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Science—Based Economic Developmentedited by Susan Raymond
Susan U. Raymond
New York Academy of Sciences
The idea that science and technology can play a role in spurring economic development has numerous and renowned supporters. The body of evidence over long periods of time points to the evolving mastery of changes in technology—with in a competitive economic context—as a critical element in any nation's or firm's long—term economic progress (see Rosenberg and Birdzell's How the West Grew Rich).
This appreciation of technology's significance in the long term has led to a belief that more immediate, directed initiatives aimed at science and technology will also be critical to economic growth in the shorter term. Toward that end, extensive public programs and hundreds of millions of public dollars are being directed at S&T policy initiatives around the globe.
Yet critical voices have also been raised. These voices caution that, to date, the relative economic effects of such directed public policy effort have not been rigorously and carefully assessed. Indeed, some critics caution that policy trade—offs amid scarce resources do not automatically lend pride of place to science and technology initiatives. Where choices must be made, S&T may not be the most important choice. In examining "lessons learned" from U.S. state as well as global case experience it is useful to understand the views, and examine the evidence, of those who would urge caution.
Scope and Purpose
This summary paper is not intended to represent a comprehensive literature review of the issues raised. A bibliography toward that end is attached. Nor does it aim to settle definitively those complex questions that surely require greater research and debate. Rather, the intent here is to summarize the main lines of argument raised by critics to encourage frank and searching debate on the most important productive pathways for policy action. The paper suggests questions about what IS known, and what may only be surmised, regarding the link between S&T policy and economic growth.
From the outset, it should be noted that the vast majority of criticism does not extend to the role of public policy and public resources in support of basic scientific research. The importance of public roles in ensuring the advancement of knowledge in the biomedical, physical, engineering, and social sciences is widely accepted. Of course, opinions differ over the proper scale of such investments, as well as the degree to which such research is, or ought to be, "mission—oriented," i.e., targeted at results rather than being driven by curiosity. However, the most serious debate engages at the point at which basic research blends into the broader goals and larger stakes of technological development, applications in the marketplace, and links to measurable economic growth.
The observations of critics can be grouped into three general themes. The most basic and broad questions concern the significance of the S&T link to short—term economic growth itself. The lack of clear empirical evidence is seen as a major barrier to the assessment of a theoretically sound rationale for major policy initiatives.
A second group of questions focuses on the utility of pro—active science and technology policy as a development tool. These authors, while acknowledging a significant role for science and (especially) technology in economic growth, view the appropriate public policy as limited to more general arenas, i.e., as non—interventionist. They see the critical policy role as setting the macroeconomic and fiscal context for the economy, with a competitive market driving the direction of product and process innovation.
Finally, a group of authors has looked critically at the outcomes of specific proactive S&T policy at the program level, and has sought to determine whether certain widely accepted public program interventions (public venture capital, publicly financed incubators, etc.) can, in fact, be linked to economic growth. In the view of this group of analysts, the evidence for a causal relationship between particular taxsupported programs and general economic results is less than compelling.
Is Science and Technology Critical to Economic Growth?
Traditionalists point out that economists do not have the luxury of working from a complete model of economic growth. Further, there is no theory of research, invention, innovation, and diffusion that meshes well with existing models. Hence, carefully testing the role of technology in economic growth is methodologically problematic. The traditional government roles of public education, public infrastructure maintenance, and community—wide security (police, fire, justice) should, critics claim, form the boundaries of government action, with interventions in technology left to the marketplace. Within the "correct" macroeconomic policy structure, technological innovation and the mastery of technological evolution will emerge over time.
Recent cross—country examinations of differences in economic growth do not point principally to science and technology as causal to economic growth in the short term. While outlays on S&T are positively related to economic growth rates, the correlation is weak (e.g., Goel and Ram). Macroeconomic and fiscal factors such as inflation, openness of the economy, appropriate exchange rates, and financial system sophistication all appear to be more important to economic prospects than science and technology.
Moreover, the direction of the science and technology link to economic growth is difficult to specify. Growth differences are more clearly linked to differences in the growth of capital per worker and the expansion of skills per capital (human capital). Hence, skeptics note, perhaps it is growth which creates the absorption of and innovation in S&T, not the reverse. It might be that economic prosperity affords a society the luxury of having a theory class, and hence the further opportunity for significant advances in science, technology, and innovation.
Is S&T Policy Important?
A second set of questions emerge even when science and technology are acknowledged to be important engines of economic growth? Is public policy necessarily important in forging a link between S&T and economic growth. Again, the issue is not public policy relative to basic scientific advance, but public policy as a marriage broker between S&T advance and its economic effects.
Support for S&T is premised on the belief that S&T can be a major factor in shaping economic growth, and that public policy is critical to that connection. Advocates believe that the S&T—economic—growth link will not be made without the intervention of public policy initiatives. Inherent in this view is an assumption that something is broken that only public policy can fix. However, critics note, most S&T policy advocates do not rigorously examine what is and is not broken, and hence apply unnecessary, perhaps irrelevant, and, at worst, even counterproductive therapies.
To begin, where underlying fiscal and macroeconomic policies are distorted, targeted S&T policy will fix little, if anything, of what is truly broken. Moreover, critics claim that S&T policy advocates seldom specify the S&T market failures that would presumably give rise to the need for active policy intervention. Most S&T initiatives are a response to economic downturns. However, the traditional policy emphasis on supply—side inducements to technology investments (industrial revenue bonds, tax abatements, and the like) targeted at lowering production costs to stimulate market mechanisms has been replaced in many S&T programs by demandside stimulation (governments creating new businesses, finding markets, developing companies, and promoting technology). This is not because of any compelling evidence of widespread market failure but because, as Irwin feller notes, hard economic times leads to political pressure "to 'do something' when no one really knows what to do."
A study of policies explicitly designed to encourage the diffusion of computing technology in the Pacific Rim raises questions about just such policy trade—offs (Kraemer et al.). The policies found most likely to cause a discrete shift in spending patterns on computing R&D adaptation, and use were those affecting sales taxes, depreciation allowance schedules, monetary policy, exchange rate policy, and foreign exchange controls. Cross—national comparison showed no evidence that the existence of national policies target at encouraging computing diffusion led to spending changes.
Given the measurement difficulties, the evaluation of the impact of S&T policy at the state or national level often quickly abandons the original "economic development" goal and focuses instead on qualitative judgements about management, administration, and program performance. The emphasis is on programmatic inputs and outputs, not on economic impact. The lack of a growth model, the lack of an innovation/diffusion model, and the fact that the resource levels attached to S&T policy—driven programs are often minuscule relative to overall economic activity make any assessment of true economic—growth impact exceedingly difficult.
As Long and Feller note, this is not just an esoteric methodological issue: "the ebb and flow of the tides of growth result from many individual and related forces... Without measurement, it is impossible to say whether R&D policy is seeking to unleash the power of a Moon or a Uranus on this system." Given the lack of an empirical technique for linking technology change to economic growth, technology is simply assumed to be part (large or small, depending on one's view) of what is left over after measurable determinants such as employment and investment have been accounted for. Hence, support for the effectiveness of interventionist S&T policy as a fundamental economic growth strategy rests on thin evidence.
Furthermore, critics point out that, at least in the United States, state S&T initiatives by state governments, have been as much as about politics as about economics. They have been championed by the political process, largely in response to economic crises, and hence gradually become a measure of the success of an executive administration or a legislature in meeting the needs of the voting public. Success is thus dearly valued. Gaps in evaluation methodology, lack of adequate base—line data, lack of adequate causative models, seldom are allowed to interfere with politicians' attributing progress to policy initiatives. Because S&T policy initiatives are so intimately bound up in the political process, objective evaluation of their true economic effect has not taken place.
Where results are identified, moreover, the data are usually not corrected to determine net economic effects. When pro—active policy creates resources to assist individual economic actors, the primary benefit is to the actor (firm, entrepreneur, etc.) The net benefit to the economy, however, is positive only if the jobs, investment, revenues, or sales generated are new to the economy. In this sense, critics claim, most evaluations confuse job—creation with wealth—creation. The latter is about net increases in real income, not simply pools of work. Cost—benefit analyses would be needed to determine which of the apparent benefits from S&T policy initiatives are canceled out by losses elsewhere (e.g., the clients attracted to the assisted business simply coming at the expense of another business; the new employment being a transfer of employees from another firm; lower total wages). In the United States, critics claim, few rigorous evaluations of this nature have been carried out to assess targeted S&T policy initiatives at the state level.
Critics also note that policy choices involve resource choices. Public resources allocated to S&T programs are, de facto, not allocated to other programs. Hence such policies have opportunity costs. These costs may be particularly troubling if the effects of the S&T public resource allocations would have occurred in any event and without public resource intervention. Do firms receiving S&T assistance generate any more jobs than those that do not? Are public resources essential to the clustering of technology—based industries or to university—industry linkages? Critics regularly cite the history of the emergence of the technology clusters around Route 128 in Massachusetts and the development of Silicon Valley as evidence that broad public policy is not the spark for S&T—based economic growth or for university—industry collaboration. In both cases, historical, cultural, and educational patterns, leaders and entrepreneurs, academic excellence, and private capital initiative—not targeted S&T public policy—gave rise to advanced clusters of innovation.
Directed S&T resource choices may also be troubling if alternative means of public resource allocation (e.g., fiscal or tax approaches in support of investment in S&T by firms or academic partnerships) would have had greater positive effect. Critics claim that very little rigorous evaluation of these trade—off issues has been carried out.
Finally, critics caution that zealous advocacy of the centrality of S&T policy often ignores many of the contextual components essential to the long—term success of an S&T—economic growth link. The persistent faith of the public in science, the quality of primary education, even the nature of cultural belief or trust in the benefits of technology—all are important prerequisites to successful S&T initiatives. Other authors point to the importance of an open, free—wheeling, entrepreneurial culture as the critical element in linking innovation to economic growth. (Indeed, the argument has been used to explain why the growth of biotechnology occurred in California and not on the Upper East Side of New York City!) Hence, while S&T policy may have a role to play in some economies at some points in time, perhaps it cannot be separated from context. The view that the S&T economic growth link is mechanical ignores much of the art inherent in social and economic development.
A major caveat: The one area in which even critics appear to agree is the importance of strong science and technology in public education. The traditional role of government and public policy in education, and the ability of education to raise skill levels of the workforce, lead most critics to accept a directed, purposeful public policy role in improving S&T programs at all levels of public education. Investment in education is acknowledged to provide a stream of benefits over long periods of time by directly improving the efficiency and productivity of the economy and hence raising standards of living. The technological preparedness of the workforce, and the quality of scientists and engineers is seen as crucial, irrespective of directed S&T policy initiatives.
Program Evaluation: Who Knows What Works?
Beyond the overall literature regarding policy choices about S&T and economic growth, there is a significant body of critical literature regarding the effectiveness of programmatic interventions that arise from interventionist policy. As with overall policy, the quality of program evaluation is viewed as shallow, with many "evaluations" seriously compromised by both purpose (self—promoting boosterism by publicly—funded agencies, or efforts to structure evaluations in defense of legislative budget requests) and methodology (lack of base—line data, gross—net impact assessments as noted above, failure to audit data reported by the recipients of program assistance, etc.).
Even within a specific group of policy initiatives, evaluation has been difficult. Requested to evaluate the Ohio S&T programs, the U.S. National Research Council's Commission on Engineering and Technical Systems noted that such public S&T programs display such diversity of initiative that no set of evaluation criteria could be applied across programs and S&T centers. The only evaluation possible was thus qualitative not quantitative. Such evaluations were focused on such program aspects as the quality of organizational relationships and the scope of academic—industry networks established, rather than on the economic impacts that the programs and centers were created to make.
The policy literature is replete with skeptical assessments of individual program initiatives. Public venture—capital programs, for example, have been widely criticized on a variety of grounds. They have been characterized by critics within the private finance industry as unnecessary in terms of available private capital, wasteful in terms of alternative uses of public funds, and simply poorly matched to the job of picking investment winners and losers. Studies of the role of venture capital in industrialized settings have found it to be proficient at locating high technology investments where they exist, but not in creating those opportunities. Capital gaps are a function not of capital access but of underlying structural weaknesses in a particular region's technology base.
Compounding this general problem of linking venture capital to startups in technologically weak settings, critics find that government—backed venture capital, with all of the political pressures from voters that adhere to government programs, cannot be an efficient investor because it can seldom close down quickly the investments that show poor rates of return. Hence, many public venture—capital funds end up losing taxpayer money, rather than creating economic growth. An inability to freely design portfolios to respond to the risks and prospects of the marketplace, critics point out, makes government venture capital a poor (and unnecessary) use of public resources.
Moreover, public venture—capital initiatives to stimulate technological growth, even where "successful" in terms of portfolio rates of return, have very little economic impact. While such efforts may stimulate individual business successes, they do not address the underlying structural weaknesses in technological infrastructure that impede a strong technology—economic growth link in the first place, and hence are poorly positioned to have significant economic impact (see Florida and Smith).
Critics also single out the creation of research parks as a poor use of public resources in support of economic growth. As noted above, two of the premier examples of such geographic agglomerations, Silicon Valley and Route 128 in Boston, were not primarily a product of public policy at all. Moreover, even these initiatives do not always presage economic good fortune over long periods and general economic cycles. Critics remind advocates that Route 128 lost 50,000 high—tech jobs from 1984 to 1991 . Moreover, a recent examination of the effect of the Route 128 and Silicon Valley experience indicates that the only consistent positive link between university research and new business startups was for electronic equipment industries. For other industries, the partnership link was statistically insignificant (Bania et al.).
Many research or high—tech park projects, as many as 50 percent by some estimates, have been outright financial failures. Those which have succeeded have done so largely because of the location commitments of very large corporations and because of proximity to renowned university facilities, not because of public policy In some views, successful parks are not a function of public policy, but of pre—existing endowments of research universities and technological clusters in the geographic area Critics have also questioned the job—creation effect of such parks. Large corporate participants simply transfer many jobs to the new location from other corporate centers rather than create new jobs.
Even in Japan, where the science park concept has been raised to the level of a national movement, truly successful, collaborative relationships between corporations and universities seldom emerge. There is little evidence that parks have contributed to local economic growth or to the viability of local industries.
Similarly, incubator initiatives have also come under criticism. Public policy and resource support for creating facilities to assist startup businesses in their first years of operations are intended to ensure that new businesses have the low—cost space, services, advice, and guidance needed to reduce their early mortality rates. Yet, critics see emerging problems with the incubator movement over time. Most businesses which locate in incubators show very low growth rates. While the mortality rate is low, the firms remain weak and disabled. Shielded from the market's natural process, incubator firms seldom grow to become industrial leaders.
What Are the Right Questions?
Given the inadequacy of the evaluation literature on targeted science and technology policy's effect on economic growth, a note of caution regarding policy decisions is appropriate. Over the long term, and across large economic aggregates, mastery of and innovation in technology is clearly linked to the productivity gains that are indispensable for economic progress and the creation of wealth. However, less clear is the link between targeted S&T policy and short—term economic goals. Indeed, the employment dislocations that occur in the short—term due to technological advance are increasingly evident in industrial economies, not only among "blue collar" workers but through the managerial ranks of a wide swath of industries. Less clear still is the effectiveness of the programmatic tax—based resource levers available to governments in forging that link. Here may be a critical point from which to begin to distill a clear reappraisal of the evidence, formulate the most searching questions for policy makers and establish an agenda for essential further evaluation as S&T investments are made and managed.
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