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Science Technology and the Economic Future edited by Susan Raymond
J. Ian Morrison, President
and
William G. Pietersen, Chairman Institute for the Future
Based on remarks delivered at the New York Academy of Sciences, November 7, 1995.
The new reality of the global marketplace is that you are not competitive unless you are globally competitive. The correlation between innovation, competitiveness, and growth is direct and relentless. America has enjoyed high rates of innovation, and hence competitiveness, because it has traditionally been among the world's leaders in R&D spending. That is changing, and the implications for the future are not pleasant.
The Importance of the Eight
The future growth of the American economy and the prosperity and well-being of the American people are closely tied to the success of the eight most research intensive industries in the United States. These eight industries are chemicals, aerospace, communications, equipment, scientific instruments, semiconductors and electronic equipment, software, pharmaceuticals, and computer and office equipment. These industries are "research intensive" in that their research spending exceeds the national industrial average.
The sheer scale of these industries within the American economy is striking. They employ 5.2 million people, pay nearly a quarter of a trillion dollars in payroll, and have final sales of nearly a trillion dollars. More striking still is their role in U.S. economic growth. Between 1953 and 19G8, the annual growth rate in expenditures on research and development of these industries was about 8%, three times the rate of growth of the GDP. It was these investments that set the roots of current economic growth. In the last 25 years, the research-intensive industries have grown twice as fast as the economy as a whole, and they produce a net trade surplus of $50 billion.
Together, these eight industries pay for 70% of the industrial R&D in the country, yet their combined sales account for only a third of net U.S. manufacturing sales. The intensity of that investment in research will yield unknown benefits in the future.
A Future in Jeopardy
Although these eight industries have been key to the U.S. economy in past decades, there is growing cause for concern about their future. As Figure 1 illustrates, the rate of growth in the nation's R&D commitments has slowed relative to the rate of growth of the GDP. Yet simultaneously, innovation is becoming ever more important to economic advance. There are eight driving forces that underpin the nation's move away from R&D commitments and the consequent threat to the future.
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Figure 1. The Great Slowdown in R&D Expenditures (Annual average percent increase in real dollar expenditures). Source: National Science Foundation, National Patterns of R&D Resources, 1992. |
First, the end of the Cold War has removed the historically compelling rationale for making national investments in research. In the last five years, annual funding for industrial R&D for aircraft and missiles fell by half, and spending for electronic components decreased to 25% of its previous level. Although there is much criticism of current levels of government support for defense R&D in light of changing geopolitics, the fact is that defense spending in the past has led to spin-offs in civilian innovation. This dynamic may not thrive in the future.
Second, global competition is squeezing R&D returns. Many large firms, especially those involved in high-technology global markets, are experiencing a decline in margins. The competition is not coming only from industrialized economies, but is truly worldwide in its origins.
Third, the costs of research are climbing. The costs of a new generation of aircraft are between $50 and $100 billion. Every new drug requires an investment in excess of $300 million. A new car model costs between $3 and $(~ billion. A new generation of computer chips can cost over $1 billion in basic investment. The costs are rising to a point where it is difficult for a single company to absorb them.
Fourth, R&D has become more oriented toward product development. Industry is cutting back on basic research. The long-term consequences of this trend are unclear.
Fifth, R&D is becoming globally disseminated more quickly. In turn, this speeds the pace of competition.
Sixth, U.S. rates of personal and corporate savings are the lowest of any nation. This constrains the ability to invest in long-term research and development, especially given the extraordinary costs of the R&D process.
Seventh, institutional investors are incredibly focused on short-term performance. Wall Street's reaction to news of increased corporate investment in research has generally not been positive. Long-term commitments raise fears about short-term returns. When investors become nervous, corporations are more hesitant to reinforce their long-term plans.
Eighth, expanded regulation risks penalizing innovation. Price, market, and environmental regulations are all double-edged swords with the potential to cut dangerously into research-intensive industries.
An Agenda for Action
If the future is in jeopardy, what ought to be the response? It is critical that the nation increase its public and private investment in research and development to ensure continued growth and global competitiveness. The government should provide the support and context necessary to increase total national R&D investment from the current 2.6% of GDP to 3%, at least matching Japan and Germany, our main international competitors. Moreover, this may not be enough. Such a commitment will not put America in a leadership role; it will merely make the nation's commitment comparable to its counterparts.
Under this general objective, there are nine specific actions that need to be taken. First, government spending on basic research must be maintained. Support for basic research should be allocated 50% to defense and 50% to civilian needs.
Second, R&D tax incentives must be substantially and permanently increased to encourage high levels of private investment and longer term R&D.
Third, the tax rate on long-term capital gains should be lowered significantly, perhaps to 15%.
Fourth, government must rely on market forces to create a regulatory environment that sets clear compliance standards and that reduces government-generated risk associated with innovation.
This is particularly true for the regulatory approach to fledgling industries such as biotechnology. Fifth, intellectual property rights should be expanded, and international enforcement aggressively pursued.
Sixth, tort system reform is needed to establish national standards for product liability and reduce the risk of litigation for innovative firms that invest capital in R&D ventures. This is particularly acute in some biomedical areas where liabilities can be enormous. Seventh, antitrust policies and laws that discourage joint corporate ventures should be re-examined in light of the emerging global markets. The complexity and costs of research are rising, and innovative joint ventures and corporate collaboration are going to be necessary if the nation's industries are to stay competitive. A related eighth point is that a suitable legal, administrative, and infrastructural framework is needed to encourage cooperative research. Finally, the government must continue to fund and encourage science education, especially at universities. Intellectual capital produced by U.S. universities is being deployed internationally. U S. policy must continue to encourage and support science education in its own university system as the fundamental resource for America's own innovative enterprise.
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