variety of fields to prepare discussion papers. Each
author is encouraged to express his or her own views sufficiently sharply to
catalyze serious discussion. The Forum members offer their individual views,
which authors may accept or reject, but the papers do not in any sense represent
the views of the Forum as a whole.
Few issues arise more consistently and more insistently than the need to
discover, develop, apply, and continuously improve the technologies employed
in our manufacturing industries and in the other parts of the economy that
support or depend on them.
Ensuring a continual stream of new technologies and attending to their
effective application is first and foremost a responsibility of individual industrial
firms in the private sector. However, both our historical experiences and those
of competitor nations demonstrate that wise public policies can play critical
roles in encouraging and facilitating technological change and application in
industry, and that such policies can bring benefits not only to industrial perfor-
mance but to the nation as a whole through enhanced contributions of industry
to the economy, to national security, and to the quality of life for all citizens.
In this paper, Dr. Erich Bloch, former Director of the National Science
Foundation and a member of the Manufacturing Forum, presents his views on
changes that should be considered in formulating our national technology policy
in the interests of enhancing manufacturing competitiveness. This paper was a
basis for discussions of technology policy in a meeting of the Forum in January
1991.
Ruben F. Mettler
Chairman
vi
Executive Summary
Americans need to understand that the world they live in is fundamentally
changing. The United States was in a dominant position at the end of World
War II. It had the most advanced technology, and it had the manufacturing and
marketing resources to dominate international trade. Today, the U.S. trade
balance is overwhelmingly negative. Even the advantage in the high-technology
industries we once took for granted has virtually disappeared.
The United States does not lag behind its competitors in generating basic
research results or in the quality of its Ph.D. scientists and engineers. But
America's former competitive advantage in the commercial application of tech-
nological developments and discoveries is quickly being eroded by our competi-
tors who often deploy new technologies in products and processes with greater
speed than we do. The results are an American "manufacturing gap" and,
ultimately, an increasing deterioration of our technology base.
We are not just witnessing a "natural" adjustment in the post-war
economy, as has been suggested, but rather a profound and critical decline in
U.S. technology and manufacturing. While the primary responsibility for this
decline in manufacturing competitiveness falls on the private sector, federal
policies and practices-such as those affecting education, macroeconomic
policy, regulatory policy, antitrust guidelines, tax policy, trade and investment
policies, and science and technology policy-have a major impact on the
country's ability to compete. To be successful in ensuring that the United
States remains a world-class manufacturing competitor, then, its technology
policy must be accompanied by a variety of policies, programs, and actions by
government, industry, and universities in these other areas.
Because manufacturing is one of America's economic foundations, and
because it is of strategic importance to the competitive position of the United
States in the world economy and to the maintenance of national well-being and
security, these declines in national capabilities relative to our major competitors
require the immediate attention of both the private and public sectors.
First, industry, academia, and the federal government must look at science
and technology-as well as technology and manufacturing-as a continuum, in
which the insights of science, from the most fundamental through the applied,
are linked to basic technology developments and to products and services in the
marketplace. Today's trends in manufacturing toward shorter production runs,
shorter product cycles, increasing quality, a greater variety of products with
1
increasing customization, and a shorter time to market for new products de-
mand an integrated manufacturing environment and a greater harmonization of
public policy and private actions.
Second, just as American industry traditionally has too often separated
R&D from production, so has the U.S. government treated science and technol-
ogy as if they were separable entities. In 1945, Vannevar Bush's report to Presi-
dent Truman, Science: The Endless Frontier¹, put in place this country's first
federal science policy, but assigned no role to the government in technology
development. Yet, the report needs to be seen as a product of the times: when
Bush wrote his report, America's industrial technology base was very strong,
while its science base was relatively weak. Today, the reverse is true-our
science base and our basic research and higher education system are unparal-
leled in the world, while our civilian technology base is in trouble.
Third, the federal government has only lately addressed technology as an
issue. Nevertheless, America has had a "de facto" technology policy in place for
many decades. In important instances during the 1950s and 1960s, the federal
government supported the development of "generic" technologies-most often
as part of the war and national defense efforts-which later developed into
important new commercial industries for this country. In fact, for nearly 40
years after World War II "strategic technology" was developed mainly in the
context of military and space programs. This gave us world leadership in televi-
sion, integrated circuits, advanced computers, aerospace, lasers, nuclear energy,
polymers, and many other fields. However, because of recent developments;
namely, the emergence of the civilian sector as the precursor of new technology
development-supplanting the military sector, the end of the Cold War, and the
aggressive investment by our foreign competitors in coordinated public-private
sector initiatives for technology development, this traditional approach to sup-
porting strategic technology development and utilization has become less effec-
tive than it was in the past.
While the primary responsibility for civilian technology development and
commercial application lies with the private sector, the federal government can
and should play a more proactive, participative role than it has traditionally.
The White House Office of Science and Technology Policy's (OSTP's) publica-
tion in the fall of 1990 of the first "U.S. Technology Policy"2 is a step in the
right direction. What is now required is for the government and industry to
translate that policy into practice by jointly developing a strategy to enhance
economic growth and manufacturing competitiveness. To begin this task,
definite actions should be taken.
2
REVERSE THE CONTINUING LOSS OF THE
U.S. TECHNOLOGY BASE
Leadership
National security is no longer primarily a military concern. Economic
growth and security have become vital considerations, and the strategic impor-
tance of technology can be a significant contributor to America's future growth
and competitiveness. To disseminate this important message, President Bush
should include in an appropriate message to Congress and to the American
people his support for OSTP's newly issued "U.S. Technology Policy" and
should articulate clearly the need to develop jointly with industry, labor, and
academia a technology strategy and to establish a continuing industry-govern-
ment dialogue at the highest levels of government to address strategic issues in
science and technology.
Rebalancing R&D Expenditures
While a case can be made for additional R&D funding, the present R&D
budget must be scrutinized for reallocation and priority setting in order to
increase the effectiveness of current investments in our nation's science and
technology base. Today, over 60 percent of the U.S. R&D budget is allocated to
defense-oriented R&D. In view of the domain and role being assumed by the
civilian sector in technology development, there is a need for more equal bal-
ance between civilian and defense R&D by 1995. A better balanced division of
expenditures would enable the U.S. to achieve R&D spending on the civilian
side of the ledger more comparable to that of our major foreign competitors.
IDENTIFY AND INVEST IN STRATEGIC, GENERIC TECHNOLOGIES
Support for Generic Technologies
Government must play a larger role in ensuring that the United States has
the technology necessary to support economic growth and promote manufactur-
ing competitiveness. The federal government should support and participate in
collaborative efforts with industry and the universities to develop generic tech-
nologies in this country. There are generic technologies that are of prime impor-
tance to the future of American manufacturing and to America's technological
leadership in the world. Prominent among these are electronics technologies,
biotechnology, information technologies, manufacturing and process technolo-
gies, and advanced materials technologies.
3
The 1992 Budget Proposals
Congress should support the President's Fiscal Year 1992 initiatives in
science and technology, including the high-performance computing and net-
working initiative, the embryonic initiative in materials technology and process-
ing, and the manufacturing technology efforts in NIST, NSF, DOE, DOD, and
other agencies. Congress and the Administration should also press forward with
an imaginative education and human resource initiative to provide leadership to
stimulate upgrading the skilled workforce American industry needs to handle
tomorrow's advances in science and technology.
R&D Credit
Congress should make the R&D tax credit applicable to R&D related to
manufacturing processes, make the tax credit permanent, and make special
provisions for investment by firms in industry-government consortia and in
academia.
SPEED-UP THE COMMERCIALIZATION OF NEW TECHNOLOGIES
The Role of the Federal Laboratories
The federal government operates more than 700 laboratories with an annual
budget of approximately $21 billion-three-fifths of which goes towards defense
applications. This amount is almost one-third of the government's R&D expen-
ditures, and nearly one-sixth of the nation's total. From the perspective of the
American economy, these laboratories are an underutilized resource. As an
experiment, the missions of some government laboratories, or specific divisions
or projects of a single laboratory, should be redirected to support industrial
coalitions aimed at creating leadership positions in strategic, generic technolo-
gies. Through joint industry-government funding and management, these efforts
could become the nuclei of U.S. generic, precompetitive technology development.
ENHANCE COLLABORATION BETWEEN THE PUBLIC
AND PRIVATE SECTORS
Collaborative Mechanisms and Technology Transfer
Developing collaborative mechanisms for technology transfer between the
public and private sectors and within each sector is fundamental to the effec-
tiveness of any technology strategy. Any viable technology strategy must in-
clude vehicles to promote the collaboration of government with industry and
the universities. Such "partnerships" can take a variety of forms including
4
industry-government consortia like SEMATECH, industry-university-govern-
ment research centers like the National Science Foundation's (NSF's) Engineering
Research Centers and its Science and Technology Centers, multi-company
industry efforts such as the Microelectronics and Computer Technology Corpo-
ration (MCC) and the Semiconductor Research Corporation (SRC), and technol-
ogy transfer centers like the National Institute of Standards and Technology's
(NIST's) five regional Manufacturing Technology Centers that focus on the
needs of smaller businesses.
Support for State and Local Initiatives in
Science and Technology
Over the past two decades, state and local governments have come to view
science and technology programs as keys to economic development. These
programs vary from state to state, but generally include funding for advanced
technology research centers-sometimes referred to as "centers of excellence,"
seed and venture capital funds, technical assistance, incubators, research parks,
R&D grants, and information dissemination and technology transfer. The
federal government should actively support these efforts and coordinate its
activities with state program developers and clients.
CONCLUDING NOTE
The end of World War II was a critical time for the country to establish the
science base, strategy, and organizational mechanisms to remain at the leading
edge of scientific research. Today, the end of the Cold War, the increasing
competition in the global marketplace, and the need for accelerating the eco-
nomic growth of the U.S. should spur the long overdue effort to put in place the
technology strategy and implementing mechanisms needed to return and keep
America on the leading edge of technology and manufacturing.
5
The New Environment
"The world is in political, economic, and technological upheaval unparal-
leled since World War II. We find ourselves in a new polycentric world in
which political, economic, and technological power is dispersed globally."
(Robert M. White, April 13, 1990)³
Americans need to understand that the world they live in is fundamentally
changing. Over the past 15 years, the United States and other nations through-
out the industrial world have faced and are continuing to face economic, politi-
cal, and technological realignment of unforeseen proportions. The United States
was in an economically dominant position at the end of World War II. It had
the most advanced technology, and it had the manufacturing and marketing
resources to dominate international trade. But that favorable position is gone.
Today, the U.S. trade balance is overwhelmingly negative. Even the advantage
in the high-technology industries that we once took for granted has virtually
disappeared. It is well recognized that the erosion of American manufacturing
capabilities has contributed heavily to the U.S. trade deficit.
The development and use of new and better technology is essential to the
future of manufacturing in this country. Although technology alone cannot
solve the competitiveness problem-it takes, in addition, a supportive social,
financial, and legal environment-technology can be an important tool in devel-
oping cost-effective products that will compete in world markets. Now, more
than ever, success in the global marketplace means creating and applying new
knowledge-which is to say new technology-faster than one's competitors.
That is the fundamental law in this competitive world.
In recent years, the markets in which we have to sell our products have
become international; we no longer have a large domestic market dominated by
our own industries. This is true for both new and established industries. During
this period we also saw technology become the foundation for a global economy,
a major impetus to economic growth, and a principal source of competitive
advantage. In addition, we witnessed the emergence of Japan, the Pacific Rim
countries, and now the European Economic Community as economic rivals in
an increasing number of industries, and the erosion of the U.S. economic posi-
tion in many of them.
6
Today, technology is critical to the continued growth of nations. Since
World War II, the world economy has been transformed into a knowledge-based,
skill-based economy. Industries based primarily on knowledge and fast-moving
technologies, such as semiconductors, advanced materials, biotechnology, and
information technologies, are the industries that are fueling economic growth.
In this new environment, competitiveness is determined less by a nation's
abundance of natural resources, low-cost labor, and other classical comparative
advantages of the past than by its abilities to generate, access, and rapidly de-
ploy new knowledge and technical insights, and to convert them into quality
products and processes.
Academics and analysts have repeatedly raised the question: Is America's
eroding competitiveness an inevitable result of our competitors' post-war invest-
ments in rebuilding their economies and in research and education, or is there
something fundamentally wrong with this nation's capacity to compete? The
answer is simple. We are not just witnessing a natural adjustment, but rather a
profound and critical decline in U.S. technology and manufacturing. This is
evident if we consider the loss in U.S. marketshare of automobiles, semiconduc-
tors, instrumentation and machine tools, and robotics in manufacturing pro-
cesses. This decline in national capabilities requires immediate attention by
both the private and public sectors because manufacturing is America's eco-
nomic foundation and is of strategic importance to the competitive position of
the United States in the world economy, and because it is essential to the main-
tenance of national security.
The reasons for our decline are many. While the primary responsibility for
the decline in manufacturing competitiveness falls on the private sector for not
being more alert to technological changes, increasing competition, the role of
quality, and market demands; federal policies and practices-such as those
affecting education, macroeconomic policy, regulatory policy, antitrust guide-
lines, tax policy, and science and technology policy-can and do have a major
impact on the private sector's ability to compete. In fact, the competitive
posture of industry has been inhibited by the lack of integration between the
government's economic policies and its ad hoc technology programs. To date,
the government has not acted to ensure that economic and related policies-
such as those listed above-are in place to provide the proper "business environ-
ment" for effective technology development and utilization in the private sec-
tor. While many of these federal policies and macroeconomic considerations are
difficult to alter, particularly in the short term, others are within our reach to
change.
However, our problems are not without solutions. America possesses
unparalleled strengths in basic research and higher education, in the openness of
our society to leadership and new ideas, in the enormous resources devoted to
R&D by both the public and private sectors, in our numerous outstanding
private and government laboratories, in our large domestic market, in the avail-
ability of venture capital, and in the free movement of people among the private,
public, and academic sectors.
7
But America is at a crossroads. If we persist in our traditional attitudes and
approaches and are unwilling to modify our institutions, our economic position
in the global marketplace will further erode. If we recognize the changes that
surround us, take advantage of our strengths, are willing to question established
wisdom and to create new collaborations and alignments, and shed outmoded
institutions and create new ones, the future can be bright.
8
Science, Technology, and Manufacturing
"So many of the world's most advanced technologies, from robotics to the
VCR, were first developed here. And yet, so many of those concepts were
ultimately brought to the marketplace by our competitors. We can do
better. And I am determined that we will do better."
(President Bush, March 7, 1990)⁴
SCIENCE AND TECHNOLOGY AS A CONTINUUM
America's economic growth and national security are intimately tied to its
standing in science, technology, and manufacturing. Today, the speed of
progress in research and development and product innovation makes it increas-
ingly inappropriate to divide the activities of science and technology as if they
are two separate spheres. Science and technology are a continuum, in which the
insights of science, from the most fundamental through the applied, are linked
to technology developments and to products and services in the marketplace.
An important element of this continuum is the scientific and technological
workforce that does the research, develops the technologies, and designs, mar-
kets, and services products.
Considering these activities as a continuum is not meant to imply that
science, technology, and manufacturing progress sequentially and linearly, and
that basic research results precede applied research or technology development.
There are numerous cases in which technology development preceded theory.
For example, electrical communication systems, the telephone, and the tele-
graph existed long before a theory of communications was established, and
steam engines were developed before thermodynamics became a scientific
discipline. Rather, science and technology should be seen as interactive and
interdependent - with stimulation and feedback flowing back and forth be-
tween parts of the system. The flow is neither linear nor unidirectional. While
science and technology share many things in common, such as the scientific
approach to experimentation, they also differ philosophically. Science asks:
"What is?" while technology asks: "What can be?"
9
TECHNOLOGY AND MANUFACTURING AS A CONTINUUM
Just as science and technology are a continuum, so are technology and
manufacturing. Technology is the driving force in the design and manufacturing
of products and the development of services. Technological innovation, design,
and manufacturing are interactive and interdependent processes. For example,
product development, design, and manufacturing all drive research and are, at
the same time, highly dependent on research for successful innovation.
In fact, the continuum runs from basic research to marketing - an ap-
proach that in the "best practice" companies is characterized by systematic and
incremental improvements in products and processes in response to changing
signals from the marketplace. Successful U.S. firms - and many of our major
foreign competitors - emphasize simultaneous improvements in engineering,
function, quality, cost, and speed of commercialization. In general, the most
competitive firms are closer to their customers and to their suppliers than their
less successful industrial counterparts; have greater functional integration
among research, design, manufacturing, and marketing; and have less hierarchi-
cal organizational structures.
The MIT Commission on Industrial Productivity⁵ correctly advocates a
systems approach to manufacturing. Such an approach encompasses a great deal
more than just what occurs on the production line. It includes designing and
developing products as well as planning, marketing, selling, and servicing them.
The technologies and processes used in these functions are also a part of manu-
facturing, as are the ways in which the workforce interacts with technology and
is educated and trained.
In contrast to its competitors - particularly those in Japan - U.S. industry
has too often placed artificial boundaries between research and design on the
one hand, and production and marketing on the other. This counterproductive
philosophy is embodied in many American companies in the physical separation
of research facilities from the factory floor. Today's trends in manufacturing are
toward shorter production runs, shorter product cycles, increasing quality, a
greater variety of products with increasing customization, and a shorter time to
market for new products. This new climate demands an integrated manufactur-
ing environment that facilitates making incremental improvements and refine-
ments in both manufactured products and the manufacturing process.
There is a consensus that the United States does not lag behind its competi-
tors in generating basic research results or in the quality of its doctoral scien-
tists and engineers. But America's ability to rapidly translate science and engi-
neering into commercializable products, and its ability to take advantage of the
detailed insights, understanding, and processes that are a prerequisite to product
design and product manufacturing is another story altogether. Thus, in recent
years it has become apparent that a "manufacturing gap"-like the technology
gap of earlier years-has emerged, and this time it is the United States that lags
behind.
10
Science Policy and Technology Policy
"America assumed that government support for science would be adequate
to provide for technology. It is not.'
(Council on Competitiveness, 1988)6
HISTORICAL OVERVIEW
Before World War II, the federal government played a limited role in the
support of science. One major activity, besides the operation of its own labora-
tories, was the establishment of the National Advisory Committee on Aeronau-
tics (NACA). NACA helped spawn the aeronautics industry in the United
States and was the organizational forerunner to NASA. But World War II
changed the course of the way science was conducted in this country by har-
nessing the talents of numerous scientists and engineers to work on the war
effort to defend America's national security. The seminal experiences of organi-
zations and individuals during the war fundamentally changed the interactions
between the public and private sectors with regard to science and technology.
The war led to a massive increase in the level of federal science funding and
firmly established the concepts of awarding research grants and contracts for the
conduct of R&D in universities and industry, rather than in government-oper-
ated laboratories.
In 1945, Vannevar Bush, then director of the federally created Office of
Scientific Research and Development, submitted to President Truman his re-
port, Science: The Endless Frontier, thereby laying out this country's first
federal science policy. In the report, Bush stated that:
"New products, new industries, and more jobs require continuous addition
to knowledge of the laws of nature, and the application of that knowledge to
practical purposes This essential new knowledge can be obtained only
through basic research that the impetus can come promptly only from the
Government [since] basic research is essentially non-commercial in nature."⁷
Subsequently, Vannevar Bush's report led to the establishment of the Na-
tional Science Foundation (NSF). For 40 years NSF, together with other,
11
mission-oriented R&D agencies of the federal government (e.g., DOD, NASA,
DOE, NIH, USDA), has kept the United States at the leading edge of basic
scientific and engineering research.
But in the same document, Bush made short shrift of any government role
in technology development, asserting that: "industry will fully rise to the
challenge of applying new knowledge to new products. The commercial incen-
tive can be relied on for that." However, Bush's view notwithstanding, during
the 1950s and 1960s there were important instances in which the federal gov-
ernment supported the development of generic technologies-as part of the war
and national defense efforts-that later developed into important new commer-
cial industries for the country. Television, for example, gained immensely from
radar and electronic developments undertaken for military and defense reasons.
In fact, for nearly 40 years after World War II, "strategic technology" was devel-
oped mainly in the context of military and space programs supported by DOD
and NASA. This gave us world leadership in integrated circuits, advanced
computers, aerospace, lasers, nuclear energy, polymers, and many other fields.
However, recent developments have made dependence on military programs to
support strategic technology development and utilization less effective than it
was in the past.
THE PARADIGM SHIFT
Several factors make it less likely that defense and other mission-oriented
R&D will be a primary source of commercial technology development in the
years to come.
First, the fundamental shift away from U.S.-Soviet military confrontation is
likely to reduce the military R&D budget and make it less possible for military
agencies to develop important dual-use technologies.
Second, the time scales for the development of military products and com-
mercial products are diverging, making commercial products the precursor for
new technologies, and resulting in strategic technologies of the future being
increasingly developed in civilian contexts rather than in military or space
programs. Biotechnology, semiconductor manufacturing, robotics, artificial
intelligence, high-definition displays, and materials technology are all being
developed for and finding applications today in the civilian sector earlier than in
the military sector. This is the reverse of the situation that existed prior to
about 1980.
Third, federal government agencies are end-mission-oriented (e.g., defense,
health, agriculture) in their selection and funding of projects and are not ori-
ented towards the development of commercial technology. In addition, govern-
ment standards and specifications-especially those of DOD-optimize tech-
nologies with different goals in mind than those sought by producers of
commercial products. With defense accounting for close to 65 percent of federal
R&D spending, and with defense technologies becoming less relevant to the
needs of the marketplace and to the economic growth of the nation, it is
12
important that we consider a rebalancing and reoptimization of federal R&D
spending to utilize these scarce resources more effectively.
The governments of most other industrial nations-and assuredly of our
major competitors-have purposefully promoted research and technology for
economic development. The role that governments have assumed in supporting
research, technology development, and its applications varies over a wide spec-
trum of activities and programs. For example, in Japan emphasis is placed on
reducing ideas to practice and making the commercialization process more
rapid. The Ministry of International Trade and Industry (MITI) promulgates a
broad strategy that harmonizes the efforts of government and industry in par-
ticular areas of technology development. The MITI-sponsored program on very-
large-scale integration (VLSI) is thought to be one of its primary successes to
date-a program that led to the dominance by Japanese manufacturers of the
production of semiconductors and to the near world monopolization of dynamic
random access memory (DRAM) chip production.
The governments of countries forming the European Community (EC)
address science, technology, and manufacturing issues across the board, ranging
from basic research to development of prototype products. Since its launch in
July 1985, EUREKA has demonstrated success in bringing about transnational
cooperation in fields of high technology close to the market. ESPRIT-the
European strategic program for R&D in information technology-is designed to
stimulate precompetitive R&D activities by means of projects carried out in
collaboration with governments, industry and research centers in member
states, and the EC. JESSI-the Joint European Submicron Silicon Initiative-is
one of the newer internal collaboration activities in Europe. Funded at a level of
$3-4 billion for the first half of the 1990s, JESSI could become a significant
challenge to established competitors in the semiconductor industry.
While our competitors engage in coordinated public-private sector initia-
tives for technology development and utilization, the debate in the United
States centers on whether and how America's policy should deviate from its
traditional approach of government-supported basic research, defense technol-
ogy, and mission-oriented R&D.⁸ Other than spinoffs from defense and other
mission-oriented technology programs, the commercial development and appli-
cation of new technologies have for the most part been considered the responsi-
bilities of the private sector.
In contrast to other countries, U.S. policymakers have not viewed science
and technology as a continuum; rather, they have tended to draw an arbitrary
dividing line between the two. Government involvement in science is widely
viewed as a legitimate role, while its support of technology is not. We have had
a science policy in place for over 40 years, concentrating almost exclusively on
support for basic research. But government support for science is not sufficient
to ensure a national comparative advantage in commercial technology develop-
ment and utilization, because the problems and issues addressed by technology
are different from those that form the basis of scientific research.
13
Because of the new international environment and the continuing erosion
of our technology and manufacturing base, in the fall of 1990 the White House
Office of Science and Technology Policy (OSTP) issued what is the first "U.S.
Technology Policy. "The goal of U.S. technology policy," it states, "is to
make the best use of technology in achieving the national goals of improved
quality of life for all Americans, continued economic growth, and national
security." This statement outlines public and private sector responsibilities for
ensuring sound technology policy, and in its introduction it proposes that:
"A nation's technology policy is based on the broad principles that govern
the allocation of its technological resources. Competitive market forces
determine, for the most part, an optimal allocation of U.S. technological
resources. Government can nonetheless play an important role by supple-
menting and complementing those forces." (emphasis added)
In elucidating federal R&D responsibilities, the document outlines two
roles that are pertinent to this discussion:
"Increase Federal investment in support of basic research. Private industry
does not invest heavily in basic research because the payoffs are so
unpredictable and diffuse that individual firms cannot be confident of
fully recovering their investments. However, the long-term potential
benefits of this research are so large that society cannot afford not to
make the investment, especially in university research which, in addi-
tion to new knowledge, also produces trained scientists and engineers of
the future."
"Participate with the private sector in precompetitive research on generic,
enabling technologies that have the potential to contribute to a broad
range of government and commercial applications."
In discussing the transfer of federally funded technology to the private
sector and ensuring closer collaboration among industry, federal laboratory, and
university personnel, the policy statement proposes two goals that build on
previous federal government efforts in technology transfer:
"Improve the transfer of Federal laboratories' R&D results to the private
sector. Where appropriate, these laboratories should give greater consid-
eration to potential commercial applications in the planning and conduct
of R&D, and these efforts should be guided by input from potential
users. To achieve this goal, there must be a closer working relationship
among these laboratories, industry, and universities."
14
"Promote increased industry-Federal laboratory-university collabora-
tion, including personnel exchanges, to help convert Federally-supported
R&D into new technologies that the private sector can then turn into
commercial products and processes."
OSTP's technology policy statement should be supported. What is now
required as the next step is a strategy to implement this policy. The end of
World War II was a critical time for the country to establish the science base,
strategy, and organizational mechanisms that would enable it to remain at the
leading edge of scientific research. Today, the end of the Cold War, increasing
international competition, and the need to accelerate the economic growth of
the U.S. should spur a long overdue effort to put in place a technology strategy
for the country and to establish the implementing mechanisms needed to return
and keep America on the leading edge of technology and manufacturing.
15
Generic Technologies
"This administration is also committed to working with [industry] in the
critical pre-competitive development stage where the basic discoveries are
converted into generic technologies that support both our economic com-
petitiveness and our national security."
(President Bush, March 7, 1990)¹⁰
Since World War II, the federal government has accepted its role as a sup-
porter of basic research. But over the years the government has been ambivalent
about taking a proactive role in providing financial support for generic technolo-
gies except in areas, such as defense, where the government is the principal
customer. We can no longer afford to be ambivalent. Rapidly growing techno-
logical complexity, increasing uncertainties, long lead times, and reduced mar-
ket shares have increased costs and decreased profits for many U.S. firms. These
circumstances militate against commercial firms investing sufficiently in ge-
neric technologies, and the indications are that these pressures will only in-
crease. Meanwhile, the benefits of targeted and publicly financed strategic
technology programs abroad continue to accrue to our foreign competitors.
These programs-in Japan and Europe-have reduced the risks associated with
technology and product development and those associated with investment in
capital, taken advantage of a limited skillbase, and assured long-term govern-
ment support for our competitors as well.
Numerous reports have been released recently describing technologies that
are termed "generic," "enabling," "strategic," "emerging," or "critical." The
Department of Defense, the Department of Commerce, the Computer Systems
Policy Project, and the Aerospace Industries Association have produced lists,
and OSTP and the Council on Competitiveness are about to do so as well.
These lists have been assembled by a wide range of scientists, engineers, and
leading industrialists, and yet they are remarkably consistent in the kinds of
technologies identified as critical to America's economic and national security
and to its ability to compete in the global marketplace, as well as in their as-
sessments that the country is losing its technological leadership in the world.
The Department of Commerce report, released in the spring of 1990, identi-
fies 12 emerging technologies with a combined U.S. market potential of about
$350 billion in annual product sales by the year 2000 and a world market of
16
about $1 trillion. 11 However, competition from the world's other two economic
powers-Japan and the EC-is strong. This study indicates that, if current
trends continue, before the year 2000 the United States could lag behind Japan
in most emerging technologies and it could trail the EC in several.
What is meant by the term "generic"? And, what does the Administration
mean when it talks about "precompetitive R&D"? In a recent address, D. Allan
Bromley, the President's Science and Technology Advisor, defined these terms
as follows:¹²
"A generic technology is simply one that has the potential to be applied
to a wide variety of products and processes extending across many industries.
A generic technology is typically not something that is sold commer-
cially. Rather, it requires subsequent research and development, gener-
ally by the private sector, to result in commercial application."
"Precompetitive refers to a particular part of the innovation process. It
applies to activities before the point at which a company can tell whether
a specific technology has commercial potential. It would not apply, for
example, to the development of application-specific commercial prototypes."
Generic technologies are not related to narrow market sectors; rather, they
often span entire industries or even multiple industries and market sectors.
Generic technology stops short of design and development of particular products
for the commercial marketplace. By the same token, precompetitive invest-
ments are not related to specific products; they are aimed at the development of
common tools and technologies that will be used later in a variety of applica-
tions. Generic, enabling technologies include advanced materials, biotechnol-
ogy, engineering and production technologies, information technologies, semi-
conductors, robotics, and artificial intelligence. These are prominent among the
technologies that will fuel economic growth in the 1990s and beyond. It should
be noted that the generic technologies of the twenty-first century are much
more complex, more multidisciplinary, and more costly to develop than those
on which our twentieth century technology has been based.
The rationale for federal government support of generic technology develop-
ment is similar to the one that guides basic research investment: generic tech-
nologies require government support because of the high risks and high costs
involved in the research and because no one firm can capture a return sufficient
to justify the investment. Since the results of research and development on
generic technologies diffuse rapidly to competitors at home and abroad, assuring
adequate R&D investment in them requires a combination of industrial funds
and government support.
Realizing benefits to the U.S. economy from government investments in
generic technology requires that the private sector and universities be closely
linked to government-supported generic technology development if commercial
17
application is to follow in the United States. This implies two related imple-
mentation steps. First, we must strengthen technology transfer mechanisms
both between the public and private sectors and within each sector. Second, we
must manage and utilize all of our scientific and engineering resources-includ-
ing those in industry, the universities, and our more than 700 federal laborato-
ries-to the maximum possible advantage in the collaborative development of
generic technologies.
Several vehicles exist to put such collaborative partnerships in place. One
such vehicle is the Advanced Technology Program (ATP), which was created by
the 1988 Omnibus Trade and Competitiveness Act to assist U.S. industry to
carry out R&D on precompetitive, enabling technologies. The ATP is a Depart-
ment of Commerce program administered by the National Institute of Standards
and Technology (NIST).
Another vehicle is the establishment of industry-government consortia
such as SEMATECH. For years the Japanese semiconductor industry has recog-
nized the advantages of cooperation in the precompetitive phases of R&D. By
contrast, U.S. industry has been characterized by relationships that are mostly
adversarial. Because U.S. firms have acted independently, each company is
burdened with the full costs of advancing all aspects of new technologies. In an
era of rapidly increasing costs of technology development, independent and
duplicative efforts hinder competitiveness. The U.S. semiconductor industry
has been late to recognize the advantage of such cooperative research efforts and
American firms have only recently organized to pool their resources. One result
is SEMATECH, a government-supported industry consortium dedicated to
improving semiconductor manufacturing technology. 13
Recently, the Administration has adopted the goal of maintaining the
technology base of the country, at least in part, through the federal government's
support of generic technologies at the precompetitive stage. It has issued a
technology policy document and made public remarks to that effect, but it has
yet to take the strategic implementation steps necessary to accomplish this.
The first step is for the federal government, together with industry, to develop a
joint technology strategy. This strategy does not involve the government in
picking "winners and losers." The basic choices of which products to develop
and when remain within the private sector, backed by private money and disci-
plined by the marketplace. Instead, the strategy must encourage the creation of
collaborative coalitions between governments at the federal and state levels
(including the vast resources at our national laboratories), industry, and univer-
sities to develop a small number of generic technologies that are of strategic
importance to the U.S. economy now and in the future.
18
Towards a U.S. Technology Strategy
"The United States is not used to designing national strategies for helping
its industries catch up with dominant producers in the rest of the world."
(MIT Commission on Industrial Productivity, 1989)14
Over the past decade, the problems of U.S. competitiveness and the role of
technology have been studied by a wide variety of groups. These include Presi-
dent Reagan's Commission on Industrial Competitiveness, the Council on
Competitiveness, the Computer Systems Policy Project, the National Academy
of Engineering, the MIT Commission on Industrial Productivity, the National
Association of Manufacturers, the Defense Science Board, and, more recently,
the National Advisory Committee on Semiconductors, the Vice-President's
Council on Competitiveness, the White House Office of Science and Technology
Policy, and the Congressional Office of Technology Assessment. Their reports
and studies all give voice to four consistent components that must be included
in an effective strategy:
Reverse the continuing loss of the U.S. technology base
Identify and invest in strategic, generic technologies
Speed-up the commercialization of new technologies
Enhance collaboration between the public and private sectors, and
within these sectors.
Although the primary responsibility for civilian technology development
and commercial application lies with the private sector, the federal government
can and should play a more proactive, participative role in these processes than
it has traditionally. The National Academy of Engineering's statement on
"Technology and Competitiveness" correctly proposed that in this critical time
of global competition, the government, working collaboratively with industry
and the universities, "must assume more responsibility for the national civilian
technology base in those areas of technology where industrial incentives or
motivation are inadequate to meet the needs of the economy as a whole. "15
For the government to assume this responsibility is a departure from the
past. Traditionally, the government has felt an obligation to provide the princi-
pal support for the nation's science base, but not its civilian technology base.
19
The result of this policy position has been that the government has put more
emphasis on basic research than on technology transfer and the commercializa-
tion of new technologies. As the OSTP report indicates, this is no longer a
tenable position: if it is to regain its competitive edge in manufacturing, the
United States cannot simply be content to dominate the basic research part of
the technological innovation process without taking steps to reap the benefits of
this investment in the marketplace. The release of this report and the planned
establishment of the Critical Technology Institute by OSTP is evidence that our
attitudes are beginning to change. But much more must occur before we can be
satisfied that we have indeed a viable approach to our technology base.
Addressing the four steps identified above suggests the following implemen-
tation steps.
REVERSE THE CONTINUING LOSS OF THE U.S. TECHNOLOGY BASE
Leadership
Our nation's technological leadership is being tested and challenged in the
global marketplace every day. The science and engineering enterprise has been
called on in the past to address problems of extreme complexity and national
importance, such as development of the atomic bomb during World War II, the
design and building of the interstate highway system in the 1950s, and the
Apollo program during the 1960s. Circumstances outside the research system
drove the extraordinary scientific and technological accomplishments in these
instances. Today, new, and in some ways more pervasive and threatening,
challenges face the nation-sustaining U.S. economic growth and our techno-
logical pre-eminence, and stemming the erosion of the manufacturing sector.
National security is no longer a purely military concern. Economic secu-
rity has become a vital consideration and the strategic importance of technology
can be a significant contributor to America's future growth and competitiveness.
To get this important message out to American citizens, President Bush should
include his support for the newly issued "U.S. Technology Policy" and should
articulate the need for an industry-government technology strategy-as well as
the implementation steps outlined below-in an appropriate message to Con-
gress and to the American people. The President should also address the need
for a continuing industry-government dialogue at the highest levels of govern-
ment to address strategic issues in science and technology.
Rebalancing R&D Expenditures
While a case can be made for additional R&D funding, the present R&D
budget needs to be scrutinized for reallocation and priority setting in order to
make our current investments in the nation's science and technology base more
effective. Today, over 60 percent of the U.S. R&D budget is allocated to
20
defense-oriented R&D. Since defense-oriented R&D is not the precursor to
civilian technology development that it has been in the past, there is a need to
introduce greater balance between civilian and defense R&D by moving towards
a more equal division of expenditures. Such a division of resources would
enable the U.S. to achieve levels of R&D spending on the civilian side of the
ledger more comparable to those of our major foreign competitors. One mecha-
nism for attaining this more effective division of R&D funds is to ensure full
public and private sector utilization of the vast resources found in the federal
laboratories by involving them in the development of civilian-oriented generic
technologies, rather than in development of defense-oriented technology.
IDENTIFY AND INVEST IN STRATEGIC, GENERIC TECHNOLOGIES
Support for Generic Technologies
Government must play a larger role in ensuring that the United States has
the technology necessary to support our economy and promote manufacturing
competitiveness. As was discussed earlier, NIST's newly implemented Advanced
Technology Program is one step on the road towards government/industry
collaboration in the development of generic technology. But much more is
needed. It is striking that after all the reports and analyses are made, a few areas
of technology come to the top of the priority list over and over. They are
Electronic technologies
Biotechnology
Information technologies
Manufacturing and process technologies
Advanced materials technologies
These generic technologies are among those that are of prime importance to
the future of American manufacturing and to the United States' technological
leadership in the world. As an experiment, the federal government should
redirect the missions of a small number of government/national laboratories so
that, through joint industry funding and management, they could become the
nuclei of generic, precompetitive technology efforts.
The 1992 Budget Proposals
Congress should support the President's FY 1992 initiatives in science and
technology, including the high-performance computing and networking initia-
tive, the embryonic initiative in materials technology and processing, and the
manufacturing technology efforts in NIST, NSF, DOE, DOD, and other agencies.
Congress and the Administration should also press forward with an imaginative
education and human resource initiative to provide leadership to stimulate
21
upgrading the skilled workforce American industry needs to handle tomorrow's
advances in science and technology.
R&D Tax Credit
Congress should make the R&D tax credit fully applicable to R&D related
to manufacturing processes, which it is not today. In addition, the tax credit
should be made permanent so that companies can plan their R&D expenditures
ahead of time and use this economic incentive more effectively. Finally, Con-
gress should make special provisions for investments by firms in industry-
government consortia and in academia as a means of enhancing the private
sector's participation with government in the development of generic, enabling
technologies. These actions would constitute first steps towards a much needed
integration of economic policy and technology policy.
SPEED UP THE COMMERCIALIZATION OF NEW TECHNOLOGIES
The Role of the Federal Laboratories
The federal government operates more than 700 laboratories with an annual
budget of approximately $21 billion-three-fifths of which goes towards defense
applications. This amount is almost one-third of the government's R&D expen-
ditures and nearly one-sixth of the nation's total. As military budgets decline,
many government laboratories must find new missions or go out of business.
Many already have no well-defined mission.
Although Congress adopted several laws in the 1980s to encourage the
commercialization of federal laboratory technology and to promote technology
transfer from the federal laboratories to the private sector, collaboration between
laboratories and industrial firms has been modest at best. Our national labora-
tories are an underutilized resource in our quest for economic growth. They
must become an effective, strategic resource.
Some government laboratories, or specific divisions or projects of a single
laboratory, should be redirected to support industrial coalitions aimed at creat-
ing leadership positions in generic technologies. Within these coalitions, indus-
tries and the laboratories would collaboratively agree on project content, and
both would provide financial, technical, and human resources.
Getting industry involved in working collaboratively with government to
develop generic technologies will positively affect the outcome of R&D by
applying a market test to the tasks and their execution. Such collaborative
ventures would also reduce federal funds that are now devoted to the laborato-
ries and make those funds available for other civilian R&D efforts.
22
ENHANCE COLLABORATION BETWEEN THE PUBLIC
AND PRIVATE SECTORS
Collaborative Mechanisms and Technology Transfer
Developing collaborative mechanisms for technology transfer between the
public and private sectors, and within each sector, is fundamental to the effec-
tiveness of any technology strategy. Any viable strategy for technology must
include vehicles to promote the collaboration of government with industry and
the universities and multi-company collaboration among U.S. industrial firms.
In order to make collaborative efforts between industry-government and univer-
sity-industry work, American firms must supplement such collaborative efforts
with in-house activities that are complementary to external ones so that they
can rapidly take advantage of the outcomes of collaborative efforts.
Such "partnerships" can take a variety of forms. One such vehicle is the
formation of industry-government consortia. SEMATECH, in the area of semi-
conductor manufacturing, is one example of this kind of joint venture. Another
mechanism for facilitating closer collaboration between sectors is the National
Science Foundation-supported Engineering Research Centers (ERCs) and Science
and Technology Centers (STCs). These centers were established to foster close
partnerships between universities, industry, and the government on industrially
relevant interdisciplinary science and engineering research and education.
Another mechanism that has been tried in various forms includes multi-
company industry efforts like the Microelectronics and Computer Technology
Corporation (MCC) and the Semiconductor Research Corporation (SRC). An-
other mechanism that has been tried to increase collaborative technology devel-
opment and deployment is the establishment by NIST of three regional Manu-
facturing Technology Centers. These centers are charged with helping small
businesses improve their productivity through the transfer and application of
new manufacturing tools and methods. Two additional centers are planned for
1991.
Support for State and Local Initiatives in Science and Technology
Over the past two decades, state and local governments have come to see
science and technology programs as keys to economic development. Following
the examples of California's Silicon Valley, Boston's Route 128, and North
Carolina's Research Triangle Park, many states have adopted active technology-
based development strategies. These programs vary from state to state, but
generally include funding for advanced technology research centers-sometimes
referred to as "centers of excellence," seed and venture capital funds, technical
assistance, incubators, research parks, R&D grants, and information dissemina-
tion and technology transfer. The federal government should actively support
these efforts and coordinate its activities with state program developers and clients.
23
REFERENCES
1. V. Bush, Science-The Endless Frontier, A Report to the President on a Pro-
gram for Postwar Scientific Research (July 1945). Reprinted by the National Science
Foundation, Washington, D.C., 1990.
2. Executive Office of the President, Office of Science and Technology Policy,
U.S. Technology Policy (Washington, D.C., September 26, 1990).
3. R.M. White, "Technology Policy in an Interdependent World," Address to the
American Association for the Advancement of Science, Washington, D.C., April 13,
1990.
4. G. Bush, "Remarks by the President to the American Electronics Association,"
Washington, D.C., March 7, 1990.
5. M. L. Dertouzos, R. K. Lester, R. M. Solow, and The MIT Commission on
Industrial Productivity, Made in America: Regaining the Productive Edge (The MIT
Press, Cambridge, Mass., 1989).
6. Council on Competitiveness, Picking Up The Pace: The Commercial Chal-
lenge to American Innovation, p. 2 (Washington, D.C., 1988).
7. V. Bush, Science-The Endless Frontier, A Report to the President on a Pro-
gram for Postwar Scientific Research (July 1945). Reprinted by the National Science
Foundation, Washington, D.C., 1990.
8. U.S. Department of Commerce, Technology Administration, Emerging Tech-
nologies: A Survey of Technical and Economic Opportunities (Washington, D.C., Spring
1990).
9. Executive Office of the President, Office of Science and Technology Policy,
U.S. Technology Policy (Washington, D.C., September 26, 1990).
10. G. Bush, "Remarks by the President to the American Electronics Association,"
Washington, D.C., March 7, 1990.
11. U.S. Department of Commerce, Technology Administration, Emerging Tech-
nologies: A Survey of Technical and Economic Opportunities (Washington, D.C., Spring
1990).
12. D. A. Bromley, "U.S. Technology Policy: The Path to Competitiveness,"
Address to the Technology 2000 Meeting, Washington, D.C., November 27, 1990.
13. National Advisory Committee on Semiconductors, A Strategic Industry at
Risk, (Washington, D.C., November 1989).
14. M. L. Dertouzos, R. K. Lester, R. M. Solow, and The MIT Commission on
Industrial Productivity, Made in America: Regaining the Productive Edge (The MIT
Press, Cambridge, Mass., 1989).
15. National Academy of Engineering, "Technology and Competitiveness: A
Statement of the Council" (Washington, D.C., January 1989).
24
NATIONAL ACADEMY PRESS
The National Academy Press was created by the
National Academy of Sciences to publish the
reports issued by the Academy and by the National
Academy of Engineering, the Institute of Medicine,
and the National Research Council, all operating
under the charter granted to the National Academy
of Sciences by the Congress of the United States.
Ste: S&T WG
U.S. ADVANCED BATTERY CONSORTIUM
April 1991
BACKGROUND
On January 30, 1991, Chrysler, Ford,
General Motors formed a research
consortium to evaluate and develop
advanced battery technologies for use
in electric vehicles.
Consortium appears in the form of a
partnership agreement.
U.S. Advanced Battery Consortium
Rationale for Consortium
Electric propulsion is the only way to meet
future emissions standards in California
There is no clear advanced battery choice
Development of a viable system is beyond
the resources of any manufacturer or
technology group
A consortium is the only way to focus a
collective effort and quickly identify the best
options for commercialization
U.S. Advanced Battery Consortium
Objectives of Consortium
Establish capability for U.S. advanced battery
manufacturing industry
Accelerate market potential of EVs by jointly
researching the most promising advanced
battery alternatives
Develop electric systems capable of providing
EVs with range and performance competitive
with conventional petroleum-based systems
Leverage funding for high-risk, high-cost
advanced battery R/D for EVs
U.S. Advanced Battery Consortium
Organization
3 partners: GM, Ford, & Chrysler
Partners' Committee
-
policy, business, plan
to meet annually
Management Committee
-
provides requirements,
priorities, allocates
funding
- EPRI, SCE
Working Groups
-
3-each led by auto
industry
EPRI and Southern California Edison (wish to join)
Respective Roles of Pertinent Contributors
Consumer
Transportation
Nation
Achieve virtually pollution-free transportation
Lessen tranportation's dependence on petroleum
Establish global leadership
Strengthen competitiveness
Utilities
Business opportunity for new infrastructure
Improved utilization of existing power/
distribution systems
Battery Developers/Suppliers
New business opportunity
Auto Companies
Sell commerically acceptable electric
vehicles
D.O.E
Support successful technology development
for public good
U.S. Advanced Battery Consortium
Preliminary Battery Candidates
O
Sodium Sulfur
Lithium Metal Sulfide
Lithium Polymer
How the Auto Industry sees Advanced Batteries
Auto industry considers electricty as an
alternative fuel, like ethanol or methanol
No intention either to produce new fuels for
conventional vehicles or batteries for electric
vehicles, rather, for EV's the intention is to
buy these components from battery developers/
suppliers who join the development effort
PROPOSED FUNDING
($ Millions)
1991
1992
1993
Auto Industry
4.5
9.0
13.5
Utilities/EPRI
4.5
9.0
13.5
Battery
4.5
9.0
13.5
Manufacturers
13.5
27.0
40.5
Proposed Government/Industry Cost Share 50/50
Totals
27.0
54.0
81.0
ENVIRONMENTAL ISSUES
GROUND RULE
Environmental Issues Will Be Adequately
Addressed
When selecting candidates for development
During system research and development
When recharging
Ultimate disposal or recycling
No more environmental problems with new
propulsion systems
RECENT/CURRENT
USABC MILESTONES
Jan 30
- Partnership Agreement Signed
Jan 31
- Technical Advisory Comm. Formed
Mar 4
- Partnership Agreement Legal
Mar 21
- Administratively Organized
Mar 21
- Request Battery Concepts from
Industry (Pre-proposal)
May 1
- Pre-proposal Responses Due
Jul 1
- First Battery Candidate Selected
April 15- Construm will provide pupped lovso
Res Agreement take 90-100 days
W.G.
OFFICE OF CABINET AFFAIRS STAFFING MEMORANDUM
Date: 4-23-91
Due by: NOW
Subject: OMB clearance: DOC Report on American Technology
From:
HollsWilliamoon
Preconinance Act
ACTION CONCUR FYI
ACTION CONCUR FYI
HOLIDAY
FITZHENRY
DANZANSKY
MCMUNN
ADAIR
PORTER
BUCHHOLZ
SCHALL
CASSE
SECHLER
EVANS
WETHINGTON
FARRAR
WILLIAMSON
GUNN
LEFKOWITZ
JACKSON
Comments:
If you have comments, P need them
usap we just received this,
my.
04/23/91
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11 reager
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
Washington, D.C. 20503
total
APR 22 1991
LEGISLATIVE REFERRAL MEMORANDUM
LRM #M-183
TO: Legislative Liaison Officer:
- -
-
-
CEA - Francine Obermiller - 395-5036 - 242
STATE - Will Davis - 647-4463 - 225
TRANSPORTATION - Tom Herlihy - 366-4687 - 226
EDUCATION - John Kristy - 401-2670 - 207
OPM - James N. Woodruff - 606-1424 - 331
OSTP - Damar Hawkins - 456-6272 - 288
USTR - David Weiss - 395-3475 - 223
TREASURY - Richard S. Carro - 566-8523 - 228
JUSTICE - Paul McNulty - 514-2061 - 217
ENERGY - Bob Rabben - 586-6718 - 209
DEFENSE - Samuel T. Brick, Jr. - 697-1305 - 325
COMPET. COUNCIL - - 456-6614 -
NCLIS - Jane Williams - 254-3100 - 278
NASA - Martin P. Kress - 453-1948 - 219
NSF - Charles H. Herz - 357-9435 - 248
GSA - Lonnie P. Taylor - 501-0563 - 237
AGRICULTURE - Marvin Shapiro - 382-1272 - 312
HHS - Frances White - 245-7760 - 328
EPA - Thomas C. Roberts - 382-5414 - 326
SUBJECT: COMMERCE Proposed Report on American
Technology Preeminence Act of 1991
The Commerce draft report comments on the House
subcommittee on Technology markup sent to you on
4/12/91. The full Science Committee is scheduled
to mark up the bill on 4/24/91.
DEADLINE: Tuesday, 12:00 noon APR 23 1991
The Office of Management and Budget requests the views of your
agency on the above subject before advising on its relationship to
the program of the President, in accordance with OMB Circular A-19.
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Honorable George E. Brown, Jr.
Chairman, Committee on Science,
Space and Technology
House of Representatives
Washington, D.C. 20515-1536
Dear Mr. Chairman:
This letter provides the views or the Administration on the
American Technology Preeminence Act of 1991 ("American Technology
B111"), as reported out of House Subcommittee on April 10, 1991,
which We wish to bring to your attention prior to your
Committee's markup of this legislation. Additional, more
detailed, comments on the bill are contained in an enclosure to
this letter.
We share your desire that a suitable reauthorization act for the
Department of Commerce's Technology Administration and National
Institute of Standards and Technology (NIST) be enacted, in order
to reauthorize the Department's technology policy and research
programs and to make important administrative improvements to a
number of statutes under which the Department currently operates.
However, certain aspects of the American Technology Bill raise
very serious problems.
First, we want to reemphasize our strenuous opposition to an
which would establish a $100 million loan program for the
amendment we understand may be offered at full Committee markup
Advanced Technology Program (ATP) in Fiscal Year 1992. A copy of
our previous letter on this issue is attached for your reference.
As the American Technology Bill notes, the purpose of the ATP is
to support industry-led private sector projects in areas of
technological research, development and application that are not
otherwise being adequately developed by the private sector. The
Administration's support for the ATP has always been conditioned
on this premise. A loan program, in contrast, would cause the
ATP to evolve into a completely different type of program
involving primarily low risk projects where commercial
feasibility is well established, to avoid high default rates.
These are the types of projects that can, and should, be financed
by the private sector. While we appreciate the Committee's
doncern about affording high technology companies lower costs of
capital, the Administration's proposals to make the research and
expenditure tax credit permanent, and to cut the capital gains
tax, are much more effective and broad-based tools to accomplish
this goal than to target, and possibly undermine, the
Department's new ATP program.
We also object to the foreign participation provisions in Title
II of the bill, which impose restrictive conditions on the access
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of non-U.S.-owned companies to the ATP. such provisions
contradict the Administration's open investment policy; do not
conform with our national treatment obligations under various
investment agreements; and may thwart rather than support the
stated M objective of the bill -- to enhance U.S. competitiveness -
by restricting the Secretary's ability to allow qualified
companies with proposals which may benefit the U.S. to
participate in the ATP, and by restricting the ability of joint
venture participants to decide for themselves which companies to
include in their ventures. At the very least, we strongly
which ensures that they would not apply to the extent they are
recommend that the Committee add language to these provisions
inconsistent with United States obligations under the General
treaty to which the United States is a party.
Agreement on Tariffs and Trade or an international agreement or
would require the Secretary to submit annual reports identifying
We also oppose an amendment adopted at subcommittee markup which
infrastructure and critical to the economic security of the
"civilian industries necessary to support a manufacturing
United States," and to develop a 10 year plan to ensure growth of
those industries. This requirement is overly burdensome and
unnecassary in light of reports we and the Office of Science and
-- technologies which have applications across many industries.
Technology Policy (OSTP) already prepare on oritical technologies
Moreover, we strongly oppose as directly contrary to
particular industries for "major public efforts needed to
Administration policy any requirement of having to target
out, as this amendment would require.
ensure the growth" of the industry, therefore leaving other ones
We urge your Committee to take these concerns and the ones noted
We remain committed to working with the Committee to enact
our very serious concerns about the proposed ATP loan amendment.
in the attachment into consideration in its markup, particularly
Administration. appropriate reauthorization legislation for the Technology
The Office of Management and Budget has advised us that there is
from no objection to the submission of this letter to the Congress
the standpoint of the Administration's program.
Sincerely,
DRAFT
Wendell L. Willkie, II
General Counsel
Enclosures
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ADDITIONAL COMMENTS
on the
American Technology Preeminence Act of 1991,
as reported out of Subcommittee on April 10, 1991.
Title I: We cannot support the authorization levels in the bill.
These levels greatly exceed the President's FY 1991 and 1992
budget requests for the Technology Administration and NIST. The
budget request of the President reflects the Administration's
judgment, recognizing tight fiscal constraints, as to the amount
of Federal funding which can be devoted to these particular
programs at this time. We are particularly concerned about the
levels for NIST's extramural programs such as the ATP, which has
only just announced its first awards and has yet to be avaluated;
the Manufacturing Technology Centers Program (MTCs), which is
undergoing evaluation; and the State Technology Extension
Program, the objectives of which are advanced through the MTCs
and other technology transfer activities of NIST. The priority
for funding for NIST should remain with its core laboratory and
standards research functions, which provide essential support
both for the extramural programs and for general U.S. industrial
health and competitiveness.
Section 103(f): We support the amendment in this section which
would allow NIST to undertake construction of and improvements to
Congress. buildings and facilities above $250,000 without notice to
Section 108: We: object to the Buy-American provisions in this
bill which, among other things, would unnecessarily restrict the
secretary's flexibility to administer departmental programs, and
unduly complicate bilateral foreign relations. These provisions
should be deleted.
Title II, section 201(c): This section broadens the ATP to
include direct grants (in addition to cooperative cost-sharing
agreements), thereby undermining a basic premise of the ATP --
put up its own funds.
that projects be industry-led, and that industry be willing to
Section 201 (c): This section retains the concept of recoupment
which presents serious conceptual and administrative problems for
the Department. We appreciate the recognition by the Congress
that the current ATP license and royalty provision -- 15 U.S.C.
278n (d) (7) -- is a significant deterrent to the participation in
the ATP of private companies, particularly computer software and
other copyright-oriented companies. However, the alternative
provision suggested in the bill is equally problematic. The
1
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Government should not be deciding whether or not a specific
project is a "commercial success." Also, notwithstanding the
ceiling on repayment provided in the bill, a recoupment
requirement in the context of the ATP is inappropriate as it
undermines private sector incentives to risk funds to promote the
We suggest, therefore, that the original provision -- 15 U.S.C.
commercialization of federally-fundad or developed technology.
278n(d) (7) -- be repealed.
Section 201 (c) (6): In addition to the objections we stated in
our cover letter regarding the restrictions on foreign
participation in the ATP in this section, we have a number of
objections to restrictions which are imposed here on non-U.S.-
incorporated companies with respect to the vesting and transfer
of intellectual property which may arise under the ATP. Both
foreign companies in the ATP, as well as qualified U.S.
sets of restrictions could discourage participation by qualified
other countries.
companies, and result in retaliatory measures in the laws of
U.S.-incorporated companies is a restraint on alienation of
The restriction on the transfer of intellectual property to non-
property. Such restraints are generally discouraged since they
its patent to its subsidiaries or other parties in foreign
instance, a U.S.-incorporated company could not transfer title to
inhibit instead of encourage trade. Under this provision, for
countries. This would inhibit exploitation of patents in other
countries, and BE a result, reduce profits of the U.S. companies.
arising from the ATP must vest in a "company" incorporated in the
well, For example, since title to the intellectual property
There are a number of technical problems with these provisions as
U.S., partnerships and individuals would not be able to take
title under this section. This could preclude partnerships from
entering into the venture, or preclude subsequent contracts
between the venture and partnerships or individuals. Also, the
proprietary information related to its license may be
sentence prohibiting the United States from publicly disclosing
a patent.
inconsistent with information required to be disclosed to obtain
ownership rights in and licensing of inventions made under
These provisions also unnecessarily complicate the disposition of
federally-funded research, which is guided by Chapter 18 of Title
suggest revising the provisions to state that "The disposition of
35 of the United States Code, At the very least, we strongly
be governed by the provisions of Public Law 96-517 (35 U.S.C.
rights to any inventions resulting from the joint venture shall
Chapter 18). The requirements contained in that law shall
without regard to the size or profit or non-profit status of apply the
joint venture participants.".
2
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Innovation Act of 1980 to make permanent a set-aside of 0.008
Section 301: This section amends the Stevenson-Wydler Technology
percent of each Federal agency's research and development budget
for transfer to NIST to fund the activities of the Federal
Laboratory Consortium (FLC). We recommend against extending this
funding mechanism indefinitely, with no cap on the total amount
of funds to be transferred, since such an approach leaves the
Branch oversight.
FLC's funding levels without proper Congressional and Executive
Section 3051 This section authorizing the Department's Under
secretary for Technology to "serve as a focal point for
discussions among United States companies on topics of interest
to industry and labor could create a conflict between the
proper roles of the Technology Administration and the Department
to the technological competency of the workforce.
of Labor. We suggest that it be narrowed to matters pertaining
Section 504: While we question the need for the Commission on
of work already being done in this area by the Council on
Technology and Procurement established in this section in light
Competitiveness and the office of Federal Procurement Policy, we
recommend the addition of other appropriate agencies to the board
of the Commission if it continues to be included in the
Department of Energy, the National Aeronautics and Space
legislation, such as the United States Trade Representative, the
Administration. Administration, the Treasury Department and the Small Business
Section 504, as added at Subcommittee markup: In addition to the
very serious concerns we stated in our cover letter regarding the
plan on critical manufacturing industries, we note that the
requirement in this amendment to identify and prepare a ten-year
Department's Industrial Outlook already provides vital
the Biennial National critical Technologies Report pursuant to
information on the manufacturing industry. Also, OSTP publishes
Organization and Priorities Act of 1976 (42 U.S.C. 6683), and
section 603 of the National science and Technology Policy,
heads a working group through the Federal Coordinating Council
for science, Engineering and Technology which focuses
specifically on manufacturing technologies.
Section 506: In this section regarding the National Technical
Information Service, the Administration strongly prefers an
approach which allows borrowing necessary sums from the Treasury.
Title VI: This title directs NIST to offer unsolicited technical
EPA's regulatory responsibilities with respect to lead-based
advice to the Environmental Protection Agency (EPA) regarding
voluntary accreditation program) would not be reimbursable or
materials, some of which (e.g., technical criteria to implement a
otherwise funded. We do not believe these provisions are
3
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appropriate for this legislation. However, if such advice is to
and be offered, it should be made first to the Secretary of Housing
Urban Development (HUD), since HUD is the lead agency
regarding lead-based paint. At the very least, therefore, we
recommend the substitution of language which directs NIST "to
provide, to the extent funds are made available and to the extent
consistent with its other responsibilities, such technical
assistance as HUD and EPA may require in connection with the
implementation of a laboratory accreditation program and
development of detection technology standardization criteria with
respect to lead in paints, films, soil and dust.".
boards be established -- such as in section 401 (the Commission
General: The bill also requires that a number of commissions and
on Reducing Capital Costs for Emerging Technologies), section 501
OSTP), and section 506 as added at Subcommittee markup (the
(the High-Resolution Information Systems Advisory Board, within
National Quality Council), among others -- which impose
duplicative of existing programs.
inappropriate new requirements on the Executive Branch and are
of permanent commissions and boards to address issues which are
We object to the establishment
already being studied or can more effectively be addressed
through reports or other existing mechanisms, such as the Council
capital cost work at Treasury. The High-Reselution Information
Capital Costs for Emerging Technology is related to on-going
on Competitiveness. For example, the Commission on Reducing
and development efforts of saveral agencies. We are also
undertaken by the Council on Competitiveness, and the research
Systems Advisory Board appears to duplicate efforts being
concerned that the new National Quality Council would be
duplicative, and may diminish the value, of the Department's
successful Malcolm Baldrige National Quality Award Program.
4
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GENERAL COUNSEL OF THE
STATES
/
Washington. D.C 20230
UNITED STATES DEPARTMENT OF COMMERCE
of
APR 9 1991
Honorable George E. Brown, Jr.
Chairman, Committee on science,
Space and Technology
House of Representatives
Washington, D.C. 20515-1536
Dear Mr. Chairman:
a This is to indicate the Administration's serious
American possible amendment which may be offered at the concerns of about the
Technology Preeminence Act of 1991, which markup
an amendment. (ATP) for FY 1992. We strongly oppose adoption of such
Program authorize a $100 million loan program for the Advanced would Technology
We the believe this amendment would undermine the basic
competitive research and development in high-risk, generic grants with
industry, ATP, which is to fund cooperatively, through objective U.S. of
their only decrease the incentive for companies to
could not technologies. We are concerned that the loan pre- program
in their own resources to high risk ventures, but could commit
requirements. having much more short term goals due to loan also repayment result
Because under the of the high-risk nature of the proposals to
extensive program to be high. The loan program would also for such
loan likely to be funded, we expect the default rate companies a
are ATP and the significant number of small be funded which
and overhead costs for the National Institute entail Standards
Reconciliation score a significant Act of 1990, We believe the loan program Budget could
purpose of scoring the program under the Omnibus For
Technology (NIST), which administers the ATP. of the
of effect above-referenced appropriations of this scoring costs amount could and others of be the to we loan reduce anticipate. authority possible due A availability potential to the
core research. for the ATP cooperative grants program and NIST
NIST We also note that the ATP in still a relatively new
of approximately the $10 million. NIST is striving to meet totalling
only recently completed the first ten awards program.
loan efficient as possible. The addition of a substantial as new
and new cooperative grants program and to make it the effective demands
program could seriously impair these efforts.
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The
<<<<<<<<<<<<<<<<<<<<<<<<< there is
sincerely,
General Counsel
L. Willkie, II
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
APR 17 1990
S&T
MEMORANDUM FOR
Hollis McLaughlin
Assistant Secretary for Policy Management
Department of the Treasury
FROM:
Deborah L. Wince-Smith
DAWSiin
Assistant Secretary for Technology Policy
SUBJECT:
Recent Speeches of Secretary Brady and
Related Matters
I applaud the recent statements by Secretary Brady on the
importance of investments that create wealth. The objective of
increasing the use of modern technology by U.S. companies
depends on their ability to obtain low cost and 'patient'
capital.
We agree with the emphasis on the national savings rate. But
members of my staff and I are not convinced that increasing the
rate alone will substantially increase productive investments.
There are too many other things that people can do with their
savings, such as increasing their speculation, margin trading,
and consumption.
Policy options such as capital gains tax provisions and IRAs
need to foster genuine productive investments rather than just
feeding the short-term churning of financial markets. Attached
are some relevant comments we made recently on a draft paper,
entitled "Competitiveness and the Cost of Capital: Executive
Summary" prepared for the EPC Working Group on that subject.
Also attached for your information is our historical analysis
of the R&E tax credit legislation.
Attachments
CC: Thomas Murrin
Robert White
Allan Bromley
Olin Wethington
French Hill
Analysis of the Research Tax Credit*
Background
Under section 41 of the U.S. Tax Code, a 20 percent tax credit is
available for certain incremental expenditures related to two types
of research activities: (1) qualified research and (2) basic
research. The credit for qualified research activities, which is
the subject of this paper, is calculated based on the increase in a
taxpayer's qualified research expenditures in the current year over
a "base amount" for that year. The credit for basic research is
available to corporations funding certain research activities by
universities and other qualified organizations.
The research credit was enacted originally in 1981 as part of
President Reagan's first tax package. According to the 1981 House
Report 4242, the stated purpose of the credit was "to reverse [a]
decline in research spending by industry" and to "overcome the
reluctance of many ongoing companies to bear the significant costs
of staffing and supplies, and certain equipment expenses such as
computer charges, which must be incurred to initiate or expand
research programs in a trade or business."
Since its enactment, the concept of a research credit has enjoyed
almost universal support by Congress and the Administration, as well
as business. Controversies that have surrounded the credit have
dealt with the question of how to create an efficient mechanism to
encourage businesses to increase their R&D expenditures beyond the
level they would have spent in the absence of a credit, and how to
do this with a minimum revenue loss to the Treasury.
Major changes to the research credit were made by Congress in 1986,
1988, and 1989. The character of these changes clearly reflects the
tension between Congress' desire to ensure a strong R&D incentive
and Congress' need to exercise fiscal restraint. Beginning in 1986
the dollar value of the credit has been significantly reduced by
reducing the rate from 25 to 20 percent, narrowing the definition of
qualifying research activities, and disallowing section 174 research
deductions. On the other hand, the incentive value of the credit
has been increased by reforming the base amount and making the
credit available to new technology ventures. These changes are
detailed below.
*Prepared by the Office of Technology Policy, Technology
Administration, U.S. Department of Commerce, April 6, 1990.
04/06/90
1
Legislative History
The 1981 Act
Credit Rate and Base Period: As enacted in 1981 on a
temporary five-year basis, the rate of the research
credit was 25 percent. This rate applied to the excess
of a taxpayer's qualified research expenditures for the
taxable year over the taxpayer's "base period research
expenses," i.e., the average amount of such yearly
expenditures in the base period (generally the preceding
three years). At a minimum, the amount of base period
research expenses is treated as equal to 50 percent of a
taxpayer's qualified expenditures for the current year.
The incremental nature of the credit was designed
specifically to limit the credit only to those research
expenditures that would not have been undertaken in the
absence of the credit.
Definition of Qualified Research: Under the 1981 Act,
"qualified research" had the same meaning as the term
"research or experimental" under section 174 (the R&D
deduction), i.e., R&D in the experimental or laboratory
sense. However, certain expenditures such as research
conducted abroad and for the humanities or social
sciences were specifically excluded from eligibility for
the credit.
Limitations on Qualified Research Activity: Only certain
types of expenditures for qualified research activities
could be included in the research credit calculation.
These include in-house expenditures for research supplies
and wages paid to individuals who are supervising,
performing or directly supporting research activities.
In addition, 65 percent of the amount paid or incurred by
a taxpayer for contract research conducted on the
taxpayer's behalf could be included.
Availability: Significantly, the research credit was
made available only for research expenditures paid or
incurred in carrying on a trade or business of the
taxpayer. This meant that the credit was unavailable to
start-up firms, many joint ventures, or existing firms
entering a new line of business. Thus, from its
inception, the research credit encompassed a more limited
array of research activities than those eligible for
current deductibility under section 174.
04/06/90
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The 1986 Act
Credit Rate Reduction: The Tax Reform Act of 1986
significantly modified several important credit
provisions, the most important of which were reduction of
the rate from 25 to 20 percent and the tightening of the
definition of qualified research. According to
Congressional explanations of the 1986 Tax Reform Act,
the rate reduction was deemed appropriate "in the context
of the base broadening and rate reduction provisions of
the Act, and the continued allowance of full expensing of
research expenditures. "
Narrowing the Definition of Qualified Research: Following
several years of debate, Congress, Treasury, and
representatives from industry arrived at a compromise
definition that narrows the definition of "qualified
research" for R&D credit purposes. Proponents of a
narrower definition believed that the 1981 definition had
been applied too broadly, and that taxpayers had claimed
the credit for virtually any expense related to product
development regardless of whether the taxpayer's
activities involved any attributes of technological
innovation. Thus, the new definition is intended to
limit the research credit to research activities
undertaken to discover information that is technological
in nature and reflects a process of experimentation.
Specifically excluded activities include: research
conducted after a business component has been developed
to its functional and economic requirements, and
adaptation of existing business components (e.g.,
modifications for the needs of a particular customer).
While some have argued that the narrower definition
provides little incentive for the final phases of
technology commercialization and the adoption of advanced
manufacturing processes, industry has not advocated
reopening the issue. Considering the fact that both
Treasury and the Congress regard the definition as
settled, proponents of greater tax support for technology
commercialization might have more success in advocating a
separate tax provision (e.g., an investment tax credit
for the purchase of flexible computer automated
manufacturing equipment).
04/06/90
3
The 1988 Act
Deduction Disallowance: A new Code provision enacted by
the Technical and Miscellaneous Revenue Act of 1988
limits the deduction available when a taxpayer claims a
research credit. As enacted by the 1988 Act, section
280C(c) disallows section 174 research deductions for the
portion of a taxpayer's qualified R&D expenses that
equalled 50 percent of the taxpayer's research credit.
According to one estimate this new disallowance reduced
the credit's effective rate from 20 to 16.6 percent.
GAO Report: The 1988 Act also required GAO to report to
Congress on the operation and effectiveness of the
research credit, and to consider alternatives to the
structure of the credit. Issued in September 1989, the
GAO report concludes that the credit "stimulated between
$1 billion and $2.5 billion of additional research
spending between 1991 and 1995 at a cost of $7 billion in
tax revenues. " Although the revenue cost was greater than
the additional spending stimulated by the credit, the
report acknowledges that the credit may still be sound
tax policy due to the larger social benefits of increased
R&D activities. The GAO report also noted that the
research credit is difficult for the IRS to administer
and that the incentive value of the credit would be
increased if the moving-average base enacted in 1981 was
replaced with a fixed base indexed to GNP growth or some
other factor.
The 1989 Act:
More Deduction Disallowance: The Revenue Reconciliation
Act of 1989 amended section 280C(c) to further increase
the deduction disallowance to 100 percent of the research
credit, thereby further reducing the credit's effective
rate to 13.2 percent.
The Base Amount: The 1989 Act redefines the "base
amount" used to calculate the proper amount of the
incremental research credit. The three-year moving base
period that had applied since 1981 had been long
criticized as reducing the marginal incentive of the
credit because it so intricately linked current spending
to future base amounts. Thus, while an increase in
research expenditures would result in an increased credit
for that year, it would also result in increased base
period amounts and a tendency towards smaller credits in
04/06/90
4
the following three years.
The provisions adopted in the 1989 Act attempt to enhance
the credit's incentive effect while retaining a structure
designed to limit the credit to those expenditures that
would not have been undertaken in the absence of the
credit.
The new provisions define the base amount in terms of two
different elements: (1) the ratio of each company's
spending on qualified research activities during a five
year period to the company's total gross receipts during
the same period (referred to as the "fixed base
percentage"), and (2) the taxpayer's average annual gross
receipts for the four taxable years preceding the taxable
year for which the credit it claimed.
The fixed base percentage is the percentage that the
taxpayer's qualified research expenditures for the five
taxable years beginning in 1984 through 1988 is to the
taxpayer's total gross receipts for the same period.
(This percentage may not exceed 16 percent and is three
percent for certain categories of start-up companies).
The base amount is determined by multiplying this fixed
base percentage by the taxpayer's average gross receipts
for the four taxable years preceding the taxable year for
which the credit is claimed. Thus, for a company to
receive the credit its research expenditures in given tax
year must exceed a fixed base that is indexed to the
company's average growth in receipts for the four
preceding years. As under previous law, the base amount
used for R&D credit calculation purposes may not be less
than 50 percent of the taxpayer's qualified R&D
expenditures for the year.
Expanded Availability: The 1989 Act expands the
availability of the research credit by modifying the
requirement that expenditures must be incurred "in
carrying on a trade or business" to qualify for the
credit. With respect to in-house research expenditures
of certain start-up ventures, the trade or business
limitation is deemed to be satisfied if the principal
purpose of the taxpayer in making the expenditures is to
use the results of the research in the active conduct of
a future trade or business.
04/06/90
5
Need for Permanence
Lack of permanence is the most common business complaint
concerning the research credit. Re-extended for an additional
three years by the 1986 Act until December 31, 1988, the
credit has been renewed twice more on a one year basis by the
1988 and 1989 Acts. It is now scheduled to expire at the end
of 1990 (although as a practical matter, the credit will be
effective only through September 1990 due to a special
provision that prorates expenditures incurred before January
1, 1991, i.e., allowing only 75 percent of expenditures to
qualify for purposes of computing the credit). Thus, although
taxpayers did not know from year to year whether the research
credit would remain, it was available continuously from the
time of its enactment in 1981 through 1990.
The fact that Congress regarded research credit legislation as
experimental in 1981 was the principal rationale for making it
temporary. However, with the enactment of structural
refinements in subsequent years and the increasing recognition
that the provision's very impermanence may be its greatest
detriment, this rationale has lapsed. Currently, Congress'
desire to reduce revenue losses is the chief roadblock to
permanence as evidenced by the reduction of recent extensions
to only one year.
While it is generally believed that the research credit has
contributed to industrial R&D efforts and the general
prosperity of U.S. business, the start and stop nature of the
credit to date has created a degree of uncertainty that
impairs the ability of firms to make long-range plans.
Complex, sophisticated research programs must necessarily be
planned years in advance. With a constantly expiring credit
provision, however, firms must make such plans completely in
the dark without foreknowledge of the tax consequences.
Proponents of a permanent research credit argue that a stable
tax provision would permit firms to plan and undertake
research activities with a much greater assurance of the tax
consequences. Accordingly, firms could establish and expand
their research facilities and projects without the concerns
brought about by constantly changing tax rules.
Administration Position
The Administration's budget for FY 1991 "proposes to make the
20 percent research tax credit permanent by allowing 100
percent of total research expenses to be used for computation
04/06/90
6
of the credit for all years after December 31, 1989." The
Administration estimates that permanent enactment of the
credit will incur revenue loses of $0.5 billion in 1991, $0.9
billion in 1992, and $1.1 billion in 1993. To assure tax
stability the Administration concurs with industry that the
current research credit should be made permanent and allowed
to operate for a while before considering any further changes
or structural adjustments.
04/06/90
7
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
APR 10 1990
MEMORANDUM TO:
J. Antonio Villamil
Chief Economist
Office of Economic Affairs
FROM:
Deborah Wince-Smith
DWS
Assistant Secretary for Technology Policy
SUBJECT:
EPC Working Group on Competitiveness and the
Cost of Capital
Thank you for sending us a copy of Treasury's draft paper,
"Competitiveness and the Cost of Capital: Executive Summary. "
There is no question that much of the business community views
the U.S. cost of capital as high, and that this impedes our
competitiveness. Accordingly, the Working Group's efforts are on
target, and we have prepared the attached technical comments to
assist it, particularly from the standpoint of investment in
technology-based businesses.
As our comments indicate, it is important to break down the cost
of capital issue into its constituent elements in order to
develop effective policy initiatives. We should also ensure
consideration of related aspects, such as the 'patience' of
capital, internal financial accounting techniques which can skew
investment decisions, and measures to distinquish between the
efficiency of capital markets and the efficiency of capital uses.
Clearly, OEA and TA have a mutual interest in this area. We will
be co-hosting a Roundtable in conjunction with the National
Center for Manufacturing Sciences on April 25/26. The program
will discuss a number of these issues as they apply to small
manufacturing companies, and I understand Charlotte Zakour will
try to attend.
In addition, we would appreciate your assistance in holding a
Financing Technology Roundtable late this summer or early fall.
Next month we will send you a draft paper that begins to frame
the issues and gather views from others.
Attachment
TECHNICAL COMMENTS* ON THE PAPER,
"COMPETITIVENESS & THE COST OF CAPITAL:
EXECUTIVE SUMMARY"
(Paper prepared for the EPC Working Group
on Competitiveness and the Cost of Capital)
Section II: Defining the Cost of Capital
NEWS ITEM: On March 28, Oracle Systems Corporation, whose
revenues have doubled in 12 of the past 13 years, announced
that its quarterly earnings were a flat 18 cents a share,
instead of the anticipated 23 to 25 cents predicted earlier.
The difference was due to auditors' disallowance of sale-on-
trial contracts which customers might still decline. The
next day, Oracle closed at $17.50, down $7.875 or 31%.
(From a 4/5/90 New York Times article which discusses
business problems that Oracle may or may not have.)
Comment: The paper defines the cost of capital as the return a
corporation has to pay to attract investors. It might
be useful to define investors in terms that support the
concept of competitiveness. Investors, including
managers of large investment funds, can have a variety
of motivations, many of which have nothing to do with
the competitive success of the companies in which they
invest. Those who dumped oracle are an example.
Failure to distinguish between the types of investors
at the outset may limit the value of the paper.
Section III: Why the Cost of Capital is Important to Investment
Comment: It might help to distinguish the business objectives of
different groups of technology company owners or their
representatives. Some "owners" manage funds for others
and are measured on the basis of safety and consistent
earnings. Often, these "owners" even set their target
selling price for a stock when they buy it, and have no
continuing interest in the companies contained in their
portfolios. Expenditures made for long term
competitive benefits, particularly those such as R&D,
process improvement, and worker training which
accounting conventions treat as expense, destroy values
for this class of "owners." Should the study serve to
aid, discourage, or be neutral toward "owners" of this
type of disengaged owner/representative?
*Prepared by the Office of Technology Policy, Technology
Administration, U.S. Department of Commerce.
1
We are testing the idea that investors can be
classified as "conservative" or "productive." On a
typical cash flow chart, the conservative investor
seeks predictable and steady gains from the outset with
no chance for loss of principal. Buyers of Treasury
bills fit this profile. The productive investor, on
the other hand, accepts the fact that the value of the
investment will decline before it produces a revenue
stream which is intended to recover the investment plus
profits. The productive investor, who is needed to
finance new competitive products and new processes,
also recognizes that the entire investment may be lost.
Most investors fall between these two extremes, but it
appears that capital increasingly is being concentrated
toward the conservative end of the spectrum in the
hands of managers of large pension, mutual, and trust
funds. Since the objectives and methods of the two
types of owners are so different, the effects of the
cost of capital probably are also different.
Reducing the cost of capital is not a cure-all for
U.S. competitiveness. For example, sharp reductions in
the cost of capital will not change corporate
management strategies in such key areas as quality,
concurrent engineering or management, or the formation
of long term relationships between suppliers and their
primes (e.g., Xerox and Honda of America).
Section IV: Factors Impacting the Cost of Capital
Comment: It may be useful to compare investment rates with GNP
for the 1980s. For example, the February Business
Conditions Digest shows that commercial and industrial
loans outstanding in 1982 dollars grew about 74% while
GNP in fixed dollars grew only about 30%. A Federal
Reserve Board chart shows a similar pattern for 1953-
77. If other measures also show that investment grew
more than GNP, perhaps there is more of a capital
productivity problem than a cost of capital problem.
One way of looking at interest rates for an industrial
project is that they comprise at least four components:
(a) The price paid for the privilege of using the
money (overcoming the lender's liquidity
preference).
(b) Anticipated loss of the principal's purchasing
power due to inflation.
(c) The risk of loss of the principal or interest.
2
(d) The opportunity to earn significantly more than
the minimum acceptable interest rate.
But for the types of productive investments we are
seeking, with a period of negative cash flow, (c), the
risk of loss, becomes the most important factor. This
varies with each investment. It is outside the range
of macro economic control but is reflected in hurdle-
rate calculations. Since risk normally grows with time
because of unknowns like unanticipated technical
problems, market responses, and competitor actions, the
risk element of the interest rate normally will be
higher for longer range projects. It seems unlikely
that changes in (a), which most observers appear to
advocate, can offset the increases in (b) and (c) to
cause longer range investments.
Conservative capital managers must ignore (d) if
significant risk is indicated by (c) ; and, if they are
obliged to show steady growth, they cannot accept the
time delay. So, while (d) is what drives the truly
productive capital managers, it is of little interest
or incentive value to the conservative ones.
Savings and Macroeconomic policies
Comment: This section opens by saying that savings supplied by
individuals, governments, and businesses determine the
amount of funds which are available for investment. It
may be useful to point out that much U.S. functional
investment is treated as expense. Private autos used
for commuting are consumption while taxis and buses are
investment. Similarly, company expenditures for
knowledge-related activities such as education, worker
training, R&D, and most software are booked as current
expenses although they are made for long-term reasons.
If discrepancies such as these were resolved, the
investment rate and the savings rate might show more
favorably.
Market efficiency
Comment: This section begins by saying, "The extent to which
impediments to capital flows remain between nations and
within a given country determine how efficiently
capital is allocated, which in turn, influences its
cost to specific users. " As this paper is directed
toward competitiveness, it may be important to
distinguish between capital market efficiency and
capital use efficiency. The Japanese are widely cited
for both their competitiveness and their low capital
cost. But they created an inefficient capital market
to the degree that they restricted both capital exports
3
and low cost loans for consumption. For years, they
induced capital use efficiency by restricting capital
market efficiency.
There is a serious question of how much new capital
that is raised is used for productive investment.
According to an article in the April 2, 1990 New York
Times business supplement, from 1982 to 1989, new
investments by venture capital companies in buyouts and
acquisitions tripled. As of 1988, only 13% of venture
capital firms' dollar commitments went to startups.
And these are supposed to be the classic productive
capitalists.
It is not clear that new capital such as pension fund
contributions will be channeled into productive
investment as opposed to speculation. It also appears
that much of the pension fund money "invested" in
blocks of S&P 500 stocks did little more than inflate
their market price value while adding few productive
assets.
The Japanese are now having to cope with the effects of
low cost capital in land and stock speculation.
Agency Costs and Costs of Financial Distress
Comment: This may well be where most of the U.S. problem is
located. There seems to be a growing gap between the
"Techies" who need money for new products, processes,
training, etc., and the "Buckies" who control the
money. Although the theory of efficient markets rests
on a presumption of perfect knowledge, most of these
people just don't understand each other, and so far,
the Buckies have done well enough without even trying
to.
One of the elements of an interest rate calculation
discussed above was (c), or the risk of loss of the
principal or interest. There is also a (c') the risk
or cost of the capital manager's inability to
understand and evaluate the factors that cause (c).
This leads to the conclusion that the highest cost of
capital situations probably occur when (c) and (c') are
cumulative. Unfortunately, this is increasingly the
case, with most productive investments now carrying a
significant (c) factor, and capital increasingly being
concentrated in the hands of investment managers who
add the (c') factor. Whether or not one wants to call
this a cost of capital issue, it appears to be a
primary reason why productive investment is lagging.
4
The Japanese keiretsu are ideally suited to handle the
(c) and (c') problem. Members of the same industrial
group can, together, explain to their member megabank
how one company's advanced development program will
help the others, and an assured partial market can be
established even prior to the investment. Given
assurances like this, the project has a lower (c) cost,
and the lender who may be a member bank, customer, or a
supplier, has much less of a (c') problem. This is
where the Japanese can obtain a lower cost of capital.
Section V: Policy Implications
Comment: This section proposes policies that reduce the cost of
capital. As the debate proceeds on this, it would be
useful to distinguish the particular aspects of the
cost of capital affected--liquidity preference cost,
inflation adjustment, project risk, and investors' lack
of knowledge of the risk.
If the (c) and (c') problem is the real capital cost
driver, the actions mentioned above under Section IV
dealing with agency costs may be the most useful part
of the paper. For example, there is some evidence that
family controlled businesses outperform others because
they have more latitude to make long term strategic
investments. The Japanese keiretsu are similar.
Another mechanism to reduce the cost of capital in an
important area would be an investment tax credit for
the purchase/lease of flexible, automated computer
integrated manufacturing equipment, including related
training and software expenses.
5
fla: S&TWG
R&D IN THE FEDERAL BUDGET: 1991 AND BEYOND
D. ALLAN BROMLEY
Assistant to the President for Science and Technology
Executive Office of the President
AAAS Science and Technology Policy Colloquium
Washington, D.C.
April 12, 1990
1
When the President's FY 1991 budget was released on January 29, I held a
press conference at which I called it an excellent budget for R&D in what is otherwise
a very difficult budget year. I continue to believe this budget to be an excellent one
for R&D. The overall increases in the budget -- 7 percent total for federal R&D, with
a 12 percent increase in nondefense R&D and an 8 percent increase in basic research
-- reflect President Bush's strong belief that research and development are a vital
investment in our nation's future.
I am not going to describe in detail the components of the budget, because I
know that will be done during much of this colloquium. Rather, I thought I would
describe some of the thinking that went in to the formulation of the President's 1991
budget, and that will go into the formulation of future budgets. I will mention some
of the problems that this budget tries to address -- and some that will have to be
addressed in future budgets. And I will cover some of the long-term priorities for the
Office of Science and Technology Policy.
FCCSET AND PCAST
But before that, I thought I would describe some of the institutional changes
associated with OSTP that have been going on during the last several months,
changes that may have a substantial effect on future R&D budgets. First, and most
important, for the first time in the history of OSTP I now have the four Presidentially
appointed, Senate-confirmed Associate Directors called for in OSTP's founding
legislation.
One of the next most important developments, in my view, is the reorganization
and revitalization of the Federal Coordinating Council for Science, Engineering, and
Technology (FCCSET), which was established by that same legislation. FCCSET is
the interagency group within the Executive Office that is charged with reviewing,
integrating, and coordinating the R&D activities of the federal government that cut
2
across the missions of more than one federal agency. As such, FCCSET has the
potential to play a substantial role in shaping federal R&D efforts and guiding
budget decisions.
There have been two meetings of FCCSET since I came to Washington last
summer, and at both meetings we had excellent representation from the agencies, with
Cabinet secretaries and heads of independent agencies constituting the majority of
those in attendance. In general, we foresee a substantially altered and enhanced role
for FCCSET within the White House. For the first time since it was created,
FCCSET should be functioning as it was designed to function.
Much of the impetus for FCCSET's revitalization has come from the recent
success that several FCCSET committees have had in coordinating cross-cutting areas
of science and technology. For example, the Committee on Earth Sciences has taken
all of the formerly disparate research being done by federal agencies on the global
environment and has organized it into the U.S. Global Change Research Program -- a
coherent, government-wide approach to the scientific understanding of global change.
This is the kind of coordination I expect FCCSET to bring to many other important
areas of science and technology.
FCCSET has recently formed seven new umbrella committees, each chaired by
a high-level official of a Federal agency or department, to oversee broad areas of
science and technology. Subcommittees and working groups will be active within each
of these umbrella committees to examine, coordinate, and integrate federal activities
in selected areas of science and technology. The seven umbrella committees are in (1)
earth and environmental sciences (chaired by Dallas Peck, Director of the U.S.
Geological Survey), (2) education and human resources (chaired by James Watkins,
Secretary of the Department of Energy), (3) food, agriculture, and forest research
(chaired by Charles Hess, Assistant Secretary for Science and Education of the
Department of Agriculture), (4) international science and engineering (chaired by
Reginald Bartholomew, Under Secretary for Security Assistance, Science and
Technology of the Department of State), (5) life sciences and health (chaired by
James Mason, Assistant Secretary of the Department of Health and Human Services),
(6) physical, mathematical, and engineering sciences (chaired by Erich Bloch, Director
3
of the National Science Foundation), and (7) technology and industry (chaired by
Thomas Murrin, Deputy Secretary of the Department of Commerce).
I expect FCCSET to be a powerful influence in helping to shape and
implement federal science and technology policy. The planning and coordination
provided by FCCSET will allow for more effective use of the scientific and
technological resources of federal agencies. FCCSET will also help to develop and
review, in close cooperation with the Office of Management and Budget, annual and
long-range federal budget plans in selected cross-cutting areas of science and
technology.
Policy matters internal to science and technology will be resolved within
FCCSET. Policy input involving science and technology to broader issues with strong
political and economic components -- such as global change -- will be channeled to
the Domestic Policy Council or the Economic Policy Council for Cabinet-level
consideration and eventual presentation to the President through a new Working
Group that will report to both Councils and that I chair.
One problem with FCCSET in the past has been that it has had very little
input from the private sector. In the future, much greater input will come from the
President's Council of Advisors on Science and Technology, a group of 12
distinguished scientists and engineers that the President established in February.
PCAST has held two meetings thus far -- the first at Camp David in February, and
the second in the White House complex last month. The President and several of his
top advisers participated in all or part of both those meetings and were involved in
very candid discussions with the PCAST members.
Because I chair both FCCSET and PCAST, I have the opportunity to
coordinate their actions so that each benefits from the other's activities. For example,
much of the work of PCAST will be carried out through panels chaired by PCAST
members and with extensive private sector representation. These panels will in many
cases parallel the committee and subcommittee structure of FCCSET, so that the
concerns and activities of the private sector can be taken into account in the
deliberations of FCCSET committees and so that PCAST can be aware, in detail, of
relevant governmental plans and activities.
4
SETTING PRIORITIES IN THE FEDERAL BUDGET
As in the case of the Committee on Earth Sciences, FCCSET committees can
have a very substantial effect on federal R&D budgets. Working through OSTP and
through the Office of Management and Budget, FCCSET committees can scrub the
components of cross-cutting programs, making it possible to consider the program as
a whole, as a coherent national activity rather than a collection of agency programs.
Regarding the interactions between OSTP and OMB, our two offices have
established an excellent working relationship. Our respective staffs work together at
all levels to review the distribution of federal funds and to ensure that the
Administration's proposals to Congress represent the most efficient and effective
allocation of those funds. This interaction is also extremely important in the priority-
setting process that goes into the development of the Presidential budget requests.
It may be helpful to describe how this priority-setting process worked last fall,
because some variant of it will be applied in the future. Last fall Dick Darman and
his senior staff reviewed all R&D programs to determine an optimum allocation of
funds across the R&D agency budgets. I participated in virtually all of the reviews
dealing with science and technology and will continue to do so in future years. It was
a very difficult process, since almost all of the agency budget proposals were excellent
and worthy of support. Unfortunately, in the reviews that were completed this past
fall, the available budget resources would not stretch to cover all agency efforts -- nor,
I suspect, will there ever be enough resources to cover all of the proposals.
As a result, this last fall, OMB, with substantial input from OSTP, applied
three quite simple guiding principles in prioritizing the agency requests.
1. The first principle is that support is required for certain programs that
address national needs and national security concerns. Examples would be scientific
research to address global change, a preeminence in space, and adequate support for
the defense technology base. Out of these considerations, I might add, comes the
division between civilian and defense needs.
5
2. The second principle is the adequacy of support for basic research. In my
view, basic research--and particularly university-based, individual-investigator and
small group research--constitutes the heart of our science and technology enterprise.
Funding for "small science" must be guaranteed if American science, as a whole, is to
flourish. Thus, in evaluating agency programs, a concerted effort was made to ensure
that small science received high priority in the agencies' final programs.
3. The third principle is to ensure an adequate level of funding for the
scientific infrastructure and facilities in this country, including large facilities. Large
facilities, such as the superconducting supercollider, Space Station Freedom, and, in a
more distributed sense, the human genome project, are essential if American scientists
are have, in future, the facilities and the infrastructure necessary to take them to the
research frontiers of their fields. Once these facilities are built, they serve thousands
of scientists and make possible a scientific understanding of the world and universe
in which we live.
The final step in preparing the Administration's budget was a series of
meetings with the President. Dick Darman and I, in each case with the affected
Cabinet secretary or R&D agency head, sat down on a case-by-case basis with the
President to resolve the budget priorities within the constraints of the available
budget resources. The President made the final priority decisions -- as indeed he
should. The budget that was presented to the Congress this January was the end
result of this process, and the same basic process--with a substantially enhanced
FCCSET role--is expected to apply to the R&D component of federal budgets in the
future.
PROBLEM AREAS IN THE BUDGET
That process resulted in a good budget for science and technology this year,
but there remain several areas of concern.
6
One very serious problem involves the funding rate for grants at the National
Institutes of Health and the National Science Foundation. Despite nearly a decade of
funding increases at those two agencies, the money available for new, young
investigators is very tight. During fiscal year 1989, for the first time ever, the fraction
of excellent, peer-reviewed, new proposals that were actually funded by these two
agencies fell below 30 percent. The discouragement caused by a lack of funding is
particularly unfortunate at a time when the nation has a very serious need to recruit
more young people into scientific careers.
There are several reasons for this state of affairs. One is that the rate of
inflation for research in the physical and life sciences is higher than the consumer
price index (sophistication inflation), and the nonearmarked dollars available to NIH
and NSF have not kept pace.
Members of the scientific community also built part of this problem for
ourselves. For years, we argued for multiyear grants and contracts to cut down on
the amount of paperwork required to do research. Both NSF and NIH have
responded to those requests, and in the process they have built substantial "outyear
mortgages" for themselves.
Simple demographics are yet another contributing factor. About 87 percent of
all the scientists and engineers who have ever lived and worked are active today,
whereas only 4 percent of all the human beings to have lived on this planet are alive
today.
Finally, we must also recognize that, to some extent, we are the victims of our
own success. It has been a remarkable decade in science. The increased funds
devoted to research during the 1980s have produced a wealth of advances, which in
turn have created an exponentially increasing number of exciting opportunities
throughout the scientific disciplines. The number of high-quality applications is
growing steadily. We must find some way of dealing with the remarkable progress
that we have made.
Another area of concern for the budget involves how Congress will treat the
President's proposals. As you well know, the President proposes, but the Congress
disposes. There is a strong base of support on Capitol Hill for science and
7
technology, but the next few years will not necessarily be easy ones for science and
technology on Capitol Hill; nor are substantial increases for R&D guaranteed. There
are a variety of pressures on the federal budget that will continue to increase, and
support for R&D is eminently vulnerable.
First and foremost are the pressures of the deficit. The Gramm-Rudman-
Hollings deficit reduction act calls for a deficit target in fiscal year 1991 of $64
billion. In fiscal year 1992 the deficit target drops to $28 billion, and the year after
that to zero. Barring a very great reduction in defense spending--and I do not believe
that we can count on that at this time--savings will have to be found in current
programs.
Science and technology in the federal budget are also in direct competition with
programs that have very active and vocal constituencies. For example, funding for the
National Science Foundation and for NASA falls under the same Appropriations
Subcommittee that supports Veteran Affairs, Housing and Urban Development, and a
number of other independent agencies.
A useful way to consider the problem such Subcommittees face is to reflect on
the types of programs funded by the federal government. These can be divided into
three categories: (1) outlays for obligations made in the past, such as commitments
to Veterans or to Social Security (2) current needs, such as health care, the homeless,
or the war on drugs, and (3) investments in the future. Thus, in the case of the
National Science Foundation and other scientific agencies, the future is in direct
competition with current needs and past obligations. In such a situation, it is always
tempting to defer investments in the future and to respond to the much more
demanding needs of the past and present.
Given these pressures, Congress does remarkably well at supporting science and
technology. But Congress cannot do it alone. Research and development must have a
constituency that is more commensurate with the importance of science and
technology to our nation. I have talked a great deal this spring about developing a
constituency for science -- a constituency for the future -- that would support the
federal government's efforts to invest our future. Partially, this will depend on
developing a level of scientific literacy in the country that enables people to
8
understand, at least in outline, the importance of science and technology in almost
every aspect of modern life. But it will also rely on your efforts, as the individuals
who are at the interface between science and technology, the federal government, and
the public.
Those of you here this morning bear a very special responsibility in helping the
Congress to respond to the President's budget requests. It is essential that you make
known your concerns about the importance of continuing - and increasing -- the
nation's investment in research and development to your Representatives and
Senators. I have been asked repeatedly by members of Congress why, if the problems
of funding are as serious as I maintain them to be, these members have not heard
directly from their scientist and engineer constituents. This is a fair question.
It is simply no longer possible for the scientific and technology communities of
this nation to expect someone else to make the case for science and technology. We
need your help so that we can better help you and the nation.
FUTURE INITIATIVES
This problem of funding is, of course, one with which OSTP is continually
involved. But there are other areas in which our office has begun to focus, and let
me conclude today by mentioning a few of them. They include science and technology
for economic growth, global change, science and mathematics education, high
performance computing, materials science and engineering, and biotechnology.
SCIENCE, TECHNOLOGY, AND THE ECONOMY In the area of science and
technology for economic growth, much has been written about the proper role of the
federal government in promoting commercially important technologies. Some people
have pointed to the loss of market share in key industries and have advocated that
the U.S. government should move to bolster those industries through favorable tax
treatment or direct subsidies. But the Bush Administration believes that private
industry, not the federal government, knows what is best for private industry. The
9
Administration will not adopt a policy that has the effect of picking winners and
losers in the marketplace.
Nevertheless, the Bush Administration does acknowledge the very important
role for the federal government in supporting the development of generic, enabling
technologies. These are technologies that are important in a wide variety of
commercial applications and to our national security; however, no single company can
capture enough of the benefits to justify investing an adequate amount of R&D in
them. The rationale for investing in these enabling technologies is essentially the
same as that for investing in basic research: individual companies cannot bear the
cost and risk of such investments alone given the diffuse nature of the benefits.
In a speech to the American Electronics Association on March 7, President
Bush pointed specifically to the importance of these enabling technologies. He said,
"This Administration is committed to working with you in the critical precompetitive
development stage where the basic discoveries are converted into generic technologies
that support both our economic competitiveness and our national security. Here
again we can help to level the international playing field on which you compete."
Later in the speech, the President noted that he would charge the
Competitiveness Council, which is chaired by the Vice-President, with a new task: "to
find ways that American industry can better translate new ideas and technologies into
marketable products."
At OSTP, we believe that this is an important function for the Administration.
OSTP's Associate Director for Industrial Technology William Phillips, who was
confirmed last week, will be working with the President, with the Competitiveness
Council, and with the other parts of the Administration to further this work on
leveraging technologies.
The FY 1990 Defense Authorization Act requires OSTP to establish a panel to
merge the lists of critical technologies prepared by the Departments of Defense and
Commerce as of importance to the long-term national security and economic
prosperity of the United States. We are now in the process of setting up that panel
and beginning the examination of candidate technologies. The panel's first report will
be submitted to the President on October 1 of this year and transmitted to Congress
10
30 days later. This will be an important process within OSTP, and we will devote a
considerable amount of time to it this spring and summer.
GLOBAL CHANGE Another area that has occupied much of our time in the last few
months has been global change. Next week I will be cochairing, together with
Michael Deland of the Council on Environmental Quality and Michael Boskin of the
Council of Economic Advisers, an international White House Conference on Science
and Economics Research Related to Global Change. The conference will bring
together delegations from 18 countries, the Organization for Economic Cooperation
and Development, and the European Community for two days of discussions on the
key scientific and economic questions surrounding global change. The conference will
look at what is known about global change, what is not known, and how long will it
be before the remaining uncertainties are reduced. In this way, the conference will
complement other ongoing national and international activities that are contributing
to the formation of policies on this issue.
A primary function of the conference, which is complementary and supporting
the work of the U.N.-sponsored Intergovernmental Panel on Climate Change (IPCC),
will be that of emphasizing the importance of economics as the glue that binds
scientific understanding of global change phenomena with rational policy making --
both national and international -- in this area. Economic analyses have been
conspicuous by their absence in most discussions to date of national and international
policies concerning global change.
HIGH PERFORMANCE COMPUTING A third area of emphasis for our office will
be high performance computing -- an important example of an enabling technology for
industrial, research, and national security applications. Last fall I sent to the
Congress a report entitled The Federal High Performance Computing Program,
produced by the Computer Research and Applications committee of FCCSET. The
program laid out by the report had four distinct parts. The first concerns developing
the hardware that will, both with enhanced mainframes and through the use of
11
parallelism, make possible TERAOP computers operating at trillions of operations per
second. The second is developing the user friendly software technology and
algorithms that will permit full and efficient use of the hardware capabilities that are
now and will soon be available. The third is building a national fiber optic network
that will increase the accessibility of geographically dispersed users to these
supercomputers and reduce the incompatibility that now characterizes many computer
networks. One of the major new areas that I see as a target here is that of education
--- an area that has been more resistant to technological change than any other in
our society. Another is the small business that up to now simply has been denied
access to the power of major computer facilities. And the fourth is training the
personnel who will extend the tremendous advances that have been made in the past.
To further coordinate and increase high-level attention for high performance
computing, and to explore where there exists a basis for extending the Federal
program into a national program, I convened a meeting earlier this year of agency
heads and their deputy directors for R&D agencies that support high performance
computing. A second meeting of this group was held last month and further meetings
will be held as necessary. I expect that the result of this effort will be a far more
coordinated program and budget submission for FY 1992.
SCIENCE AND MATHEMATICS EDUCATION A fourth area of emphasis within our
office is that of science and mathematics education. I do not have time to discuss
education in detail, but I want to outline our overall approach. During his State of
the Union message, President Bush set down six goals for education, including making
American students the best in the world in science and mathematics education. The
Administration takes this set of national goals and objectives very seriously. The
President and the Governors have agreed to work with Congress, with education
groups, and with business to institutionalize a process to oversee the development of
ways to measure progress against these goals and report regularly to the nation on
whether they are being achieved.
We need to pursue a number of detailed steps to achieve the goals and
objectives that the President and Governors have established. We need more magnet
12
schools for science and mathematics that can inspire our most gifted young people.
We must focus on the "forgotten middle"--the technicians who will be running the
high-technology factories of the future. And we need to encourage more women and
minorities to study science and engineering and to pursue technical careers.
MATERIALS SCIENCE AND TECHNOLOGY A fifth area is that of materials
science and technology -- in my opinion an orphan area in the federal government
because it does not fall neatly into any given agencies or, indeed, into any of the
traditional scientific or engineering disciplines. Yet this area is of enormous
importance to almost every aspect of our increasingly technological society.
BIOTECHNOLOGY Finally, biotechnology may hold the promise in the coming
decades that electronics and other products of the physical sciences did in the
postwar decades. While we still hold a commanding lead in the related basic
research areas, we are falling behind on international competitiveness in the critical
scale-up of laboratory to industrial production facilities.
CONCLUSION
We are committed in OSTP, and indeed throughout the Administration, to
strengthening, to the greatest extent possible, the science and technology base on
which so much of our national future depends. But hard choices lie ahead: how best
to balance large projects in science against funding for individual investigators and
small groups, how to produce the steady stream of trained scientists and engineers
that industry and universities will require in the 21st century, how to increase
cooperation among universities, government, and the private sector.
The federal budget will reflect the decisions that are made in these and other
areas. But the decisions themselves will come from our vision for the future of
science and technology, from our deeper ideas of where we are and where we should
be going. The first rule of the budget examiner is that God is in the details, and if I
13
might apply that analogy to science, I would hope that as you delve into the numbers
that we have presented this year, you might also spend some time reflecting on the
broader import of those numbers.
And let me reiterate my plea for your individual help in building a national
constituency for science and technology. In a very real sense, those of you in this
morning's audience hold the future of American science and technology in your hands.
Working together, we can maintain it as a central part of our national future -- and
as perhaps the great adventure that is available to members of our species.
Document Originally
Attached to
Following Page
DEPARTMENT OF COMMERCE
Assistant Secretary
UNITED STATES OF AMERICA
for Technology Policy
DATE: 4/10/90
FROM THE DESK OF:
Deborah L. Wince-Smith
TO: Olen Wethington
Per our conversation.
For your information.
For appropriate action.
For draft of an appropriate reply for
my signature.
Please answer directly.
Let's discuss.
Please return with your comments.
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
APR 10 1990
file. set
working
MEMORANDUM TO:
J. Antonio Villamil
things
Chief Economist
Office of Economic Affairs
FROM:
Deborah Wince-Smith
Assistant Secretary for Technology Policy
SUBJECT:
EPC Working Group on Competitiveness and the
Cost of Capital
Thank you for sending us a copy of Treasury's draft paper,
"Competitiveness and the Cost of Capital: Executive Summary."
There is no question that much of the business community views
the U.S. cost of capital as high, and that this impedes our
competitiveness. Accordingly, the Working Group's efforts are on
target, and we have prepared the attached technical comments to
assist it, particularly from the standpoint of investment in
technology-based businesses.
As our comments indicate, it is important to break down the cost
of capital issue into its constituent elements in order to
develop effective policy initiatives. We should also ensure
consideration of related aspects, such as the 'patience' of
capital, internal financial accounting techniques which can skew
investment decisions, and measures to distinquish between the
efficiency of capital markets and the efficiency of capital uses.
Clearly, OEA and TA have a mutual interest in this area. We will
be co-hosting a Roundtable in conjunction with the National
Center for Manufacturing Sciences on April 25/26. The program
will discuss a number of these issues as they apply to small
manufacturing companies, and I understand Charlotte Zakour will
try to attend.
In addition, we would appreciate your assistance in holding a
Financing Technology Roundtable late this summer or early fall.
Next month we will send you a draft paper that begins to frame
the issues and gather views from others.
Attachment
TECHNICAL COMMENTS* ON THE PAPER,
"COMPETITIVENESS & THE COST OF CAPITAL:
EXECUTIVE SUMMARY"
(Paper prepared for the EPC Working Group
on Competitiveness and the Cost of Capital)
Section II: Defining the Cost of Capital
NEWS ITEM: On March 28, Oracle Systems Corporation, whose
revenues have doubled in 12 of the past 13 years, announced
that its quarterly earnings were a flat 18 cents a share,
instead of the anticipated 23 to 25 cents predicted earlier.
The difference was due to auditors' disallowance of sale-on-
trial contracts which customers might still decline. The
next day, Oracle closed at $17.50, down $7.875 or 31%.
(From a 4/5/90 New York Times article which discusses
business problems that Oracle may or may not have.)
Comment: The paper defines the cost of capital as the return a
corporation has to pay to attract investors. It might
be useful to define investors in terms that support the
concept of competitiveness. Investors, including
managers of large investment funds, can have a variety
of motivations, many of which have nothing to do with
the competitive success of the companies in which they
invest. Those who dumped oracle are an example.
Failure to distinguish between the types of investors
at the outset may limit the value of the paper.
Section III: Why the Cost of Capital is Important to Investment
Comment: It might help to distinguish the business objectives of
different groups of technology company owners or their
representatives. Some "owners" manage funds for others
and are measured on the basis of safety and consistent
earnings. Often, these "owners" even set their target
selling price for a stock when they buy it, and have no
continuing interest in the companies contained in their
portfolios. Expenditures made for long term
competitive benefits, particularly those such as R&D,
process improvement, and worker training which
accounting conventions treat as expense, destroy values
for this class of "owners. " Should the study serve to
aid, discourage, or be neutral toward "owners" of this
type of disengaged owner/representative?
*Prepared by the Office of Technology Policy, Technology
Administration, U.S. Department of Commerce.
1
We are testing the idea that investors can be
classified as "conservative" or "productive. " On a
typical cash flow chart, the conservative investor
seeks predictable and steady gains from the outset with
no chance for loss of principal. Buyers of Treasury
bills fit this profile. The productive investor, on
the other hand, accepts the fact that the value of the
investment will decline before it produces a revenue
stream which is intended to recover the investment plus
profits. The productive investor, who is needed to
finance new competitive products and new processes,
also recognizes that the entire investment may be lost.
Most investors fall between these two extremes, but it
appears that capital increasingly is being concentrated
toward the conservative end of the spectrum in the
hands of managers of large pension, mutual, and trust
funds. Since the objectives and methods of the two
types of owners are so different, the effects of the
cost of capital probably are also different.
Reducing the cost of capital is not a cure-all for
U.S. competitiveness. For example, sharp reductions in
the cost of capital will not change corporate
management strategies in such key areas as quality,
concurrent engineering or management, or the formation
of long term relationships between suppliers and their
primes (e.g., Xerox and Honda of America).
Section IV: Factors Impacting the Cost of Capital
Comment: It may be useful to compare investment rates with GNP
for the 1980s. For example, the February Business
Conditions Digest shows that commercial and industrial
loans outstanding in 1982 dollars grew about 74% while
GNP in fixed dollars grew only about 30%. A Federal
Reserve Board chart shows a similar pattern for 1953-
77. If other measures also show that investment grew
more than GNP, perhaps there is more of a capital
productivity problem than a cost of capital problem.
One way of looking at interest rates for an industrial
project is that they comprise at least four components:
(a) The price paid for the privilege of using the
money (overcoming the lender's liquidity
preference).
(b) Anticipated loss of the principal's purchasing
power due to inflation.
(c) The risk of loss of the principal or interest.
2
(d) The opportunity to earn significantly more than
the minimum acceptable interest rate.
But for the types of productive investments we are
seeking, with a period of negative cash flow, (c), the
risk of loss, becomes the most important factor. This
varies with each investment. It is outside the range
of macro economic control but is reflected in hurdle-
rate calculations. Since risk normally grows with time
because of unknowns like unanticipated technical
problems, market responses, and competitor actions, the
risk element of the interest rate normally will be
higher for longer range projects. It seems unlikely
that changes in (a), which most observers appear to
advocate, can offset the increases in (b) and (c) to
cause longer range investments.
Conservative capital managers must ignore (d) if
significant risk is indicated by (c) ; and, if they are
obliged to show steady growth, they cannot accept the
time delay. So, while (d) is what drives the truly
productive capital managers, it is of little interest
or incentive value to the conservative ones.
Savings and Macroeconomic policies
Comment: This section opens by saying that savings supplied by
individuals, governments, and businesses determine the
amount of funds which are available for investment. It
may be useful to point out that much U.S. functional
investment is treated as expense. Private autos used
for commuting are consumption while taxis and buses are
investment. Similarly, company expenditures for
knowledge-related activities such as education, worker
training, R&D, and most software are booked as current
expenses although they are made for long-term reasons.
If discrepancies such as these were resolved, the
investment rate and the savings rate might show more
favorably.
Market efficiency
Comment: This section begins by saying, "The extent to which
impediments to capital flows remain between nations and
within a given country determine how efficiently
capital is allocated, which in turn, influences its
cost to specific users.' " As this paper is directed
toward competitiveness, it may be important to
distinguish between capital market efficiency and
capital use efficiency. The Japanese are widely cited
for both their competitiveness and their low capital
cost. But they created an inefficient capital market
to the degree that they restricted both capital exports
3
and low cost loans for consumption. For years, they
induced capital use efficiency by restricting capital
market efficiency.
There is a serious question of how much new capital
that is raised is used for productive investment.
According to an article in the April 2, 1990 New York
Times business supplement, from 1982 to 1989, new
investments by venture capital companies in buyouts and
acquisitions tripled. As of 1988, only 13% of venture
capital firms' dollar commitments went to startups.
And these are supposed to be the classic productive
capitalists.
It is not clear that new capital such as pension fund
contributions will be channeled into productive
investment as opposed to speculation. It also appears
that much of the pension fund money "invested" in
blocks of S&P 500 stocks did little more than inflate
their market price value while adding few productive
assets.
The Japanese are now having to cope with the effects of
low cost capital in land and stock speculation.
Agency Costs and Costs of Financial Distress
Comment: This may well be where most of the U.S. problem is
located. There seems to be a growing gap between the
"Techies" who need money for new products, processes,
training, etc., and the "Buckies" who control the
money. Although the theory of efficient markets rests
on a presumption of perfect knowledge, most of these
people just don't understand each other, and so far,
the Buckies have done well enough without even trying
to.
One of the elements of an interest rate calculation
discussed above was (c), or the risk of loss of the
principal or interest. There is also a (c') the risk
or cost of the capital manager's inability to
understand and evaluate the factors that cause (c).
This leads to the conclusion that the highest cost of
capital situations probably occur when (c) and (c') are
cumulative. Unfortunately, this is increasingly the
case, with most productive investments now carrying a
significant (c) factor, and capital increasingly being
concentrated in the hands of investment managers who
add the (c') factor. Whether or not one wants to call
this a cost of capital issue, it appears to be a
primary reason why productive investment is lagging.
4
The Japanese keiretsu are ideally suited to handle the
(c) and (c') problem. Members of the same industrial
group can, together, explain to their member megabank
how one company's advanced development program will
help the others, and an assured partial market can be
established even prior to the investment. Given
assurances like this, the project has a lower (c) cost,
and the lender who may be a member bank, customer, or a
supplier, has much less of a (c') problem. This is
where the Japanese can obtain a lower cost of capital.
Section V: Policy Implications
Comment: This section proposes policies that reduce the cost of
capital. As the debate proceeds on this, it would be
useful to distinguish the particular aspects of the
cost of capital affected--liquidity preference cost,
inflation adjustment, project risk, and investors' lack
of knowledge of the risk.
If the (c) and (c') problem is the real capital cost
driver, the actions mentioned above under Section IV
dealing with agency costs may be the most useful part
of the paper. For example, there is some evidence that
family controlled businesses outperform others because
they have more latitude to make long term strategic
investments. The Japanese keiretsu are similar.
Another mechanism to reduce the cost of capital in an
important area would be an investment tax credit for
the purchase/lease of flexible, automated computer
integrated manufacturing equipment, including related
training and software expenses.
5
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DRAFT TEXT OF PRESS RELEASE
ON S&T WORKING GROUP AND FCCSET REORGANIZATION:
WHITE HOUSE POLICY APPARATUS
FOR SCIENCE AND TECHNOLOGY
For Immediate Release
March 21, 1990
The White House today announced the appointment of D. Allan Bromley, Assistant to
the President for Science and Technology and Director of the Office of Science and
Technology Policy, as chairman of the White House Working Group on Science and
Technology. The Working Group currently reports to the Economic Policy Council
and assists in the formulation, coordination, and implementation of Administration
policies involving science and technology. The Working Group will also develop all
science and technology issues related to domestic and social policy for consideration
by the Domestic Policy Council. Members will include White House officials and
senior representatives from all Federal agencies and departments with substantial
involvement in scientific and technological issues.
The Working Group will analyze the scientific and technological components of
economic and domestic policy issues, including Federal encouragement of investment
research and development by the private sector; cooperation among government
laboratories, university laboratories, and business; and access by American firms to
international research and technology.
In addition, the Working Group will act as a conduit through which the deliberations
and actions of the Federal Coordinating Council for Science, Engineering, and
Technology (FCCSET) that relate to policy issues broader than science and technology
can be considered by the Economic Policy Council or the Domestic Policy Council.
In a related action, Dr. Bromley announced a substantial restructuring of the Federal
Coordinating Council for Science, Engineering, and Technology, which is charged with
reviewing and coordinating Federal activities in science and technology that cut across
the missions of more than one Federal agency. Dr. Bromley is the chairman of
FCCSET, and a list of the new FCCSET membership is attached. Other agencies
may be requested to participate in meetings of the FCCSET concerned with matters of
interest to those agencies.
FCCSET is in the process of forming seven umbrella committees, each chaired by a
high-level official of a Federal agency or department, to oversee broad areas of science
and technology. Subcommittees and working groups will work within each of these
umbrella committees to examine, coordinate, and integrate Federal activities in
selected areas of science and technology.
The Federal Coordinating Council for Science, Engineering, and Technology (FCCSET)
was originally established in 1976 by Public Law 94-282, the National Science and
Technology Policy Organization and Priorities Act, which also established the Office of
Science and Technology Policy. FCCSET is charged with:
Providing for more effective planning, coordination, and administration of
Federal scientific and technological programs.
0
Identifying research and development needs, including areas requiring
additional emphasis.
Achieving more effective use of the scientific and technological resources of
Federal agencies.
Developing and reviewing, in close cooperation with the Office of
Management and Budget, annual and long-range Federal budget plans in selected
cross-cutting areas of science and technology.
0
Furthering international cooperation in science and technology.
FCCSET is also charged with identifying scientific and technological issues of
importance to the nation and with developing authoritative scientific and technological
expertise and advice for the Executive Branch.
FCCSET also expects to receive information and advice on issues of science and
technology from the President's Council of Advisers on Science and Technology, which
the President established on February 2. PCAST consists of 12 distinguished
scientists and engineers from academia and industry and is chaired by Dr. Bromley.
PCAST members will chair panels on specific areas of science and technology that in
some cases will parallel the committee structure of FCCSET, allowing private sector
input into high-level government policy making.
FEDERAL COORDINATING COUNCIL
March 1990
FOR SCIENCE, ENGINEERING & TECHNOLOGY
MEMBERSHIP
Chairman: D. Allan Bromley
Assistant to the President for Science and Technology
Director, Office of Science and Technology Policy
Members: Manuel Lujan
Secretary of the Interior
Clayton Yeutter
Secretary of Agriculture
Louis Sullivan
Secretary of Health and Human Services
James D. Watkins
Department of Energy
Lauro F. Cavazos
Secretary of Education
William K. Reilly
Administrator
Environmental Protection Agency
Donald J. Atwood, Jr.
Deputy Secretary of Defense
Thomas J. Murrin
Deputy Secretary
Department of Commerce
Alfred A. DelliBovi
Under Secretary
Department of Housing and Urban Development
Elaine Chao
Deputy Secretary
Department of Transportation
Anthony J. Principi
Deputy Secretary
Department of Veterans Affairs
Richard McCormack
Under Secretary for Economic Affairs
Department of State
Richard H. Truly
Administrator
National Aeronautics and Space Administration
Erich Bloch
Director
National Science Foundation
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
MAR 26 1990
SET
Dr. Kenneth P. Yale
Special Assistant to the President
Domestic Policy Council
The White House
Washington, D.C. 20500
Dear Dr. Yale:
On behalf of the Department of Commerce, I would like to
invite you to a meeting of the Interagency Committee for Federal
Laboratory Technology Transfer. The meeting will be held on
April 4 at 1:30 p.m. in room 4830 of the Department of Commerce.
During the meeting the Committee will review the responsi-
bilities of Federal agencies in implementing the Federal
Technology Transfer Act and Executive Order 12591. We hope you
can attend this important meeting.
The Department of Commerce is required by the Federal
Technology Transfer Act to report to the President and Congress
every two years on agency implementation of that Act. The next
report will cover the period ending in October 1990. Because
Congressional oversight committees have indicated that they plan
to carefully scrutinize each agency's implementation plan, the
meeting will focus on agency responsibilities under the Act.
Enclosed is background information on the Department's first
biennial report on technology transfer and a copy of testimony by
Lee Mercer, Deputy Under Secretary for Technology, on commercial-
ization of Federally-funded research.
Sincerely,
Deborah L. Wince smith
Deborah L. Wince-Smith
Enclosures
MEMBERSHIP OF THE
INTERAGENCY COMMITTEE FOR FEDERAL LABORATORY TECHNOLOGY TRANSFER
Commerce
Deborah Wince-Smith
Assistant Secretary for Technology Policy
U.S. Department of Commerce
Room 4813, Hoover Building
14th Street and Constitution Ave., N.W.
Washington, D.C. 20230
Phone: 377-1581
Agriculture
Dr. Charles E. Mess
Assistant Secretary for Science and Education
U.S. Department of Agriculture
Room 217W, Adninistration Building
Washington, D.C. 20250
Phone: 447-5923
Interior
John Sayre
Assistant Secretary for Water and Science
U.S. Department of the Interior
18th & C Street, N.W.
Room 6660
Washington, D.C. 20240
Phone: 343-2186
EPA
Frich Bretthauer
Assistant Administrator for Research
and Development
U.S. Environmental Protection Agency
Waterside West Building, Room 913
Washington, D.C. 20460
Phone: 382-7676
Air Force
John J. Welch, Jr.
Assistant Secretary for Acquisition
U.S. Department of the Air Force
Pentagon, Room 4E964
Washington, D.C. 20330-1000
Phone: 697-6361
Army
George E. Dausman
Assistant Secretary for Research, Development,
and Acquisition
U.S. Department of the Army
SARD-ZA
Pentagon, Room 2E-661
Washington, DC 20310-0103
Phone: 695-6153
Navy
Gerald Cann
Assistant Secretary for Research, Development,
Acquisitions
U.S. Department of the Navy
Pentagon, Room 4E732
Washington, D.C. 20350
Phone: 695-6315
Defense
Dr. George Millburn
Deputy Under Secretary for Research and
Advanced Technology
U.S. Department of Defense
Pentagon, Room 3E114
Washington, D.C. 20301-3000
Phone: 695-5036
NASA
Kenneth S. Pedersen
Deputy Associate Administrator,
External Relations
National Aeronautics and Space Administration
Federal Office Building 6, Room 7021
400 Maryland Avenue, S.W.
Washington, D.C. 20546
Phone: 453-8310
Energy
James F. Decker,
Acting Director, Office of Energy Research
U.S. Department of Energy
Room 7B-058
1000 Independence Avenue, S.W.
Washington, D.C. 20585
Phone: 586-5430
Transportation
Mark Dowis
Executive Assistant to the Administrator
Research and Special Programs Administration
U.S. Department of Transportation
Room 8410
400 Seventh Street, S.W.
Washington, D.C. 209590
Phone: 366-4433
HHS
Dr. Frank E. Young
Deputy Assistant Secretary for Health,
Science, and Environment
U.S. Department of Health and Human Services
Humphrey Building, Room 701-H
200 Independence Avenue, S.W.
Washington, DC 20201
Phone: 245-6811
OSTP
Dr. William Phillips
Associate Director for Industrial Policy
Office of Science and Technology Policy
New Executive Office Building, Room 5026
Washington, D.C. 20506
Phone: 395-3125
USTR
S. Bruce Wilson
Assistant U. S. Trade Representative
Office of the U.S. Trade Representative
Room 401A
600 17th Street, N.W.
Washington, D.C. 20506
Phone: 395-7320
VA
Stephen Litwin
Deputy Assistant Chief Medical Director
Veterans Administration Central Office
810 Vermont Avenue, N.W.
Washington, D.C. 20420
Phone: 233-2618
CPSC
Dr. Robert D. Verhalen
Associate Executive Director
5401 Westbard Avenue, N.W.
Washington, D.C. 20207
Phone: 301-492-6440
STATEMENT OF LEE W. MERCER
DEPUTY UNDERSECRETARY FOR TECHNOLOGY
BEFORE THE HOUSE SUBCOMMITTEE ON REGULATION,
BUSINESS OPPORTUNITIES, AND ENERGY
OCTOBER 5, 1989
Thank you for this opportunity to testify before the
Subcommittee on an issue which is very important to the
Department of Commerce-- increasing the commercialization of
federally funded research by United States industry.
The U.S. Government funds approximately one-half of all our
R&D, supports about 80% of U.S. basic research and employs one-
sixth of our scientists and engineers. We must translate this
investment of the American taxpayer into new products, jobs, and
business opportunities if we are to remain competitive in an
increasingly tough international economy.
We have made enormous strides foward in the last eight
years. This is not to say that all barriers have been overcome.
Nevertheless, we have removed the main legal obstacles preventing
joint R&D efforts between our federal laboratories, universities
and the private sector. The public sector is becoming
increasingly skillful in applying new authorities allowing our
universities and federal laboratories to manage their
technologies. We should not lose sight of this substantial
progress.
By removing these barriers, U.S. industry can now draw from
the world's largest research pool. They can tap into long-range,
high risk research using unique facilities which took billions of
dollars to establish and are impossible for the private sector to
replicate. This ability is increasingly important as our
market. companies operate in today's complex and competitive world
As Secretary Mosbacher stated in his recent report to the
2
President and Congress on the implementation of the Federal
Technology Transfer Act, in order to judge how far we have come,
we must remember where we started. After World War II the basic
policy toward all Government funded R&D was essentially a
Marshall Plan for technology. Any patentable or commercially
valuable discoveries made with federal funding were freely
available to anyone who chose to exploit them -- domestic or
foreign.
The policy of licensing patents resulting from federally.
supported R&D non-exclusively, and the lack of incentives for the
public sector institutions to pursue commercially important
research, led to a widening gap between the U.S. public and
private sectors. Ignoring the observation of President Lincoln
that the patent system was designed to "add the fuel of interest
to the fires of genius, few incentives were available to reward
our federal scientists or their laboratories for successful
technology transfers. The result was predictable.
President Johnson conducted a study of the Department of
Health, Education and Welfare (now HHS) in 1968 and found that
not one drug had ever been commercialized when the Government
owned the patent. A decade later the situation had not improved.
By the late 1970's the U.S. Government had stockpiled over 28,000
patents on its shelves and was licensing less than 5% of them
for development. It routinely took up to 3 years for
universities to receive final answers on their petitions to
Washington for ownership of the inventions they made with federal
support.
3
Recognizing that a new approach was needed in a hurry,
Congress tried a revolutionary approach-- allowing for
decentralized technology management coupled with incentives for
success. Passage of the Bayh-Dole Act in 1980 (P.L. 96-517, as
amended) for universities and small business contractors, and the
Federal Technology Transfer Act in 1986 (P.L. 99-502) for
federally owned and operated laboratories, were clear breaks with
the past. President Reagan in Executive Order 12591 in April,
1987 made these laws the centerpieces of the Administration's
technology management policy. However, it takes time for the
full benefits of this change to become fully evident.
We have already seen significant economic benefits from the
new policies. The U.S. biotechnology industry was greatly
assisted because universities were allowed to manage their
technologies without interference from Washington. This
permitted the creation of a series of small biotechnology spin-
off companies around our major universities.
Universities adapted this model to other promising
technologies. The University of Utah, for example, became a
leader in medical device technology creating more than 35
small-high tech businesses in the last 8 years. And, it is no
accident that Silicon Valley, Route 128 in Boston, and Research
Triangle in North Carolina are located near federally-supported
universities. States and local governments are increasingly
citing their universities as centers of their economic
development plans.
This progress in commercializing university R&D has been
4
made without sacrificing the prime educational mission of the
universities. Indeed, according to the National Science
Foundation, since 1980 university scientific publications have
steadily increased. Universities are reporting that their
ability to perform joint R&D with. industry is also proving very
beneficial in better training our future scientists and engineers
in state-of-the-art research.
This experience is important to the rest of Government. In
crafting a new policy to increase technology transfer from
federally-owned and operated laboratories to U.S. industry,
Congress drew on the successful university model. The enactment
of the Federal Technology Transfer Act in 1986 gave similar
authorities to manage inventions to these laboratories as
universities received in 1980. In analyzing how successful these
laboratories have been in utilizing the new Act, it is helpful to
compare their progress with that of the universities who went
through the same learning curve six years earlier.
The first indicator of the impact of the Bayh-Dole Act on
campus was a jump in university patent disclosures after years of
stagnation. This was followed by a steady increase in royalty
revenues as university inventions were licensed to industry and
began to be marketed. As more and more universities identified
promising research on campus and became aware of the successes of
other schools, a great interest was shown in training campus
technology managers to successfully negotiate with industry. The
membership of the Society of University Patent Administrators,
for instance, increased from less than 50 members in 1978 to more
5
than 600 today. Universities began trading model agreements,
royalty sharing plans for their scientists, and policies for
guiding the faculty in using the new law. Different universities
applied different models to meet their specific needs, but this
information exchange allowed them to greatly speed up the
process.
The federally owned and operated laboratories are showing
exactly the same traits as the universities in the early 1980's.
The Department of Commerce has already seen its patent
applications triple since enactment of the Federal
Technology Transfer Act. The Department of Agriculture reported
76 inventions in FY 1987 and 139 in FY 1988. The Army's
inventions disclosures increased 40% and the Navy's 30% during-the
last year. Health and Human Services reported that as many
2.
inventions were dislosed during the first nine months of 1988 as
in all of 1987.
The National Technical Information Service reported a
quadrupling of federal royalty income between FY 1985 and FY 1988
when royalties reached $5.6 million. While modest compared to
current university royalties, this growth is indicative of the
excitement caused by the Federal Technology Transfer Act and
should show steady growth each year.
Former Secretary of Commerce Baldrige recognized the need
for the agencies to have a support network similar to that
developed by the universities, and formed the Interagency
Committee on Federal Technology Transfer to quicken the learning
process.
6
The Committee, which Commerce chairs, is composed of
Assistant Secretary's from each agency responsible for
implementing the Federal Technology Transfer Act. A working
group of senior staff meets approximately every six weeks. Over
the last two years the working group developed models for
answering questions like: how do you delegate authorities to the
laboratories pursuant to the Act, what is the relationship
between the labs and headquarters for reviewing agreements, what
types of arrangements are appropriate and which are not, what
percentage of royalties should an agency share with its
personnel, should all of the remaining royalties go to one
laboratory or should a certain percentage go to other
laboratories, how do agencies advertise their research to insure
equal access by different companies, do current agency procedures
1.
on conflict of interest need revision or clarification for the
Act, how do agencies identify foreign owned or controlled
companies as required by the law, how do agencies account for
cost sharing arrangements with industry under the Act, how do
agencies reconcile the Freedom of Information Act with the
Federal Technology Transfer Act, etc. These are not simple
questions, yet until the laboratories received guidance on them
full use of the Act was not possible.
In passing the law, Congress recognized that the answers to
such questions would vary from agency to agency depending on its
mission. For example, the needs of a regulation-oriented agency
such as the Food and Drug Administration are considerably
different from those of the Department of Commerce.
7
Nevertheless, as Secretary Mosbacher pointed out in his July,
1989 report to the President and Congress on implementation of
the Act, substantial progress has been made in developing the
infrastructure for applying the new law. The tools for success
have been painstakingly created and the Administration now
expects each agency to use them.
While it is not appropriate for the Department of Commerce
to judge the different models adopted by the agencies, we do take
seriously our responsibility to report objectively on their
performance. In our next report, due in 1990, we will cite
objective indicators such as numbers of agreements signed by each
agency, inventions disclosed, and royalties received so that the
President and Congress can make informed judgements on how
various models are working.
There has already been considerable success in using the Act.
Secretary Mosbacher cited more than 100 cooperative research and
development agreements (CRADA's) already signed in the first two
years of the law. This number has steadily increased since the
report was written. There are now about 200 agreements in effect
and many more pending.
Recent articles like that appearing in Science on
September 19, 1989: "NIH, Inc.: The CRADA Boom" illustrate the
considerable impact the Act is having on our agencies, its
laboratories, and most importantly, on research scientists.
Washington Technology in its September 14, 1989 issue cites the
implementation of the Act by the Air Force in its story "CRDA's
Tie Military, Civilian Research." The Department's National
8
Institute of Standards and Technology has been a leader in
implementing the Act, and is completing approximately four
agreements a month.
Other exciting new cooperative efforts are underway which
would have been impossible just a few years ago. The Secretary
cited the formation of the Biotechnology Research and Development
Consortia (BRDC) in Peoria, Illinois. BRDC is a joint research
effort between a USDA lab, the University of Illinois, six U.S.
companies and the State of Illinois. Such projects have enormous
potential for helping the U.S. stay on the cutting edge in high
technology. This effort was initiated by the City of Peoria
after identifying its local technology assets. Such
decentralized economic leadership is our most appropriate
technology transfer model.
The Department intends to vigorously address the remaining
obstacles agencies now face. One of the most challenging is
involving a larger segment of U.S. industry in commercializing
federally funded research. The Department through its new
Technology Administration will be undertaking a major initiative
to alert the private sector to the recent changes in the law
allowing them to perform joint. R&D with universities and
federal laboratories. We will focus on small as well as large
companies in this effort. The working group of the Interagency
Committee on Federal Technology Transfer has scheduled a meeting
later this month with industry leaders to exchange ideas for this
campaign.
The Technology Administration will also work toward
9
developing more efficient training methods for our laboratory
technology managers. We will work closely with the Federal
Laboratory Consortium in this effort. It is one thing to
receive legal authority to negotiate a joint research project
with industry, and quite another thing to actually do it. This
type of nuts-and-bolts information is increasingly important.
In summary, we have made considerable progess in breaking
down the formidable barriers which had grown up over forty years
between universities, federal laboratories and American industry.
Agencies are taking this responsibility seriously. The
Department of Commerce sees its role as a facilitator of this
effort. The Department will use its reporting responsibilities
to objectively monitor agency compliance with Executive Order
12591. The Department will continue to strive to promote
increased cooperation between our public and private sectors
which will greatly strengthen the U.S. economy.
10
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
for sot walls passp
March 22, 1990
MEMORANDUM FOR THE SECRETARY
OfWeee Smith
FROM:
DEBORAH L. WINCE-SMITH
Assistant Secretary for Technology Policy
SUBJECT:
INTELLECTUAL PROPERTY RIGHTS IN THE GLOBAL MARKET
Attached is an excellent case study the Technology Administration
developed about the importance of intellectual property rights in
the global market, and the direct linkage to our federal
technology transfer initiative. Corning Glass protected its
fiber optic technology advantage over a Japanese competitor by
using its patent portfolio. Since Corning now has a cooperative
agreement with a federal laboratory, we can appreciate the
importance of intellectual property right sections in government-
to-government science and technology agreements. Companies such
as Corning must have confidence that foreign competitors will not
indirectly obtain access to U.S. technology, when they cannot
obtain it directly.
Attachment
CC:
Thomas Murrin
Wayne Berman
Bruce Soll
Wendell Wilkie
Michael Farren
Michael Skarzynski
Harry F. Manbeck
DEPARTMENT OF COMMERCE
UNITED STATES DEPARTMENT OF COMMERCE
The Assistant Secretary for Technology Policy
UNITED STATES OF AMERICA
Washington, D.C. 20230
23 MAR 1990
MEMORANDUM FOR LEE W. MERCER hee WMerier
Deputy Under Secretary, Technology Administration
DEBORAH L. WINCE-SMITH OCTUS
Assistant Secretary for Technology Policy
FROM:
MARK JAMES Chief LIEBERMAN V. Counsel LACY for Technology
Director, Office of\Technology Commercialization
SUBJECT:
THE IMPORTANCE OF ENFORCEMENT OF INTELLECTUAL
PROPERTY RIGHTS - A CASE STUDY.
This memo summarizes the Corning Glass Works V. Sumitomo,
U.S.A. case, in which Corning, the inventor of optical fibers,
successfully protected its patents from infringement and stopped
Sumitomo from marketing optical fibers in the United States. The
case demonstrates that protecting intellectual property rights
from infringement can provide U.S. companies with a competitive
advantage.
The Corning Case
U.S. companies are increasingly recognizing that they must
not only acquire an advantage for their company over competitors
by superior research and engineering efforts, but that they must
also protect that hard earned advantage with the same vigilance
they used to acquire it. Corning, a New York glass manufacturer,
began researching the possibility of transmitting information by
light in 1966. After sixteen years of research and spending
several hundred million dollars to develop the product and a
market, Corning made its first major sale in 1982. Just as
Corning was achieving commercial success however, Corning noticed
that its Canadian customer, Canadian Cable and Wire, was using
optical fibers based on Corning's patents. The fibers were made
by Sumitomo, the Japanese electronics firm.
Corning faced several choices when they learned Sumitomo was
manufacturing optical fiber based on Corning's patents. First,
Corning could ignore it; two, Corning could license the
technology to Sumitomo; or lastly, Corning could sue to protect
its patents. Corning chose to sue. As David Duke, Corning's
optical fiber manager explained, "Few materials companies put as
much into research as Corning. Over $100 million a year. Out of
all that the firm might get one major breakthrough a decade. The
2
only way to continue a high level of research was to get the
maximum possible profit from each of those breakthrough
products." In essence, research and development was not worth
doing, if it could not be legally protected.
Corning sued Sumitomo and Canadian Wire and Cable in the
Canadian courts and won. Sumitomo was forced to stop shipping
optical fibers into Canada. Sumitomo then began shipping optical
fibers into the United States. Rather than fight Sumitomo in the
courtroom, Corning decided to protest to the International Trade
Commission (ITC). A favorable ruling would prevent Sumitomo and
other importers from shipping infringing optical fibers into the
United States. The ITC ruled that Sumitomo had infringed
Corning's patents, but could not find the necessary injury to bar
Sumitomo's imports since Sumitomo's import sales had suddenly
become so small.
Sumitomo had in the meantime, converted a research center in
North Carolina into an optical fiber manufacturing center and
began producing optical fiber in anticipation of an adverse ITC
ruling. (Sumitomo's U.S. production of optical fiber would not
be subject to the ITC decision, because the ITC has jurisdiction
only over imports.) Corning again sued, this time in U.S.
district court, claiming that Sumitomo was infringing its
patents. Corning won, Sumitomo was ordered to close its North
Carolina plant and pay Corning for past damages.
Corning is now the primary seller of optical fiber in the
United States, after several years of lawsuits and spending
millions of dollars to enforce its patents. Its investment in
optical fibers has paid off, not only because it kept investing
in technology nobody else believed in or would buy, but because
it spent the resources to defend its patents. Never complacent
Corning has recently entered into a cooperative agreement with
several federal laboratories for further fiber optics research.
Intellectual Property Rights
As the Corning case demonstrates, companies need to
vigorously defend their patents and other intellectual property
rights to protect their markets. Other firms will infringe on
another company's patents to reap commercial rewards, if
permitted. As the District Court in the Corning stated,
There is no evidence that Sumitomo made any effort to change
the composition of its optical waveguide fibers to avoid
Corning's 915 patent after the ITC and Canadian court
decisions.
To proceed thereafter to manufacture and
sell the same fibers without changes designed to avoid
infringement can only be construed as outright defiance or
baseless optimism. 671 F.Supp. 1369,1401 (S.D.N.Y. 1987).
3
Other firms may not be so bold as Sumitomo, but they will exploit
opportunities to profit from unprotected intellectual property.
In such an environment, the U.S. government and U.S.
corporations need to recognize that U.S. technology is a major
national economic asset, but only if it can be adequately
protected from theft or misappropriation. U.S. firms need to
appreciate the interest they have in protecting intellectual
property from infringement. Firms must begin to devote as much
attention to intellectual property rights, as they do to
research, development, and innovation. Some have even suggested
integrating intellectual property right strategies into the
concurrent engineering process. Firms that fail to protect their
inventions, especially as ideas, information, and technology
become the center of their ability to compete, will increasingly
find other companies copying their product and selling it
cheaper.
Similarly, the U.S. government has a policy interest in
emphasizing that the legal protection of intellectual property is
as important as research and development. Firms may be reluctant
to participate in cooperative research and development
agreements, or the Advanced Technology Program, if the federal
government does not vigorously protect the intellectual property
developed under the agreement from infringement.
Cooperative agreements and overall government policy should
be structured so the technology developed remains with the
participating company and can be protected from infringement by
other firms who have not invested in similar research and
development efforts. This proper protection and use of
technology and information will further encourage innovation, new
product and service development, efficiency, and competitive
advantage in the global marketplace.
Olin Wethington
EXECUTIVE SECRETARIAT CORRESPONDENCE PROFILE
ROFILE #: 91-98477
CREATE DATE: 05/03/91
DDRESSEE: Brady, Nicholas F.
AUTHOR: Mosbacher, Robert A.
Secretary
Commerce
UBJECT: Working Group On Science And Technology
BSTRACT: Secretary of Commerce nominates Robert White for Commerce's
representative at the EPC's Working Group on Science and
Technology.
ISTRIBUTION: ECONOMIC POLICY
POLICY MANAGEMENT
PUBLIC AFFAIRS/LIAISON
EXEC SEC
DEPARTMENT OF COMMERCE
91-98477
THE SECRETARY OF COMMERCE
Washington, D.C. 20230
UNITED STATES OF AMERICA
May 2, 1991
The Honorable Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
The White House
Washington, D. C. 20500
Dear Mr. Secretary:
Thank you for your recent letter on the new Working Group on
Science and Technology under the Economic Policy Council. I
appreciate the opportunity to name a representative of the
Department of Commerce to sit on the working group.
The economic performance of the United States is largely
dependent upon our country's technological prowess. This is a
major concern of the Commerce Department's Technology
Administration Therefore, I would like to have Under Secretary
for Technology, Robert M. White, represent Commerce on the
Working Group. His mailing address and telephone are:
Technology Administration
U.S. Department of Commerce
14th & Constitution Avenue, N.W.
Room 4824
Washington, D. C. 20230
(202) 377-1575
Sincerely,
him
Robert A. Mosbacher
07/08/91 13:00 93953911
E
5
001
DEPARTMENT OF THE TREASURY
WASHINGTON
15TH & PENNSYLVANIA AVE, N.W.
WASHINGTON, DC 20220
FACSIMILE COVER SHEET
ECONOMIC POLICY
DATE 7/8/91
FAX MESSAGE NUMBER:
NUMBER OF PAGES TO FOLLOW:
3
Olin Wethington
TO:
Economic Policy Council
456-7739
ADDRESSEE'S FAX NUMBER:
456-7968
ADDRESSEE'S CONFIRMATION NUMBER:
FROM:
Maynard Comiez
566-5808
SENDER'S FAX NUMBERS: (202) 786-8452
SENDER'S CONFIRMATION NUMBER: (202) 566-5808
COMMENTS/SPECIAL INSTRUCTIONS:
PER OUR TELEPHONE CONVERSATION.
UNCLASSIFIED
07/08/91
13:00
93953911
E
002
OF COMMERCE
91-98477
THE SECRETARY OF COMMERCE
Washington, D.C. 20230
UNITED STATES of AMERICA
May 2, 1991
The Honorable Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
The White House
Washington, D. C. 20500
Dear Mr. Secretary:
Thank you for your recent letter on the new Working Group on
Science and Technology under the Economic Policy Council. I
appreciate the opportunity to name a representative of the
Department of Commerce to sit on the working group.
The economic performance of the United States is largely
dependent upon our country's technological prowess. This is a
major concern of the Commerce Department's Technology
Administration. Therefore, I would like to have Under Secretary
for Technology, Robert M. White, represent Commerce on the
Working Group. His mailing address and telephone are:
Technology Administration
U.S. Department of Commerce
14th & Constitution Avenue, N.W.
Room 4824
Washington, D. C. 20230
(202) 377-1575
Sincerely,
him
Robert A. Mosbacher
55
07/08/91
13:01
93953911
E
003
91-99752
DEPARTMENT OF TRANSPORTATION
THE SECRETARY OF TRANSPORTATION
WASHINGTON, D.C. 20590
JANITED STATES of AMERICA
June 4, 1991
Mr. Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
The White House
Washington, DC 20500
Dear Nick:
Thank you for your memorandum describing the re-establishment of
the Working Group on Science and Technology. The Department of
Transportation (DOT) is strongly committed to programs which
promote innovation, and one of the six major tenets of our
National Transportation Policy is to engage vigorously in such
activities.
I am designating Mr. Travis P. Dungan, Administrator of the
Research and Special Programs Administration, as our
representative to the Working Group. Mr. Dungan has oversight of
research in the Department, and acts as the chairman of the
Department's Research and Development Coordinating Council. The
Council is the top level body setting technical directions for
DOT. He also is an active advocate for technical activities in
the Department's program development and budgeting activities.
We look forward to contributing to the effectiveness of the
Working Group through Mr. Dungan's participation.
Sincerely,
Som
Samuel K. Skinner
07/08/91
13:01
93953911
E
5.
004
91-98566
EIMENT OF ENGREEN
The Secretary of Energy
Washington, DC 20585
May 7, 1991
STATESOF
MEMORANDUM FOR THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
SUBJECT:
Economic Policy Council Working Group on
Science and Technology
Thank you for inviting representation from the Department of
Energy on the Economic Policy Council Working Group on Science and
Technology. Linda G. Stuntz, Deputy Under Secretary for Policy,
Planning, and Analysis, will serve as the Department's
representative to the Working Group, with support from the
Department's technical organizations as appropriate.
Fan James D. wath Watkins
Admiral, U.S. Navy (Retired)
CC: The Honorable D. Allan Bromley
THE WHITE HOUSE
WASHINGTON
April 9, 1991
MEMORANDUM FOR THE VICE PRESIDENT
THE SECRETARY OF STATE
THE SECRETARY OF DEFENSE
THE SECRETARY OF AGRICULTURE
THE SECRETARY OF COMMERCE
THE SECRETARY OF LABOR
THE SECRETARY OF TRANSPORTATION
THE SECRETARY OF ENERGY
THE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
THE UNITED STATES TRADE REPRESENTATIVE
THE CHIEF OF STAFF TO THE PRESIDENT
THE ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS
THE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS
THE ASSISTANT TO THE PRESIDENT FOR ECONOMIC AND
DOMESTIC AFFAIRS
THE ASSISTANT TO THE PRESIDENT FOR SCIENCE
AND TECHNOLOGY
SUBJECT:
Working Group on Science and Technology
The economic performance of the United States is closely tied to
increases in productivity through innovation and the development
and application of new technologies. The President has
continually demonstrated his commitment to a vigorous research
and development agenda, most recently in the FY 1992 budget
submission to Congress.
To support the Administration's leadership on research and
development issues, the Economic Policy Council (EPC) Working
Group on Research, Development, Technology and Innovation is
being re-established. This group will be called the Working
Group on Science and Technology. The Assistant to the President
for Science and Technology will assume the role of chairman.
The Working Group will provide a forum for developing
Administration policy on significant science and technology
issues that affect U.S. economic performance. As initial tasks,
the Working Group will review the policy approach of the federal
government toward implementation of the networking aspects of the
high performance computing and communications initiative and
various joint industry-government cost-sharing consortia
contemplated by the recent Administration initiatives.
The Working Group should include representatives from the Office
of the Vice President, Departments of State, the Treasury,
- 2 -
Defense, USTR, Commerce, Energy, Office of Management and Budget,
Council of Economic Advisers, Office of Policy Development, and
Office of Science and Technology Policy. The members of the
Working Group should be at the Assistant Secretary level or
above.
As the Working Group focuses on specific issues, representatives
of appropriate Executive Branch agencies will be invited to
participate.
The chairman of the Working Group should coordinate its
activities with the Executive Secretary to the EPC.
Thank you very much for your cooperation.
health x sus
Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council
THE WHITE HOUSE
WASHINGTON
April 9, 1991
MEMORANDUM FOR THE VICE PRESIDENT
THE SECRETARY OF STATE
THE SECRETARY OF DEFENSE
THE SECRETARY OF AGRICULTURE
THE SECRETARY OF COMMERCE
THE SECRETARY OF LABOR
THE SECRETARY OF TRANSPORTATION
THE SECRETARY OF ENERGY
THE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
THE UNITED STATES TRADE REPRESENTATIVE
THE CHIEF OF STAFF TO THE PRESIDENT
THE ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS
THE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS
THE ASSISTANT TO THE PRESIDENT FOR ECONOMIC AND
DOMESTIC AFFAIRS
THE ASSISTANT TO THE PRESIDENT FOR SCIENCE
AND TECHNOLOGY
SUBJECT:
Working Group on Science and Technology
The economic performance of the United States is closely tied to
increases in productivity through innovation and the development
and application of new technologies. The President has
continually demonstrated his commitment to a vigorous research
and development agenda, most recently in the FY 1992 budget
submission to Congress.
To support the Administration's leadership on research and
development issues, the Economic Policy Council (EPC) Working
Group on Research, Development, Technology and Innovation is
being re-established. This group will be called the Working
Group on Science and Technology. The Assistant to the President
for Science and Technology will assume the role of chairman.
The Working Group will provide a forum for developing
Administration policy on significant science and technology
issues that affect U.S. economic performance. As initial tasks,
the Working Group will review the policy approach of the federal
government toward implementation of the networking aspects of the
high performance computing and communications initiative and
various joint industry-government cost-sharing consortia
contemplated by the recent Administration initiatives.
The Working Group should include representatives from the Office
of the Vice President, Departments of State, the Treasury,
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Defense, USTR, Commerce, Energy, Office of Management and Budget,
Council of Economic Advisers, Office of Policy Development, and
Office of Science and Technology Policy. The members of the
Working Group should be at the Assistant Secretary level or
above.
As the Working Group focuses on specific issues, representatives
of appropriate Executive Branch agencies will be invited to
participate.
The chairman of the Working Group should coordinate its
activities with the Executive Secretary to the EPC.
Thank you very much for your cooperation.
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Nicholas F. Brady
Chairman Pro Tempore
Economic Policy Council