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SUPPORTING INNOVATION IN

THE 21ST CENTURY ECONOMY

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION 

COMMITTEE ON SCIENCE AND 

TECHNOLOGY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

MARCH 24, 2010

Serial No. 111–90

Printed for the use of the Committee on Science and Technology

(

Available via the World Wide Web: http://www.science.house.gov 
(II)

COMMITTEE ON SCIENCE AND TECHNOLOGY 

HON. BART GORDON, Tennessee, Chair 

JERRY F. COSTELLO, Illinois 

EDDIE BERNICE JOHNSON, Texas 

LYNN C. WOOLSEY, California 

DAVID WU, Oregon 

BRIAN BAIRD, Washington 

BRAD MILLER, North Carolina 

DANIEL LIPINSKI, Illinois 

GABRIELLE GIFFORDS, Arizona 

DONNA F. EDWARDS, Maryland 

MARCIA L. FUDGE, Ohio 

BEN R. LUJA ́ N, New Mexico 

PAUL D. TONKO, New York 

JOHN GARAMENDI, California 

STEVEN R. ROTHMAN, New Jersey 

JIM MATHESON, Utah 

LINCOLN DAVIS, Tennessee 

BEN CHANDLER, Kentucky 

RUSS CARNAHAN, Missouri 

BARON P. HILL, Indiana 

HARRY E. MITCHELL, Arizona 

CHARLES A. WILSON, Ohio 

KATHLEEN DAHLKEMPER, Pennsylvania 

ALAN GRAYSON, Florida 

SUZANNE M. KOSMAS, Florida 

GARY C. PETERS, Michigan 

VACANCY 

RALPH M. HALL, Texas 

F. JAMES SENSENBRENNER JR., 

Wisconsin 

LAMAR S. SMITH, Texas 

DANA ROHRABACHER, California 

ROSCOE G. BARTLETT, Maryland 

VERNON J. EHLERS, Michigan 

FRANK D. LUCAS, Oklahoma 

JUDY BIGGERT, Illinois 

W. TODD AKIN, Missouri 

RANDY NEUGEBAUER, Texas 

BOB INGLIS, South Carolina 

MICHAEL T. MCCAUL, Texas 

MARIO DIAZ–BALART, Florida 

BRIAN P. BILBRAY, California 

ADRIAN SMITH, Nebraska 

PAUL C. BROUN, Georgia 

PETE OLSON, Texas 

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

HON. DAVID WU, Oregon, Chair 

DONNA F. EDWARDS, Maryland 

BEN R. LUJA ́ N, New Mexico 

PAUL D. TONKO, New York 

DANIEL LIPINSKI, Illinois 

HARRY E. MITCHELL, Arizona 

GARY C. PETERS, Michigan 

BART GORDON, Tennessee 

ADRIAN SMITH, Nebraska 

JUDY BIGGERT, Illinois 

W. TODD AKIN, Missouri 

PAUL C. BROUN, Georgia 

RALPH M. HALL, Texas 

MIKE QUEAR Subcommittee Staff Director 

MEGHAN HOUSEWRIGHT Democratic Professional Staff Member 

TRAVIS HITE Democratic Professional Staff Member 

HOLLY LOGUE Democratic Professional Staff Member 

DAN BYERS Republican Professional Staff Member 

VICTORIA JOHNSTON Research Assistant 
(III)

C O N T E N T S 

March 24, 2010

Page 

Hearing Charter ...................................................................................................... 2

Opening Statements

Statement by Representative David Wu, Chairman, Subcommittee on Technology and Innovation, Committee on Science and Technology, U.S. House 

of Representatives ................................................................................................ 6

Written Statement ............................................................................................ 6

Statement by Representative Judy Biggert, Member, Subcommittee on Technology and Innovation, Committee on Science and Technology, U.S. House 

of Representatives ................................................................................................ 7

Written Statement ............................................................................................ 7

Witnesses:

Hon. Aneesh Chopra, Chief Technology Officer of the United States, White 

House Office of Science and Technology Policy (OSTP) 

Oral Statement ................................................................................................. 8

Written Statement ............................................................................................ 10

Biography .......................................................................................................... 14

Dr. Mark Kamlet, Provost, Carnegie Mellon University 

Oral Statement ................................................................................................. 15

Written Statement ............................................................................................ 17

Biography .......................................................................................................... 21

Dr. Robert D. Atkinson, President, the Information Technology and Innovation Foundation (ITIF) 

Oral Statement ................................................................................................. 21

Written Statement ............................................................................................ 23

Biography .......................................................................................................... 54

Dr. Dan Breznitz, Associate Professor, the Sam Nunn School of International 

Affairs, Georgia Institute of Technology 

Oral Statement ................................................................................................. 55

Written Statement ............................................................................................ 57

Biography .......................................................................................................... 63

Mr. Paul Holland, General Partner, Foundation Capital 

Oral Statement ................................................................................................. 64

Written Statement ............................................................................................ 66

Biography .......................................................................................................... 72

(1)

SUPPORTING INNOVATION IN THE 21ST 

CENTURY ECONOMY 

WEDNESDAY, MARCH 24, 2010

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

COMMITTEE ON SCIENCE AND TECHNOLOGY

Washington, DC.

The Subcommittee met, pursuant to call, at 10:39 a.m., in Room 

2318 of the Rayburn House Office Building, Hon. David Wu [Chairman of the Subcommittee] presiding.
2

1 A Strategy for American Innovation: Driving Towards Sustainable Growth and Quality Jobs, 

Executive Office of the President, National Economic Council, and the Office of Science and 

Technology Policy. September, 2009. 2 Innovation and Economic Growth, Nathan Rosenberg, Organization of Economic Cooperation 

and Development, 2004. 3 Innovation Interrupted, BUSINESSWEEK, June 15, 2009. 

HEARING CHARTER

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON SCIENCE AND TECHNOLOGY

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION 

Supporting Innovation in the

21st Century Economy 

WEDNESDAY, MARCH 24, 2010

10:30 A.M.–12:30 P.M.

2318 RAYBURN HOUSE OFFICE BUILDING

1. Purpose

Innovation, ‘‘the development of new products, services, and process,’’ 1 has had 

an indelible impact on the lives of Americans and is increasingly important for ensuring the well-being of the Nation’s economy. While new technology like the Internet dramatically changed society in a short period of time, such profound innovation 

has remained elusive in sectors like energy, where fossil fuels have dominated for 

over a century. This hearing will examine factors that drive innovation, as well as 

those that impeded it. In addition, this hearing will discuss the role of the Federal 

Government in promoting the innovation that is crucial for American prosperity. 

2. Witnesses

Æ The Honorable Aneesh Chopra is the Chief Technology Officer of the 

United States at the White House Office of Science and Technology Policy.

Æ Dr. Mark Kamlet is the Provost at Carnegie Mellon University.

Æ Dr. Rob Atkinson is the President of the Information Technology and Innovation Foundation.

Æ Dr. Dan Breznitz is an Associate Professor at the Sam Nunn School of 

International Affairs at Georgia Institute of Technology.

Æ Mr. Paul Holland is a General Partner at Foundation Capital.

3. Background

First developed in the late nineteenth century, the telephone became one of the 

most important inventions in the twentieth century. The technology, made possible 

by previous research in sound and electricity, created a new industry and new infrastructure, and greatly enhanced productivity across the entire economy. However, 

it is notoriously difficult to predict the impact of technological advances on society 

and the U.S. economy. For instance, in 1983 prominent experts forecasted that the 

demand for mobile phones in the U.S. would total only one million by 1999. Instead, 

by that time, 70 million Americans had cell phones. Rapid improvements in technology and reductions in costs made the original predictions obsolete.2 In contrast, 

a Massachusetts company started in 1998 with promising technology to revolutionize skin grafts suffered bankruptcy and near-collapse before solving the manufacturing and logistical problems that allowed it to finally succeed a decade later.3

Regardless of the difficulty of predicting or creating it, economists have long studied the impact of innovation on the U.S. economy. Nobel Prize winner Robert Solow 

found that approximately 85 percent of the growth in the U.S. economy from the 

late nineteenth century to the mid-twentieth century was the result of forces beyond 

the traditional economic inputs of labor and capital. These ‘‘intangible’’ inputs—

namely R&D and a more educated workforce—grew in importance in the twentieth 

century as innovations moved away from physical-capital intensive technology ad-
3

4The Search for the Sources of Growth: Areas of Ignorance, Old and New, Moses Abramovitz, 

The Journal of Economic History, June 1993. 5Federal Research and Development Funding: FY 2011, Congressional Research Service, 

March 2010. 6 Executive Office of the President, National Economic Council, and the Office of Science and 

Technology Policy. September, 2009. 7 Boosting Productivity, Innovation, and Growth Through a National Innovation Foundation,

ITIF & Brookings, April 2008. 

vancements, like railroads, to more research-intensive advancements, like DNA sequencing.4

The increasingly competitive nature of the global economy has raised concerns 

among U.S. policy-makers and others that the U.S. has not sufficiently invested in 

maintaining leadership for the intangible inputs that drive innovation. The influential 2007 National Academies Rising Above the Gathering Storm report took note of 

factors such as declining Federal investment in R&D, poor performance in math and 

science among American schoolchildren, and declining support for corporate R&D 

within the U.S. The authors recommended increasing support for science and engineering research and targeted action to improve American students’ capacity and 

interest in science, math, and related fields. Congress acted upon the recommendations with the America COMPETES Act, which put the budgets of the National 

Science Foundation (NSF), the National Institute of Standards and Technology 

(NIST), and the Department of Energy Office (DOE) of Science on the path to doubling, and also provided for improvement in science and math education through 

teacher development. 

President Obama’s FY 2011 budget request includes $147.7 billion for R&D across 

the Federal Government, and reflects the commitments made in COMPETES by increasing the budgets of NSF (by eight percent), NIST (by 7.7 percent, core scientific 

and technical research services), and the DOE Office of Science (by 4.6 percent).5

In addition to increasing R&D expenditures (with the goal of reaching a total R&D 

investment of three percent of GDP as a nation), the Administration has identified 

a number of other priorities which are key to supporting innovation for economic 

growth and job creation, such as broadband coverage, strong protection for intellectual property, better support of entrepreneurs, and increased effort to open-up foreign markets to U.S. exports.6

A number of Federal R&D programs use the word ‘‘innovation’’ within their titles 

or mission statements. For example, NSF spent nearly $50 million in FY 2009 on 

Industrial Innovation and Partnership funding and the Emerging Frontiers in Research and Innovation program (with an additional $19 million for ARRA (P.L. 111–

5) funding). These programs fund a wide range of activities from research to making 

more efficient use of radio frequencies to developing measurements for sustainable 

construction practices and the development of applied mathematical models for complex engineered systems. The Department of Energy also makes a number of awards 

for innovation, such as the Energy Innovation Hubs to fund research to bridge the 

gap between basic scientific breakthrough and industrial commercialization. However, the authors of Boosting Productivity, Innovation, and Growth Through a National Innovation Foundation 7 note that while the Federal Government invests billions in R&D, there is very little funding directed toward ‘‘firm-level’’ innovation. 

They identified only two programs that focused directly on stimulating commercial 

innovation, NIST’s Manufacturing Extension Partnership Program and its Technology Innovation Program. Other Federal programs, like the Defense Advanced Research Project Agency (DARPA) and the Small Business Innovation Research (SBIR) 

program focus on spurring technological development, but generally to accomplish 

a mission-related goal. 

The authors of the Boosting Productivity report recommend that the Federal Government take a more active role in supporting innovation to help overcome some of 

the barriers faced by the private sector. These barriers, or market failures that disadvantage innovation, include the pressure to shift corporate R&D away from longterm breakthroughs, towards short-term development projects and the difficulties 

faced in aligning the needs of universities and the private sector to enable effective 

collaboration. The authors propose creating a National Innovation Foundation to 

remedy the shortcomings in Federal innovation policy, which they view as ad-hoc, 

too focused at the Federal-level, and too narrow (e.g., very little Federal science and 

technology support directly for the service-sector). This Foundation, an independent 

Federal agency, would fund industry-university research partnerships, make statelevel grants to help promote regional industry clusters and technology commercialization, assist small firms in adopting new technologies, and support innovation 

throughout the Federal Government. 
4

8 Boosting Productivity, Innovation, and Growth Through a National Innovation Foundation,

ITIF & Brookings, April 2008. 9 Innovation America: Investing in Innovation, National Governors Association, The Pew Center on the States, 2007. 10 Clusters of Innovation Initiative: Atlanta-Columbus, U.S. Council on Competitiveness 11Fanning the Flames of Economic Progress: Igniting Greater Rochester’s Entrepreneurial 

Economy, U.S. Council on Competitiveness, September 2004. 12 National Science Foundation Science and Engineering Indicators, 2010 13 National Science Foundation Science and Engineering Indicators, 2010

Investment in innovation is not confined to the Federal level. Many states, recognizing that they now must compete globally, as well as with each other, are making 

investments to improve the innovation capacity of their economies. Collectively, 

states spend approximately $1.9 billion per year on technology-based economic development activity.8

These types of initiatives, like the Oregon Nanoscience and Microtechnologies Institute, provide funds, facilities, and other services to high-tech start-up companies. 

Some states are also investing directly in R&D and in recruiting top science and 

engineering talent, such as Maryland’s $23 million per year investment in stem cell 

research and Kentucky’s decade long $350 million investment in recruiting top faculty to its universities.9 States make many of these investments not only to improve 

their economies over a range of sectors, but also in an effort to spur the development of specific-industry clusters. The rise of Silicon Valley demonstrates the powerful force of cluster development both to regional economic growth and to spurring 

innovation. The Council on Competitiveness has identified clusters as a critical element to advancing regional competitiveness and innovation capacity. The presence 

of related industries, though, is only one piece of a strong innovative economy. A 

multitude of factors, such as workforce, R&D capacity, demand conditions, availability of capital, and local governance all affect the innovation capacity of regional 

economies.10

A study of Rochester, New York, by the Council on Competitiveness, illustrates 

the need for all of these factors to enable innovation. The study found that Rochester had the fundamental building blocks for an innovation economy, but lacked 

both the capital and culture to take the necessary risks to innovate. The area, dominated by Eastman Kodak and Xerox, has two well-regarded universities, a strong 

K–12 educational system, a skilled workforce, and a good transportation and communications infrastructure. However, despite the fact that workers there produce 

six-times the average number of patents as workers elsewhere in the country, the 

area ranked very low in terms of licensing technology and launching start-ups or 

spin-out companies. The authors attributed the low rate of entrepreneurship to the 

fact that the area had long relied on a few strong corporate entities, contributing 

to a risk-averse culture. In fact, between 1995 and 2003, the area attracted only 0.6 

percent of the total venture capital market. The venture capital in the region tends 

to focus on the least risky opportunities. The report did note that the region is attempting to create coalitions around strengths like optics, and promote more collaboration between business and the universities.11

Funding to bring new discoveries from the lab into commercialization is critical 

for innovation. Experts have noted the declining level of funding available for early 

stage commercialization—the money needed for proof of concept or prototype development. Angel investors, independent investors working with their own funds, have 

traditionally focused funding at this early stage, but their contributions have 

dropped dramatically, particularly with the recent economic downturn ($19 billion 

in 2008, down from a five-year high of $26 billion in 2007). At the same time, venture capital investment is increasingly trending toward later stage investment. The 

NSF Science and Engineering Indicators reported that venture capitalists have 

largely abandoned seed and start-up stage funding from a high of nine percent in 

1996 through 1998, to a low of two percent from 2002 to 2004. Currently, such funding stands at five percent, but this lack of early stage funding contributes significantly to the ‘‘valley of death phenomena’’ which makes commercialization of new 

technology notoriously difficult.12

Despite the increasingly competitive global environment, the U.S. is still a leader 

in knowledge and high-tech industries. According to the most recent National 

Science Foundation Science and Engineering Indicators, the U.S. provided 34 percent of knowledge intensive service industries (business, financial, and communications) in 2007 and 30 percent of the global value added for high technology manufacturing was accounted for by the U.S. However, the U.S. trade deficit in high-tech 

goods in 2008 was $80 billion.13
5

4. Overarching Questions

Æ What factors have enabled innovation in the past?

Æ What is the role of the Federal Government in spurring innovation?

Æ How can government best support entrepreneurs?

Æ What factors enable regional innovation-based economic growth? 

How can these be encouraged and sustained?

Æ How should efforts to create innovation be measured or assessed?
6

Chairman WU. The hearing will come to order. 

Good morning, everyone. I would like to thank you all for being 

here, and also for helping us think about a very challenging topic 

and one that frequently doesn’t get addressed as well as in our Nation’s capital as sometimes it gets addressed elsewhere in the country. We tend to get tied up in the issues of the day and the issues 

of the moment rather than looking a long ways down the road and 

also looking carefully at our own history, and it is very instructive 

that economists like Solow and others attribute at least 50 percent 

of our economic growth, and in some instances up to 90 percent of 

our economic growth, in the last century or especially in the postwar era is attributable to innovation, to things other than immediate changes in labor inputs and other factors. It is absolutely crucial that we understand the past in order to set our policies properly today to have the future that we want for our country and the 

world. 

I view this as the beginning of a very important conversation 

that we are going to have here in the science and technology community. I know that this is a discussion which many of you have 

been initiating elsewhere but I think that bringing this to the Congress and supporting the Administration’s efforts in this arena is 

absolutely crucial. 

So today we have a beginning of the conversation, and I look forward to holding probably several hearings on this topic and looking 

at what pieces of legislation we can initiate from this Subcommittee and from the Full Committee to better encourage the innovative forces which have always been quite strong in our society 

and our economy but which sometimes suffer from some impediments and it is our task both to remove those impediments and 

also to engage in those activities which truly promote innovation 

and all the things that we want from innovation. 

Chairman WU. With that, I would like to recognize Ms. Biggert, 

the gentlelady from Illinois, for her opening statement. 

[The prepared statement of Chairman Wu follows:]

PREPARED STATEMENT OF CHAIRMAN DAVID WU

Good morning. I would like to thank everybody for being at today’s hearing, particularly our witnesses. 

Near the end of every year, Time Magazine publishes a list of that year’s best 

inventions. Some on the 2009 list include rubber from dandelions, a 3–D camera, 

and highly maneuverable underwater robots. At one point, no doubt Time’s list 

would have included the telephone, the transistor, or the polio vaccine. It is a challenging exercise in imagination to look at lists like these and try to predict which 

discovery will have the same level of impact as the Internet or the combustion engine, which discovery will go nowhere, and which will be tomorrow’s airship—useful 

for a time, but made obsolete by superior technology. 

It is not an exercise in imagination to contemplate the impact innovation has had 

on our economy and our lives. Economists estimate that innovation has been responsible for 50 to 85 percent of the economic growth in this country. The importance 

of innovation—creating new ideas, products, and services—cannot be overstated. 

And in this global, highly competitive economy, it is increasingly the intangible inputs of R&D, education, and entrepreneurial risk-taking that drive that growth. Innovation is key to creating new industries, and therefore key to the creation of 

American jobs. 

As I’m sure the witnesses will tell us today, the government’s commitment to 

funding research and education has had a major impact on fueling innovation. Innovation, though, is not just about expanding knowledge and making discoveries. Innovation brings new products and services into the marketplace that can then drive 

economic growth and future prosperity. 
7

I hope the panel today can give us greater insight into the factors that have promoted innovation in the past and a picture of the health of our current innovation 

environment. I look forward to learning how the government can best support innovation. This is an important discussion to have as we look forward to reauthorizing 

America COMPETES.

Ms. BIGGERT. Thank you, Mr. Chairman, and thank you so much 

for calling this hearing on supporting innovation in the 21st century economy. As we move forward reauthorizing the America 

COMPETES Act, we can always learn from new ideas, from listening to a broad range of viewpoints, so I welcome that opportunity 

today. 

And likewise, the President should be applauded for taking a 

committed interest in innovation as he has demonstrated with his 

strategy for American innovation, and we welcome you, Mr. 

Chopra, to this side of the Capitol. 

But Chairman Wu, I think you will agree with me that innovation and competitiveness have long been at the forefront of this 

Committee agenda for as long as we have been members. I think 

we struggle to get some of our other members to be as engaged as 

we are, and I think you are right that in the hinterland there is 

probably a lot more emphasis on this. But we do understand its importance and we will continue to work towards ensuring that the 

United States remains the world’s leader in innovation, and it is 

not only imperative to maintain our competitive edge but also to 

strengthen our economy. 

And we took some major steps to reinforce our innovative future 

with the 2007 America COMPETES Act, which was a result of recommendations from the Rising Above the Gathering Storm Report, 

and I think that is where we really took that on, the previous Administration’s American Competitiveness Initiative and the bipartisan leadership of this Committee, so as the chairman and I have 

both already mentioned, this hearing is a part of that reauthorizing 

process. 

We are still waiting to see the benefits of some of the initiatives 

put into place in COMPETES as well as the return on investment 

from the more than $10 billion dollars in stimulus funding for R&D 

within this Committee’s jurisdiction, so I hope that given our current economic climate, we proceed very cautiously with any new 

initiatives to spur innovation until we know our current investments are worthwhile. 

So I want to thank our witnesses for being here today and I look 

forward to your testimony, and I yield back the balance of my time. 

[The prepared statement of Ms. Biggert follows:]

PREPARED STATEMENT OF REPRESENTATIVE JUDY BIGGERT

Thank you, Mr. Chairman, for calling this hearing on supporting innovation in 

the 21st century economy. As we move forward on reauthorizing the America COMPETES Act, we can always learn new ideas from listening to a broad range of viewpoints, so I welcome that opportunity today. 

Likewise, the President should be applauded for taking a committed interest in 

innovation as he has demonstrated with his Strategy for American Innovation, and 

we welcome you, Mr. Chopra, to this side of the Capitol. However, I am sure you 

will agree with me, Chairman Wu, that innovation and competitiveness have been 

at the forefront of this Committee’s agenda for as long as we have been Members. 

We understand its importance and will continue to work towards ensuring that the 

United States remains the world leader in innovation. It is not only imperative to 

maintaining our competitive edge, but also to strengthening our economy. 
8

We took some major steps to reinforce up our innovative future with the 2007 

America COMPETES Act, which was a result of recommendations from the Rising 

Above the Gathering Storm Report, the previous Administration’s American Competitiveness Initiative, and the bipartisan leadership of this Committee. As the 

Chairman and I have both already mentioned, this hearing is part of that reauthorization process. 

We are still waiting to see the benefits of some of the initiatives put into place 

in COMPETES, as well as the return on investment from the more than $10 billion 

in stimulus funding for R&D within this Committee’s jurisdiction. I hope that, given 

our current economic climate, we proceed very cautiously with any new initiatives 

to spur innovation until we know our current investments are worthwhile. 

I would like to thank our witnesses for being here today, and I look forward to 

your testimony. I yield back the balance of my time.

Chairman WU. Thank you very much, Mrs. Biggert. 

If there are Members who wish to submit additional opening 

statements, your statements will be added to the record at this 

point. 

Now it is my distinct pleasure to introduce our witnesses. Mr. 

Aneesh Chopra is the Chief Technology Officer of the United States 

at the White House Office of Science and Technology Policy. Welcome. It is absolutely wonderful to have an Administration which 

seems to really get it in terms of technology and innovation. Dr. 

Mark Kamlet, who is the Provost at Carnegie Mellon University. 

Dr. Rob Atkinson is the President of the Information Technology 

and Innovation Foundation. Dr. Dan Breznitz is Associate Professor at the Sam Nunn School of International Affairs at the Georgia Institute of Technology, and our final witness is Mr. Paul Holland, who is General Partner at Foundation Capital. 

Welcome, one and all. You will each have five minutes for your 

spoken testimony. Your written testimony will be included in the 

record for the hearing, and I commend this to all of us as audience 

and witnesses, the body of work in the written testimony is truly 

impressive for its completeness and hitting on so many of the 

issues important to innovation. Each Member will have five minutes to question the panel after the spoken testimony, and Mr. 

Chopra, please begin. 

STATEMENT OF HON. ANEESH CHOPRA, CHIEF TECHNOLOGY 

OFFICER OF THE UNITED STATES, WHITE HOUSE OFFICE OF 

SCIENCE AND TECHNOLOGY POLICY (OSTP) 

Hon. CHOPRA. Well, thank you very much, Chairman Wu and 

Congresswoman Biggert. It is a pleasure to be with you and others 

here on the Subcommittee. 

It is my honor and privilege to discuss the President’s strategy 

for American innovation, an issue he addressed directly on September 21, 2009, when he released his approach for sustainable 

growth and quality jobs. As Chief Technology Officer, I work to execute on that strategy by harnessing technology, data and innovation to transform the Nation’s economy and to improve the lives of 

everyday Americans. As you noted, I will briefly summarize the key 

highlights of my testimony for us this morning, beginning with 

what we define as the nature of the problem, which we call the 

problems of bubble-driven growth of the past. So despite America’s 

economic strength historically, our economic growth has rested too 

long on what we believe to be an unstable foundation. Time and 

again, explosive growth in one sector of our economy provided a 
9

short-term boost while masking what we consider to be some longterm weaknesses. A short-term approach to the economy masks the 

underinvestments in essential drivers of sustainable, broadly 

shared growth. It promotes temporary fixes over lasting solutions. 

That said, the American economy remains the most dynamic, innovative and resilient in the world. America’s strengths are clear: 

world-class research universities, flexible labor markets, deep capital markets, and an energetic entrepreneurial culture. The United 

States must redouble its efforts to give our world-leading 

innovators every single chance to succeed. America cannot rest on 

our laurels while other countries are clearly catching up. 

So the need for innovation is clear. It is the foundation for durable, sustainable expansion in both employment and economic 

growth. From our perspective, it begins with the development of a 

new product, service, or process. It then proceeds with widespread 

diffusion throughout our economy and at an appropriate scale, resulting in jobs and economic value. 

So what is the proper role for government? The Obama Administration proposes to strike a balance by investing in the building 

blocks that only the government can provide, setting an open and 

competitive environment for business and individuals to experiment and grow, and by providing extra catalysts to jump-start innovation in sectors of national importance. I’d like to highlight just 

a few of those components, the building blocks of innovation. We 

are committed to making investments that will foster long-term 

economic growth and productivity including R&D, a skilled workforce, a leading physical infrastructure and widely available 

broadband networks. Given last week’s Federal Communication 

Commission’s release of the National Broadband Plan, I thought I 

would simply note we have established a broadband subcommittee 

within the National Science and Technology Council to advise this 

Administration on the actions it should take to promote broadband 

as a platform to improve the lives of everyday Americans and drive 

innovation in the economy. 

On the topic of promoting competitive markets that spur productive entrepreneurship, here too we believe that this is a key imperative to create a national environment that is ripe for entrepreneurship. Part of this strategy is to change the way Washington 

works by promoting a more open and innovative government. Yesterday I was pleased to announce that the Defense Advanced Research Projects Agency, DARPA, will begin providing data on 

awardees in the Small Business Innovation Research Program that 

utilize a streamlined process for contracting and will extend this 

streamlined process to future SBIR solicitations starting with their 

one coming out on April 21st. Initially, DARPA will display data 

on the number of awardees that are eligible for this streamlined 

program, how many awardees have opted for it and the average 

number of days it took to complete. 

Now, what does this mean? Typically, contracting can take up to 

five or six months to complete after you have been given an award. 

But we believe this streamlined approach will take on average less 

than 60 days. That represents a 60 to 70 percent reduction in both 

time and cost, saving small businesses tens of thousands of dollars 

and letting them get to work months faster. 
10

Finally, on the topic of catalyzing breakthroughs for national priorities, we are absolutely committed to harnessing the power of 

science, technology and innovation to address our challenges in 

clean energy, health care and, broadly speaking, the grand challenges of the 21st century. Increasingly, our efforts to spur innovation on these matters rely on an effective, open and strategic collaboration between the Federal agencies and the private sector to 

ensure that the technological innovation needed to tackle these national problems is an opportunity for economic growth and job creation. 

To that end, I am pleased to announce today that I am joining 

our Federal CIO [Chief Information Officer], Vivek Kundra, and 

OIRA [Office of Information and Regulatory Affairs] Administrator, 

Cass Sunstein, in establishing a new subcommittee on standards 

under the National Science and Technology Council’s Committee on 

Technology, which will be co-chaired by Patrick Gallagher at NIST 

[National Institute of Standards and Technology] as well as Phil 

Wiser from the Department of Justice. This interagency group will 

provide high-level leadership so that Federal agencies are strategically focused and actively engaged in critical standards-related 

issues. The improved coordination will in turn ensure that agencies 

can work in a responsive and timely fashion with the private sector 

so that effective standards are developed or practiced to meet their 

needs. This subcommittee will work closely with the existing Interagency Committee on Standards Policy [ICSP], which also happens 

to be chaired by NIST. The subcommittee we announce today will 

provide direction and guidance to the ICSP and rely on them to fulfill their traditional duties and coordinating assessing progress and 

so forth. 

In conclusion, Mr. Chairman, the United States is still the land 

of the future. We retain this honor because America’s scientists, entrepreneurs and public officials have understood the importance of 

applying the power of American curiosity and ingenuity to the biggest economic and societal challenges. Clearly, we welcome any 

questions you may have. 

[The prepared statement of Hon. Chopra follows:]

PREPARED STATEMENT OF ANEESH CHOPRA

Chairman Wu, Ranking Member Smith, and Members of the Subcommittee, it is 

my distinct privilege to be here with you today to discuss the Obama Administration’s Strategy for American Innovation. 

President Obama understands the importance of innovation for sustainable 

growth and quality jobs. On September 21st, 2009, he released his Strategy for 

American Innovation that identified three critical roles for the Federal Government: 

to invest in the building blocks of innovation; to create the right environment for 

private sector investment and competitive markets by, for example, promoting highgrowth entrepreneurship, protecting U.S. intellectual property rights, and fostering 

an open government; and to serve as a catalyst for breakthroughs related to national priorities such as clean energy, health care, and other ‘‘grand challenges’’ of 

the 21st century. 

In my capacity as Assistant to the President, Chief Technology Officer, and Associate Director for Technology in the Office of Science and Technology Policy, my mission is to harness the power and potential of technology, data, and innovation to 

transform the Nation’s economy and to improve the lives of everyday Americans. 

The Administration envisions an economy in which jobs are more plentiful, American firms are more competitive, Americans are safer and more secure, and energy 

use is cleaner and more economical.
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Problems with the Bubble-Driven Growth of the Past

Despite the American economy’s historic strength, our economic growth has rested 

for too long on an unstable foundation. Time and again, explosive growth in one sector of our economy provided a short-term boost while masking long-term weaknesses. In the 1990s, the technology sector climbed to unprecedented heights of 

valuation. The tech-heavy NASDAQ composite index rose over 650 percent between 

1995 and 2000, but then lost two-thirds of its value in a single year. 

After the tech bubble burst, a new one emerged in the housing and financial sectors. This type of growth isn’t just problematic when the bubble bursts, it is not entirely healthy even while it lasts. Between 2000 and 2007 the typical working-age 

American household saw its annual income decline by nearly $2,000. 

A short-term approach to the economy masks under-investments in essential drivers of sustainable, broadly-shared growth. It promotes temporary fixes over lasting 

solutions. This is patently clear when looking at how American education, infrastructure, healthcare, energy, and research—all pillars of lasting prosperity—were 

ignored during the last bubble. 

Despite this underinvestment in key drivers of growth, the American economy remains the most dynamic, innovative, and resilient in the world. America’s strengths 

are clear: world-class research universities, flexible labor markets, deep capital markets, and an energetic entrepreneurial culture. The United States must redouble its 

efforts to give our world-leading innovators every chance to succeed. America cannot 

rest on our laurels while other countries are catching up.

The Need for Innovation

Innovation is at the core of a new foundation for durable, sustainable expansion 

in both employment and economic growth. Robert Solow won the Nobel Prize in economics by showing that factors other than capital intensity, most notably advances 

in human knowledge and technology, accounted for almost 90 percent of the growth 

in America’s output per hour in the first half of the last century. Growth accounting 

has been refined since Solow’s first attempts, yet contemporary research still shows 

that human skill and innovation remain far and away the most powerful force for 

improving prosperity over the long-run, which is exactly what we need. 

Given its importance, the process of innovation cannot be taken for granted. It 

begins with the development of a new product, service or process. But it does not 

end there. To create value, a new idea must be implemented. Thus successful innovations will diffuse throughout an economy and across the world, impacting various 

sectors and sometimes even creating new ones. A diffused innovation must then 

scale appropriately, reaching an efficient size at which it can have a maximal effect. 

The full process—from development to diffusion to scaling—has many variables 

and many inputs. Ideas often fail before they make it through the full chain. But 

those that do succeed can create value and jobs while improving people’s lives. 

It is essential for the long-run prosperity of our society that innovations flourish 

and progress along this chain. And here, government has a fundamental role to 

play.

The Appropriate Role for Government

While it is clear that a new foundation for innovation and growth is needed, the 

appropriate framework for government involvement is still debated. Some claim that 

the laissez-faire policies of the last decade capture the right strategy, and that the 

recent crisis was the result of too much rather than too little government support. 

Another view is that the government must dominate certain sectors, protecting and 

insulating those areas thought to be drivers of future growth. The Obama Administration rejects both sides of this unproductive and anachronistic debate. 

The United States proposes to strike a balance by investing in the building blocks 

that only the government can provide, setting an open and competitive environment 

for businesses and individuals to experiment and grow, and by providing extra catalysts to jumpstart innovation in sectors of national importance.

A Strategy for American Innovation

President Obama has already taken historic steps to lay the foundation for the 

innovation economy of the future. In the Recovery Act alone the President committed over $100 billion to support groundbreaking innovation with investments in 

energy, basic research, education and training, advanced vehicle technology, health 

IT and health research, high speed rail, smart grid, and information technology. 
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The Obama Innovation Strategy has three parts: investing in the building blocks 

of innovation, promoting competitive markets that spur productive entrepreneurship, and catalyzing breakthroughs for national priorities.

Investing in the building blocks of American innovation

President Obama is committed to making investments that will foster long-term 

economic growth and productivity. These investments are in areas that include research and development, a skilled workforce, a leading physical infrastructure, and 

widely available broadband networks. 

Recognizing the need for long-term and sustained investments in R&D, President 

Obama has pledged to complete the doubling of funding for three key science agencies, the National Science Foundation, the laboratories of the National Institute of 

Standards and Technology, and the Department of Energy’s Office of Science. In his 

landmark address before the National Academy of Sciences, President Obama set 

a goal of lifting the sum of public and private investment in R&D to three percent 

of GDP, which would exceed the level achieved at the height of the space race. As 

the President noted, ‘‘science is more essential for our prosperity, our security, our 

health, our environment and our quality of life than it has ever been before.’’ To 

encourage private sector investment in R&D, the President has proposed making 

the Research and Experimentation Tax Credit permanent. The Obama Administration is working to increase the impact of this investment by providing greater support for university commercialization efforts, for high-risk, high-return research, for 

multidisciplinary research, and for scientists and engineers at the beginning of their 

careers. For example, the National Science Foundation’s FY 2011 budget proposes 

to double support for the Partnerships for Innovation program, which will help universities move ideas from the lab to the marketplace. 

The Obama Administration is committed to expanding access to broadband. Last 

week, the Federal Communications Commission (FCC) released the National 

Broadband Plan, called for in the American Recovery and Reinvestment Act, to 

identify ways to expand access to broadband and promote economic growth and job 

creation. 

In his statement on the plan’s release, the President committed to ‘‘build upon our 

efforts over the past year to make America’s nationwide broadband infrastructure 

the world’s most powerful platform for economic growth and prosperity.’’ To that 

end, I’ve established a Broadband Subcommittee of the National Science and Technology Council’s Committee on Technology, to focus closely on the plan that the 

FCC—an independent agency—produced, and to advise the Administration on the 

actions it should take to promote broadband as a platform to improve the lives of 

everyday Americans and drive innovation in the economy.

Promoting competitive markets that spur productive entrepreneurship

The Obama Administration believes that it is imperative to create a national environment that is ripe for entrepreneurship and risk taking, and allows U.S. firms to 

compete and win in the global marketplace. The Administration is pursuing policies 

that will promote U.S. exports, support open capital markets, encourage highgrowth entrepreneurship, invest in regional innovation clusters, and improve our 

patent system. The Administration also strongly supports public sector and social 

innovation. 

Competitive, high-performing regional economies are the building blocks for national growth, and the Administration is stepping up its efforts to cultivate regional 

economic clusters across the country. For example, the Administration has just announced a $130 million competition for an Energy Regional Innovation Cluster. This 

pilot project is designed to spur regional economic growth while developing energy 

efficient building technologies, designs, and systems. This will allow a region to develop a strategy that includes support for R&D, infrastructure, small and mediumsized enterprises, and workforce development. 

Innovation must occur within all levels of society, including the government and 

civil society. The Obama Administration is committed to increasing the ability of 

government to promote and harness innovation. The Administration is encouraging 

departments and agencies to experiment with new technologies that have the potential to increase efficiency and reduce expenditures, such as cloud computing. The 

Federal Government should take advantage of the expertise and insight of people 

both inside and outside the Federal Government; use high-risk, high-reward policy 

tools such as prizes and challenges to solve tough problems; support the broad adoption of community solutions that work; and form high-impact collaborations with researchers, the private sector, and civil society. 
13

The Administration launched the White House Open Government Initiative to coordinate Open Government policy, support specific projects, and design technology 

platforms that foster transparency, participation and collaboration across the Executive Branch. The principles of open government help to advance a set of key national priorities with emphasis on demonstrating tangible benefits for the American 

people. 

As an example, I am pleased to announce that the Defense Advanced Research 

Projects Agency (DARPA) will begin providing data on awardees in the Small Business Innovation Research (SBIR) program that utilize a streamlined process for contracting, and will extend this streamlined process to future SBIR solicitations. The 

SBIR program is one of the major Federal Government programs used to support 

innovative technologies in America—yet the paperwork is cumbersome, lengthy and 

time consuming. These new steps represent a significant improvement—think of 

this as the 1040 EZ for Federal Government innovation grants. Initially, DARPA 

will display data on the number of awardees that are eligible for this streamlined 

process, how many awardees opted to utilize this process, and the average number 

of days it took to complete the streamlined agreement. In addition, the next round 

of DARPA’s SBIR solicitations, scheduled for April 21st, will for the first time announce the wide availability of this streamlined option. 

Typically contracting would take from five to six months to complete, but we believe that the streamlined approach will take on average less than 60 days. This 

represents a 60 to 70% reduction in the time and cost, saving small businesses tens 

of thousands of dollars and letting them get to work months faster. 

By taking these steps, the Federal Government is matching young, innovative 

companies responsible for creating new technologies, new jobs and America’s future 

economic growth with Federal funding that meets their needs.

Catalyzing breakthroughs for national priorities

President Obama is committed to harnessing science, technology and innovation 

to unleash a clean energy revolution, improve America’s health care system, and address the ‘‘grand challenges’’ of the 21st century.

Smart Grid Technologies

Modernization of the Nation’s electric grid is a vital component of efforts to build 

a low-carbon economy. The ‘‘smart grid’’ will help provide consumers with the information, automation, and tools they need to control and optimize energy use. The 

tools and services enabled by the smart grid will improve the reliability, security, 

and efficiency of the electric grid. Smart grid technologies can facilitate energy generation from clean energy supplies and enable more effective integration with the 

electricity delivery system of renewable energy sources, demand response resources, 

and plug-in electric vehicles. The National Institute of Standards and Technology 

(NIST) has coordinated an unprecedented, open, and transparent public/private collaboration involving over 550 companies, organizations and government agencies to 

create the interoperability standards needed to foster innovation in the electric grid. 

One month ago, in conjunction with NIST, we broadened participation by launching the Smart Grid Forum, an on-line forum focused on the Nation’s energy consumers with an emphasis on spurring innovation in smart grid products and services. We received comments from over 130 individuals and organizations contributing their solutions to some of the most challenging smart grid goals that we 

have—from deployment of smart grid solutions, to development of standards needed 

for information exchange, to ensuring cybersecurity in the smart grid.

Healthcare IT

Another important Presidential priority is improving our health care system. 

Broad use of health information technology has the potential to improve health care 

quality, prevent medical errors, increase the efficiency of care provision and reduce 

unnecessary health care costs, reduce paperwork, increase administrative efficiencies, expand access to affordable care, and improve population health. The Recovery Act provides support for the deployment of health information technology, 

such as electronic health records. The Office of the National Coordinator for Health 

IT and the Centers for Medicare & Medicaid Services are working to ensure that 

health information technology products and systems are secure, can maintain data 

confidentially, can work with other systems to share information, and can perform 

a set of well-defined functions. NIST, in coordination with the Office of the National 

Coordinator and others, is accelerating the adoption of health IT standards by providing the critical testing infrastructure needed to achieve these goals. 
14

One month ago, the Office of the National Coordinator for Health IT announced 

a new collaborative, NHIN Direct, which will organize a set of standards, services 

and policies that enable secure health information exchange over the Internet 

(www.nhindirect.org). Several Federal agencies and healthcare organizations are already using the Nationwide Health Information Network (NHIN) technology to exchange information amongst themselves and their partners. This new effort will provide an easy ‘‘on-ramp’’ for a wide set of providers and organizations looking to 

adopt the exchange of health information—and provide a framework to spur innovation in support of direct communication amongst providers, and between providers 

and patients—in a secure and simple manner.

Grand Challenges

Finally, the Obama Administration believes that grand challenges should be an 

important organizing principle for science, technology and innovation policy. They 

can address key national priorities, catalyze innovations that foster economic growth 

and quality jobs, spur the formation of multidisciplinary teams of researcher and 

multi-sector collaborators, bring new expertise to bear on important problems, 

strengthen the ‘‘social contract’’ between science and society, and inspire students 

to pursue careers in science, technology, engineering, and mathematics. The President’s innovation strategy sets forth a number of grand challenges, such as solar 

cells as cheap as paint, educational software that is as compelling as the best video 

game and effective as a personal tutor, and early detection of diseases from a saliva 

sample. The National Economic Council and the Office of Science and Technology 

Policy are encouraging multi-sector collaborations to achieve these grand challenges 

that might involve companies, research universities, foundations, social enterprises, 

non-profits, and other stakeholders.

The Way Forward

Thanks to President Obama’s leadership, the Administration has taken large 

strides in developing and implementing an ambitious innovation agenda. The Recovery Act alone provides over $100 billion to support research and development and 

the deployment of advanced technologies such as clean energy, health IT, the smart 

grid, and high-speed rail. This commitment to investing in America’s future continues in the President’s most recent budget, with sustained support for research, 

entrepreneurial small businesses, education reform, college completion, and a 21st 

century infrastructure. 

The Administration is working with a wide range of stakeholders to identify the 

most promising ideas for implementing and further refining the Administration’s innovation strategy. There are active inter-agency working groups on issues such as 

prizes and challenges, regional innovation clusters, research commercialization, 

spectrum reform, broadband, open government, and standards. The National 

Science and Technology Council is leading multi-agency research initiatives in dozens of critical areas such as aeronautics, genomics, green buildings, nanotechnology, 

quantum information science, robotics, and information technology. Through the 

President’s Council of Advisors on Science and Technology, the Administration is 

able to receive high quality advice from the Nation’s leading scientists, engineers 

and innovators on issues such as health information technology, advanced manufacturing, clean energy, and STEM education. 

America has always been a Nation built on hope—hope that we can build a prosperous, healthy world for ourselves and for our children. These long-standing American aspirations depend critically on our far-sighted investments in science, technology and innovation that are the ultimate act of hope and will create the most 

important legacies we can leave. 

The United States is still the land of the future. We have held that honor since 

this continent was discovered by a daring act of exploration more than 500 years 

ago. We have earned it anew with each passing generation because America’s scientists, entrepreneurs and public officials have understood the importance of applying the power of American curiosity and ingenuity to the biggest economic and societal challenges. 

I welcome any questions that the Committee may have.

BIOGRAPHY FOR ANEESH CHOPRA

Aneesh Chopra is the Chief Technology Officer and in this role serves as an Assistant to the President and Associate Director for Technology within the Office of 

Science & Technology Policy. He works to advance the President’s technology agenda by fostering new ideas and encouraging government-wide coordination to help 
15

the country meet its goals from job creation, to reducing health care costs, to protecting the homeland. He was sworn in on May 22nd, 2009. Prior to his appointment, he served as Secretary of Technology for the Commonwealth of Virginia from 

January 2006 until April 2009. He previously served as Managing Director with the 

Advisory Board Company, a publicly-traded healthcare think tank. Chopra was 

named to Government Technology magazine’s Top 25 in their Doers, Dreamers, and 

Drivers issue in 2008. Aneesh Chopra received his B.A. from The Johns Hopkins 

University and his M.P.P. from Harvard’s Kennedy School. He and his wife Rohini 

have two young children.

Chairman WU. Thank you very much, Mr. Chopra. 

Dr. Kamlet, please proceed. 

STATEMENT OF DR. MARK KAMLET, PROVOST, CARNEGIE 

MELLON UNIVERSITY 

Dr. KAMLET. Chairman Wu, thank you very much, and it is an 

honor to be able to participate in this hearing. 

As Provost and Executive Vice President of Carnegie Mellon, I 

am here today to offer perspectives on supporting innovation from 

the trenches, so to speak. I will cover two main areas in my brief 

remarks. First, I would like to offer a quick overview of Carnegie 

Mellon’s experience in helping to shape a pathway from research 

to innovation, and second, based upon these experiences, I will 

offer a few thoughts for your consideration on Federal policies that 

can help ensure continued U.S. leadership in technology-based innovation in the future. 

I should say that as with our peer institutions, we have benefited 

immeasurably from the strong historic partnership with the Federal Government that has made the American research university 

truly unique in the world as an engine for new business creation, 

and of course, this partnership was dramatically energized by the 

Bayh-Dole Act, which over the last 30 years has made technology 

transfer a critically important university mission. But Carnegie 

Mellon’s experience highlights the importance, as well, of supporting the Federal investment in research with deliberative strategies that create a culture of innovation and speed research to the 

marketplace. At Carnegie Mellon, we have implemented two strategic thrusts to directly accelerate commercialization. 

First, we overhauled our tech transfer process in 2004 to create 

a streamlined, transparent approach for faculty seeking to create 

new companies known as our ‘‘5% go in peace’’ policy, named such 

because of the fact that we cap university equity at five percent, 

up to $2 million dilution event, and that this strategy has largely 

removed the conflicts that often accompany negotiations over faculty startups. Combined with a series of supporting initiatives that 

range from widespread entrepreneurial education for faculty and 

students, to the placement of embedded entrepreneurs right in the 

heart of research labs, the 5% go in peace approach has more than 

doubled our rate of new business creation. We now have 10 to 20 

new companies that we launch each year, and we rank consistently 

among the top three universities in the Nation in surveys by 

AUTM [Association of University Technology Managers] of university startups and first among universities without a medical school. 

Our second major strategic thrust has been a campus-wide commitment to regional economic development born from a sense of our 

need to contribute to our region’s recovery from the collapse of the 
16

steel industry. That focus has included aggressive efforts to directly 

link faculty research to the attraction of companies to Pittsburgh. 

As a result of this focus on economic development, we have succeeded in helping bring companies such as Apple, Intel, Google, 

Disney and Caterpillar to Pittsburgh. 

More critically, this economic development commitment has fostered a vibrant environment for the industry-university research 

collaboration as with the burst of new startups created by our 5% 

go in peace policy. The collaborations stemming from this focus on 

economic development have created new channels for commercializing university research. 

Let me offer three key suggestions on what lessons the Carnegie 

Mellon experience may hold for policies that can support innovation. First, I believe that we can significantly improve the climate 

for innovation by focusing small but targeted Federal investments 

to fill the gap between the end of basic research and the point 

where private investments or even SBIR funding can support startup development or licensing. This gap often involves the development of pre-commercial prototypes and other early market tests. 

The Obama Administration has proposed $12 million in the innovation ecosystem funding in the NSF budget. This and ideas such as 

the notion of regional prototype centers offered by Secretary Locke 

will be valuable steps towards filling this gap. This funding should 

come with strings that hold universities accountable for creating 

the policies and environment necessary for commercialization to 

thrive. 

Second, I believe there is great promise in seeking to identify 

niche areas for Federal science funding where greater synergy can 

be created between basic research and technology development to 

accelerate commercialization. For example, over the last two years, 

faculty from Carnegie Mellon have joined with colleagues at ten 

other universities and a range of industry leaders to create a roadmap for commercial robotics. This roadmap outlines a shared vision 

for advances in both fundamental research and shorter-term barriers to commercial application that must be addressed to dramatically expand the U.S. robotics industry. 

Finally, we need to create the equivalent of a Bayh-Dole Act for 

university-industry collaboration, a broad framework that can reinvigorate partnership development. Two pillars to build this framework would include a lessening of restrictions that impede the ability of universities to conduct exclusive research for companies in 

buildings funded with tax-exempt bonds and more focused provisions for the industry-university collaboration in the R&D tax credit. 

In closing, I want to thank the Members of this Committee for 

their commitment to preserving U.S. leadership in science and 

technology. I have witnessed the fruit of it directly in the research 

labs at Carnegie Mellon and we are grateful for your leadership. 

Thank you very much. 

[The prepared statement of Dr. Kamlet follows:]
17

PREPARED STATEMENT OF MARK KAMLET

Introduction

Thank you Chairman Wu, Ranking Member Smith, and Members of the Committee for the opportunity to speak to you today and to share perspectives on strategies to maintain and reinvigorate the leadership of the United States in innovationled job and business growth. My name is Mark Kamlet. I am the Provost and Executive Vice President of Carnegie Mellon University. I serve as the chief academic officer of CMU but I have also been very engaged in our tech transfer policies and directly involved in a number of university spin-out companies. I also serve on the 

National Academy of Sciences panel on intellectual property—though my remarks 

today reflect only my views and not those of the panel. 

My comments will focus on two key areas. First, I will share briefly with you Carnegie Mellon’s experience in seeking to create a culture that accelerates the path 

from basic research to commercialization. Second, my remarks will seek to discern 

lessons from these experiences that may be of value as you assess policy options to 

ensure that the U.S. remains the world leader in innovation and, particularly, the 

capacity for innovation to stimulate broad-based economic opportunity. 

However, it is important that I first begin by thanking you and the members of 

this Committee for your tireless support of the advancement of science and technology. This Committee has been a steadfast proponent of policies to maintain U.S. 

science excellence and an ‘‘incubator’’ of the kinds of creative ideas needed to refresh 

and rejuvenate our leadership for a changing world. I have witnessed the impact 

of this leadership directly in labs within Carnegie Mellon and I am grateful for your 

efforts.

Recognizing Our Strengths: The Vitality of the American Research University Partnership

An effort to assess future directions for U.S. innovation policy must begin with 

recognition of the core vision and values that have been at the heart of our success 

to date. The fundamental partnership between the Federal Government and American higher education in the post-war period to create the modern research university has been the greatest catalyst to economic growth in the last half century. 

While the U.S. faces intense competition in the global economy it is worth noting 

that we possess one asset that no other nation has yet duplicated—the capacity of 

university based research to launch high growth companies. There is virtually no 

equivalent of ‘‘Google’’ emerging from dorm rooms in universities in Europe or Asia. 

This is an asset we must seek to nurture for the future. 

The power of this partnership in creating the modern research university was in 

my view greatly enhanced by the passage of the Bayh-Dole Act. Bayh-Dole extended 

this partnership by fully engaging universities in technology transfer and spin-out 

development. At its essence, the Bayh-Dole Act created a vehicle for leveraging U.S. 

investment in basic research into a stronger engine for commercialization. 

Bayh-Dole was enacted at a time when the U.S. economy faced economic challenges nearly as severe as those we currently confront. In 1980 the U.S. economy 

was beset by double digit unemployment and double digit inflation. The rise of 

international competition had brought the phrase ‘‘rust belt’’ into the popular lexicon for the first time. In Pittsburgh, America’s epicenter of economic dislocation in 

the early 1980s, over 100,000 jobs were lost in the steel industry in less than three 

years. 

The Bayh-Dole Act created the foundation for the innovation-led recovery of the 

1980s and the growth of the 1990s. Since the enactment of Bayh-Dole the university 

community’s commitment to technology transfer has skyrocketed. The number of 

university tech transfer programs increased from 30 to over 300. Over 5,000 new 

companies have been created and university-based patents and product introductions have also risen dramatically. 

Without question I believe that the U.S. investment in science and basic research 

would never have produced the commercial and job dividends so vital over the last 

two decades without the Bayh-Dole Act and its impact on energizing universities to 

become partners and advocates for commercialization. 

But while a recognition of those historic strengths is vital to charting a course 

forward, past achievements are no guarantee for a future where we face fundamental new challenges from increasing international competition, a critical need to 

overcome a period of stagnation in Federal support for basic research, some evidence 

of a plateauing in university-based patenting trends and unmistakable indications 

that the vital link between basic research and innovation-led job growth has weakened if not broken completely. I will seek to identify lessons from Carnegie Mellon’s 
18

experiences that may hold promise for writing a new chapter in the innovation compact between the Federal Government and American universities.

Searching for Strategies to Rejuvenate Innovation: Lessons from Carnegie 

Mellon’s Experiences

Carnegie Mellon University brings perspectives on these challenges from a relatively unique history among leading American research universities. Created in 

1900 to be a technical trade school for the sons and daughters of steelworkers, the 

University is the youngest Top 25 research institution in the U.S. Our roots have 

instilled a focus on practical problem solving and a culture of interdisciplinary research that have been critical to our capacity to stimulate innovation. 

Nevertheless, we have faced the challenge of having to forge policies and a cultural environment capable of generating significant results. Upon becoming provost 

in 2000, I confronted the strong findings of a University committee convened to 

guide the search for my position that concluded that Carnegie Mellon’s tech transfer 

process was broken. The Committee found that the policies and processes in place 

at that time instilled conflict between the University and our faculty and choked 

off both commercialization and start-up creation. 

Our response was an overhaul of Carnegie Mellon’s tech transfer process and the 

creation of what we call the ‘‘5% go in peace’’ approach. This approach creates a 

streamlined, common template for faculty based start-ups that limits university equity to 5% capped at a $2 million dilution event, establishes clear royalty guidelines 

with a three year delay in payments and ensures virtually no University interference in start-up operations. This streamlined template has been augmented by 

supportive policies that allow faculty to incubate companies in University labs for 

short periods and that also allow faculty to hold C-level positions in the companies 

they create. 

The 5% go in peace program has also been bolstered by the establishment of a 

supportive innovation ecosystem across the University. This ecosystem consists of 

aggressive entrepreneurial training and outreach that engages over 10% of the student population each year. It also includes the strategic placement of entrepreneurs 

in residence in key areas to jump start the development of ideas for new companies. 

In addition, a new initiative in computer science, known as Project Olympus, is 

bringing focused assistance on entrepreneurship to researchers in the earliest 

phases of research. One Project Olympus supported start-up was recently acquired 

by Google. Finally, we augment our streamlined processes for start-up creation with 

intense collaboration with regional economic development organizations to ensure 

that our companies have fertile ground for growth after leaving the University. 

The 5% go in peace approach has been a catalyst to innovation. The rate of university spin-outs has doubled since the implementation of this policy in 2004. Since 

2007, Carnegie Mellon has ranked number #1 among all U.S. universities without 

a medical school in the number of start companies created per research dollar spent 

and ranked number two in the Nation among all universities in 2008 (source: 

AUTM, the Association of University Technology Managers). 

On average the University creates 10 to 20 new companies each year. These startups range from robotics firms launching new applications for manufacturing and 

services, to video game companies, to a new battery storage company and a recent 

start-up that has developed a technology to utilize a person’s blood to engineer plastics for plates to be used in medical procedures in order to reduce rejection rates. 

While most of these start-ups focus on leading edge technologies, nearly one-third 

involve the manufacturing of products. University-based innovation is capable of far 

reaching impacts. 

This focus on creating an ecosystem to support start-ups has been mirrored by 

a University-wide commitment to economic development by Carnegie Mellon’s President, Jared Cohon. This commitment has resulted in the creation of an on campus 

facility to ease the ability of companies to launch operations in Pittsburgh. The facility is currently home to Apple, Intel and Google. Carnegie Mellon has also helped 

to attract Caterpillar, Disney Research and Rand to Pittsburgh. Other major tech 

leaders such as Network Appliance, Foster Miller and Cadence Design Systems have 

entered the Pittsburgh market by purchasing CMU-related companies. 

This focus on economic development has done more than simply contribute to the 

nearly 9,000 jobs created by Carnegie Mellon related companies in the Pittsburgh 

region that are central to the area’s recovery from the collapse of the 1980s. A University wide commitment to economic development has helped to establish entirely 

new models for industry/university research collaboration—the second core component of the innovation equation. While each company tends to pursue its own 

unique model of collaboration ranging on a spectrum from open source research to 
19

highly proprietary engagements, our experience demonstrates that a commitment to 

economic development is a vital catalyst to building the strong faculty/company relationships that are essential to stimulating innovation.

Challenges and Potential Strategies for the Road Ahead

The Carnegie Mellon experience demonstrates that a focus on accelerating startups and a commitment to regional economic development as a core university mission can help establish a culture of innovation that produces tangible commercialization outcomes. At the same time we confront clear challenges that illustrate 

the difficulties the Nation faces in accelerating innovation-led job growth. 

These challenges fall into two major areas. First, at a time when universities and 

the Federal Government face enormous fiscal challenges, the resources needed to 

advance basic research outcomes to the point where a determination can be made 

as to whether they provide the basis for licensing or start-up creation are virtually 

non-existent. 

The scale of resources required is not large. An investment of $100,000 in a promising area, for example, can often enable a researcher to make the leap from concept 

to commercial potential. But currently, universities must rely on either internal 

sources or foundations for these funds and the net result is a lower return on U.S. 

investment in basic research. 

The Federal effort most applicable to meeting this gap is the SBIR program. However, the need for pre-commercial prototyping is often-greatest before a researcher 

would be ready to start a firm and be SBIR eligible. 

The second challenge is the need to fundamentally reevaluate strategies to encourage stronger partnerships between universities and new industry. While Carnegie Mellon’s focus on economic development has fostered important collaborations, 

the overall climate created by key tax policies is having a chilling effect on the capacity to stimulate a stronger research partnership with companies. I believe that 

this climate is hindering our capacity to link university research to capturing manufacturing opportunities in the U.S. 

Recognizing these two main challenges I would offer the following three recommendations for consideration.

(1) Create funding sources to close the gap between basic research and 

commercialization

I would strongly encourage Committee consideration of experimental approaches to enhance investment in moving basic research outcomes closer 

to commercialization. The President has proposed one approach to fill this 

gap by including $12 million in the proposed FY 2011 NSF budget for Innovation Ecosystem grants. The goal of this proposal is to provide support for 

programs that link researchers to resources that can evaluate the potential 

for new business creation or commercial licensing earlier in the research 

process.

Secretary Locke has also discussed the potential creation of regional ‘‘prototype development centers’’ that would also facilitate pre-commercialization 

refinement of research activities. A national pilot program in efforts such 

as these could both test their effectiveness and foster the creative development of strategies.

This funding should come with clear requirements however to ensure a 

Federal return. I would propose for example that to be eligible, universities 

must demonstrate that they have in place policies conducive to start-ups 

and commercialization and have created the economic development partnerships vital to foster innovation. Where applicable these programs should 

also enhance collaboration among universities in the commercialization 

process.

(2) Invest in Targeted Research Initiatives that have the Potential to 

Dynamically Link Fundamental Research and Commercialization

The ability to stimulate innovation would also be enhanced by exploring opportunities to target investments towards areas where a strong synergy exists between advancements in basic research and near term commercial 

growth.

For example, over the last two years researchers at Carnegie Mellon have 

joined their colleagues at ten other universities and a number of major companies to develop a roadmap for the future of U.S. commercial robotics. 

Funded by the Computing Community Consortium, the roadmapping proc-
20

ess focused on identifying near term, medium range and long term application and research needs.

The outcome of this work is an integrated vision for linking continued 

progress in fundamental research areas vital to breakthrough advances 

with near term technology gaps that can accelerate new product innovations in manufacturing, health care, education and service applications. 

This approach harnesses the best strengths of U.S. research universities 

but creates a framework for collaborations on near term innovations that 

can stimulate new companies and technology transfer. I believe similar initiatives in areas such as the science of learning or the brain sciences where 

major breakthroughs in fundamental research have recently been made 

could also be fertile ground for this type of approach.

(3) Establish a National Focus on Rejuvenating Industry-University 

Collaboration

Just as the Bayh-Dole Act ushered in a boom in university based start-ups, 

the U.S. is in need of an overall strategy or policy framework for increasing 

collaboration among companies and universities. Such a framework should 

assess both current barriers and opportunities for new incentives.

One starting point for developing this framework would be an examination 

of the U.S. Tax code and Revenue Procedure 97–14 which places restrictions on the ability of universities to effectively engage companies. This procedure precludes companies sponsoring research projects from receiving 

preferential treatment in licensing. In effect, it requires universities to essentially stipulate that companies cannot own the IP coming from research 

they fund. It is a barrier unique to the U.S. and a major competitive disadvantage.

Efforts were made in Revenue Procedure 2007–47 to mitigate the impact 

of these provisions. But these changes still largely preclude the ability of 

companies to readily obtain exclusive licenses for research that they fund 

in buildings financed with tax exempt bonds.

Arguments can be made that altering these provisions would foster unfair 

competition with private sector research or undermine the basic mission of 

universities. I believe these issues can be addressed and that the competitive challenges facing the U.S. demand that we try.

A second starting point for this initiative would be to continue to explore 

modifications to the R & D tax credit that would incentivize university collaboration. At a time when companies are increasingly off-shoring research 

operations, tax incentives for university collaborations could be a valuable 

tool for retaining innovation capacity in the U.S.

Finally, an initiative to rejuvenate university/industry collaborations should 

focus specifically on opportunities to more closely link basic research to 

manufacturing. Carnegie Mellon is launching a campus-wide initiative 

called the Manufacturing Accelerator to create more direct pathways between leading edge basic engineering and computer science research and 

manufacturing.

The Accelerator will leverage a network of over 200 small and medium 

sized Pennsylvania firms to focus basic research on industry defined product and process opportunities. Any effort to stimulate stronger university/

industry collaboration must include strategies for extending that partnership to production.

Conclusion

Thank you again for your commitment to American leadership in science and the 

opportunity to share Carnegie Mellon’s experiences in seeking to ensure that the 

Federal investment in basic research stimulates innovation. The U.S. confronts the 

challenges from a unique position of strength. The American research university is 

an asset not yet matched anywhere in the world. 

But the times demand that we evaluate strategies that can insure that this asset 

fosters broad-based economic opportunities in the future. Carnegie Mellon has 

worked to foster a culture of innovation that has accelerated new business creation 

and commercialization research partnerships with companies. Our experiences suggest that strategic policy initiatives could serve to reinvigorate the overall climate 

for university-based innovation. 

These strategic initiatives should include new funding sources that bridge the gap 

between basic research and commercialization anchored in strict requirements for 
21

universities to put in place and maintain start-up supportive policies. Second, focusing some segment of basic research funding on targeted areas where close collaboration to foster synergy between fundamental science breakthroughs and barriers to 

commercial applications, such as robotics, would be a critical step to accelerate research-based innovation. Finally, a broad-based effort to explore means of enhancing 

the environment for industry/university collaboration is clearly needed. A focus on 

tax code and tax credit actions as well as an assessment of opportunities that create 

closer linkages between university research and manufacturing activities could provide a starting point for establishing a policy framework as bold as the Bayh-Dole 

Act proved to be in launching an era of start-up creation. 

In closing, let me pass on the observation that one cannot spend time on the campus of an American university without coming away with a renewed belief that our 

best times are ahead of us. Carnegie Mellon and the entire university community 

stand ready to join you in advancing ideas and policies that will match the vigor 

and creativity of our students.

BIOGRAPHY FOR MARK KAMLET

Mark S. Kamlet is provost and senior vice president of Carnegie Mellon University and professor of economics and public policy. He received a B.S. in Mathematics 

from Stanford, and an M.S. in Statistics, M.S. in Economics and Ph.D. in Economics 

from the University of California at Berkeley. He has taught at Carnegie Mellon 

since 1976. He has served as head of the Department of Social and Decision 

Sciences, associate dean of the College of Humanities and Social Sciences, and for 

eight years served as dean of the H. John Heinz III School of Public Policy and 

Management. 

Kamlet’s research areas are in the economics of health care, quantitative methodology, and public finance. He has over 75 published papers, and has received the 

outstanding publication award from the Association of Public Policy and Management for his work on the Federal budgetary process. 

He has served on a U.S. Public Health Service panel to produce national guidelines on applying cost-effectiveness analysis in health care; and on three National 

Institute of Health consensus panels to make recommendations on national policies 

relating to prenatal genetic testing; neonatal screening; and end-of-life care. He has 

served on the Institute of Medicine’s Board on Population Health and Public Health 

Practice, National Institute of Health’s Public Access Working Group, and various 

consensus panels for the Centers for Disease Control. 

Kamlet is chairman of the board of directors of Carnegie Learning, Inc., past 

chairman of the board of Carnegie Technology Education, Inc. He has served on numerous boards of regional not-for-profits, including currently Pittsburgh Parks Conservancy, the Institute for Transfusion Medicine, The Western Pennsylvania Hospital and Highmark Inc. He served on the committee that drafted the rules and procedures for the new Allegheny County Executive and County Council, chaired the 

transition team for Allegheny County in the area of information technology, and 

chaired the first advisory board for the County Chief Executive on economic development.

Chairman WU. Thank you very much, Dr. Kamlet. 

Dr. Atkinson, please proceed. 

STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, THE 

INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION (ITIF) 

Dr. ATKINSON. Thank you, Chairman Wu, Mr. Smith and other 

Members. It is a pleasure to be here. 

I want to start by making, I think, a simple but very important 

point. In a report that we issued last year called The Atlantic Century, we benchmarked the United States against 39 other nations 

or multi-nation regions on 16 different indicators of competitiveness and innovation; factors like corporate R&D, government R&D, 

venture capital, new business startups, number of scientists and 

engineers and the like. What we found was that in 2000, the 

United States was by far the world leader. Our closest competitor 

was significantly below us in overall ranking and score, and that 
22

was Sweden. Unfortunately, by 2009, when we released the report, 

we had fallen from number one to number six behind counties like 

Denmark, Sweden, South Korea and some others. 

The reason we fell so much and so fast is because we ranked 

40th out of 40 nations or regions in change. In other words, we 

were dead last in progress on these factors. Other nations expanded their corporate and government R&D faster. Other nations 

expanded their number of scientists and engineers faster. They expanded their venture capital faster. So while a lot of that is due 

principally to the fact that in the last decade or so a wide array 

of other countries have woken up to the fact that they need to be 

competitive in innovation. Just a simple factoid on that. In the 

early 1990s the United States had the most generous research and 

development tax credit in the world. According to the most recent 

OECD data, we are 17th out of 30 OECD [Organization for Economic Co-operation and Development] nations in R&D tax credit 

generosity, and that is just one example of many kinds of policies. 

Why do we care about this? Why is it important? I would actually argue that we can trace at least a portion of the cause of the 

recent financial crisis to this trend we have seen in innovation. We 

had an enormous amount of money in the United States looking for 

a home, money coming in from overseas including China, and it 

was looking for a place to be invested and there just weren’t 

enough good investment opportunities of things we would consider 

good, i.e., innovation, and so the money ended up going into essentially bad consumption opportunities of subprime mortgages and 

other kinds of housing investments, which did nothing to promote 

U.S. long-term productivity or innovation and essentially, as we 

learned, was unsustainable. So I think there is a connection between the financial crisis and the lack of innovation or the suboptimal amount of innovation. 

I think the second key point here, though, is that innovation can 

play a key role in driving jobs in the future. One of the reasons is 

not just because you can get high-tech jobs and innovation-based 

jobs that export and pay more, but more importantly for what 

Keynes once talked about is the key to capitalist economies working is the ‘‘animal spirits of capitalism.’’ People have to have faith 

and optimism that there is going to be a better tomorrow, and innovation is a key enabler of that optimism to occur. 

So what do we need to do? Let me just say, money is important 

but I don’t think money is enough. I think one of the most important changes we need to make in our national innovation policy 

system is, we need to increasingly put partnerships and collaboration at the center of it. It is not just enough to give money to NSF 

or other agencies and do individual projects. We need to think 

about systemic partnerships, and we lay out and propose several 

recommendations in the testimony on some of those. A few examples—science and technology STEM [Science, Technology, Engineering and Mathematics] high schools. There are a number of 

these STEM high schools around the country. They partner with 

high-tech companies. They do a great job of educating kids in 

science. One locally here is Thomas Jefferson High School in Northern Virginia—there are a number of these. But there aren’t enough 

of them, and what we would propose is that there is a role for NSF 
23

funding to help expand the number of these specialty math and 

science high schools. 

I think one of the key areas that we lack right now, and Dr. 

Kamlet had alluded to this, is we do an OK job of funding basic 

research. Where we fall down, though, is sometimes translating 

that research into commercial opportunities, and you have some 

leading institutions including Carnegie Mellon, MIT, Stanford, and 

Georgia Tech who do a very good job of that but they are the 

outliers. We need a national system that really helps all universities and Federal laboratories do a better job there. One of the proposals we have made is for a new kind of SBIR. We call it an 

SCNR, ‘‘Spurring Commercialization of Our Nation’s Research,’’ 

which would take a small portion of Federal R&D funds, about 0.15 

percent, allocate that to universities and Federal labs and states to 

do this kind of bridging and commercialization. 

Another component, I think Dr. Kamlet alluded to this, we have 

proposed a collaborative R&D tax credit. Many countries in the last 

five years have created special, more generous credits if you are 

funding research at universities or Federal laboratories because 

that research spills over. 

And two final things. One, we think it is important that Federal 

research do a better job of supporting sector-based collaborations. 

We have got a very good one now in a program called the Focus 

Center program that the semiconductor industry and DARPA fund. 

It is a very, very good program, but it is only one program. So we 

need to be working more on sector-based efforts where industry 

comes to the table with ideas and money and the Federal Government helps match that, and we need to do a better job of supporting the state and local efforts that are trying to revive the U.S. 

economy through innovation-based economic development. They are 

very good efforts in many cases but they are underfunded. One way 

to do that, but certainly not the only way, would be to create as 

we have proposed with the Brookings Institution, a National Innovation Foundation to support that. 

The final proposal or suggestion would be, one of the things 

many countries have done in the last few years is create a national 

innovation strategy to look more in a detailed way where they are 

strong, where they are weak, what other countries are doing. I 

think it would behoove us to also do something like that akin to 

the national broadband strategy but for innovation. Thank you. 

[The prepared statement of Dr. Atkinson follows:]

PREPARED STATEMENT OF ROBERT D. ATKINSON

Mr. Chairman, Mr. Smith, and Members of the Committee, I appreciate the opportunity to appear before you to discuss the critical question of U.S. innovation 

leadership and what the Federal Government can do about it. 

The United States is no longer the global innovation leader and our rank is rapidly slipping. The effects are seen in increased trade deficits, relatively lower increases in standards of living, higher unemployment and even the severity of the 

current economic crisis. While ultimately businesses and other organizations (e.g., 

universities) will have to take the lead in driving innovation, the Federal Government can and should take a much more proactive role. As I describe below, Congress can take a number of important steps, including: ensuring that USTR takes 

a more aggressive role in trade enforcement, expanding the R&D credit, promoting 

science, technology, engineering and math (STEM) skills and increasing support for 

research and most importantly research commercialization. In addition, we encourage the Committee to particularly consider two ideas discussed in more detail below: 
24

the creation of a national innovation and competitiveness strategy and the establishment of a National Innovation Foundation, akin to the National Science Foundation (NSF), but for innovation.

What is at Stake: Why is Innovation Important? 

In recent years, a growing number of economists have come to see that it is not 

so much the accumulation of more savings or capital that is the key to improving 

standards of living; rather it is innovation-the creation and adoption of new products, services, processes, and business models.1 When economists Kienow and 

Rodriguez-Clare decomposed the cross-country differences in income per-worker into 

shares that could be attributed to physical capital, human capital and total factor 

productivity, they found that more than 90 percent of the variation in the growth 

of income per worker was a result of how effectively capital is used (e.g. innovation), 

with differences in the actual amount of human and financial capital accounting for 

just 9 percent. 

Innovation is also essential if we are to create a future of better jobs for all Americans. Properly conceived, innovation is not just about creating more jobs for engineers and managers in high technology industries. It is also about providing more 

and better training for incumbent workers in manufacturing and ‘‘low-tech’’ services 

and reorganizing work processes so that their companies can perform better. Boosting innovation leads to higher real wages for American workers, and in the 

moderate- to the long-term, (and often in the short-term as well) leads to more jobs. 

Innovation, properly conceived, also benefits not just the notable high-tech regions 

of the nation, but all regions. 

The growth of international trade also makes it increasingly important for the 

United States to innovate to maintain its standard of living. Low-wage nations can 

now more easily perform labor-intensive, difficult-to-automate work in manufacturing and in a growing share of services. Indeed, it has become difficult for the 

United States to compete in such industries as textiles and commodity metals. Notwithstanding the efforts of countries like China and India to compete in advanced 

technology industries, for the foreseeable future their competitive advantage should 

remain in more labor-intensive, less complex portions of the production process.2

By contrast, the United States’ primary source of competitive advantage should 

be in innovation-based activities that are less cost-sensitive. To illustrate, a software 

company can easily move routine programming jobs to India where wages are a 

fraction of U.S. levels. There is less economic incentive for moving advanced programming and computer science jobs there because innovation and quality are more 

important than cost in influencing the location of these jobs. Likewise, an auto company can easily move production of commodity car parts to China. But the case for 

moving advanced research and development or production of complex, technologydriven parts (such as drive trains) there is weaker. 

Nor does this mean that the United States must inevitably cede entire industries 

to low-wage countries. Even in industries such as apparel and textiles, which are 

dominated by labor-intensive production, some firms have carved out innovationbased product niches (e.g., high-fashion articles whose designs change rapidly or 

textiles made of advanced materials) that make it possible for them to produce in 

the United States. Moreover, with sufficient productivity growth, companies can offset the cost of high U.S. wages, enabling them to produce in the United States at 

costs equal to or below those of low-wage countries.

The United States Led in Innovation from WWII to the End of the 20th Century 

Prior to World War II, it could be argued that Europe, and in particular Germany 

and Great Britain, led in innovation. However, since World War II until the early 

part of the last decade, the United States led the world in innovation. A range of 

statistics consistently showed this. We were leading on patents, corporate R&D, 

Nobel Prize winners, high tech exports, etc. Indeed, as the Information Technology 

and Innovation Foundation (ITIF) documented in a report, The Atlantic Century, released last year, the United States was ranked first among 40 leading nations in 

2000 according to an amalgam of 16 innovation-based competitiveness factors (such 

as funding of corporate and government R&D, venture capital as a share of GDP, 

new businesses created, number of scientists and engineers as a share of the workforce, etc.). And our lead was not slight; we were far ahead of our closest two rivals 

(Sweden and Singapore).
25

What Factors Helped the United States Lead in Innovation-based Competitiveness? 

There are a number of policy and non-policy factors which contributed to the 

United States lead in innovation from the 1940s through to the 2000s. 

On the non-policy side, a key factor was our large and growing market which enabled U.S. corporations to have large enough markets to invest in R&D at the scale 

needed to drive innovation. The large market (both in number of consumers but also 

in their higher incomes) also meant that U.S. firms could gain economies of scale 

and economies of learning that enabled costs to be driven down and new generations 

of products and services to become profitable faster. For example, in 1960, the number of automobiles sold in Los Angeles County alone exceeded all those sold in Asia 

or South America.3

Indeed, the U.S. led the world in the application of mass production manufacturing to virtually all sectors. Numerous production innovations, including automated assembly lines, numerically controlled machine tools, automated process control systems and mechanical handling systems drove down prices in American manufacturing and led to production of a cornucopia of inexpensively manufactured consumer goods. 

The United States was also the first nation to transform its innovation system 

into a science-based one where innovation was derived from a more fundamental 

understanding of underlying processes than from one of mere tinkering and mechanical trial and error. As economist Joseph Schumpeter argued in the 1940s, reflecting on the U.S. economy, ‘‘Technological progress is increasingly becoming the 

business of teams of trained specialists who turn out what is required and make 

it work in predictable ways.’’ 4 As a result, U.S. R&D expenditures skyrocketed by 

400 percent between 1953 and 1964. For example, DuPont’s R&D expenditures increased from around $1 million per year in 1921 to over $60 million by the mid1950s.5 The number of research and development laboratories increased from 

around 1,000 in 1927—with few doing basic research—to almost 5,000 in 1956, with 

many, like Bell Labs, conducting extensive basic research. As the innovation process 

became systematized and corporatized, engineers became more important. In 1900, 

engineers made up only 0.05 of the population, but by 1940, 2 out of 1,000 people 

were engineers, and by 1970, 6 out of 1,000 were.6 As a result, the locus of innovation also switched from individual inventors like Edison and Bell tinkering in their 

garages to scientists working in corporate R&D laboratories.7 One reflection of this 

is the fact that in 1901 there were 20,896 patents issued to individuals, with only 

4,650 going to corporations. This evened out by the 1930s, but by the mid-1950s the 

corporate rate took off. By 1980, corporations obtained about five times more patents than individuals. 

But our lead in scientific discovery alone was not enough to propel the United 

States to the lead. That required firms willing and able to make the investments 

needed to transform from invention to innovation and commercialization. And a key 

factor was the new science of management and the organization of firms able to 

handle large complex production systems. After WWII, new forms of corporate organization emerged, in which a top managerial cadre became empowered with the information necessary to centrally manage massive, sprawling enterprises. When the 

large, multidivisional company became commonplace after World War II, CEOs put 

in place elaborate paper-based managerial systems to coordinate these sprawling 

companies. Millions of new white-collar middle managers were needed to make 

these behemoths work. This rise of a new managerial class was one of the most profound changes resulting from the rise of the corporate economy. Indeed, after World 

War II, the formal discipline of management emerged. James Burnham’s 1941 book, 

The Managerial Revolution, argued that the world was witnessing the emergence 

of a new ruling class, the managers,’ who would soon replace the rule of capitalists 

and communists alike. Combine this with the emergence of world class business 

schools that educated managers who could manage innovation, and the United 

States had another lead over its competitors who did not embrace the ‘new 

managerialism’ until decades later. 

Other factors played a role. The American inventor and entrepreneurial ethos also 

helped drive our innovation lead. More so than any other nation at the time, America was a place where ‘‘anyone could make it,’’ provided they worked hard and took 

risks. America was able to draw on the talents of a larger share of the population 

to drive innovation. And related to this, in contrast to many nations, failure was 

not seen as a stigma from which recovery was difficult. Rather, it was a mark that 

someone had the fortitude to take a risk, and perhaps the second (or third, or 

fourth) time would be the charm. Moreover, in those days, if one wanted to remake 

oneself, one simply moved south or west. Indeed, the very size of our nation and 

the relative underdevelopment of much of the West and South until the 1970s 
26

meant that entrepreneurs could locate in places unconstrained by the dead weight 

of tradition and inertia. No wonder that in the 1960s Silicon Valley instead of Pittsburgh (where the largest electronics firm in the world at the time, GE, was 

headquartered) became the world’s innovation leader. Pittsburgh was a place where 

if it hadn’t been tried before, it was probably because it was a bad idea. Silicon Valley was a place where if it hadn’t been tried before, it probably meant it was a good 

idea that no one had yet before come up with. In addition, in comparison to other 

nations that exhibited greater institutional rigidities and hierarchies, the more flexible and collaborative U.S. innovation system provided an advantage. Compared to 

other nations, the U.S. innovation system has long been characterized by collaboration and cooperation, with universities working more closely with industry, small 

firms working with large ones, etc. 

Finally, our financial system provided real advantages. Compared to other nations 

it was easier for entrepreneurs to get financing for new and risky ventures, and for 

those firms to pay back initial investors, either by issuing stocks or getting large 

firms to finance their acquisitions as the way to maintain a pipeline of new products.8

It would be a mistake to argue, though, that it was only, or even largely, nonpolicy factors that led to America becoming the world’s innovation leader. Clearly 

some of our policy choices to regulate less and to be more accepting of change propelled the United States to lead. 

Our relatively open borders (itself a policy factor) made the United States a mecca 

for talent. Welcoming the world’s most skilled foreign-born scientists and engineers 

into the land of economic opportunity that America affords has long been one of the 

strengths of the U.S. national innovation system. Both the U.S. economy and the 

standard of living of American citizens have benefited enormously from this influx 

of foreign talent. AnnaLee Saxenian, a professor at the University of CaliforniaBerkeley, has shown that Indian and Chinese entrepreneurs founded or co-founded 

roughly 30 percent of all Silicon Valley startups in the late 1990s.9 During this period, many of the leading scientists, managers and entrepreneurs came from other 

nations where opportunities were more limited and in some cases where the opportunities didn’t even exist, as was the case in communist nations. 

Likewise, our embrace of a light regulatory touch in the face of new technologies 

allowed innovators to be confident that their innovations would be able to enter the 

market. In contrast, regulatory regimes such as the European ‘‘precautionary principle,’’ which sought to limit innovation until all possible effects were known, slowed 

innovation. And in fast-moving industries where competitive advantage is related to 

how quickly players get in the market and establish a position, the slower and more 

restrictive regulatory regimes in many other nations benefited the United States. 

The overall business climate and rule of law that the United States has enjoyed 

has provided entrepreneurs and firms with the certainty that if they invested they 

could make a market-based rate of return. Likewise, the United States’ leadership 

in promoting open markets and globalization helped the United States, at least 

through the 1980s, for it expanded the size of markets, allowing more dominant 

U.S. technology-based firms to gain even more scale and profits (allowing them respectively in turn to drive prices down even more and to invest more into research 

and new technology). 

In addition, while the United States brought a number of anti-trust cases during 

this period, the emergence of a large number of large, profitable companies meant 

that innovations were a way that firms could charge premium prices or even gain 

market share from their competitors. With constrained competition and consequent 

market control, these companies could apply lower discount rates to new research 

opportunities; in essence, they were willing to take on the higher levels of risk required to pursue more radical but higher payoff technologies. As a result, many of 

these dominant firms used the steady flow of profits to invest heavily in their own 

research laboratories. They created factories for inventions that brought large numbers of scientists and engineers directly under the corporate umbrella. In the 1950s 

and 1960s, the central research laboratories of firms such as AT&T, GE, IBM, RCA 

and Xerox were corporate jewels that attracted highly productive researchers. 

But proactive policies also played a key role. Perhaps the most important one was 

the role of government as a buyer of technology and funder of research and education. During the three decades immediately following World War II, the Federal 

Government’s role in supporting new technologies centered on military and space 

imperatives. Such familiar spin-offs as mainframe computers and jet airplanes had 

been largely unintended consequence of government spending for the military and 

the space program, both in support for research in these areas and procurement of 

products using these technologies. Clearly the United States’ lead in many technology areas, including information technology, would not have occurred without 
27

government procurement and government support for R&D. Indeed, as late as 1992, 

Santa Clara County (Silicon Valley) received more defense contracts than any other 

county (in dollar value as a share of county economic output). 

But support for research and research universities was also central in driving 

U.S. innovation leadership. Federal and state support meant that a large number 

of research universities were not only doing cutting-edge research, much of it transferred to the private sector, but also educating a regular crop of top notch scientists 

and engineers. Our global lead in pharmaceutical and biotech industries, for example, would not have been as strong without the significant funding provided to NIH, 

much of which in turn supported leading research universities. 

As the United States excelled, its lead over other nations expanded, leaving the 

Europeans fearful of being left behind. In the 1960s, French author Jean-Jacques 

Setvan-Schreiber wrote the best seller, The American Challenge, which described an 

all powerful American economic system widening its technological lead and utilizing 

superior management ability and economies of scale to take over the European economy. 

But our unparallel leadership lasted only approximately 25 years. For by the mid1970s, evidence was emerging that the United States faced new innovation competitors. But U.S. policy didn’t stand still in response to the challenges of globalization 

1.0 in the 1980s (the emergence of Japan and Europe as key competitors). Indeed, 

significant changes occurred in Federal policies in the 1980s in direct response to 

the heightened international competitive pressures experienced by U.S.-based corporations. In that decade, both Congress and the Executive Branch launched a series of initiatives that were intended to mobilize public resources to accelerate the 

development and commercial exploitation of new technologies. These programs extended well beyond the defense and space sectors that had previously been the main 

areas of Federal technology policy. 

These initiatives can be usefully grouped into four separate areas. First, there 

were a series of efforts to increase the commercial impact of research already being 

funded by the Federal Government, particularly in universities and government laboratories. Incentives were created for scientists and institutions to push their research discoveries into the commercial sphere either by creating new start-ups, licensing technologies to private firms or engaging in collaborative projects with business firms. The Bayh-Dole Act encouraged universities to see their research enterprise as a potential revenue source and concerted efforts were made over twenty 

years to shift resources in the Federal Laboratories away from weapons production 

and towards commercial applications. 

Second, new programs were created to help finance pre-competitive research and 

development costs for individual firms, both startup and established firms.10 Most 

prominent among these programs was the Small Business Innovation Research 

(SBIR) program through which government agencies set aside a small percentage 

of their R&D budgets for projects proposed by small firms, many of which are newly 

created spinoffs from university or Federal laboratories. The Advanced Technology 

Program (ATP) at the National Institute of Standards and Technology (NIST) and 

a series of initiatives at the Department of Energy provided matching funds to support particularly promising new technologies among both new and more established 

firms. In addition, the United States was the first nation to create a Research and 

Development (R&D) Tax credit in 1981. 

Third, the Federal Government expanded its ‘‘in-kind’’ technical support to business firms trying to surmount technological barriers. The Manufacturing Extension 

Partnership (MEP) has helped thousands of small firms adapt to computerization 

and the more demanding schedules of just-in-time production. The National 

Nanotechnology Initiative has made a series of federally funded, university-based 

laboratories available to business firms that want to avoid the costs of developing 

their own laboratory infrastructure. Similarly, efforts by Federal laboratories to 

form partnerships with firms provide them with important technical support, including through the formation of Cooperative Research and Development Agreements 

(CRADAs). 

Fourth, the Federal Government played an active role in facilitating and supporting research consortia that bring together multiple firms in the same industry 

to solve technological problems. The passage of the 1984 Cooperative Research and 

Development Act made it easier for companies to collaborate. Federal investment in 

SEMATECH in the 1980s and the Semiconductor Focus Center Program in the 

1990s helped the semiconductor industry maintain a leadership position.11 Congress 

created programs at NSF to spur more collaborative research, including NSF’s Engineering Research Centers, a group of 17 interdisciplinary centers located at universities and operated in close partnership with industry.
28

The United States Has Lost its Lead in Innovation 

The combination of its policy and non-policy strengths, combined with policy and 

non-policy weaknesses in other nations, enabled the United States to lead in innovation for over half a century. However, changes both in the United States and abroad 

have meant that while the United States continues to have many strengths, there 

is disturbing evidence that our overall innovation lead has not only been lost, but 

that we are continuing to rapidly lose ground. As ITIF documented in The Atlantic 

Century, from the year 2000 to 2009, the United States slipped from number 1 to 

number 6 in global innovation-based competitiveness, behind nations such as Singapore, Denmark, Sweden and South Korea. The primary reason for this is that every 

other nation or region made faster progress than we did on a collection of 16 innovation competitiveness indicators. Overall, we ranked 40th out of 37 countries and 

three regions in making progress on innovation and competitiveness. 

We see signs of this relative decline in innovation capacity in a wide array of indicators. The decline began at least in the 1990s with the United States’ shares of 

worldwide total domestic R&D spending, new U.S. patents, scientific publications 

and researchers and bachelor’s and new doctoral degrees in science and engineering 

all falling from the mid-1980s to the beginning of this century (figure 1), when we 

were still number 1. But given our strong overall lead, the declines were not enough 

to move us down from number 1 until this last decade.

There has been a declining share of American college graduates with science and 

technology degrees. The United States now lags behind much of the world in the 

share of its college graduates majoring in science and technology. As a result, the 

United States ranks just 29th out of 109 countries in the percentage of 24-year-olds 

with a math or science degree. Although Americans (citizens and permanent residents) are getting graduate degrees at an all-time high rate, the increase in graduate degrees in natural science, technology, engineering and math fields has been 

minimal during the last two decades. The number of non-science and engineering 

degrees increased by 64 percent between 1985 and 2002, while the number of 

science, technology, engineering and mathematics degrees grew by only 14 percent 

during that period.12

The United States ranks only 14th among countries for which the National 

Science Foundation tracks the number of science and engineering articles per million inhabitants. Sweden and Switzerland produce more than 60 percent as many 

science and engineering articles in relation to the size of their populations than does 

the United States.13

The United States ranks only seventh among OECD countries in the percentage 

of its GDP that is devoted to R&D expenditures (2.6 percent), behind Sweden (3.9 

percent), Finland (3.5 percent), Japan (3.3 percent), South Korea (3.0 percent), Switzerland (2.9 percent), and Iceland (2.8 percent), and barely ahead of Germany and 

Denmark (2.5 percent each).14 One reason explaining this is that the United States 

is one of the few nations where total investments in R&D as a share of GDP fell 

from 1992 to 2005 (largely because of a decline in public R&D support).15 Moreover, 

corporate-funded R&D as a share of GDP fell in the United States by five percent 
29

from 1999 to 2006, while in Europe it grew by two percent and in Japan it grew 

by 12 percent.16

We also see the evidence of our decline in innovation-based competiveness in 

other areas including our trade performance. The trade deficit represents perhaps 

the most visible manifestation of the global challenge. At five percent of GDP in 

2008, the current account deficit is at extremely high levels both in absolute terms 

and relative to the size of our economy.17 The traditional U.S. trade surplus in agricultural products is nearing zero and in high-technology products has already 

turned negative. Meanwhile, our surplus in services trade is small and only holding 

relatively steady. Moreover, the U.S. trade surplus in services is only 17 percent of 

the overall trade deficit in goods. 

Moreover, companies are increasingly shifting R&D overseas. For example, R&D 

expenditures from U.S.-based MNCs in emerging Asian markets increased from five 

percent to 14 percent between 1995 and 2006.18 In the last decade, the share of U.S. 

corporate R&D sites in the United States has declined from 59 percent to 52 percent, while the share in China and India, specifically, increased from 8 to 18 percent.19

We also see it in the decline in U.S. manufacturing output. The United States has 

experienced a hollowing out of many advanced production supply chains, as more 

advanced manufacturing has moved offshore than has expanded in the United 

States. I recently spoke with the CEO of a major U.S. high technology company 

about a new product line they were introducing. I asked him where he was sourcing 

the very advanced display that was being incorporated in the device. His response 

was ‘‘we looked long and hard around the United States to see if we could source 

it here. We couldn’t find any company with the capability of producing here, so we 

ended up sourcing it in Taiwan.’’

This hollowing out of supply chains is overlooked by many economists because the 

national economic accounts that track manufacturing output provide a misleading 

picture of the health of U.S. manufacturing by overstating output, particularly in 

the computer and semiconductors industry. According to the Department of Commerce’s Bureau of Economic Analysis, manufacturing output as a share of GDP has 

stayed somewhat constant between 1994 and 2008, at around 13.7 percent.20 But 

drilling down to more detail causes a different picture to emerge. Over the last 25 

years, the share of non-durable manufacturing output peaked around 1993 and has 

declined from around seven percent to 4.7 percent of GDP in 2008. The share of durables, in contrast, increased to just over nine percent in 2007, with a very slight 

decline in 2008, leading many to the rosy conclusion that while manufacturing employment may have declined, manufacturing output is still strong and therefore that 

employment declines were due only to the higher levels of productivity in manufacturing relative to the rest of the economy. But taking out computers and electronic 

products (NAICS code 334) shows a very different picture, with durable goods output share declining from seven percent in 1998 to 5.3 percent in 2008. Overall manufacturing output minus computers and electronic products declined from 13 percent 

of GDP in 1998 to just 9.7 percent in 2008. Defenders of the status quo will respond 

that the proper measure is overall manufacturing, not manufacturing minus computers. But does anyone really think that the real inflation-adjusted value added 

of computers and electronic products really doubled between 2003 and 2007, which 

is what the BEA numbers suggest? The problem is that BEA counts output of computers based on improvements in Moore’s law and when processing power doubles 

every 18 months or so it counts that in the value-added. But this clearly overstates 

output and provides an extremely misleading picture of the real health of the U.S. 

manufacturing sector. For those who want to play down the threat to the U.S. manufacturing base, these statistics provide reassuring, if false, comfort.

Factors Contributing to our Relative Decline in Innovation-based Competitiveness 

There are a number of factors which have contributed to the United States’ relative decline in innovation-based competitiveness. Many point to globalization. At 

one level there is no doubt that with the emergence of globalization and the relatively faster growth in income of many nations to ‘‘catch up’’ to the United States, 

one would expect to see the global share of U.S. economic output fall. And it is certainly true that as some advanced nations began to catch up to the United States 

(in part by emulating our policies, as described below) the U.S. share of global innovation output (e.g., R&D and patents) would also fall, although by less than overall 

economic output since the United States should actually be increasingly specializing 

in innovation-based activities as more routine-based production shifts offshore. But 

there was nothing preordained about the United States falling from number 1 in 
30

2000 to number 6 in 2009. The United States can and should remain the global innovation leader. 

So what happened? As in explaining our success, non-policy and policy factors 

have played a role. There are a number of non-policy factors that appear to be at 

work. First, the evolution of U.S. financial markets has placed mounting pressure 

on large corporations to prioritize increasing short-term returns to shareholders over 

growth or investments with longer-term payoffs. And related to this, the market environment has become much more competitive. 

On the one hand, this has disciplined firms into being more efficient. But at the 

same time it has led many firms to seek short-term cost reductions (often through 

moving to lower cost locations) even if similar or even greater cost reductions 

through innovation could be achieved but over a slightly longer period of time. Likewise, these new financial pressures have forced many firms to reallocate their research portfolios more toward product development efforts and away from longer 

term and more speculative basic and applied research. From 1991 to 2007, basic research as a share of total corporate R&D conducted in the United States fell by 3.6 

percentage points, while applied research fell by roughly the same amount, by 3.5 

percentage points. In contrast, development’s share of corporate R&D increased by 

7.1 percentage points, as figure 2 shows.

We see this focus on the shorter term in the venture capital industry. As the venture capital market has matured, firms have found it more profitable to invest in 

larger deals and less risky later-stage deals. Even though the overall amount of venture capital has grown since the mid-1990s, the actual amount invested in startupand seed-stage venture deals is smaller today than a decade ago, and a smaller percentage of venture funding now goes to early-stage deals (the stage just after seedstage).21 The result is a gap between the completion of basic research and applied 

R&D. 

When it comes to policy, it is important to focus both on the change in policy in 

the United States and externally. Externally, as we discuss below, nations put in 

place aggressive technology and competitiveness policies to lure internationally mobile technology investment. U.S. firms are now competing against firms in a growing 

number of national economies in which their governments actively help them compete. 

Over the last 15 years in particular, a large number of other nations have woken 

up to the fact that they need to compete for internationally mobile high technology 

manufacturing, and they have put in place policies that reflect that determination, 

such as more generous research and development tax treatments and stronger government support for all stages of research. In contrast, the United States has lagged 

behind, believing that it needed to do little since it had long been the global innovation leader. In the early 1990s, for example, the United States had the most generous research and development tax credit among the 30 OECD nations. Now, be-
31

cause other nations have expanded their R&D tax incentives, the U.S. rank has fallen to 17th. 

In response to increased global competition for internationally mobile economic activities, most nations have established competitiveness policies, including more competitive corporate tax codes. In the early 1980s, the average statutory tax rate 

amongst OECD nations was nearly 50 percent; by 2001 the rate had fallen to under 

35 percent. Some formerly high tax nations have reduced their taxes dramatically. 

For example, the statutory corporate tax rate in Sweden in 1982 was 60 percent; 

by 1999 it had been reduced to 28 percent. Overall, average corporate tax rates have 

declined by at least 15 percentage points in leading industrialized nations over the 

last 30 years. Not only have corporate tax rates declined, but a growing number of 

nations, particularly Asian nations, use targeted tax incentives (such as tax holidays 

on new plants) to attract internationally mobile investment. The U.S. statutory rate 

has not changed since 1986, and the Federal Government does not provide tax incentives to attract or retain international investment. 

We see the same trend in other areas. Among 36 nations, the United States 

ranked just 21st in the growth of government investment in R&D from 1999 to 

2006, with a growth rate of just 20 percent the average of the other nations. The 

major reason for this slippage has been a slowdown in Federal R&D investment. 

Since the mid-1990s total Federal R&D spending grew at a sluggish 2.5 percent per 

year from 1994 to 2004—much lower than its long-term average of 3.5 percent 

growth per year from 1953 to 2004.22 Indeed, the United States is one of only a few 

nations where total investment in R&D as a share of GDP actually fell from 1992–

2005, largely because of that decline in public R&D support.23 When U.S. R&D intensity is compared to other OECD countries, we find that at 2.6 percent of GDP 

devoted to R&D investment, the United States ranks only seventh in R&D intensity, 

behind a list of countries including Japan, South Korea, Finland and Sweden.24 In 

more recent rankings (2006) from the OECD, the United States placed only 22nd 

in the fraction of GDP devoted to nondefense research.25

Finally, while many nations have practiced ‘‘good’’ innovation policy, many have 

also put in place ‘‘bad’’ innovation policy: high-tech mercantilism. Indeed, a key factor in the loss of U.S. innovation leadership has been the dramatic increase in technology-oriented trade protectionism engaged in by many U.S. competitors. While 

U.S. markets are generally open, the same cannot be said for many other nations. 

Many nations, and not just China, manipulate their currency as a way to subsidize 

exports and raise the price of imports. On top of that they use an array of tariff 

barriers to keep out U.S. exports. But these nations go further, engaging in a kind 

of protectionism 2.0. This involves aggressive anti-trust enforcement, particularly 

against U.S. high tech companies (witness foreign actions taken against U.S. tech 

companies like Microsoft, Intel and Qualcomm); technology standards manipulation 

(the Chinese alone have developed over 15 proprietary technology standards designed to keep out U.S. IT products); turning a blind eye to and even engaging in 

rampant intellectual property theft (over 85 percent of software in China is pirated, 

while many nations attempt to force U.S. pharmaceutical companies to transfer intellectual property in return for market access); and huge government subsidies to 

prop up high-tech exporters (without EU government subsidies, Airbus would have 

nowhere near the global market share it does). 

But even absent what other nations have done, the U.S. relative position would 

have declined because of policies at home. One policy area that has been cited by 

many is K–12 education. While there is no doubt that improving the quality of K–

12 education will have some positive benefit on our innovation-based competitive position, it would be a mistake to believe that fixing K–12 will be the silver bullet 

for innovation. K–12 quality has not been the major reason for the precipitous and 

troubling decline in U.S. innovation leadership. In fact, while the U.S. competitiveness position has declined relative to other nations, at least by one measure, our 

educational performance has not. For 20 nations for which there are comparable 

data, between 1999 and 2007 the United States ranked fourth in improvement in 

8th grade math scores an sixth out of 25 nations in 81’ grade science scores according to TIMMS (Trends in International Mathematics and Science Study). The 

United States has also made greater improvement in 8th grade science scores than 

several international leaders such as Japan, Sweden, Norway and Singapore between 1999 and 2007. 

The United States does less well on the OECD’s PISA (Programme for International Student Assessment) test, which focuses more on measures of application 

of learning to real world situations than does TIMMS. Still, the U.S. performance 

on PISA has not been so bad as to indicate our economic decline. In reading, math 

and science, U.S. 15-year-olds in 2000 (who would now be 25-years-old and entering 

the workforce) performed about as well on average as 15-year-olds in the 27 partici-
32

pating OECD countries and ahead of the 4 non-OECD nations. Compare the United 

States and Denmark. Denmark outperformed the United States in innovation-based 

competitiveness, ranking fifth in progress, compared to our last place rank. Yet, in 

2000, U.S. 15-year-olds outperformed Danish 15-year-olds on reading, math and 

science. Likewise, U.S. 15-year-olds did better than 15-year-olds in Germany, Spain, 

Russia and Brazil, all of which made faster progress on competitiveness. Let us also 

remember that U.S. college education levels are at historic highs. In 2007, 46 percent of high school graduates between the ages of 18 and 24 were actively enrolled 

in higher education. This is hardly the stuff of catastrophic failure. 

An area of more concern is the reduced investment in innovation infrastructure, 

including research. Total Federal funding for R&D declined as a share of GDP from 

1985 to 2004. To restore Federal R&D support as a share of GDP to its 1993 level, 

we would have to increase Federal R&D spending by 50 percent, or over $37 billion. 

Federal investment in most of the programs that focus most directly on innovation 

promotion have declined or grown more slowly than the economy overall. Between 

1998 and 2006, the budgets for the Advanced Technology Program, the Manufacturing Extension Partnership, the Office of Science and Technology Policy, and the 

Industrial Technologies Program declined in nominal terms, while that of NSF’s Engineering Research Center program grew at less than one-fifth the rate of GDP 

growth. Funding for NSF’s Partnerships for Innovation also grew more slowly than 

GDP since the program began operating in 2000. And while our public and private 

research universities used to be the envy of the world, 20 years of underfunding by 

state governments have meant that many public research universities have fallen 

in capabilities relative to private research universities. 

Adequately investing in and developing innovation-enhancing policies is crucial to 

national innovation competitiveness, as Professors Jeffrey Furman and Richard 

Hayes found in a study of the national innovation capacity (an economy’s potential 

for producing a stream of commercially relevant innovations) of twenty-three countries from 1978 to 1999.26 Starting with the year 1979, they classify countries as 

either world-leading innovators (the United States, Germany, Japan), middle-tier 

(Great Britain, France, Australia), third-tier (Spain, Italy), or ‘‘emerging’’ innovators 

(Ireland, Taiwan) based on countries’ patenting activity per capita, a proxy for commercialized innovations. 

A number of these ‘‘emerging innovators’’—among them Ireland, Finland, Singapore, South Korea, Denmark and Taiwan, in particular—achieved remarkable increases in innovative output per capita from 1978 to 1999, moving to the world’s 

technological frontier and overtaking the innovative capacities of many mid- and 

third-tier countries, including Great Britain, France and Italy, whose economic conditions started off much more favorably in the early 1980s. Furman and Hayes conclude that innovation leadership among countries requires not only the development 

of innovation-enhancing policies and infrastructure, such as strong IP protections, 

openness to trade, highly competitive markets, and strong industry clusters, but 

also a commitment to maintaining substantial financial and human capital investments in innovation. 

Additionally, Federal agencies have not responded as nimbly as they should too 

many of the changes in the innovation environment. For example, the U.S. Patent 

and Trademark Office (PTO) used to be the envy of other nations around the globe 

for its effectiveness and efficiency. But today backlogs at the PTO mean that most 

patent applicants will wait years before finding out if their invention is granted a 

patent. 

Moreover, even as services innovation has become much more important, U.S. innovation policy has not responded. U.S. innovation policy is largely focused on innovation in goods-producing industries, e.g., developing a new energy source or coming 

up with new materials. In the past, when goods production was a much larger share 

of the economy than it is today, such a focus made more sense. But in an economy 

where more than 80 percent of civilian jobs lie in service-providing industries, the 

lack of focus on services innovation makes little sense. The emerging discipline of 

service science brings together ongoing work in computer science, operations research, industrial engineering, business strategy, management sciences, social and 

cognitive sciences, and legal sciences to develop the skills required in a services-led 

economy.27

Finally, as the U.S. innovation system has spread out to all states and corners 

of the nation, the Federal system has remained national in scope. Washington is 

often far removed from the firms and other institutions that drive innovation. This 

is particularly true for small and mid-sized firms. In contrast, state and local governments and metropolitan-level economic developers have a long track record of 

creating organizations that work more closely with firms. Unfortunately, most existing Federal programs do not work through or in collaboration with state or local 
33

governments or regional organizations, which are often more flexible and less remote from production processes. Indeed, there is very little appreciation in Washington for the fact that virtually every state has in place technology-based economic 

development programs.28 Federal program managers and policymakers all too often 

seem to assume that there is one uniform national economy in which regional agglomerations are at best a sideshow.

What Can We Learn From Other Nations? 

Many forward-thinking countries have made innovation-led economic development 

a centerpiece of their national economic strategies during the past decade. These nations know that moving up the value chain to more innovation-based economic activity is a key to boosting future productivity, and that losing the competition can result in a relatively lower standard of living as economic resources shift to lowervalue-added industries. These countries are implementing coordinated national innovation agendas that boost R&D funding, introduce policy changes and government 

initiatives that more effectively transfer technologies from universities and government laboratories to the private sector for commercialization, and ensure that immigration policies support innovation. 

While many nations have taken the innovation challenge to heart and put in place 

a host of policies to spur innovation, the United States has done little, consequently 

falling behind in innovation policies and in innovation performance as well. We see 

this gap in at least four main areas: programs to establish civilian technology and 

innovation promotion agencies, services innovation initiatives, tax incentives for research and development, and policies regarding high-skill immigration.29

1. Civilian Technology and Innovation Promotion Agencies 

A number of advanced countries are well ahead of the United States in creating 

national agencies that support innovation. In recent years, Finland, France, Iceland, 

Ireland, Australia, Japan, the Netherlands, New Zealand, Norway, South Korea, 

Canada, Germany, Taiwan, Switzerland and Great Britain have all either established or significantly expanded separate technology-and innovation-promotion agencies. Other nations, such as Denmark, Sweden and Spain, have longstanding agencies of this type.30 All these countries have science- and university-support agencies 

similar to America’s National Science Foundation, which largely fund basic research, universities and national laboratories. But these countries realized that if 

they were to prosper in the highly competitive, technology-driven global economy, 

they needed specifically to promote technological innovation, particularly in small 

and mid-sized companies and in partnership with universities. 

Perhaps the most ambitious of these efforts is Tekes, Finland’s National Agency 

for Technology and Innovation. In the last two decades, Finland has transformed 

itself from a largely natural resource-dependent economy to a world leader in technology, with Tekes a key player in the country’s transformation. Affiliated with the 

Ministry of Employment and the Economy, Tekes funds many research projects in 

companies, multi-company partnerships, and business-university partnerships. With 

a budget of $560 million (in a country of only 5.2 million people), Tekes works in 

partnership with business and academia to identify key technology and application 

areas—including nano-sensors, ICT and broadband, health care, energy and the environment, services innovation, and manufacturing and minerals—that can drive 

the Finnish economy. Tekes also operates a number of overseas technology liaison 

offices that conduct ‘‘technology scanning,’’ seeking out emerging technologies bearing on the competitiveness of Finnish industries, and sponsors foreign outreach efforts to help its domestic companies partner with foreign businesses and researchers. 

Similarly, Japan’s New Energy and Industrial Technology Development Organization (NEDO) is a quasi-public agency that receives its $2 billion budget from the 

Ministry of International Trade and Industry. Great Britain’s new Technology Strategy Board is a non-departmental public body (similar to an independent government 

agency in the United States) whose mission is to drive forward the government’s 

national technology strategy. In South Korea, the Korea Industrial Technology 

Foundation, established in 2001, engages in a wide range of technology activities, 

including providing training to develop industry technicians and cooperating with 

international entities to promote industrial technology development. A host of other 

nations have similar bodies dedicated specifically to promoting innovation and competitiveness.31

Most foreign innovation-promotion agencies provide grants to companies for research, either alone or in consortia, including in partnership with universities. All 

support university-industry partnership grant programs, whereby companies or 
34

business consortia can receive grants (usually requiring matching funds) to partner 

with universities on research projects. Vinnova, Sweden’s innovation-promotion 

agency, gives most of its grants to research consortia involving companies and universities. 

Most agencies focus their resources on specific areas of technology. For example, 

by working with business and academia, Tekes has identified 22 key technology 

areas to fund. Many foreign programs have expanded their focus to include service 

sector innovation. One of Tekes’ focus areas is innovation in services, including insurance and finance, retail and wholesale trade, logistics, and knowledge-intensive 

business services. The United Kingdom’s Technology Strategy Board is working with 

knowledge-intensive industries such as creative and financial services in addition to 

the high-tech and engineering sectors. Most programs insulate their grant making 

from political pressure by using panels of outside experts to review grant application, just as our National Science Foundation and the Technology Improvement Program (TIP) do. 

Most agencies also support national sector-based activities that bring together researchers in the private, non-profit and public sectors. For example, the UK’s Technology Strategy Board established its Innovation Platforms program to bring together government stakeholders and funders, engage with the business and research communities to identify appropriate action, and align regulation, government 

procurement and other public policies to support innovative solutions. To date, this 

program has identified two priority areas, intelligent transport systems and network 

security.32

One of the benefits of these programs is that they not only fund research projects 

but also facilitate networking and collaboration. For example, Tekes brings together 

in forums many of the key stakeholders in the research community. For each of its 

22 technology areas there are networking groups of researchers. In addition, Tekes 

publishes a description of each project it funds. Through these processes, researchers learn more about research areas and gain opportunities to collaborate. Many 

agencies also work with industry on ‘‘roadmapping’’ exercises, whereby key participants (industry and academic researchers and government experts) identify technology challenges and key areas of need over the next decade. They then base their 

selection of research topic funding on the results of the roadmap exercise. The UK’s 

Technology Strategy Board is funding over 600 collaborative business-university research projects which have been launched over the past two to three years. Like 

Tekes, it is also responsible for more than 20 industry-and technology-based knowledge transfer networks, with more being established. 

Foreign innovation-promotion agencies do not limit their activities to R&D support. The Danish Technological Institute and Iceland Technology Institute, for example, help small and mid-sized firms upgrade their technologies and business processes. Enterprise Ireland offers workforce training grants to small and mid-sized 

businesses. 

Many innovation-promotion agencies also have foreign outreach efforts to help domestic companies partner with foreign companies or researchers. For example, 

Tekes has a number of overseas offices that act as technology liaisons including in 

Washington, DC, Singapore and South Korea. Indeed, 40 percent of Tekes-funded 

projects involve international collaboration. Spain’s innovation-promotion agency, 

CDTI, also helps Spanish businesses find partners in other nations and provides up 

to 60 percent funding to the participating Spanish firm. 

Most of these organizations are affiliated with, but separate from, national cabinet-level agencies similar to our Commerce Department. However, some are independent government agencies or government-sponsored corporations. The Danish 

Technological Institute is a private, nonprofit organization. In virtually all cases, 

though, these nations have made an explicit decision not to place their innovationpromotion initiatives under the direct control of large government departments. Although most innovation-promotion agencies are affiliated with those departments, 

they usually have a substantial degree of independence. It is common for these 

agencies to have their own executive director and a governing board of representatives from industry, government, university, or other constituency groups. For example, Japan’s government recently made a conscious choice to establish NEDO as an 

autonomous agency because it realized that MITI, as a large government bureaucracy, did not have the flexibility needed to manage such a program. NEDO is governed by a board of directors, with the Chair appointed by MITI and members from 

industry, universities and other government agencies. Similarly, Tekes is affiliated 

with the Ministry of Trade and Industry but has its own governing board that includes national and regional government, businesses and union representatives.33 

The Technology Strategy Board, begun in 2004 as a unit of the Department of Trade 

and Industry, was established in 2007 as an executive non-departmental public 
35

body. While it is now affiliated with the Department for Innovation, Universities 

and Skills, it is governed by a board made up mostly of technical experts from industry.34

One reason for structuring innovation-promotion agencies this way is that they 

have more flexibility, including the ability to pay salaries high enough to attract 

staff from the business world and the ability to employ some staffers who are on 

leave from positions in private business. For example, about one-third of the NEDO 

staff is from industry and one-third is from universities, while the remaining third 

is full time NEDO staff. Rotating in outside staff helps keep the agency in touch 

with current business practices and cutting-edge technology. (For similar reasons, 

NSF employs some people who are on leave from academic and research positions 

outside the Federal Government.) The Technology Strategy Board has been able to 

source a fairly large share of its staff from industry, enabling it to have the kind 

of expertise that would be difficult without this ability. In addition, independent 

government bodies can adapt more quickly than those that are subject to the tight 

control of larger agencies. It is easier for them to start new initiatives and abolish 

less effective ones. Likewise, many national technology agency programs are able to 

pay employees more than the standard government salaries, enabling them to attract higher quality individuals, often with industry experience. Nevertheless, most 

of these agencies are fairly lean. For example, Tekes, with a budget equivalent to 

$560 million, has a staff of just 300. 

To be effective, these agencies need to be flexible and able to work closely with 

industry. For this reason they are less bureaucratic than traditional ministries or 

departments. As the UK government notes, ‘‘As separate legal entities, non-departmental public bodies can operate more flexibly than executive agencies, entering 

into partnerships and taking commercial and entrepreneurial decisions.’’ Moreover, 

‘‘their distance from government means that the day-to-day decisions they make are 

independent as they are removed from ministers and civil servants.’’ 35 Foreign innovation-promotion agencies today are a far cry from the strongly directive Japanese 

MITI of the 1980s. They do not try to decide the path of business innovation and 

then induce firms to follow that path. Instead, they exemplify the cooperative, facilitative government role that is needed to address the market failures that hamper 

the innovation process. 

If the United States wanted to match Finland’s outlays per dollar of GDP in inno- vation-promotion efforts, it would have to invest $34 billion per year. While other 

nations invest less in their innovation-promotion agencies than Finland, they still 

invest considerably more than the United States. As a percent of their countries’ 

GDPs, Sweden spends 0.07 percent, Japan 0.04 percent and South Korea 0.03 percent on their innovation promotion agencies. To match these nations on a per-capita 

basis, the United Sates would have to invest $9 billion to match Sweden, $5.4 billion 

to match Japan, and $3.6 billion to match South Korea.35 It is astounding that 

economies a fraction the size of the United States spend more on innovation-promotion in actual dollars, let alone as a percentage of their economy. 

But compared with other industrialized democracies, the U.S. government invests 

relatively little in innovation-promotion efforts. In fiscal year 2006, the Federal Government spent a total of $2.7 billion, or 0.02 percent of gross domestic product, on 

its principal innovation programs and agencies: the National Institute of Standards 

and Technology’s Advanced Technology Program and Manufacturing Extension 

Partnership, the White House’s Office of Science and Technology Policy, three NSFadministered innovation programs (Small Business Innovation Research, Small 

Business Technology Transfer and Industrial Technologies Program), and the Department of Labor’s Workforce Innovation Regional Economic Development 

(WIRED) program. 

This places U.S. industries and corporations operating alone at a disadvantage 

against foreign corporations that benefit from coordinated and enlightened national 

strategies among universities, governments and industry collaborations to foster 

competitiveness. For example, the Japanese government has recognized advanced 

battery technology as a key driving force behind its competitiveness, and views battery technology as an issue of ‘‘national survival.’’ 37 It is funding Lithium-ion bat- tery research over the five-year period from October 2007 to October 2012 at $275 

million (¥25 billion), and longer term has committed to a 20-year Li-ion battery research program. Germany’s government will provide a total of Ö1.1 billion ($1.4 billion) over ten years to applied research on automotive electronics, lithium ion batteries, lightweight construction, and other automotive applications.38

2. Services Innovation Initiatives 

As services increasingly drive employment, productivity, and economic growth, a 

number of countries have developed explicit national services innovation policies fo-
36

cused on spurring innovation in the services sectors of their economies. Policymakers in these countries have recognized that knowledge of services innovation 

has largely been informed by studies of the manufacturing sector, and acknowledged 

the need to tailor unique measures to the needs of services firms and industries.39

The focus on service innovation began in the mid-2000s with a coterie of small 

Northern European countries—Finland, Denmark, Norway, The Netherlands and 

Sweden—and has since grown to include additional small countries in Europe and 

Asia (Taiwan, Ireland and Singapore) and large nations (Great Britain, Canada and 

Germany). Finland was the first to implement a national services innovation policy, 

with a five-year, Ö100 million 40 program launched in 2006 called ‘‘SERVE—Innovative Services Technology Programme.’’ 41 Finland’s neighbors soon followed suit, recognizing the increasing importance of services as their domestic manufacturing industries departed for cheaper production centers abroad, particularly in the form of 

‘‘near-shoring’’ to Baltic and Eastern European countries. The same phenomenon affected developed Pacific Rim countries, as manufacturing moved first from Japan 

and Taiwan to cheaper production centers in China, and now out of China and on 

to the poorer nations of Southeast Asia. This process has forced almost all industrialized countries to seek to migrate their economies up the value chain towards 

knowledge-based, high-value-added services activities such as R&D, design, finance, 

consulting/training, and post-installation service and support. 

Policy approaches quickly evolved into two main strands. First, these countries 

strove to develop framework conditions that support competitive services industries. 

As they began to scrutinize their services industries, these countries found they first 

needed considerable work in setting favorable framework conditions, such as removing barriers to labor market mobility in services industries, further opening and integrating cross-border services markets, developing better accounting practices for 

intangible assets, updating intellectual property and trade laws to accommodate the 

unique characteristics of services, developing core information technology infrastructure, and providing structures and incentives to encourage services exports. 

Second, with this supportive policy framework in place, these countries implemented specific programs to support innovation in services businesses. Specific efforts (and at least one sample country implementing them) include: 42

• Boosting academic research in the area of services innovation and services 

business, especially research on creating innovative services-based business 

models, quantifying improvements in services productivity, and enhancing the 

quality of services delivery. (Finland, The Netherlands, Denmark)

• Funding Services Science research; that is, cross-disciplinary research that 

draws on fields such as computer science, management, operations, marketing 

and organizational behavior. (Singapore, Taiwan)

• Extending research and experimentation tax credits to services industries; especially, defining where the ‘‘innovative step’’ occurs for services firms. (Norway and The Netherlands)

• Developing innovation metrics that measure innovation in services, not just 

advanced manufacturing, and looking for ‘‘hidden innovation’’ in services industries. (Great Britain, the United States, Ireland)

• Supporting the development of creative industries through establishing regional design centers. (South Korea, the Netherlands, Great Britain)

• Providing online self-assessment tools that allow companies to benchmark 

their innovation infrastructures (R&D budgets, number of employees, intellectual property strategies) against in-nation and in-industry peer companies. 

(Great Britain and European Union)

• Benchmarking services innovation policies across European countries. (European Union)

3. Tax Incentives for Research and Development 

The tax incentives the U.S. government provides corporations for R&D activities 

have fallen from the most generous in the world in the late 1980s to 17th among 

30 OECD countries in 2004.43 Many nations now provide significantly more generous tax incentives for research than does the United States. From leading the 

world in the late 1980s,44 the United States by 1996 fell to seventh most generous 

among OECD nations, behind Spain, Australia, Canada, Denmark, the Netherlands 

and France.45 By 2004, we had fallen to 17th in generosity for general R&D; 16th 

for machinery and equipment used for research; and 22nd for buildings used for research.46

Among nations with a tax incentive for R&D, the United States now provides one 

of the weakest incentives, below our neighbors Canada and Mexico, and behind 
37

many Asian and European nations. Japan’s credit is almost three times as generous 

as the United States’, and for small companies it’s four times as generous. In 2004, 

France adopted a credit essentially equivalent to a 40 percent incremental R&D tax 

credit. In an explicit effort to attract U.S. corporate R&D, our neighbor to the north 

is even more generous. In Canada, large companies are eligible for a flat 20 percent 

credit while small companies can receive a 35 percent credit; in many provinces, 

equally generous credits can be taken on top of the Federal credit. Indeed, over the 

past decade, all other nations with R&D tax incentives have boosted the generosity 

of their R&D tax incentives, particularly since 2000.47

At a time of increased concern about America’s growing competitiveness challenge, our tax credit has been getting weaker, both in absolute terms and relative 

to other nations, in part because of changes made by Congress over the years that 

have diminished its generosity.48 In fact, until the passage in 2006 of the Alternative Simplified Credit, the credit was about half as generous as it was in the early 

1980s.49 Even with the recent increases in R&D tax incentives (the passage of the 

Alternative Simplified Credit in 2006 and its expansion in the Emergency Economic 

Stabilization Act of 2008), the United States moved up only to 14th place. Out of 

the 21 OECD nations that offered R&D tax credits in 2008, the United States 

ranked 17th. The United States would need to increase the ACS to 20 percent to 

move up to 10th place, 31 percent to move to 5th place, and 47 percent to become 

the most generous of the OECD nations.50 However, this doesn’t include non-OECD 

nations such as India, China and Brazil, all of which have significantly more generous tax incentives to attract multinational R&D. India’s R&D tax credit is now 

four times that of the United States. On top of salaries for R&D personnel that are 

as low as one-sixth of the costs in the United States, China provides a 150 percent 

deduction on R&D expenses (provided that R&D spending increased ten percent 

over the prior year). Some countries, including Denmark and the Netherlands, have 

begun to extend R&D tax credits to cover process R&D activities, effectively extending the R&D tax credit from their goods to services industries as well.

4. High-Skill Immigration 

Over the last decade, many nations have liberalized their policies regarding highskill immigration, while the United States, in stark contrast, has restricted its policies. In a study benchmarking high-skill immigration policies in eight nations (the 

United States, Canada, New Zealand, Australia, Japan, Great Britain, Germany 

and France), ‘‘Global Flows of Talent: Benchmarking the United States,’’ ITIF found 

that the United States trails other peer countries in developing a proactive approach 

to attract high-skill foreign workers.51

Using data from 2001 to 2006, the United States received an average of about 

67,000 highly skilled permanent immigrants per year, with Canada receiving 56,000 

per year, Australia 20,000 and New Zealand about 10,000.52 As a share of their populations, these rates are all several times larger than those in the United States—

more than 11 times larger in the case of New Zealand. 

ITIF’s study of the immigration policies of those eight countries found three broad 

approaches. The first group—Australia, Canada and New Zealand-conceive of immigrants as a source of economic growth and consider highly skilled immigrants especially valuable contributors. The second group-the United States and Great Britain—are more amenable towards immigration but do not place high priority on tilting the mix of immigrants toward the talented. The third group—France, Germany 

and Japan—tend to view highly skilled immigrants (and immigrants in general) 

more as threats to native workers than as positive additions to national well-being. 

While the United States may not be as reflexively anti-immigration as some other 

industrialized countries, in recent years it has severely limited the flow of foreign 

talent entering the country at a time when the science and engineering workforce 

in the United States has become increasingly reliant on foreign talent. In 1995, nonU.S. citizens accounted for only six percent of the U.S. science and engineering 

workforce; by 2006, that percentage had doubled to 12 percent, and for the youngest 

cohort of scientists and engineers (ages 21 to 35), the percentage rose to 20 percent. 

With the United States restricting the number of H–1B visas issued annually to 

85,000 from 2006 to 2008 (and 65,000 as of today),53 almost 50 percent of highly 

talented foreign professionals who applied for temporary work in the United States 

in the years 2006 to 2008 were turned away. Limiting the influx of talented foreignborn science and engineering professionals not only hurts U.S. competitiveness, it 

may also contribute to the decision of companies to source R&D operations abroad 

to be closer to local pools of S&E talent.
38

Why Does the United States Need a Robust Innovation Policy? 

The global competitive landscape continues to stiffen as a number of countries get 

serious about creating favorable climates that attract foreign direct investment and 

R&D activities and that support the innovation efforts of their domestic corporations 

and workforce. It is time for the United States to articulate and implement an innovation-led economic growth strategy to respond to global economic competitiveness 

challenges. 

But before detailing some of the key elements of such a strategy, it is first worth 

briefly discussing why there is a need to develop such a strategy. Unfortunately in 

the United States too many conventional ‘‘neoclassicalist’’ economists hold on to the 

antiquated view that economic welfare is maximized by individual firms acting as 

independent utility maximizers, doing what is best for them individually. In fact, 

according to this view, many policy efforts to help firms become more innovative will 

only make things worse. Indeed, the worst possible sin in the eyes of neoclassical 

economists is to ‘‘pick winners and losers’’ (an absurd characterization since nations 

only pick winners, not losers). Substituting for the wisdom of the market can only 

lead to a worse, not better, allocation of resources, they opine. 

Because of that, many conventional neoclassical economists argue that policy 

makers should be indifferent to the occupational and industrial mix of the U.S. 

economy. For most neoclassical economists, the right industrial structure is the one 

that ‘‘the market’’ provides, because by definition market exchanges engaged in by 

two parties are what is known as ‘‘Pareto optimal.’’ Why else would the parties engage in them? Any attempt by policy makers to try to alter this invisible hand by 

increasing innovation output can only reduce, not increase, economic welfare. This 

view, it should be noted, is almost unique in the world. In no other nation, perhaps 

with the exception of British Commonwealth nations, does the economics profession 

consist of such a large cohort of neoclassicalists counseling such blind faith in market processes. 

This helps explain a key reason why so many neoclassical economists advising 

Washington have been so blase about the decline in U.S. high-tech manufacturing. 

To the extent that they are even willing to admit that high-tech manufacturing has 

declined, they simply assert as a matter of faith that domestic resources left idle 

by offshoring will automatically shift to new higher-productivity industries. The 

magic of the market will optimally reallocate resources. But only if one believes that 

economies are largely made up of ‘‘Coasian’’ factors of production that assemble and 

reassemble on the basis of prices could one take this view seriously. As innovation 

economist Greg Tassey argues, ‘‘The central failure of current economic growth models is the assumption that shifts in relative prices will automatically elicit a 

Schumpeterian-type efficient reaction from domestic private markets—namely an 

adjustment involving development and assimilations of new technologies to replace 

offshored ones.’’ 54

According to this view, if a high-wage, high-tech firm like Boeing, for example, 

were to go out of business because of unfair European Commission subsidies to Airbus, as long as America maintains flexible labor and capital markets, these resources will flow into other industries, including into expanding or new firms and 

sectors. In such a market environment, policies are needed only to facilitate the 

transition of resources from losing to winning companies, including making sure 

that losing companies are not protected from this tough but necessary discipline, 

and helping workers get reemployed quickly. As a result, proponents of this view 

believe that as long as we have a good education system and don’t restrain creative 

destruction, then all should be well. 

This conventional view may have accurately described a country’s economy before 

the emergence of the globalization era over the last two decades. During the old 

economy era, if firms could not compete and went out of business, the only issue 

was making sure that their assets, including employees, were quickly redeployed to 

other companies that could compete successfully. If Boeing failed, Northrop Grumman or Lockheed Martin would add capacity. 

But in the new global economy, in which knowledge is increasingly the major factor of production, this framework no longer sufficiently explains industrial and economic change. As such, in the 21st century global economy, nations can no longer 

be indifferent to the industrial and value-added mix of their economy. In contrast 

to the neoclassical view, knowledge is not a free-flowing commodity held solely by 

individuals. It is embedded in organizations and if organizations die so too does a 

significant amount of knowledge. Moreover, there are significant spillover effects 

from firm activities and significant first-mover advantages, including learning effects that enable firms’ early leads to translate into dominant positions. There are 

also significant network effects that mean that advancement in one industry (e.g., 

broadband telecommunications) can lead to advancement in a host of others (e.g., 
39

Internet video). As a result, for many parts of the U.S. economy exposed to international competition, if you lose it, you can’t easily reuse it. In these cases, foreign 

high-value imports may end up substituting for the defunct U.S. product. 

To bring this back to a company like Boeing, if America were to lose Boeing, in 

all likelihood it could not rely on market forces, even a dramatic drop in the dollar, 

to later recreate a domestic civilian aviation industry. For to do so would require 

recreating not just the firm, but it’s complex web of suppliers, professional associations, university programs in aviation engineering and other knowledge-sharing organizations. 

Clearly if Boeing were to go out of business, the economy would quickly regain 

‘‘equilibrium’’ as factors of production were reabsorbed. But neoclassical economics 

assume that there is only one equilibrium and it is the role of government to make 

sure that that the market attains it. But new research suggests that there may be 

multiple equilibria in an economy, some better than others. Indeed, while economies 

can attain equilibrium, absent a robust innovation policy that equilibrium may not 

be a high-wage, high-skill equilibrium. Research by economist Elvio Accinelli has 

shown that there is strategic complementarily between the percentage of high-skill 

workers and high-value added, innovative firms in an economy. He finds that economies can be in perfect neoclassical equilibrium at either a high level of innovation 

or in a ‘‘poverty trap’’ of low skills and underinvestment in innovation. Since the 

poverty trap can be avoided if the number of innovative firms in an economy exceeds a threshold level leading to an increased number of skilled workers, there is 

a role for public policy to move economies to a high-level equilibrium on innovation.55

But there is a second reason for an innovation policy and that is because economies are subject to a host of ‘‘market failures’’ with the implication that markets 

acting alone will not always lead to optimal performance. Following are five market 

failures that cause markets to perform suboptimally: 

1. Because individual firms cannot capture all the benefits of their own 

innovative activity, firms will produce less innovation activity than society 

needs. The first market failure has to do with who benefits from private companies’ 

investments in innovation. The knowledge needed to create new products, processes 

and organizational forms is not something that can be completely contained within 

an individual firm. It inevitably spills over to other firms, which can use it without 

paying the costs of creating it. For example, an entrepreneur develops a new business model that others copy. A university transfers discoveries from the lab to the 

marketplace. A company makes a breakthrough that forms the basis of innovations 

that other companies can use. This is why studies have found that the rates of return to society from corporate R&D and investments in IT are at least twice the 

estimated returns that the company itself receives.56 Firms’ inability to capture all 

the benefits of their own innovative activity means that firms, left on their own, will 

produce less innovation than society needs. 

2. R&D increasingly depends on collaboration between firms and universities but the interests of the collaborators are not well-aligned. Problems 

with the important interactions of firms and universities represent another area of 

possible market failure. As short-term competitive pressures make it difficult for 

even the largest firms to support basic research and even much applied research, 

firms are relying more on university-based research and industry-university collaborations. Yet, the divergent needs of firms and universities can hinder the coordination of R&D between these two types of institutions. University researchers are not 

necessarily motivated to work on problems that are relevant to commercial needs. 

University technology transfer offices do not always promote the licensing of university intellectual property to firms. Conversely, individual businesses sometimes 

want to ‘‘rent’’ universities’ research capabilities and appropriate the resulting research discoveries for themselves. This can impede the free flow of knowledge that 

can contribute to innovation elsewhere in the economy.57

3. Many industries and firms lag in adopting proven technologies. Market 

failures also plague the diffusion of innovation. Outside of relatively new, sciencebased industries such as information technology and biotechnology, many industries 

lag in adopting more productive technologies. For example, the health care industry 

has lagged in adoption of available technologies that could boost productivity and 

health care quality.58 The residential real estate industry has resisted moving toward more Internet-enabled sales.59 The construction industry is plagued by inefficiencies and failure to adopt best-practice technologies and techniques.60 A host of 

market failures, including chicken-or-egg issues related to standards and technology 

adoption and principal-agent problems where innovation may hurt the implementers 

of it (e.g., real estate agents embracing e-realty systems) impede faster productivity 

growth in these sectors of the economy. 
40

4. The innovation producing benefits of industry clusters are under-realized. A fourth market failure involves the under-recognition of industry clusters’ 

role in innovation. Both the creation and the diffusion of innovation often occur in 

geographic clusters. Geographic industry clustering enables firms to take advantage 

of common resources (e.g., a workforce trained in particular skills, technical institutes or a common supplier base), to facilitate better labor market matching and to 

facilitate the sharing of knowledge. This process may be particularly relevant in industries that rely more on the creation or use of new knowledge, as clustering appears to spur knowledge transfers. Such industries are especially likely to cluster 

in large metropolitan areas.61 Perhaps the best known cluster is Northern California’s Silicon Valley, where a large agglomeration of high-tech firms, research universities such as Stanford, technical colleges to train high-tech workers, venture capitalists, and other supporting institutions make it the world’s most vibrant technology region. But Silicon Valley is not the only region in the United States with 

industry clusters: From the furniture cluster in Tupelo, Mississippi; to the jewelry 

cluster in Rhode Island and southern Massachusetts; to the recreational vehicle 

cluster in Elkhart, Indiana; to the biotechnology clusters in the Boston, Washington, 

DC, and San Diego metropolitan areas, regional industry clusters abound. And as 

these examples show, clusters are not only made up of ‘‘high-tech’’ firms. Moreover, 

clusters are not confined to manufacturing, but also exist in a host of service industries, including financial services in New York, movies and music in Hollywood, software in Seattle and gaming in Las Vegas. Evidence suggests that industry clustering may have become more important for productivity growth during the last 

three decades; the extent to which an industry was geographically concentrated (at 

the metropolitan or county level) was increasingly associated with subsequent productivity growth during the last three business cycles.62

Yet because the benefits of geographic clustering spill over beyond the boundaries 

of the firm, market forces produce less geographic clustering than society needs. 

Each firm in a cluster confers benefits on other firms in the cluster, but no individual firm takes these ‘‘external’’ benefits it produces into account when making 

its own location decisions. In addition, the firms in a cluster have common needs 

(e.g., for worker training or infrastructure) that they cannot meet on their own. 

Clustered firms usually require external coordination (e.g., from governments or industry associations) to meet these needs because no one firm can capture all the 

benefits. Failure to meet these common needs makes clusters smaller and less productive than they would otherwise be. If the benefits of clustering to all firms in 

the United States were considered and the common needs of all firms in each cluster met, there would be more clustering, and thus more innovation and higher productivity. 

5. The interests of geographically mobile firms in locating innovative activity may diverge from those of U.S. residents. There is one other failure that 

has emerged in the last decade or so and that, while not a market failure per se, 

results in too little innovation in the United States. That failure is the potential divergence between the interests of geographically mobile firms and those of the residents of the United States.63 Firms’ decisions about where to locate innovative activity are based on their own interests, which may or may not coincide with the interests of a place’s residents. Since World War II and the emergence of a truly national 

market, most U.S. states have put in place policies to tilt the choice of corporations 

to invest in their states. To be sure, even the most liberal governors recognize and 

respect the power and primacy of markets as the key driver of prosperity. But even 

the most conservative governors recognize that this market-produced bounty does 

not always automatically end up in their own jurisdiction. For this reason, both Republican and Democratic governors ‘‘intervene’’ in their economies with robust economic development policies. They are not content to let the ‘‘market’’ determine 

what kind and how many jobs are created: they work to ensure that they gain more 

high-paying, high-productivity jobs. With the rise of the globally integrated enterprise, the United States faces the same reality states faced after World War II: 

without robust economic and innovation policies, it risks losing out in global competition. 

These failures in the process of innovation and its diffusion suggest that, left to 

itself, the market will produce less innovation and lower productivity in the United 

States than our society needs. In a globally competitive world, this is a limitation 

that we can no longer afford. What is more, these market failures in turn suggest 

that there are several ways in which government can improve the process.
41

What Steps Should Congress Take to Boost U.S. Innovation and Competitiveness? 

The government’s role in addressing these market failures is not to regulate business or to direct the path of technological or economic development. We do not advocate a heavy-handed, government-driven industrial policy. Indeed, such a policy cannot be nimble enough to respond to the kinds of market failures that afflict the innovation process. At the same time, though, we do not advocate giving away public 

funds to companies without any public benefit. Government should be a facilitator 

that spurs firms to innovate in ways that serve the public interest. Economist Dani 

Rodrik captures this view of the appropriate relationship between government and 

business with respect to innovation policy when he describes ‘‘an interactive process 

of strategic cooperation between the public and private sectors which, on the one 

hand, serves to elicit information on business opportunities and constraints and, on. 

the other hand, generates policy initiatives in response.’’ 64 Political scientist Dan 

Breznitz similarly writes that a government innovation-promotion agency should not 

pick strategic products or technologies but should motivate firms, individually and 

in cooperation with other firms and government, to make the investments needed 

to innovate.65 In short, while we believe that the private sector should lead in innovation, we also believe that in an era of globalized innovation and intensely competitive markets the Federal Government can and should play an important enabling 

role in supporting private sector innovation efforts. Indeed, many nations have already come to this realization. In recent years, they have come to understand that 

markets relying on price signals alone will not always be as effective as smart public-private partnerships in spurring higher productivity and greater innovation. It 

is time for the United States to do the same. There are two major areas where the 

United States needs to act, one domestic and one international.

More Robust Trade Enforcement 

It will be difficult for the United States to regain global innovation leadership if 

we continue to largely turn a blind eye to rampant foreign policies that distort the 

spirit, if not often the letter, of the WTO, with the goal of limiting U.S. imports of 

high tech products and services and promoting their exports. These countries want 

it both ways. They desperately want access to the U.S. market (and as reflected by 

the fact that the United States has run massive annual trade deficits, for instance, 

of almost $800 billion in 2006 alone,66 they are getting it) but they don’t want to 

buy U.S.-produced goods and services. They want U.S. foreign direct investment, 

particularly high-tech investment, through outsourcing, joint ventures and other 

types of investment, but they also want to systematically weaken the competitive 

advantage of U.S. technology companies in favor of their domestic technology companies. They want our wonderful technology and intellectual property, but they 

don’t want to pay for it. ‘‘Take’’ is not ‘‘trade.’’

These aggressive technology mercantilist policies have resulted in fewer high paying technology jobs in the United States and have eroded the United States’ global 

innovation leadership position. As such if we want to stop the continued erosion of 

America’s technology leadership, the Federal Government will have to be much 

more vigilant and make fighting these unfair trade practices a top priority. Both 

Congress and the Obama Administration need to let countries know that they can’t 

expect to get the WTO’s benefits when they aren’t meeting its obligations. Countries 

are willfully violating these agreements and we need to make them live up to their 

commitments. 

While many of the tools for more aggressive enforcement of global trade policies 

are in the hands of the administration, Congress can play an important supporting 

role. To start with, we urge Congress to pass S.1466: The Trade Enforcement Act 

of 2009, which strengthens USTR’s trade enforcement powers and restructures the 

agency to more greatly focus on eliminating foreign barriers to exports.67 In short, 

Congress should hold USTR’s feet to the fire and expect them to wake up every 

morning figuring out how they are going to enforce trade agreements, and defend 

American technology jobs from the assault of unfair trade practices.

Develop and Implement a More Robust National Innovation Policy 

Even with the orientation of many neoclassical economists there is a somewhat 

broad consensus that the role of the Federal Government should include support for 

basic research, education, and provision of a good regulatory climate. But while 

these are necessary ingredients, they are woefully inadequate in enabling the 

United States to increase its global rank in innovation-based competitiveness. Indeed the neoclassical model which not only posits an overly simplistic innovation 

process (the linear model) but also assumes that it is only basic research which re-
42

quires a government role is a poor guide to policy. Generic platform technologies, 

infra-technologies and risk reduction all also require a public-private approach. 

What are essentially ideological statements put forth by neoclassical economists, 

such as that the role of government is not to support applied research, are supported by little logic and even less data and only serve to stop, not advance, needed 

reasoned analysis and discussion. With this in mind, I list a number of specific proposals that if enacted would help the U.S. regain its innovation lead.

1. Spur Science, Technology, Engineering and Math (STEM) Education and 

Skills 

Ensuring an adequate supply of talented scientists and engineers is one key step 

in the U.S. innovation agenda. Following are three proposals to address the STEM 

challenge: 

1a) Fund Specialty Math and Science High Schools 

A wide array of proposals before Congress seek to intervene upstream in the 

STEM pipeline at the K–12 level. These include expanding professional development 

programs for science teachers; enhancing science enrichment programs; using No 

Child Left Behind to judge scientific educational outcomes; and boosting science 

teacher quality, either through stricter requirements, providing incentives to attract 

higher quality teachers to science, and/or making it easier for scientists and engineers to become teachers. 

While these proposals have received the lion’s share of attention in the policy debates over STEM education, we believe that the focus is too broad. If funding were 

unlimited, such a broad-based strategy might make sense. But since funding is limited and since less than ten percent of the U.S. workforce is engaged in STEM-related careers, it makes more sense to focus limited funds more narrowly. In particular, we believe that the most effective strategy to address the STEM challenge 

at the high school level is to significantly expand the number of specialty math and 

science high schools (MSHS). 

There are only about 100 math and science high schools across the nation, ranging from pull-out programs with 125 students, to full day programs and dedicated 

high schools of over 4,000 students, to state sponsored residential schools, enrolling 

over 47,000 students in total.68 By creating an environment focused more intensely 

on science and technology, these schools have been able to successfully enable students to study science and math, often at levels far beyond what students in conventional high schools are at; they can then go on to degrees in math and science at 

relatively high levels. It’s time to build upon this successful model and significantly 

expand the number and scope of our nation’s math and science specialty high 

schools. 

Mathematics, science, and technology high schools differ from the general education found in comprehensive high schools in key ways. First, as the name implies, 

MSHSs focus much more extensively on STEM curricula. For example, in addition 

to the three years of lab science and three years of mathematics required by the 

state for high school graduation, Florida’s Center for Advanced Technologies offers 

students an opportunity to declare a mathematics and science major by taking four 

additional courses in mathematics and science, often Advanced Placement 

Courses.69

Second, students don’t just take more STEM courses; they take more advanced 

courses and do more advanced work. Indeed, the coursework and integrated curricula of MSHSs go over and above the normal graduation requirements for general 

education students. For example, students at the Arkansas School for Mathematics, 

Sciences, and the Arts can take courses in Biomedical Physics, Immunology, Microbiology, Multivariable Calculus, Number Theory, Differential Equations, Math Modeling, Computer Programming III, and Web Application Development. 

A third distinguishing feature of these schools is their level of partnership with 

other organizations. Collegiate, corporate, and alumni organizations have formed 

significant partnerships with these schools. While some partnerships have been in 

support of specific events, others have been long-term partnerships supporting research and innovation among students and faculty. Collegiate partners, for example, 

often provide classroom, dormitory, research and financial support to these schools. 

For example, at the Governor’s School of South Carolina, every rising senior is 

placed for six weeks in the summer at an off-campus program. Many of the students 

work with a research professor at an in-state university. 

While the educational environments are exemplary, the key question is whether 

they produce results. While formal studies are few, there is some evidence that 

these schools are highly effective at producing graduates not only with high levels 

of aptitude in STEM, but who go on to further study and careers in STEM. For ex-
43

ample, one study of 1,032 graduates finds, 99 percent of graduates enroll in college 

within one year of high school (compared to 66 percent nationally) while 79 percent 

complete college in four years (compared to 65 percent in private universities and 

38 percent in public universities).70 Moreover, graduates earn undergraduate and 

graduate degrees in mathematics, science, and technology fields in significantly 

higher numbers than the general population. Approximately 56 percent of MSHS 

graduates earn undergraduate degrees in mathematics or science-related fields, 

compared to just over 20 percent of students who earn an undergraduate degree. 

Over 40 percent of females earn such degrees, nearly double the national average. 

A key part of any solution to the STEM challenge needs to be the significant expansion of specialty math and science high schools. But because more so than other 

high schools, math and science high schools produce benefits that local communities, 

and even states, will not capture, local school districts will under-invest in them. 

Rather than be seen as solely the responsibility of local school districts, or even 

states, they should be seen for what they are: a critical part of the scientific and 

technological infrastructure of the nation. Thus, we believe that the National 

Science Foundation should play a key role in supporting and expanding such 

schools. As a result, Congress should set a goal of approximately quintupling 

enrollment at such high schools to around 250,000 students. This will require both the creation of a significant number of new high schools, but 

also expansion of others with room to grow. To do this, Congress should 

allocate $100 million a year for the next five years to the National Science 

Foundation to be matched with funding from states and local school districts and industry to invest in both the creation of new MSHSs and the 

expansion of existing ones.71 Moreover, a share of these funds should go toward 

establishing MSHSs focused on under-represented populations. States and/or local 

school districts would be required to match every dollar of Federal support with two 

dollars of state and local funding. Industry funding would count toward the state 

and/or local school district match.

1b) Fund Joint Government-Industry STEM Ph.D. Fellowships 

One key factor in producing more Ph.D. degrees in STEM, especially by U.S. residents, is the ability to support doctoral fellowships. But as Richard Freeman notes, 

the number of NSF graduate research fellowships awarded per thousand of college 

students graduating with degrees in science and engineering went from over seven 

in the early 1960s to just over two in 2005. Today the same number of NSF graduate research fellowships are offered per year as in the early 1960s, despite the fact 

that the number of college students graduating with degrees in science and engineering has tripled.72 But rather than simply expand funding for the NSF Graduate Research Fellowship program (funded at $102 million) to do this, Congress should 

instead create a new NSF-industry Ph.D. fellows program. Currently the program 

provides up to three years of support over a five year period and supports approximately 3,400 students per year at $40,500 per year.73 The new NSF-industry pro- gram would work by enabling industry to fund individual fellowships of $20,250 

with NSF to match industry funds dollar-for-dollar. Congress should allocate an additional $21 million to a joint industry-NSF STEM Ph.D. fellowship program. This would allow NSF to support an additional 1,000 graduate fellows. 

Individual companies could commit to supporting American residents in whatever 

fields that the companies are interested in. Students would of course be under the 

supervision of their university faculty, and ultimately dissertation advisor, but industry would be able to build a relationship with the student. For example, a company might offer the student a summer internship at one of the company’s laboratories, helping the student to get a better sense of actual research challenges the 

company faces. 

To be sure, this program would be slightly more complicated to administer. First, 

companies would have to be informed of the program and propose graduate fellow 

areas of study. Prospective fellowship applicants would have to identify which 

awards they are most interested in applying for. However, with the Internet, such 

matching would be relatively straightforward, with students indicating their intended areas of study and the online program identifying relevant fellowship opportunities. If after three years, it turns out that industry does not support the program in great enough numbers or students and universities are not interested in 

the program, then it could and should be terminated and the funding redirected into 

the regular fellows program. 

However, this program would have two advantages over the regular NSF fellows 

program. First, by leveraging industry funds, Federal dollars would go twice as far. 

Instead of having to appropriate $42 million to fund 1,000 additional fellowships, 

they could appropriate $22 million instead. Second, and more important, engaging 
44

industry as a partner would help selected graduate students better understand how 

research is conducted in industry and better understand the interdisciplinary nature 

of today’s innovation process. Both of these challenges have been the subject of increasing focus by scholars writing about STEM graduate education. There have been 

several studies about the growing disconnect between the training that graduate 

students receive and their future job responsibilities.74 Most doctoral programs still 

train students as if they were going to be going into academic teaching and research 

careers. But increasingly this is not the case.75 For example, one survey of doctoral 

chemistry students found that only 36 percent intended to go into academia (compared to 76 percent of English students).76 As Campbell, Fuller and Patrick have 

argued, ‘‘graduate education needs to be broadened from its research focus to include a wider range of training for the careers students are pursuing and to reflect 

the versatility needed to work in an increasingly global job market, where collaboration between industry, universities, and government agencies is the norm rather 

than the exception.’’ 77 Finally, for those who worry that industry funding will somehow taint the scientific learning process, it is important to remember that students 

would be guaranteed the funds as long as the university agreed that the student 

was performing up to standards.78

1c) Allow Foreign Students Receiving STEM Ph.D.s from U.S. Universities 

to Automatically Qualify for Green Cards 

While ideally the supply of American STEM workers will expand to fill the gap, 

the likelihood of that happening in the near- to moderate-term is unlikely, even if 

Federal efforts to support STEM education expand significantly. Yet welcoming the 

world’s most skilled foreign-born scientists and engineers into the land of economic 

opportunity that America affords has long been one of the strengths of the U.S. national innovation system. The U.S. economy and the standard of living for American 

citizens have benefited enormously from this influx of foreign talent. AnnaLee 

Saxenian, a professor at the University of California-Berkeley, has shown that Indian and Chinese entrepreneurs founded or co-founded roughly 30 percent of all Silicon Valley startups in the late 1990s.79

Recognizing this, over the last decade many nations have liberalized their policies 

regarding high-skill immigration, while the United States, in stark contrast, has restricted its policies. In a study benchmarking high-skill immigration policies in eight 

nations (the United States, Canada, New Zealand, Australia, Japan, Great Britain, 

Germany and France), ITIF found that the United States trails other peer countries 

in developing a proactive approach to attracting high-skilled foreign workers.80

Moreover, the current system of employer sponsorship signals only that potential 

immigrants are desirable employees. A system that allowed additional criteria to be 

considered, like those used in the point systems of Australia, Canada and New Zealand, would meet policy objectives better. (Applicants for immigration in these countries receive points for such characteristics as education, work experience and language skills. Those surpassing an adjustable point threshold are admitted. Having 

a job offer in hand and meeting a designated occupational shortage may add points 

to an individual’s application, but it is usually possible to meet the pass mark without either of these attributes.) Toward that end, foreign graduate students in STEM 

fields should be given special preference within such a system, even if they have 

not received job offers. To do this, Congress should automatically make recipients of advanced science and engineering degrees eligible for permanent 

residency. Providing additional opportunities for green cards not tied to employment could allow highly skilled foreign graduates to make more creative contributions to the economy more quickly by working in smaller and riskier businesses.

2. Create a National Innovation and Competitiveness Strategy Modeled on 

the National Broadband Strategy 

The United States needs to create millions of new good-paying jobs over the next 

decade. If the United States wants to do this and be successful in the global economy, it is critical that the Federal Government develop a serious, in-depth, and analytically-based national competitiveness strategy. We are in fact one of the few nations without one. Denmark, the United Kingdom, South Korea, The Netherlands 

and Ireland are just a few of the nations that in recent years spent the time and 

effort to craft a national competitiveness strategy. The last time the United States 

did anything similar was President Carter’s Domestic Policy Review on Industrial 

Innovation in 1978. This review was in fact extremely important in setting the stage 

for a number of important Congressional initiatives in the following decade, including the R&D tax credit, the Bayh-Dole Act, the National Cooperative R&D Act, and 

the Stevenson-Wydler Technology Innovation Act. 
45

It should be noted that ITIF is not advocating industrial policy or top-down direction of innovation. Thus we have deliberately chosen the term ‘‘agenda’’ to describe 

the outcome of a process that we believe must engage private and civil society constituencies and reflect the bottom up as well as top down nature of innovation. This 

would allow the development of a robust national innovation agenda. Its value 

would be apparent in allowing our country to more effectively address complex challenges with ‘‘whole of government’’ solutions, galvanize the public by advancing a 

useful narrative around innovation, enable us to engage more effectively with global 

innovation constituencies, and most importantly allow us to reinvent the traditional 

sources of our economic and societal success. 

The American Recovery and Reinvestment Act charged the FCC with the development of a national broadband plan. The next America COMPETES Act should 

charge the White House Office of Science and Technology Policy with the development of a national competitiveness strategy. Adequate funding should be provided 

to bring in an outside director with deep technical and policy knowledge and hire 

individuals with technical and business experience. 

A national innovation strategy would provide an opportunity to engage in a comprehensive analysis of the key factors contributing to future U.S. competiveness. 

Legislation to create this could require that the strategy focus on a number of broad 

issues, going more in depth on each. These should include assessing: 1) current U.S. 

competitiveness, including at the major industry level; 2) current business climate 

for competiveness (including tax and regulatory); 3) trade and trade policy issues; 

4) education and training; 5) science and technology policy; 6) regional issues in 

competitiveness (including the role of state and local government and impacts on 

rural, urban and other regions); 7) measurement and data issues; and 8) proper organization of government to support a comprehensive innovation and competitiveness agenda.

3. Spur Technology Commercialization 

While the United States remains a leader at nurturing innovation and commercializing new inventions, the process can and should be improved. The United States 

will forfeit technology leadership unless it finds ways to accelerate entry of new 

growth sectors. The U.S. innovation system separates fundamental research from 

incremental development, with the former increasingly performed at research universities and labs with Federal support, and the latter performed by industry. Connections between these sectors need significant strengthening, so there is a smoother and more active hand-off process. Recommendations include:

3a) Create an SCNR (Spurring Commercialization of Our Nation’s Research) Program to Support University, State and Federal Laboratory Technology Commercialization Initiatives 

The current Federal system for funding research pays too little attention to the 

commercialization of technology, and is still based on the linear model of research 

that assumes that basic research gets easily translated into commercial activity. In 

fact, the process is ripe with barriers, including institutional inertia, coordination 

and communication challenges, and lack of funding for proof of concept research and 

other ‘‘valley of death’’ activities. It is time for Federal policy to explicitly address 

this challenge and allocate more funding to commercialization activities. 

However, in an era of fiscal constraint adequate new funding may be difficult to 

obtain. As a result, one idea would be to establish an automatic set-aside program 

taking a modest percentage of Federal research budgets and allocating them to a 

technology commercialization fund. Currently the SBIR program allocates 2.5 percent of agency research budgets to small business research projects; the STTR program allocates 0.3 percent to universities or nonprofit research institutions that 

work in partnership with small businesses. 

3b) Thus, Congress should allocate 0.15 percent of agency research budgets (around 5110 million per year) to fund university, Federal laboratory, 

and state government technology commercialization and innovation efforts. The 0.15 percent share could either be added on top of the existing 2.8 percent allocation currently going to SBIR and STTR, or it could be taken from the 

SBIR share. 

This program would be different than the STTR program which funds small businesses working with universities.81 Half the funds would go to universities, and 

Federal laboratories could use the funds to create a variety of different initiatives, 

including mentoring programs for researcher entrepreneurs, student entrepreneurship clubs and entrepreneurship curriculum, industry outreach programs, seed 

grants for researchers to develop commercialization plans, etc. 
46

The other half of funds would go to match state technology-based economic development (TBED) programs. Since the 1980s, when the United States first began to 

face global competitiveness challenges, all states have established TBED programs. 

Republican and Democratic governors and legislators support these programs because they recognize that businesses will not always create enough high-productivity jobs in their states without government support. State and local governments 

now invest about $1.9 billion per year in TBED activities.82 This is about 70 percent 

of the amount that the Federal Government spends on its principal innovation programs and agencies. 

States and regions engage in a variety of different TBED activities. They spur the 

development of cutting-edge, science-based industries by boosting research funding. 

For example, Oregon’s NanoScience and Microtechnologies Institute serves as a 

forum for R&D synergy among Oregon’s three public research universities, the Pacific Northwest National Laboratory, the state, and the ‘‘Silicon Forest’’ high technology industry cluster. States also try to ensure that research is commercialized 

and good jobs created in both cutting-edge, science-based industries and industries 

engaging in related diversification. For example, the Georgia Advanced Technology 

Development Center at Georgia Tech is a technology incubator that offers services 

including consulting, connections to university researchers and networking with 

other entrepreneurs and service providers. States have also established programs to 

help small and mid-sized firms support collaborative research at universities. For 

example, Maryland’s Industrial Partnerships program provides funding, matched by 

participating companies, for university-based research projects that help companies 

develop new products or solve technical challenges.83 Finally, states have established initiatives to help firms commercialize research into new business opportunities. For example, Oklahoma’s non-profit i2E organization helps Oklahoma companies with strategic planning assistance, networking opportunities, and access to capital. i2E’s Oklahoma Technology Commercialization Center assists researchers, inventors, entrepreneurs and companies in turning advanced technologies and hightech startups into growing companies.84 But without assistance from the Federal 

Government, states will invest less in TBED activities than is in the national interest. A formula-based allocation to help fund state TBED efforts would help correct 

this limitation. 

We propose that NIST be responsible for administering this program. Universities 

and Federal labs would submit proposals explaining their proposed activities. States 

would submit proposals to NIST laying out their TBED strategy and explaining how 

NIST support would enable them to do more and better. Qualifying activities would 

include a host of TBED activities, such as technology commercialization centers, industry-university research centers, regional cluster development programs, regional 

skills alliances, and entrepreneurial support programs. In addition, where relevant, 

states would need to spell out in detail how they intended to create innovation alliances among local governments, businesses, educational institutions, and other institutions (such as economic development organizations or labor unions) in metropolitan areas. States would have to explain how their activities would meet the 

needs of firms following innovation trajectories that currently exist or that can reasonably be developed within the state. The precise mix of TBED activities would be 

left up to each state because the mix of innovation trajectories and the specific 

needs of firms in each trajectory vary among and within states. However, proposals 

would have to be economically realistic. For example, a state proposal to develop a 

new biotechnology cluster in a metropolitan area that had no existing institutions 

to support such a cluster and no realistic strategy to develop those institutions 

would be unlikely to be funded. Proposals that built appropriately on TBED activities in neighboring states or that included plans for interstate collaboration in 

TBED would receive extra points in the review process. To be eligible for NIST 

funding, states would need to provide at least two dollars in actual funding for every 

NIST dollar they receive. 

Rotating panels of TBED experts would review proposals. In most cases these 

would be experts in the field (e.g., consultants, academics, venture capitalists and 

economic development professionals). For states there would be a two-stage proposal 

review process. States would submit initial proposals describing activities and use 

of funds. Based on review from the TEED panel and NIST staff, the program would 

provide feedback to states on how to modify and improve their proposals. States 

would then submit final proposals that would be reviewed and scored by the outside 

panel of experts. Proposals that were judged acceptable would be funded to the extent that funds were available, with priority going to those with the highest scores. 

States with proposals judged not fundable would be eligible to receive modest planning grants and technical assistance from NIST staff to develop a proposal for the 

subsequent year’s competition.85
47

4. Expand the R&D Tax Credit 

As ITIF has demonstrated, the U.S. R&D tax credit is no longer generous when 

compared to other nations. It is not enough to make the credit permanent, it also 

needs to be expanded. There are several reforms that are needed. One is to provide 

greater incentives for collaborative R&D. Increasingly, firms are collaborating with 

other firms or institutions in order to lower the cost of research and increase its 

effectiveness by maximizing idea flow and creativity. Indeed, a growing share of research is now conducted not only on the basis of strategic alliances and partnerships 

but also through ongoing networks of learning and innovation.86 Moreover, participation in research consortia has a positive impact on firms’ own R&D expenditures 

and research productivity.87

Most collaborative research, whether in partnership with a university, national 

laboratory, or industry consortium, is more basic and exploratory than research 

typically conducted by a single company. Moreover, the research results are usually 

shared, often through scientific publications. As a result, firms are less able to capture the benefits of collaborative research, leading them to under-invest in such research relative to societally optimal levels.88 This risk of underinvestment is particularly true as the economy has become more competitive, and a reflection of this 

is the fact that for the first time since the data were collected in 1953, the percentage of U.S. academic R&D supported by industry has declined in each of the last 

five years.89 This may stem from the fact that university contracts are often undertaken as discretionary activities and are the first to be cut when revenues are 

down.90

Other countries, including France, Norway, Spain and the United Kingdom, provide firths more generous tax incentives for collaborative R&D. Denmark and Hungary provide more generous tax deductions for collaborative R&D with public research institutions.91 Japan’s R&D incentive is almost twice as generous for research expenditures companies make with universities and other research institutes.92 France provides a 60 percent flat tax credit for business-funded research 

conducted at national laboratories. 

The U.S. tax code allows firms a basic research credit of 20 percent of expenses 

above a base period amount.93 But the credit is not significantly more generous than 

the regular credit. Moreover, its applicability is limited because rules require that 

such research not have any ‘‘specific commercial objective.’’ At a minimum, Congress should delete this restrictive language from current law and allow 

any research expenditures at universities to qualify for the basic research 

credit.

But Congress should go further and provide a more generous incentive for collaborative research. As part of the Energy Policy Act of 2005, Congress created an energy research credit that allowed companies to claim a credit equal to 20 percent 

of the payments to qualified research consortia (consisting of five or more firms, universities, and Federal laboratories) for energy research. In 2006, several bills were 

proposed allowing all research consortia, not just energy-related ones, to become eligible for a 20 percent flat credit.94 Congress should go further and allow firms 

to take a flat credit of 30 percent for collaborative research conducted at 

universities, Federal laboratories, and research consortia.

In addition, Congress needs to expand the Alternative Simplified Credit. Currently the ASC provides a credit of 14 percent of qualified R&D expenditures in excess of 50 percent of base period expenditures. Congress should increase the Alternative Simplified Credit rate from 14 percent to between 20 and 40 percent, depending on the level of increase in research investment. Congress 

should also broaden the definition of qualified R&D from beyond that involved in inventing a new product, to that involved in developing a new 

production process. Under current law only product R&D is eligible for the credit. 

But a key source of U.S. manufacturing renewal will come from more advanced production processes. Allowing companies to take a credit against process R&D investments would spur more of this kind of research. Taking these steps would put the 

U.S. R&D tax credit back among the top 5 most generous in the world.

5. Fund Industry-University-Government Manufacturing Research and Deployment Centers 

The debate over science and technology policy has tended to oscillate between 

those who argue that the Federal Government should fund industry to conduct generic pre-competitive R&D and those who maintain that money should be spent on 

curiosity-directed basic research at universities. This is a false dichotomy. There is 

no reason why some share of university basic research cannot be oriented toward 

problems and technical areas that are more likely to have economic or social payoffs 
48

to the nation. Science analyst Donald Stokes has described three kinds of research: 

purely basic research (work inspired by the quest for understanding, not by potential use), purely applied (work motivated only by potential use), and strategic research (research that is inspired both by potential use and fundamental understanding).95 Moreover, there is widespread recognition in the research community 

that drawing a bright line between basic and applied research no longer makes 

sense. One way to improve the link between economic goals and scientific research 

is to encourage the formation of industry research alliances that fund collaborative 

research, often at universities. 

While the government supports a few sector-based research programs, they are 

the exception rather than the rule.96 Moreover, existing ones are largely underfunded. As a result, Congress should fund a competitive Industry Research 

Alliance Challenge Grant program to match funding from consortia of businesses, businesses and universities, or businesses and national labs. This 

program would resemble the current Technology Improvement Program (TIP) operated by NIST but would have an even greater focus on broad sectoral consortia and 

would allow large firms as well as small and mid-sized ones to participate. It could 

be housed in either NSF or NIST. 

To be eligible for matching funding, firms would have to: form an industry-led research consortium of at least five firms, agree to develop a mid-term (three-to-ten 

year) technology roadmap that charts out generic science and technology needs that 

the firms share, and provide at least a dollar-for-dollar match of Federal funds. This 

initiative would increase the share of federally funded university and laboratory research that is commercially relevant. In so doing it would better adjust the balance 

between curiosity-directed research and research more directly related to societal 

needs.

6. Establish a National Innovation Foundation 

If Congress wanted to go further, it could establish a National Innovation Foundation (NIF)—a new, nimble, lean, and collaborative entity devoted to supporting 

firms and other organizations in their innovative activities.97 The goal of NIF would 

be straightforward: to help firms in the nonfarm American economy become more 

innovative and competitive. It would achieve this goal by assisting firms with such 

activities as joint industry-university research partnerships, technology transfer 

from laboratories to businesses, technology-based entrepreneurship, industrial modernization through adoption of best practice technologies and business practices, and 

incumbent worker training. By making innovation its mission, funding it adequately, and focusing on the full range of firms’ innovation needs, NIF would be a 

natural next step in advancing the innovation agenda that Congress put in place 

when it passed the America COMPETES Act. A National Innovation Foundation 

would:

• Catalyze industry-university research partnerships through national sector 

research grants.

• Expand regional innovation-promotion through state-level grants to fund activities like technology commercialization and entrepreneurial support.

• Encourage technology adoption by assisting small and mid-sized firms in taking on existing processes and organizational forms that they do not currently 

use.

• Support regional industry clusters with grants for cluster development.

• Emphasize performance and accountability by measuring and researching innovation, productivity, and the value-added to firms from NIF assistance.

• Champion innovation to promote innovation policy within the Federal Government and serve as an expert resource on innovation to other agencies.

By doing these things, NIF would address quite robustly each of the major flaws 

that weaken current Federal U.S. innovation policy. We recognize that in the current fiscal climate it will be difficult for the Federal Government to launch major 

new investment initiatives, especially since strong political forces on either side of 

the aisle oppose raising taxes or cutting spending. Nevertheless, the compelling 

need to boost innovation and productivity merits a substantial investment in NIF. 

We propose that the Federal Government fund NIF at an initial level of $1 billion 

per year (with around $350 million coming from several programs that would be 

consolidated into NIF), ramping up to $2 billion after several years. At $2 billion, 

NIF’s budget would be approximately one-third the size of NSF’s. In addition, because of its strong leveraging requirements from the private sector and state gov-
49

ernments, NIF would indirectly be responsible for ensuring that states and firms 

spend at least one dollar on innovation for every dollar NIF spent.

7. Federal Institutional Reforms to Spur Innovation 

Innovation policy is not just about tax incentives or funding for government programs. It is about a wide array of government actions that can have an impact on 

innovation. But currently, the institutional ability of the Federal Government to 

strategically and comprehensively spur innovation is more limited than it needs to 

be. To remedy that we propose two recommendations:

7a) Form an Office of Innovation Policy in OMB (i.e., an Office of Information and Regulatory Affairs for Innovation) 98

The relative absence of innovation from the agenda of many relevant Federal 

agencies—as well as interagency processes such as the centralized cost-benefit review performed by the Office of Information and Regulatory Affairs (OIRA) within 

the Office of Management and Budget (OMB)—manifests the confluence of two regulatory challenges: first, the tendency of political actors to focus on short-term goals 

and consequences; and second, political actors’ reluctance to threaten powerful incumbent actors. Courts, meanwhile, lack sufficient expertise and the ability to conduct the type of forward-looking policy planning that should be a hallmark of innovation policy. 

7b) To remedy these problems, Congress should create a White House Office of Innovation Policy that would have the specific mission of being the 

‘‘innovation champion’’ within these processes. OIP would be an entity that 

would be independent of existing Federal agencies and that would have more than 

mere hortatory influence. It would have some authority to push agencies to act in 

a manner that either affirmatively promoted innovation or achieved a particular 

regulatory objective in a manner least damaging to innovation. OIP would operate 

efficiently by drawing upon, and feeding into, existing interagency processes within 

OIRA and other relevant White House offices (e.g., the Office of Science and Technology Policy). It is important to note that OIP would not be designed to thwart 

Federal regulation; as a matter of fact, in some cases, the existence of OIP might 

lead to increased Federal regulation (e.g., more Environmental Protection Agency 

regulations might pass muster under cost-benefit analysis if innovation-related effects were calculated). 

Some might question the significance of this proposal. Isn’t creating an OIP a fairly small change to the system? Certainly adding OIP to the existing mix is a smaller 

change than jettisoning the existing substantive agencies in favor of a new agency 

with authority to regulate, and promote, innovation across all government agencies. 

But implementing this proposal will significantly change the regulatory environment. First, an entity focused on innovation would add an important new voice to 

the regulatory conversation. There would now be an entity speaking clearly and 

forthrightly on the centrality of innovation. Second, and more important, OIP would 

not merely have a voice: it would be able to remand agency actions that harm innovation. It would also have as part of its mission proposing regulation that benefits 

innovation. This is no small matter. Indeed, it would change the regulatory playing 

field overnight. 

To those who might oppose an OIP on the grounds that making predictions about 

the future is very difficult and that experts are often wrong when they make such 

predictions, our response is straightforward: Agencies are already making predictions about the future (whether consciously or not) when they make laws that 

affect innovation. They are simply doing so in a manner that is unsystematic, haphazard, and subject to undue influence by well-funded incumbents. We can do better.

Conclusion 

For over half a century, the United States led the world in innovation on a perGDP and per-capita basis. This leadership role not only enabled America to be the 

leading military power, it enabled us to be the leading economic power, with the 

resultant economic and social benefits that came with that. But now more than 

ever, the American standard of living depends on innovation: To be sure, companies 

are the engines of innovation and the United States has an outstanding market environment to fuel those engines. Yet firms and markets do not operate in a vacuum. 

By themselves they do not produce the level of innovation and productivity that a 

perfectly functioning market would. Even indirect public support of innovation in 

the form of basic research funding, R&D tax credits, and a strong patenting system, 
50

important as they are, are not enough to remedy the market failures from which 

the American innovation process suffers. 

At a time when America’s historic lead in innovation has evaporated and its relative innovation competitiveness continues to shrink, when more and more high-productivity industries are in play globally, and when other nations are using explicit 

public policies to foster innovation, the United States cannot afford to remain complacent. Relying solely on firms acting on their own will increasingly cause the 

United States to lose out in the global competition for high-value added technology 

and knowledge-intensive production. Congress has an opportunity to take steps now 

to stop and reverse this slide, but only if it adopts the kinds of policies and makes 

the kinds of investments needed to help firms in the—United States do a better job 

of driving innovation here at home.

Endnotes:

1 Elhanan Helpman, The Mystery of Economic Growth (Cambridge, Massachusetts: Belknap 

Press, 2004). 2This is not to say that these nations have not developed some technology-based jobs. It is 

to say that relative to the rest of their economies, technology jobs will be a much smaller share 

than is the case in the United States. For an analysis of how, because of very low wages, China 

is specializing in manual assembly production, see Thomas Hout and Jean Lebreton, ‘‘The Real 

Contest Between America and China,’’ Asian Wall Street Journal, September 16, 2003. 3 Ronald J. Oakley, God’s Country: America in the Flies, (New York: Red Dembner Enterprises, 1986), 239. 4 Joseph Schumpeter, Capitalism, Socialism and Democracy (New York: George Allen & 

Unwin Ltd.,1975), 132. 5Total private industrial research and development expenditures as a share of GDP grew 28 

times from 1920 to 1960 (0.07 percent to 2.0 percent). By the mid-1950s, over 3,000 companies 

had R&D facilities. Public and private R&D expenditures grew from $3.6 billion in 1940 to $23 

billion in 1967 (in constant dollars). See http://www.nsf.gov/sbe/srs/seind00/c1/tt01-03.htm. 6The process was the same with scientists. The 1900 census had only two scientific occupations: chemical assayers and metallurgists. 7 Under the census categories, ‘inventor’ was a separate occupation since 1900, but was downgraded to a title within professional workers not elsewhere classified in 1940. 8 Robert D. Atkinson, ‘‘The Globalization of R&D and Innovation: How Do Companies Choose 

Where to Build R&D Facilities?’’ October 4, 2007, Testimony to the House Science Committee, 

http://www.itif.org/index.php?id=102; Richard Rosenbloom and William J. Spencer. Eds. Engines of Innovation: U.S. Industrial Research at the End of an Era (Boston, Massachusetts: Harvard Business School Press, 1996). 9 Richard Florida, ‘‘The World is Spiky,’’ Atlantic Monthly, October 2005, 48–51, http://

www.isites.harvard.edu/fs/docs/icb.topic30774.files/2-2¥Florida.pdf. 10Pre-competitive research is defined as everything before the development of a saleable prototype. 11 Raymond E. Corey, Technology Fountainheads: The Management Challenge of R&D Consortia (Boston: Harvard Business School Press, 1997); Andrew P. Cortell, Mediating 

Globalization: Domestic Institutions and Industrial Policies in the United States and Britain (Albany, New York: SUNY Press, 1997). 12 Robert D. Atkinson et. al, ‘‘Addressing the STEM Challenge by Expanding Specialty Math 

and Science High Schools,’’ Information Technology and Innovation Foundation, March 2007, 

http://www.itif.org/publications/addressing-stem-challenge-expanding-specialty-math-andscience-high-schools. 13 Authors’ analysis of data on scientific articles from National Science Foundation, ‘‘Science 

and Engineering Indicators 2008,’’ National Science Foundation, 2008, Appendix Table 5–34; 

population data from the World Bank World Development Indicators database. 14Organization for Economic Co-operation and Development, OECD Science, Technology and 

Industry Scoreboard 2007, http://ocde.p4.siteinternet.com/publications/doifiles/922007081

P1G2.xls. 15Organization for Economic Co-operation and Development, OCED S&T and Industry Outlook, 2004. 16Organization for Economic Co-operation and Development, OECD Science, Technology and 

Industry Scoreboard 2005, 2005. 17 U.S. Bureau of Economic Analysis, ‘‘U.S. Current-Account Deficit Increases in 2006,’’ News 

Release, March 14, 2007, www.bea.gov/newsreleases/international/transactions/2007/pdf/

transannua106¥fax.pdf. 18 ‘‘Science and Engineering Indicators: 2010,’’ National Science Foundation, 2010, http://

www.nsf.gov/statistics/seindl0/cO/cOs3.htm. 19 Booz Allen Hamilton and INSEAD, ‘‘Innovation: Is Global the Way Forward?’’ (n.p.: Booz 

Allen Hamilton, 2006), 3. 20 U.S. Bureau of Economic Analysis, ‘‘Real Value-Added by Industry.’’ 21While venture capital in the United States more than doubled from $113 billion in 1996 

to $26.4 billion in 2006, the amount invested in startup- and seed- stage deals fell from $1.3 

billion to $1.1 billion. The amount invested in early-stage deals rose from $2.8 billion to $4.0 

billion between 1996 and 2006, but the early-stage share of total venture funding fell from about 

25 percent to about 15 percent. Similarly the number of startup- and seed-stage deals fell from 

504 to 342; the number of early-stage deals rose from 762 to 918, but this represented a relative 

decline from about 30 percent to about 25 percent of all deals. Authors’ analysis of 2006 data 
51

from PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, available at https://www.pwcmoneytree.com/MTPublic/ns/nav/jsp?page=historical. 22Titus Galama and James Hosek, U.S. Competitiveness in Science and Technology (Santa 

Monica, California: RAND Corporation, 2008), 67. 23Organization for Economic Co-operation and Development, OECD Science Technology and 

Industry Scoreboard 2005. 24Organization for Economic Co-operation and Development, OECD Science, Technology, and 

Industry Scoreboard 2007, 2007, http://oecd.p4.siteinternet.com/publications/doifiles/

922007081PIG2.xls. 25 Norman Augustine, Is America Falling Off the Flat Earth? (Washington: National Academies Press, 2006), 53. 26 Jeffrey L. Furman and Richard Hayes, ‘‘Catching up or standing still? National innovative 

productivity among ‘follower’ countries, 1978–1999,’’ Research Policy 33 (2004): 1329–1354. 27See Abe Tadahiko, ‘‘What is Service Science?’’ Research Report 246, Fujitsu Research Center, Tokyo, Japan, December 2005. The America COMPETES Act calls for a National Academy 

of Sciences study of service science (a useful first step) but does not create any means for the 

Federal Government to advance this discipline or diffuse its findings to foster innovation in 

services. See America COMPETES Act, section 1005, P.L. 110–69, 121 Stat. 593 (2007). 28 Issues of the State Science and Technology Institute’s Weekly Digest provides examples 

(www.ssti.org). 29 In this context, ‘‘civilian’’ means non-defense-focused technology and innovation promotion 

agencies focusing on private sector and non-defense public sector technology and innovation funding and support. 30 Information about foreign technology and innovation-promotion agencies is from the following sources: Denmark-Danish Technological Institute Web site, www.danishtechnology.dk;

Finland—Tekes Web site, www.tekes.fi/eng, and personal communication with Peter 

Westerstra ̊hle of Tekes; France—OECD Reviews of Innovation Policy: France (Paris: Organization for Economic Cooperation and Development, 2006); Iceland—Technological Institute of Iceland Web site, www.iti.is/english; Ireland—Enterprise Ireland Web site, www.enterprise-ireland.com; Japan—NEDO Web site, www.nedo.go.jp/english, and personal communication with 

Hideo Shindo of NEDO; Netherlands—TNO Web site, www.tno.nl/index.cfm?Taal=2; New Zealand—New Zealand Trade and Enterprise Web site, www.nzte.govt.nz; Norway—Innovation Norway Web site, www.innovasjonnorge.no; South Korea—Korea Industrial Technology Foundation 

Web site, http://lenglish.kotef.or.kr; Spain—CDTI Web site www.cdti.es/

index.asp?idioma=es&r-1024*768; Sweden-Vinnova Web site, www.vnnova.se/misc/menyer-ochfunktioner/Global-meny/In-English; Switzerland-CTI Web site, www.bbt.admin.ch/kti/

index.html?lang=en; United Kingdom Technology Strategy Board Web site, www.dti.gov.uk/innovation/technologystrategyboard. 31 It is difficult to obtain information on actual results. However, discussions with government 

officials suggest that overall, the programs have been successful. Moreover, agencies work to improve performance. For instance, Tekes conducts regular evaluations of specific programs. An 

example of such an evaluation may be found at http://www.tekes.fi/julkaisut/

FENIX¥arviointi.pdf (in Finnish, with English summary). 32Technology Strategy Board Web site, www.dti.gov.uk/innovation/technologystrategyboard/

page40223.html. 33Tekes Web site, http://tekes.fi/eng/contact/personnel/hallitus.htm. 34Technology Strategy Board Web site, www.dti.gov.uk/innovation/technologystrategyboard/

page40218.html. 35 United Kingdom Cabinet Office, ‘‘Public Bodies: A Guide for Departments,’’ (June 2006). 36 Expenditures for Finland, Sweden, Japan and South Korea are based on personal correspondence between the authors and representatives of the respective nations’ innovation-promotion agencies. Inference for the United States is from the authors’ analysis. 37Testimony of Don Hillebrand, Ph.D., Director, Center of National Transportation Research 

at Argonne National Laboratory, to House Appropriations Subcommittee on Energy and Water 

Development, February 14, 2008. 38 Auto Industry UK, ‘‘Germany invests Ö420M in lithium-ion battery development,’’ May 13, 

2008, http://www.autoindustry.co.uk/news/13-05-08¥2. 39Forfas, Service Innovation in Ireland—Options for Innovation Policy, (Dublin, Ireland: 

Forfas, September 2006), 10, http://www.forfas.ie/media/forfas060928¥services¥

innovation¥full¥report.pdf. 40Ö100 million converted into $120 million according to exchange rates at the time. (Ö100 million converts to $135 million in today’s dollars.) 41Tekes, the Finnish Funding Agency for Technology and Innovation, Ö (Helsinki, Finland: 

Tekes, 2006). 42While this is a small sampling, a comprehensive inventory of European services innovation 

policies is available via the European Innovation Policy Project in Services available at http:/

/www.europe-innova.org/serv/et/Doc?cid=9268&lg=EN. 43 Robert D. Atkinson, ‘‘Expanding the R&D Tax Credit to Drive Innovation, Competitiveness 

and Prosperity,’’ Information Technology and Innovation Foundation, April 2007, http://

www.itif.org/node/1280. 44 Bronwyn Hall and John van Reenen, ‘‘How Effective Are Fiscal Incentives for R&D? A Review of the Evidence,’’ Research Policy 29 (2000): 449–469. 45Dominique Guellec and Bruno van Pottelsberghe de la Potterie, ‘‘Does Government Support 

Stimulate Private R&D?’’ OECD Economic Studies 29 (1997). 46 In fact, government support declined significantly over this period and as a result, the 

United States was one of the few nations where the share of R&D-to-GDP ratio fell between 

1991 and 2002. 
52

47Martin Falk, ‘‘What Drives Business R&D Intensity Across OECD Countries?’’ Paper Presented at the DRUID 10th Anniversary Summer Conference, Copenhagen, Denmark (June 27–

29, 2005). 48 In 1985, the rate was reduced from 25 to 20 percent, and other restrictions (such as the 

50 percent rule and the recapture of benefits through reductions in expensing) were put in place 

in the late 1980s. 49K.C. Whang, A Guide to the Research Tax Credit: Why We Have It, How It Works, and How 

It Can Be Improved (Washington, DC: U.S. Congress, Working Paper Series, Offered to the Joint 

Economic Committee Minority, Dec. 1998). 50 Robert Atkinson and Scott Andes, ‘‘U.S. Continues to Tread Water in Global R&D Tax Incentives,’’ Information Technology and Innovation Foundation, 2009, http://www.itif.org/

filesJWM-2009-03-rd.pdf. 51David M. Hart, ‘‘Global Flows of Talent: Benchmarking the United States,’’ Information 

Technology and Innovation Foundation, November 2006, 12, http://www.itif.org/files/HartGlobalFlowsofTalent.pdf. 52 Australian data are drawn from the Australian Department of Immigration and Multicultural Affairs (DIMA) annual Immigration Update, http://www.immi.gov.au/media/publications/statistics/. New Zealand data are drawn from OECD, SOPEMI 2006, 303–304. Canadian 

data are drawn from Citizenship and Immigration Canada annual Facts and Figures, accessible 

at http://www.cic.gc.ca/english/research/menu-fact.html. All figures are for principal applicants only. 53 However, the 65,000 cap doesn’t apply to all countries. For example the United States-South 

Korea Free Trade Agreement allows for a higher number of H–1B visa applicants from South 

Korea. 54Gregory Tassey, ‘‘Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D 

Strategies,’’ December 2009, forthcoming in Journal of Technology Transfer, June 2010. 55 Elvio Accinelli, Silvia London, and Edgar J. Sanchez Carrera, ‘‘Complimentarity and Imitative Behavior in the Populations of Firms and Workers,’’ 2008, http://www.ssrn.com/

abstract=1136323, (accessed on February 28, 2008). 56See Charles I. Jones and John Williams, ‘‘Measuring the Social Return to R&D,’’ Quarterly 

Journal of Economics 113 (1998): 1119–1135; Edwin Mansfield, ‘‘Social Returns from R&D: 

Findings, Methods, and Limitations,’’ Research Technology Management 34 (1991): 24–27; Eric 

Brynjolfsson, Lauren Hitt, and Shinkyu Yang, ‘‘Intangible Assets: How the Interaction of Information Technology and Organizational Structure Affects Stock Market Valuations,’’ Brookings 

Papers on Economic Activity 1, (2000): 137–199. 57On the conflict between firms’ desires to appropriate university research capacity and universities’ broader social and economic role in promoting the free flow of knowledge, see Richard 

K. Lester and Michael J. Piore, Innovation: The Missing Dimension (Cambridge: Harvard University Press, 2004). 58Daniel Castro, ‘‘Improving Health Care: Why a Dose of IT May Be Just What the Doctor 

Ordered,’’ Information Technology and Innovation Foundation, 2007, http://www.itif.org/node/

1238. 59Shane Ham and Robert Atkinson, ‘‘Modernizing Home Buying: How IT Can Empower Individuals, Slash Costs, and Transform the Real Estate Industry,’’ Progressive Policy Institute, 

2003. 60 Barry LePatner, Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar 

Construction Industry (Chicago: University of Chicago Press, 2007). 61For a comprehensive overview of the causes and consequences of geographic industry clustering, see Joseph Cortright, Making Sense of Clusters: Regional Competitiveness and Economic 

Development (Washington: Brookings Institution, 2006). On the geographic clustering of innovation and the special importance of large metropolitan areas for innovation, see Andrew Reamer 

with Larry Icerman and Jan Youtie, Technology Transfer and Commercialization: Their Role in 

Economic Development (Washington: U.S. Department of Commerce, Economic Development Administration, 2003), 57–110. 62The authors’ analysis of Bureau of Economic Analysis data on value added and employment 

at the national level and Economy.com data on the geographic distribution of industry employment shows that, for the 17 nongovernmental industry supersectors other than real estate (accommodation and food services; administrative and waste management services; arts, entertainment, and recreation; construction; educational services; finance and insurance; health care and 

social assistance; information; management of companies and enterprises; manufacturing; mining; other services; professional, scientific, and technical services; retail trade; transportation 

and warehousing; utilities; and wholesale trade), the cross-industry correlation between an industry’s Herfindahl index of employment concentration at the county or metropolitan level (a 

measure of the extent to which an industry is geographically concentrated rather than spread 

out evenly across the nation) at the beginning of the business cycle and the growth of inflationadjusted value added per job in the industry over the course of the business cycle increased over 

the course of the 1979–89, 1989 2000, and 2000–05 periods. (Business cycles here are approximated by periods that begin and end in the last pre-recession year. The most recent period ends 

in 2005 because of data limitations.) At the county level, the correlation coefficient rose from 

¥0.18 in 1979–89 to ¥0.07 on 1989–2000 to 0.36 in 2000–05. At the metropolitan level, it rose 

from ¥0.12 in 1979–89 to 0.00 in 1989–2000 to 0.15 in 2000–05. 63For a detailed treatment of this issue in the context of international trade, see Ralph 

Gornory and William J. Baumol, ¥ (Cambridge, Massachusetts: MIT Press, 2000). 64Dani Rodrik, ‘‘Industrial Policy for the Twenty-First Century,’’ Kennedy School of Government Working Paper, Harvard University, 2004, 38. 65Dan Breznitz, Innovation and the State (New Haven, Connecticut: Yale University Press, 

2007), 29. 
53

66 Annual U.S. trade deficits have subsequently shrunk somewhat, to $731.2 billion in 2007 and to $673.3 billion in 2008; however, these annual trade deficits are still extremely high. 67 ‘‘S.1466: Trade Enforcement Act of 2009,’’ Govtrack.us, 13, http://www.govtrack.us/congress/bill.xpd?bill=s111-1466. See also Robert Atkinson, ‘‘Combating Unfair Trade Practices in 

the Innovation Economy,’’ Testimony before the Committee on Finance, United States Senate, 

May 22, 2008, http://www.itif.org/files/atkinsonfinancecommitteetestimony.pdf. 68 Robert D. Atkinson et. al, ‘‘Addressing the STEM Challenge by Expanding Specialty Math 

and Science High Schools.’’ 69Many MSHS students are able to take these extra courses by taking regular education graduation requirements such as Economics, American Government, Physical Fitness, and Health 

online at the Florida Virtual High School. 70Source for national figures are: U.S. Department of Education, National Center for Education Statistics, ‘‘Digest of Education Statistics,’’ Table 18, http://nces.ed.gov/programs/digest/d05/tables/dtO5¥181.asp, and U.S. Department of Education, National Center for Education Statistics, ‘‘2000101 Baccalaureate and Beyond Longitudinal Study,’’ http://nces.ed.gov/

das/library/tables¥listings/show¥nedre.asp?rt=p&tableID=1378. 71Some of the expansion would come from construction and creation of new MSHSs. Costs for building such a high school can range from around $11 million (for rehabilitating an existing 

building) to over $50 million for constructing a new MSHS in an area where land prices are 

more expensive. Some expansion of enrollment would come from expanding existing high 

schools, where the price would presumably be less. However, even at these schools the costs can 

be higher, particularly for more extensive laboratory equipment. Overall these funds will be 

used as an incentive to spur states and local school districts to create more specialty math and 

science high schools. 72 Richard Freeman, ‘‘Investing in the Best and the Brightest: Increased Fellowship Support 

for American Scientists and Engineers,’’ The Brookings Institute, 2006, http://

www.brookings.edu/views/papers/200612freeman.pdf. 73 Established in the early years of NSF, the program provides the nation’s most promising 

graduate students with great flexibility in selecting the university of their choice and gives them 

the intellectual independence to follow their research ideas unfettered by the exigencies of mode 

of support. 74Donald Wulff, Ann Nquiest, and Jo Sprague, ‘‘The Development of Graduate Students as 

Teaching Scholars: A four-year longitudinal study,’’ in Paths to the professoriate: Strategies for 

enriching the preparation of future faculty, ed. Donald Wulff and Ann Austin (San Francisco: 

University of Chicago Press, 2006); Chris Golde and Timothy Dore, ‘‘At Cross Purposes: What 

the experiences of today’s doctoral students reveal about doctoral education,’’ Pew Charitable 

Trusts, 2001, http://www.phd-survey.org/report%20final.pdf. 75 Jody Nyquist , BJ Woodford , and Dale Rogers, ‘‘Re-envisioning the Ph.D.: A challenge for 

the twenty-first century,’’ in Paths to the professoriate: Strategies for enriching the preparation 

of future faculty, ed. Donald Wulff and Ann Austin (San Francisco: University of Chicago Press, 

2006). 76 Chris Golde and Timothy Dore, ‘‘At Cross Purposes: What the experiences of today’s doctoral students reveal about doctoral education.’’ 77Steven Campbell, Angela Fuller and David Patrick, ‘‘Looking beyond research in doctoral 

education,’’ Frontiers in Ecology and the Environment, 3, no. 3, (2005), http://

www.biology.duke.edu/jackson/ecophys/153-160¥ESA¥April05.pdf 78Moreover, research suggests that there is little difference in ethical behavior by faculty 

whether they are funded by industry or government; see Brian Martison, Lauren Crain, Melissa 

Anderson, and Raymond De Vries, ‘‘Institutions’ Expectations for Researchers’ Self Funding, 

Federal Grant Holding, and Private Industry Involvement: Manifold Drivers of Self-Interest and 

Research Behavior,’’ Academic Medicine, 84, no. 11 (2009). 79Government Accountability Office, ‘‘Streamlined Visas Mantis Program Has Lowered Burden,’’ GAO 05–198, February 2005, http://www.gao.gov/new.items/d05198.pdf 80David Hart, ‘‘Global Flows of Talent: Benchmarking the United States.’’ 81 U.S. Small Business Administration, ‘‘Description of the Small Business Technology Transfer Program,’’ STIR, http://www.sba.gov/aboutsba/sbaprograms/sbir/sbirstir/

SBIR¥STTR¥DESCRIPTION.html. 82Dan Berglund, State Science and Technology Institute, in-person interview with Rob Atkinson, January, 2010. 83 Connecticut’s Yankee Ingenuity program and Pennsylvania’s Ben Franklin Technology Partners program work in a similar manner. See Yankee Ingenuity Competition, http://

www.ctinnovations.corn/funding/ccef/yankee.php and Ben Franklin Technology Partners, http:/

/www.benfranklin.org/about/index.asp. 84The Great Lakes Entrepreneur’s Quest, a program in Michigan, is similar. Its organizers 

represent Michigan’s entrepreneurial community: academics, investors, lawyers, CPAs, corporate 

executives and other entrepreneurs. Program gives competitors a chance to win seed capital and 

valuable services (e.g., legal, accounting, and consulting) and provides other opportunities to 

help entrepreneurs launch or grow a business. 85This kind of assistance to states with unsuccessful proposals is based on similar assistance 

that JumpStart, a nonprofit pre-venture capital fund in the Cleveland area, and Adena Ventures, an Athens, OH-based venture capital firm, provide to applicants whose proposals are not 

yet fundable. See www.jumpstartinc.org/Process/Assist.aspx and www.adenaventures.com/

serviceprograrns/opsassist.aspx. 86 Jane E. Fountain and Robert D. Atkinson, Innovation, Social Capital, and the New Economy: New Federal Policies to Support Collaborative Research, Progressive Policy Institute, July 

1998, http://www.ppionline.org/ppi¥ci.cfxn?knlgAreaID=140&subseclD=293 &contentID=1371. 87L. Branstetter and M. Sakakibara, ‘‘Japanese Research Consortia: A Microeconometric 

Analysis of Industrial Policy,’’ Journal of Industrial Economics, 46 (1998): 207–233. 
54

88For example, spillovers from company-funded basic research are very high—over 150 percent according to one study: Albert Link, ‘‘Basic Research and Productivity Increase in Manufacturing: Additional Evidence,’’ The American Economic Review, 71, no. 5 (Dec. 1981): 1111–1112. 89 According to NSF, industrial R&D support to U.S. universities and colleges in current dollars reached its peak in 2001 and has declined every year since then (to 2004). The share of 

academic R&D provided by industry peaked in 1999 and has declined every year since. See Alan 

I. Rapoport, ‘‘Where Has the Money Gone? Declining Industrial Support of Academic R&D,’’ National Science Foundation, Division of Science Resources Statistics, September 2006, http://

www.nsf.gov/statistics/infbrief/nsf06328/. 90 Barry Bozeman and Albert N. Link, ‘‘Tax Incentives for R&D: A Critical Evaluation,’’ Research Policy 13, no. 1 (1984): 21–31. 91Denmark looks to promote public and private co-operation in R&D by having a 150 percent 

deduction of investments co-financed by a public university or research institute and the industry. 92 Jacek Warda, ‘‘Tax Treatment of Investment in Intellectual Assets: An International Comparison,’’ OECD Science, Technology and Industry Working Papers, 4, 2006, Appendix 1.1. 93 Expenditures firms make to outside organizations are treated two ways. Qualified expenses 

cover just 65 percent of payments for contract research, unless the payments are to a qualified 

non-profit research consortium at which point the company can count 75 percent of the payments as qualified expenses. However, firms contracting with certain nonprofit organizations 

(e.g. universities) to perform basic research may claim a credit of 20 percent. 94The 109th Senate considered versions of HR.4297 (Thomas, (R–CA)), S.14 (Stabenow (D–

MI)), S.2199 (Domenici (R–NM)), and S.2357 (Kennedy (D–MA)). S.2357 would institute a flat 

credit for payments to qualified research consortia. 95Donald Stokes, ‘‘Pasteur’s Quadrant,’’ Brookings Institution, 1997. 96See the Focus Center Program, http://fcrp.src.org/member/about/about¥centers.asp. 97 Robert Atkinson and Howard Wial, ‘‘Boosting Productivity, Innovation, and Growth 

Through a National Innovation Foundation,’’ Information Technology and Innovation Foundation and The Brookings Institution, April 2008, http://www.itiF.org/publications/boosting-productivity-innovation-and-growth-through-national-innovation-foundation. 98This is based on a report by Stuart Benjamin and Arti Rae, ‘‘Structuring U.S. Innovation 

Policy: Creating a White House Office of Innovation Policy,’’ Information Technology and Innovation Foundation, June 2009, http://www.itif.org/files/WhiteHouse¥Innovation.pdf.

BIOGRAPHY FOR ROBERT D. ATKINSON

Robert Atkinson is the founder and president of the Information Technology and 

Innovation Foundation, a Washington, DC-based technology policy think tank. He 

is also author of the State New Economy Index series and the book, The Past And 

Future Of America’s Economy: Long Waves Of Innovation That Power Cycles Of 

Growth (Edward Elgar, 2005). He has an extensive background in technology policy, 

he has conducted ground-breaking research projects on technology and innovation, 

is a valued adviser to state and national policy makers, and a popular speaker on 

innovation policy nationally and internationally. 

Before coming to ITIF, Dr. Atkinson was Vice President of the Progressive Policy 

Institute and Director of PPI’s Technology & New Economy Project. While at PPI 

he wrote numerous research reports on technology and innovation policy, including 

on issues such as broadband telecommunications, Internet telephony, universal 

service, e-commerce, e-government, middleman opposition to e-commerce, privacy, 

copyright, RFID and smart cards, the role of IT in homeland security, the R&D tax 

credit, offshoring, and growth economics. 

Previously Dr. Atkinson served as the first Executive Director of the Rhode Island 

Economic Policy Council, a public-private partnership including as members the 

Governor, legislative leaders, and corporate and labor leaders. As head of RIEPC, 

he was responsible for drafting a comprehensive economic strategic development 
55

plan for the state, developing a ten-point economic development plan, and working 

to successfully implement all ten proposals through the legislative and administrative branches. Prior to that he was Project Director at the former Congressional Office of Technology Assessment. While at OTA, he directed The Technological Reshaping of Metropolitan America, a seminal report examining the impact of the information technology revolution on America’s urban areas. 

He is a board member or advisory council member of the Alliance for Public Technology, Internet Education Foundation, NetChoice Coalition, the Pacific Institute for 

Workforce Innovation, and the University of Oregon Institute for Policy Research 

and Innovation. He is also chair of the Congressionally-created National Surface 

Transportation Infrastructure Financing Commission. He also serves on the advisory panel to Americans for Computer Privacy, is an affiliated expert for the New 

Millennium Research Council, a member of the editorial board of the Journal of 

Electronic Government and the Journal of Internet Policy, a member of the Reason 

Foundation’s Mobility Project Advisory Board, a member of the Global Innovation 

Forum Brain Trust and a Nonresident Senior Fellow at the Brookings Institution. 

Dr. Atkinson was appointed by President Clinton to the Commission on Workers, 

Communities, and Economic Change in the New Economy. He is also a member of 

the Task Force on National Security in the Information Age, co-chaired by Markle 

Foundation president Zoe Baird and former Netscape Communications chairman 

James Barksdale. In 1999, he was featured in ‘‘Who’s Who in America: Finance and 

Industry.’’ In 2002, he was awarded the Wharton Infosys Business Transformation 

Award Silver Medal. In addition, Government Technology Magazine and the Center 

for Digital Government named him one of the 25 top Doers, Dreamers and Drivers 

of Information Technology. In 2006, Inc. Magazine listed Atkinson as one of 19 

Friends of Small Business in Washington. Ars Technica listed Atkinson as one of 

2009’s tech policy People to Watch. Dr. Atkinson has testified before a number of 

committees in Congress and has appeared in various media outlets including CNN, 

Fox News, MSNBC, NPR, and NBC Nightly News. He received his Ph.D. in City 

and Regional Planning from the University of North Carolina at Chapel Hill in 

1989.

Chairman WU. Thank you very much, Dr. Atkinson. 

Dr. Breznitz, please proceed. 

STATEMENT OF DR. DAN BREZNITZ, ASSOCIATE PROFESSOR, 

THE SAM NUNN SCHOOL OF INTERNATIONAL AFFAIRS, 

GEORGIA INSTITUTE OF TECHNOLOGY 

Dr. BREZNITZ. Mr. Chairman and Members of the Committee, 

thank you for the opportunity to take part in this hearing. In this 

testimony, I hope to do three things: clarify some baseline points 

with regards to innovation policy, give an example of successful foreign innovation policy, its negative and positive consequences, conclude by sketching the need for the United States to concentrate 

on all three roles government can play in stimulating more innovation, and urge for new Federal-state partnerships. 

There are some baseline points to be made when discussing innovation policy. Stimulating and promoting innovation is a critical 

role of government and is a very different strategic exercise from 

promoting specific industries, sectors, or even skills. Good innovation policies need to allow experimentation and change. In order to 

promote innovation, there is a need to balance with different interests of the public represented by the elected government and the 

private actors who are going to be the major agents of innovation 

in our country. 

Two key strategic constraints: When you talk about innovationbased growth, it calls for a different logic of policies. You have undefined markets and undefined products. You basically aim to come 

up with new technologies and new products which you don’t know 

what they are. It is a very different exercise when trying to restructure the car industry where we know what cars are, we know 
56

what the troubles are, we know what the markets are, and we have 

a pretty good idea of how to make better cars and what skills we 

need. When we think about the ideal kind of innovation policy, we 

aim to equip the economy with agents of change that are stimulated for action in ways we cannot yet foresee. 

Second, production is now globally fragmented. Activities, not 

whole industries, are clustered in specific nations and we have to 

take that into account if we want to understand how our innovation activities are going to impact job growth in this country. Government needs to make innovation less risky and more rewarding 

for entrepreneurs in order to maximize innovating activities. It also 

needs to ensure positive global-local interconnection in order to 

maximize our national spillovers. The ways in which different 

countries have successfully done this have led to very diverse national industries with different outcomes in terms of economic distribution as well as the current and future challenges each of those 

models have. 

To optimize the impact of a public funding of innovation, governments need to meet three challenges: trust—the need to establish 

trust between government and those private actors and we need 

the private actors themselves; coordination—the need to coordinate 

R&D across different institutional actors; and motivation—the need 

to motivate private actors to innovate in a way that contributes to 

the domestic economy, which is the main reason for public funding 

in the first place. 

Broadly speaking, there are three roles by which government 

successfully supports this: public finance of private innovation 

where, if a government supplies capital to private agents who use 

it to engage in R&D, public production of innovation and a 

facilitator role. Here the main emphasis is on the government role 

in anchoring professional interinstitutional networks and more 

generally on the government’s role in fostering relations with and 

between private actors. The importance of these facilitating policies 

cannot be overemphasized as government-sponsored networks have 

been shown to be one of the most important factors for creation of 

a favorable environment for radical innovation, and Dr. Atkinson 

just mentioned the semiconductor industry. 

Let me give you the example of Israel. Facing crisis starting in 

1968 with 886 R&D workers with academic education in the whole 

industrial sector, probably less than what we have in this building 

right now, the government opted to focus on what they called 

science-based industry and concentrated on financial and facilitator 

roles, implementing horizontal R&D policy, meaning trying to sponsor R&D activities to novel products in all industries, all sectors, 

and emphasizing the conduction of the local and the global, especially with the United States, the BIRD [Binational Industrial Research and Development] Foundation, which is cosponsored by the 

U.S. government and the Israeli government, and anchoring cooperation around innovation. Outcomes have been the great success of Israel as the supplier of new technologies and products, the 

largest number of high-tech companies after the United States—

more than the EU in total—and the challenges, however, with industry migrates to the United States, exactly the opposite of what 

we think about in globalization, building of sustainable success and 
57

major economic inequality, mainly because you have a high-tech 

sector but you have measurable positive spillover to the rest of the 

economy. 

To conclude, innovation policy can significantly enhance economic 

growth and national competitiveness. Innovation policies are contact specific and need to evolve in tandem with industry. To be successful at implementing innovation policies, government needs to 

be able to engage in all three roles: financier, producer and 

facilitator. In the U.S., much attention has been given to the financier role. I argue that much more attention needs to be given to 

the facilitator role, and in order to be successful in this, we have 

to devise new, and build upon old, Federal-state partnerships as 

well as public-private partnerships. I think it is time that we apply 

innovation to our own innovation policies. 

Thank you for the hearing. 

[The prepared statement of Dr. Breznitz follows:]

PREPARED STATEMENT OF DAN BREZNITZ

Chairman Wu, Ranking Member Smith, and members of the Subcommittee, thank 

you for the opportunity to take part in this hearing. I was invited here to talk about 

innovation for economic growth, and what we can learn from the extensive efforts 

of other nations to excel in this domain so we can secure the long-term economic 

welfare of the American people. 

There are some baseline points to be made when discussing innovation policy:

1. Spurring and promoting innovation is a critical role of government, and is 

a very different strategic exercise from promoting specific industries, sectors, 

or even skills.

2. Good innovation policy needs to allow experimentation and change as it, and 

the industries it helps to develop, evolve.

3. In order to promote innovation there is a need to balance the different interests of the public, represented by the elected government, and private companies and individuals that will be the major agents of innovation in our country.

Current U.S. policy debates have been clouded by significant misunderstandings 

in relation to these principles. A careful analysis of other nations’ efforts to use the 

tremendous forces of competition and entrepreneurship to spur innovation, can help 

us sort out these misunderstandings and improve our innovation policies. 

In this testimony I will:

1. Lay out the challenges associated with government efforts to enable innovation.

2. Describe three roles a government can take on to support rapid innovationbased growth and illustrate how some other countries have implemented 

policies to fill these roles.

3. Discuss the lessons the U.S. might take from international experiences in innovation policy.

Innovation, growth and the U.S.

Innovation has been a tremendous force for good. Innovations in industry, health, 

and agriculture have advanced the quality of life of the American people to such 

a degree that today the average American child has a much better, more comfortable, luxurious, and healthy life than the Emperor of China had in the beginning 

of the 20th century. Thanks to innovation, the world no longer faces imminent hunger, diseases that were once both common and fatal are vanquished, and the sum 

set of appliances in an average American home gives its owner the ability to do 

things that were impossible with a regiment of workers and scholars just a few generations ago. We might forget, but what we now consider as low-tech traditional industries, were, only a few decades ago, the cutting edge of high-technology. Indeed, 

in the 1967 movie, The Graduate, Mr. McGuire famously said to Benjamin one word 

that embodied the future of industrial innovation: ‘‘Plastics.’’ For this country to 

stay a world leader, our children will need to be able to react in the same bemused 
58

way we do to the idea of plastics as the future, when someone in circa 2050 would 

say: ‘‘Nano-technology.’’

The U.S. has grown to prominence as the place where people with vision and 

drive can become educated, generate novel ideas, and secure specialized financing 

to transform their ideas into superior products and services. Furthermore, it was in 

the U.S. where one could pursue that course without its being squashed in infancy 

by stronger corporations, the legal system, or the growing costs of doing business 

and staying independently employed. With each new innovation-based revolution—

agriculture, steel, electricity, internal combustion engine, aviation, space, information technology, and biotechnology—the U.S. has led the world, becoming richer and 

stronger as a result. This has been true not only with regard to novel technologies 

brought to the market for the first time, but with regard to new ideas all along the 

production chain. To accomplish this, the United States has developed the world’s 

best centers of higher education and research and the world’s most efficient system 

for transforming ideas into marketable realities. Today, however, in each and every 

part of this system we face increased international competition.

Choices matter

Contrary to commonly held belief, the current processes of intensified 

globalization give countries a larger number of rapid-innovation-based economic 

growth alternatives than they had in the past. A general truism today is that both 

the onslaught of international economic forces and the fragmentation of production 

limit the power of governments to set unique courses of successful economic growth. 

And yet, these same conditions have given countries more choices of action than 

ever before, for the increasing complexity and openness of the world allow nations 

that wish to engage with the international economic system a far larger number of 

entry points than in any other period. This does not mean that stimulating development has become an easier task for government, nor that success, if it is achieved, 

is without cost.

Rapid-Innovation-Based growth—the misunderstood strategic policy implication

The case of rapid-innovation-based growth presents a variety of problems for 

those who try to understand the role of government. Since the main aim is to bring 

to fruition novel ideas—ideas that cannot be known in advance—for products and 

services that are as yet unimagined, we cannot develop policies assuming that we 

know the markets, the products, the industries, the specific skills needed, or how 

they will be combined (Breznitz 2007b). This is not the case of developing or restructuring an existing industry, such as the car industry, where the products are well 

understood, and where we have a clear idea of how to make them, and a pretty good 

guess about the capabilities we would need to make better vehicles. 

In the case of innovation, the aim of the government is to spur agents, some of 

whom are currently unknown or do not yet exist, to come up with novel ideas and 

transform them into products and services, which, as of now, cannot be defined. Accordingly, in its idealized form innovation policy aims to equip the economy with 

agents of change that are stimulated for actions in ways we cannot foresee. Furthermore, with globalization—that is, the growing fragmentation of production where 

products are produced in discreet stages across many locales—we at best have only 

a limited ability to predict the exact division of labor between the local agents and 

the international economy that would allow for the making and sale of these products and services for maximum profits. Hence, we need to develop agents (both individuals and organizations) that have the capacity to understand science and technology as well as the market, and the capability to generate novel ideas. In addition, 

we need to ensure that they work within a system that enables them, as smoothly 

as possible, to transform these ideas into products and services to be sold worldwide. 

What we do know, however, is that the inherent characteristics of industrial research and development (R&D) would lead, under free competitive market conditions, to under-investment in innovation from a social optimum point of view (Arrow 

1962; Nelson 1959). For this reason almost every nation on earth now engages in 

public funding of innovation in an attempt to lower the risk and stimulate more activity. Similarly, many nations now try to increase the rewards for innovation in the 

hope of making them more attractive. This is part of the logic behind systems, such 

as the patent system, that grant monopoly rights to inventors who come up with 

ideas that are deemed original. Consequently, in our era of globalization governments now need to actively engage in two critical domains: i) solutions to the industrial R&D market failure; ii) local-global relationships. My research has found that 

different countries successfully solve these issues in very different ways, leading to 
59

significantly varied outcomes both in the scope of activities and in the distribution 

of the economic fruits of success within their societies. 

None of these issues are considered to be outside the mainstream of policy and 

theory. Most scholars and policy makers would fully agree that there is a need for 

public funding of industrial R&D. However, the common policy prescription urges 

government to go no further than minimal ‘market-enhancing’ intervention. It is 

here where the most common misunderstandings about innovation policy occur.

Three Challenges

Once governments commit to funding of industrial R&D, a host of issues that are 

not fully acknowledged in policy debates and theory comes into play. Specifically, 

nations that subsidize industrial R&D face three overlapping challenges (Breznitz 

and Zehavi 2010):

1. Trust: the need to establish trust both between public and private actors and 

among private actors.

2. Coordination: the need to coordinate R&D across institutional actors. Both 

the trust and coordination challenges are closely associated with the overarching goal of establishing cooperation among private and quasi-private actors.

3. Motivation: the need to motivate private actors to innovate in ways that contribute to the domestic economy—the prima facie reason for public funding 

in the first place.

Trust: The importance of trust for industrial R&D is manifested in two different 

types of relationships: trust between the government and private actors and trust 

among the private actors themselves. The ‘trust’ deficit with regard to ‘governmentprivate’ relations is associated with the problem of information asymmetries. One 

of the government’s main objectives in financing R&D is the creation of new industries and the introduction of new activities into the local economy. As a consequence, 

by definition, markets are either underdeveloped or not yet in existence. Under 

these circumstances, the government cannot rely on market signals to ensure that: 

a) its investments are used properly; and b) that its policies lead to the stated goal 

of creating new industries and capabilities within the national economy. Because 

governments cannot fully rely on the market for information, adherence to a pure 

financier/provider division might create significant information asymmetry problems 

between the government and private firms. Even in the private market it is assumed that these problems can never be optimally resolved, and hence, that financing of new R&D-based companies is, supposedly, best handled by specialized financiers, such as venture capitalists, who use a variety of instruments to negate, but 

can never fully eliminate, these information asymmetries. 

Second, as we have learned from the multidisciplinary study of innovation in the 

last few decades, innovation is a collective endeavor that necessitates close cooperation among agents if it is to flourish and result in long-term economic growth 

(Antonelli 2000; Carlsson et al. 2002; Edquist 1997; Hagedoorn 2002; Kenney 2000; 

Lester and Piore 2004; Lundvall 1992; Nelson 1993; Powell et al. 1996). Therefore, 

for public investments in private R&D to deliver sustained economic growth there 

is a need to accommodate close cooperation among firms. However, against the backdrop of fully competitive free markets it is to be expected that inter-firm collaborations would be laced with suspicion and distrust. Balancing cooperation and competition is no simple matter even when firms possess complementary knowledge and 

capabilities. Moreover, even in situations in which private firms do choose to cooperate, insufficient trust is likely to push partners to restrict the scope of cooperation 

(Li, Eden et al. 2008). Government-facilitated cooperation has, over time, successfully engendered trust among cooperating private actors. Closely related to this 

problem, countries that rely solely on public funding to stimulate R&D growth 

might well discover, to their dismay, that firms are underutilizing public funding 

because of capacity problems in the private sector (Sustman and Teubal 1995). This 

problem is compounded by inter-firm competition that engenders distrust and discourages professional cooperation across firms. This is a major problem because 

R&D is a collaborative venture in which the interplay of different skills and ideas 

allows professionals to achieve together what would have been well nigh impossible 

on their own. Isolated professionals might well fail to make substantial breakthroughs, where the same professionals working in cooperation would have had a 

far better chance. 

Coordination: Meaningful and sustained interaction among diverse actors that are 

separated organizationally, geographically, or both, is not a given regardless of concerns regarding trust. The system of innovation literature shows that private firms 
60

that engage in R&D activities cannot operate in an optimal manner without the 

support of an array of other institutions (Carlsson et al. 2002; Edquist 1997; 

Lundvall 1992; Nelson 1993). The development of a high technology industry does 

not happen in an institutional vacuum. Many locales must undergo a fair amount 

of industrial restructuring before the conditions are right for high technology 

growth. For example, dynamic R&D-led industries lead to the need to have ever 

greater flexibility in the labor force. This flexibility must be achieved while preventing severe political backlash against innovation when it leads to deep crises in 

specific locales. Such a feat, however, can be accomplished only with close coordination between private market actors and public actors that work together to legitimize and facilitate flexibility-enhancing restructuring (McDermott 2007; Ornston 

and Rehn 2006; Traxler and Unger 1994). 

Domestically-oriented Motivation: Governments would like private actors not only 

to be motivated to innovate, but to do so in ways that would benefit the local economy. Yet there is little assurance that this would be the case because private actors’ 

prime need and interest is to maximize their personal utility regardless of effect on 

other domestic firms or the geographical locale in which their value-added activities 

take place. These different goals create two distinct conflicts of interests between 

the government, on the one hand, and private companies, on the other. 

First, one of the main justifications for public support of industrial R&D is the 

expectation that private R&D would generate positive spillovers for the rest of the 

economy. The government therefore aims to maximize local spillovers from its industrial R&D investment. However, in their search for profits, companies prefer to 

maximize the appropriability of their R&D outcomes. Private firms do their best to 

create the most competitive R&D possible—certainly a public interest—but would 

also do their utmost to fully appropriate its benefits and limit the spillover effects—

something that governments would like to prevent. 

Second, governments prefer that individuals and firms contribute first and foremost locally. But what could motivate private domestic actors to stay, or for that 

matter, return, home? While the government hopes to keep as much high valueadded business at home, commercial firms would relocate abroad if they deem such 

a move advantageous. The traditional economic viewpoint is that, even if commercial firms indeed choose to pick up and leave, it is all for the best because the reallocation of resources would be more efficient and benefit domestic consumers 

(Krugman and Obstfeld 1991). Nonetheless, the rationale for public investment in 

R&D is specifically to create positive spillover at home, and this will not occur if 

both the R&D and the diffusion of its results are conducted abroad as it is more 

and more the case in our globalizing world (Gomory and Baumol 2000). 

The three related problems of trust, coordination and motivation are by no means 

unique to innovation. In the R&D field, however, these concerns are accentuated for 

at least three reasons. First, distrust—especially among private actors—is likely to 

be prevalent because of the nature of the product and also that of the firms involved. Where innovation is at the epicenter, then a firm’s advantage is to be found 

primarily in its ability to create new know-how. Transfer of information and technology to other firms, and with it a firm’s competitive advantage, is relatively easy 

(Lundvall 1999). Hence, firms have a strong incentive to limit the lines of communication with other firms so as not to suffer from unwelcome knowledge transfer. 

As a result, establishing trust between private firms is a challenging venture. Second, the R&D field is relatively internationalized compared to most other production 

domains. This means that coordination is likely to involve not only domestic but also 

international actors. Obviously, this implies an additional challenge for coordination. Finally, in R&D-intensive high-technology sectors, such as information- or biotechnology, both firms and professionals are comparatively far more footloose than 

in traditional industries or services (e.g., steel manufacture or healthcare). Therefore, the question of how to motivate private actors to contribute locally is more pertinent than in most other fields.

Three Government Roles, Many Games: What do other countries do?

There are three broad roles by which governments, using very different modes 

which are tailored to their specific conditions, support rapid-innovation-based 

growth:

i) public-financing of private-innovation, where the government supplies capital to private agents who use it to engage in R&D and innovation;

ii) public production of innovation, where public production is commonly understood to imply industrial R&D conducted in government research institutes, universities, and non-profit research institutes such as hospitals; 

and,
61

iii) the government acting as a facilitator, where the main emphasis here is on 

the government role in anchoring professional, inter-institutional networks, 

and more generally, on the government’s role in fostering relations with—

and among—private actors.

The importance of the third role, facilitating policies, cannot be over-emphasized, 

as government-sponsored networks have been shown to be one of the most important factors for the creation of a favorable environment for radical innovation 

(Godoe 2000; Kushida 2008; Kushida and Zysman 2008; O’Riain 2004). Actor interaction within these networks helps shape a common vision of the future, and R&D 

efforts, which are then channeled towards realizing this vision (Lester and Piore 

2004). Indeed, some argue that DARPA’s excellence in conducting this role in the 

American context is the base for its greatest successes (Fuchs, forthcoming). 

Since public financing of private innovation activities is the best known and most 

discussed role of the three, let me briefly describe some international examples of 

successful usage of the two others. Taiwan has received much attention for its extremely successful application of the public production strategy. The government 

had mitigated the market failure and information asymmetries problems by undertaking the core R&D itself. This created a unique division of labor between government and industry in the case of the IT industry. The specificity of this division of 

labor stems from the state’s high level of participation in the development of the 

technological capabilities of the industry. In this division of labor, public research 

institutions do most of the R&D up to the level of a working prototype, and then 

disseminate the results to industry, which concentrates on final development and 

integrated design. It is this division of labor that is considered responsible for Taiwan’s leading role in the global information technology industry, most famously in 

semiconductors. This strategy also allowed Taiwan to create a large number of 

jobs—not just jobs for the very high-skilled and educated, but jobs at many levels, 

thereby spreading the fruits of its innovation success more widely across the society 

(Amsden and Chu 2003; Berger and Lester 2005; Breznitz 2007b; Fuller et al. 2003; 

Hong 1997; Mathews and Cho 2000; Meany 1994; Park 2000). 

This public production-anchored model also addresses the capacity problem. The 

government concentrates scarce capacities, and by so doing, overcomes the private 

non-cooperation obstacle. Arundel and Geuna contend that in Europe public research is an especially important resource for firms that lack the financial resources, or capabilities, to obtain knowledge abroad (Arundel and Geuna 2004). 

Therefore, a case can be made for more direct public intervention in R&D. However, 

for such interventions to work the incentives for public R&D production should be 

carefully aligned with the growth and creation of a local privately-owned industry 

and the government should set a premium on bureaucratic flexibility in its research 

institutions. Otherwise, the negative outcomes will outweigh the positive ones. 

Israel is an example of a highly successful use of the facilitator strategy. A measure of the success of its innovation policies is the fact that in 1968, when the first 

government committee on R&D policy was convened, there were only 886 academytrained R&D workers in the entire industrial sector. Within three decades of implementing its new innovation policies, Israel boasted the highest number of high-tech 

companies listed on NASDAQ after the United States. As part of these efforts, as 

early as 1975, the Israeli Office of the Chief Scientist of the Ministry of Trade, Industry and Employment (OCS), Israel’s main industrial innovation agency, launched 

a joint program with the American Government that matched local companies with 

American multinational corporations (MNCs). This program, known as the Bi-national Industrial R&D foundation (BIRD), concentrated on fostering and financing 

cooperation between Israeli and U.S. companies (BIRD 2000; Breznitz 2007a; Teubal 

1997; Trajtenberg 2001; Yahalomi 1991). Its mode of operation has been to fund 

projects co-designed by American and Israeli companies, in which the R&D was 

done in Israel, and the marketing and product definition handled in the U.S. As a 

consequence, the Israeli government stimulated international cooperation that ensured R&D would commence in Israel, and mitigated the information asymmetries 

between itself and the private firms it sponsored by receiving high-quality ‘‘external’’ 

evaluation from world-leading American MNCs. In 1992 Israel went further in its 

network facilitating policies with the MAGNET program. MAGNET, which stands 

for Generic Non-Competitive R&D, addresses two problems related to the development and maintenance of the long-term innovative advantage of companies. The 

first problem is a large number of companies in the same technological space, all 

of them too small to compete on the basis of, or to advance, cutting-edge 

infrastructural research activities that are crucial to their survival. The second 

problem is the underutilization of academic research. MAGNET solves some of these 

issues by creating a consortium to develop generic technologies. MAGNET consor-
62

tiums are created for a period of up to three years. All IP outputs are shared among 

the consortium members, at least one of which must be a university. The consortium 

members also must agree to license this IP to local companies at a cost that does 

not reflect monopoly status. MAGNET has been critical in allowing Israeli firms to 

tap into otherwise inaccessible knowledge domains, and to develop new technologies 

and products for markets and niches whose needs they did not understand, using 

technologies they could not afford to develop alone. However, while Israel’s sole 

focus on novel-product R&D and intimate ties with the American industry led it to 

great success, the economic gains of this success have been very narrowly distributed, and the success of the high-tech industry has resulted in only negligible 

spillovers to the rest of the business sector (Breznitz 2007a; Breznitz 2007b; 

Trajtenberg 2001). 

Finland is a classic example for the government role as a facilitator using a very 

different strategy. In Finland, after the fall of the USSR, national employer and 

labor associations created long ago for collective bargaining and resolution of laborcapital conflicts were infused with a new mission as they morphed into institutions 

to regulate the transition from a traditional to a high-technology ‘‘new’’ economy 

(Ornston 2006; Ornston and Rehn 2006). Consensus among the old actors created 

a platform on which new dense inter-firm networks were built. A panoply of government actions established new public commissions, and agencies pushed the old partners towards agreement on new objectives for the economy and new channels for 

public expenditure, for example, the Science and Technology Policy Council, which 

subsequently gave rise to Tekes. These broad agreements legitimized the deep structural transformations involved and formed the bedrock of multi-polar networks on 

the local level. In the most successful cases of development of new technology industries in Finland, for example in the city of Tampere, new networks were constructed 

by combinations of previously-developed skilled labor, university strengths, industrial commitment, and municipal leadership. However, Finland’s inability to create 

new companies and its growing reliance on one—Nokia—is apparent even in the 

case of Tempere, where Nokia is by far the biggest employer (Juba and Sotarauta 

2002).

Back to the home court—Lessons Learned

Successful innovation policies throughout the world have taught us a few valuable 

lessons:

i) innovation policy can significantly enhance economic growth and national 

competitiveness;

ii) innovation policy are context-specific and need to evolve in tandem with 

private industry;

iii) there are many different modes of devising and implementing innovation 

polices, each of which leads to different social and economic outcomes;

iv) to be successful in innovation policy implementation governments need to 

be able to engage in all three roles: financer, producer, and facilitator.

While far from ensuring success, these points lead to a few principles, which if 

applied, can increase the chances of success and induce a better policy learning 

curve. First, the Federal Government should sustain and enhance its important role 

as financier. While that by itself will not yield a qualitative change, it is necessary 

as the minimal first step. Second, the government needs to carefully evaluate its 

R&D production activities to decide which serve useful purposes and which should 

be restructured or cancelled, and to determine in which domains timely, and perhaps finite (that is limited in time-scope), public production could stimulate largescale undertaking by private actors, which should always be the ultimate goal of innovation policy. Thirdly, and perhaps most importantly, the Federal Government 

needs to think more constructively and comprehensively on the role that the government can play as a facilitator of innovation activities. Here scope for experimentation is needed, and while the ARPA/DARPA model has worked in the past it is 

far from being the only approach that should be pursued. 

It is critical to note that in order to conduct the three roles, specifically the facilitating role, a nation must have deep knowledge of the technological domains, as well 

as a nuanced understanding of the current, and always changing, needs of private 

actors. This includes knowing and having access to individuals (such as leading researchers in specific labs) as well as organizations, and understanding business dynamics in multiple sectors. 

In the case of a the U.S., a big Federal democracy aiming to stimulate growth 

throughout its economy in all locales, a dual approach, local and Federal, might be 

the key to success. Creating new Federal-state partnerships could also have the ben-
63

efit of stimulating states to compete in the development of different, experimental, 

and creative policies. 

From many levels of analysis, American states, in terms of size, economic history 

and capacity, and unique contextual situation, are similar to many of the European 

and Asian countries that are widely viewed as the paragons of successful innovation 

policy experimentation and implementation. Many of these policies necessitate close 

collaboration among actors within a particular spatial unit, and hence, lend themselves much more easily to state rather than Federal engagement. Furthermore, 

since many successful innovation policies need to be tailored to specific conditions, 

both the intimate knowledge essential for the development, and the capacities critical for their implementation, exist on the local and not Federal level. 

One way, certainly not the only one, of tapping this potential, creating a dynamic 

of innovative thinking among policymakers, and devising a working public-private 

partnership, is to allow for Federal funding to be allocated on competitive basis for 

states and local governments that develop unique and comprehensive ten to fifteenyear programs that take into account local needs and capabilities as well as the national innovation agenda. Winning proposals should get substantial Federal funding 

(50–60%), and should be evaluated around the seventh year of the program, by 

which time the first signs of change should be evident. If successful, these programs 

should be funded for another finite period of time. In addition the Federal agency 

responsible for these programs should arrange workshops that allow collaboration 

and learning among participating states, as well as replication of the more successful models across the country. 

We need to recruit the tremendous forces of competition and ingenuity to help us 

seriously apply innovation to our innovation policies. We must think outside of conventional constraints as we seek to develop policies to enhance the innovativeness 

of the American business sector and secure our future economic growth.

BIOGRAPHY FOR DAN BREZNITZ

Professor Dan (Danny) Breznitz (Georgia Institute of Technology, Sam Nunn 

School of International Affairs & The School of Public Policy, Ph.D. MIT) has extensive experience in conducting comparative in-depth research of Rapid-InnovationBased Industries and their globalization. Dr. Breznitz’s first book, Innovation and 

the State: Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland 

(Yale University Press), won the 2008 Don K. Price for best book on Science and 

Technology given by APSA and was a finalist for the 2007 best book of the year 

award in political science by Fore Word Magazine. His second book (co-authored 

with Michael Murphree) The Run of the Red Queen: Government, Innovation, 

Globalization, and Economic Growth in China is forthcoming with Yale University 

Press in 2010. In addition, his work was published in various journals, as well as 

chapters in edited volumes. Breznitz is one of five young North American scholars 

to be selected as a 2008 Industry Study Fellow of the Sloan Foundation. Breznitz 

has also been an advisor for local and national governments on Science Technology 

and Innovation Policies in the U.S., Asia, and Europe. 

During 2006 Breznitz was a visiting scholar at Stanford University’s Project on 

Regions of Innovation and Entrepreneurship, and during 2007 he was a Visiting 

Fellow at the Bruegel Institute for International Economics, Brussels. His work is 

sponsored by the Sloan Foundation, the Kauffman Foundation, and the Samuel 

Neaman Institute for Advance Studies, the Bi-National Science Foundation (U.S. 

Israel), the NSF, Georgia Research Alliance, and the Enterprise Innovation Institute. In addition, Breznitz is the co-director with John Zysman of UC Berkeley of 

a collaborative study titled ‘‘Can Wealthy Nations Stay Rich in a Rapidly Changing 

Global Economy?’’ A former founder and CEO of a small software company, Breznitz 

is also a research affiliate of MIT’s Industrial Performance Center. In addition he 

is a senior researcher of the Science, Technology, and Innovation Policy Program 

(STIP) and the Academic Director of the Initiative for Sustainable High Tech Cluster at The Enterprise Innovation Institute (EI2), and the director of the 

Globalization, Innovation, and Development program at the Center for International 

Strategy, Technology and Policy (CISTP) in the Sam Nunn School of the Georgia 

Institute of Technology.

Chairman WU. Thank you very much, Dr. Breznitz. 

Mr. Holland, please proceed. 
64

STATEMENT OF MR. PAUL HOLLAND, GENERAL PARTNER, 

FOUNDATION CAPITAL 

Mr. HOLLAND. Chairman Wu, Ranking Member Smith and Members of the Committee, my name is Paul Holland. I am a general 

partner at Foundation Capital, a venture firm in Menlo Park, California, commonly known as the Silicon Valley. We invest in earlystage companies driving innovation in software, clean tech, the 

Internet, telecommunications and semiconductors. Since our first 

fund in 1995, we have invested $1.5 billion in well over 100 innovative startups. 

In addition to my responsibilities as a venture investor, I am also 

a member of the National Venture Capital Association located here 

in Arlington. The NVCA represents more than 400 venture capital 

firms and more than 90 percent of the venture industry in the 

United States by dollar volume. 

So let us talk a little bit about innovation. Historically, our government has helped pave the path with policies that encourage innovation at many levels, yet the environment has changed significantly in the last decade and the United States is no longer guaranteed a monopoly on entrepreneurship and innovation. 

So I will spend a moment talking about how venture capital 

works, and I think most of you are probably familiar with this. We 

take in large pools of capital from endowment funds, universities, 

foundations, charitable organizations, employee pensions and so 

forth, and we take our own capital, combine that, and we invest it 

in hundreds and hundreds of innovative companies over the course 

of any given year. We do not employ leverage or issue debt as part 

of our investments, so we are not like a hedge fund or other forms 

of private equity you might have heard of. We also generally take 

a seat on the company’s board and we work for five to ten years, 

often reinvesting several times in that company over the course of 

that time period until we achieve an exit, either an IPO or a mergers and acquisition exit. 

The venture class has been recognized for building a significant 

number of high-tech industries including biotechnology, semiconductors, online retailing and software. Within the last several 

years, we have invested billions of dollars in clean technology including smart grid, renewable power, power management, recycling, water purification and conservation. In fact, I coordinate the 

clean tech practice at my firm, Foundation Capital, and I had the 

honor of giving a nationally televised speech last year with President Obama on clean tech investing, and it was truly a highlight. 

My partners and I are extremely proud of the work we do each 

day and we are working very hard to create a positive future for 

this country. So what are the results of all this hard work on behalf of venture capitalists and entrepreneurs? Since 1970, companies that were started with venture capital have accounted for 

$12.1 million jobs, or 11 percent of private sector employment, and 

also $3 trillion in revenue by 2008. Such companies include historic 

innovators such as Genentech, Intel, Federal Express, Microsoft, 

Google, Amgen and Apple. These companies have brought to market thousands of innovations that have improved, and in the case 

of life sciences, actually saved millions of lives. 
65

So I often get asked why is so much of this happening in the Silicon Valley, and many of you are regular visitors to our region. 

Forty percent of venture capital in this country is deployed between 

the cities of San Francisco and San Jose ́. There are a number of 

reasons for that, too long to get into in the time that we have 

today. We have two outstanding universities there in Stanford and 

U.C. Berkeley. We leverage those as much as we can. But I think 

maybe the biggest factor is that we have a very strong risk-taking 

culture and our society supports it in all the different dimensions 

including Federal, state and local government. But it is not just 

Silicon Valley where this is occurring. It is in Boston with MIT, it 

is in Philadelphia with Penn, Pittsburgh with CMU, Atlanta with 

Georgia Tech, Duke and University of North Carolina, the research 

triangle. This is happening across the country and it has been a 

very, very successful model, particularly over the last 40 years or 

so. 

So that is a look at what is happening on the regional level in 

our world. Let us take a look at the national level, and the big 

issue there is competition. Competition is looking internationally 

like we have never seen before. At the same time we are seeing all 

sorts of benefits of globalization, and we are big fans of it, we want 

to see, you know, open standards and open trade provisions from 

our government. At the same time, there is a significant rise of 

venture capital and entrepreneurial activity in Asia, Eastern Europe and South America, and foreign governments are being very 

aggressive in promoting favorable tax policies and improving their 

infrastructure. So for the first time we have got very, very viable 

competitors outside of the United States. They are giving us a run 

for our money. 

That is one of the reasons why we support the America COMPETES Act of 2007. Some of the major components of that Act are 

things like support for basic research, so we leverage NIH, DOD, 

DARPA and ARPA–E, and if we have time later, I will give you 

some really fun examples of companies that have been started as 

a result of this that are now employing thousands and thousands 

of Americans. 

Another component of this is support for a highly skilled workforce. This is very critical for us. The venture capital community 

wholeheartedly supports improving math and science education for 

U.S. students, particularly in K–12 students, things like STEM 

curriculum and other fundamentals of 21st century education, 

some of which I am fortunate enough to see practiced in my children’s schools in California at Ormondale and Cormadera and 

Castalella. 

But other critical elements for us are things like immigration reform. Twenty-five percent of venture-backed public companies were 

founded by immigrant entrepreneurs. We have immigrant entrepreneurs represented at this table. In fact, I would daresay that if 

you go back a couple of generations, we are all represented in one 

form or another by immigrants. These companies include stars 

such as Intel, eBay, Google, Yahoo and Sun, and yet in recent 

years U.S. immigration policy has become relatively restricted 

when it comes to bringing in the best and brightest from overseas. 

We have to stop that and we have to reverse these policies. India 
66

and China are welcoming these bright minds. We have to be first 

in that regard. For that reason, we are supportive of the Start Up 

Visa initiatives that are in the House and the Senate. Passage of 

these types of bills will signal the entrepreneurial community 

around the world that the United States is indeed open for business. 

Another major category for us is access to capital. A significant 

part for us and a very, very serious near-term threat to our entire 

industry is what is being contemplated by Congress now in changing the capital gains rate associated with venture capital and innovation. Going back to 1968, Congress passed a watershed law that 

had risk capital rewarded with a lower capital gains rate, not ordinary income rates. There is a discussion underway right now within Congress to reverse that and to in fact install ordinary income 

rates on capital gains. If that happens, make no mistake, you are 

tripling the rates of taxation on our industry and you will absolutely kill the goose that is laying the golden eggs. I can’t make 

that any clearer for you. It is just that simple. 

The need for capital, however, does not end with venture investment. We need a lively and a vibration IPO market. Go back to 

1996. Sixty percent of the IPOs in the world in 1996 were done in 

the United States. By 2006, 22 percent were done. Last year, twothirds of the clean tech exits in clean tech, the field in which I 

work, were in China, not in the United States. There are a number 

of things that we have to improve and we have to get stronger 

around this. The implementation of Sarbanes-Oxley, some of the 

restrictive provisions around financial regulation are starving our 

young companies of the ability to have early exits. That is very, 

very difficult for us. I realize you are not the Finance Committee 

but we could use your help on that wherever we can. 

Finally, on intellectual property protection, we have some of the 

strongest intellectual property protection in the world but it needs 

to be even stronger and we need to continue to reform and augment the work of the U.S. Patent Office. 

So in conclusion, let us make no mistake about it, the race is 

ours to lose but to maintain our innovation advantage we must rededicate ourselves to what has made us successful: increasing support for basic R&D, improving math and science education, supporting immigration and patent reform, and improving access to 

capital through smart tax policies. Without action on these fronts, 

the United States may find itself in the unfamiliar role of an alsoran in the innovation race. The venture capital community looks 

forward to working with you, the Federal Government, on this, and 

I will be happy to take any questions. Thank you. 

[The prepared statement of Mr. Holland follows:]

PREPARED STATEMENT OF PAUL HOLLAND

Introduction

Chairman Wu, Ranking Member Smith, and members of the Committee, my 

name is Paul Holland and I am a general partner at Foundation Capital, a venture 

capital firm based in Menlo Park, California. Foundation invests in early stage companies that are driving innovation in the areas of software, clean technology, the 

Internet, telecommunications and semiconductors. We look for new and innovative 

ideas that don’t simply improve the status quo incrementally, but rather disrupt it 

in positive ways. Specifically, we fund companies that promise to change the way 
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businesses, consumers and even entire industries behave. Since our first fund in 

1995, Foundation has invested more than $1.5 billion dollars into innovative startup companies located primarily in California but across the United States as well. 

In addition to my responsibilities as a venture investor, I am also a member of 

the National Venture Capital Association (the NVCA) based in Arlington, Virginia. 

The NVCA represents the interests of more than 400 venture capital firms in the 

United States. These firms comprise more than 90 percent of the venture industry’s 

capital under management. 

It is my privilege to be here today to share with you, on behalf of the venture 

industry, our perspective on the critical factors that foster innovation on a regional 

and national basis in the United States. Our country is home to many of the brightest minds on the planet. And that intellectual prowess has benefited our economy 

in countless ways. Yet we all know that the process of bringing innovation to life 

is not simple. There is a critical path along which many stakeholders—including entrepreneurs, venture capitalists and policy makers—play important roles. Historically, our government has helped pave that path with policies that encourage innovation on many levels. Yet the environment has changed significantly in the last 

decade and the United States is no longer guaranteed a monopoly on entrepreneurship and innovation. We have a tremendous opportunity to shape our future and 

I look forward to discussing today how we can ensure our technological and economic leadership going forward.

The Role of Venture Capital in the Innovation Life Cycle

I would like to share a brief overview of the role of venture capital in the innovation life cycle. For decades, the venture capital industry has dedicated itself to finding the most innovative ideas and bringing those ideas to market. We raise money 

from institutional investors and our firm partners for the express purpose of identifying and investing in the most promising ideas, entrepreneurs and companies. We 

only choose those with the potential to grow exponentially with the application of 

our expertise and venture capital investment. Often these companies are formed 

from ideas and entrepreneurs doing work in university and government laboratories—or even someone’s garage. Many of these ideas would never see the light of 

day were it not for venture investment. 

Once we have identified a promising opportunity, we conduct a thorough due diligence process on the entrepreneur or scientist, the technology on which the opportunity is based, and the potential market. For a venture capitalist to invest in a 

company, the discovery process must be well underway. Oftentimes, we will delay 

an investment until further research is successfully completed. Put another way, 

venture capitalists invest in applied research—not basic research. For those companies that have moved through the basic research process and have a functioning 

product that passes muster with our firm, we make an investment in exchange for 

equity ownership in the business. Venture capitalists do not employ leverage or 

issue debt as a part of our investment. We also generally take a seat on the company’s board of directors and work very closely with management to build the company and bring the innovation to market. 

The innovation process is long and characterized by significant technological and 

entrepreneurial risk. We typically hold a venture capital investment in an individual company for at least eight to ten years, often longer and rarely much less. 

During that time we continue to invest follow-on capital in those companies that are 

performing well; we cease follow-on investments in companies that do not reach 

their agreed-upon milestones. Our ultimate goal is what we refer to as an exit—

which is when the company is strong enough to either go public on a stock exchange 

or become acquired by a strategic buyer at a price that ideally exceeds our investment. At that juncture, the venture capitalist ‘‘exits’’ the investment, though the 

business continues to grow and innovation continues to take place. 

The nature of our industry is that many companies do not survive, yet those that 

succeed do so in major ways. Our asset class has been recognized for building a significant number of high-tech industries, including the biotechnology, semiconductor, 

online retailing and software sectors. Within the last several years, the venture industry has also committed itself to funding companies in the clean technology arena. 

This includes renewable energy, power management, recycling, water purification 

and conservation. Many of the young companies that we fund serve as the de facto 

R&D pipeline for larger corporations as, in many cases, our start-up technology is 

far superior than what can be generated in a corporate R&D environment. This phenomenon is especially true in the life sciences and software sectors, where our companies are regularly acquired for their technology and intellectual property. We believe this dynamic will ultimately become the reality in the energy and clean tech 
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sectors as well. My partners and I are extremely proud of the work that we do each 

day because we are indeed creating the future. 

Historically, venture capital has differentiated the U.S. economy from all others 

across the globe in terms of job creation and innovation. According to a 2009 study 

conducted by the econometrics firm IHS Global Insight, companies that were started 

with venture capital since 1970 accounted for 12.1 million jobs (or 11 percent of private sector employment) and $2.9 trillion in revenues in the United States in 2008. 

Such companies include historic innovators such as Genentech, Intel, FedEx, Microsoft, Google, Amgen and Apple. These companies have brought to market thousands 

of innovations that have improved and, in the case of the life sciences sector, actually saved millions of lives. 

Venture-backed companies are responsible for the introduction of Internet navigation and search, microprocessors and wireless applications. On the medical side, our 

companies brought to market drugs to treat cancer, diabetes, heart disease and spinal chord injuries. And on the clean technology side, we are actively working on innovations to reduce our dependence on foreign oil and create a more sustainable environment for the next generation. It is almost inconceivable that these monumental 

advances were once small ideas tucked away in a lab or a living room. But we assert 

that the next great innovation is today a small idea waiting somewhere. We are 

committed—along with the government—to finding and funding it. Our country’s future depends on it.

The Silicon Valley Phenomenon

No other region in the country can attest to the positive impact of innovation on 

the economy than California. In fact, most people who are familiar with venture 

capital—even remotely—tend to associate it with Silicon Valley. It is indeed the industry’s Fertile Crescent, with approximately 40 percent of all venture capital dollars invested in companies from San Jose to San Francisco. For this reason, VCs 

are often asked what factors drive Silicon Valley’s ongoing growth and keep the region successful in fostering innovation and growing new companies. It is a relevant 

question because the answer offers a blueprint for other regions that wish to emulate the Valley’s success. This blueprint is also consistent with what our country 

must do as a whole to keep innovation alive. 

Like Silicon Valley, most successful venture capital hubs begin as communities of 

extremely bright, best-in-class innovators. These innovators are usually drawn together by a top-flight research university, government laboratory or a highly innovative, often venture-backed company. Stanford University has been the source of 

countless innovations around which venture capitalists have formed Silicon Valleybased companies. The same can be said for MIT in Boston, University of Pennsylvania in Philadelphia and Duke and North Carolina in the Research Triangle region. Silicon Valley is also home to important anchor companies: Intel, Genentech, 

Cisco and Google are just a few. These companies regularly spin-out new entrepreneurs who pursue their own ideas and start-ups from existing operations. They 

also foster a pool of technical talent available to the region. We have seen similar 

types of spin-out companies in places such as Austin, Texas with Dell, in Minneapolis with MedTronic, and in Seattle with Microsoft. 

Often, these communities coalesce around a certain industry or technological 

niche. Silicon Valley has a long and successful history of embracing these niches 

early on, beginning with semiconductors and following up with biotechnology, enterprise software, consumer Internet and now, clean technology. Other examples of regions that have successfully built an ecosystem around a specific technology include 

New York with new media, Tennessee with healthcare IT, and Northern Virginia 

with telecommunications. Concentrating on these niches creates a virtuous circle 

that spurs research and innovation, draws more talent and attracts more capital to 

the region. And while regions such as Silicon Valley and Boston account for a majority of the investment in certain sectors, there is room for more than one region to 

claim space. To wit, Florida, in its quest to become a life sciences center, recruited 

the new Scripps Institute to locate there and has benefited from that institution’s 

presence in Palm Beach County. Many regions are now vying for a stake in the 

clean technology sector. Rocky Mountain states like New Mexico, Colorado and Arizona making strides in this area. 

Innovators become entrepreneurs only when they have the supporting environment to do so. Venture capital alone is not enough. There must be a sound mechanism for transferring technological innovations from the research institutions and 

scientists that spurred them to the company that will guide them to market. To support that process, a robust network of lawyers, accountants and other business professionals to help with business planning, networking, intellectual property protec-
69

tion, IPO registration compliance and hiring issues is also important. In addition, 

though as simple as it sounds, the region must have an infrastructure that can support growing companies. That means efficient local and regional transportation systems, convenient airports, affordable housing, quality schools and vibrant cultural 

and social scenes. 

Government and civic support is also essential. This starts with favorable tax policies, common-sense regulatory structures and encouragement of basic research. 

State and local initiatives that reward emerging growth companies also make a significant difference. Please understand that is different than giving massive tax 

abatements to large local corporations. Instead, a program like Ben Franklin Technology Partners in Pennsylvania, that supports start-up companies in their earliest 

stages, helps create a pipeline from which venture capitalists can draw. Also, state 

pension funds that invest in local venture capital firms also drive success. States 

such as California, Pennsylvania, and Wisconsin have strongly supported local venture firms in recent years, resulting in increased investment by indigenous firms in 

their states’ start ups. 

It is important to note that venture capitalists do not create these conditions favorable to investment. We seek them out. For those looking to replicate Silicon Valley’s success, it starts with these factors and builds from there. States should understand that growing such an environment is an expensive, long-term endeavor. However, I’m sure that Californians will tell you that the economic pay-off is worth it.

Looking Forward on a National Level

The ingredients that make for successful venture capital hubs like Silicon Valley 

are not unlike the ingredients for a thriving innovation ecosystem in the U.S. as 

a whole. Access to strong basic research, the best and brightest minds, public policy 

that promotes access to capital, and an infrastructure that supports the entrepreneur are in fact the precise components that have historically allowed the U.S. 

to thrive on the innovation spectrum. And these same drivers will determine our 

fate going forward. 

Yet, it is important to recognize that the global environment for innovation has 

changed dramatically in the last decade—creating both opportunities and threats to 

U.S. innovation. Technology has indeed made the world flat and our companies 

today all employ global strategies when it comes to markets, product development 

and operations. The global markets offer our companies tremendous growth opportunities—provided the U.S. maintains open trade provisions. Yet, at the same time, 

there has been a significant rise of venture capital and entrepreneurial activity in 

regions outside the United States such as Asia, Eastern Europe and South America. 

As entrepreneurialism grows on a global scale, we face a new competitive environment in which innovation can be developed anywhere. Foreign governments are 

being extremely aggressive in promoting favorable tax policies, improving their 

legal, accounting and intellectual property structures, and boosting their R&D 

spending to foster more innovation in their countries. The U.S. needs not only to 

maintain our current commitment to an innovation agenda but rise up to meet the 

challenge set by our foreign competitors or risk losing our technological edge. 

For these reasons, the venture capital industry supported the America Competes 

Act and continues to support the spirit in which it was passed in 2007. In order 

for the U.S. to maintain its competitive advantage and economic leadership, we 

must continue to aggressively promote a public policy agenda that rewards risk takers and embraces innovation at a national level. Components that are particularly 

relevant to the venture capital industry and our role as purveyors of innovation are 

as follows:

Support for Basic Research

The government has a critical role to play in the area of basic research. It is from 

this pipeline of scientific advances in fields such as information technology, life 

sciences and now, clean technology, that the venture capital industry has traditionally drawn many of our innovations. Often, early stage research into new discoveries 

is first funded with Federal dollars in a university or government lab and then commercialized by a venture investor. 

Such was the case with Atheros Communications, founded by leading experts in 

radio and signal processing at Stanford University. Atheros benefited early on from 

access to DARPA research on semiconductors and communications. My firm helped 

to shepherd the researchers out of Stanford and invested the first $100,000 into the 

company in 1997. Since that time, the company has become the leading provider of 

WiFi communications, providing the technology that powers innovations such as 

wireless local area networks (WLAN), mobile WLAN, global positioning systems 
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(GPS), Bluetooth, Ethernet and powerline communications. Atheros went public in 

2004 and today employs more than 1,300 people and has a market capitalization 

of $2.5 billion. 

Sources of these basic research funds have historically included the NIH, DOD, 

DARPA and, most recently ARPA–E. Continuing to support federally funded research through these agencies will allow the symbiotic relationship between the government and venture capital to continue. Essentially we pick up where government 

funding leaves off. We believe this relationship will be especially important in the 

area of clean tech innovation. We have been very encouraged by the funding of 

ARPA–E at the $400 million level. We hope to see a continued commitment at that 

level or above going forward, so that the exciting work taking place in those labs 

has the opportunity to be brought to the American public. We also ask that policy 

makers continue to exhibit the same patience they have shown in the past for the 

high-risk and long-term nature of the innovation process. This support is critical to 

our ability to see our projects through to success.

Support for a Highly Skilled Work Force

In addition to supporting the research, government must also support the entrepreneurial and technological talent that brings this research to life. The venture 

capital community wholeheartedly supports improving math and science education 

for U.S. students, particularly in grades K through 12. Other countries have been 

committed to the Science, Technology, Engineering and Math (STEM) components 

of education for some time. Our understanding is that we are making strides in 

these areas; but we can not ease up on our commitment to engage our students 

more fully. 

In addition to better educating our own students, it is also critical that we ensure 

that the best and the brightest scientists and entrepreneurs from all over the world 

want to come to the United States to innovate and grow their businesses. The venture industry has long supported highly skilled immigration reform that would 

make it easier for foreign born nationals to build companies in the United States. 

The NVCA-commissioned study, American Made: The Impact of Immigrant Entrepreneurs and Professionals on U.S. Competitiveness found that 25 percent of venture-backed public companies were founded by immigrant entrepreneurs. These 

companies include innovation stars such as Intel, eBay, Google, Yahoo and Sun. 

Yet in recent years, U.S. immigration policy has become restrictive relative to the 

policies of foreign countries—and just when they are proactively growing their own 

entrepreneurial and innovation ecosystems. As the United States is making it more 

difficult for foreign scientists and entrepreneurs to enter our country, other countries such as India and China are welcoming these bright minds to their shores. Unless we see a significant change in immigration policy for highly skilled workers, 

we risk losing the brightest talent to our global competitors. 

For this reason, we are very supportive of the Start Up Visa initiatives that have 

been introduced in both the House and the Senate. Under these bills, immigrant entrepreneurs can obtain a special visa to build their companies in the United States 

if they have secured venture capital financing from a qualified investor. The passage 

of such a bill would send a much needed signal to entrepreneurs around the world 

that United States wants them innovating here. Companies that are formed here 

drive innovation here. There is no other way to say it.

Access to Capital

Support for innovation also hinges upon the government’s understanding of the 

importance of capital formation and support for incentives for long-term investment 

and risk taking. While we know that this committee does not have jurisdiction on 

developing tax policies, it is an area that remains of critical concern to the venture 

industry and has the potential to impact our ability to fund innovation. Entrepreneurs and venture capitalists must continue to be rewarded for the risks they 

take. Today there is a meaningful differential between ordinary income and capital 

gains tax rates, which offers an incentive for the long-term investment in innovative 

companies as opposed to short-term speculation. Without this differential, the reward for building and growing a company from scratch is significantly lower and 

less likely to promote this type of activity. 

We also continue to support the current tax policy that allows both entrepreneurs 

and the venture capitalists who invest their time and capital alongside management 

to receive capital gains tax treatment when they have successfully built and grown 

companies. This policy—which grants capital gains tax status to venture capitalists 

who successfully invest in and help companies to grow—has been under fire as certain lawmakers have sought to change the tax status of carried interest to ordinary 
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income. The result will likely be a long-term reduction of venture capitalists, a lower 

risk threshold for existing venture capitalists, and fewer innovations funded overall. 

By enacting this policy, Congress will put innovation and job creation at tremendous 

risk. Our position on this issue is publicly available from previous hearings and we 

continue to welcome the opportunity to work with lawmakers to better understand 

the implications of this troubling proposal. 

The need for capital does not end with venture investment. The goal of many venture-backed companies is to one day thrive as a publicly traded entity. However, the 

last decade, and the last three years in particular, have been especially hard for 

venture-backed IPOs. A healthy venture-backed IPO market would see close to 100 

new issues each year. In 2008, we saw just 6 venture-backed IPOs; 2009 had 12; 

in the first three months of 2010, there have been just 5. 

While much of this lackluster environment can be attributed to the financial crisis 

and skittish investors, we believe that there are fundamental structural issues that 

need to be more closely examined. The implementation of Sarbanes Oxley, the separation of research and investment banking, and decimalization—among other factors—have all contributed to a market that is not receptive to small cap IPOs. This 

situation is critical to the future of innovation because without an IPO market recovery, venture capitalists are not in a position to make new investments at the 

pace we have kept in previous years. We will spend more time with existing companies, wait longer to take them public, and complete fewer new deals. We do not 

want these good companies to wither on the vine if we can jump start the IPO market once again. 

We believe there is a role for policy makers and regulators to better support 

emerging growth companies and commit formal resources to understanding the dynamics and challenges of today’s IPO market. Dedicating senior SEC officials to address the collective interest of these rising stars will send a message to the market 

that the government is there to help, not hinder, their growth and innovation. We 

believe the formation of such a group would be extremely well received and we as 

an industry would commit to supporting its endeavors.

Intellectual Property Protection

The U.S. must also enact some essential reforms to its patent system. Few systems have protected and rewarded innovation better, but the system has gone 50 

years without so much as a tune up. Patents are particularly important to the startup community because they are sometimes the only asset of value that an emerging 

company holds. Often venture capitalists evaluate the quality of a company’s patent 

or patents when deciding whether or not to invest. Thus, patents protect the value 

of both the innovation and the investment. 

For this reason, the U.S. must focus on improving the quality of the patents it 

grants and the predictability of its protection process. Stronger patents will help reduce the amount of needless litigation generated by specious or spurious challenges 

and infringement claims. Greater predictability in how the U.S. Patent and Trademark Office, or PTO, awards and protects patents will also reduce risk for emerging 

companies and their investors. Current patent reform legislation moving through 

the Senate addresses many of these challenges and we are hopeful that the final 

outcome will institute reform that adequately funds the PTO and protects small innovative companies.

Conclusion

As we’ve seen, the United States has harnessed innovation to power economic 

growth, raise standards of living and improve our lives. The Federal Government 

has played a vital role in this success through innovation-friendly policies and incentives. We applaud policy makers who seek to foster an ecosystem where risk taking 

and entrepreneurship are rewarded. Yet the bar continues to rise as many foreign 

governments have begun to emulate our success and seek to surpass it. Their successes mean that we no longer hold a monopoly on innovation and its benefits. 

Make no mistake: The race is still ours to lose. But to maintain our innovation 

advantage, we must rededicate ourselves to what made us successful: increasing 

support for basic R&D, improving math and science education, supporting immigration and patent reform, and improving access to capital through smart tax policies. 

Without action on these fronts, the United States may find itself in the unfamiliar 

role of also-ran in the innovation race. The venture capital community remains committed to doing our part to ensure this is not the case. We look forward to working 

with Members of this Committee, Congress and the Administration to support the 

best and brightest ideas and continue to fill a robust pipeline of innovation for our 
72

country. I want to personally thank you for the opportunity to discuss these important issues with you today and I am happy to answer any questions.

BIOGRAPHY FOR PAUL HOLLAND

In addition to coordinating the CleanTech practice at Foundation Capital, Paul’s primary focus is on helping early-stage start-ups go from zero to $100M in revenue. 

He helped take public two venture-funded software start-ups, Kana Communications (KANA), and Pure Software (RATL). Paul currently serves on the board of directors for Bella Pictures, CalStar Products, Chegg, Coverity, Ketera, Serious Materials, and TuVox; and previously for Talking Blocks (acquired by Hewlett-Packard) 

and RouteScience (acquired by Avaya). 

Prior to joining Foundation Capital, was senior vice president of worldwide sales 

at Kana Communications, a leading supplier of Enterprise Relationship Management solutions to strategic e-businesses. Paul went on to build a team of over 350 

people that secured more than 900 customers worldwide, helping Kana become one 

of the top ten IPOs of 1999. Before Kana, Paul was a vice president and general 

manager for another highly successful start-up, Pure Software, helping raise their 

market value from $2 million to over $1 billion in his five-year tenure there. He 

began his professional career at SRI International (formerly the Stanford Research 

Institute). 

Paul enjoys spending time with his wife Linda Yates, and their three daughters, 

Kylie, Devon, and Piper. In his spare time he enjoys golf, volleyball, poker, traveling 

(he has visited over 50 countries to date), and is building a LEED Platinum home 

in Portola Valley. Paul has been guest lecturer on entrepreneurship at Dartmouth’s 

Amos Tuck School of Business, Harvard Business School, James Madison University, and the Stanford Graduate School of Engineering. He is an active advisor and 

supporter of Project BUILD in East Palo Alto, the Bing School at Stanford and Sustainable Silicon Valley. Paul received an MBA from the University of California at 

Berkeley; an MA in Foreign Affairs from the University of Virginia; and a BS from 

James Madison University.

Chairman WU. Thank you very much, Mr. Holland. At this point 

we will open for our first round of questions, and the Chair recognizes himself for 5 minutes. 

I just want to point out that we have a number of opportunities 

right before us. It is not just the Administration’s deployment of 

broadband but the Administration already has statutory approval 

and funding for health IT initiatives, for its energy initiatives. We 

have a couple of very important legislative opportunities in front of 

this Congress. One is the reauthorization of SBIR and of course the 

big one is the reauthorization of America COMPETES, which affects so much of what you all have addressed. 

I am going to begin by throwing you a puffball for you all, and 

I think I will just go from my left to right and ask that you, from 

your view, don’t repeat anything that is cited to your right but list 

additional factors, and the question is, what are the biggest barriers, what are the biggest barriers to entrepreneurship and what 

are your top one, two or three priorities, priority recommendations 

to help address those particular barriers. Mr. Chopra, why don’t we 

start with you? 

Hon. CHOPRA. We are squarely focused on strengthening the 

commercialization success rate out of research and development investments as a Nation, and you heard a terrific body of testimony 

from Dr. Kamlet. But Secretary Locke is leading a dialog with the 

university community throughout the country specifically on how 

we address this issue. I will simply highlight one basic phenomenon. As my mentor describes, we have a terrific portfolio of 

ideas throughout our university system and we have a challenge to 

bring market relevance to those ideas. In combination we can 

achieve a much higher rate of entrepreneurship, and so a great 
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deal of the reason you saw the $12 million investment in the partnership for innovation fund in the National Science Foundation in 

the President’s budget—was to bring more of the market relevance 

capabilities to the ideas that are coming out of our universities. 

You see that our innovation clusters work, and we are going to continue to focus on that as an important lever to see, we think, an 

improvement in the rate of entrepreneurship in the country. Obviously the factors I had cited earlier-about ensuring the conditions 

for an open and competitive marketplace, the capital markets success, an open and efficient government—are all factors as well but 

we are first and foremost going to look at the commercialization aspect. 

Chairman WU. Terrific. Thank you. 

Dr. Kamlet. 

Dr. KAMLET. Thank you. I will focus on one that is specific to 

universities and in particular to university-industry partnerships. 

Right now a company may come to the university and to a faculty 

member and say I would like to give you $1 million to do research 

in this particular area, and the faculty member will say that is fabulous, that is exactly what I want to do and this is going to be critically important research, and then we tell the company but you do 

know that you will not own the intellectual property, that we can’t 

guarantee that we will license it to you and we cannot guarantee 

we won’t license it to your competitors instead. And then the company says I am sorry, you must have misunderstood, I said we 

were going to give you $1 million. And we say yes, we heard you 

correctly but those are the conditions, and then the company says 

here we go to Singapore. And this is a reflection of an unintended 

aspect of the tax laws pertaining to doing research that is funded 

by industry in buildings that were originally once upon a time financed by tax-exempt bonds. It seems like it is a small thing but 

when you are trying to find good ways to interface with industry, 

it is a huge impediment and we would be happy to provide more 

details about that. It is something that is not recognized very 

broadly but affects us quite a bit. 

Chairman WU. You know, a staffer brought that to my attention 

about five years ago, and I had a hard time understanding it until 

just this moment. Thank you. 

Dr. Atkinson. 

Dr. ATKINSON. Let me list two, one that isn’t this Committee’s jurisdiction but I do think it is a central one, and that is what you 

could term foreign technology protectionism or mercantilism. I 

think it is much harder for entrepreneurs to succeed in this country now when you have intellectual property theft on a rampant 

basis, when you have standards manipulation, when you have a 

whole set of other practices that countries, not just China, but 

other countries are engaged in that that violate the spirit and oftentimes the law of WTO. I think that is a key factor that we are 

going to have get right. 

But the second thing I think is, we don’t do anywhere near as 

good a job of creating support systems for entrepreneurs at the 

ground level, and you compare that to a country like Finland which 

has a wonderful support system linked to their universities where 

if you are an entrepreneur with an idea, you can get help, you can 
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get technical assistance, you can find maybe an incubator to be in. 

You can get easy technology transfer from universities. So I commend what the Administration has done and I hope we can continue to improve on that because I think that is the right direction 

to go as we have got to beef up these regional innovation clusters. 

I think that would be an important step. 

Chairman WU. Thank you. Dr. Breznitz. 

Dr. BREZNITZ. I would like to follow Dr. Atkinson and the Honorable Chopra and also to talk about people, and in this case with 

great opportunity we have with this financial crisis that we just 

had. If you look at other countries, Finland, Israel and Ireland, one 

of the most important things for the high-tech industry was a crisis 

after which there were released a resource of a great genius who 

are in their middle ages with families and kids that need to go to 

college that couldn’t even think about becoming entrepreneurs before and now they had to, and what those countries did is help 

those kinds of people who know the industry, know how to make 

products but never wanted to do this job, now had to do this job, 

helped them to get the education to be entrepreneurs and the environment to be entrepreneurs and I think that is part of what we 

should do. 

Chairman WU. Thank you. 

Mr. Holland. 

Mr. HOLLAND. I will try not to be duplicative. I got the bad seat 

for that. It is pretty straightforward from our perspective. 

Chairman WU. Well, I knew that you were up to the challenge. 

Mr. HOLLAND. Thank you so much, Chairman. I appreciate your 

confidence. 

So straightforward for us. Please don’t triple the tax rate on the 

industry that has created 11 percent of the high-quality jobs and 

about 20 percent of the GDP in this country over the last 40 years. 

It is pretty straightforward from our perspective. Second, pass the 

Start Up Visa Act and take any steps necessary to ensure that the 

best and brightest from around the world continue to come to this 

country and don’t choose instead to go to China and India and 

other places that welcome them in a more receptive way than it 

looks as if we are about to as a society. 

And finally, continue to drive for improvements in math and 

science education and a 21st century curriculum in our K–12 system. If any of you saw the recent Friedman article on the Intel 

Prize, which the top science students in the country compete for, 

80 percent of the kids that were there were either first- or secondgeneration immigrants and many of whom’s parents had had training elsewhere. We have got to upgrade our basic infrastructure in 

K–12 and get back on the forefront of producing the best scientists 

in the world. 

Chairman WU. Thank you very much. 

Mr. Adrian Smith of Nebraska, five minutes. 

Mr. SMITH. Thank you, Mr. Chairman, and thank you to the 

panel for sharing your expertise. I am grateful for the many perspectives that you bring and certainly I hope that we can focus on 

innovation more so every day. I can’t help but think that the best 

driver for more innovation is available capital, and so I want—and 

I think we need to be mindful of that. I understand the government 
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needs to provide a nudge here and there but I struggle to think 

where the government should be the most important driver of innovation because I think that the private sector is underestimated 

with that. This has been interesting hearing the various perspectives and so again I just want to reiterate how much I appreciate 

your willingness to come here today. 

Dr. Chopra—I hope I am pronouncing that right—how involved 

should the Federal Government be in terms of the growth of innovation and what are the building blocks that you mentioned only 

the Federal Government can provide? 

Hon. CHOPRA. Well, thank you for the question. We actually 

strongly agree with the view that our private sector has been at 

the heart of job creation and the success of our entrepreneurial 

economy. But we, as I referenced in testimony, believe that there 

is a balance to be struck around building blocks, and the building 

blocks in particular are very straightforward, basic research and 

development, the work this Committee had done on putting us on 

track to doubling the basic research investments at NIST, the National Science Foundation and the basic science office within the 

Department of Energy. We very much believe in the importance of 

basic research investments and that is why the President has done 

as much as he can both in the stimulus act and in the proposed 

budget-to get us on track for the investment. 

On the workforce piece: I think, to underscore Mr. Holland, we 

are absolutely committed to making sure that our educational system focuses on science, technology, engineering and mathematics. 

That is why in the Race to the Top Fund, the only competitive 

differentiator a state could get extra points for when they applied 

for the Race to the Top funding was the degree to which they incorporated STEM into their application. It is the only differentiator. 

That is why the President, with basically no government money, 

collaborated with dozens of companies to create the Educate to Innovate Initiative which has already tallied over $500 million in private sector and philanthropic commitments to focus on STEM education. His priority goal is having America achieve the highest proportion of college graduates in the world by 2020, all of that is an 

essential building block. But we also believe in advanced IT infrastructure and the degree to which we have effective and efficient 

broadband, affordable and universal broadband throughout the 

country is a key priority for this Administration. If you are in a 

rural part of the country and you have a terrific idea and you want 

to build that application to generate wealth in your neighborhood, 

with the access to high-speed affordable broadband, we think you 

deserve every right to have the ability to compete. So those are the 

key building blocks as we see them, and I would be happy to go 

into more detail if you would like. 

Mr. SMITH. So I hear you saying that perhaps research wasn’t exactly ignored during the tech bubble, 1995 to 2000 or 2000 to 2007. 

I think you mentioned previously that it was ignored. Really? I 

mean, do you really mean that? 

Hon. CHOPRA. Maybe I misunderstood your characterization. I 

never said that research and development investments per se had 

been ignored, but I think if you looked at the overall performance, 

the statistics that Rob Atkinson cited very clearly were that there 
76

is a distinction between flat year after year, or I should say consistent with historical purposes, and how others around the world 

are competing. I think Rob’s statement that we had been at the top 

on a range of these measures and that if you look at the rate at 

which we have improved on those numbers from 2000 to 2009 that 

the rate of change in our investments in these areas hadn’t kept 

up the pace. I think that is the heart of the COMPETES Act, about 

putting us on track to doubling R&D. It is not that per se the numbers had fallen and we have ignored them. We have been funding 

universities forever. But it is the notion that we hadn’t put more 

of the research emphasis in that area, and I think that was where 

I was referring to, the notion of the historical perspective. 

Mr. SMITH. Okay. Thank you. I appreciate that. I do want to also 

add, you know, as I am across not only my district but I do get out 

of Washington and my district now and then, there is an immense 

concern that some of the goings-on in Washington will indeed stifle 

innovation, whether it is tax policy as has been mentioned a little 

bit here, and I don’t want to elaborate in the interest of time on 

exactly what these things are, but I want to give emphasis and 

pass along the concern of many Americans that many of these policies, tax policy among them but just one of them, would constrain 

innovation, would have a lockdown among our economy that is especially damaging, especially to innovation, especially to technology, ultimately to prosperity, and as we know, our budget relies 

heavily on those who have prospered and the fewer prosperous 

folks and entities we have, the more our budget hurts. 

And so I know that my time is up and so I want to close with 

that, at least for now, but again, let me say thank you for your expertise. 

Chairman WU. Thank you very much, Mr. Smith. 

Ms. Edwards. 

Ms. EDWARDS. Thank you, Mr. Chairman, and thank you to all 

of our witnesses. As is always the case whenever we are in this 

Subcommittee, we hear much more interesting and creative things 

than in some other places here in Congress, so thank you. 

I want to ask about this notion of innovation and entrepreneurship because I do think that there is a distinction and I think 

sometimes we get confused that merely investing in entrepreneurship is investing in innovation, and I wonder if some of our witnesses could actually discuss that, and along those lines, also this 

notion of investing in risk taking and the role of government, particularly in early stages in risk taking which might be distinct from 

the kind of risk taking, Mr. Holland, that you spoke about, where 

you are making decisions about where to place venture capital. And 

perhaps starting with Mr. Chopra, Mr. Holland, I wonder if you 

could weigh in on that. 

Hon. CHOPRA. Very thoughtful questions. Thank you. Let me 

begin by saying the distinction between innovation and entrepreneurship may be slightly less broad if you focus on high-growth entrepreneurship, and a great deal of our policy framework is focused 

on high growth, and of course, neither are sufficient. Simply investing in high growth, one has to make some leaps of faith as to what 

is in fact a high-growth business, and there is a whole body of work 
77

around how one does that. Experts like Paul at the end are focused 

there. 

On the topic of risk capital, we see that the President has made 

investment decisions to reflect this, that high-risk, high-reward 

basic research should remain a priority within the government. So 

while we have asked for the rate of growth to continue to rise in 

investments in National Science Foundation and so forth, we are 

also innovating within how that money is deployed so that we are 

pushing as much as we can to ensure that those programs that 

they fund allow for creativity and innovation. That is what I would 

call the productivity with which our R&D investments flourish, and 

I think high-risk, high-reward opportunities that we are focused 

on-for a specific example, ARPA–E in the energy domain—allow us 

to take a chance in areas that may not be as viable for traditional 

private investment but might make sense given the construct of 

where we are from a basic research perspective. 

When it comes to risk capital in the commercial setting, as we 

said earlier, creating the right market conditions that spur productive entrepreneurship is where we have focused our policy priorities. So making sure that we are doing what we can to be supportive of our private sector participants and ensuring that we are 

doing what we can to make government work, where we engage, 

that we have created a capital markets environment that is supportive and encouraging of the kind of investments that——

Ms. EDWARDS. Well, can you tell me how that relates to the new 

rules around—the new policies around SBIR? Because we have 

heard testimony in our larger subcommittee and this Committee 

about the tensions between the sort of private smaller business entrepreneurs and the institutional-based educational research institutions. 

Hon. CHOPRA. Well, actually I think there is a great deal of creativity and innovation taking place. I wouldn’t call it matchmaking—that may not be the right word—but just last week the 

National Science Foundation announced a $4 million solicitation, 

kind of a matchmaking service, to find the most innovative SBIR 

firms coupled with the most successful engineering research centers to see if they could collaborate together in spurring new economic activity. So we are focused. I think the comment that I was 

making about SBIR was, DARPA as just one agency has tried to 

streamline it. You know, one of the things that is frustrating, if you 

are a small business and you are successful in winning an award 

but you have to wait six months to get a contract, you can’t carry 

your cash flow for that long. It is almost not worth the effort. So 

by getting them to streamline the operations and say well, in 60 

days we are going to get you paid to get you to work, we think that 

is more in line with the notion of a small business. So there are 

some operational aspects to this that we are trying to get right. 

Ms. EDWARDS. Before I run out, Mr. Holland. 

Mr. HOLLAND. Yes. Thank you. It is an honor to take a question 

from you, Representative Edwards. I was born in Baltimore a long 

time ago, so I am very proud of my birth State of Maryland. 

I think, simply put, when Steve Jobs and Steve Wozniak were 

forming Apple, when Gordon Moore and Bob Norris were forming 

Intel, when Serge and Larry were forming Google, to put it bluntly, 
78

they didn’t give a frog’s fat behind about what was going on back 

here in Washington. It just doesn’t work that way in entrepreneurial circles. We just do what we do. It is almost as if the entrepreneurs are almost genetically programmed to start companies 

and to raise capital and to hire people. It is just the way they exist. 

It is like artists who create art. It is like writers who write. It is 

a form of existence that people do. 

Where government can help is in the areas that Dr. Chopra is 

referring to. Interfering in the way that capital is formed and capital is deployed and making it less efficient for that capital to be 

deployed is an incredible hindrance. That is the hallmark of Second 

World countries. That is not a hallmark of this country. And so 

that is one of the things that we are very, very concerned about as 

we look at what happens. So we have plenty of private capital 

available to help start these companies and get things to happen. 

Just putting us in a position where we can go and operate and do 

what we do and enable entrepreneurs is all we ask of the Federal 

Government at that level. All the work that we are hearing about 

here with the universities, the national labs and so forth is very, 

very important but we deal with things at the end of the line. We 

are where the rubber meets the road in trying to make these into 

businesses that will hire millions and millions of people. We know 

how to do that. The industry knows how to do it. But we are at 

risk right now. 

And just as a footnote, just to give you an idea, there were 1,200 

firms practicing venture capital by the year 2000. There are probably close to something like 600 or 700 firms now. Only 95 of those, 

according to some sources, did more than four investments last 

year. That is a very scary statistic for anybody that thinks about 

job growth over the next five or ten years. And if you add on to 

that some of the things that are being contemplated, that is only 

going to get worse. 

Ms. EDWARDS. Mr. Chairman, I have greatly exceeded my time. 

Chairman WU. Mr. Smith, five minutes. 

Mr. SMITH. I would yield if the Member from Maryland wishes 

for any more time. If she is on a roll, I don’t want to stand in the 

way. Okay. Thank you. 

Now, we have heard here this morning that America is one of the 

only countries in the world that does not have a national competitiveness strategy yet the Committee is continually examining our 

innovation and competitiveness needs through various hearings, 

culminating in the passage of the 2007 America COMPETES Act

and continuing with its legislation reauthorization this year. To all 

the witnesses, what do you see as the failures in the current America COMPETES that would lead to perhaps such a conclusion? 

Dr. ATKINSON. Let me start. I can’t resist the last question so let 

me do 30 seconds on that, because I think one of the problems with 

our innovation policy is, we are torn between, is this something the 

private sector does or is it something the government does. And 

with all due to respect to Mr. Holland’s last comment, when you 

look at many of the Silicon Valley companies, they can trace their 

roots very clearly back to government funding in one way, shape 

or form. Google had an NSF grant and others had NSF grants 

around library technology, searching technology. Intel, one of its 
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first customers was the Defense Department. In fact, in 1992, the 

county in the United States that had the most defense contracts—

this was a study I did for OTA [Office of Technology Assessment] 

when OTA still existed—was actually Santa Clara County. So it is 

sort of I think a false choice to say it is all entrepreneurs who are 

creative and it is all the government—the government didn’t create 

Apple nor could it, but certainly it helped, and I think we have got 

to think about our policies in that regard. 

So to your point about COMPETES, we are big supporters of 

COMPETES. I think it was a very important first step. But COMPETES is a little different than a strategy. COMPETES is a set of 

policies and programs, and I think what we would argue needs to 

be framed on that is a very in-depth strategy to really look at exactly where our weaknesses are, where our strengths are. And the 

last point on COMPETES, and I would echo Dr. Breznitz’s point, 

I think we need innovation in our innovation policy. I think COMPETES was principally about what economists would call supporting factor conditions, in other words, more basic research and 

more STEM personnel. Those are very important, and we have not 

done enough of that in this country. But there is a whole set of 

other things around tax policy, around institutional frameworks, 

what Mr. Chopra was talking about, public-private partnerships, 

research consortia, better university relations with entrepreneurs 

and companies, and I think that is where the next COMPETES 

could do a little more with. 

Dr. BREZNITZ. If I can add, I can also tell something about what 

other nations are doing since I have done this for both Finland and 

Israel and other nations do every seven years in the case of Finland, which I think is the Nation that does it, convey a group of 

experts, both local and foreign so they know they have somebody 

to evaluate them, and try to really look at how the country works, 

what are the policies and do they make sense together, not just as 

one act but all the tax laws, all the education facilities, all the entrepreneurship policies, do they make sense together? How they 

can be fixed? What are good ideas to fix them? And that I think 

is what put both Israel and Finland from peripheral economies—

let us call them that—to being on the forefront, and I think that 

this is what we should do. So I do think that we need to, as Dr. 

Atkinson said, think strategically about those issues. 

Mr. HOLLAND. And if I could just tag onto Dr. Atkinson’s comments, I certainly don’t mean to give the impression that we don’t 

appreciate some of the groundbreaking work that has been done 

over the years from the Federal Government in the Silicon Valley. 

In fact, I will give you an example out of portfolio. There is a company. I will mention the name of the company. It is Atheros Communications. I am going to guess that perhaps some of the people 

on this panel would know but most of the people in the public 

won’t know Atheros. When I tell you what they do, you will all 

know. This is a company that was funded, we funded it with 

$100,000 in 1997. There was a professor named Theresa Mung, 

first-generation Chinese, Ph.D. at Stanford University, and she had 

come up with an innovation in communications and we brought her 

into our group. We brought her whole lab over into our building. 

I will fast forward this. Eighty million dollars of private investment 
80

later including some really interesting work early on with DARPA, 

and this company is now the inventor of what is now known as 

WiFi, so most of us now in our personal computers, when we fire 

up our personal computer, there is a wireless chip in it and it is 

almost guaranteed it is by this company called Atheros. The company is worth several billion dollars and employs close to 10,000 

people. It integrates all the different things that we are talking 

about here today. I think that point that Dr. Breznitz is making 

about, I will describe that as a holistic and an integrated strategy. 

I think that is often really hard to do in this country but it is worth 

it in this case if we can find a way to do that. 

Mr. SMITH. Anyone else? If not, thank you. 

Chairman WU. Thank you very much. 

The gentleman from New Mexico, Mr. Luja ́n, for five minutes. 

Mr. LUJA ́ N. Mr. Chairman, thank you very much. I appreciate 

very much the conversation today and the emphasis on R&D, the 

emphasis with commercialization, but I am very concerned of the 

lack of mention of our national laboratories when we talk about 

commercialization, tech transfer, trying to understand what is not 

working there with legislation that has been brought forth in the 

past to create an environment such that tech can transfer and we 

can commercialize it, but we do know that we don’t see much of 

it. Back in the 1990s, we saw an acceleration that created the cooperative research and development agreements with lack of utilization going into 2000 and 2001, and we need to figure out how to 

integrate them more into this and see how we can involve them. 

Dr. Atkinson, I very much appreciate that you did mention the 

national laboratories with your bullets that you highlighted. The 

one thing that I would ask is your perspective on how we can use 

our national laboratories as part of the nucleus for the regional innovation clusters. As we all know, the national labs currently engage in a range of tech transfer activities but we still don’t see that 

strength, and you highlight with your first bullet to see what we 

can do to remove the restrictions on universities from having specific commercialization objective. I wonder what your thoughts are 

around that, and also, Mr. Chopra, around what we could do with 

creating incentives so that we can see more commercialization and 

this kind of activity and even incentives for entrepreneurial lead so 

that way we can create certainty for companies that Mr. Holland 

would bring in, the scientists, the engineers, the physicists that 

help develop these ideas is able to partner with those entrepreneurs that have the ability to manufacture, and your thoughts 

on that. 

Dr. ATKINSON. Excellent question and comment. We did a report 

last year with a colleague of ours at University of California Davis, 

Fred Bloch, and Fred did a report called ‘‘Where Do U.S. Innovations Come From,’’ and he did an analysis over 40 years with the 

top hundred innovations every year. What Fred and his team found 

was that Federal labs actually play a more important role than you 

think, that about two-thirds of award-winning innovations today, 

actually more than that, about 75 percent, come from collaborative 

partnerships. That is very different than 30 years ago when most 

innovations came from one company having it in their lab, figuring 

out how to do it and commercializing it. Today it is much more 
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about collaboration—SBIR award winners, Federal laboratories, 

universities, small businesses, big businesses. So in that new ecosystem, Federal labs can play an important role. And we see that 

in New Mexico, for example, the Sandia Science Park, very effective. There is an innovative approach to try to get some of those 

technologies out of there. 

I think we could do two things. One, in the 2005 energy bill, 

there was a provision put in there by Senator Bingaman, I believe 

Senator Domenici at the time, on a collaborative energy R&D tax 

credit so if you worked with a Federal laboratory, you are a company and you worked with a Federal laboratory on energy R&D, 

you could get a more generous credit because the logic is, a lot of 

that benefit is going to spill over. A scientist at the lab will publish 

those results. I think we could just change that provision and say 

that any R&D done at a Federal laboratory by a company could get 

a more generous R&D tax credit. That would be one thing. I think 

the second part of this would be to make sure that any provisions 

or proposals that the Administration has or other proposals that 

try to engage universities in better efforts on technology transfer 

that we also apply that to Federal laboratories because there are 

certainly some Federal laboratories that have a lot of potential and 

could do a lot more. 

Mr. LUJA ́ N. I appreciate it. 

Mr. Chopra and Mr. Holland. 

Hon. CHOPRA. Let me begin by saying I hope I didn’t convey the 

impression that it was only a university focus. I think the Federal 

labs have a great deal to offer. In fact, I was with the Chief Technology Officer at Procter and Gamble who has created a multimillion-dollar benefit out of a collaboration with Sandia itself. So 

we are seeing the same principles apply. Now, there are some peculiarities in how we promote bringing of industry relevance into research activities and so there are some processes that are different, 

but no, we are very much committed to servicing best practices and 

understanding what we can do to make it work. We are doing a 

deep dive on the experiment that had been done in the labs to 

bring in entrepreneurs and residents. It may not have achieved the 

results we had anticipated. The venture capital community participated in that program. Trying to gather lessons learned and see 

how we can think anew. I was with Christina Johnson at the Department of Energy, very focused on this issue within the portfolio 

in collaboration with Koonan. So we are very much open and interested to finding ways in which we can collaborate on best practices 

with the universities and Federal labs and see that as a strong engine of new ideas for the commercial sector. 

Mr. LUJA ́ N. And I apologize, Mr. Holland. My time has run short. 

Just quickly. 

Mr. HOLLAND. So Representative Luja ́n, I think it is a good news/

bad news thing. The bad news aligns with the frustration that I 

heard in your question. The good news is, I think the venture industry is waking up to the potential in the national labs so that 

the NVCA does clean tech road trips where we take 40 VCs out to 

Sandia, Enrel, Oak Ridge and Argonne, and a number of us, including me, have actually funded projects out of the labs. On the 

bad news side, we were one of the participants in the EIR [Entre-
82

preneur in Residence] program. We took a brilliant Ph.D. physicist, 

we embedded him in a national lab, not in your state, for a year. 

He looked at a thousand projects and at the end of that time period 

we concluded there were none that we could put venture money behind, that we had confidence would succeed, and so I think the 

issue there is, it goes back to your original question. There is a fundamental disconnect, I think, between some of the activities in the 

work and their ability to apply those in a commercial realm, so 

there is sort of a bridge too far in some ways that we have to figure 

out. 

Mr. LUJA ́ N. And Mr. Chairman, I know my time is up, but if you 

give me the flexibility to—we mentioned this to Secretary Chu as 

far as how can we put these incentives in to create a stronger environment, and I will give you just a quick example. There was a 

brain imaging scientific exploration going on at Los Alamos National Laboratories. The spin-off was that we were as a result of 

what happened on the failed attempt on Christmas, we were able 

to take that brain imaging technology and use that magnetic resonance technology to now be able to put a molecular footprint on 

chemicals, liquids, materials that we could identify that could be 

harmful in a plane. Now, there may not be an obvious technology 

but the spin-offs are endless, and I certainly think that as we talk 

about the competitiveness of the United States, Mr. Chairman, 

that we need to look to see how we can include our national labs 

in this process and see how we can get this technology off the shelf 

and into the market. Thank you, Mr. Chairman. 

Chairman WU. Mr. Luja ́n, always happy to give you a couple of 

additional minutes. You are a great representative for the country 

and especially those two national labs, absolutely wonderful. 

I was just stunned. I was in a conversation with some of the 

folks at Los Alamos recently and just as an aside asked how many 

Ph.D.s do you have there, and the fellow said 2,700. Absolutely 

stunning, and we need to build a different culture perhaps and do 

a better job of mining what is there. 

Dr. Kamlet, a couple of quick questions for you. I used to represent folks doing spinouts. Most of the time I represented the institution, and we engaged in protracted discussions about how to 

do the spinout, and at the risk of starving some future attorney 

families, you all have found an interesting way of doing business 

with this five percent go-in-peace policy. Have other universities 

adopted it? It apparently has worked well for you all. What is you 

evidence that it is causality rather than correlation in the step up 

in your spinouts, and just a couple of other questions, is it the decrease in transactions cost or an important signal to your PIs or 

some of each of that? 

Dr. KAMLET. Well, first I should say, I mean, most of our technologies are in the IT and engineering space and it is possible that 

other approaches in biotech would have to take other forms, but for 

us it has been transformational. When I came in as Provost ten 

years ago, the committee that had searched for the provost had 

identified tech transfer as the single most broken thing at Carnegie 

Mellon, and it is almost impossible to overstate the ill will that occurs when you start negotiating hard with your own faculty and 

the transaction costs are stupendous. We have found that the sim-
83

ple template, five percent go in peace, has made things very transparent. It has made things very quick. It has made things very mutually friendly on both sides between us and our faculty, and we 

know from advisory groups that come to evaluate different parts of 

campus that we are now seeing by the faculty, by the researchers 

as this being a competitive strength for Carnegie Mellon. It is 

something that attracts both students and faculty to us because we 

have these kinds of policies, and I think other universities have not 

adopted this very widely but we are on their radar screen and 

hopefully they will in the future. 

Chairman WU. Terrific. Thank you. 

Mr. Holland, do you care to comment if you have had experience 

in negotiating with universities or research institutions and whether that has been hard or easy? 

Mr. HOLLAND. I guess I would say I think it is getting better in 

part because of the kind of innovation we are seeing from Dr. 

Kamlet and others. I think that we went through a period of time 

where nobody really knew how to do the dance and now we have 

kind of figured it out. We figured out the rules that make the most 

sense. We have been extraordinarily fortunate in terms of rolling 

projects directly out of university and having them be incredibly 

successful, and I won’t bore you with all the examples. I could give 

you six right off the top of the bat, and we are one of hundreds of 

venture firms. One that is notable is a company called Financial 

Engines. We funded that directly out of Nobel prize-winning work 

out of Stanford University. We took the professor and his top graduate student out and started this company back in 1996. Financial 

Engines creates these algorithms that are very interesting. They 

automatically help invest your retirement money. It is a lot more 

complicated than that but there are 58 patents associated with the 

work there. This is a company that took 13 years for us to get to 

the point where it could reach the public market. It went public 

two weeks ago on Monday and is now trading at about a $800 million market cap on NASDAQ so it is employing hundreds and hundreds of people, very high-quality jobs, and it was a research 

project directly out of a university, but as I can tell you, I can give 

you many, many more of those and I think, you know, quite frankly there are just some places that do it better than others. The 

schools that are represented on this panel do it very, very well. 

We were at Carnegie Mellon two weeks ago. We commissioned 

some work there, a study on some things that we can’t handle 

within our own firm on some algorithms we want to develop and 

so we spent a day at Carnegie Mellon, had a competition, had a 

bunch of students and faculty come forward with some great ideas. 

It was very cost-effective for us, so we love that type of collaboration. 

Chairman WU. Great. Thank you very much. 

Dr. Kamlet, just very quickly, this project at Olympus and the 

entrepreneur in residence program, I am fascinated by that. How 

do you set that up and how do you select the people to participate? 

Dr. KAMLET. Well, the people who participate are self-selected 

but it is amazing how many of them respond incredibly well to a 

little bit of assistance. They didn’t see themselves necessarily as 

knowing how the dance works, so to speak, in terms of commer-
84

cialization and we have found both students and faculty to be enormously receptive. We have tried to create what you might call an 

entrepreneurial ecosystem trying to provide assistance across all 

the points in which faculty and students interface with us, and in 

terms of entrepreneurs in residence, it is a process that has worked 

amazingly smoothly. We have to find the funding for it, but we 

have a very good culture for welcoming some entrepreneurs. 

Chairman WU. Thank you very much, Dr. Kamlet. 

I recognize the gentlelady from Maryland. 

Ms. EDWARDS. Thank you, Mr. Chairman. 

I want to go back to Dr. Atkinson. In your testimony you talked 

particularly about tax policy, and this isn’t the committee to do tax 

policy but it is actually important to our consideration about how 

we structure investments in innovation, and you talked about other 

countries and their tax policies that have elevated them to spur investment, and one of our recommendations goes to a 30 percent 

credit around the idea of collaboration, which you have spoken to 

a great deal. I believe in investing in collaboration and I don’t 

think you necessarily get the kind of collaboration you want unless 

you do invest in it. But I wonder if there is a point in time or process or research at which it is important to scale up those investments and collaboration as opposed to some other times because 

you could make those investments really early or allow for a 30 

percent credit early but it still doesn’t necessarily at the end product result in the kind of collaboration that you want to spur something toward one form of innovation into the commercial sector. So 

I wonder if you can give us some ideas about that or what the limitations or hazards might be in putting in and enabling that kind 

of credit at the outset at such a substantial amount. 

Dr. ATKINSON. Sure. I guess we do see that this notion of collaborative innovation systems is critical to driving high rates of innovation that are commercialized within the United States, and we 

need a multitude of different policies, and we have heard a lot of 

them today, different policies around how intellectual property is licensed and different incentive policies and all. I do think the tax 

policy is one component of that. I don’t think in and of itself a collaborative R&D tax credit is going to solve all the problems but I 

think it will help. Right now if a company wants to invest at Carnegie Mellon, and you have many, and there are at Georgia Tech 

as well, a lot of that research is going to be a benefit to everybody. 

So even though Google has a lablet there and Intel has a lablet 

there, the faculty aren’t prohibited from publishing articles. In fact, 

they do publish articles. So economists would call that knowledge 

has spilled over and other sort of free riders, if you will, can just 

take it and innovate. And so there is an underinvestment of industries in university collaborative research, and to Mr. Luja ́n’s point, 

in Federal labs as well. So that is why we think that a tax credit 

could play an important role there. 

One of the nice things about that too, by the way, this wouldn’t 

involve the government picking a winner or a loser. If an industry 

and a university or a lab come together and they think there is 

something valuable in that partnership, they would be able to do 

that under the system. So I don’t really see a lot of risks with that 
85

other than the risk of if we only did that, I think we wouldn’t do 

enough because you have to have a whole ecosystem. 

Ms. EDWARDS. And are there standards—and maybe, Mr. 

Chopra, you can answer this. Are there standards or principles 

that could be set so that when government makes grant-type investments that you don’t just encourage collaboration but you actually buy it? 

Hon. CHOPRA. Well, in fact, we make those judgments within the 

program areas, so let me answer your question in two parts. One 

example is health IT as a new research and development endeavor 

that was called for because of the Recovery Act, and because for 

health IT there is a closer gap between what is done in the research environment there and what could actually be seen in the 

hands of the software companies who produce the goods for doctors 

and hospitals. Collaboration was a requirement as part of the grant 

request and so there was an explicit notion there that you had to 

collaborate not only across research institutions but also with the 

private sector. So that is one. And two, and this is an important 

point and I think the term ‘‘innovation cluster’’ can be described in 

lots of ways. From a policy standpoint, there are program mission 

restrictions about what they should or shouldn’t fund, but what we 

tried to do to promote collaboration was to say if we could bring 

multiple agencies that have mission alignment around a particular 

policy objective—but come to it with their own perspectives—that 

we could actually achieve the kind of collaboration we are looking 

for without bearing all that burden on a single funded program 

area. 

So the reference we made earlier, maybe a month ago in February, the Department of Energy initiated an energy innovation 

hub on building efficiency, and we are scoped to make an investment that looked like as defined in the program, but we wrapped 

around it the engineering research centers in the National Science 

Foundation. We wrapped around it Small Business Administration 

grant opportunities. We wrapped around it NIST opportunities to 

the Manufacturing Extension Program. So we stitched together 

seven Federal agencies who offered if an applicant could describe 

their approach to the innovation cluster, the collaboration that 

would help bring about the economic growth we would like to see 

out of the investment, they could apply for multiple buckets, in a 

sense, in a coordinated fashion. This is our first pilot of this regard. 

It seems that the demand out in the field is pretty high. We had 

a couple of public hearings about people’s interest in this. Normally 

you get 100 people to show up at these things. Four hundred-plus 

people showed up at the first of these to talk about how they could 

take advantage of this new initiative. As we see the results of this 

program, we might factor that into future activities. So some programs will have more specific language about collaboration and the 

solicitations themselves. Others will take this collaborative approach where they bring multiple agencies to the table to achieve 

the same goal. I am sure there is a better and cleaner and more 

efficient way of doing this but we are doing it within the constraints of the current environment, and you all will, I am sure, engage on these issues during the course of your deliberations. 

Ms. EDWARDS. Thank you, Mr. Chairman. 
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Chairman WU. Thank you, and thank you very much, Mr. 

Chopra. I saw that group of 400 individuals and it was an interesting gathering, and I just want to let you know that the folks 

that we brought together for our little regional application for that 

project, the red-team analysts commented that this is the most 

complex offering, shall we say, that they had ever seen, and I am 

not sure which way to take that, but——

Hon. CHOPRA. We are learning as we go, Mr. Chairman. 

Chairman WU. Mr. Luja ́n for five minutes. 

Mr. LUJA ́ N. Mr. Chairman, thank you very much, and I just want 

to say, what a useful and very valuable discussion that this has 

been today to get some insight and especially the level of detail 

that you went to in the testimony that you submitted to us as well 

prior to this hearing. Very insightful. 

A very simple question directed to Mr. Chopra. It seems that a 

lot of the R&D directorates that we see with the Department of Defense and DOE are top down that we push what we want to see 

but there are a lot of ideas that are percolating from the bottom 

up. What can we do or how can we work to create an environment 

that can support a lot of that as well to have some flexibility with 

those programs as well, which is those centers were originally created for but other programs that do exist for some of these collaborations to allow for that to happen? 

Hon. CHOPRA. Well, thank you very much. That happens to be 

an area that I have a great deal of passion for, which is balancing 

the top down from the bottom up, and here I would like to invoke 

the President’s open government initiative where we are trying to 

change the way Washington works by being much more transparent and collaborative and participatory so we can find great 

ideas from the bottom up and see that they have a chance to take 

hold, and this applies beyond R&D. This is a philosophy we are 

taking to every Federal agency. I will mark the date April 7th 

when each of the Federal agencies, the Cabinet agencies in particular, will be publishing open government plans as directed by 

the directive that had been issued back in December. You will see 

a great deal of strategy in each of those plans outlining how agencies will service bottom up new ideas that can be implemented. 

Specifically, I will point to a line in that directive referencing 

prizes, competitions and challenges. 

When the President issued the open government directive, one of 

the key deliverables coming out of it was produced on March 8th, 

guidance from OMB [Office of Management and Budget] to all Federal agencies on how we can thoughtfully utilize prizes, competitions and challenges to do the kind of thing you are describing, 

bring ideas up that hadn’t been conceived and detailed requirements that go over 500 pages of material where you know exactly 

what you are looking for. That is a culture change in Washington. 

I am not going to suggest it is going to happen immediately but we 

are starting to see the fruits of that activity. More and more of our 

agencies are thinking about ways that they can capture both frontline worker innovations, perhaps the Federal labs might be another 

example, as well as innovations out in the private sector. 

I will give you just one agency in particular, the Veterans Administration. They have been trying to get the claims backlog down 
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forever, and as many of us know, it is a top priority for nearly 

every presidency is to serve our veterans at the highest standards 

yet the claims backlog continues. President Obama in August said 

‘‘I want the 19,000 frontline workers to give us your best ideas.’’ 

We ran a business plan competition, picked the 10 best. Those are 

being implemented as we speak, but a gentleman from Togus, 

Maine had a simple idea that didn’t cost us a nickel to restructure 

our performance measures so that we could create a culture of accountability for results. He wouldn’t know that his idea would go 

anywhere. Togus, Maine put it in their business plan, came down 

to Washington, made the pitch. Secretary Shinseki said yes, this is 

it. They are now executing, and by July that will be implemented 

at zero additional cost. So we are going to do this, I hope, in every 

one of our agencies. 

Mr. LUJA ́ N. I appreciate that. 

And Mr. Holland, and this goes for the entire panel, I am very 

interested in getting whatever analysis was conducted with that 

pilot project that you engaged with, with working with the national 

laboratories to see what failed, and for that matter, hearing from 

any companies that you have worked with or that are out there 

that have positive stories and negative stories so that we can see 

what we can do to learn from that and see how we can integrate 

that to make a much more friendly environment to allow for this 

to move forward. 

Mr. HOLLAND. Given the nature of the time constraints, we have 

other more positive stories to share and I am happy to take those 

offline with you. One is around some of the work at Oak Ridge 

around their energy efficiency smart homes, and our clean tech 

practice at the foundation happens to specialize in energy efficiency, smart grids, smart materials. So one of our companies has 

their windows installed in this smart home. The windows are actually manufactured in Pittsburgh, just outside of Pittsburgh. But we 

have got great stories around that type of thing. But the bottomsup nature of what you are talking about is a huge issue for us. It 

is what we call deal flow, and it is actually probably the most important thing in our industry. 

One of the things that we are working on now, and you all, 

thank you for so many things about this meeting but one is, you 

saved me a couple plane flights because we are going to be hitting 

up our friends at Carnegie Mellon and Georgia Tech to participate 

in a program that we are going to start, having us basically hire 

students to be campus reps, and we want those campus reps to be 

the equivalent of kind of little miniature AWACS [Airborne Warning and Control System] planes. We want them sort of buzzing 

around the area and notifying us when they see something that 

looks interesting, looks like it could be a good project. A project can 

come from anywhere. It could come from the university, come from 

the local area. We are looking very closely at a company in Pittsburgh called Mod Cloth right now that was funded out of two students that happened to be married who were undergraduates at 

Carnegie Mellon. That is the kind of stuff that we live and breathe 

for, so we are very interested in this whole notion of bottom up and 

we are spending a lot of time on it. 

Mr. LUJA ́ N. Thank you. 
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Thank you, Mr. Chairman. 

Chairman WU. Thank you very much. 

Mr. Holland, we read your materials about facilitating collaboration and we acted on it promptly. 

Three very, very quick questions. I hope to get this in in my last 

five minutes. Dr. Kamlet, you suggest, and I think a couple other 

people also suggested, that there are some funding issues. The 

Technology Innovation Program and SBIR don’t cover the spectrum 

of taking a product from the lab to commercialization and that we 

need to address earlier as well as later funding, if we could quickly 

tap on that and then move on. 

Dr. KAMLET. Yes. The government’s main role of course is in the 

domain of basic research but it is also the case that before Mr. Holland and his organizations can take a product, it has to reach a 

certain potential in terms of commercial capability and have progressed to the point in which there is a clear functionality and intellectual property and so forth, and it is really before something 

is ready for an SBIR or for venture funding because that requires 

a company to already have been formed. That chasm exists, and in 

order to get the most mileage from the basic research to translate 

into commercialization, spending some attention on trying to find 

funding mechanisms to take not large amounts, $50,000, $100,000. 

There should be a lot of accountability attached to it but that is a 

current gap in which unless we find funding from foundations or 

conceivably do it ourselves, there is no basis in the ecosystem and 

the American structure and the universities to fund those kinds of 

things. 

Chairman WU. Well, shoot, you know, maybe the feds can just 

match what Carnegie Mellon is willing to put on the table in terms 

of indirect cost recovery funds. 

Dr. KAMLET. Well, we can talk. 

Chairman WU. If no one else wants to comment on that, Dr. Atkinson, you and Dr. Breznitz mentioned that some of our innovation is perhaps better done at the state level or that coordination 

is better done at the state level, and I wanted you to address that 

a little bit further because quite frankly, that is something that I 

have not focused on despite all the activity that has been going on 

in my neck of the woods with Onami and others. 

Dr. ATKINSON. Sure. Within the last perhaps 15 years, I think 

one of the biggest changes in the U.S. innovation system is that 

virtually every state has developed some programs and policies to 

spur technology-based economic development, and it is completely 

divorced from party lines so Republican governors do this just as 

actively as Democratic governors. The big problem with that, 

though, is that the incentive for them is limited because sometimes 

it takes innovation policies five to ten years to pay off. I don’t think 

a lot of governors are thinking five to ten years down the line. Oftentimes they have to worry about their reelection. And secondly, 

a lot of these policies sometimes will spill over into other states. 

So our view is that the United States is so big—Dr. Breznitz mentioned Finland, great, interesting programs there. They are sort of 

like a state. The United States is so big that we can’t really have 

a national innovation system that is completely run from Washington. The people who are running the technology group in Pitts-
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burgh that the state helps fund, they know about these projects in 

Pittsburgh pretty well but I don’t think Washington knows about 

them. Same thing in Portland. That is why Oregon has a program 

like that. So the problem though, is that these programs are underfunded, and if the Federal Government could support them in a 

more systemic way and tie them also to the development of longterm strategies around innovation, as you, Dr. Breznitz, have alluded to in your testimony, I think that would really go a long way. 

I think we have an undervalued resource here as partners with the 

states and it is, I think, time for a Federal-state innovation partnership. 

Dr. BREZNITZ. Thank you for this question since, as you know, 

I am very much interested in this. I can give an example from 

Georgia, so for example, we conducted a study at Georgia Tech 

about what happens to a cluster of high-tech industries in Atlanta 

and we found out it is stagnant, so it grew and then it is stagnant 

for about ten years, and we tried to figure out what it is. Money? 

No. Good people? No. We found out it is basically a secret sauce 

of Silicon Valley, collaboration. Companies do not collaborate. And 

in order to make the Atlanta cluster better, therefore you had to 

have a program that understands how to connect the actors within 

the Atlanta region. This is something that the Federal Government 

can’t even know and therefore we need to go to the state levels if 

we talked about bottom-up ideas and understand what some of the 

limits, constraints, ideas that they have and we can probably do 

that as the Honorable Chopra said by giving competitions. If you 

want to have a really innovative idea to look for your region and 

your city, you have to submit a proposal for a competition and the 

Federal Government can give you a certain amount of money or tax 

credits and make it happen. An experiment that works can be replicated and the Federal Government can make sure that if you 

want to do semiconductors, which is all around the Nation, and 

have three or four of those competitions, you can coordinate with 

them and that way we can bring the forces and the knowledge from 

the bottom up and from the Federal Government and have a national strategy at the same time. 

Chairman WU. Terrific. Thank you. My understanding is that 

there are no more questions form the panel except for this last one 

from me. Lessons from DARPA, ARPA–E and NASA. Many people 

have talked about the good model that DARPA has provided. 

DARPA and NASA were started at about the same time, and we 

might have some lessons about how each has or has not spurred 

private sector innovation, and finally, our experience to date with 

ARPA–E. I don’t know if we have had enough run time to draw any 

conclusions but if the panel would like to comment on at least 

these three organizations and their effect on innovation in America. 

Hon. CHOPRA. You know, I would not want to speak for the directors of the programs that you have referenced to describe their success, but I will tell you from my vantage point, a key to their success is understanding a problem that they wanted to solve. When 

you have a problem, an itch you are trying to scratch, a problem 

you are trying to solve, you can be much more effective in bringing 

together an ecosystem to help you address the particular problem 

that you are looking to solve. That is, in a sense, that equation of 
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ideas and relevance equals innovation. So I think a key in DARPA 

in particular and NASA as well, it is really early in ARPA–E but 

it is part of the DNA there, is a really thoughtful understanding 

of the problem. That allows there to be a creative approach to tackling that problem and that I think has been much more effective 

to produce relevant ideas that hopefully have the ability to translate in the commercial sector. 

Dr. ATKINSON. I will just make one comment, there was a report 

that we had an event on with a Carnegie Mellon professor, Erica 

Fuchs, who is an engineering and also public policy professor, and 

she has done a very in-depth study of DARPA over the long history 

of DARPA and when it was more successful and less successful at 

spurring innovation sort of beyond just the Defense Department. 

And what she found was that DARPA was most successful when 

it didn’t just focus on their narrow mission and it had a more 

broader and expansive role, also going to Mr. Chopra’s point about 

still had focus but it wasn’t just we are trying to do this very narrow thing. So I think that is important for an agency like DARPA 

or ARPA–E to maintain that somewhat broader focus on spurring 

innovation, and DARPA has been able to do that sometimes quite 

successfully and other times less successfully. 

The last point I will make is, one of the things that I do think, 

though, it is important to recognize that there are innovation challenges in the United States that aren’t related only to mission 

needs, and I think that is a big gap that we have and other countries—talk about a leader is Taiwan. I mean, they really are focused on some technologies that are driving their economy and 

have been quite successful but aren’t really related to national government mission needs. 

Dr. BREZNITZ. On that point, two remarks. I think DARPA—and 

I know Erica very well. We have been officemates at MIT when we 

were both slightly less young. DARPA was very, very successful 

when it managed to become a facilitator for private actors and universities to work together and come up with great ideas and fund 

them to do research that otherwise would not have been funded. 

When it saw its main role in creating those networks, making them 

happen and letting them run, it was amazingly successful. And the 

same goes for Taiwan. When Taiwan was amazingly successful as 

a research foundation, very similar to a national lab, in creating 

the private industry—the most famous one is semiconductors—is 

when it understood what its main role and its main metrics and 

benchmarks would be the creation of new companies that brings on 

billions and come up from new ideas and new collaboration with 

itself, universities and private entrepreneurs, and I think that is 

part of a facilitating role of the Federal Government that I would 

like to see more of. 

Chairman WU. Terrific. Thank you all very much. This has been 

such an important discussion. I just wish that it had the draw of, 

say, doing a hearing on steroids in baseball. But putting the economy on steroids just doesn’t have the same draw. 

I very much share with you all the view that America’s best days 

are ahead. The balance with that sort of quintessentially American 

optimism about the future, I think it also behooves us to look over 

our shoulder. A few years ago when I was visiting China, and I vis-
91

ited a number of research institution and universities, but I also 

took the time to visit a high school, and we had a vigorous discussion there. It was absolutely terrific. It was very similar to the discussions that I have with high school students at home in Oregon. 

But the question that came up that I want to recall now is this 

Chinese high school student asked me what do you think is America’s greatest strength, and I thought about it for a second and I 

said well, actually paranoia, paranoia about whether we are staying ahead, whether someone is catching up, and I think that sometimes we can overplay that concern and that can infect our optimism in negative ways and we should not have either a blind optimism or blind paranoia, and striking that balance is a very important role for anyone who leads the public, and I think that we all 

have an important role to play in that. 

Again, I want to thank you all for appearing before this Subcommittee. I view this as part of a continuing dialog and look forward to looking for both legislative opportunities and convening opportunities and other opportunities to push our agenda forward in 

stimulating innovation in America. 

The record will remain open for two weeks for additional statements from the Members and for questions to the witnesses. 

The witnesses are excused. Thank you very much. The hearing 

is now adjourned. 

[Whereupon, at 12:24 p.m., the Subcommittee was adjourned.]

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