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Government Involvement in the InnovationProcess: A Contractor's Report to the

Office of Technology Assessment

August 1978

NTIS order #PB-286545



Library of Congress Catalog Number 78-600102

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402



FOREWORD

As part of its planned comprehensive assessment of national R&D programs

and priorities, the Office of Technology Assessment is studying policy tools to en-

courage innovation. This document, Government involvement in the innovationProcess

j is an interim report from this study.

RUSSELL W. PETERSONDirector

Office of Technology Assessment

. . .

Ill



Government Policies for Innovation

Project Staff

Ellis R. Mottur, Program Manager*

Carolee McBee, Acting Program Manager and Project LeaderL.F. Barry Barrington, Project Leader

Irene Zarechnak, Clerical Support

OTA Publishing Staff

John C. Holmes, Publishing Officer

Kathie S. Boss Joanne Heming

Contractor

The body of this report was prepared by Staff of the Center for Policy Alternatives,Massachusetts Institute of Technology.

“Resigned, effective July 31, 1978, to accept position with Woodrow Wilson International Center for Scholars,Smithsonian Institution.

iv



Program on R&D Policies and

Priorities Steering Committee

Russell W. Peterson Lewis M. BranscombDirector Chairman

Office of Technology Assessment Panel on the Applications of Science and Technology

Jerome B. WiesnerChairmanTechnology Assessment Advisory

Council

Harvey BrooksChairman

Panel on Health of the Scientificand Technical Enterprise

Gilbert F. WhiteChairmanPanel on Decisionmaking on R&D

Policies and Priorities

Application of Science andTechnology Advisory Panel

Lewis M. Branscomb, ChairmanVice President and Chief Scientist, IBM Corporation

Preston T. BankstonDeputy Director

Office of Science and TechnologyMississippi Fuel and EnergyManagement Commission

Barry R. BIoomPresident, Central ResearchPfizer, Inc.

Irving BluestoneVice President, DirectorUnited Auto WorkersGeneral Motors Division

Edward E. David, Jr.

PresidentEXXON Research and EngineeringCompany

Charles J. HitchPresident

Resources for the Future, Inc.

C. Lester HoganPresident and Chief Executive

OfficerFairchild Camera and Instrument

Corporation

Alice Tepper MarlinExecutive DirectorCouncil on Economic Priorities

Claire NaderIndependent Consultant

Arthur S. ObermayerPresident

MOLECULON ResearchCorporation

Robert M. SolowInstitute ProfessorMassachusetts Institute Technology

Philip H. TreziseSenior FellowThe Brookings Institute

Herbert F. York

Professor of PhysicsUniversity of California atSan Diego



.

PREFACE

This report was prepared by the Center for Policy Alternatives at theMassachusetts Institute of Technology, under a contract awarded by OTA. It was

undertaken to acquaint OTA with Government policies that relate to or bear

upon technological innovation—the process that leads to the commercial in-troduction of a new technology.

The study included an examination of the major factors that currently in-fluence the process of introducing new goods and services to the user, These fac-

tors include the following: incentives and funding for basic research; tax, patent,procurement, and antitrust policies; regulations; size, sector, and locale of the

business; subsidies; inflation rate; available technical, marketing, and manage-ment skills; credit; and the formation of capital (see pp. 23-25).

The report also identifies and describes the activities of five other industrial-ized nations in the support of science and technology (see pp. 43-47). The ap-

plicability and transferability of these approaches to the United States are ques-tionable.

The report is summarized in chapter I, where the contractor’s findings aretranslated into suggestions and options. The authors identify 10 opportunities forCongress to consider for facilitating beneficial innovation. These complex issues

deserve much greater consideration than wa s possible in the brief study. How-ever, it illustrates the complicated dynamics of the innovation process.

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CONTENTS

Chapter Page

GOVERNMENT INVOLVEMENT IN THE INNOVATION PROCESS

I . Sum m ar y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . .The Government Role in the Innovation Process . . . . . . . . . . . . . . . . . . . . .U.S. Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government Programs . . . . . . . . . . . . . . . . . . . , . . . . , . . . . . . . . . . . . .Table I. —Thirteen Program Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A Comparison of Selected Industry Experiences . . . . . . . . . . . . . . . . . . . .Key Features of Government Support for Technological Innovation

in Selected Foreign Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Issues in Future U.S. Government Policy Toward Technological Innovation. .

I I . G o v e r n m e n t I n v o l v e m e n t i n t h e I n n o v a t i o n P r o c e s s :

Pol icy Imp l icat ion s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Approach and Structure of This Report. . . . . . . . . . . . . . . . . . . . . . . .

The Government Role in the Innovation Process . . . . . . . . . . . . . . . . . . . . . .Reasons for Government Concern With Innovation , . . . . . . . . . . . . . . . . .

I I I . U.S. Exper ience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A Framework for Viewing U.S. Government Programs and Activities. . . . .Identification of U.S. Programs . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . .

A Comparison of Selected Industry Experiences . . . . . . . . . . . . . . . . . . . . . .

IV. Sum m ary o f Ma jo r Fea tu r e s o f Seve ra l Fo re ign Approach es

to Tech nology Pol ic ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Great Britain. . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Summary Observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

V. Major I ssues in U.S . Pol icy Toward Technologica l Innovat ion . . . . . . . .

Issue l—Direct Support of Nonmission-Oriented Technology . . . . . . . . . .Issue 2—Reconsideration of the Role of the National Laboratories . . . . . .Issue 3–FacilitatingNew Entrants Into the Market. . . . . . . . . . . . . . . . . . .Issue 4—Diffusion of Technology Within the Private Sector . . . . . . . . . . .Issue 5—Implementation of Environmental and Safety Regulations . . . . .Issue 6–Manpower Resources, the Labor Market, and Technology . . . . . .Issue 7—1nternational Commerce and Domestic Innovation. . . . . . . . . . . .Issue 8—Support for Sector-Specific Microanalysis. . . . . . . . . . . . . . . . . . .Issue 9—Support for Hazard Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .Issue 1O—Affecting the Demand for New Technologies . . . . . . . . . . . . . .

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Contents—continued

Chapter

Glossa ry of Acrony m s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIST OF FIGURES

Figure I.—Government Involvement in the Innovation Process . . . . . . . . . . . . . . . . .Figure 2.—U.S. and Foreign Experience. . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .Matrix I.-The Assessment of New and Existing Specific Technologies . . . . . . . . . . . . .Matrix II. —Direct Regulation of the Research or Development of New Products

and Processes . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Matrix III. —Direct Regulation of the Production, Marketing, and Use of New or

Existing Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix IV. –Programs To Encourage the Development and Utilization of Technologyin and for the Private Goods and Services Sector . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix V. —Government Support of Technology for Public Services Where Consumersare the Primary Users . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VI. –Support for the Development of Technology Where the FederalGovernment is the Primary User . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VII. —Support for the Science Base Necessary for the Developmentof New Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VIII. –Policies To Affect Industry Structure Which May Affect theDevelopment of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix 1X. —Policies Affecting Supply and Demand of Manpower ResourcesHaving an Impact on Technological Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix X. —Economic Policies With Unintended or Indirect Effects onTechnological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Matrix XI. —Policies Affecting International Trade and Investment. . . . . . . . . . . . . . . . .Matrix XII.—Policies Intended To Create Shifts in Consumer Demand . . . . . . . . . . . . .Matrix XIII. —Government Policies Responding to Worker Demand Having

Impact on Technological Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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x



Government Invo lvementi n t he Innovat ion Proc ess

A cont ractor 's Repor t

to the Off ice of Technology Assessment

CONGRESS OF

THE UNITED STATESW

Office of Tec hnology Assessment



The research underlying this report was supported by a contract from the Office of Technology Assessment, U.S. Congress, to the Center for Policy Alternatives at theMassachusetts Institute of Technology.

Principal contributors to the report include:

George R. Heaton, Jr., Project Manager

J. Herbert Hollomon, Principal Investigator

Nicholas A. Ashford Jinjoo Lee

Byron Battle Wolfgang Leidig

Shing K. Fung Amit Sen

Paul Horwitz Marvin Sirbu

Linsu Kim James Utterback

Meir Weinstein



Chapter I

SUMMARY

INTRODUCTION

This report is concerned with the relationship between Government action

and technological innovation in the civilian sector of the U.S. economy. Itsprincipal objective is to develop some of the key policy issues important indesigning future programs affecting innovation. These issues are concernedwith promoting technological innovation for economic purposes, using in-novation to achieve a variety of social goals, and controlling the adverse con-sequences of new technology. The issues have been derived from severalresearch components: consideration of the appropriate role of Government inthe technological innovation process (chapter 11); a knowledge of the range ofcurrent U.S. Government actions bearing on innovation and an understandingof the innovation process and how industry responds to such Government in-terventions (chapter Ill); and an acquaintance with the experience of com-parable industrialized nations in fostering technological innovation (chapterIV). The result of the analysis is not to prescribe specific legislative actionsfor Congress, but to suggest broad areas where Congress might considerprograms in the future to reinforce the momentum or influence the directionof U.S. technological development.

THE GOVERNMENT ROLE IN THE INNOVATION PROCESS

Governments in all modern industrializedcountries employ a variety of techniques to pro-mote and shape technological development.

Each has concluded that the free action of themarket is not sufficient to achieve the desiredlong-term goals of technological strength and in-dependence. For many different reasons, gov-ernments may choose to intervene where marketforces are clearly incapable of achieving definednational objectives.

First, with respect to knowledge generatedfrom the research and development process,private economic units cannot capture all thebenefits arising from the creation of new knowl-edge and will tend to invest in those projects

whose results they can control. Similarly, in somecases, like public health, few economic unitsbenefit from research investments. Hence, fromthe societal point of view, underinvestment in im-portant research areas may occur because of thenonappropriable or public nature of knowledge.

Second, while some larger companies in theUnited States may invest vast amounts of resources in research and development, the

limited scale of most private economic units pro-hibits their undertaking very large-scale research.Hence, Government performance or support of some kinds of R&D as well as many forms of basic research is necessary.

Third, the public interest often requires a Gov-ernment role to shape and control the social andpolitical nature of new technological develop-ment. The private sector, responding to marketsignals other than social priorities, cannot be ex-pected to ensure the welfare of society and the

Nation. This situation may require regulation tocorrect market failures (for example, pollutioncontrol) or substitution of social decisions for themarket allocation of resources (for example,transportation facilities for the elderly and thehandicapped).

3



U.S. EXPERIENCE

The task of documenting the current contentand effect of U.S. Government policy toward in-novation has been approached from two per-spectives. Part of the analysis concentrated onidentifying and categorizing existing Governmentprograms. A parallel effort attempted to illustratesome of the effects of Government programs in

selected industries. The utilization of these twoperspectives is based on an important premise of this report—that a full understanding of the Gov-ernment-innovation relationship involves notonly a knowledge of existing programs but also of the industrial contexts in which their impacts oc-cur.

Government Programs

The number and variety of Government pro-

grams affecting innovation is very large, althoughmany, if not most, are not necessarily designedwith that goal in mind. On the contrary, they aredirected toward goals as disparate as economicgrowth, job security, and environmental quality.It is useful and necessary for conceptual purposesto establish a framework for organizing these ac-tions into a number of self-contained programareas which reflect the major technology-relatedthemes of current Government policy. Such aframework can (1) provide a convenient analyti-cal framework for viewing the programs, (2) il-lustrate the programs’ relationships to technologi-

cal innovation, and (3) furnish a common struc-ture within which proponents of different view-points can make a case for reorientation of na-tional policy regarding technology.

The framework developed for this report isshown in table 1.

For each area, the existing programs havebeen identified and categorized. This is donethrough the use of 13 matrices (see pp. 23-25),whose headings illustrate some aspects of therelationship of the programs to innovation. This

categorization was useful to the research effort inthat it highlighted areas of current program em-phasis and neglect. Conclusions of this nature,reached from the matrices, were used as a majorsource of input to the development of the keypolicy issues presented in chapter V.

Area

1.

Il.

Ill.

Iv.

v.

V1.

V1l.

Vlll.

lx.

x.

xl.

X11.

X111.

Table 1 .—Thirteen Program Areas

Program

The assessment of new and existing specifictechnologies.

Direct regulation of the research or developmentof new products and processes.

Direct regulation of the production, marketing,

and use of new or existing products.Programs to encourage the development andutilization of technology in and for the privategoods and services sector.

Government support of technology for publicservices where consumers are the primary users.

Support for the development of technologywhere the Federal Government is the primaryuser.

Support for the science base necessary for thedevelopment of new technology.

Policies to affect industry structure that mayaffect the development of technology.

Pol icies affecting supply and demand ofmanpower resources having an impact on tech-

nological change.Economic policies with unintended or indirecteffects on technological innovation.

Policies affecting international trade andinvestment.

Policies intended to create shifts in consumerdemand.

Government policies responding to workerdemand having impact on technological change.

A Comparison ofSelected Industry Experiences

The experience in several industries has beenreviewed to determine the nature of the impact of Government actions on the innovation process.From this sample of industries, three policy in-struments emerge as the most effective Govern-ment policies in influencing the rate and directionof technological change:

q

q

q

Inthat

Regulation (pollution, health and safety,energy conservation);

Federal R&D support (direct to industry, in-

direct, and Government-performed); andProcurement of innovative technology-based products.

general, these industry studies have shownseveral characteristics of Government ac-

4



tions have made them particularly effective inpromoting technological innovation. First,

Government programs and incentives that helpnew firms and ventures get started normally haveresulted in important innovative activities invarious sectors. Second, where the Governmenthas provided a market for new technologies orhas given direct R&D support, firms have fre-quently responded by changes in products andprocesses as a result.

Third, actions that complement normal com-petitive pressures for change in an industry havebeen effective in inducing technological change,largely because they have taken into account theforce of the market on innovations. For example,

regulations with respect to energy conservationhave reinforced normal market forces to stimu-late new fuel conservation innovation.

Fourth, while Government performance of basic research has made many outstanding con-tributions to industrial innovation, evidenceshows that Government development per se of new products and processes has often been over-taken by the rapid pace of innovation in private

industry where superior knowledge of the pro-duction process and product design prevails. Thisobservation leads to the conclusion that Govern-ment action of this nature is most effective whereit complements normal market forces operating

within the private sector.

KEY FEATURES OF GOVERNMENT SUPPORT

FOR TECHNOLOGICAL INNOVATION IN SELECTED

FOREIGN COUNTRIES

While there exists no clear equivalent to the

U.S. experience among foreign countries, thesuccess and failure of government involvement inthe innovation process abroad can be instructiveto U.S. policy makers. In analyzing the major fea-tures of programs in Japan, the United Kingdom,West Germany, and France, several clear con-trasts in philosophies and tactics with respect toencouraging technological change are apparent.In particular, the relative success of certainJapanese approaches and the lack thereof of sev-eral British programs may offer interesting les-sons for future U.S. programs. On the whole,however, several common elements tend to

emerge in observing the approaches of these fourcase countries, namely:

Direct government support for product de-

velopment and R&D in private firms tendsto be a prominent instrument in stimulatinginnovation abroad.

Government support for technological de-velopments basic to a wide range of in-

dustry is almost ubiquitous (e.g., frictionresearch).

ISSUES IN FUTURE U.S.

q

q

q

q

q

Use of government procurement is relied on

to strengthen demand for innovative tech-nologies and reduce market risk and uncer-tainty for firms.

Prouision of capital by the government tofirms seeking to introduce innovative prod-ucts and/or processes is present in all thesecountries, although the form and timing dif-fers from case to case.

Emphasis on changes in industrial structureis apparent in all four countries in order tomeet the requirements of technological

progress and international competition.Emphasis on export performance in inter-national markets is a clear priority in allthese countries, and is translated into sev-eral types of incentives for new productsand processes.

Emphasis on labor training and manpowerdevelopment policies constitutes a majorfeature in the technology development poli-cies of these countries.

GOVERNMENT POLICYTOWARD TECHNOLOGICAL INNOVATION

On the basis of what is known about current dustru’s response to these proqrams, and the in-U.S. policy toward technological innovation, in-

. -sights’ gained from foreign experience, several

5



policy issues have emerged which, in the author’sopinion, merit consideration by Congress. Thefollowing summarizes these issues and some il-lustrative, although far from exhaustive, initia-tives which may derive from them.

ISSUE 1

Direct Support of Non mission-Oriented Technology

Currently, the U.S. Government provides nodirect support for nonmission-oriented techno-logical development, unlike other industrializedcountries where this support is frequently promi-nent. There are several reasons for consideringsuch support. First, the United States is facinggrowing competition in international markets intechnology-based products from countries whereGovernment support for such technologies isstrong. Second, the social returns on technologi-cal innovation are frequently greater than those

accruing to the individual inventor and may takethe form of increased employment, environmen-tal protection, and product safety. Therefore,there are many areas in which the private sectorwill underinvest in the development of new tech-nologies because of the inability of the developerto appropriate the rewards. Congressional ini-tiatives for the implementation of a policy to sup-port the development of such technology mightinclude:

1. Legislation directing the procurement of in-novative products at a price that provides

for an indirect subsidy of R&D costs;2. Support for a program of advanced

3

research responsive to a variety of socialgoals, but not appropriable by any singlefirm; and

The granting of exclusive patent rights to in-dividuals and firms making inventions onfederally supported R&D programs.

ISSUE 2

Reconsideration of the Role of theNational Laboratories

Most of the existing National Laboratorieswere set up to support a specific governmental

6

mission such as nuclear weapons developmentor space research. In many instances, however,these laboratories have expanded their rolesbeyond the original missions. In other cases, thechanging nature of Government policies hasbrought on changes in their activities. At present,many of the National Labs compete directly withprivate industry in performing research directedat the development of civilian technology of com-mercial significance. Options available to Con-

gress to better utilize the National Laboratories in-clude:

1. The definition of explicit missions, as well as

2

the identification of, and justification for,new research roles for them; and

Development of guidelines for use by thefunding agencies in deciding which projectsto fund in-house and which to support inthe private sector.

ISSUE 3

Facilitating New Entrants Intothe Market

New and small firms have been shown to beleading innovators in many areas, largelybecause they are often formed on the basis of anew idea or product and have great flexibility inintroducing radically new products into themarket. Such firms frequently face a variety of barriers in establishing or expanding their opera-

tions, including restrictions on venture capital,tax disadvantages (including less favorable thanbefore capital-gains taxation), regulatory barriers,and market dominance by larger, establishedfirms. Congress might usefully consider severaloptions to ease the process of entering the mar-ket for new firms and individual entrepreneurs,such

1.

2.

3.

4.

as:

Selective use of Government procurementpolicy;

Stricter enforcement of antitrust laws;

Assistance to new firms in meeting regu-latory requirements; and

Greater patent protection for the small in-novator.



ISSUE 4

Diffusion of Techno ogy Withinthe Private Sector

Better diffusion of existing technologies andexisting technical information would serve tostimulate innovation in several ways. First, theproductivity levels of industries could be raised byclosing technology gaps. Second, by helpingsmall- and medium-size firms compete withlarger ones, new innovative products and proc-esses could be encouraged. Third, compliancewith regulation could be facilitated by diffusingknowledge of the means to comply. Finally, newuses of technologies could be promoted by trans-fers among different types of industries. Existingmarket structures tend to inhibit wide applicationof technologies, thereby giving undue advan-tages to large technology leaders. Several in-struments are available to the U.S. Governmentto overcome such market rigidity, some of which

might be:1.

2.

3.

4.

5

Establishment of a network of localtechnical centers;

Support for industrial cooperative activitiesby small firms;

Support for technology information/com-munications systems;

Compulsory licensing of technologies tocompetitors when leading firms reach a cer-tain market share; and

Government purchases of technology for

resale to new users.

ISSUE 5

Implementation of Environmentaland Safety Regulations

The effect of regulation on technological in-novations remains highly controversial. Theresearch which has been undertaken in this areaindicates that the effects which exist, thoughsubstantial, cannot be simply characterized. At aminimum, it is necessary to recognize both posi-tive and negative impacts and to distinguish theeffects of regulation on the development of newcompliance technology from the more general ef-fects that it may have on the rate and direction of technological innovation in the broad sense. In-

sufficient attention has been given to new meansof implementing regulatory legislation so as toencourage innovative compliance technologiesthat help to achieve regulatory goals. For exam-ple, the following regulatory mechanisms,among others, deserve consideration in the U.S.context:

1.

2.

3.

4.

Strict liability for pollution damage;

Effluent taxes;

Joint R&D for pollution control; and

Government support for the developmentof compliance technology.

Evaluation of the means to promote innova-tion in regulatory compliance is needed as well asimmediate application in selected contexts of new policies to facilitate the achievement of regulatory goals via technological change.

ISSUE 6

Manpower Resources, the LaborMarket, and Technology

An infrastructure element essential to techno-logical change is qualified manpower. The rapid-ly changing nature of technology requires a flexi-ble and farsighted manpower policy to preparefor future technological development, both interms of training for the future and helpingworkers adjust to the dislocations that are fre-quently caused by technological change. A com-prehensive manpower policy adopted by Con-gress might include several important com-ponents to satisfy these needs, such as:

1.

2.

3.

An analytical capacity within Governmentto conduct continuing forecasts of futureskill requirements in different sectors;

An effective program of labor adjustmentassistance to facilitate the adaptation of workers and their skills to new job require-ments; and

A long-term strategy for scientific andtechnical education and training adapted tofuture manpower needs and technologicaltrends, particularly in the area of engineer-ing education.

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ISSUE 7

International Commerce andDomestic Innovation

Technological innovations are vital to U.S. in-dustries in competing with foreign producers inboth international and U.S. markets. Govern-ment efforts are needed to help U.S. industries

enhance their competitiveness by promotingdomestic innovations as well as facilitating theadaptation and improvement of advanced for-eign technologies. For industries that are non-competitive in the long run, Government meas-ures are needed to assist labor and business ad-

just structurally and to soften dislocations duringthe transition.

ISSUE 8

Support for Sector-SpecificMicroanalysis

The relationship between Government actionand technological innovation varies significantlyamong different industrial sectors. Because thereis a lack of good studies of specific industries andthe effects of Government programs on them,Government policymaking in various areas isoften severely hampered. No sector-specificmicroanalytical capability of significant size existsin Government today. Consideration should begiven to support for such a capability to aid deci-sionmaking in areas ranging from regulation totax policy. This capability need not necessarily be

lodged in the Government, but could also suc-cessfully be established within universities or other parts

ISSUE

Government supportof the private sector.

9

Support for Hazard Analysis

Because hazards too often go unrecognizeduntil their dangers reach crisis proportion, it is im-

portant to create a capability to anticipate them,or at a minimum, to institutionalize a means tomonitor their presence. Although various agencyprograms attempt to assess and prevent hazards,the existing efforts are deficient in severalrespects. Hazard analysis as currently performedin Government lacks coordination and is not con-tained within the explicit mission of many agen-cies. Consequently, it is an underdeveloped

discipline. Several policies deserve considera-tion,

1.

2.

3

including:

A centralized agency to strengthen the U.S.hazard analysis capability;

Government support for development of this discipline in universities, worker, andconsumer education; or

A hazard analysis requirement for industrialfirms.

ISSUE 10

Affecting the DemandTechnologies

for New

Perhaps as a result of the overemphasis onR&D as a component of the innovation process,Government policy to date has tended to focusmore on the supply of new technologies than thedemand. However, policies that work throughinfluences on demand have often been shown tobe more effective in eliciting innovative productsand processes. Government procurement is one

notably successful example, and environmentalregulation may sometimes work in a similarfashion to change demand. New demand-ori-ented policies should be considered, includingmechanisms that create new or expanded mar-kets, for certain kinds of technologies, e.g., pro-curement, user subsidies, regulations; andmechanisms that directly influence consumer de-mand, e.g., information provision or advertisingregulation.

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Chapter II

GOVERNMENT INVOLVEMENT

IN THE INNOVATION PROCESS

Policy Implications



Chapter II

GOVERNMENT INVOLVEMENT

IN THE INNOVATION PROCESS

Policy Implications

INTRODUCTION

This report is concerned with the relationshipbetween Government action and technologicalinnovation in the civilian sector of the economy.Because that relationship is exceptionally wide-ranging and complex and its importance is sub-

ject to considerable debate, the general effec-tiveness of Government influence on innovation

cannot be adequately assessed in this work, norcan a thorough evaluation of individual programsbe provided. Neither task is the purpose here.Rather, this document is intended to accomplishthe following:

q

q

q

q

q

It

To develop an appropriate framework forviewing the relationship between Govern-ment action and innovation.

To provide a comprehensive overview of the major existing U.S. Government pro-grams and policies having both intendedand unintended effects on innovation.

To understand typical responses of U.S. in-dustry to Government programs in severalselected industry contexts.

To review some selected experiences of for-eign governments in the innovation proc-ess, taking note of particularly effective orineffective policies.

To suggest a series of important issues con-cerning the Government-innovation rela-tionship in the United States to provide abasis for considering the reorientation of

existing policies.is important to be clear at the outset about

both the definition of innovation and the range of Government programs with which this report isconcerned. Innovation is the commercial in -

troduction of a new technology and is not to beconfused with invention, which is the develop-ment of a new technical idea. The innovationprocess includes a complex and interconnectedset of activities leading from invention to com-mercial introduction, but not necessarily in anyprescribed sequence. Although R&D is often an

important part of this process, it is by no meansalways the most important, nor is it often likely tobe a sufficient condition for successful innova-tion.

The interaction between Government pro-grams and innovation is very wide-ranging, andGovernment influence on all elements of the in-novation process may be significant. This reportis concerned with all aspects of that influence.Thus, the Government programs surveyed in-clude those intended to enhance innovation aswell as those intended to control it. They include

not only those programs directed at the actualcommercial introduction of a new technology,but also those affecting the various factors and in-puts leading to innovation and the various socialimpacts resulting from innovation. In addition,the unintended but nevertheless important ef-fects of programs designed to serve a variety of social purposes not directly related to technologi-cal innovation are also considered.

The Approach and Structureof This Report

There were several elements to the researchinvolved in this report. This chapter explores thevarious justifications for Government concernwith innovation. In chapter 111, the U.S. ex-perience was considered from two perspectives.



One element began with a comprehensive docu-mentation of existing Government programs anddrew upon a series of analytical studies, ’ whichattempt to understand their effects (Government

Programs, p . 19). Although this approach wasuseful, it was not sufficient to understand fully thecomplexity of the Government-innovation rela-tionship. Because the focus of this approach wason programs and their intended purposes, it was

unable to uncover some of the unintended con-sequences of the program or assess programsfully in combination.

In order to have a more balanced approach, asecond element of the research focused on sev-eral industries where the total effects of Govern-ment programs were felt (A Comparison of Se-

lected Industry Experience, p. 35). Studies util-ized here attempted to understand the nature of the innovation process in industry

zand whether

and how Government action has actually influ-enced the pattern of innovation in an industry—within the context of other forces that also in-fluence it. The combination of these two researchelements yielded a relatively full factual picture of the Government-innovation relationship. Bothperspectives were necessary to obtain this under-standing.

Another major element of the research drewupon a series of studies

3examining foreign gov-

ernment policies in regard to technological in-novation (chapter IV). This analysis provideduseful contrasts to the U.S. experience. None of these research efforts involved original empiricalresearch; rather, each was a synthesis of existingstudies.

The final element of this research involvedutilizing all of these components in order toderive a series of important policy issues for con-gressional consideration (chapter V). It should be

‘See, for example: 1) The Impact of Governmental noted that these issues do not attempt to recom-

Restrictions on the Production and Use of Chemicals, CPA,December 1976, 2) An Analysis of the Effects of PublicRegulation on the Copper Wire Industry, CPA, March1977, and 3) Program Development Procedures and Trans -

fer Mechanisms in the National Sea Grant Program, CPA,November 1977, These studies focused on the overall ef-fects of individual programs, not just the relationship to in-novation. They were useful to this research effort in pro-viding factual material about existing programs, in develop-ing evaluative tools, and in placing the Government-innova-tion relationship within context of other governmental goals.

‘These studies have been documented and summarizedin other Center for Policy Alternatives reports, including anearlier report to the Office of Technology Assessment,Government Action and the innovation Process, April

1977, the results of which have been incorporated into thisdocument.

mend specific legislative actions, but rather tosuggest broad areas where Congress might con-sider future actions to reinforce the momentumor channel the direction of U.S. technologicaldevelopment.

These components of the analysis and therelationships among them are presented dia-grammatically in figure 1.

‘See Government Support for Technology: An Examina-tion of the Foreign Experience, CPA 75-12, 1975. Theresults of this study and others were summarized in the April

1977 CPA report to OTA (see footnote 2) and arerecapitulated in chapter IV of this report.

THE GOVERNMENT ROLE IN THE INNOVATION PROCESS

Technological innovation in the civilian sectorof the U.S. economy occurs largely as a directresult of the activities of private firms. This beingthe case, one may well ask why the U.S. Gov-ernment should be concerned with innovationand what, even given this concern as a legitimategovernmental function, its appropriate role

should be. Various governments answer thisquestion differently and thus the degree of in-volvement in industrial innovation varies fromcountry to country, influenced in part by theprevailing economic and political systems. Forexample, many governments, in both developed

and developing countries, own and run enter-prises that would be private in the United States.This is especially true in heavy or high-technol-ogy industries, where governments often becomethe prime developers, users, and marketers of in-novations. Even when the government does notown the producing enterprises, subsidization and

or direct support for the innovation process in in-dustry is common.

This is not to argue that the U.S. Governmentshould necessarily do likewise. However, itshould be recognized that the governmental



Figure 1 .—Government Involvement in the Innovation Process

Policy Questions

Why should Govern-ment be involved intechnological innova-tion?

How does the U.S.Government currentlyact on the innovationprocess?

How do foreign gov-ernments affect theinnovation process?

What future policiesshould the U.S. Gov-ernment consider toinfluence technologi-cal innovation?

What specific legis-lative measures areava i l ab le t o C on-gress?

Chapter II

Definition of appropriaterole for Government

\

(Diagrammatic View of CPA Analysis)

Components of Analysis

\

Chapter IllChapter Ill

Current U.S. GovernmentU.S. industry response to

+ U.S. Government programsprograms (see p. 19)

(see p. 35)

SOURCE Center for Policy Analysis



presence in the United States may be as signifi-cant as that in other countries, although it takes adifferent form. For example, the U.S. Govern-ment has historically been involved in supportingselected industries (see chapter III, Government

Programs, pp. 19) and currently plays a majorbut indirect role in the innovation processthrough various economic and social policies orregulations. Although many of these programsand regulations are not directly aimed at influenc-ing the innovation process, their impacts mayoften be greater than those arising from directGovernment support for technological develop-ment.

Reasons for Government ConcernWith Innovation

Governments are not concerned with techno-logical innovation for their own sake, but ratherattempt to promote it or manage it because of the

social, economic, and political effects that result.For example, because technological change hasbeen shown to be an important contributing fac-tor to economic growth, governments seek to en-courage it. Similarly, innovation is promoted inorder to increase productivity and retard inflationor to improve the international competitivenessof a nation’s products and improve its balance-of-payments position. On the other hand, govern-ments are also vitally concerned with the adverseeffects of technological change, including unem-ployment, pollution, and unsafe products. In thiscase, policies may be directed toward the controlrather than the promotion of new technologies.In none of these instances, however, is the rela-tionship between the social goal and technologysimple or unidirectional. For example, althoughtechnological changes may have led to pollution,they must also certainly occur in order to controlit. The crucial point is that in a technologicallybased society, the process of innovation is inti-mately related to many, if not most, of the impor-tant social goals of that society and that innova-tion is therefore a critical element of most govern-ment policies.

Going beyond these rather general reasons forgovernment concern with innovation, there arealso strong arguments why the governmentshould intervene directly to influence innovationunder certain circumstances. These interventions

are usually justified because of market failures ordeficiencies of the following kinds:

THE PUBLIC NATURE OF KNOWLEDGE

Private firms may underinvest in the develop-ment of new technology (from a societal point of view) because they are not able to capture all of

the benefits resulting from such investments. Thissituation, often called the “appropriability prob-lem, ” occurs because the knowledge which re-sults from investments in technical developmentcan usually be readily acquired by others who willcompete away part of the benefits from theoriginal developer. Basic research in particularsuffers from this problem because its output isusually an advance in scientific or technologicalknowledge that can subsequently be used in ap-plied research and commercial development by awide and often unforeseeable range of firms.Moreover, new technical developments also tend

to be highly uncertain in terms of results and util-ity. Thus, direct government support of this classof R&D is necessary to correct for underinvest-ments. In addition, government support for tech-nical development may have positive effects forfirms other than those in which the research isperformed, thus creating “positive externalities. ”

STRUCTURAL CHARACTERISTICS OF INDUSTRY

The problem of indivisibility exists where

economies-of-scale requirements prevent smallorganizations from undertaking certain activitiesviably and efficiently. For example, certain in-dustries may be too fragmented and firm size toosmall to support an adequate research and prod-uct development effort. Furthermore, large oli-gopolistic firms may concentrate their resourceson short-term improvements in existing productsrather than on risky and market-disturbing long-term innovations. Individual consumers face asimilar problem in that they often lack the in-formation to make wise purchases or the marketpower to be effective bargainers. In these situa-

tions, the large economies of scale suggest thatsupport from the Federal Government is neededfor some types of R&D, or that cooperative in-dustrial or consumer efforts must occur in orderto attain the minimum efficient size.

14



—

SOCIAL AND POLITICAL NEEDS

The “public goods” problem refers to the factthat there are certain goods whose benefits aredifficult or impossible to deny to a citizen who isunwilling to pay for them. For example, all U.S.residents enjoy the full benefits of nationaldefense even though they might not want them.Therefore, for public goods, the decision of how

much to supply to individual units cannot bemade by the market, but must be made by thepolitical system. This is in contrast to the situationwhere the market can provide the appropriateresults if the government attaches the right costsand benefits to the appropriate decision makingunits. It is thus justifiable for the government todirectly support the R&D for these types of goods.

There is also another direct, intended role forgovernment. In part, this role is one of control.Technological innovations are frequently ac-companied by undesirable social or economicconsequences, such as environmental pollution,health or safety hazards, and displacement of workers. In these cases, the government asoverseer and protector of the public interest mustplay a very direct role in ameliorating such

undesirable effects, via planning, controls, regu-lations, or transfer payments. The governmentpresence is necessary either because the privatemarket has not eliminated or cannot be expectedto eliminate these undesirable effects, or becauseefficient market solutions are not desirable socialpolicy.

15



Chapter Ill

U.S. EXPERIENCE



Chapter Ill

U.S. EXPERIENCE

This chapter is concerned with documenting the status and effect of U.S.G o v e r n m e n t p o l i c y r e g a r d i n g t e c h n o l o g i c a l i n n o v a t i o n . I t p r e s e n t s f a c t u a l i n -

fo rmat ion about which programs exist and suggests a framework withinwhich t o cons ider the i r e f fec ts .

The task has been approached from two perspectives. One, a “programperspective, ” concentrates on the documentation of existing U.S. programsand policies that have an important relationship to technological innovation.These have been organized into a series of 13 major policy areas and arepresented in Government Programs, see below. The second approach, an “in-dustry perspective, ” focuses on a series of industrial sectors and considerswhat have been the effects of Government action on innovation in those sec-tors. This is presented in A Comparison of Selected Industry Experiences, p.35. The presentation of two different perspectives illustrates an importantpremise of this report —that a full understanding of the Government-innovation relationship must involve an appreciation not only of the existing

programs, but also of the industrial contexts in which their effects are felt.

Although the presentation of each perspective contains a large amount offactual information, detailed analysis and evaluation have been eschewed infavor of a broad overview. This approach was chosen in order to be consonantwith the overall focus of the report on the development of policy issues. Eachof the perspectives has been utilized extensively as a source from which todraw in the development of the policy issues presented in chapter V. Figure 2illustrates the components of this section and their relationship to the otherparts of the report.

GOVERNMENT PROGRAMS

A Framework for ViewingU.S. Government Programs and Activities

The U.S. Government programs with whichthis report is concerned are those that have animportant relationship to technological innova-tion. The number and variety of such programsare very large, and many, if not most, are not in-tended to affect innovation. On the contrary, the

programs are directed toward a diversity of socie-tal goals, some of which include: increasing theavailability of goods and services for a variety of purposes, protecting society from the adverseconsequences of technology such as endanger-

ment of health and safety or dislocation of man-power, and designing measures benefiting specif-ic sectors such as manufacturing, small business,labor, consumers, or the disadvantaged. Thesegoals represent sometimes conflicting purposes.and the particular programs and activitiesdirected toward them are undertaken somewhatindependently of each other. Nevertheless, it isuseful and necessary for conceptual purposes to

establish a framework for organizing the Govern-ment programs and activities into a number of self-contained program areas which reflect themajor technology-related themes of the pro-grams that seem to be important or are at issue.



I

I

Us.

Chapter Ill

Government actions

Program areas and matrices

Conclusions:

Areas of emphasis and neglect in

current U.S. programs

Figure 2.— U.S. and Foreign Experience(Sources of Issues for Technological Innovation Policy)

Chapter Ill

U.S. industry experience

Sample of six industrial sectors I

Conclusions:

Effectiveness of Government actionsi n eliciting innovation i n industry

Chapter V

Chapter IV

Foreign experience

Survey of technology policy in fourindustrialized countries

Conclusions:

Types of policies which have beenmost effective i n foreign contexts

Policy issues for future U.S. Government action regarding technological innovation

SOURCE: Center for POIICY Analysls



A framework of this kind is valuable for severalreasons. First, it provides a convenient constructfor viewing the large number of relevant pro-grams. Second, it illustrates some aspects of theprograms’ relationships to technological innova-tion. Third, it provides a common structurewithin which the proponents of various view-points can make their case concerning a reorien-tation of national policy in relation to technology.

PROGRAM AREAS

q

q

Government role in this area has tradition-ally been a relatively limited one.

Area V concerns programs to support tech-nology in public services where consumersare the primary users. In contrast to area IV,the Government role here has traditionallybeen rather large. Public goods and servicessuch as transportation, communication, orlaw enforcement comprise the relevant pro-

grams.Area VI represents technology enhance-

The framework developed for these purposesis presented below. The 13 program areas arelisted in table 1. They have been organized ac-cording to the following logical sequence.

q Area 1, technology assessment, is basic topolicy design. Ideally, Government must beable to assess specific technologies withregard to their utility, unintended conse-quences (externalities), and the distribu-

tional consequences of both utility and ex-ternalities, if specific programs or activitiesare to be continued, altered, or initiated.

Area 11 addresses the direct regulation of the

innovation process through constraints onthe research and development of new prod-ucts and processes. Regulation here is in-tended to ameliorate the adverse conse-quences of technologies. The design of policy in this area is concerned with theproblem of externalities and distributionalconsequences of possible adverse health or

environmental effects.q Area 666 focuses on direct regulation of the

production, marketing, and use of new or

existing products. The purposes andmethods of regulation in this category donot differ substantially from area II. How-ever, because regulation here focuses onend products rather than the developmentprocess, its impact on innovation is more in-direct. The numbers of regulatory programsin this area are quite large and exceed thosein area II.

q Area IV addresses the activities and pro-grams that are intended to enhance the

development and utilization of technology

for private goods and services where the

private sector is the primary user. T h e

ment activities where the Government itself

(on behalf of the society) is the prime user.

This area would include programs such asthe space and defense efforts.

The program areas 11 through VI all representactivities and programs that are undertaken inorder to directly affect a perceived deficiency inresource availability, utility, externalities, ordistributional consequences of technological ac-tivity. Areas 11 and 111 consist of programs inwhich regulatory means are employed to channelthe direction of technology, and areas IV throughVI consist of programs that utilize othermechanisms to enhance the development of technology. The remaining seven program areasrepresent activities that are less direct, though im-portant for technological change.

q

q

q

q

Area VII is the list of programs generallydescribed as the necessary infrastructure or

science base required -for innovation to oc-cur, for whatever purpose. This includesprograms such as support for basic re-

search, information transfer efforts, etc,

Areas VIII and 1X represent less technology-focused policies, emphasizing policiesdirected toward industry and labor marketstructure respectively, which nonethelessmay affect technological change.

Areas X and XI represent even moregeneral domestic economic and )ore igntrade policies with possibly unintended orindirect effects on technological innovation.

Area XII concerns programs that create

shifts in the consumer demand for technol-ogies. Various regulatory policies, user sub-sidies, and information transfer programsoperate in this area as modulators of exist-ing market forces and hence exert an im-

21



q

portant impact on the kinds of new technol-ogies developed.

Area XIII similarly concerns workerdemands that are likely to influence thenature of new technologies. The demandfor safe working conditions is one example.

The programs in areas 11 through X1 all focusprimarily on supply-side Government programsand activities, intending to affect what the in-dustrial or labor sectors are able to deliver. Incontrast, areas XII and XIII emphasize thedemand-side policies directed towards enhancingthe expression of consumer and worker demandsrespectively.

Because the 13 program areas reflectindependent, and sometimes even conflicting,societal goals, there are difficult choices to bemade concerning the relative emphasis amongthem. Accordingly, the choice of which areasdeserve more or less attention is necessarily apolitical determination, which might be very dif-

ferent if made by those concerned primarily withindustrial growth in contrast to those interested inenvironmental pollution. What the organizing of Government programs and activities into these13 groups permits is a discussion as to relativepolicy emphasis that makes clear the priorities of the group proposing expanded or diminished at-tention to various areas. The categorization of ac-tivities into these policy areas should itself evokelittle controversy and will allow the differentperceptions of what deserves greater or lesseremphasis to be advocated within a commonframework.

Identification of U.S. Programs

The following section identifies and categorizesexisting U.S. Government programs that have animportant relationship to technological innova-tion. This is done through the use of 13 matrices,each of which corresponds to one of the 13 pro-gram areas. The matrices were developed inorder to illustrate something of the nature of therelationship between the programs and activitieswhich comprise the policy areas and technologi-

cal innovation. This is accomplished by the axislabels for each matrix. For example, in area I,which concerns technology assessment, the pri-mary evaluative questions with respect to a newor existing technology—its utility, external ef -

fects, and the distribution of its effects to differentsegments of society—are listed on the horizontalaxis. Similarly, in area IV, which concerns tech-nology enhancement in the private sector, thevarious mechanisms for encouraging new tech-nologies—transferring information, reducingcost, increasing the reward, etc. —are listed onthe vertical axis.

For each program area, the matrix entries rep-

resent an attempt to identify the major existingprograms and agency actions. Because many, if not most, Government activities are addressed tomore than a single purpose, programs often ap-pear in more than one matrix. It should be em-phasized that although the programs listed clearlydiffer in terms of their size and effectiveness, in-formation as to their relative weight is not con-tained in the matrices since the primary purposeof the matrices is to identify and categorize ratherthan to evaluate.

The matrices were a valuable tool to the

analysis in several respects. First, they provided aconvenient structure for categorizing the largeamount of data gathered about the existing U.S.programs. Although the programs are listed with-out annotations in the matrices, substantial back-ground research and analysis went into theircategorization and the matrix development. Thiseffort, though relied on to reach the researchconclusions, is not presented in this report. Sec-ond, the matrices allowed the areas of programsemphasis to be highlighted, both among the 13policy areas and within each area. Third, theyfurnished an analytical tool which was relied

upon heavily in developing the major policyissues presented in the final section of this report.Those issues are all concerned with possiblereorientations of existing national priorities.

The matrices were important, therefore, insuggesting where existing emphasis lies and whatkinds of programs have generally been neg-lected. For example, in matrix IV, which con-cerns the encouragement of private-sector tech-nological development, it became apparent fromthe categorization of existing programs that thereis no major, across-the-board program in support

of basic civilian technology. The realization thatthere is a lack of such a program, when com-bined with information about the foreign experi-ence in this regard, led to the suggestion that newprograms of this kind should be considered as a

22



Reason forundertakingassessment

—

Matrix L-The Assessment of New and Existing Specific Technologies*

Explicit or primarymission agency

Incidental toprimary mission, buta recurring function

Ad hoc

Subject matter of assessment

Utility Externality Distributional effects

I

I Full assessment studies:

–OTA *

–GAO *

. Assessment as to safety:CPSC, NHTSA, FDA,OSHA, NRC

. Assessment as toenvironmental effects:EPA (TOSCA), CEQ

q Assessment as toinfIation: CWPS

I Part of cost-benefit or . Impact statements by

other program analysis or mission agencies:evaluations by mission —environmental (E IS)agencies, e.g., DOT, DOD , —economic (inflation)NASA, DOE *

I Special commissions orstudies: e.g., NASJNAEsaccharin study m

Special studies bymission agencies, e.g.,FCC electronic mailassessment, NSF fundin g

q OSTP IS responsible for assessment or coordination of agency technology pollcles rather than assessing speclflc technologies

23



Outright suppressionof R&D

Limited granting oflicense/permit forR&D

Setting standards/requirements forR&D

Setting guidelines forFederal funding ofR&D

Voluntary guidelines

Matrix Il.— Direct Regulation of the Research or Developmentof New Products and Processes

Purpose of Program

Control of health/safety Control of environmental Safeguard of nationalhazards hazards security

. Research on highly q Nuclear weaponsinfectious agents research

— .

q Research on certain . Research using fast-radioactive materials breeder reactors (DOE) *(DOE)

q Research on nuclearfuel reprocessing — - ~ ~

q Research on uraniumisotopes separation(DOE)

. Research using humansubjects (HEW)

q Pharmaceutical research(FDA) +

s Pesticide research (EPA) *

. Food additives F

. Research on toxic Psubstances (EPA)

. Medical devices (FDA)

q Recombinant DN Aresearch (N1 H)

q Recombinant DNAresearch

24



Regulatoryarea

Pollution control

Health/safetystandards

Productspecification

Products liability

Matrix Ill.— Direct Regulation of the Production, Marketing,and Use of New or Existing Products

Commercial stage affected

Production Marketing Use

q Air pollution (EPA) —stationary sources — mobiIe sources

q Water pollution (EPA) —effIuent —drinking

. Noise pollution (DOT,EPA, OSHA)

q Workplace (OS HA) . Labeling q Pharmaceuticals (FDA) —consumer products

q Toxic substances (EPA) (CPSC) q Food additives (FDA)

. Drugs (FDA) –pesticides (EPA)

q Pesticides (EPA)

q Advertising control, e.g., . Transportation safetyq Pesticides (EPA) cigarettes (FTC) (DOT)

Consumer product safe- q Radioactive materialsty standards (CPSC) (NRC)

. Automobiles (NHTSA)

. Drugs (FDA)

q Automobile fuel q Food inspection and q Communicationsefficiency (EPA, grading (USDA, FDA, regulation (FCC)

DOE, DOT) DOC)q Building codes (HUD)

q Appliance energy q Packaging and labelingefficiency (DOE) specification (FTC) q Product standardization

(NBS)q Coal conversion, energy

conservation i n manu-facturing (DOE)

q Tort system

25



Transfer oftechnology tothe firm

Reducing costsof innovation

Increasing rewardof innovation

Decreasingprobability ofcommercial failure

Decreasingprobability oftechnical failure

Matrix IV.- Programs To Encourage the Development and Utilization ofTechnology in and for the Private Goods and Services Sector

Stages of innovation process

Development/ Production andMarket research Technical research engineering commercialization

. Antitrust reguIat ions

joint R&D (antitrustexemption) —compulsory

licensing. Tech. Ut il. Program

(e.g., NASA, SBA). Diffusion program of

R&D from Governmentlabs b

. Diffusion of R&Dfunded by Govern- *ment (e.g., ASRA,NTIS)

. AgricuItural extension wservices

. Govern ment-univer-sit y-industry coopera-

tion (e.g., Sea Grant)

. Direct funding of R&D(e.g., DOE)

. Tax treatment for R&Dq Antitrust regulations *

—licensing –joint R&D (SBA)

q Compulsory licensingunder Governmentprocurement

Q Agricultural extensionservices

w

. Investment tax credits w. Loans and subsidies

for modernization(e.g., fisheries andshipbuilding)

. Patent and I icensesystem

+

Governmentprocurement +

Governmentprocurement q Demonstration

Provision of market in - projects

formation (DOC, SBA)

q Provision of technicalinformation (e.g.,NTIS, other missionagencies) c Demonstration

q Invention evaluation projects

(DOE/NBS)

26



Manner ofGovernment action

Reducing private

sector costs

Governmentperformance

Increasing privatesector reward

Reducing probabilit~of failure

Diffusion

Influencing demand

Matrix V.—Government Support of Technology for Public Services*Where Consumers are the Primary Users

Element of innovation process affected

Development and Production andMarket research Technical research engineering commercialization

Direct funding of

R&D (e.g., EPA, *DOE, DOT, DOC)

q Provision ofcapital (e. g., *CO MSAT)

IStudies of con- c R&D by national q Demonstration

sumer demand and agency labs projects (e.g.,

(e.g., DOT) DOT, DOE)

I Governmentprocurement

~ Rate-of-returnregulation (e. g.,utilities)

q ReguIationslimiting entry(e.g., FCC, CAB)

q Governmentprocurement bspecif i cat ions

c Demonstrationprojects

~ Publication of q Technology

market studies transfer programs

(e.g., mission (mission agencies )

agencies)

c Government usersubsidy (e. g., taxincentives for horninsu I at ion)

q Specification ofapproved product:(e.g., medicaldevices)

“Program areas: Law enforcement, health, transport, communications, energy, education delivery, pollution control delivery.

27



Manner ofaction

Productprocurement

Support forR&D in theprivate sector

Performance ofR&D by theGovernment

Matrix V1.—Support for the Development of Technology Wherethe Federal Government is the Primary User

Stage of innovation

Prototype development Manufacturing/Research or demonstration production

c DOD (e. g., lasers) q DOD (armed services) c DOD (weaponsprocurement)

. NASA (e. g., spacesystems)

qNASA (e. g., shuttle q NASA (e. g., spacecraft

program) components)

q Other mission agencies(i.e., EPA, DOT, etc.) *

qDOD (mainly DAR PA) q DOE (fusion research) qDOD (e. g., ICAMprogram)

q NASAq DOD (mainly armed

services)

c Other mission agencies b

. DOD (service labs) qDOD (e. g., weapons q DOD (weaponsdevelopment) procurement)

. DOE (energy researchcenters, National Labs) qDOE (e. g., fusion, . DOE (nuclear weapons)

uranium enrichment)

q Other mission agencies

28



Activitysupported

Education

Basic research

Data compilation

and validation

Dissemination ofresearch results

Matrix VII.—Support for the Science Base Necessary for theDevelopment of New Technology

Government action

Government performance Government support

q MiIitary academy science programs Fellowship program (e. g., NSF, NIH)

(e.g., West Point)q Military training programs i n private

institut ions

q Support of university research

c NBS (e. g., laser research) N S F

q DOE (e. g., high-energy physics)

N I H *

q NASA w

Federal data banks (NBS) q Support for data compiIation

—as a component of overall scientific

q Mission agencieseffort (NSF, NIH)

—related to specific problems (N AS)

q NTIS q Support for scientific publications,conferences (NSF, NI H)

29



Aspect ofindustry structuraffected

Entry-exit

Competitive positionof small firms

Relative marketdominance of

larger firms

Collaborationamong firms

Matrix VllI-Policies To Affect Industry Structure Which May Affectthe Development of Technology

Nature of effects

Motivation to innovate Ability to innovation

Increase Decrease Increase Decrease

q Bankruptcy laws q Compulsory q Tax loss provisions q SEC regulationlicensing actions

q Tax-loss provisionsBarriers due topatent rights

Procurement ear- . Capital gains q Subchapter S q Capital gainsmarked for small treatment (IRS code) treatmentbusinesses

q Access to venture q SBA loans,q Access to venture

capital (Sec. 144) guaranteescapital (Sec. 144)

q SEC specialexemptions

SBA joint R&Dexemption

Holder’s patent q Governmentrights procurement

q Compulsorylicensing act ions

Governmentprocurement Antitrust laws

Antitrust laws

Antitrust laws q SBA joint R&Dexempt ion

q Antitrust laws

30



\

Matrix IX.—Policies Affecting Supply and Demand of Manpower ResourcesHaving an Impact on Technological Change

\

Principal group affected

Characteristicaffected

\ Employers Employees Educational institutions

supply

Demand

Price

Distribution

Mobility

q Retraining programs q Government-fundedscholarships

q Immigration policy c Federal support forvocational and technicaltraining

q Tax credit for new . Government-funded R&C

employment generated

b Governmentprocurement

qGovernment-funded R&D

—

q Minimum wage

Q Social security taxes

q Tax credit for newemployment

q Regional development q Tax provisions forincentives moving expenses

s Sectoral developmentincentives

q Tax credits for q Labor adjustment s Federal support forretraining programs assistance vocational/technical

training

. Industry-Governmentexchange programs



Policy type

Macro-economicpolicy

Capital markettransactions

Regulatorymeasures

Tax policies

Matrix X.—Economic Policies With Unintended or Indirect Effectson Technological Innovation

Area affected

Motivation to innovate Ability to innovate

. Government budget

Minimum wage legislation Interest rate

Social security taxes

. SEC rules and regulations

Banking regulations

q ERISA provisions on venturecapital investments

. Regulated rate structures(e.g., ICC)

. Tax writeoff for losses *

q Investment credit

. Depreciation alIowance b

q Capital gains preference

. Depletion allowances

32



Areaaffected

U.S. import

U.S. export

U.S. investmentoverseas

Foreign investmentin United States

Matrix Xl.—Policies Affecting International Trade and Investment

Direction of effect

Tend to encourage Tend to discourage

. M FN status on tariffs . Tariff barriers (ITC)

. Adjustment assistant program qProduct safety standards (e. g., FDA) —labor q Import quotas

—business q Government procurement (Buy American)

. Tariff concessions q Industrial standards

q GATT q Antidumping duties. CounterveiIing duties. 200-mile Iimit on fishing rights. STR (Special Trade Representative)

Government subsidies (e. g., on agricultural products)q Export exemption of product safety regulations Expor t Admin is tra tion Ac t

Tax concessions (DISC) Munitions Control Actq Export credits (EXIM bank, Commodity Credit Corp. q Trading with Enemy Act

of DOA) . Anti-Boycott legislationq Loan guarantees by EXIM bank to private credit sources

(PEFCO, FCIA)q Tied foreign aid (AID)q Export promotional information service (DOC)

q Tax credits on foreign taxes paidq Tax deferrals (e. g., subpart F income) q Extraterritorial application of antitrust. OPIC guarantees. Pollution and safety standards on U.S. plantsqTransfer pricing control (IRS code 482)qAllocation of R&D expenses (IRS code 1.861)

Mechanisms discouraging i m ports may encourage . Pollution and safety standards on domestic plantsinvestment i n United States

Exchange ratesetting

. Industries closed to foreign investment (nuclear energcommunications, shipping)



Mannerof action

Regulationof productcharacteristics

Regulation markettransactions

Informationtransfer

Financial

incentives

Matrix XII.—Policies Intended To Create Shifts in Consumer Demand

Policy purpose

Protecting economicProtecting health/saf@v welfare Other social purposes. . - --- -.. . _ . ---- - . t z

Consumer products . Energy efficiency(CPSC) standards: cars,

. Toxics, pesticides appliances(EPA)

Food, drugs (FDA)q Food (USDA). Cars (DOT)

Consumer creditregulation

. Warranty regulation

. FTC enforcementagainst deceptivetrade practices

. Advertising regulation,(e.g., correctiveadvertising)

. Nutritional labeling q Food grading (USDA) q Energy labeling

Warning labels (e. g., . Regulation of creditcigarettes) Warranty regulation

. Fair packaging andlabeling

. Tax credit for pollution-control devices

34



Mannerof action

Regulation

Governmentinformationtransferprogram

Matrix XllI-Government Policies Responding to Worker DemandHaving Impact on Technological Change

Policy in response to:

Demands for Demands forhealth/safety economic welfare Demands for legal rights

1

. Working conditions: . Social Security benefits . NLRA

–OSHA q Minimum wage —mine safety Protection of pension

regulations earnings (ERISA). Raising retirement age

q OSHA . Ajustment assistance(DOC, DOL)

. Retraining

major policy issue (see issue #l, chapter V).Similarly, an analysis of the programs in matrices11 and 111, which concern regulation, led to therealization that there are various approaches toregulatory design which have not yet been seri-ously attempted as a means of encouraging thedevelopment of new compliance-oriented tech-nology. Some of these means were suggested asa regulatory policy issue (see issue #5, chapter

V). It should be emphasized that the matrices didnot provide the only input to the development of issues. On the contrary, the industry studiesbelow and the foreign experience (chapter IV)were also important. The matrices did, however,furnish the principal structure for depicting andanalyzing the existing U.S. Government effort re-garding technology.

A COMPARISON OF SELECTED INDUSTRY EXPERIENCES

The industry-by-industry study presented in On the one hand, it provides a needed “real-this section was undertaken to complement the world” input into what would otherwise be apolicy-oriented approach described previously. rather theoretical construct. Thus, not only does

35



it serve to identify influential governmentalpolicies, which might otherwise be overlooked(for instance, decisions concerning the allocationof the radiofrequency spectrum by the FederalCommunications Commission that have had anenormous impact on innovation in the electronicsindustry), but it also helps to order such policiesaccording to the observed magnitude of their ef-fect on innovation.

On the other hand, those policies, programs,or procedures that have an indirect or long-rangeimpact, or that affect innovation primarilythrough their effect on the business environmentwithin which firms innovate, are unlikely to be ac-corded their proper weight in a microcosmicstudy concentrating on a particular industry. Fur-thermore, examination of an industry that hasfared relatively poorly in recent years is likely tobias the results toward those Government poli-cies having a net negative effect on innovation,whereas the opposite may be true of industrieswhose track record is more favorable. In short,

the two approaches—macroscopic by policyarea, and microscopic by industry—are comple-mentary and have quite different strengths andweaknesses.

Six industries were chosen for study:

qAircraft and aircraft engines,q Automobiles,q Carpets,q Synthetic materials,q Iron and steel, andq Semiconductors.

They were selected based on the existing re-sources of the Center and the need to include aswide a coverage as possible of the areas exam-ined in the preceding sections.

The conclusions below are only a first step. Lit-tle evidence was available on consumer goodsand services, and this was especially so when theprimary question of the impact of Governmentprograms and actions on innovation was raised.It would be most desirable to broaden the exam-ples considered in a future comparison, beyondthose of industrial goods and consumer durables

listed above.This section of the study has been based en-

‘W. R. Maclaurin, lnuention and Innovation in the Radio Industry (New York, Macmillan, 1949).

tirely on secondary sources; books, dissertations,and papers describing the various industries,which were chosen to reflect a long-term view of each industry and the effects on it of variousgovernmental actions over a period, preferably,of several decades. Wherever possible, an at-tempt has been made to isolate those Govern-ment policies and programs that have had aclearly traceable effect on technological innova-tion in the industry under study, rather than, forexample, those mainly affecting its structure oroverall economic situation.

Certain limitations of this study must be iden-tified at the outset. The most immediate of thesestems from the relatively small number of in-dustries examined. Many more could profitablyhave been studied, time permitting, and a samplemore representative of the economy as a wholecould have been obtained. Even within a givenindustry, this methodology may have empha-sized certain forms of Government action overothers perhaps equally important in the long run.The self-imposed limitation of examining onlythose actions that can be shown to have causedmeasurable change in the technological characterof an industry’s products or processes mayunderstate long-term, indirect, and incrementaleffects. Thus, no mention is made of antitrust lawas it has affected the automobile industry simplybecause an effect on technological innovationthat flows from it cannot be clearly identified.Similarly, the impact on the industry of federallysubsidized highway construction is easily substan-tiated, but its specific effects on innovation are

difficult to document, and have not been in-cluded.

There are clearly gainers and losers from anyinnovation. A new product or process technol-ogy may strengthen some firms’ competitivepositions at the expense of others. Ancillarychanges which are both positive and negativemay also occur. Only the fact that an innovationoccurred is examined here with no attempt to saythat net results were positive, The weight of evidence in general supports the assumption thatproduct and process innovation contributesstrongly to the longrun vitality and viability of theeconomy.

Within the limitations stated, we are quite con-fident about the conclusions reported. Multiplesources of evidence were consulted in each case.

36



Direct and documented relationships weresought, and for the most part the conclusions aresupported by other independent studies.

A general overview of the six industriesstudied reveals the expected industry-to-industrydifferences, but also points up some striking simi-larites—particularly if attention is limited to thoseforms of governmental initiatives as described inpolicy areas 111 and VI in this chapter—that seem

to be the most effective in inducing technologicalchange. These three are:

Regulation (pollution, health and safety,energy conservation),

Federal R&D support (direct to industry, in-direct, and performance by Government),and

Purchase of innovative technology-basedproducts.

Although other governmental actions (e.g., in-ternational policies) were identified that had an

effect on technological innovation in some in-dustries, and although certain industries (e. g.,the carpet industry)

2seem to have been relatively

unaffected by any of the actions outlined above,these three stood out as the most important forthose industries in which innovation has beenmost closely tied to Government action. In otherwords, these mechanisms were found to be theones most effective in affecting the rate anddirection of technological change in those in-dustries most responsive to Government ini-tiatives.

An earlier study of foreign experiences in en-couraging innovation based on over 150 cases infive industries reached identical conclusions. Oneadditional program, Government assistance intechnology transfer, was noted as important ininterviews conducted in Europe and Japan, butnot mentioned prominently in the United States.

3

The earlier work in Europe and Japan con-cluded that strikingly different patterns of govern-ment influence on innovation were apparent inthe five industries studied. This is certainly true inthe United States as well. Different actions and

‘Jin]oo Lee, Th e Euolution oj Technological innovation inthe Carpet industry (Cambridge, Mass.: MIT Center forPolicy Alternatives working paper, January 1978).

‘National Support for Science and Technology: A nEualuatlon oj the Fore~grt Experience (Cambridge, Mass.:MIT Center for Policy Alternatives).

programs clearly are of vastly different i m-

portance in the six industries examined. Varyingeffects were also noted in newer as opposed toolder firms in these industries, and consequentlyon different groups of employees, regions, andproducts. For example, defense procurementand Federal support for R&D in industry haveshaped both the semiconductor and aircraftengine industries. Federal performance of R&Dwas also an important force in the latter case.Product regulation in the areas of emissions,safety, and fuel economy has shaped recentchanges in the auto industry, while energy pric-ing policies have influenced synthetic materials—regulation of processes in the areas of energyconservation, safety, and environmental qualityhave been important factors in iron and steel in-vestments and innovations. Also, higher mini-mum wages were held to have speeded introduc-tion of new equipment in the carpet industry,while restrictions on wool imports hastened theuse of synthetic fibers.

Actions that help new firms and ventures getstarted are highly effective in encouraging majorinnovations. Government purchases and supportfor R&D have been particularly important in thisregard. For example, defense procurement andsupport for R&D stimulated the entry of newfirms into the electronics industry in several ways,primarily through direct purchases. By providingan initial market and premium prices for majoradvances, defense purchasers speeded their in-troduction into use. The main contribution to themost important innovations in electronics andespecially the development of integrated circuits

seems to have been through this means. 4 A simi-lar pattern of rapid technological advance, manynew entrants, and economies resulting from pro-duction experience economies was evident foraircraft engines. The early establishment of air-cooled engines in the United States can be at-tributed to new entrants. None of the establishedengine manufacturers undertook the develop-ment of these engines until either persuaded todo so or extensively assisted by their govern-ments.5

“James M. Utterback and Albert E. Murray, The Influence

of Defense Procurement and Sponsorship of Research and Deue/opment on the Development of the Civi~ian Elec-tronics Industry (Cambridge, Mass.: MIT Center for PolicyAlternatives (CPA-77-5), June 1977).

‘R. Miller and D. Sawers, The Technical Development of Modern Auiation (New York, N. Y,: Praeger, 1970).

37



novation. Unless the needed infrastructure, suchas trained people, is in place or created concur-rently to meet the requirements, severe disloca-tions may result. Structural unemployment andcompensation of employees displaced by man-dated major changes is a continuing concern.The implication is that a steady and gradual paceof mandated requirements is advantageous inthis respect,

This report does not argue that regulationnecessarily leads to more economically efficientor commercially desirable a llocat ions of resources. Moreover, regulation may sometimesimpose sufficiently high costs and stringent con-straints that innovation is impeded. Nevertheless,there are many examples of innovations enabledor enhanced by regulation. When regulation of products and processes is required for health,safety. or other purposes, it was found thatpotentials often exist for effective and innovativetechnological solutions, This should be con-sidered in decisions about the timing, form, and

implementation of regulatory actions.Government actions often have unintended

effects on innovation, and several programstogether may generate unexpected effects.

q

q

q

q

Intense pressure for rapid change may forceindustry to patch up an existing technologyrather than risk the failure of a radical in-novation.

1 q

Stringent requirements for approval of newproducts may act to reduce competitionfrom new producers and new entrants in a

business, thus increasing the value to firmsof established and accepted products.

At the level of detailed design changes,Federal laws or regulations have beenfound to act as a constraint to innovationsabout as frequently as they act to stimulatechange. And if regulations are not continu-ally updated to reflect changing possibilities,they may greatly reduce potentials for im-provements.

15

An implication is that performance specifi-cations would generally distort potential im -

‘“Abernathy and Chakravarthy. 1977. op cit

“A H Rubenstein and John E Ettlie, ‘*Analysis of Federal Stimuli to Development of New Technology bySuppl]ers to Automobile Manufacturers. ” F/nal Report toU S Department oj Transportation, March 1977

q

provements to a lesser extent than wouldspecification of specific technologies or solu-tions.

16

Major innovations have drastically reducedthe total costs of ownership and use of ma-

jor appliances, aircraft engines, and elec-tronic systems, but this was not readily ap-parent at first. Undue stress on cost im-provement might discourage seemingly

costly new technologies which have drama-tic potential for savings in the longer run.17

There is evidently potential for damage as wellas benefit in many Government programs andactions that influence technology. In this respecta special note should be made concerning theFederal role in actually performing research anddevelopment. The evidence reviewed stronglyindicated that large projects directly performed byGovernment for the development of productsand production process equipment have beenquickly made obsolete by the rapid pace of in-novation in industry, and their results have notfound widespread use. This was true of projectsto develop compact proximity fuses based onvacuum tubes, of development of equipment forautomatic production of transistor-based circuits,of projects to develop several liquid-cooled air-craft engines, and so on.

18Similar cases are evi-

dent in the United Kingdom and Germany. Onereason for this appears to be the firms’ superiorknowledge of critical details of the productionprocess, its interaction with product design, and amultitude of important adjustments in both. Con-versely, Government performance of more basic

research had evidently made outstanding con-tributions to industrial innovations. This seems tobe true for example, of basic work on aerody-namics, high-temperature liquid cooling, improv-ed aviation fuel, and other areas of generalusefulness which, however, do not yield propri-etary advantage.

19

Design of programs and analysis of the effectson innovation of Government programs and ac-tions should recognize that there is no simpleconnection between cause and effect. Actions

“R. O. Schlaifer and S.D. Heron, Deueloprnent of Air-craft Engines and Fuels (Cambridge, Mass.: HarvardUniversity Press, 1950).

‘7Utterback and Murphy. 1977, op. cit.

‘81bid,

“Kim, 1977, op cit

39



can have multiple effects. Many actions can con-tribute to the same effect. Several actions can in-teract to produce a disproportionate effect. Thenet result or bottom line so to speak is not alwaysclear. For example, early support given to semi-conductor technology through development con-tracts, direct procurement of prototypes andearly production at premium prices, dramatiza-tion and demonstration of the military need forgreater performance and reliability, and a will-ingness to encourage new and unproven sup-pliers all promoted entry of new firms. But theirrelative importance seems to vary widely in thecase of different firms. Similarly, reductions inprices for electronic components appear to havebeen caused by a variety of factors: the develop-ment of production lines for “industrial prepared-ness, ” direct and indirect procurement of a highvolume of electronics components, encourage-ment of entry, competition and development of “second sources, ” and occasional decreases inpurchases by the military. By the same token,

manpower development and mobility were alsoaffected by many different actions. 20

No one policy or technique can be recom-mended as a key to effective stimulation or sup-port for change. Many factors, including avail-ability of private venture capital, can contribute toentry of new firms and enhance the climate formajor product innovation. These may be sup-ported by other conditions such as the supplyand mobility of key personnel, Governmentencouragement of competition, and so on. Sev-eral factors might be considered as a set of loose-ly coupled active elements rather than one beingcause and the other effect. Lack of balance or alack of one critical factor may be seen as a “bar-rier” to innovation.

Finally, sophisticated control of program im-plementation has apparently enhanced the in-fluence of many Government programs and ac-tions. Should funds be concentrated on one firm—

“’Utterback and Murray, 1977, op, cit

or spread among many? Should established firmsbe supported or should new entrants be en-couraged? Should suppliers of advanced com-ponents be supported as well as users of suchcomponents in final systems or products? Shouldspecifications be based on an informal under-standing of best performance or best effort, orshould they be rigidly detailed? Should stand-ardization be stressed, or should diverse parallelapproaches be taken? Each of these conflictingoptions, among many others, has been effectivein certain examples. Apart from the content of the program, careful timing and implementationcan greatly enhance its impact.

1n conclusion, Government programs and ac-tions that affect innovation have widely varyingeffects in different industry and technology con-texts. Timing, interaction with other programs,and the details of implementation are oftencrucial. This has been well-understood in manysuccessful past developments for national pur-poses going back from well beyond early en-

couragement of the radio industry and Govern-ment pressure for four-wheel brakes on autos tocontemporary examples such as integrated cir-cuitry, numerically controlled machine tools,emission controls, etc. Understanding of thedynamics of different industries is needed inorder to promote positive and avoid negative im-pacts. Similarly, what industry can and should dowith respect to innovation can not be judged in-dependently of Government action. Since we arebeginning to recognize the many areas in whichGovernment and industry are closely interde-pendent, Government actions must be designed

with a greater appreciation for industrial potentialand responses. This will require study of more in-dustries, product areas, and services. We need tounderstand industry organization, decision-making, and responses with greater generalityand subtlety. A program of active experimenta-tion and study in cooperation with industry isneeded to provide an environment conducive tomore creative technological advance.



Chapter IV

SUMMARY OF MAJOR FEATURES

OF SEVERAL FOREIGN APPROACHES

TO TECHNOLOGY POLICY



Chapter IV

SUMMARY OF MAJOR FEATURES

OF SEVERAL FOREIGN APPROACHES

TO TECHNOLOGY POLICY

Foreign experience can offer several useful lessons as to why and how spe-cific policies succeed or fail under a given set of circumstances. In effect, itprovides a testing ground for policies in action that can be instructive to theanalyst. On the basis of extensive studies previously undertaken by theauthors on the policies of several foreign countries, both developed andunderdeveloped, the following review highlights the major thrust of policiesin four technologically advanced nations. The reasons for this selection arethat each case illustrates either some similar factors that are present in theU.S. environment or some contrasting approaches that might be instructive.While there is no implicit suggestion that the United States could or shouldemploy similar techniques, the purpose of the analysis is to outline the objec-

tives that have tended to dominate foreign technology planning.The Gilpin report to the Subcommittee on Economic Growth of the Joint

Economic Committee’ argued that the most distinctive example of differ-ences in approach are those of Japan and the United Kingdom. The former iscommonly cited as an illustration of a highly successful pursuit of techno-logical growth while the latter demonstrates policies that have had dis-appointing resuIts. The G i I pi n report observes that these cases are in-teresting not simply because of their contrast, but because of their relevanceto the U.S. position today. On one hand, there is a tendency to pursue policiesin the United States, which have not been successful abroad, notably in theUnited Kingdom. On the other hand, the Japanese example, which for so longhas been dismissed as irrelevant to U.S. circumstances, appears to have anincreasing number of useful lessons to American policy makers.

The following paragraphs offer an overview of the principal thrust of themajor national programs, including the original or innovative features ofthose programs.

JAPAN

It is clear that the unique circumstances of theJapanese industrial environment have accountedheavily for Japan’s successful exploitation of technology. The tightly organized industrial struc-ture, the government-industry -banking partner-

ship, the weight of government direction of .‘Robert Gilpin, Technology, EcorIormc Growth, and in-ternational Competlt/ueness, a report prepared for the Sub-committee on Economic Growth of the Joint EconomicC o m m i t t e e . U.S C o n g r e s s (Washingotn, D.C U . S .Government Print]ng Office, 1975)

economic activity and the notable self-disciplineof Japanese entrepreneurs and workers arealways cited.

The distinguishing feature of Japanese tech-nology policy as such has been its total and com-plete identification with economic growth poli-cies. The use and development of technologyhave been the backbone of industrial growth.Low-technology and inefficient industries unableto compete with firms in the developed Western

43



countries have been allowed to die out ratherthan be protected. Protective policies have beenemployed only to the extent that they aid the de-velopment of infant or emerging high-technologyindustries. The Japanese government has madea distinction between its treatment of largebusiness enterprises and small business. The roleof both is recognized as important in the industrialstructure. Whereas the larger firms may appear

to spearhead Japan’s export drive, the govern-ment nevertheless has a strong policy for thetechnological and business infrastructure supportof the small firm.

Japanese policy has stressed the commercial-ization of technology in the economic growthprocess. Until very recently, little R&D fundingemanated from the government. In fact, thegovernment’s role in technology and innovationhas been highly indirect. R&D and its commercialdevelopment has been left to industry while thegovernment has concentrated heavily on creatingthe environment for its industry to operate in.

Government “technology policy” thus hasconsisted principally of the following elements:

Heavy emphasis on technical educationand training highly skilled manpower re-sources available to industry,

GREAT

The British example contrasts sharply with the

Japanese in most respects. First, the circum-stances underlying innovation have perhapsplayed a role as important in the weakness of British technological policy as it has in the successof its Japanese counterpart. The positive indus-trial-financial-government partnership which hasbeen the key element of Japanese strength hasbeen far less present in Great Britain. Similarly,British technology policy has had less relation tothe economic growth strategy of the government.

British government policy has focused heavilyon supporting R&D efforts in basic fields. On onehand, this orientation has made it possible for theBritish to make major contributions to scienceand technology, in particular, areas of big sciencesuch as defense, nuclear energy, and space. Onthe other hand, this emphasis has been heavilyon the supply-side with lesser attention given to

q

q

q

q

q

q

Emphasis on consumer technologies re-sponding to market demand, as opposed toinvestments in basic R&D, “big science, ”and national prestige projects.

Strong export orientation of the economywith the resulting need for Japanese firms tocompete with the most technologically ad-vanced international firms.

Careful manipulation of the industrial struc-ture to prepare sectors and firms to meet in-ternational competition; limited protectionof infant industries until prepared to com-pete; and elimination of technologicallyweak companies.

Avoidance of technology monopolies byJapanese firms by mandatory licensing tocompetitors of firms attaining dominantmarket positions.

Government support for industry throughanalyses of export markets and availableforeign technologies.

Tax credits and deductions for industrialR&D and accelerated depreciation for pilotplants and R&D facilities.

BRITAIN

market demand (at home and abroad) for the

products of current research or to the problemsfaced by British industries in commercializingpromising new technologies.

The British government, rather than theprivate market, has tended to make most of thekey decisions on technologies to be developed bythe country. Reliance on and support of privatesector initiatives have not been key features inthe British experience. Industry-wide researchassociations have been fostered by the govern-ment to respond to the needs of the private sec-tor, but they have not had a major impact on

private firm behavior.

Outside the public sector itself, the govern-ment has concentrated on the university systemto expand the country’s technical and scientificbase of knowledge. Although the universities

44



have developed strong programs in basicscience, there has been a minimum of spillovereffect into industry.

Finally, the British have not followed a strongmanpower policy, as several other developedcountries have done, to prepare technical per-sonnel specifically for the needs of industry andtechnological change. The environment has beenmarked by poor relations with the labor force,

low worker mobility, and strong worker resist-ance to change.

Several programs, however, merit close atten-tion as important experiments by the governmentto bring technologies to the commercial stage.The National Research Development Corpora-tion (NRDC) has been closely watched as an in-teresting experiment in government-industrypartnership with relatively favorable results, whilethe Launching Aid program raised high expecta-tions but fewer results. The Preproduction OrderSupport Program has produced interesting re-

sults in bringing advanced equipment already de-veloped into commercial use.

The NRDC has been the subject of closeobservation due to its unique character andthe interest that other countries have shownin the experiment. NRDC is a public cor-poration (divorced form direct governmentmanagement) supporting innovation viaseveral activities, either (a) by paying part or

q

q

FRANCE

French policy, much like that of Great Britain,has been characterized by heavy governmentsupport of civilian technology. This is particularlytrue of both governments’ commitment to heavyinvestments in big technologies such as com-puters, aircraft, and nuclear energy.

Consistent with France’s highly centralized ad-ministrative structure, French science and tech-nology policy is characterized by strong directionand control and a measure of long-range plan-ning. Most technology policy has been dictatedby France’s political commitment to industrialand technological independence. The objectiveof maintaining at least one domestic supplier inevery important industry—a policy requiring ex-tensive government subsidies, frequently to weak industries—has had mixed results in stimulatinginnovative entrepreneurial behavior.

—.

all of the development costs, (b) by licensingpublic sector technologies, or (c) by enteringinto joint ventures with national privatecompanies. The NRDC is a modest under-taking but a relative success. Its main suc-cess has come through its exploitation of public sector technologies especially thosecoming from the universities and researchcouncils.

Launching Aid has had as its objectives thereduction of commercial risk facing manu-facturers by interest-free loans to thedeveloper, repayable as a levy on sales orlicenses. Unlike NRDC, this program hasnot been marked by significant success. Itsinvestments have flowed primarily intogovernment-designated projects rather thanprivate market initiatives.

The Preproduction Order Support Programaims at encouraging industry to utilize ad-vanced equipment on a loan basis from thegovernment with the option of purchasingthe equipment after a trial period. TheDepartment of Industry buys equipmentfrom the manufacturer and lends it toselected industrial users. This program hasshown some success, particularly in themachine tool industries, where the pro-gram, in effect, aided in introducingnumerically controlled machine tools.

French policy makers have linked technoloqi -cal and economic growth policies more closlythan the British. Great emphasis has been givento strengthening the industrial structure in Franceby encouraging mergers of companies intostronger national entities to respond to foreigncompetition. Strengthening the technologicalbase of these firms has been a key objective.Similarly, the French have emphasized the im-portance of firm participation in the training of manpower resources.

The main outline of the French programs is as

follows:

q “Concerted Action Programs’ ’—with com-mittees created to coordinate research inspecific areas.

45



q

q

q

q

“Thematic Action Programs’ ’—designed tocoordinate interdisciplinary applied re-search among laboratories normally under-taking basic research projects.

q

“Pre-Development Aid’’ —helping researchorganizations launch work on new technol-ogies.

“Development Aid’’ —providing loans to

meet development costs of private firms.“National Agency for the Valorization of q

ers, inventors, and small firms in developinginnovations.

Tax Incentives

— all operating R&D expenses fully deduc-tible costs,

— accelerated depreciationfacilities, and

— tax deduction of capitalized

sources in a new organizationWorker Training—payroll tax for

o f R & D

R&D re-

worker re -Research” (ANVAR)–assisting research- training programs.

WEST GERMANY

Unlike France, Germany relies far more onmarket forces and industry -government-univer-sity cooperation than on regulation and controlby the government. Government assistance isnormally granted only where the market is ex-pected to be sufficiently strong to guarantee thesuccess of the program. As a result, German aid

tends to focus on influencing the “climate” for in-novation through indirect measures rather thandesignating or promoting specific development of technologies. However, a notable exception hasbeen the German government’s direct role indeveloping major technologies (electronics, com-puters, etc.), much as in Britain and France.

A positive factor in the German environmentfor innovation is the relatively high level of cooperation that exists among industry, univer-sities, and government. Largely due to this fac-tor, government action is not directed to stimu-

lating joint programs as much as in France, forexample. The principal German policy orienta-tion is in efforts to reduce the costs of R&D forprivate firms and encouragement of large techni-cally based corporations in advanced technologi-cal areas.

Several programs are of particular interest inthe German case:

q

q

q

q

Extensive network of research instituteslargely supported by federal and state gov-ernments, ranging from basic research (e.g.Max Planck Institutes) to applied industry-oriented research (e.g. AIF—Industrial Re-search Organizations).

Priority programs including the “bigscience” programs and the “key technol-ogies” program; the later is focusedspecifically on R&D for industrial innovationand includes direct government cost-shar-ing with industry,

The “first innovations” program consistingof interest-free, forgivable loans wherebythe government meets 50 percent of thecost of commercial development of a newtechnology. If the effort fails, the loan iscancelled.

Venture capital through an independentconsortium of banks (WFG) supported bygovernment guarantees under which theconsortium purchases equity shares in newcompanies undertaking innovative projects.

SUMMARY OBSERVATIONS

On the basis of the previous four cases and tend to emerge in observing the foreign ex-

several other studies,2 the principal elements that perience are the following:‘The Current International Economic Climate and Poli-

cies /or Technical lnnouation, by Science Policy ResearchUnit, University of Sussex, United Kingdom, in collabora-

1

tion with Staff Group Strategic Surveys TNO, T h eNetherlands.

46

Direct government support of R&D infirms–by varying degrees, most developedcountries provide facilities (direct, indirect,



or both) to encourage R&D functions withinprivate firms.

2. Use of government demand through pro-curement policies has the effect of reducingrisk and uncertainty for the innovative firmand as such constitutes one of the most ef-fective tools of most industrialized countriesin stimulating technological change.

3. Provision of capital by the government tofirms desiring to introduce innovative prod-ucts or processes to the market. Most coun-tries have programs to meet the capitalneeds of private firms, either by venturecapital corporations that buy equity sharesin the firms or by direct government “start-up” funding available to firms introducingnew technologies.

4. Concern with industrial structure—mostdeveloped countries have seen the neces-sity to force or encourage industrial restruc-

5

6.

turing to meet the requirements of rapidgrowth and international competition withtechnologically advanced firms. This hasbeen accomplished through mergers, for-mation of public companies, elimination of technologically weak firms, and limited pro-tection for emerging technologically weak and technologically oriented firms.

Emphasis on export capacity and interna-

tional competition. All four countries dis-cussed have viewed technological progressas an essential element in capturing new ex-port markets and foreign competition as animportant impetus of technological change.

Emphasis on labor-training and manpowerdevelopment policies as a key feature intechnological development. Most devel-oped countries view the quality of man-power skills as their direct responsibility instrengthening the conditions for technologi-cal change.

47



Chapter V

MAJOR ISSUES IN U.S. POLICY

TOWARD TECHNOLOGICAL INNOVATION



Chapter V

MAJOR ISSUES IN U.S. POLICY

TOWARD TECHNOLOGICAL INNOVATION

This chapter presents a series of policy issues concerning the relation-ship between Government action and technological innovation which are,in the authors’ view, major questions deserving of congressional attentionin the near future. The articulation of these issues is intended to provide acritique of existing U.S. programs and policies in relation to innovation andto provoke debate about how existing policies might be reoriented. Itshould be acknowledged from the outset that the choice of these issueswas at least partially subjective. Thus, reasonable people will undoubtedlydiffer about how important they are for congressional attention. It is notmeant to imply that these issues are necessarily more important than othernational priorities. Rather, they are intended to suggest a series of new ini-

tiatives that merit consideration in reassessing existing technology-relatedpolicies.

Although the issues involve subjective choice, the process for arriving atthem was rooted in objective research. Thus, they derive principally fromthe three major elements of this report, the survey of existing Governmentprograms, industry studies (chapter Ill), and foreign experience (chapter IV).The survey and categorization of existing U.S. programs furnished aframework within which to understand the relative emphasis among majorpolicy areas and, within each policy area, to uncover what kinds of policymechanisms have been employed most frequently for various purposes.From this survey it was possible to derive policy areas and mechanismswhich, although now relatively neglected, may deserve additional attentionin the future. The industry studies, on the other hand, provided information

about how existing programs have actually affected innovation in those in-dustries and therefore offered guidance as to what kinds of new or modi-fied Government actions are likely to be effective in different contexts.Finally, the survey of foreign experience offered case studies of effectiveand ineffective techniques employed by other governments to encouragetheir private firms to innovate (see figure 2).

The purpose of this chapter, therefore, is to define these major issues,articulate why they appear to be important, and then to suggest a series ofalternative policies which address the issues in various ways. The a l te r -

na t i v es s ugges t ed a re no t mean t t o be an ex haus t i v e l ist, nor is advocacyintended. They are suggested in order to illustrate the action potential in-herent in each issue. It is intended that the focus of debate will be primar-

ily on the issues themselves and only secondarily on the possible alter-native actions.



ISSUE 1Direct Support of Non mission-

Oriented Technology

Should Congress consider pro-v id ing for the d i rect suppor t o fnonmission-oriented technology?

Direct Federal support for technological in-novation has traditionally taken one of two

forms in this country: general support forresearch and development, such as that fundedby the National Science Foundation (NSF), andsupport for technology development (throughR&D funding and the procurement of innova-tive products) in furtherance of certain well-defined national goals, such as the defense andspace missions, and more recently the searchfor new sources of energy (see program areasIV, V, VI, and VII in chapter III).

This policy differs markedly from the practiceand procedures of other technologically ad-

vanced nations, notably Japan, in which thegovernments support technological innovationwith no other goal than the general economicone of helping particular sectors of industry togrow and to compete in international markets(see chapter IV).

Increased attention has recently been focusedwithin the Government on ways in which, incooperation with the private sector, it might seek to stimulate and encourage technological innova-tion through programs of direct support of somekind. There are three basic reasons for theheightened interest in such programs. First, the

United States is facing increasingly stiff competi-tion in technology-based products from other na-tions that have programs for domestic support of technological innovation for purely economicpurposes.

In addition, the social returns on technologicalinnovation are often greater than any reasonableexpected private return, due to the inap-propriability of some of the benefits, which makesa Federal sponsorship role appropriate (seechapter II). Lastly, there are purely social reasonsfor supporting innovation. An example of these is

the general desirability of creating employment.Support for new development with specific man-power benefits in mind may involve both techno-logical innovation and job redesign, and differsfrom the application of traditional labor market

policies (discussed in issue #6). Technological in-novation may also be supported for reasons of environmental protection or product safety.

If the Federal Government were to adopt apolicy of broad support for technological innova-tion, the question would arise as to what typeand degree of Federal intervention is appropriateand necessary at each stage of the innovativeprocess. In attempting to answer this question,

reference has been made to government pro-grams in other countries (see chapter IV), as wellas a study of some of the domestic effects of U.S.Government actions on a selected group of in-dustries (see chapter 111). There are two generalconclusions that can be drawn from thesesources. On the one hand, it was found that in-direct effects of Government action can be ex-tremely efficient in promoting technologicalchange in specific industries, even when such ef-fects are unintended. On the other hand, as ageneral rule, direct Government support fortechnology tends to be more effective in the early

stages of development, rather than later whenthe technology nears commercialization (seeissue #2).

The potential effectiveness of the procurementprocess to stimulate and encourage innovation inthe private sector was particularly borne out bythe industry studies performed for this report. In-deed, the purchase by the Government of new,innovative products was found to be one of themost efficient stimulants of new technology. Thatprocurement could be used to enhance innova-tion was recognized by the Commission on Gov-ernment Procurement, and was embodied insome of the recommendations in their 1972report to Congress. Many of these recommenda-tions, in turn, have been included in legislationnow before Congress.

2Nevertheless, the recog-

nition is lacking that procurement expendituresmay in certain circumstances constitute a moreefficient alternative to direct subsidy of R&D.

Another weakness in present policy resultsfrom the fact that there is at present no Federalagency charged with the mission of assuring thetechnological health and vitality of American in-dustry generally. As a result, there is no focus in

‘For example, the carpet industry’s adoption of syntheticfibers was stimulated by the 1950 ban on the import of Chinese wool. See chapter Ill.

2S. 1269 the Federal Acquisition Act,

52



the Government for the support of general, non-appropriable research related to this broad mis-sion. (The Directorate for Applied Science andResearch Applications (ASRA) at NSF may dosome of this, but only as a secondary mission forthe agency, and on a very small scale. ) For ex-ample, the Department of Energy supports re-search in basic nuclear physics, and the DefenseDepartment supports laser research, because

these are fields related to the missions of theseagencies. However l there are other scientificfields, for example, the study of friction, corro-sion, mechanical design, catalysis, manufactur-ing technology, etc., that are relevant to a widevariety of industrial processes, but for which noagency feels responsible.

Increased Government support for technologybasic to commercial development is not likely inthe majority of cases to result in patentable inven-tions; however, in those instances where patentsmight arise, there is an issue as to who shouldown the patent rights to inventions stemmingfrom publicly funded R&D. The situation regard-ing this question is currently quite chaotic. Eachof the various mission agencies has, over time,adopted its own procedures in dealing with theissue, and the result is that there is no uniformtreatment in the Government either in policy orin its implementation. The effectiveness of patents, either in promoting innovation or instifling competition and thereby retarding it, dif-fers from industry to industry. However, studies

3

have shown that, in general, patents held by theGovernment and licensed only on a nonexclu-sive basis are used much less often than those inthe private sector. Of course, there are socialgoals other than that of promoting innovation,and the granting of a monopoly license to manu-facture and market a product developed in partwith Federal funds may conflict with these. How-ever, from the restricted viewpoint of this anal-ysis, the conclusion is clear: a polic

yof refusing

exclusive patent rights to federally funded inven-tions has a retarding rather than a stimulating ef-fect on innovation.

The preceding discussion suggests the follow-ing options for possible congressional action.

——.. —

‘See the Government Patent Policy Study performed byHarbridge House for the Federal Council on Science andTechnology, May 17, 1968,

1. Initiate a policy of selective procurement of products embodying innovative technologyat prices that reflect the R&D costs incurredby the innovator. Such purchases of inno-vative products, by creating a market, maydo more to stimulate innovation than wouldan equivalent expenditure of researchfunds.

—

—

This strategy is most likely to succeed in

those situations in which a commercialmarket exists for the product, the tech-nology has matured, and the price hasdropped.Procedures for dealing with the problemof monopoly creation-might include par-allel funding of several firms, or man-datory licensing by firms that capture aset fraction of the market.4

2. Establish a funding capability for the sup-port of advanced, nonappropriable re-

3

search responsive to a wide variety of

societal needs, such as energy conserva -tion,

sor manufacturing productivity. The

research could focus on technical subjects of wide applicability such as product fatigue,safety friction, corrosion, catalysis, etc.

– A program could be set up either as aseparate agency or as a function withinan existing agency to monitor and fundnonappropriable research in fields of in-terest to a wide variety of industries.

— Macroeconomic analysis suggested inissue #8 would enhance the ability of thisprogram to concentrate on those tech-nologies of interest to specific industrialsectors, and specific manpower and en-vironmental needs.

Grant, under appropriate safeguards,’ ex-clusive patent rights to inventions made byprivate individuals or firms under Govern-ment funding, as in Europe and Japan.

— Requiring guarantee of an intention towork the patent.

— Avoiding the creation of a monopoly, for

‘See chapter IV for a discussion of Japan’s handling of

this problem.5The Advanced Technology Assessment Program of the

Department of Energy does some of this on a very smallscale

‘Bill HR. 6249, the Uniform Federal Research and De-velopment Utilization Act, addresses the Issue,

53



example through “march-in rights” bywhich the Government may revoke ex-clusive patent rights.

ISSUE 2

Reconsideration of the Role of theNational Laboratories

Should Congress consider the ap-propriate role of the National Labora-tories in the support of technologicalinnovation?

The question of the proper use of the federallyowned and funded research institutes—in-houselaboratories, national centers, and federally fund-ed research and development centers (FFRDCS),which we refer to here as “National Labs’’—isbecoming a more and more critical issue, both forCongress and for the executive branch, as Gov-ernment research activity expands into tradition-ally private domains (e.g. energy) and as thenumber and influence of the Labs grow commen-surately. Indeed the Office of TechnologyAssessment (OTA), through its R&D Policies andPriorities Program, has been studying this issue,and has issued a draft report (NationalLaboratories Issues, May 9, 1977), which ex-plores its implications thoroughly.

There is no doubt that the National Labora-tories can perform a very useful role in under-taking research of broad social benefit, but whichis unlikely to be performed in the private sector.Examples of such research might include work done to demonstrate the feasibility of specificpollution control technology, or investigations of alternative methods for the storage of radioactivewaste products.

Nevertheless, there is significant doubt as tothe advisability of involving the National Labs inthe development of technology of immediatecommercial significance because they are notclosely attuned to the market. A strong conclu-sion which emerges from an examination of ac-tual industry responses to governmental ini-

tiatives, both here and abroad, is that directGovernment funding or performance of R&D isgenerally unsuccessful in creating commerciallyuseful technology when it is applied to the laterusages of the innovative process.

In addition, experience has shown that theproblem of “spinning off” a new technology tothe private sector at the appropriate stage is avery difficult one. Lastly, involvement of the Na-tional Labs in technology of commercial signifi-cance creates a bias toward in-house perform-ance because of the competition engendered be-tween them and privately owned research facil-ities, and the political difficulties sometimes en-countered by an agency in locating large pro-grams in specific private firms. The problem of competition can become serious when a NationalLaboratory serves a dual role as research facility,and as contract monitor or proposal evaluator.

The problems inherent in the competition be-tween Government-owned and private R&D fa-cilities, and their potential for inhibiting innova-tion, have been recognized by the Office of Man-agement and Budget,

7and more recently by the

OTA study referred to above. The issue has notyet been dealt with effectively by legislation. Ap-propriate congressional actions might include the

following:

1. Develop an explicit set of guidelines for use

2.

by the research-funding agencies in decidingwhich projects to fund in-house and whichto support in the private sector on the basisof:

— Time-horizon of research,– Potential for commercial application, and– Direct utility to mission of sponsoring

agency.

Cooperate with the executive branch, to

define explicit missions for the various Na-tional Labs, in keeping with the overall mis-sion of their sponsoring agencies in orderto:

—

— .70MB

Clarify goals to facilitate performanceevaluation,Control mission expansion beyond orig-inal boundaries without congressionaloversight, andPossibly reduce the scope of NationalLab activities so as to eliminate programsthat would be more productive in theprivate sector.

Circular A-76, as revised, sets forth the genera]Federal policy of relying on the private sector, and lists anumber of restrictive circumstances that must apply to justifythe Government providing an industrial or commercialproduct for itself.

54



Cooperate with the executive branch indeveloping new roles for the National Labs,in performing research of broad social bene-fit that is unlikely to be undertaken in theprivate sector.

ISSUE 3

Facilitating New Entrants Intothe Market

Should Congress consider meas-ures to faciIitate the entry of new firmsand inventors into the market as ameans of encouraging the introduc-tion of new technologies and innova-tive entrepreneurship?

Technological innovations are frequentlybrought to the market by new firms or inventorswho translate a new idea into a commercial ven-ture. Similarly, new or small firms often have the

flexibility to adapt easily and effectively to newand innovative ideas. It is important thereforethat the entry and survival of new firms in theprivate sector be facilitated.

The relationship between technologicalchange and new ventures may be seen from twoperspectives. First, a new firm may be the directresult of a technological innovation by, for exam-ple, an individual inventor who decides to bringhis new product into commercial use or an in-dividual or group of individuals in an older, moreestablished firm who decide to spinoff a new

company founded on a new product. The olderenterprise may even decide to create a new firmas a more appropriate vehicle for introducing anew technology.

Second, the characteristic of “smallness” or“newness” in an enterprise may offer the firmgreater flexibility in experimenting with new ideasor processes. Production processes are less well-established and capital equipment is frequentlymore all-purpose. The new firm has no estab-lished market image that must be maintained andtherefore may be more inclined to assume com-

mercial risks in its effort to gain a market niche.This does not imply that older firms are by natureless capable of innovative activities than the new,smaller firm. Rather, the perceptions of risk andlong-term gain may be different at the margin,

with the small entrepreneur more willing to act ona new idea or product, which will differentiatehim from larger, more powerful producers.

Ease of entry of new firms in the free enter-prise system is an obvious economic as well associal objective in the United States. The abilityof firms to enter and leave a market is a criticalfeature of an economic system with a soundcompetitive environment. This report empha-

sizes another dimension to this picture, i.e. , thatthere is a strong technological objective as well inpolicies to assist the entry of new firms. Newtechnologies with the potential of significant com-mercial use should not be kept from the marketby unjustified structural, financial, or legal bar-riers. Yet the authors believe that the currentU.S. industrial and financial structure does—even if inadvertently—impede easy entry of many potential new firms. Several examples of types of barriers that might be expected to facewould-be entrants are:

Venture Capital Restrictions

The new entrepreneur frequently requires out-side capital to launch his operation. This must beobtained through the private or public market.The Securities and Exchange Commission regu-lations (particularly Regulation #144), with re-spect to private placements of venture capital,limit the rate at which investors can recoup theirinvestments. In short, the investors in these newfirms are unable to obtain a fast payback. Entryinto the public market poses extremely difficult

problems also. For the new or small firm to gopublic, intensive preparations are necessary, in-volving high costs associated with registration of public issues. Furthermore, the entrepreneurbears a greater liability compared to the investorwhen entering the public market.

Tax Disadvantages

Although certain tax provisions have beendesigned to assist new entrants or small firms

(such as Small Business Investment Companies

(SBIC) and subchapter S of the IRS code), thenew firm nevertheless encounters a variety of obstacles. For example, capital gains are treatedless favorably than formerly, e.g., the increasedholding periods and changed stock option provi-

55



-——.

sion. This is keenly felt by the small entrepreneurin need of investment capital. The new tax provi-sions reduce investor interest in investing insmaller, riskier firms. As investors themselvesfind such firms less interesting, the potential en-trepreneur, having difficulty in selling his sharesto the public, may be frequently induced tomerge with older larger firms to avoid capital-gains taxes and obtain dividend payments.

Other provisions affecting the capital positionof the new firm, compared to the older firm, arethe loss carry-forward and carry-back rules. Ex-isting firms can carry back losses, an advantagethat is clearly impossible for new firms. Hence theolder firm enjoys a financial advantage over newfirms in introducing an innovation that does notbear immediate profits.

Regulatory Barriers

New firms may have greater difficulty inmeeting environmental and health regulations

than established firms, which are already struc-tured to comply with such regulations. They maylack adequate managerial or technical skills tomeet Government requirements. (Issue #4 pro-poses programs to deal with this problem. ) Also,the total cost of compliance may be prohibitivefor new or small firms, either discouraging theirformation or inducing them to sell out or mergewith larger firms.

Market Barriers

New entrepreneurs typically face greater mar-ket uncertainties. For example, established tech-nologically advanced firms frequently benefitfrom substantial Government procurement. Newfirms with only a short track record may have lit-tle chance for Government contracts. Further-more, the market power of existing firms bearsheavily on the new small entrant. This power fre-quently results in their absorption through mergeror acquisition or through product imitation bylarger firms with well-organized marketingsystems.

While solutions to these special problems are

not always obvious and often run awry of otherpolicy considerations, Congress should studymeasures to ease the problem of entry for newfirms as well as to improv~ chances for survival

56

against stronger, more established firms. Severalalternative actions might be:

1.

2.

3.

4.

5.

6.

7.

8

Early venture capital assistance (such as theNational Research Development Corpora-tion (NRDC) in Great Britain).

Industry-Government joint-venture ar-rangements.

Selective use of Government procurementto assist new technologically innovativefirms. (Studies of the electronics industryhave shown that Government procurementwas an important factor in the early healthof the industry. )

Stricter antitrust enforcement to strengthenthe position of the new firm from the marketdomination of larger firms.

Consulting assistance to new firms inmeeting regulatory requirements. (Seeissue #4 “Diffusion of Technology.”)

More favorable tax treatment for new firms

(e.g., higher carry-forward provision,changed depreciation, lower tax on capitalgains).

Simplification of task of obtaining informa-tion about and using various Federal, State,and local incentives in form of cutoff rules inapplication procedures for small firms, andcomputer data-bank information sources onavailable aids.

Patent protection for small firms and inven-tors against violations and encroachmentsfrom larger firms, such as through use of a

national patent board wherebe reported and prosecutedsary.

ISSUE 4Diffusion of Technology

a

the Private Sector

violations canwhere neces-

Within

Should Congress consider compre-hensive programs to enhance the dif -fusion of existing technologies andtechnical information within the pri-

vate sector?

‘Diffusion of technology from Government sources to thecivilian sector is discussed in issue #1, and internationaltransfers in issue #8,



—

Diffusion means the spreading of technologyand technical information to new users. As op-posed to generating new technologies, diffusionof existing technologies is usually a low-cost wayto bring about greater economic benefits by: (1)raising productivity levels of industries by closingtechnology gaps, (2) encouraging more innova-tions by helping small- and medium-size firmscompete with larger ones, and (3) promoting

new uses of technology by means of transfers be-

tween different industries.

Many industries are characterized by a few,large technology leaders and many smaller pro-ducers. For the U.S. economy more than 95 per-cent of all manufacturing establishments employless than 200 people. ’ Although there are otherfactors besides diffusion barriers which result inwide ranges of technology in terms of age andproductivity being adopted by producers of simi-lar products, there exist many opportunitieswhere better diffusion can help close the gap be-tween best-practice technology and average

technology. A General Accounting Office (GAO)study of manufacturing productivity

10suggests

that wider diffusion of modern manufacturingtechnology can improve industrial productivity,especially among small batch-process manufac-turers, which contribute 36 percent of manufac-turing’s share of the GNP. The study maintainsthat such productivity improvement can in turnincrease the competitiveness of U.S. products,decrease the cost of Government purchases, andreduce inflationary pressure.

Technology gaps tend to stifle competition andreduce the incentive for large firms to innovate.By promoting diffusion of technology, the Gov-ernment can help small- and medium-size firmscompete more equally with larger ones, and alsohelp foster more innovations. In the special casesof pollution control, health, and safety standards,the Government can help the diffusion of tech-nologies for meeting these requirements andachieve wider compliance by helping small firms,which tend to lack the knowledge of regulatoryrequirements and the means to comply.

11

‘U.S. Statistical Abstract, 1976 (Department of Com-merce, Bureau of Census).

‘OGAO Repor t to the C o n g r e s s , M a n u f a c t u r i n gTechnology – A Changing Challenge to improved Produc-tivity, LCD-75-436, Washington, D.C , June 1976.“Charleswater Associates, Inc., The impact on Small

Business Concerns of Government Regulations That ForceTechnological Change, Report to SBA and NBS,September 1975,

The diffusion of technology used in one typeof application to another can often result in newproducts, sometimes new industries. The use of sophisticated electronics in watches is perhaps anexample. Thus wider diffusion of existing tech-nologies not only increases opportunities to im-prove technology, but can also lead to more in-novations. This is supported by the findings of the industry study in this report (see chapter III).

The funding of R&D to generate new technol-ogies has often received much more attentionthan the diffusion of existing technologies to newusers. Since diffusion is an important mechanismin raising average productivity levels of industriesand in spreading the benefits of technological in-novations to bigger segments of the economy,the problems of diffusion of technology in theprivate sector deserve Government attention.

The structure of the marketplace frequentlyworks against the diffusion process. Many in-dustries are dominated by a few, large technol-ogy leaders, which are obviously reluctant to help

diffuse technology to their smaller, less efficientcompetitors. Such oligopolistic firms often usepatent and patent-pooling practices to reinforcethe diffusion barrier. By themselves, small firmsoften lack information and other resources totake advantage of more productive availabletechnologies.

Given the lack of market forces to promote dif-fusion, there are few Government programsaimed at redressing the situation. The GAOstudy mentions some efforts by the Small Busi-ness Administration (SBA), National Technical

Information Service (NTIS), and others, butmaintains that such efforts are fragmented andvery limited. In contrast, it points out thatWestern Europe and Japan have well-developedgovernment-directed programs for overcomingbarriers to diffusion. These include widespreadregional productivity centers and various govern-ment-industry-university cooperative efforts.

To address the diffusion problem, a compre-hensive policy might use a variety of instruments:

1. Establish a nationwide network of local cen-t e r s , that provide small firms with tech-

nical, informational, and consultative assist-

‘2A model of this kind of program, entitled State

Technical Services, was enacted in the mid- 1960’s (22U.S. C. 278). A residue of the program still exists in 23States.

57



2%

ance about the availability and usenologies applicable to their needssuch means as:

of tech-through

— Technical agents that provide advice andassistance to firms on request and act asinterface between firms and varioussources of Government assistance suchas NTIS, National Bureau of Standards(NBS), etc.;

— Seminars and workshops on technologi-cal problems/solutions for small firms inspecific industries;

— Legal/administrative/technical assist-ance to meet Government regulationssuch as pollution, health, and require-ments (e.g. Occupational Safety andHealth Administration consultation pro-gram); and

— Financial assistance through loans, guar-antees, or tax provisions for investmentsin regulatory compliance equipment andfacilities (e.g. Environmental Protection

Agency/Occupational Safety and HealthAdministration/Small Business Adminis-tration financial assistance for pollutioncontrol).

Support and encourage industry coop-erative activities by small firms (within thelimitations of antitrust legislation) throughindustry trade associations, professionalassociations, or marketing and purchasingcooperatives to:

— Conduct adaptive R&D and demonstra-

tion projects of existing technologies forsmall-firm applications;

– Construct jointly-operated productionand pollution control facilities;

– Purchase materials and services on acooperative basis;

— Articulate joint technical problems andneeds; and

– Promote group efforts of self-help.

3. Support for technology information/com-munications systems that serve both tech-

nology suppliers and users such as:

—

Government-operated systems such asNTIS; andPrivate technology brokerage firms.

4 Require compulsory licensing to competi-tors when firms attain certain market-shares(see Japanese practice in chapter IV).

Support for programs where the Govern-ment purchases technology and resells it tomultiple users (see Preproduction OrderSupport Program of Great Britain, in chap-ter IV).

ISSUE 5Implementation of Environmental

and Safety Regulations

Should Congress consider newmeans of implementing environmentaland safety regulatory requirementswhich will encourage the developmentof innovative compliance technol-ogies and safer products and mater-ials?

Much of the debate concerning environmentalregulation to date has focused on the need fornew legislation and the stringency of regulatoryrequirements. Questions relating to implementa-tion of the legislative mandates have beenunderemphasized. In particular, the role of technology vis-a-vis regulation has largely beenignored. The suggestion here is that increasedpolicy consideration be given by Congress toissues concerning regulatory system design andimplementation so as to encourage both thedevelopment of the new technologies necessaryto achieve environmental goals and the develop-ment of safer products and materials.

There are at least two important aspects to therelationship between regulation and technologi-cal innovation. One concerns how regulation af-fects or is likely to affect innovation, and theother concerns the role of technological innova-tion in achieving regulatory goals. As to the firstaspect, there has not been a great deal of syste-matic research about the effect of environmentalregulation on U.S. technology

13and the issue re -

13There have been several studies of the pharmaceutical

industry, notably those of Peltzman (Journal of Political

Economy, Vol. 81, September/October 1973), Warden andLasagna (Regulation and Drug Development, AmericanEnterprise Institute, 1975), and Grabowski (Drug Regula-tion and Innovation, AEI, 1976). Other industries studies in-clude automobiles (see Abernathy and chakravarthy, op.cit., p. 47) and an ongoing CPA study of the chemical in-dustry.

58



.

mains controversial. From the evidence whichdoes exist, one can say with certainty that it is im-possible to make simple or general characteriza-tions about the nature of the impact. At a mini-mum, it is necessary to distinguish between thedirect effects on innovation in compliance effortsand the longer term, ancillary impacts on thegeneral process of innovation. The effects in bothinstances are likely to vary significantly depend-

ing on the nature of the regulation and the regu-lated industry.

The effects of regulation can be positive ornegative. For example, positive effects may oftenoccur when regulatory requirements comple-ment some existing market force (for example, inthe case of fuel economy regulations on the autoindustry—chapter III, p. 00) or where a new orignored area of development can be exploited.Regulatory constraints, however, may hamperinnovation by blocking certain new technical op-tions or by decreasing the resources available fornew product development. Of particular concernis the fact the regulation may hurt the competitiveposition of small firms. As these effects can onlybe understood on a sector-specific basis there is a

need for such analyses concerning the impact of regulatory programs as an input to regulatorydesign (see issue #8 for further discusson of analysis needs).

Although the basic environmental require-ments in the United States have been highly pro-gressive (viewed internationally), mandatorystandards have been the almost exclusive meansused to achieve them. Some consideration has

been given to the “technology-forcing” characterof health-based regulatory standards,

15but in

general, the encouragement of new technologieshas been absent as a conscious element of regulatory policy. This has not always been thecase abroad, where several different approachesto regulatory design, which focus specifically onnew technology, have been implemented.—

‘“In addition to chapter [11, see U.S. Department of Com-merce, The E/jects of Pollution Abatement on International

Trade – l], 1/1, IV (published yearly). which finds little or noeffect on the U S. trade position; 1. Waker (ed. ) Studies inInternational Enuironrnental Economics, Wiley & Sons,

New York, 1976, a series of essays; and CharleswaterAssociates, The impact on Small Business Concerns of

Government Regulations That Force Technological

Change, Boston. 1975.“See “Technology-Forcing and Federal Environmental

Protection Standards, ” Iowa L Reu , February 1977.

The foreign experience is but one source fromwhich new means of implementing regulationsand facilitating regulatory compliance can be un-covered. A systematic effort to improve thedesign of regulations might include the followingtwo components:

1.

2 .

Evaluation, through such means as a task force, special commission, or research ef-

fort, of the means by which innovative com-pliance with regulatory needs can beachieved; ‘

band

Application in appropriate regulatory con-texts of demonstrations, experiments, ornew policies designed to facilitate theachievement of regulatory goals throughthe encouragement of technologicalchange.

17

Either component would require congres-

sional direction. Some of the particular regula-tory alternatives, which might be either studied orimplemented, are contained in the following list.It is not suggested that any of these alternativesbe immediately adopted. Rather, they are of-fered as examples of possible new methods of regulating and serve to illustrate the need for athoroughgoing reassessment of the means bywhich to achieve regulatory goals via technologi-cal innovation.

1

2

Expansion of direct Government supportfor in-firm technological development incrucial areas (e. g., pollution control in auto-mobiles) leading to both process and prod-uct change.

Modification of pollution control tax incen-tives, i.e., accelerated depreciation andmunicipal bond financing, so as to favorprocess redesign and the development of new products and materials rather that add-

“The regulatory reform efforts of the Ford and Carter ad-ministrations are not what is envisioned here. These efforts

have not concentrated on the utilization of technology butrather on an efficient regulatory process and the economicimpacts of regulation.

“The ETIP Program in the Department of Commerce hasas one of its components this purpose; however, it is a smalleffort.

59



3<

4 .

5 .

6 .

7 .

8 .

—

on modifications associated with purchasingof pollution abatement equipment.

18

Government financial support for majornew technological advances when firms areunlikely to undertake them on their owneither because such development would re-quire large-scale efforts, would be long incoming to fruition, or their results non-ap-propriable (e.g. closed systems to contain

toxic chemicals). This occurs in Germanyand France as part of broader programs toencourage the development of new tech-nologies for various social purposes.

Greater industry-specificity in standard set-ting (e.g. in the OSHA context) so as tominimize hardship when new technologieswould be difficult to develop and to max-imize health safety protection when thetechnological capacity is great.

Alternatives or supplements to standardsetting, such as products liability or strict

liability imposed on polluters, as in Japan.

A formal antitrust exemption procedure toclarify the status of joint R&D relating toenvironmental control technology.

Special programs to assist small firms’compliance efforts (see issue #3).

Effluent taxes as a means of achievingwater pollution abatement on a regionalbasis (these have apparently been suc-cessful in Europe, especially in Germany,and are alleged to provide continuing in-

centives for more efficient control technol-ogy) .20

‘“These provisions, Section 169 and 103 of the InternalRevenue Code, have been criticized as 1) ineffective,because the general investment tax credit is often moregenerous, 2) effectively available only to the large firms thatcan undertake municipal bond financing, and 3) penalizingradical improvements by their exclusion of “significant” (i. e.,more than 5 percent) process change.

“The Japanese force polluters to compensate all victimsof pollution via a system similar to workers’ compensation.A bill to enact such a mechanism in the United States, H.R.9616, was introduced in this session of Congress.

‘“Effluent taxes are widely endorsed by economists (see

R. Solow, “The Economist’s Approach to Pollution and ItsControl, ” Science, Aug. 6, 1971). They are opposed bymany others on a variety of grounds (see M. Weitzman,“Prices vs. Quantities, ” Review of Economic Studies, o c -

tober 1974), especially where life-threatening hazards areinvolved.

ISSUE 6Manpower Resources, the Labor

Market, and Technology

Should Congress consider an inte-grated national manpower policy de-signed (a) to strengthen the contribu-tion that qual i f ied manpower canmake to the innovation process and (b)to alleviate the disruptive impacts thatrapid technological change can haveon employment?

The interaction of labor and innovation is com-plex and frequently misunderstood. There is little

disagreement over the key role that highly qual-ified manpower resources play in the innovationprocess. The existence of qualified technical per-sonnel at all levels is critical to the environmentfor innovation. Most technologically advancedforeign countries place heavy emphasis on man-

power policies as a key contribution to thecapacity of industry and the research establish-ment to undertake technological change. Theessence of these manpower policies is to preparehuman resources for future needs of industriesand the economy in general. As such, there is anelement of long-term planning based on judg-ments about the nature of future needs.

While the importance of labor for technologi-cal change is clear, technological change itself has an impact on labor. As technological innova-tion raises demands for qualified personnel atone end of the spectrum, the effects of such in-novation may cause a shift in demand for skillson the other end. Technological change in in-dustries frequently leads to changes in the “skill-

mix” which their production process requires.Certain worker skills may become obsolete andthe result may be layoffs and serious dislocation.

The labor market issue therefore takes on adouble dimension. Beyond the need for person-nel in the technological innovation process,another basic issue is how to adapt a supplyresource—manpower—to rapidly changing de-mand. Technological change in particular may

lead to a shift in the demand curve for laborrather than a simple decline along the demandcurve. This shift may cause a change in the de-mand for skills as opposed to the numbers of workers.

60



.

In general, the overall macroeconomic effectof technological innovation on employment lev-els is considered to be positive insofar as techno-logical progress continually produces new prod-ucts, processes, and services leading to newemployment opportunities. 21 Technological in-novation is a key element of a company’s com-petitive position in domestic markets and of U.S.firms in general in international markets. Indeed,

it can be argued that the failure of a company orsector to stay abreast of technological develop-ments may over time lead to declines in employ-ment as a result of the declining fortunes of the

firm or sector. In this broader sense, therefore,labor has a genuine stake in the technologicalhealth of individual sectors and firms.

However, while the macro impact of innova-tion may be favorable for the employment pictureover time, the micro effects of technologicalchange may frequently result in serious labordislocations. Manpower policy is therefore con-fronted with the problem of how to treat such

disruptive impacts on the labor force that resultfrom such changes at the level of the firm.

The United States today (as illustrated in pro-gram area IX in chapter 111) has no consciousmanpower policy specifically designed to streng-then the environment for technological innova-tion and to respond to the needs of workers in atechnologically changing economy. In particular:

q There is no central body mandated to studyand predict the impacts of technical changeon the labor market.

q There exists no general labor adjustmentassistance program (a) to assist workersfinancially to make the difficult transitionfrom one job to another and (b) to offerworkers retraining opportunities in skills thatindustry is currently in need of. The onlycurrent program deals with workers in in-dustries “injured by excessive foreign im-ports. ”

q There is no longer term strategy, based onfuture projections, for educating middle-and higher- level technical personnel

“Lowell Gallaway, “Labor Mobility, Resource Allocation,and Structural Unemployment, ” American EconomicReuiew, LM No. 4 (September 1963); Otto Eckstein, “Ag-gregate Demand and the Current Unemployment Prob-lem, ” in Unemployment and the American Economy, ed.,A M. Ross (New York: John Wiley& Sons, 1964),

needed to sustain the process of technologi-cal innovation. 22

Both short-term measures and longer termstrategies are needed to meet these related objec-tives. Adaptive and continual training of man-power resources are required to provide laborwith the mobility to adjust readily to changing skillrequirements and to furnish the vital human in-puts to the process of technological change.

The following outline suggests alternativemeasures for congressional consideration:

1. Manpower Forecasting and Planning—toprepare basis for labor adjustment assist-ance and long-term technical educationstrategy:

—

—

Early-warning systems in various sectorsto predict areas of foreseeable laborshortages and surpluses; andMechanisms for translating the abovedata into policy planning options for edu-cational strategy and labor adjustmentassistance.

2. Labor Adjustment Assistance–short- andmedium-term measures to assist displacedworkers:

—

—

—

—

—

—

Financial assistance to aid worker transi-tion from job to job;Adequate financial aids to workers toundertake retraining for new jobs:Incentives to firms to retain and retraintheir own personnel for new positions (asin Japan) or payroll taxes on employersto finance worker retraining (as con-ducted in France);University-industry cooperation for re-training of higher level personnel in in-dustry for new responsibilities;Publicly financed continuing educationcenters for displaced workers accordingto sector or industry;Improved employment information andplacement services according to sector orindustry to assist in rapid relocation of

workers.

“it should be noted that there is also nothing in the UnitedStates approaching the European movement towardcodetermination that would guarantee labor a voice inmanagement decisions concerning technology,

61



3. Long-Term Technical Education Strat-egy—to improve the environment for tech-nological innovation:

— Establishment of training institution net-

work to prepare middle-level technicalpersonnel;

— Raising the professional stature and in-creasing financial rewards for teachingpersonnel in technical institutes;

— Mandatory continuing education in cer-tain key technical fields (e.g. wherelicenses required);

— University-trade school-industry coop-eration for upgrading and updating scien-tific and technical personnel; and

— Incentives to industry for in-house train-eeships for qualified personnelticed in Germany for example).

(as prac-

ISSUE 7

International Commerce andDomestic Innovation

Should Congress consider a com-prehensive program to strengthen theU.S. position in international trade byenhancing the technological competi-tiveness of U.S. industries adverselyaffected by international commerce,and assisting labor and business toadjust structurally when dislocationsoccur?

International commerce (trade and technologytransfer) has important implications for domesticinnovation. First, technological innovation is amajor determinant of competitiveness in interna-tional trade .23 Competition with foreign pro-ducers in international markets as well as in theUnited States increases the need for U.S. pro-ducers to innovate. Second, access to foreignmarkets provides an extra stimulus to U.S. in-novations by increasing the demand for U.S.goods and technology. Third, proceeds fromforeign sales of U.S. corporations help financetheir R&D. It is estimated that the foreign sales of

U.S. corporations (after consolidating their ex-ports from the United States and overseas sales

—

“See, for example, Raymond Vernon (cd.), Th e Tech-nology Factor in International Trade (National Bureau of Economic Research, New York, 1970).

62

of their foreign subsidiaries) accounted for almostone-third of their total sales in 1976.

24Fourth,

technology transfer from abroad has stimulatedor complemented many U.S. innovations. Tocite a few examples, continuous casting and thebasic oxygen furnace in steelmaking, the jetengine, float glass manufacturing, and penicillinwere all first introduced abroad and then broughtto the United States.

While many benefits for the U.S. economyand for domestic innovation derive from interna-tion commerce, there are clearly problems forsome U.S. industries also. Competition withforeign producers, whether here or abroad, is adynamic process that creates a changing mix of opportunities and problems for U.S. industries ascomparative technological advantages shift overtime. Coupled with other changing internationalconditions, this has caused domestic job losses insome sectors, or is threatening to do so, throughrising imports or declining exports.

Consumer electronics, steel, textiles, andshoes are examples of industries severely under-cut by imports and where domestic jobs havebeen lost by the closing of plants in the UnitedStates. In these sectors, there is strong labor andbusiness sentiment in favor of restricting imports.In other manufacturing sectors, labor groupshave voiced forceful complaints against the ex-port of jobs by U.S. companies transferringtechnology and making direct investments inforeign countries. Although some have arguedthat these actions by U.S. businesses are defen-sive in nature and in response to changing inter-

national conditions and some have even arguedthat there are net gains in U.S. jobs as a result of U.S. direct investments overseas, ” there areundeniable job losses for specific workers.

Although in the modern world of increasinglyinterdependent economies international com-merce is essential to national welfare, it results incosts as well as benefits. Because of these costs,there is mounting pressure on the U.S. Govern-ment to institute protectionist measures. How-—.——

“Based on sample of 295 U.S. companies with a com-bined total sales of $588 billion, as reported in “Foreign

Sales Special Report, ” Standard and Poor’s industrySurueys, July 28, 1977.

‘sSee, for example, several studies summarized in Robert

Hawkins, Job Displacement and the Multination Firm –A

Methodo/ogica/ Reuiew, Center for Multinational Studies,Occasional Paper No. 3, Washington, D. C., June 1972.



ever, protectionist measures alone are unsatisfac-tory and dangerous without accompanying ac-tions to remedy basic structural weaknesses. Pro-tectionist measures tend to generate inflationarypressures domestically and invite internationalretaliation against U.S. exports, both of whichwill cause more job losses. They merely alleviatesymptoms and reinforce long-term rigidities in in-dustrial structures, while denying U.S. con-sumers cheaper or better products. While short-

term protectionist measures may be necessary insome cases, they should be accompanied by acomprehensive package of technological/struc-tural adjustment programs that can soften thedislocations caused by declining industries, helprevive their competitiveness, or assist in theirtransformation.

Although there are programs in existence forlabor and business adjustment administered bythe Departments of Commerce and Labor andthe International Trade Commission, they are in-adequate and fragmented for this purpose. An

integrated policy towards technological/struc-tural adjustment might include the followingcomponents:

1. An early-warning system based perhaps on

2

3.

the kind of sector-specific microanalysis (seeissue #6) that would yield forewarningsabout declining industries and their prob-lems and thus avoid crisis-triggered reac-tions (e.g. the recent case of steel). Thissystem should be part of a policy-formu-lating unit that will coordinate relief and ad-

justment assistance decisionmaking.

A comprehensive labor adjustment pro-gram that can help labor adjust, retrain, orrelocate (see issue #4).

A comprehensive business adjustment pro-gram which may include:

— Short-term protectionist support underspecial circumstances (e. g., for vital or in-fant industries);

— Capital support for modernization andrestructuring (e. g., R&D funds, exemp-tion from antitrust of joint R&D by in-dustry);

—Regulatory support (relaxation or ex-emption of regulatory measures that im-pact on industry, e.g., in a recent case,water pollution standards were relaxedfor parts of the steel industry); and

4.

5.

6.

—

—

Export support (e.g., use of Export Im-eport Bank (EXIM) bank facilities or taxprovisions similar to the Domestic Inter-national Sales Corporation (DISC) topromote industry exports).

An R&D support system that enhances thetechnological competitiveness of U.S. in-dustries by supporting:

—

.

—

—

Technological development based on

assessments of U.S. comparative advan-tages (see issue #8, sector-specific micro-analysis);Technological development that canraise industrial productivity across manysectors (see issue #1);Technological development that can leadto new industries or markets (both do-mestic and export); andAdaptation and improvement of ad-vanced foreign technologies by domesticindustries.

Selective use of incentives/disincentives toinflows of technology through the channelsof trade, contractual arrangements, anddirect investment (as Japan did in the1950’s and 1960’s through the Ministry of International Trade and Industry).

Selective removal of barriers to technolocwtransfer from abroad, e.g., bias againstforeign testing data under Food and DrugAdministration regulations on introductionof new drugs (see program area XI, chapter111, for other tariff and nontariff barriers).

ISSUE 8

Support for Sector-SpecificMicroanalysis

Should Congress consider suppor t

f o r sy s te m a t i c a n d o n g o i n g a n a l y se s

of the social, economic, and techno-logical issues pertaining to individualindustrial sectors as an input to publicdecisionmaking?

The overall purpose of this report has been to

understand the relationship between technologi-cal innovation and Government action. One of the major premises underlying its execution is

63



——

that this relationship can best be understood on asector-specific basis. This was a major reason forundertaking a series of industry studies (seechapter III). As the work progressed, however, itbecame increasingly apparent that there areserious deficiencies in the knowledge base:

q

q

On the industry side, there were often major gaps in the literature concerning thetechnology-related problems of the sector,such as obsolescence, capital needs, posi-tion in international trade, etc.

On the Government program side there ex-isted an even greater lack of evidence aboutthe effects of various programs and seriousdeficiencies in the knowledge base uponwhich to make regulatory decisions.

These deficiencies arise in part from the factthat there is no sector-specific microanalyticalcapability of significant size in Government to-day. For example, the Domestic and Interna-tional Business Administration, part of theDepartment of Commerce, has concentratedmore on macroeconomic data than on sectorstudies. The National Science Foundation hasfunded some studies and the National Bureau of Standards also has some capability along theselines, but each is a very small effort. Regulatoryagencies also sometime fund such studies inresponse to a crisis. While these studies may fulfillan immediate regulatory need, they are generallynot readily applicable to other governmentalneeds. Although existing studies performed infirms might provide some useful information,they are often proprietary and not designed tosuit governmental purposes.

Accordingly, there is a need for an expanded,Government-supported capability. Most Govern-ment actions which significantly affect thetechnology of an industry must be taken on asector-specific basis. For example, air and waterpollution control standards are, almost withoutexception, different according to the sector af-fected. This is a natural consequence of the dif-ference in hazards present and the differenttechnological and economic capabilities of the

relevant sectors. Energy conservation regulationsare another example of a Government functionthat cannot proceed without sector-specific disag-gregation. Concerns relating to export and im-port controls, productivity, and employment also

64

require detaileddecisionmaking.

microanalysis for Government

One example of a study that might be under-taken concerns the steel industry, whose health iscurrently a subject of major national controversybecause of its position in international trade andits ability to comply with environmental regula-tions. Good thorough studies of the technological

position of the U.S. steel industry will be neededin order to develop and implement new policiestoward it. Another example might focus on theeffect of international trade and foreign direct in-vestment by U.S. multinationals on domesticemployment. Because most existing studies onlyexamine net aggregate employment impacts andprovide no information as to where the employ-ment gains and losses in fact occur, policies toprovide structural adjustment are severely ham-pered.

Other research needs might include analysis of the capital investment needs in specific sectors,the impact of regulation on technology inselected industries, or the effectiveness of exist-ing Government programs on a sector-specificbasis.

There are several institutional alternativespossible to support such analysis including:

1.

2.

3.

Government financial support for sectoranalyses performed in universities or re-

search institutes;Support for industry-performed analyses;and

Performance of the analyses in one or moreGovernment agencies.

Irrespective of the institutional arrangement,the analysis could be oriented either toward (1)broad policy areas such as control of internationaltrade, but with particular reference to individualsectors or (2) specific sectors, such as steel, foruse in a variety of policy contexts. In either event,

the analysis would be useful to the formulation of public policy in regulation, planning, establishingresearch priorities, etc; and could aid privatedecisionmaking as well by providing a data baseand new syntheses of existing information.



ISSUE 9

Support for Hazard Analysis

Should Congress consider support-ing additional national capability foranticipating significant hazards aris-ing from new and existing technolo-gies?

Recognition and control of significant hazardsbefore they create damage is obviously a desir-able goal. Several existing regulatory systems at-tempt to fulfill this purpose with regard to newchemical products or uses (e.g. pharmaceutical,pesticide, and toxic substance regulation—seepolicy area 11 for this listing). In addition,assessments that may have hazard identificationand analysis as a component are performed byvarious agencies (e. g., the environmental impactstatement process required for major Federal ac-tions, OTA studies, etc. —see program area I,chapter 111).

While each individual program has its own vir-tues and drawbacks, the overall effort may lack suffient purpose, coordination, and capability torespond to the national need for hazard recogni-tion and prevention, especially with regard tohazards already in the marketplace or environ-ment. There are several reasons for this.

First, is the existing programs coordination .2’For example, although the dangers of a toxicsubstance in the workplace may be recognized,its control as a hazard in the atmosphere or in a

consumer product is often not coordinated withthe workplace regulatory effort. This may resultin transfer of the hazard from one location toanother (for example by ventilation from a fac-tory into the atmosphere) rather than effectivecontrol.

Second, hazard analysis is not containedwithin the mission of many agencies. For exam-ple, the National Aeronautics and Space Admin-istration and the Department of Defense had thecapability but not the responsibility to be con-cerned about satellite radioactivity before the re-cent Canadian incident involving the crash of a

Soviet satellite. Moreover, the hazard analysisfunction that does exist is typically only incidental

“The recent voluntary cooperative effort in the toxicsarea by OSHA, EPA, CPSC. and FDA is an encouraginginitial step at meeting this problem.

to the larger agency mission. For example, EPA’spesticide division attempts to prescribe labels,register pesticides, prescribe standards for licens-ing applicators, as well as to prevent “unreason-able adverse effects” on the environment.

Third, hazard analysis is a relatively newdiscipline and has so far achieved little recogni-tion or support. Consequently, its analytical tech-niques are as yet underdeveloped.

For all these reasons, hazards typically gounrecognized until a crisis develops. The recordof the environmental/safety movement is repletewith examples in this regard: vinyl chloride,recombinant DNA, and most recently, radioac-tive debris from a Soviet satellite.

Several alternative policies may be undertakento expand and improve the existing hazard anal-ysis capability, including:

1

2 .

3 .

4

5

6 .

7 .

A central hazard identification/analysis mis-

sion and capability located in a Governmentagency, for example OTA or EPA. Thisagency could either conduct or coordinatehazard analysis efforts in Government.

Government financial support for hazardanalysis performed elsewhere (for example,through NSF).

Government support for training a n d

research to develop a hazard analysis capa-bility, for example, through curriculum de-velopment, support for students, publica-tions, etc.

Hazard identification and analysis in firms—although this is occuring already to someextent as a result of regulatory and legal(e.g. products liability) requirements, new,more formal requirements could be im-posed.

Education of workers and consumers inhazard identification.

Systematic and ongoing monitoring of envi-ronmental and health research in the UnitedStates and abroad to keep abreast of new

developments.Adequate followup analyses or proceduresto ensure that hazards identified are con-trolled to the extend feasible and to monitorthe analysis capability.

65



- . — -

Whatever the mechanism, its existence maybe as important as its form. Although hazardidentification/analysis can be a systematic, scien-tific undertaking, it is also undeniable that it mayinvolve a good deal of serendipity. Therefore, aconsciousness about the problem and a missionto be concerned with it may be as important asthe development of new analytical techniques.

ISSUE 10

Affecting the Demand for New

Technologies.

Should Congress cons ider in-creased use of programs of policiesthat focus on the demand for newtechnologies rather than on supply?

Most Federal programs intended to affect tech-nological innovation have historically been con-

cerned with the supply of new technologies. Ac-cordingly, they have attempted to increase thissupply by, for example, reducing the cost of development, undertaking research in publiclysupported laboratories, increasing the rewardsfor innovation, etc. (See program areas IVthrough VIII in chapter III. ) This policy emphasishas resulted in part from a widely held, but overlysimple, view of the innovation process, whichsees R&D as the overridingly important aspect.In contrast, recent research emphasizes the com-plex interconnectedness of various stages in theinnovation process and recognizes that market

demands are often a more important motivatorof innovation than technical discoveries.

Experience suggests that policies which work through influences on demand may often bemore effective than those which concentrate onincreasing supply. One way of influencing de-mand is by Government procurement. Evidencepresented earlier in this report shows that anassured Government market for new productscan be an effective stimulus to innovation. Thisconclusion is also strongly supported by theforeign experience. Another way of influencing

demand is to impose a Government require-ment. Environmental regulation, for example,had fostered innovation by creating a demand forsafer, nonpolluting technologies. Both of theseexamples show programs that create new or ex-panded markets.

Most of the factors that mold consumer de-mand for new technologies arise from the privatemarket. Advertising, marketing techniques, andvarious other kinds of market information play apredominant role in this regard. Although adver-tising regulation has long existed, it has, untilrecently, been limited in scope; however, newGovernment initiatives are likely to influenceconsumer demand more directly. For example,recent developments in counter, corrective, andcomparative advertising attempt to ensure abalance of viewpoints in the commercial market-place.

Other existing programs also affect demand.For example, product safety regulation may ef-fectively shift consumer demand toward a prefer-ence for safe technologies embodied in consumerproducts. Although such shifts may in fact occur,they are largely unintended from the viewpoint of the regulators, whose major interest is to removeunsafe products from the market, and only in-cidentally to promote the development of new,

safe technologies. (These and other policies areidentified in program area XII. )

The potential importance of policies intendedto affect demand may be illustrated in thedevelopment of energy conservation technology.Decreases in demand (through conservation)and shifts in the nature of demand (through apreference for energy-efficient or nonconsump-tion alternatives) are both required for conserva-tion to be successful. In order to achieve thesetwo goals, major changes may be required in ex-isting products, production processes, and in-

dividual lifestyles. If this is indeed the case,Government action may be necessary to (1) in-form consumers fully about the means and bene-fits of energy conservation, (2) persuade them toadopt different consumption patterns, and (3)counteract or control existing advertising prac-tices inimical to energy conservation .27 More-over, the Government could vastly increase thedemand for energy-efficient technologies by sub-sidizing their users, for example, through a taxcredit for solar heating or low-interest home in-sulation loans. Similarly, Government purchaseof such products could speed their development

and commercialization.

“AS an example of this third option, France has recentlyinstituted a major program to prohibit any advertising thatencourages energy consumption.

66



—— .—

Energy conservation is but one example of theareas in which Government can affect techno-logical change through influences on demandrather than by encouraging supply. It is used asan example not to advocate any specific pro-gram, but rather to illustrate how the Govern-ment can work through demand-side policies in avariety of ways.

The existing imbalance between supply and

demand-based policies in the overall Govern-ment approach toward technological innovationstrongly suggests that consideration should begiven to increased use of programs focusing ondemand. Such programs might include the fol-lowing components:

1. Greater emphasis on mechanisms that cre-ate new or expanded markets for certaintypes of technology, for example:

—procurement,—user subsidy,—products liability, and—regulation.

2. Greater emphasis on mechanisms thatdirectly influence the nature of consumerdemand, for example:

—counteradvertising,—consumer information provision, and—education.

67



AID

ANVAR

ASRA

CABCEQCPSC

CWPS

DISC

DOC

DODDOEDOJDOLDOTEIS

EPAERISA

ETIP

EXIMFCC

FC[A

FDAFTcGAO

GATT

HEW

— —.—— — —

Glossary of Acronyms

–Agency for InternationalDevelopment

—National Agency for the

Valorization of Research (French)–Applied Science and Research

Applications, a directorate of theNational Science Foundation

–Civil Aeronautic Board–Council on Environmental Quality–Consumer Product Safety

Commission—Council on Wage and price

Stability—Domestic International Sales

Corporation—Department of Commerce

—Department of Defense–Department of Energy—Department of Justice—Department of Labor— Department of Transportation— Environmental impact statement

(also economic impact statement)–Environmental Protection Agency— Employee Retirement Income

Security Act–Experimental Technology

Incentives Program—Export Import Bank —Federal Communications

Commission—Foreign Export Credit Insurance

Association—Food and Drug Administration—Federal Trade Commission–General Accounting Office–General Agreement on Tariffs and

Trade—Department of Health, Education,

and Welfare

HUD

IIs

ITCIRS

MFNNAENASNASA

NBSNHTSA

NIHNLRANRC

NRDC

NSFNTIS

OPIC

OSHA

OSTP

OTAPEFCO

SBASEC

STRTOSCATUPUSDA

—Department of Housing and UrbanDevelopment

—Inflationary impact statement

—International Trade Commission—Internal Revenue Service—Most Favored Nation—National Academy of Engineerin

g

—National Academy of Sciences—National Aeronautics and Space

Administration–National Bureau of Standards–National Highway Traffic Safety

Administration–National Institutes of Health—National Labor Relations Act—Nuclear Regulatory Commission

—National Research DevelopmentCorporation (British)

—National Science Foundation—National Technical Information

Service—Overseas Private Investment

Corporation–Occupational Safety and Health

Administration–Office of Science and Technology

Policy—Office of Technology Assessment—Private Export Funding

Corporation—Small Business Administration—Securities and Exchange

Commission—Special Trade Representative—Toxic Substances Control Act—Technology Utilization Program—U.S. Department of Agriculture