Government Involvement in the Innovation

Process: A Contractor's Report to the

Office of Technology Assessment

August 1978

NTIS order #PB-286545
Library of Congress Catalog Number 78-600102

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

Washington, D.C. 20402
FOREWORD

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

and priorities, the Office of Technology Assessment is studying policy tools to encourage innovation. This document, Government involvement in the innovation

Processj is an interim report from this study.

RUSSELL W. PETERSON

Director

Office of Technology Assessment

. . . Ill
Government Policies for Innovation

Project Staff

Ellis R. Mottur, Program Manager*

Carolee McBee, Acting Program Manager and Project Leader

L.F. Barry Barrington, Project Leader

Irene Zarechnak, Clerical Support

OTA Publishing Staff

John C. Holmes, Publishing Officer

Kathie S. Boss Joanne Heming

Contractor

The body of this report was prepared by Staff of the Center for Policy Alternatives,

Massachusetts Institute of Technology.

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

Smithsonian Institution.

iv
Program on R&D Policies and

Priorities Steering Committee

Russell W. Peterson Lewis M. Branscomb

Director Chairman

Office of Technology Assessment Panel on the Applications of

Science and Technology

Jerome B. Wiesner

Chairman

Technology Assessment Advisory

Council

Harvey Brooks

Chairman

Panel on Health of the Scientific

and Technical Enterprise

Gilbert F. White

Chairman

Panel on Decisionmaking on R&D

Policies and Priorities

Application of Science and

Technology Advisory Panel

Lewis M. Branscomb, Chairman

Vice President and Chief Scientist, IBM Corporation

Preston T. Bankston

Deputy Director

Office of Science and Technology

Mississippi Fuel and Energy

Management Commission

Barry R. BIoom

President, Central Research

Pfizer, Inc.

Irving Bluestone

Vice President, Director

United Auto Workers

General Motors Division

Edward E. David, Jr.

President

EXXON Research and Engineering

Company

Charles J. Hitch

President

Resources for the Future, Inc.

C. Lester Hogan

President and Chief Executive

Officer

Fairchild Camera and Instrument

Corporation

Alice Tepper Marlin

Executive Director

Council on Economic Priorities

Claire Nader

Independent Consultant

Arthur S. Obermayer

President

MOLECULON Research

Corporation

Robert M. Solow

Institute Professor

Massachusetts Institute Technology

Philip H. Trezise

Senior Fellow

The Brookings Institute

Herbert F. York

Professor of Physics

University of California at

San Diego
.

PREFACE

This report was prepared by the Center for Policy Alternatives at the

Massachusetts Institute of Technology, under a contract awarded by OTA. It was

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

upon technological innovation—the process that leads to the commercial introduction of a new technology.

The study included an examination of the major factors that currently influence the process of introducing new goods and services to the user, These factors include the following: incentives and funding for basic research; tax, patent,

procurement, and antitrust policies; regulations; size, sector, and locale of the

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

The report also identifies and describes the activities of five other industrialized nations in the support of science and technology (see pp. 43-47). The applicability and transferability of these approaches to the United States are questionable.

The report is summarized in chapter I, where the contractor’s findings are

translated into suggestions and options. The authors identify 10 opportunities for

Congress to consider for facilitating beneficial innovation. These complex issues

deserve much greater consideration than was possible in the brief study. However, it illustrates the complicated dynamics of the innovation process.

vii
—

CONTENTS

Chapter Page

GOVERNMENT INVOLVEMENT IN THE INNOVATION PROCESS

I. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . .

The Government Role in the Innovation Process . . . . . . . . . . . . . . . . . . . . .

U.S. Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government Programs . . . . . . . . . . . . . . . . . . . , . . . . , . . . . . . . . . . . . .

Table I. —Thirteen Program Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Key Features of Government Support for Technological Innovation

in Selected Foreign Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issues in Future U.S. Government Policy Toward Technological Innovation. .

II. Government Involvement in the InnovationProcess:

Policy Implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

The Government Role in the Innovation Process . . . . . . . . . . . . . . . . . . . . . .

Reasons for Government Concern With Innovation , . . . . . . . . . . . . . . . . .

III. U.S. Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A Framework for Viewing U.S. Government Programs and Activities. . . . .

Identification of U.S. Programs . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . .

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

IV. Summary of Major Features of Several Foreign Approaches

to Technology Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Great Britain. . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary Observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

V. Major Issues in U.S. Policy Toward Technological Innovation . . . . . . . .

Issue l—Direct Support of Nonmission-Oriented Technology . . . . . . . . . .

Issue 2—Reconsideration of the Role of the National Laboratories . . . . . .

Issue 3–FacilitatingNew Entrants Into the Market. . . . . . . . . . . . . . . . . . .

Issue 4—Diffusion of Technology Within the Private Sector . . . . . . . . . . .

Issue 5—Implementation of Environmental and Safety Regulations . . . . .

Issue 6–Manpower Resources, the Labor Market, and Technology . . . . . .

Issue 7—1nternational Commerce and Domestic Innovation. . . . . . . . . . . .

Issue 8—Support for Sector-Specific Microanalysis. . . . . . . . . . . . . . . . . . .

Issue 9—Support for Hazard Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 1O—Affecting the Demand for New Technologies . . . . . . . . . . . . . .

3

3

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4

4

4

4

5

5

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66
Contents—continued

Chapter

Glossary of Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIST OF FIGURES

Figure I.—Government Involvement in the Innovation Process . . . . . . . . . . . . . . . . .

Figure 2.—U.S. and Foreign Experience. . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .

Matrix I.-The Assessment of New and Existing Specific Technologies . . . . . . . . . . . . .

Matrix II. —Direct Regulation of the Research or Development of New Products

and Processes . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

Matrix IV. –Programs To Encourage the Development and Utilization of Technology

in and for the Private Goods and Services Sector . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix V. —Government Support of Technology for Public Services Where Consumers

are the Primary Users . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VI. –Support for the Development of Technology Where the Federal

Government is the Primary User . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VII. —Support for the Science Base Necessary for the Development

of New Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix VIII. –Policies To Affect Industry Structure Which May Affect the

Development of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix 1X. —Policies Affecting Supply and Demand of Manpower Resources

Having an Impact on Technological Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix X. —Economic Policies With Unintended or Indirect Effects on

Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Matrix XI. —Policies Affecting International Trade and Investment. . . . . . . . . . . . . . . . .

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

Matrix XIII. —Government Policies Responding to Worker Demand Having

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

Page

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x
Government Involvement

in the Innovation Process

A contractor's Report

to the Office of Technology Assessment

CONGRESS OF

THE UNITED STATES W

Office of Technology Assessment
The research underlying this report was supported by a contract from the Office of

Technology Assessment, U.S. Congress, to the Center for Policy Alternatives at the

Massachusetts Institute of Technology.

Principal contributors to the report include:

George R. Heaton, Jr., Project Manager

J. Herbert Hollomon, Principal Investigator

Nicholas A. Ashford Jinjoo Lee

Byron Battle Wolfgang Leidig

Shing K. Fung Amit Sen

Paul Horwitz Marvin Sirbu

Linsu Kim James Utterback

Meir Weinstein
Chapter I

SUMMARY

INTRODUCTION

This report is concerned with the relationship between Government action

and technological innovation in the civilian sector of the U.S. economy. Its

principal objective is to develop some of the key policy issues important in

designing future programs affecting innovation. These issues are concerned

with promoting technological innovation for economic purposes, using innovation to achieve a variety of social goals, and controlling the adverse consequences of new technology. The issues have been derived from several

research components: consideration of the appropriate role of Government in

the technological innovation process (chapter 11); a knowledge of the range of

current U.S. Government actions bearing on innovation and an understanding

of the innovation process and how industry responds to such Government interventions (chapter Ill); and an acquaintance with the experience of comparable industrialized nations in fostering technological innovation (chapter

IV). The result of the analysis is not to prescribe specific legislative actions

for Congress, but to suggest broad areas where Congress might consider

programs in the future to reinforce the momentum or influence the direction

of U.S. technological development.

THE GOVERNMENT ROLE IN THE INNOVATION PROCESS

Governments in all modern industrialized

countries employ a variety of techniques to promote and shape technological development.

Each has concluded that the free action of the

market is not sufficient to achieve the desired

long-term goals of technological strength and independence. For many different reasons, governments may choose to intervene where market

forces are clearly incapable of achieving defined

national objectives.

First, with respect to knowledge generated

from the research and development process,

private economic units cannot capture all the

benefits arising from the creation of new knowledge and will tend to invest in those projects

whose results they can control. Similarly, in some

cases, like public health, few economic units

benefit from research investments. Hence, from

the societal point of view, underinvestment in important research areas may occur because of the

nonappropriable or public nature of knowledge.

Second, while some larger companies in the

United States may invest vast amounts of

resources in research and development, the

limited scale of most private economic units prohibits their undertaking very large-scale research.

Hence, Government performance or support of

some kinds of R&D as well as many forms of

basic research is necessary.

Third, the public interest often requires a Government role to shape and control the social and

political nature of new technological development. The private sector, responding to market

signals other than social priorities, cannot be expected to ensure the welfare of society and the

Nation. This situation may require regulation to

correct market failures (for example, pollution

control) or substitution of social decisions for the

market allocation of resources (for example,

transportation facilities for the elderly and the

handicapped).

3
U.S. EXPERIENCE

The task of documenting the current content

and effect of U.S. Government policy toward innovation has been approached from two perspectives. Part of the analysis concentrated on

identifying and categorizing existing Government

programs. A parallel effort attempted to illustrate

some of the effects of Government programs in

selected industries. The utilization of these two

perspectives is based on an important premise of

this report—that a full understanding of the Government-innovation relationship involves not

only a knowledge of existing programs but also of

the industrial contexts in which their impacts occur.

Government Programs

The number and variety of Government programs affecting innovation is very large, although

many, if not most, are not necessarily designed

with that goal in mind. On the contrary, they are

directed toward goals as disparate as economic

growth, job security, and environmental quality.

It is useful and necessary for conceptual purposes

to establish a framework for organizing these actions into a number of self-contained program

areas which reflect the major technology-related

themes of current Government policy. Such a

framework can (1) provide a convenient analytical framework for viewing the programs, (2) illustrate the programs’ relationships to technological innovation, and (3) furnish a common structure within which proponents of different viewpoints can make a case for reorientation of national policy regarding technology.

The framework developed for this report is

shown in table 1.

For each area, the existing programs have

been identified and categorized. This is done

through the use of 13 matrices (see pp. 23-25),

whose headings illustrate some aspects of the

relationship of the programs to innovation. This

categorization was useful to the research effort in

that it highlighted areas of current program emphasis and neglect. Conclusions of this nature,

reached from the matrices, were used as a major

source of input to the development of the key

policy issues presented in chapter V.

Area

1.

Il.

Ill.

Iv.

v.

V1.

V1l.

Vlll.

lx.

x.

xl.

X11.

X111.

Table 1 .—Thirteen Program Areas

Program

The assessment of new and existing specific

technologies.

Direct regulation of the research or development

of new products and processes.

Direct regulation of the production, marketing,

and use of new or existing products.

Programs to encourage the development and

utilization of technology in and for the private

goods and services sector.

Government support of technology for public

services where consumers are the primary users.

Support for the development of technology

where the Federal Government is the primary

user.

Support for the science base necessary for the

development of new technology.

Policies to affect industry structure that may

affect the development of technology.

Policies affecting supply and demand of

manpower resources having an impact on technological change.

Economic policies with unintended or indirect

effects on technological innovation.

Policies affecting international trade and

investment.

Policies intended to create shifts in consumer

demand.

Government policies responding to worker

demand having impact on technological change.

A Comparison of

Selected Industry Experiences

The experience in several industries has been

reviewed to determine the nature of the impact of

Government actions on the innovation process.

From this sample of industries, three policy instruments emerge as the most effective Government policies in influencing the rate and direction

of technological change:

●

●

●

In

that

Regulation (pollution, health and safety,

energy conservation);

Federal R&D support (direct to industry, indirect, and Government-performed); and

Procurement of innovative technologybased products.

general, these industry studies have shown

several characteristics of Government ac4
tions have made them particularly effective in

promoting technological innovation. First,

Government programs and incentives that help

new firms and ventures get started normally have

resulted in important innovative activities in

various sectors. Second, where the Government

has provided a market for new technologies or

has given direct R&D support, firms have frequently responded by changes in products and

processes as a result.

Third, actions that complement normal competitive pressures for change in an industry have

been effective in inducing technological change,

largely because they have taken into account the

force of the market on innovations. For example,

regulations with respect to energy conservation

have reinforced normal market forces to stimulate new fuel conservation innovation.

Fourth, while Government performance of

basic research has made many outstanding contributions to industrial innovation, evidence

shows that Government development per se of

new products and processes has often been overtaken by the rapid pace of innovation in private

industry where superior knowledge of the production process and product design prevails. This

observation leads to the conclusion that Government action of this nature is most effective where

it complements normal market forces operating

within the private sector.

KEY FEATURES OF GOVERNMENT SUPPORT

FOR TECHNOLOGICAL INNOVATION IN SELECTED

FOREIGN COUNTRIES

While there exists no clear equivalent to the

U.S. experience among foreign countries, the

success and failure of government involvement in

the innovation process abroad can be instructive

to U.S. policy makers. In analyzing the major features of programs in Japan, the United Kingdom,

West Germany, and France, several clear contrasts in philosophies and tactics with respect to

encouraging technological change are apparent.

In particular, the relative success of certain

Japanese approaches and the lack thereof of several British programs may offer interesting lessons for future U.S. programs. On the whole,

however, several common elements tend to

emerge in observing the approaches of these four

case countries, namely:

Direct government support for product development and R&D in private firms tends

to be a prominent instrument in stimulating

innovation abroad.

Government support for technological developments basic to a wide range of industry is almost ubiquitous (e.g., friction

research).

ISSUES IN FUTURE U.S.

●

●

●

●

●

Use of government procurement is relied on

to strengthen demand for innovative technologies and reduce market risk and uncertainty for firms.

Prouision of capital by the government to

firms seeking to introduce innovative products and/or processes is present in all these

countries, although the form and timing differs from case to case.

Emphasis on changes in industrial structure

is apparent in all four countries in order to

meet the requirements of technological

progress and international competition.

Emphasis on export performance in international markets is a clear priority in all

these countries, and is translated into several types of incentives for new products

and processes.

Emphasis on labor training and manpower

development policies constitutes a major

feature in the technology development policies of these countries.

GOVERNMENT POLICY

TOWARD TECHNOLOGICAL INNOVATION

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

. -

sights’ gained from foreign experience, several

5
policy issues have emerged which, in the author’s

opinion, merit consideration by Congress. The

following summarizes these issues and some illustrative, although far from exhaustive, initiatives which may derive from them.

ISSUE 1

Direct Support of Non missionOriented Technology

Currently, the U.S. Government provides no

direct support for nonmission-oriented technological development, unlike other industrialized

countries where this support is frequently prominent. There are several reasons for considering

such support. First, the United States is facing

growing competition in international markets in

technology-based products from countries where

Government support for such technologies is

strong. Second, the social returns on technological innovation are frequently greater than those

accruing to the individual inventor and may take

the form of increased employment, environmental protection, and product safety. Therefore,

there are many areas in which the private sector

will underinvest in the development of new technologies because of the inability of the developer

to appropriate the rewards. Congressional initiatives for the implementation of a policy to support the development of such technology might

include:

1. Legislation directing the procurement of innovative products at a price that provides

for an indirect subsidy of R&D costs;

2. Support for a program of advanced

3

research responsive to a variety of social

goals, but not appropriable by any single

firm; and

The granting of exclusive patent rights to individuals and firms making inventions on

federally supported R&D programs.

ISSUE 2

Reconsideration of the Role of the

National Laboratories

Most of the existing National Laboratories

were set up to support a specific governmental

6

mission such as nuclear weapons development

or space research. In many instances, however,

these laboratories have expanded their roles

beyond the original missions. In other cases, the

changing nature of Government policies has

brought on changes in their activities. At present,

many of the National Labs compete directly with

private industry in performing research directed

at the development of civilian technology of commercial significance. Options available to Congress to better utilize the National Laboratories include:

1. The definition of explicit missions, as well as

2

the identification of, and justification for,

new research roles for them; and

Development of guidelines for use by the

funding agencies in deciding which projects

to fund in-house and which to support in

the private sector.

ISSUE 3

Facilitating New Entrants Into

the Market

New and small firms have been shown to be

leading innovators in many areas, largely

because they are often formed on the basis of a

new idea or product and have great flexibility in

introducing radically new products into the

market. Such firms frequently face a variety of

barriers in establishing or expanding their operations, including restrictions on venture capital,

tax disadvantages (including less favorable than

before capital-gains taxation), regulatory barriers,

and market dominance by larger, established

firms. Congress might usefully consider several

options to ease the process of entering the market for new firms and individual entrepreneurs,

such

1.

2.

3.

4.

as:

Selective use of Government procurement

policy;

Stricter enforcement of antitrust laws;

Assistance to new firms in meeting regulatory requirements; and

Greater patent protection for the small innovator.
ISSUE 4

Diffusion of Techno ogy Within

the Private Sector

Better diffusion of existing technologies and

existing technical information would serve to

stimulate innovation in several ways. First, the

productivity levels of industries could be raised by

closing technology gaps. Second, by helping

small- and medium-size firms compete with

larger ones, new innovative products and processes could be encouraged. Third, compliance

with regulation could be facilitated by diffusing

knowledge of the means to comply. Finally, new

uses of technologies could be promoted by transfers among different types of industries. Existing

market structures tend to inhibit wide application

of technologies, thereby giving undue advantages to large technology leaders. Several instruments are available to the U.S. Government

to overcome such market rigidity, some of which

might be:

1.

2.

3.

4.

5

Establishment of a network of local

technical centers;

Support for industrial cooperative activities

by small firms;

Support for technology information/communications systems;

Compulsory licensing of technologies to

competitors when leading firms reach a certain market share; and

Government purchases of technology for

resale to new users.

ISSUE 5

Implementation of Environmental

and Safety Regulations

The effect of regulation on technological innovations remains highly controversial. The

research which has been undertaken in this area

indicates that the effects which exist, though

substantial, cannot be simply characterized. At a

minimum, it is necessary to recognize both positive and negative impacts and to distinguish the

effects of regulation on the development of new

compliance technology from the more general effects that it may have on the rate and direction of

technological innovation in the broad sense. Insufficient attention has been given to new means

of implementing regulatory legislation so as to

encourage innovative compliance technologies

that help to achieve regulatory goals. For example, the following regulatory mechanisms,

among others, deserve consideration in the U.S.

context:

1.

2.

3.

4.

Strict liability for pollution damage;

Effluent taxes;

Joint R&D for pollution control; and

Government support for the development

of compliance technology.

Evaluation of the means to promote innovation in regulatory compliance is needed as well as

immediate application in selected contexts of

new policies to facilitate the achievement of

regulatory goals via technological change.

ISSUE 6

Manpower Resources, the Labor

Market, and Technology

An infrastructure element essential to technological change is qualified manpower. The rapidly changing nature of technology requires a flexible and farsighted manpower policy to prepare

for future technological development, both in

terms of training for the future and helping

workers adjust to the dislocations that are frequently caused by technological change. A comprehensive manpower policy adopted by Congress might include several important components to satisfy these needs, such as:

1.

2.

3.

An analytical capacity within Government

to conduct continuing forecasts of future

skill requirements in different sectors;

An effective program of labor adjustment

assistance to facilitate the adaptation of

workers and their skills to new job requirements; and

A long-term strategy for scientific and

technical education and training adapted to

future manpower needs and technological

trends, particularly in the area of engineering education.

7
ISSUE 7

International Commerce and

Domestic Innovation

Technological innovations are vital to U.S. industries in competing with foreign producers in

both international and U.S. markets. Government efforts are needed to help U.S. industries

enhance their competitiveness by promoting

domestic innovations as well as facilitating the

adaptation and improvement of advanced foreign technologies. For industries that are noncompetitive in the long run, Government measures are needed to assist labor and business adjust structurally and to soften dislocations during

the transition.

ISSUE 8

Support for Sector-Specific

Microanalysis

The relationship between Government action

and technological innovation varies significantly

among different industrial sectors. Because there

is a lack of good studies of specific industries and

the effects of Government programs on them,

Government policymaking in various areas is

often severely hampered. No sector-specific

microanalytical capability of significant size exists

in Government today. Consideration should be

given to support for such a capability to aid decisionmaking in areas ranging from regulation to

tax policy. This capability need not necessarily be

lodged in the Government, but could also successfully be established with

in universities or other parts

ISSUE

Government support

of the private sector.

9

Support for Hazard Analysis

Because hazards too often go unrecognized

until their dangers reach crisis proportion, it is important to create a capability to anticipate them,

or at a minimum, to institutionalize a means to

monitor their presence. Although various agency

programs attempt to assess and prevent hazards,

the existing efforts are deficient in several

respects. Hazard analysis as currently performed

in Government lacks coordination and is not contained within the explicit mission of many agencies. Consequently, it is an underdeveloped

discipline. Several policies deserve consideration,

1.

2.

3

including:

A centralized agency to strengthen the U.S.

hazard analysis capability;

Government support for development of

this discipline in universities, worker, and

consumer education; or

A hazard analysis requirement for industrial

firms.

ISSUE 10

Affecting the Demand

Technologies

for New

Perhaps as a result of the overemphasis on

R&D as a component of the innovation process,

Government policy to date has tended to focus

more on the supply of new technologies than the

demand. However, policies that work through

influences on demand have often been shown to

be more effective in eliciting innovative products

and processes. Government procurement is one

notably successful example, and environmental

regulation may sometimes work in a similar

fashion to change demand. New demand-oriented policies should be considered, including

mechanisms that create new or expanded markets, for certain kinds of technologies, e.g., procurement, user subsidies, regulations; and

mechanisms that directly influence consumer demand, e.g., information provision or advertising

regulation.

8
Chapter II

GOVERNMENT INVOLVEMENT

IN THE INNOVATION PROCESS

Policy Implications
Chapter II

GOVERNMENT INVOLVEMENT

IN THE INNOVATION PROCESS

Policy Implications

INTRODUCTION

This report is concerned with the relationship

between Government action and technological

innovation in the civilian sector of the economy.

Because that relationship is exceptionally wideranging and complex and its importance is subject to considerable debate, the general effectiveness of Government influence on innovation

cannot be adequately assessed in this work, nor

can a thorough evaluation of individual programs

be provided. Neither task is the purpose here.

Rather, this document is intended to accomplish

the following:

●

●

●

●

●

It

To develop an appropriate framework for

viewing the relationship between Government action and innovation.

To provide a comprehensive overview of

the major existing U.S. Government programs and policies having both intended

and unintended effects on innovation.

To understand typical responses of U.S. industry to Government programs in several

selected industry contexts.

To review some selected experiences of foreign governments in the innovation process, taking note of particularly effective or

ineffective policies.

To suggest a series of important issues concerning the Government-innovation relationship in the United States to provide a

basis for considering the reorientation of

existing policies.

is important to be clear at the outset about

both the definition of innovation and the range of

Government programs with which this report is

concerned. Innovation is the commercial introduction of a new technology and is not to be

confused with invention, which is the development of a new technical idea. The innovation

process includes a complex and interconnected

set of activities leading from invention to commercial introduction, but not necessarily in any

prescribed sequence. Although R&D is often an

important part of this process, it is by no means

always the most important, nor is it often likely to

be a sufficient condition for successful innovation.

The interaction between Government programs and innovation is very wide-ranging, and

Government influence on all elements of the innovation process may be significant. This report

is concerned with all aspects of that influence.

Thus, the Government programs surveyed include those intended to enhance innovation as

well as those intended to control it. They include

not only those programs directed at the actual

commercial introduction of a new technology,

but also those affecting the various factors and inputs leading to innovation and the various social

impacts resulting from innovation. In addition,

the unintended but nevertheless important effects of programs designed to serve a variety of

social purposes not directly related to technological innovation are also considered.

The Approach and Structure

of This Report

There were several elements to the research

involved in this report. This chapter explores the

various justifications for Government concern

with innovation. In chapter 111, the U.S. experience was considered from two perspectives.
One element began with a comprehensive documentation of existing Government programs and

drew upon a series of analytical studies, ’ which

attempt to understand their effects (Government

Programs, p. 19). Although this approach was

useful, it was not sufficient to understand fully the

complexity of the Government-innovation relationship. Because the focus of this approach was

on programs and their intended purposes, it was

unable to uncover some of the unintended consequences of the program or assess programs

fully in combination.

In order to have a more balanced approach, a

second element of the research focused on several industries where the total effects of Government programs were felt (A Comparison of Selected Industry Experience, p. 35). Studies utilized here attempted to understand the nature of

the innovation process in industryz and whether

and how Government action has actually influenced the pattern of innovation in an industry—

within the context of other forces that also influence it. The combination of these two research

elements yielded a relatively full factual picture of

the Government-innovation relationship. Both

perspectives were necessary to obtain this understanding.

Another major element of the research drew

upon a series of studies3 examining foreign government policies in regard to technological innovation (chapter IV). This analysis provided

useful contrasts to the U.S. experience. None of

these research efforts involved original empirical

research; rather, each was a synthesis of existing

studies.

The final element of this research involved

utilizing all of these components in order to

derive a series of important policy issues for congressional consideration (chapter V). It should be

‘See, for example: 1) The Impact of Governmental noted that these issues do not attempt to recomRestrictions on the Production and Use of Chemicals, CPA,

December 1976, 2) An Analysis of the Effects of Public

Regulation on the Copper Wire Industry, CPA, March

1977, and 3) Program Development Procedures and Trans -

fer Mechanisms in the National Sea Grant Program, CPA,

November 1977, These studies focused on the overall effects of individual programs, not just the relationship to innovation. They were useful to this research effort in providing factual material about existing programs, in developing evaluative tools, and in placing the Government-innovation relationship within context of other governmental goals.

‘These studies have been documented and summarized

in other Center for Policy Alternatives reports, including an

earlier report to the Office of Technology Assessment,

Government Action and the innovation Process, April

1977, the results of which have been incorporated into this

document.

mend specific legislative actions, but rather to

suggest broad areas where Congress might consider future actions to reinforce the momentum

or channel the direction of U.S. technological

development.

These components of the analysis and the

relationships among them are presented diagrammatically in figure 1.

‘See Government Support for Technology: An Examination of the Foreign Experience, CPA 75-12, 1975. The

results of this study and others were summarized in the April

1977 CPA report to OTA (see footnote 2) and are

recapitulated in chapter IV of this report.

THE GOVERNMENT ROLE IN THE INNOVATION PROCESS

Technological innovation in the civilian sector

of the U.S. economy occurs largely as a direct

result of the activities of private firms. This being

the case, one may well ask why the U.S. Government should be concerned with innovation

and what, even given this concern as a legitimate

governmental function, its appropriate role

should be. Various governments answer this

question differently and thus the degree of involvement in industrial innovation varies from

country to country, influenced in part by the

prevailing economic and political systems. For

example, many governments, in both developed

and developing countries, own and run enterprises that would be private in the United States.

This is especially true in heavy or high-technology industries, where governments often become

the prime developers, users, and marketers of innovations. Even when the government does not

own the producing enterprises, subsidization and

or direct support for the innovation process in industry is common.

This is not to argue that the U.S. Government

should necessarily do likewise. However, it

should be recognized that the governmental
Figure 1 .—Government Involvement in the Innovation Process

Policy Questions

Why should Government be involved in

technological innovation?

How does the U.S.

Government currently

act on the innovation

process?

How do foreign governments affect the

innovation process?

What future policies

should the U.S. Government consider to

influence technological innovation?

What specific legislative measures are

available to Con -

gress?

Chapter II

Definition of appropriate

role for Government

\

(Diagrammatic View of CPA Analysis)

Components of Analysis

\

Chapter Ill Chapter Ill

Current U.S. Government U.S. industry response to

+ U.S. Government programs programs (see p. 19) (see p. 35)

SOURCE Center for Policy Analysis
presence in the United States may be as significant as that in other countries, although it takes a

different form. For example, the U.S. Government has historically been involved in supporting

selected industries (see chapter III, Government

Programs, pp. 19) and currently plays a major

but indirect role in the innovation process

through various economic and social policies or

regulations. Although many of these programs

and regulations are not directly aimed at influencing the innovation process, their impacts may

often be greater than those arising from direct

Government support for technological development.

Reasons for Government Concern

With Innovation

Governments are not concerned with technological innovation for their own sake, but rather

attempt to promote it or manage it because of the

social, economic, and political effects that result.

For example, because technological change has

been shown to be an important contributing factor to economic growth, governments seek to encourage it. Similarly, innovation is promoted in

order to increase productivity and retard inflation

or to improve the international competitiveness

of a nation’s products and improve its balance-ofpayments position. On the other hand, governments are also vitally concerned with the adverse

effects of technological change, including unemployment, pollution, and unsafe products. In this

case, policies may be directed toward the control

rather than the promotion of new technologies.

In none of these instances, however, is the relationship between the social goal and technology

simple or unidirectional. For example, although

technological changes may have led to pollution,

they must also certainly occur in order to control

it. The crucial point is that in a technologically

based society, the process of innovation is intimately related to many, if not most, of the important social goals of that society and that innovation is therefore a critical element of most government policies.

Going beyond these rather general reasons for

government concern with innovation, there are

also strong arguments why the government

should intervene directly to influence innovation

under certain circumstances. These interventions

are usually justified because of market failures or

deficiencies of the following kinds:

THE PUBLIC NATURE OF KNOWLEDGE

Private firms may underinvest in the development of new technology (from a societal point of

view) because they are not able to capture all of

the benefits resulting from such investments. This

situation, often called the “appropriability problem, ” occurs because the knowledge which results from investments in technical development

can usually be readily acquired by others who will

compete away part of the benefits from the

original developer. Basic research in particular

suffers from this problem because its output is

usually an advance in scientific or technological

knowledge that can subsequently be used in applied research and commercial development by a

wide and often unforeseeable range of firms.

Moreover, new technical developments also tend

to be highly uncertain in terms of results and utility. Thus, direct government support of this class

of R&D is necessary to correct for underinvestments. In addition, government support for technical development may have positive effects for

firms other than those in which the research is

performed, thus creating “positive externalities. ”

STRUCTURAL CHARACTERISTICS OF INDUSTRY

The problem of indivisibility exists where

economies-of-scale requirements prevent small

organizations from undertaking certain activities

viably and efficiently. For example, certain industries may be too fragmented and firm size too

small to support an adequate research and product development effort. Furthermore, large oligopolistic firms may concentrate their resources

on short-term improvements in existing products

rather than on risky and market-disturbing longterm innovations. Individual consumers face a

similar problem in that they often lack the information to make wise purchases or the market

power to be effective bargainers. In these situations, the large economies of scale suggest that

support from the Federal Government is needed

for some types of R&D, or that cooperative industrial or consumer efforts must occur in order

to attain the minimum efficient size.

14
—

SOCIAL AND POLITICAL NEEDS

The “public goods” problem refers to the fact

that there are certain goods whose benefits are

difficult or impossible to deny to a citizen who is

unwilling to pay for them. For example, all U.S.

residents enjoy the full benefits of national

defense even though they might not want them.

Therefore, for public goods, the decision of how

much to supply to individual units cannot be

made by the market, but must be made by the

political system. This is in contrast to the situation

where the market can provide the appropriate

results if the government attaches the right costs

and benefits to the appropriate decision making

units. It is thus justifiable for the government to

directly support the R&D for these types of

goods.

There is also another direct, intended role for

government. In part, this role is one of control.

Technological innovations are frequently accompanied by undesirable social or economic

consequences, such as environmental pollution,

health or safety hazards, and displacement of

workers. In these cases, the government as

overseer and protector of the public interest must

play a very direct role in ameliorating such

undesirable effects, via planning, controls, regulations, or transfer payments. The government

presence is necessary either because the private

market has not eliminated or cannot be expected

to eliminate these undesirable effects, or because

efficient market solutions are not desirable social

policy.

15
Chapter Ill

U.S. EXPERIENCE
Chapter Ill

U.S. EXPERIENCE

This chapter is concerned with documenting the status and effect of U.S.

Government policy regarding technological innovation. It presents factual information about which programs exist and suggests a framework within

which to consider their effects.

The task has been approached from two perspectives. One, a “program

perspective, ” concentrates on the documentation of existing U.S. programs

and policies that have an important relationship to technological innovation.

These have been organized into a series of 13 major policy areas and are

presented in Government Programs, see below. The second approach, an “industry perspective, ” focuses on a series of industrial sectors and considers

what have been the effects of Government action on innovation in those sectors. This is presented in A Comparison of Selected Industry Experiences, p.

35. The presentation of two different perspectives illustrates an important

premise of this report —that a full understanding of the Governmentinnovation relationship must involve an appreciation not only of the existing

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

Although the presentation of each perspective contains a large amount of

factual information, detailed analysis and evaluation have been eschewed in

favor of a broad overview. This approach was chosen in order to be consonant

with the overall focus of the report on the development of policy issues. Each

of the perspectives has been utilized extensively as a source from which to

draw in the development of the policy issues presented in chapter V. Figure 2

illustrates the components of this section and their relationship to the other

parts of the report.

GOVERNMENT PROGRAMS

A Framework for Viewing

U.S. Government Programs and Activities

The U.S. Government programs with which

this report is concerned are those that have an

important relationship to technological innovation. The number and variety of such programs

are very large, and many, if not most, are not intended to affect innovation. On the contrary, the

programs are directed toward a diversity of societal goals, some of which include: increasing the

availability of goods and services for a variety of

purposes, protecting society from the adverse

consequences of technology such as endangerment of health and safety or dislocation of manpower, and designing measures benefiting specific sectors such as manufacturing, small business,

labor, consumers, or the disadvantaged. These

goals represent sometimes conflicting purposes.

and the particular programs and activities

directed toward them are undertaken somewhat

independently of each other. Nevertheless, it is

useful and necessary for conceptual purposes to

establish a framework for organizing the Government programs and activities into a number of

self-contained program areas which reflect the

major technology-related themes of the programs that seem to be important or are at issue.
I

I

Us.

Chapter Ill

Government actions

Program areas and matrices

Conclusions:

Areas of emphasis and neglect in

current U.S. programs

Figure 2.— U.S. and Foreign Experience

(Sources of Issues for Technological Innovation Policy)

Chapter Ill

U.S. industry experience

Sample of six industrial sectors I

Conclusions:

Effectiveness of Government actions

i n eliciting innovation i n industry

Chapter V

Chapter IV

Foreign experience

Survey of technology policy in four

industrialized countries

Conclusions:

Types of policies which have been

most effective i n foreign contexts

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

SOURCE: Center for POIICY Analysls
A framework of this kind is valuable for several

reasons. First, it provides a convenient construct

for viewing the large number of relevant programs. Second, it illustrates some aspects of the

programs’ relationships to technological innovation. Third, it provides a common structure

within which the proponents of various viewpoints can make their case concerning a reorientation of national policy in relation to technology.

PROGRAM AREAS

●

●

Government role in this area has traditionally been a relatively limited one.

Area V concerns programs to support technology in public services where consumers

are the primary users. In contrast to area IV,

the Government role here has traditionally

been rather large. Public goods and services

such as transportation, communication, or

law enforcement comprise the relevant programs.

Area VI represents technology enhanceThe framework developed for these purposes

is presented below. The 13 program areas are

listed in table 1. They have been organized according to the following logical sequence.

● Area 1, technology assessment, is basic to

policy design. Ideally, Government must be

able to assess specific technologies with

regard to their utility, unintended consequences (externalities), and the distributional consequences of both utility and externalities, if specific programs or activities

are to be continued, altered, or initiated.

 Area 11 addresses the direct regulation of the

innovation process through constraints on

the research and development of new products and processes. Regulation here is intended to ameliorate the adverse consequences of technologies. The design of

policy in this area is concerned with the

problem of externalities and distributional

consequences of possible adverse health or

environmental effects.

● Area ✩✩✩ focuses on direct regulation of the

production, marketing, and use of new or

existing products. The purposes and

methods of regulation in this category do

not differ substantially from area II. However, because regulation here focuses on

end products rather than the development

process, its impact on innovation is more indirect. The numbers of regulatory programs

in this area are quite large and exceed those

in area II.

● Area IV addresses the activities and programs that are intended to enhance the

development and utilization of technology

for private goods and services where the

private sector is the primary user. T h e

ment activities where the Government itself

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

This area would include programs such as

the space and defense efforts.

The program areas 11 through VI all represent

activities and programs that are undertaken in

order to directly affect a perceived deficiency in

resource availability, utility, externalities, or

distributional consequences of technological activity. Areas 11 and 111 consist of programs in

which regulatory means are employed to channel

the direction of technology, and areas IV through

VI consist of programs that utilize other

mechanisms to enhance the development of

technology. The remaining seven program areas

represent activities that are less direct, though important for technological change.

●

●

●

●

Area VII is the list of programs generally

described as the necessary infrastructure or

science base required -for innovation to occur, for whatever purpose. This includes

programs such as support for basic research, information transfer efforts, etc,

Areas VIII and 1X represent less technologyfocused policies, emphasizing policies

directed toward industry and labor market

structure respectively, which nonetheless

may affect technological change.

Areas X and XI represent even more

general domestic economic and )oreign

trade policies with possibly unintended or

indirect effects on technological innovation.

Area XII concerns programs that create

shifts in the consumer demand for technologies. Various regulatory policies, user subsidies, and information transfer programs

operate in this area as modulators of existing market forces and hence exert an im21
●

portant impact on the kinds of new technologies developed.

Area XIII similarly concerns worker

demands that are likely to influence the

nature of new technologies. The demand

for safe working conditions is one example.

The programs in areas 11 through X1 all focus

primarily on supply-side Government programs

and activities, intending to affect what the industrial or labor sectors are able to deliver. In

contrast, areas XII and XIII emphasize the

demand-side policies directed towards enhancing

the expression of consumer and worker demands

respectively.

Because the 13 program areas reflect

independent, and sometimes even conflicting,

societal goals, there are difficult choices to be

made concerning the relative emphasis among

them. Accordingly, the choice of which areas

deserve more or less attention is necessarily a

political determination, which might be very different if made by those concerned primarily with

industrial growth in contrast to those interested in

environmental pollution. What the organizing of

Government programs and activities into these

13 groups permits is a discussion as to relative

policy emphasis that makes clear the priorities of

the group proposing expanded or diminished attention to various areas. The categorization of activities into these policy areas should itself evoke

little controversy and will allow the different

perceptions of what deserves greater or lesser

emphasis to be advocated within a common

framework.

Identification of U.S. Programs

The following section identifies and categorizes

existing U.S. Government programs that have an

important relationship to technological innovation. This is done through the use of 13 matrices,

each of which corresponds to one of the 13 program areas. The matrices were developed in

order to illustrate something of the nature of the

relationship between the programs and activities

which comprise the policy areas and technological innovation. This is accomplished by the axis

labels for each matrix. For example, in area I,

which concerns technology assessment, the primary evaluative questions with respect to a new

or existing technology—its utility, external ef -

fects, and the distribution of its effects to different

segments of society—are listed on the horizontal

axis. Similarly, in area IV, which concerns technology enhancement in the private sector, the

various mechanisms for encouraging new technologies—transferring information, reducing

cost, increasing the reward, etc. —are listed on

the vertical axis.

For each program area, the matrix entries represent an attempt to identify the major existing

programs and agency actions. Because many, if

not most, Government activities are addressed to

more than a single purpose, programs often appear in more than one matrix. It should be emphasized that although the programs listed clearly

differ in terms of their size and effectiveness, information as to their relative weight is not contained in the matrices since the primary purpose

of the matrices is to identify and categorize rather

than to evaluate.

The matrices were a valuable tool to the

analysis in several respects. First, they provided a

convenient structure for categorizing the large

amount of data gathered about the existing U.S.

programs. Although the programs are listed without annotations in the matrices, substantial background research and analysis went into their

categorization and the matrix development. This

effort, though relied on to reach the research

conclusions, is not presented in this report. Second, the matrices allowed the areas of programs

emphasis to be highlighted, both among the 13

policy areas and within each area. Third, they

furnished an analytical tool which was relied

upon heavily in developing the major policy

issues presented in the final section of this report.

Those issues are all concerned with possible

reorientations of existing national priorities.

The matrices were important, therefore, in

suggesting where existing emphasis lies and what

kinds of programs have generally been neglected. For example, in matrix IV, which concerns the encouragement of private-sector technological development, it became apparent from

the categorization of existing programs that there

is no major, across-the-board program in support

of basic civilian technology. The realization that

there is a lack of such a program, when combined with information about the foreign experience in this regard, led to the suggestion that new

programs of this kind should be considered as a

22
Reason for

undertaking

assessment

—

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

Explicit or primary

mission agency

Incidental to

primary mission, but

a recurring function

Ad hoc

Subject matter of assessment

Utility Externality Distributional effects

I

I Full assessment studies:

–OT A *

–GAO *

. Assessment as to safety:

CPSC, NHTSA, FDA,

OSHA, NRC

. Assessment as to

environmental effects:

EPA (TOSCA), CEQ

● Assessment as to

infIation: CWPS

I Part of cost-benefit or . Impact statements by

other program analysis or mission agencies:

evaluations by mission —environmental (E IS)

agencies, e.g., DOT, DOD , —economic (inflation)

NASA, DOE *

I Special commissions or

studies: e.g., NASJNAE

saccharin study m

Special studies by

mission agencies, e.g.,

FCC electronic mail

assessment, NSF fundin g

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

23
Outright suppression

of R&D

Limited granting of

license/permit for

R&D

Setting standards/

requirements for

R&D

Setting guidelines for

Federal funding of

R&D

Voluntary guidelines

Matrix Il.— Direct Regulation of the Research or Development

of New Products and Processes

Purpose of Program

Control of health/safety Control of environmental Safeguard of national

hazards hazards security

. Research on highly ● Nuclear weapons

infectious agents research

— .

● Research on certain . Research using fastradioactive materials breeder reactors (DOE) *

(DOE)

● Research on nuclear

fuel reprocessing — - ~ ~

● Research on uranium

isotopes separation

(DOE)

. Research using human

subjects (HEW)

● Pharmaceutical research

(FDA) +

s Pesticide research (EPA) *

. Food additives F

. Research on toxic P

substances (EPA)

. Medical devices (FDA)

● Recombinant DNA

research (N1 H)

● Recombinant DNA

research

24
Regulatory

area

Pollution control

Health/safety

standards

Product

specification

Products liability

Matrix Ill.— Direct Regulation of the Production, Marketing,

and Use of New or Existing Products

Commercial stage affected

Production Marketing Use

● Air pollution (EPA)

—stationary sources

— mobiIe sources

● Water pollution (EPA)

—effIuent

—drinking

. Noise pollution (DOT,

EPA, OSHA)

● Workplace (OS HA) . Labeling ● Pharmaceuticals (FDA)

—consumer products

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

. Drugs (FDA)

–pesticides (EPA) ● Pesticides (EPA)

● Advertising control, e.g., . Transportation safety

● Pesticides (EPA) cigarettes (FTC) (DOT)

 Consumer product safe- ● Radioactive materials

ty standards (CPSC) (NRC)

. Automobiles (NHTSA)

. Drugs (FDA)

● Automobile fuel ● Food inspection and ● Communications

efficiency (EPA, grading (USDA, FDA, regulation (FCC)

DOE, DOT) DOC)

● Building codes (HUD)

● Appliance energy ● Packaging and labeling

efficiency (DOE) specification (FTC) ● Product standardization

(NBS)

● Coal conversion, energy

conservation i n manufacturing (DOE)

● Tort system

25
Transfer of

technology to

the firm

Reducing costs

of innovation

Increasing reward

of innovation

Decreasing

probability of

commercial failure

Decreasing

probability of

technical failure

Matrix IV.- Programs To Encourage the Development and Utilization of

Technology in and for the Private Goods and Services Sector

Stages of innovation process

Development/ Production and

Market research Technical research engineering commercialization

. Antitrust reguIat ions

joint R&D (antitrust

exemption)

—compulsory

licensing

. Tech. Ut il. Program

(e.g., NASA, SBA)

. Diffusion program of

R&D from Government

labs b

. Diffusion of R&D

funded by Govern- *

ment (e.g., ASRA,

NTIS)

. AgricuItural extension w

services

. Govern ment-universit y-industry cooperation (e.g., Sea Grant)

. Direct funding of R&D

(e.g., DOE)

. Tax treatment for R&D

● Antitrust regulations *

—licensing

–joint R&D (SBA)

● Compulsory licensing

under Government

procurement

Q Agricultural extension

services w

. Investment tax credits w

. Loans and subsidies

for modernization

(e.g., fisheries and

shipbuilding)

. Patent and I icense

system +

 Government

procurement +

Government

procurement ● Demonstration

Provision of market in - projects

formation (DOC, SBA)

● Provision of technical

information (e.g.,

NTIS, other mission

agencies) c Demonstration

● Invention evaluation projects

(DOE/NBS)

26
Manner of

Government action

Reducing private

sector costs

Government

performance

Increasing private

sector reward

Reducing probabilit~

of failure

Diffusion

Influencing demand

Matrix V.—Government Support of Technology for Public Services*

Where Consumers are the Primary Users

Element of innovation process affected

Development and Production and

Market research Technical research engineering commercialization

Direct funding of

R&D (e.g., EPA, *

DOE, DOT, DOC)

● Provision of

capital (e. g., *

CO MSAT)

I Studies of con- c R&D by national ● Demonstration

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

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

I Government

procurement

~ Rate-of-return

regulation (e. g.,

utilities)

● ReguIations

limiting entry

(e.g., FCC, CAB)

● Government

procurement b

specif i cat ions

c Demonstration

projects

~ Publication of ● Technology

market studies transfer programs

(e.g., mission (mission agencies)

agencies)

c Government user

subsidy (e. g., tax

incentives for horn

insu I at ion)

● Specification of

approved product:

(e.g., medical

devices)

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

27
Manner of

action

Product

procurement

Support for

R&D in the

private sector

Performance of

R&D by the

Government

Matrix V1.—Support for the Development of Technology Where

the Federal Government is the Primary User

Stage of innovation

Prototype development Manufacturing/

Research or demonstration production

c DOD (e. g., lasers) ● DOD (armed services) c DOD (weapons

procurement)

. NASA (e. g., space

systems) ● NASA (e. g., shuttle ● NASA (e. g., spacecraft

program) components)

● Other mission agencies

(i.e., EPA, DOT, etc.) *

● DOD (mainly DAR PA) ● DOE (fusion research) ● DOD (e. g., ICAM

program)

● NASA ● DOD (mainly armed

services)

c Other mission agencies b

. DOD (service labs) ● DOD (e. g., weapons ● DOD (weapons

development) procurement)

. DOE (energy research

centers, National Labs) ● DOE (e. g., fusion, . DOE (nuclear weapons)

uranium enrichment)

● Other mission agencies

28
Activity

supported

Education

Basic research

Data compilation

and validation

Dissemination of

research results

Matrix VII.—Support for the Science Base Necessary for the

Development of New Technology

Government action

Government performance Government support

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

(e.g., West Point)

● Military training programs i n private

institut ions

● Support of university research

c NBS (e. g., laser research) NS F

● DOE (e. g., high-energy physics)

 NI H *

● NASA w

 Federal data banks (NBS) ● Support for data compiIation

—as a component of overall scientific

● Mission agencies effort (NSF, NIH)

—related to specific problems (N AS)

● NTIS ● Support for scientific publications,

conferences (NSF, NI H)

29
Aspect of

industry structur

affected

Entry-exit

Competitive position

of small firms

Relative market

dominance of

larger firms

Collaboration

among firms

Matrix VllI-Policies To Affect Industry Structure Which May Affect

the Development of Technology

Nature of effects

Motivation to innovate Ability to innovation

Increase Decrease Increase Decrease

● Bankruptcy laws ● Compulsory ● Tax loss provisions ● SEC regulation

licensing actions

● Tax-loss provisions

 Barriers due to

patent rights

 Procurement ear- . Capital gains ● Subchapter S ● Capital gains

marked for small treatment (IRS code) treatment

businesses

● Access to venture ● SBA loans,

● Access to venture capital (Sec. 144) guarantees capital (Sec. 144)

● SEC special

exemptions

 SBA joint R&D

exemption

 Holder’s patent ● Government

rights procurement

● Compulsory

licensing act ions

 Government

procurement Antitrust laws

 Antitrust laws

 Antitrust laws ● SBA joint R&D

exempt ion

● Antitrust laws

30
\

Matrix IX.—Policies Affecting Supply and Demand of Manpower Resources

Having an Impact on Technological Change

\

Principal group affected

Characteristic

affected \

Employers Employees Educational institutions

supply

Demand

Price

Distribution

Mobility

● Retraining programs ● Government-funded

scholarships

● Immigration policy c Federal support for

vocational and technical

training

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

employment generated

b Government

procurement

● Government-funded R&D

—

● Minimum wage

Q Social security taxes

● Tax credit for new

employment

● Regional development ● Tax provisions for

incentives moving expenses

s Sectoral development

incentives

● Tax credits for ● Labor adjustment s Federal support for

retraining programs assistance vocational/technical

training

. Industry-Government

exchange programs
Policy type

Macro-economic

policy

Capital market

transactions

Regulatory

measures

Tax policies

Matrix X.—Economic Policies With Unintended or Indirect Effects

on Technological Innovation

Area affected

Motivation to innovate Ability to innovate

. Government budget

 Minimum wage legislation Interest rate

 Social security taxes

. SEC rules and regulations

 Banking regulations

● ERISA provisions on venture

capital investments

. Regulated rate structures

(e.g., ICC)

. Tax writeoff for losses *

● Investment credit

. Depreciation alIowance b

● Capital gains preference

. Depletion allowances

32
Area

affected

U.S. import

U.S. export

U.S. investment

overseas

Foreign investment

in United States

Matrix Xl.—Policies Affecting International Trade and Investment

Direction of effect

Tend to encourage Tend to discourage

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

. Adjustment assistant program ● Product safety standards (e. g., FDA)

—labor ● Import quotas

—business ● Government procurement (Buy American)

. Tariff concessions ● Industrial standards

● GATT ● Antidumping duties

. CounterveiIing duties

. 200-mile Iimit on fishing rights

. STR (Special Trade Representative)

 Government subsidies (e. g., on agricultural products)

● Export exemption of product safety regulations Export Administration Act

 Tax concessions (DISC) Munitions Control Act

● Export credits (EXIM bank, Commodity Credit Corp. ● Trading with Enemy Act

of DOA) . Anti-Boycott legislation

● Loan guarantees by EXIM bank to private credit sources

(PEFCO, FCIA)

● Tied foreign aid (AID)

● Export promotional information service (DOC)

● Tax credits on foreign taxes paid

● Tax deferrals (e. g., subpart F income) ● Extraterritorial application of antitrust

. OPIC guarantees

. Pollution and safety standards on U.S. plants

● Transfer pricing control (IRS code 482)

● Allocation of R&D expenses (IRS code 1.861)

 Mechanisms discouraging i m ports may encourage . Pollution and safety standards on domestic plants

investment i n United States

 Exchange ratesetting

. Industries closed to foreign investment (nuclear energy,

communications, shipping)
Manner

of action

Regulation

of product

characteristics

Regulation market

transactions

Information

transfer

Financial

incentives

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

Policy purpose

Protecting economic

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

 Consumer products . Energy efficiency

(CPSC) standards: cars,

. Toxics, pesticides appliances

(EPA)

 Food, drugs (FDA)

● Food (USDA)

. Cars (DOT)

 Consumer credit

regulation

. Warranty regulation

. FTC enforcement

against deceptive

trade practices

. Advertising regulation,

(e.g., corrective

advertising)

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

 Warning labels (e. g., . Regulation of credit

cigarettes) Warranty regulation

. Fair packaging and

labeling

. Tax credit for pollutioncontrol devices

34
Manner

of action

Regulation

Government

information

transfer

program

Matrix XllI-Government Policies Responding to Worker Demand

Having Impact on Technological Change

Policy in response to:

Demands for Demands for

health/safety economic welfare Demands for legal rights

1

. Working conditions: . Social Security benefits . NLRA

–OSHA ● Minimum wage

—mine safety Protection of pension

regulations earnings (ERISA)

. Raising retirement age

● OSHA . Ajustment assistance

(DOC, DOL)

. Retraining

major policy issue (see issue #l, chapter V).

Similarly, an analysis of the programs in matrices

11 and 111, which concern regulation, led to the

realization that there are various approaches to

regulatory design which have not yet been seriously attempted as a means of encouraging the

development of new compliance-oriented technology. Some of these means were suggested as

a regulatory policy issue (see issue #5, chapter

V). It should be emphasized that the matrices did

not provide the only input to the development of

issues. On the contrary, the industry studies

below and the foreign experience (chapter IV)

were also important. The matrices did, however,

furnish the principal structure for depicting and

analyzing the existing U.S. Government effort regarding technology.

A COMPARISON OF SELECTED INDUSTRY EXPERIENCES

The industry-by-industry study presented in On the one hand, it provides a needed “realthis section was undertaken to complement the world” input into what would otherwise be a

policy-oriented approach described previously. rather theoretical construct. Thus, not only does

35
it serve to identify influential governmental

policies, which might otherwise be overlooked

(for instance, decisions concerning the allocation

of the radiofrequency spectrum by the Federal

Communications Commission that have had an

enormous impact on innovation in the electronics

industry), but it also helps to order such policies

according to the observed magnitude of their effect on innovation.

On the other hand, those policies, programs,

or procedures that have an indirect or long-range

impact, or that affect innovation primarily

through their effect on the business environment

within which firms innovate, are unlikely to be accorded their proper weight in a microcosmic

study concentrating on a particular industry. Furthermore, examination of an industry that has

fared relatively poorly in recent years is likely to

bias the results toward those Government policies having a net negative effect on innovation,

whereas the opposite may be true of industries

whose track record is more favorable. In short,

the two approaches—macroscopic by policy

area, and microscopic by industry—are complementary and have quite different strengths and

weaknesses.

Six industries were chosen for study:

● Aircraft and aircraft engines,

● Automobiles,

● Carpets,

● Synthetic materials,

● Iron and steel, and

● Semiconductors.

They were selected based on the existing resources of the Center and the need to include as

wide a coverage as possible of the areas examined in the preceding sections.

The conclusions below are only a first step. Little evidence was available on consumer goods

and services, and this was especially so when the

primary question of the impact of Government

programs and actions on innovation was raised.

It would be most desirable to broaden the examples considered in a future comparison, beyond

those of industrial goods and consumer durables

listed above.

This section of the study has been based en-

‘W. R. Maclaurin, lnuention and Innovation in the Radio

Industry (New York, Macmillan, 1949).

tirely on secondary sources; books, dissertations,

and papers describing the various industries,

which were chosen to reflect a long-term view of

each industry and the effects on it of various

governmental actions over a period, preferably,

of several decades. Wherever possible, an attempt has been made to isolate those Government policies and programs that have had a

clearly traceable effect on technological innovation in the industry under study, rather than, for

example, those mainly affecting its structure or

overall economic situation.

Certain limitations of this study must be identified at the outset. The most immediate of these

stems from the relatively small number of industries examined. Many more could profitably

have been studied, time permitting, and a sample

more representative of the economy as a whole

could have been obtained. Even within a given

industry, this methodology may have emphasized certain forms of Government action over

others perhaps equally important in the long run.

The self-imposed limitation of examining only

those actions that can be shown to have caused

measurable change in the technological character

of an industry’s products or processes may

understate long-term, indirect, and incremental

effects. Thus, no mention is made of antitrust law

as it has affected the automobile industry simply

because an effect on technological innovation

that flows from it cannot be clearly identified.

Similarly, the impact on the industry of federally

subsidized highway construction is easily substantiated, but its specific effects on innovation are

difficult to document, and have not been included.

There are clearly gainers and losers from any

innovation. A new product or process technology may strengthen some firms’ competitive

positions at the expense of others. Ancillary

changes which are both positive and negative

may also occur. Only the fact that an innovation

occurred is examined here with no attempt to say

that net results were positive, The weight of

evidence in general supports the assumption that

product and process innovation contributes

strongly to the longrun vitality and viability of the

economy.

Within the limitations stated, we are quite confident about the conclusions reported. Multiple

sources of evidence were consulted in each case.

36
Direct and documented relationships were

sought, and for the most part the conclusions are

supported by other independent studies.

A general overview of the six industries

studied reveals the expected industry-to-industry

differences, but also points up some striking similarites—particularly if attention is limited to those

forms of governmental initiatives as described in

policy areas 111 and VI in this chapter—that seem

to be the most effective in inducing technological

change. These three are:

Regulation (pollution, health and safety,

energy conservation),

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

and

Purchase of innovative technology-based

products.

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

effect on technological innovation in some industries, and although certain industries (e. g.,

the carpet industry)2 seem to have been relatively

unaffected by any of the actions outlined above,

these three stood out as the most important for

those industries in which innovation has been

most closely tied to Government action. In other

words, these mechanisms were found to be the

ones most effective in affecting the rate and

direction of technological change in those industries most responsive to Government initiatives.

An earlier study of foreign experiences in encouraging innovation based on over 150 cases in

five industries reached identical conclusions. One

additional program, Government assistance in

technology transfer, was noted as important in

interviews conducted in Europe and Japan, but

not mentioned prominently in the United States. 3

The earlier work in Europe and Japan concluded that strikingly different patterns of government influence on innovation were apparent in

the five industries studied. This is certainly true in

the United States as well. Different actions and

‘Jin]oo Lee, The Euolution oj Technological innovation in

the Carpet industry (Cambridge, Mass.: MIT Center for

Policy Alternatives working paper, January 1978).

‘National Support for Science and Technology: A n

Eualuatlon oj the Fore~grt Experience (Cambridge, Mass.:

MIT Center for Policy Alternatives).

programs clearly are of vastly different i mportance in the six industries examined. Varying

effects were also noted in newer as opposed to

older firms in these industries, and consequently

on different groups of employees, regions, and

products. For example, defense procurement

and Federal support for R&D in industry have

shaped both the semiconductor and aircraft

engine industries. Federal performance of R&D

was also an important force in the latter case.

Product regulation in the areas of emissions,

safety, and fuel economy has shaped recent

changes in the auto industry, while energy pricing policies have influenced synthetic materials—

regulation of processes in the areas of energy

conservation, safety, and environmental quality

have been important factors in iron and steel investments and innovations. Also, higher minimum wages were held to have speeded introduction of new equipment in the carpet industry,

while restrictions on wool imports hastened the

use of synthetic fibers.

Actions that help new firms and ventures get

started are highly effective in encouraging major

innovations. Government purchases and support

for R&D have been particularly important in this

regard. For example, defense procurement and

support for R&D stimulated the entry of new

firms into the electronics industry in several ways,

primarily through direct purchases. By providing

an initial market and premium prices for major

advances, defense purchasers speeded their introduction into use. The main contribution to the

most important innovations in electronics and

especially the development of integrated circuits

seems to have been through this means. 4 A similar pattern of rapid technological advance, many

new entrants, and economies resulting from production experience economies was evident for

aircraft engines. The early establishment of aircooled engines in the United States can be attributed to new entrants. None of the established

engine manufacturers undertook the development of these engines until either persuaded to

do so or extensively assisted by their governments.5

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

of Defense Procurement and Sponsorship of Research and

Deue/opment on the Development of the Civi~ian Electronics Industry (Cambridge, Mass.: MIT Center for Policy

Alternatives (CPA-77-5), June 1977).

‘R. Miller and D. Sawers, The Technical Development of

Modern Auiation (New York, N. Y,: Praeger, 1970).

37
Government procurement has played a significant role by establishing aircraft designers as

commercial innovators. For instance, Douglas,

which introduced the most successful DC-3 in the

mid- 1930’s, spun off from Martin in 1920 and

started as a military aircraft designer. Vickers

developed the Viking and Viscount from experience gained from the Wellington bomber.

Boeing was largely a military supplier before it

built the 707, one of the first successful jetliners. b

These few examples certainly do not mean

that encouraging entry through procurement

would have a positive effect in every case. In a

product area with little commercial growth potential, such a policy might simply lead to instability

and greater uncertainty for the participants. The

argument is that purchases by Government have

great strategic leverage in stimulating innovations

in many instances when this is understood and

considered.

Actions that complement normal competitive

pressures for change in an industry often appear

to be more effective in promoting innovation

than those that do not take account of market

forces. For example, while the minimum standards for auto-emission control tend not to be exceeded, industry has met fuel economy standards well in advance of what has been required. 7

The difference seems to reflect the degree to

which market forces and regulatory requirements

are in concert in the case of fuel economy. In

such cases industry is doubly motivated to innovate. Requirements for energy saving in steelmaking are also in line with the industry’s competitive concerns with productivity and costs. As

fuel is a major part of total production costs, conservation requirements and competitive forces

have acted together to stimulate change.8 Conversely, pollution-control regulations and the current tax treatment for pollution-control expend-

‘Linsu Kim, The ln}luence of Government on Technological Development in Aircra-ft and Aircrajt Engines (Cambridge, Mass.: MIT Center for Policy Alternatives working

paper, December 1977).

‘William J. Abernathy and Balaji S. Chakravarthy, Technological Change in the U.S. Automobile Industry: Assessing the Federal Initiative (Cambridge, Mass.: prepared for

Department of Transportation, Transportation Systems

Center, December 1977).

‘Linsu Kim, The Injluence of Government Actions on

Technological Development in the Iron and Steel industry

(Cambridge, Mass.: MIT Center for Policy Alternatives

working paper, January 1978).

itures appear to have simply encouraged retrofits

on existing facilities instead of investment in

newer and more efficient technologies. 9

There is a strong suggestion here that an effluent charge or heavy penalty above some minimum total-plant discharge would act in concert

with competitive forces and encourage innovation, while a host of specific requirements work

against competitive forces and also discourage innovation. 10

Many creative departures from continuing incremental improvement of existing technology

seem to be the result of firms’ responses to crises.

A crisis forces the firm to search in new directions

for solutions. It can result in major losses and

failures, but also can result in unexpected solutions. For example, a new process for making

stainless steel using less chromium was introduced when imports of Rhodesian products were

restricted. Also, steel firms joined together to

develop new ore benefication methods when

diminishing supplies of high-grade ore in the

Great Lakes region threatened their economic

survival. 11

Some evidence suggests that direct regulation

of products and processes may act as a crisis to

accelerate major innovation. 12 For example, the

use of electronic microprocessors to control auto

engines is a major innovation to address needs

for both fuel economy and lower emissions

levels. New technologies sometimes open great

potentials for expansion of their application and

for improvements, in this case for other electronic

automotive applications such as controlled braking. And it should be noted that while costs will

be higher for automakers and consumers, a large

market has been created for firms making microprocessors, sensors, new auto accessories, etc.

The timing of regulatory interventions is critical

regarding their influence on technology and in-

‘Joseph Mintzes, Technology and World Trade: The

Steel Industry, a paper prepared for OTA, May 19, 1977.

‘OW. J. Vaughn, C.S. Russell, and H,C. Cochrane, Government Policies and the Adoption of )nnouations in the Integrated Steel Industry (Washington, D. C,: Resources for

the Future, 1976).

“Kim, 1978, op. cit.

“Thomas J. Allen, et al., “Government Influence on the

Process of Innovation in Europe and Japan, ” Research

Policy, (in press).

‘

3 George White, “Management Criteria for Technological

Innovation,” Technology Review, February 1978,

38
novation. Unless the needed infrastructure, such

as trained people, is in place or created concurrently to meet the requirements, severe dislocations may result. Structural unemployment and

compensation of employees displaced by mandated major changes is a continuing concern.

The implication is that a steady and gradual pace

of mandated requirements is advantageous in

this respect,

This report does not argue that regulation

necessarily leads to more economically efficient

or commercially desirable allocations of

resources. Moreover, regulation may sometimes

impose sufficiently high costs and stringent constraints that innovation is impeded. Nevertheless,

there are many examples of innovations enabled

or enhanced by regulation. When regulation of

products and processes is required for health,

safety. or other purposes, it was found that

potentials often exist for effective and innovative

technological solutions, This should be considered in decisions about the timing, form, and

implementation of regulatory actions.

Government actions often have unintended

effects on innovation, and several programs

together may generate unexpected effects.

●

●

●

●

✎

Intense pressure for rapid change may force

industry to patch up an existing technology

rather than risk the failure of a radical innovation. 1 q

Stringent requirements for approval of new

products may act to reduce competition

from new producers and new entrants in a

business, thus increasing the value to firms

of established and accepted products.

At the level of detailed design changes,

Federal laws or regulations have been

found to act as a constraint to innovations

about as frequently as they act to stimulate

change. And if regulations are not continually updated to reflect changing possibilities,

they may greatly reduce potentials for improvements. 15

An implication is that performance specifications would generally distort potential im -

‘“Abernathy and Chakravarthy. 1977. op cit

“A H Rubenstein and John E Ettlie, ‘*Analysis of

Federal Stimuli to Development of New Technology by

Suppl]ers to Automobile Manufacturers. ” F/nal Report to

U S Department oj Transportation, March 1977

●

provements to a lesser extent than would

specification of specific technologies or solutions. 16

Major innovations have drastically reduced

the total costs of ownership and use of major appliances, aircraft engines, and electronic systems, but this was not readily apparent at first. Undue stress on cost improvement might discourage seemingly

costly new technologies which have dramatic potential for savings in the longer run. 17

There is evidently potential for damage as well

as benefit in many Government programs and

actions that influence technology. In this respect

a special note should be made concerning the

Federal role in actually performing research and

development. The evidence reviewed strongly

indicated that large projects directly performed by

Government for the development of products

and production process equipment have been

quickly made obsolete by the rapid pace of innovation in industry, and their results have not

found widespread use. This was true of projects

to develop compact proximity fuses based on

vacuum tubes, of development of equipment for

automatic production of transistor-based circuits,

of projects to develop several liquid-cooled aircraft engines, and so on. 18 Similar cases are evident in the United Kingdom and Germany. One

reason for this appears to be the firms’ superior

knowledge of critical details of the production

process, its interaction with product design, and a

multitude of important adjustments in both. Conversely, Government performance of more basic

research had evidently made outstanding contributions to industrial innovations. This seems to

be true for example, of basic work on aerodynamics, high-temperature liquid cooling, improved aviation fuel, and other areas of general

usefulness which, however, do not yield proprietary advantage. 19

Design of programs and analysis of the effects

on innovation of Government programs and actions should recognize that there is no simple

connection between cause and effect. Actions

“R. O. Schlaifer and S.D. Heron, Deueloprnent of Aircraft Engines and Fuels (Cambridge, Mass.: Harvard

University Press, 1950).

‘

7 Utterback and Murphy. 1977, op. cit.

‘81bid,

“Kim, 1977, op cit

39
can have multiple effects. Many actions can contribute to the same effect. Several actions can interact to produce a disproportionate effect. The

net result or bottom line so to speak is not always

clear. For example, early support given to semiconductor technology through development contracts, direct procurement of prototypes and

early production at premium prices, dramatization and demonstration of the military need for

greater performance and reliability, and a willingness to encourage new and unproven suppliers all promoted entry of new firms. But their

relative importance seems to vary widely in the

case of different firms. Similarly, reductions in

prices for electronic components appear to have

been caused by a variety of factors: the development of production lines for “industrial preparedness, ” direct and indirect procurement of a high

volume of electronics components, encouragement of entry, competition and development of

“second sources, ” and occasional decreases in

purchases by the military. By the same token,

manpower development and mobility were also

affected by many different actions. 20

No one policy or technique can be recommended as a key to effective stimulation or support for change. Many factors, including availability of private venture capital, can contribute to

entry of new firms and enhance the climate for

major product innovation. These may be supported by other conditions such as the supply

and mobility of key personnel, Government

encouragement of competition, and so on. Several factors might be considered as a set of loosely coupled active elements rather than one being

cause and the other effect. Lack of balance or a

lack of one critical factor may be seen as a “barrier” to innovation.

Finally, sophisticated control of program implementation has apparently enhanced the influence of many Government programs and actions. Should funds be concentrated on one firm —

“’Utterback and Murray, 1977, op, cit

or spread among many? Should established firms

be supported or should new entrants be encouraged? Should suppliers of advanced components be supported as well as users of such

components in final systems or products? Should

specifications be based on an informal understanding of best performance or best effort, or

should they be rigidly detailed? Should standardization be stressed, or should diverse parallel

approaches be taken? Each of these conflicting

options, among many others, has been effective

in certain examples. Apart from the content of

the program, careful timing and implementation

can greatly enhance its impact.

1n conclusion, Government programs and actions that affect innovation have widely varying

effects in different industry and technology contexts. Timing, interaction with other programs,

and the details of implementation are often

crucial. This has been well-understood in many

successful past developments for national purposes going back from well beyond early encouragement of the radio industry and Government pressure for four-wheel brakes on autos to

contemporary examples such as integrated circuitry, numerically controlled machine tools,

emission controls, etc. Understanding of the

dynamics of different industries is needed in

order to promote positive and avoid negative impacts. Similarly, what industry can and should do

with respect to innovation can not be judged independently of Government action. Since we are

beginning to recognize the many areas in which

Government and industry are closely interdependent, Government actions must be designed

with a greater appreciation for industrial potential

and responses. This will require study of more industries, product areas, and services. We need to

understand industry organization, decisionmaking, and responses with greater generality

and subtlety. A program of active experimentation and study in cooperation with industry is

needed to provide an environment conducive to

more creative technological advance.
Chapter IV

SUMMARY OF MAJOR FEATURES

OF SEVERAL FOREIGN APPROACHES

TO TECHNOLOGY POLICY
Chapter IV

SUMMARY OF MAJOR FEATURES

OF SEVERAL FOREIGN APPROACHES

TO TECHNOLOGY POLICY

Foreign experience can offer several useful lessons as to why and how specific policies succeed or fail under a given set of circumstances. In effect, it

provides a testing ground for policies in action that can be instructive to the

analyst. On the basis of extensive studies previously undertaken by the

authors on the policies of several foreign countries, both developed and

underdeveloped, the following review highlights the major thrust of policies

in four technologically advanced nations. The reasons for this selection are

that each case illustrates either some similar factors that are present in the

U.S. environment or some contrasting approaches that might be instructive.

While there is no implicit suggestion that the United States could or should

employ similar techniques, the purpose of the analysis is to outline the objectives that have tended to dominate foreign technology planning.

The Gilpin report to the Subcommittee on Economic Growth of the Joint

Economic Committee’ argued that the most distinctive example of differences in approach are those of Japan and the United Kingdom. The former is

commonly cited as an illustration of a highly successful pursuit of technological growth while the latter demonstrates policies that have had disappointing resuIts. The G i I pi n report observes that these cases are interesting not simply because of their contrast, but because of their relevance

to the U.S. position today. On one hand, there is a tendency to pursue policies

in the United States, which have not been successful abroad, notably in the

United Kingdom. On the other hand, the Japanese example, which for so long

has been dismissed as irrelevant to U.S. circumstances, appears to have an

increasing number of useful lessons to American policy makers.

The following paragraphs offer an overview of the principal thrust of the

major national programs, including the original or innovative features of

those programs.

JAPAN

It is clear that the unique circumstances of the

Japanese industrial environment have accounted

heavily for Japan’s successful exploitation of

technology. The tightly organized industrial structure, the government-industry -banking partnership, the weight of government direction of

.

‘Robert Gilpin, Technology, EcorIormc Growth, and international Competlt/ueness, a report prepared for the Subcommittee on Economic Growth of the Joint Economic

Committee. U.S Congress (Washingotn, D.C U.S .

Government Print]ng Office, 1975)

economic activity and the notable self-discipline

of Japanese entrepreneurs and workers are

always cited.

The distinguishing feature of Japanese technology policy as such has been its total and complete identification with economic growth policies. The use and development of technology

have been the backbone of industrial growth.

Low-technology and inefficient industries unable

to compete with firms in the developed Western

43
countries have been allowed to die out rather

than be protected. Protective policies have been

employed only to the extent that they aid the development of infant or emerging high-technology

industries. The Japanese government has made

a distinction between its treatment of large

business enterprises and small business. The role

of both is recognized as important in the industrial

structure. Whereas the larger firms may appear

to spearhead Japan’s export drive, the government nevertheless has a strong policy for the

technological and business infrastructure support

of the small firm.

Japanese policy has stressed the commercialization of technology in the economic growth

process. Until very recently, little R&D funding

emanated from the government. In fact, the

government’s role in technology and innovation

has been highly indirect. R&D and its commercial

development has been left to industry while the

government has concentrated heavily on creating

the environment for its industry to operate in.

Government “technology policy” thus has

consisted principally of the following elements:

 Heavy emphasis on technical education

and training highly skilled manpower resources available to industry,

GREAT

The British example contrasts sharply with the

Japanese in most respects. First, the circumstances underlying innovation have perhaps

played a role as important in the weakness of

British technological policy as it has in the success

of its Japanese counterpart. The positive industrial-financial-government partnership which has

been the key element of Japanese strength has

been far less present in Great Britain. Similarly,

British technology policy has had less relation to

the economic growth strategy of the government.

British government policy has focused heavily

on supporting R&D efforts in basic fields. On one

hand, this orientation has made it possible for the

British to make major contributions to science

and technology, in particular, areas of big science

such as defense, nuclear energy, and space. On

the other hand, this emphasis has been heavily

on the supply-side with lesser attention given to

●

●

●

●

●

●

Emphasis on consumer technologies responding to market demand, as opposed to

investments in basic R&D, “big science, ”

and national prestige projects.

Strong export orientation of the economy

with the resulting need for Japanese firms to

compete with the most technologically advanced international firms.

Careful manipulation of the industrial structure to prepare sectors and firms to meet international competition; limited protection

of infant industries until prepared to compete; and elimination of technologically

weak companies.

Avoidance of technology monopolies by

Japanese firms by mandatory licensing to

competitors of firms attaining dominant

market positions.

Government support for industry through

analyses of export markets and available

foreign technologies.

Tax credits and deductions for industrial

R&D and accelerated depreciation for pilot

plants and R&D facilities.

BRITAIN

market demand (at home and abroad) for the

products of current research or to the problems

faced by British industries in commercializing

promising new technologies.

The British government, rather than the

private market, has tended to make most of the

key decisions on technologies to be developed by

the country. Reliance on and support of private

sector initiatives have not been key features in

the British experience. Industry-wide research

associations have been fostered by the government to respond to the needs of the private sector, but they have not had a major impact on

private firm behavior.

Outside the public sector itself, the government has concentrated on the university system

to expand the country’s technical and scientific

base of knowledge. Although the universities

44
have developed strong programs in basic

science, there has been a minimum of spillover

effect into industry.

Finally, the British have not followed a strong

manpower policy, as several other developed

countries have done, to prepare technical personnel specifically for the needs of industry and

technological change. The environment has been

marked by poor relations with the labor force,

low worker mobility, and strong worker resistance to change.

Several programs, however, merit close attention as important experiments by the government

to bring technologies to the commercial stage.

The National Research Development Corporation (NRDC) has been closely watched as an interesting experiment in government-industry

partnership with relatively favorable results, while

the Launching Aid program raised high expectations but fewer results. The Preproduction Order

Support Program has produced interesting results in bringing advanced equipment already developed into commercial use.

 The NRDC has been the subject of close

observation due to its unique character and

the interest that other countries have shown

in the experiment. NRDC is a public corporation (divorced form direct government

management) supporting innovation via

several activities, either (a) by paying part or

●

●

FRANCE

French policy, much like that of Great Britain,

has been characterized by heavy government

support of civilian technology. This is particularly

true of both governments’ commitment to heavy

investments in big technologies such as computers, aircraft, and nuclear energy.

Consistent with France’s highly centralized administrative structure, French science and technology policy is characterized by strong direction

and control and a measure of long-range planning. Most technology policy has been dictated

by France’s political commitment to industrial

and technological independence. The objective

of maintaining at least one domestic supplier in

every important industry—a policy requiring extensive government subsidies, frequently to weak

industries—has had mixed results in stimulating

innovative entrepreneurial behavior.

—.

all of the development costs, (b) by licensing

public sector technologies, or (c) by entering

into joint ventures with national private

companies. The NRDC is a modest undertaking but a relative success. Its main success has come through its exploitation of

public sector technologies especially those

coming from the universities and research

councils.

Launching Aid has had as its objectives the

reduction of commercial risk facing manufacturers by interest-free loans to the

developer, repayable as a levy on sales or

licenses. Unlike NRDC, this program has

not been marked by significant success. Its

investments have flowed primarily into

government-designated projects rather than

private market initiatives.

The Preproduction Order Support Program

aims at encouraging industry to utilize advanced equipment on a loan basis from the

government with the option of purchasing

the equipment after a trial period. The

Department of Industry buys equipment

from the manufacturer and lends it to

selected industrial users. This program has

shown some success, particularly in the

machine tool industries, where the program, in effect, aided in introducing

numerically controlled machine tools.

French policy makers have linked technoloqi -

cal and economic growth policies more closly

than the British. Great emphasis has been given

to strengthening the industrial structure in France

by encouraging mergers of companies into

stronger national entities to respond to foreign

competition. Strengthening the technological

base of these firms has been a key objective.

Similarly, the French have emphasized the importance of firm participation in the training of

manpower resources.

The main outline of the French programs is as

follows:

● “Concerted Action Programs’ ’—with committees created to coordinate research in

specific areas.

45
●

●

●

●

“Thematic Action Programs’ ’—designed to

coordinate interdisciplinary applied research among laboratories normally undertaking basic research projects. ●

“Pre-Development Aid’’ —helping research

organizations launch work on new technologies.

“Development Aid’’ —providing loans to

meet development costs of private firms.

“National Agency for the Valorization of ●

ers, inventors, and small firms in developing

innovations.

Tax Incentives

— all operating R&D expenses fully deductible costs,

— accelerated depreciation

facilities, and

— tax deduction of capitalized

sources in a new organization

Worker Training—payroll tax for

of R&D

R&D reworker re -

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

WEST GERMANY

Unlike France, Germany relies far more on

market forces and industry -government-university cooperation than on regulation and control

by the government. Government assistance is

normally granted only where the market is expected to be sufficiently strong to guarantee the

success of the program. As a result, German aid

tends to focus on influencing the “climate” for innovation through indirect measures rather than

designating or promoting specific development of

technologies. However, a notable exception has

been the German government’s direct role in

developing major technologies (electronics, computers, etc.), much as in Britain and France.

A positive factor in the German environment

for innovation is the relatively high level of

cooperation that exists among industry, universities, and government. Largely due to this factor, government action is not directed to stimulating joint programs as much as in France, for

example. The principal German policy orientation is in efforts to reduce the costs of R&D for

private firms and encouragement of large technically based corporations in advanced technological areas.

Several programs are of particular interest in

the German case:

●

●

●

●

Extensive network of research institutes

largely supported by federal and state governments, ranging from basic research (e.g.

Max Planck Institutes) to applied industryoriented research (e.g. AIF—Industrial Research Organizations).

Priority programs including the “big

science” programs and the “key technologies” program; the later is focused

specifically on R&D for industrial innovation

and includes direct government cost-sharing with industry,

The “first innovations” program consisting

of interest-free, forgivable loans whereby

the government meets 50 percent of the

cost of commercial development of a new

technology. If the effort fails, the loan is

cancelled.

Venture capital through an independent

consortium of banks (WFG) supported by

government guarantees under which the

consortium purchases equity shares in new

companies undertaking innovative projects.

SUMMARY OBSERVATIONS

On the basis of the previous four cases and tend to emerge in observing the foreign exseveral other studies,2 the principal elements that perience are the following:

‘The Current International Economic Climate and Policies /or Technical lnnouation, by Science Policy Research

Unit, University of Sussex, United Kingdom, in collabora- 1

tion with Staff Group Strategic Surveys TNO, T h e

Netherlands.

46

Direct government support of R&D in

firms–by varying degrees, most developed

countries provide facilities (direct, indirect,
or both) to encourage R&D functions within

private firms.

2. Use of government demand through procurement policies has the effect of reducing

risk and uncertainty for the innovative firm

and as such constitutes one of the most effective tools of most industrialized countries

in stimulating technological change.

3. Provision of capital by the government to

firms desiring to introduce innovative products or processes to the market. Most countries have programs to meet the capital

needs of private firms, either by venture

capital corporations that buy equity shares

in the firms or by direct government “startup” funding available to firms introducing

new technologies.

4. Concern with industrial structure—most

developed countries have seen the necessity to force or encourage industrial restruc5

6.

turing to meet the requirements of rapid

growth and international competition with

technologically advanced firms. This has

been accomplished through mergers, formation of public companies, elimination of

technologically weak firms, and limited protection for emerging technologically weak

and technologically oriented firms.

Emphasis on export capacity and international competition. All four countries discussed have viewed technological progress

as an essential element in capturing new export markets and foreign competition as an

important impetus of technological change.

Emphasis on labor-training and manpower

development policies as a key feature in

technological development. Most developed countries view the quality of manpower skills as their direct responsibility in

strengthening the conditions for technological change.

47
Chapter V

MAJOR ISSUES IN U.S. POLICY

TOWARD TECHNOLOGICAL INNOVATION
—

Chapter V

MAJOR ISSUES IN U.S. POLICY

TOWARD TECHNOLOGICAL INNOVATION

This chapter presents a series of policy issues concerning the relationship between Government action and technological innovation which are,

in the authors’ view, major questions deserving of congressional attention

in the near future. The articulation of these issues is intended to provide a

critique of existing U.S. programs and policies in relation to innovation and

to provoke debate about how existing policies might be reoriented. It

should be acknowledged from the outset that the choice of these issues

was at least partially subjective. Thus, reasonable people will undoubtedly

differ about how important they are for congressional attention. It is not

meant to imply that these issues are necessarily more important than other

national priorities. Rather, they are intended to suggest a series of new initiatives that merit consideration in reassessing existing technology-related

policies.

Although the issues involve subjective choice, the process for arriving at

them was rooted in objective research. Thus, they derive principally from

the three major elements of this report, the survey of existing Government

programs, industry studies (chapter Ill), and foreign experience (chapter IV).

The survey and categorization of existing U.S. programs furnished a

framework within which to understand the relative emphasis among major

policy areas and, within each policy area, to uncover what kinds of policy

mechanisms have been employed most frequently for various purposes.

From this survey it was possible to derive policy areas and mechanisms

which, although now relatively neglected, may deserve additional attention

in the future. The industry studies, on the other hand, provided information

about how existing programs have actually affected innovation in those industries and therefore offered guidance as to what kinds of new or modified Government actions are likely to be effective in different contexts.

Finally, the survey of foreign experience offered case studies of effective

and ineffective techniques employed by other governments to encourage

their private firms to innovate (see figure 2).

The purpose of this chapter, therefore, is to define these major issues,

articulate why they appear to be important, and then to suggest a series of

alternative policies which address the issues in various ways. The alternatives suggested are not meant to be an exhaustive list, nor is advocacy

intended. They are suggested in order to illustrate the action potential inherent in each issue. It is intended that the focus of debate will be primarily on the issues themselves and only secondarily on the possible alternative actions.
ISSUE 1

Direct Support of Non missionOriented Technology

Should Congress consider providing for the direct support of

nonmission-oriented technology?

Direct Federal support for technological innovation has traditionally taken one of two

forms in this country: general support for

research and development, such as that funded

by the National Science Foundation (NSF), and

support for technology development (through

R&D funding and the procurement of innovative products) in furtherance of certain welldefined national goals, such as the defense and

space missions, and more recently the search

for new sources of energy (see program areas

IV, V, VI, and VII in chapter III).

This policy differs markedly from the practice

and procedures of other technologically advanced nations, notably Japan, in which the

governments support technological innovation

with no other goal than the general economic

one of helping particular sectors of industry to

grow and to compete in international markets

(see chapter IV).

Increased attention has recently been focused

within the Government on ways in which, in

cooperation with the private sector, it might seek

to stimulate and encourage technological innovation through programs of direct support of some

kind. There are three basic reasons for the

heightened interest in such programs. First, the

United States is facing increasingly stiff competition in technology-based products from other nations that have programs for domestic support of

technological innovation for purely economic

purposes.

In addition, the social returns on technological

innovation are often greater than any reasonable

expected private return, due to the inappropriability of some of the benefits, which makes

a Federal sponsorship role appropriate (see

chapter II). Lastly, there are purely social reasons

for supporting innovation. An example of these is

the general desirability of creating employment.

Support for new development with specific manpower benefits in mind may involve both technological innovation and job redesign, and differs

from the application of traditional labor market

policies (discussed in issue #6). Technological innovation may also be supported for reasons of

environmental protection or product safety.

If the Federal Government were to adopt a

policy of broad support for technological innovation, the question would arise as to what type

and degree of Federal intervention is appropriate

and necessary at each stage of the innovative

process. In attempting to answer this question,

reference has been made to government programs in other countries (see chapter IV), as well

as a study of some of the domestic effects of U.S.

Government actions on a selected group of industries (see chapter 111). There are two general

conclusions that can be drawn from these

sources. On the one hand, it was found that indirect effects of Government action can be extremely efficient in promoting technological

change in specific industries, even when such effects are unintended. On the other hand, as a

general rule, direct Government support for

technology tends to be more effective in the early

stages of development, rather than later when

the technology nears commercialization (see

issue #2).

The potential effectiveness of the procurement

process to stimulate and encourage innovation in

the private sector was particularly borne out by

the industry studies performed for this report. Indeed, the purchase by the Government of new,

innovative products was found to be one of the

most efficient stimulants of new technology. That

procurement could be used to enhance innovation was recognized by the Commission on Government Procurement, and was embodied in

some of the recommendations in their 1972

report to Congress. Many of these recommendations, in turn, have been included in legislation

now before Congress.2 Nevertheless, the recognition is lacking that procurement expenditures

may in certain circumstances constitute a more

efficient alternative to direct subsidy of R&D.

Another weakness in present policy results

from the fact that there is at present no Federal

agency charged with the mission of assuring the

technological health and vitality of American industry generally. As a result, there is no focus in

‘For example, the carpet industry’s adoption of synthetic

fibers was stimulated by the 1950 ban on the import of

Chinese wool. See chapter Ill.

2S. 1269 the Federal Acquisition Act,

52
the Government for the support of general, nonappropriable research related to this broad mission. (The Directorate for Applied Science and

Research Applications (ASRA) at NSF may do

some of this, but only as a secondary mission for

the agency, and on a very small scale. ) For example, the Department of Energy supports research in basic nuclear physics, and the Defense

Department supports laser research, because

these are fields related to the missions of these

agencies. Howeverl there are other scientific

fields, for example, the study of friction, corrosion, mechanical design, catalysis, manufacturing technology, etc., that are relevant to a wide

variety of industrial processes, but for which no

agency feels responsible.

Increased Government support for technology

basic to commercial development is not likely in

the majority of cases to result in patentable inventions; however, in those instances where patents

might arise, there is an issue as to who should

own the patent rights to inventions stemming

from publicly funded R&D. The situation regarding this question is currently quite chaotic. Each

of the various mission agencies has, over time,

adopted its own procedures in dealing with the

issue, and the result is that there is no uniform

treatment in the Government either in policy or

in its implementation. The effectiveness of

patents, either in promoting innovation or in

stifling competition and thereby retarding it, differs from industry to industry. However, studies3

have shown that, in general, patents held by the

Government and licensed only on a nonexclusive basis are used much less often than those in

the private sector. Of course, there are social

goals other than that of promoting innovation,

and the granting of a monopoly license to manufacture and market a product developed in part

with Federal funds may conflict with these. However, from the restricted viewpoint of this analysis, the conclusion is clear: a policy of refusing

exclusive patent rights to federally funded inventions has a retarding rather than a stimulating effect on innovation.

The preceding discussion suggests the following options for possible congressional action.

——.. —

‘See the Government Patent Policy Study performed by

Harbridge House for the Federal Council on Science and

Technology, May 17, 1968,

1. Initiate a policy of selective procurement of

products embodying innovative technology

at prices that reflect the R&D costs incurred

by the innovator. Such purchases of innovative products, by creating a market, may

do more to stimulate innovation than would

an equivalent expenditure of research

funds.

—

—

This strategy is most likely to succeed in

those situations in which a commercial

market exists for the product, the technology has matured, and the price has

dropped.

Procedures for dealing with the problem

of monopoly creation-might include parallel funding of several firms, or mandatory licensing by firms that capture a

set fraction of the market.4

2. Establish a funding capability for the support of advanced, nonappropriable re3

search responsive to a wide variety of

societal needs, such as energy conserva -

tion, s

or manufacturing productivity. The

research could focus on technical subjects of

wide applicability such as product fatigue,

safety friction, corrosion, catalysis, etc.

– A program could be set up either as a

separate agency or as a function within

an existing agency to monitor and fund

nonappropriable research in fields of interest to a wide variety of industries.

— Macroeconomic analysis suggested in

issue #8 would enhance the ability of this

program to concentrate on those technologies of interest to specific industrial

sectors, and specific manpower and environmental needs.

Grant, under appropriate safeguards,’ exclusive patent rights to inventions made by

private individuals or firms under Government funding, as in Europe and Japan.

— Requiring guarantee of an intention to

work the patent.

— Avoiding the creation of a monopoly, for

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

this problem.

5

The Advanced Technology Assessment Program of the

Department of Energy does some of this on a very small

scale

‘Bill HR. 6249, the Uniform Federal Research and Development Utilization Act, addresses the Issue,

53
example through “march-in rights” by

which the Government may revoke exclusive patent rights.

ISSUE 2

Reconsideration of the Role of the

National Laboratories

Should Congress consider the appropriate role of the National Laboratories in the support of technological

innovation?

The question of the proper use of the federally

owned and funded research institutes—in-house

laboratories, national centers, and federally funded research and development centers (FFRDCS),

which we refer to here as “National Labs’’—is

becoming a more and more critical issue, both for

Congress and for the executive branch, as Government research activity expands into traditionally private domains (e.g. energy) and as the

number and influence of the Labs grow commensurately. Indeed the Office of Technology

Assessment (OTA), through its R&D Policies and

Priorities Program, has been studying this issue,

and has issued a draft report (National

Laboratories Issues, May 9, 1977), which explores its implications thoroughly.

There is no doubt that the National Laboratories can perform a very useful role in undertaking research of broad social benefit, but which

is unlikely to be performed in the private sector.

Examples of such research might include work

done to demonstrate the feasibility of specific

pollution control technology, or investigations of

alternative methods for the storage of radioactive

waste products.

Nevertheless, there is significant doubt as to

the advisability of involving the National Labs in

the development of technology of immediate

commercial significance because they are not

closely attuned to the market. A strong conclusion which emerges from an examination of actual industry responses to governmental initiatives, both here and abroad, is that direct

Government funding or performance of R&D is

generally unsuccessful in creating commercially

useful technology when it is applied to the later

usages of the innovative process.

In addition, experience has shown that the

problem of “spinning off” a new technology to

the private sector at the appropriate stage is a

very difficult one. Lastly, involvement of the National Labs in technology of commercial significance creates a bias toward in-house performance because of the competition engendered between them and privately owned research facilities, and the political difficulties sometimes encountered by an agency in locating large programs in specific private firms. The problem of

competition can become serious when a National

Laboratory serves a dual role as research facility,

and as contract monitor or proposal evaluator.

The problems inherent in the competition between Government-owned and private R&D facilities, and their potential for inhibiting innovation, have been recognized by the Office of Management and Budget, 7 and more recently by the

OTA study referred to above. The issue has not

yet been dealt with effectively by legislation. Appropriate congressional actions might include the

following:

1. Develop an explicit set of guidelines for use

2.

by the research-funding agencies in deciding

which projects to fund in-house and which

to support in the private sector on the basis

of:

— Time-horizon of research,

– Potential for commercial application, and

– Direct utility to mission of sponsoring

agency.

Cooperate with the executive branch, to

define explicit missions for the various National Labs, in keeping with the overall mission of their sponsoring agencies in order

to:

—

— .

7

0MB

Clarify goals to facilitate performance

evaluation,

Control mission expansion beyond original boundaries without congressional

oversight, and

Possibly reduce the scope of National

Lab activities so as to eliminate programs

that would be more productive in the

private sector.

Circular A-76, as revised, sets forth the genera]

Federal policy of relying on the private sector, and lists a

number of restrictive circumstances that must apply to justify

the Government providing an industrial or commercial

product for itself.

54
Cooperate with the executive branch in

developing new roles for the National Labs,

in performing research of broad social benefit that is unlikely to be undertaken in the

private sector.

ISSUE 3

Facilitating New Entrants Into

the Market

Should Congress consider measures to faciIitate the entry of new firms

and inventors into the market as a

means of encouraging the introduction of new technologies and innovative entrepreneurship?

Technological innovations are frequently

brought to the market by new firms or inventors

who translate a new idea into a commercial venture. Similarly, new or small firms often have the

flexibility to adapt easily and effectively to new

and innovative ideas. It is important therefore

that the entry and survival of new firms in the

private sector be facilitated.

The relationship between technological

change and new ventures may be seen from two

perspectives. First, a new firm may be the direct

result of a technological innovation by, for example, an individual inventor who decides to bring

his new product into commercial use or an individual or group of individuals in an older, more

established firm who decide to spinoff a new

company founded on a new product. The older

enterprise may even decide to create a new firm

as a more appropriate vehicle for introducing a

new technology.

Second, the characteristic of “smallness” or

“newness” in an enterprise may offer the firm

greater flexibility in experimenting with new ideas

or processes. Production processes are less wellestablished and capital equipment is frequently

more all-purpose. The new firm has no established market image that must be maintained and

therefore may be more inclined to assume commercial risks in its effort to gain a market niche.

This does not imply that older firms are by nature

less capable of innovative activities than the new,

smaller firm. Rather, the perceptions of risk and

long-term gain may be different at the margin,

with the small entrepreneur more willing to act on

a new idea or product, which will differentiate

him from larger, more powerful producers.

Ease of entry of new firms in the free enterprise system is an obvious economic as well as

social objective in the United States. The ability

of firms to enter and leave a market is a critical

feature of an economic system with a sound

competitive environment. This report emphasizes another dimension to this picture, i.e. , that

there is a strong technological objective as well in

policies to assist the entry of new firms. New

technologies with the potential of significant commercial use should not be kept from the market

by unjustified structural, financial, or legal barriers. Yet the authors believe that the current

U.S. industrial and financial structure does—

even if inadvertently—impede easy entry of

many potential new firms. Several examples of

types of barriers that might be expected to face

would-be entrants are:

Venture Capital Restrictions

The new entrepreneur frequently requires outside capital to launch his operation. This must be

obtained through the private or public market.

The Securities and Exchange Commission regulations (particularly Regulation #144), with respect to private placements of venture capital,

limit the rate at which investors can recoup their

investments. In short, the investors in these new

firms are unable to obtain a fast payback. Entry

into the public market poses extremely difficult

problems also. For the new or small firm to go

public, intensive preparations are necessary, involving high costs associated with registration of

public issues. Furthermore, the entrepreneur

bears a greater liability compared to the investor

when entering the public market.

Tax Disadvantages

Although certain tax provisions have been

designed to assist new entrants or small firms

(such as Small Business Investment Companies

(SBIC) and subchapter S of the IRS code), the

new firm nevertheless encounters a variety of

obstacles. For example, capital gains are treated

less favorably than formerly, e.g., the increased

holding periods and changed stock option provi55
-——.

sion. This is keenly felt by the small entrepreneur

in need of investment capital. The new tax provisions reduce investor interest in investing in

smaller, riskier firms. As investors themselves

find such firms less interesting, the potential entrepreneur, having difficulty in selling his shares

to the public, may be frequently induced to

merge with older larger firms to avoid capitalgains taxes and obtain dividend payments.

Other provisions affecting the capital position

of the new firm, compared to the older firm, are

the loss carry-forward and carry-back rules. Existing firms can carry back losses, an advantage

that is clearly impossible for new firms. Hence the

older firm enjoys a financial advantage over new

firms in introducing an innovation that does not

bear immediate profits.

Regulatory Barriers

New firms may have greater difficulty in

meeting environmental and health regulations

than established firms, which are already structured to comply with such regulations. They may

lack adequate managerial or technical skills to

meet Government requirements. (Issue #4 proposes programs to deal with this problem. ) Also,

the total cost of compliance may be prohibitive

for new or small firms, either discouraging their

formation or inducing them to sell out or merge

with larger firms.

Market Barriers

New entrepreneurs typically face greater market uncertainties. For example, established technologically advanced firms frequently benefit

from substantial Government procurement. New

firms with only a short track record may have little chance for Government contracts. Furthermore, the market power of existing firms bears

heavily on the new small entrant. This power frequently results in their absorption through merger

or acquisition or through product imitation by

larger firms with well-organized marketing

systems.

While solutions to these special problems are

not always obvious and often run awry of other

policy considerations, Congress should study

measures to ease the problem of entry for new

firms as well as to improv~ chances for survival

56

against stronger, more established firms. Several

alternative actions might be:

1.

2.

3.

4.

5.

6.

7.

8

Early venture capital assistance (such as the

National Research Development Corporation (NRDC) in Great Britain).

Industry-Government joint-venture arrangements.

Selective use of Government procurement

to assist new technologically innovative

firms. (Studies of the electronics industry

have shown that Government procurement

was an important factor in the early health

of the industry. )

Stricter antitrust enforcement to strengthen

the position of the new firm from the market

domination of larger firms.

Consulting assistance to new firms in

meeting regulatory requirements. (See

issue #4 “Diffusion of Technology.”)

More favorable tax treatment for new firms

(e.g., higher carry-forward provision,

changed depreciation, lower tax on capital

gains).

Simplification of task of obtaining information about and using various Federal, State,

and local incentives in form of cutoff rules in

application procedures for small firms, and

computer data-bank information sources on

available aids.

Patent protection for small firms and inventors against violations and encroachments

from larger firms, such as through use of a

national patent board where

be reported and prosecuted

sary.

ISSUE 4

Diffusion of Technologya

the Private Sector

violations can

where necesWithin

Should Congress consider comprehensive programs to enhance the dif -

fusion of existing technologies and

technical information within the private sector?

‘Diffusion of technology from Government sources to the

civilian sector is discussed in issue #1, and international

transfers in issue #8,
—

Diffusion means the spreading of technology

and technical information to new users. As opposed to generating new technologies, diffusion

of existing technologies is usually a low-cost way

to bring about greater economic benefits by: (1)

raising productivity levels of industries by closing

technology gaps, (2) encouraging more innovations by helping small- and medium-size firms

compete with larger ones, and (3) promoting

new uses of technology by means of transfers between different industries.

Many industries are characterized by a few,

large technology leaders and many smaller producers. For the U.S. economy more than 95 percent of all manufacturing establishments employ

less than 200 people. ’ Although there are other

factors besides diffusion barriers which result in

wide ranges of technology in terms of age and

productivity being adopted by producers of similar products, there exist many opportunities

where better diffusion can help close the gap between best-practice technology and average

technology. A General Accounting Office (GAO)

study of manufacturing productivity10 suggests

that wider diffusion of modern manufacturing

technology can improve industrial productivity,

especially among small batch-process manufacturers, which contribute 36 percent of manufacturing’s share of the GNP. The study maintains

that such productivity improvement can in turn

increase the competitiveness of U.S. products,

decrease the cost of Government purchases, and

reduce inflationary pressure.

Technology gaps tend to stifle competition and

reduce the incentive for large firms to innovate.

By promoting diffusion of technology, the Government can help small- and medium-size firms

compete more equally with larger ones, and also

help foster more innovations. In the special cases

of pollution control, health, and safety standards,

the Government can help the diffusion of technologies for meeting these requirements and

achieve wider compliance by helping small firms,

which tend to lack the knowledge of regulatory

requirements and the means to comply. 11

‘U.S. Statistical Abstract, 1976 (Department of Commerce, Bureau of Census).

‘OGAO Report to the Congress, Manufacturin g

Technology – A Changing Challenge to improved Productivity, LCD-75-436, Washington, D.C , June 1976.

“Charleswater Associates, Inc., The impact on Small

Business Concerns of Government Regulations That Force

Technological Change, Report to SBA and NBS,

September 1975,

The diffusion of technology used in one type

of application to another can often result in new

products, sometimes new industries. The use of

sophisticated electronics in watches is perhaps an

example. Thus wider diffusion of existing technologies not only increases opportunities to improve technology, but can also lead to more innovations. This is supported by the findings of

the industry study in this report (see chapter III).

The funding of R&D to generate new technologies has often received much more attention

than the diffusion of existing technologies to new

users. Since diffusion is an important mechanism

in raising average productivity levels of industries

and in spreading the benefits of technological innovations to bigger segments of the economy,

the problems of diffusion of technology in the

private sector deserve Government attention.

The structure of the marketplace frequently

works against the diffusion process. Many industries are dominated by a few, large technology leaders, which are obviously reluctant to help

diffuse technology to their smaller, less efficient

competitors. Such oligopolistic firms often use

patent and patent-pooling practices to reinforce

the diffusion barrier. By themselves, small firms

often lack information and other resources to

take advantage of more productive available

technologies.

Given the lack of market forces to promote diffusion, there are few Government programs

aimed at redressing the situation. The GAO

study mentions some efforts by the Small Business Administration (SBA), National Technical

Information Service (NTIS), and others, but

maintains that such efforts are fragmented and

very limited. In contrast, it points out that

Western Europe and Japan have well-developed

government-directed programs for overcoming

barriers to diffusion. These include widespread

regional productivity centers and various government-industry-university cooperative efforts.

To address the diffusion problem, a comprehensive policy might use a variety of instruments:

1. Establish a nationwide network of local centers, that provide small firms with technical, informational, and consultative assist-

‘

2A model of this kind of program, entitled State

Technical Services, was enacted in the mid- 1960’s (22

U.S. C. 278). A residue of the program still exists in 23

States.

57
2%

ance about the availability and use

nologies applicable to their needs

such means as:

of techthrough

— Technical agents that provide advice and

assistance to firms on request and act as

interface between firms and various

sources of Government assistance such

as NTIS, National Bureau of Standards

(NBS), etc.;

— Seminars and workshops on technological problems/solutions for small firms in

specific industries;

— Legal/administrative/technical assistance to meet Government regulations

such as pollution, health, and requirements (e.g. Occupational Safety and

Health Administration consultation program); and

— Financial assistance through loans, guarantees, or tax provisions for investments

in regulatory compliance equipment and

facilities (e.g. Environmental Protection

Agency/Occupational Safety and Health

Administration/Small Business Administration financial assistance for pollution

control).

Support and encourage industry cooperative activities by small firms (within the

limitations of antitrust legislation) through

industry trade associations, professional

associations, or marketing and purchasing

cooperatives to:

— Conduct adaptive R&D and demonstration projects of existing technologies for

small-firm applications;

– Construct jointly-operated production

and pollution control facilities;

– Purchase materials and services on a

cooperative basis;

— Articulate joint technical problems and

needs; and

– Promote group efforts of self-help.

3. Support for technology information/communications systems that serve both technology suppliers and users such as:

—

Government-operated systems such as

NTIS; and

Private technology brokerage firms.

4 Require compulsory licensing to competitors when firms attain certain market-shares

(see Japanese practice in chapter IV).

Support for programs where the Government purchases technology and resells it to

multiple users (see Preproduction Order

Support Program of Great Britain, in chapter IV).

ISSUE 5

Implementation of Environmental

and Safety Regulations

Should Congress consider new

means of implementing environmental

and safety regulatory requirements

which will encourage the development

of innovative compliance technologies and safer products and materials?

Much of the debate concerning environmental

regulation to date has focused on the need for

new legislation and the stringency of regulatory

requirements. Questions relating to implementation of the legislative mandates have been

underemphasized. In particular, the role of

technology vis-a-vis regulation has largely been

ignored. The suggestion here is that increased

policy consideration be given by Congress to

issues concerning regulatory system design and

implementation so as to encourage both the

development of the new technologies necessary

to achieve environmental goals and the development of safer products and materials.

There are at least two important aspects to the

relationship between regulation and technological innovation. One concerns how regulation affects or is likely to affect innovation, and the

other concerns the role of technological innovation in achieving regulatory goals. As to the first

aspect, there has not been a great deal of systematic research about the effect of environmental

regulation on U.S. technology13 and the issue re -

13 There have been several studies of the pharmaceutical

industry, notably those of Peltzman (Journal of Political

Economy, Vol. 81, September/October 1973), Warden and

Lasagna (Regulation and Drug Development, American

Enterprise Institute, 1975), and Grabowski (Drug Regulation and Innovation, AEI, 1976). Other industries studies include automobiles (see Abernathy and chakravarthy, op.

cit., p. 47) and an ongoing CPA study of the chemical industry.

58
.

mains controversial. From the evidence which

does exist, one can say with certainty that it is impossible to make simple or general characterizations about the nature of the impact. At a minimum, it is necessary to distinguish between the

direct effects on innovation in compliance efforts

and the longer term, ancillary impacts on the

general process of innovation. The effects in both

instances are likely to vary significantly depending on the nature of the regulation and the regulated industry.

The effects of regulation can be positive or

negative. For example, positive effects may often

occur when regulatory requirements complement some existing market force (for example, in

the case of fuel economy regulations on the auto

industry—chapter III, p. 00) or where a new or

ignored area of development can be exploited.

Regulatory constraints, however, may hamper

innovation by blocking certain new technical options or by decreasing the resources available for

new product development. Of particular concern

is the fact the regulation may hurt the competitive

position of small firms. As these effects can only

be understood on a sector-specific basis there is a

need for such analyses concerning the impact of

regulatory programs as an input to regulatory

design (see issue #8 for further discusson of

analysis needs).

Although the basic environmental requirements in the United States have been highly progressive (viewed internationally), mandatory

standards have been the almost exclusive means

used to achieve them. Some consideration has

been given to the “technology-forcing” character

of health-based regulatory standards, 15 but in

general, the encouragement of new technologies

has been absent as a conscious element of

regulatory policy. This has not always been the

case abroad, where several different approaches

to regulatory design, which focus specifically on

new technology, have been implemented.

—

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

Trade – l], 1/1, IV (published yearly). which finds little or no

effect on the U S. trade position; 1. Waker (ed. ) Studies in

International Enuironrnental Economics, Wiley & Sons,

New York, 1976, a series of essays; and Charleswater

Associates, The impact on Small Business Concerns of

Government Regulations That Force Technological

Change, Boston. 1975.

“See “Technology-Forcing and Federal Environmental

Protection Standards, ” Iowa L Reu , February 1977.

The foreign experience is but one source from

which new means of implementing regulations

and facilitating regulatory compliance can be uncovered. A systematic effort to improve the

design of regulations might include the following

two components:

1.

2.

Evaluation, through such means as a task

force, special commission, or research effort, of the means by which innovative compliance with regulatory needs can be

achieved; ‘b and

Application in appropriate regulatory contexts of demonstrations, experiments, or

new policies designed to facilitate the

achievement of regulatory goals through

the encouragement of technological

change. 17

Either component would require congressional direction. Some of the particular regulatory alternatives, which might be either studied or

implemented, are contained in the following list.

It is not suggested that any of these alternatives

be immediately adopted. Rather, they are offered as examples of possible new methods of

regulating and serve to illustrate the need for a

thoroughgoing reassessment of the means by

which to achieve regulatory goals via technological innovation.

1

2

Expansion of direct Government support

for in-firm technological development in

crucial areas (e. g., pollution control in automobiles) leading to both process and product change.

Modification of pollution control tax incentives, i.e., accelerated depreciation and

municipal bond financing, so as to favor

process redesign and the development of

new products and materials rather that add-

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

have not concentrated on the utilization of technology but

rather on an efficient regulatory process and the economic

impacts of regulation.

“The ETIP Program in the Department of Commerce has

as one of its components this purpose; however, it is a small

effort.

59
3<

4.

5.

6.

7.

8.

—

on modifications associated with purchasing

of pollution abatement equipment. 18

Government financial support for major

new technological advances when firms are

unlikely to undertake them on their own

either because such development would require large-scale efforts, would be long in

coming to fruition, or their results non-appropriable (e.g. closed systems to contain

toxic chemicals). This occurs in Germany

and France as part of broader programs to

encourage the development of new technologies for various social purposes.

Greater industry-specificity in standard setting (e.g. in the OSHA context) so as to

minimize hardship when new technologies

would be difficult to develop and to maximize health safety protection when the

technological capacity is great.

Alternatives or supplements to standard

setting, such as products liability or strict

liability imposed on polluters, as in Japan.

A formal antitrust exemption procedure to

clarify the status of joint R&D relating to

environmental control technology.

Special programs to assist small firms’

compliance efforts (see issue #3).

Effluent taxes as a means of achieving

water pollution abatement on a regional

basis (these have apparently been successful in Europe, especially in Germany,

and are alleged to provide continuing incentives for more efficient control technology) .20

‘“These provisions, Section 169 and 103 of the Internal

Revenue Code, have been criticized as 1) ineffective,

because the general investment tax credit is often more

generous, 2) effectively available only to the large firms that

can undertake municipal bond financing, and 3) penalizing

radical improvements by their exclusion of “significant” (i. e.,

more than 5 percent) process change.

“The Japanese force polluters to compensate all victims

of pollution via a system similar to workers’ compensation.

A bill to enact such a mechanism in the United States, H.R.

9616, was introduced in this session of Congress.

‘“Effluent taxes are widely endorsed by economists (see

R. Solow, “The Economist’s Approach to Pollution and Its

Control, ” Science, Aug. 6, 1971). They are opposed by

many others on a variety of grounds (see M. Weitzman,

“Prices vs. Quantities, ” Review of Economic Studies, october 1974), especially where life-threatening hazards are

involved.

ISSUE 6

Manpower Resources, the Labor

Market, and Technology

Should Congress consider an integrated national manpower policy designed (a) to strengthen the contribution that qualified manpower can

make to the innovation process and (b)

to alleviate the disruptive impacts that

rapid technological change can have

on employment?

The interaction of labor and innovation is complex and frequently misunderstood. There is little

disagreement over the key role that highly qualified manpower resources play in the innovation

process. The existence of qualified technical personnel at all levels is critical to the environment

for innovation. Most technologically advanced

foreign countries place heavy emphasis on manpower policies as a key contribution to the

capacity of industry and the research establishment to undertake technological change. The

essence of these manpower policies is to prepare

human resources for future needs of industries

and the economy in general. As such, there is an

element of long-term planning based on judgments about the nature of future needs.

While the importance of labor for technological change is clear, technological change itself

has an impact on labor. As technological innovation raises demands for qualified personnel at

one end of the spectrum, the effects of such innovation may cause a shift in demand for skills

on the other end. Technological change in industries frequently leads to changes in the “skillmix” which their production process requires.

Certain worker skills may become obsolete and

the result may be layoffs and serious dislocation.

The labor market issue therefore takes on a

double dimension. Beyond the need for personnel in the technological innovation process,

another basic issue is how to adapt a supply

resource—manpower—to rapidly changing demand. Technological change in particular may

lead to a shift in the demand curve for labor

rather than a simple decline along the demand

curve. This shift may cause a change in the demand for skills as opposed to the numbers of

workers.

60
—.—

In general, the overall macroeconomic effect

of technological innovation on employment levels is considered to be positive insofar as technological progress continually produces new products, processes, and services leading to new

employment opportunities. 21 Technological innovation is a key element of a company’s competitive position in domestic markets and of U.S.

firms in general in international markets. Indeed,

it can be argued that the failure of a company or

sector to stay abreast of technological developments may over time lead to declines in employment as a result of the declining fortunes of the

firm or sector. In this broader sense, therefore,

labor has a genuine stake in the technological

health of individual sectors and firms.

However, while the macro impact of innovation may be favorable for the employment picture

over time, the micro effects of technological

change may frequently result in serious labor

dislocations. Manpower policy is therefore confronted with the problem of how to treat such

disruptive impacts on the labor force that result

from such changes at the level of the firm.

The United States today (as illustrated in program area IX in chapter 111) has no conscious

manpower policy specifically designed to strengthen the environment for technological innovation and to respond to the needs of workers in a

technologically changing economy. In particular:

● There is no central body mandated to study

and predict the impacts of technical change

on the labor market.

● There exists no general labor adjustment

assistance program (a) to assist workers

financially to make the difficult transition

from one job to another and (b) to offer

workers retraining opportunities in skills that

industry is currently in need of. The only

current program deals with workers in industries “injured by excessive foreign imports. ”

● There is no longer term strategy, based on

future projections, for educating middleand higher-level technical personnel

“Lowell Gallaway, “Labor Mobility, Resource Allocation,

and Structural Unemployment, ” American Economic

Reuiew, LM No. 4 (September 1963); Otto Eckstein, “Aggregate Demand and the Current Unemployment Problem, ” in Unemployment and the American Economy, ed.,

A M. Ross (New York: John Wiley& Sons, 1964),

needed to sustain the process of technological innovation. 22

Both short-term measures and longer term

strategies are needed to meet these related objectives. Adaptive and continual training of manpower resources are required to provide labor

with the mobility to adjust readily to changing skill

requirements and to furnish the vital human inputs to the process of technological change.

The following outline suggests alternative

measures for congressional consideration:

1. Manpower Forecasting and Planning—to

prepare basis for labor adjustment assistance and long-term technical education

strategy:

—

—

Early-warning systems in various sectors

to predict areas of foreseeable labor

shortages and surpluses; and

Mechanisms for translating the above

data into policy planning options for educational strategy and labor adjustment

assistance.

2. Labor Adjustment Assistance–short- and

medium-term measures to assist displaced

workers:

—

—

—

—

—

—

Financial assistance to aid worker transition from job to job;

Adequate financial aids to workers to

undertake retraining for new jobs:

Incentives to firms to retain and retrain

their own personnel for new positions (as

in Japan) or payroll taxes on employers

to finance worker retraining (as conducted in France);

University-industry cooperation for retraining of higher level personnel in industry for new responsibilities;

Publicly financed continuing education

centers for displaced workers according

to sector or industry;

Improved employment information and

placement services according to sector or

industry to assist in rapid relocation of

workers.

“it should be noted that there is also nothing in the United

States approaching the European movement toward

codetermination that would guarantee labor a voice in

management decisions concerning technology,

61
3. Long-Term Technical Education Strategy—to improve the environment for technological innovation:

— Establishment of training institution network to prepare middle-level technical

personnel;

— Raising the professional stature and increasing financial rewards for teaching

personnel in technical institutes;

— Mandatory continuing education in certain key technical fields (e.g. where

licenses required);

— University-trade school-industry cooperation for upgrading and updating scientific and technical personnel; and

— Incentives to industry for in-house traineeships for qualified personnel

ticed in Germany for example).

(as pracISSUE 7

International Commerce and

Domestic Innovation

Should Congress consider a comprehensive program to strengthen the

U.S. position in international trade by

enhancing the technological competitiveness of U.S. industries adversely

affected by international commerce,

and assisting labor and business to

adjust structurally when dislocations

occur?

International commerce (trade and technology

transfer) has important implications for domestic

innovation. First, technological innovation is a

major determinant of competitiveness in international trade .23 Competition with foreign producers in international markets as well as in the

United States increases the need for U.S. producers to innovate. Second, access to foreign

markets provides an extra stimulus to U.S. innovations by increasing the demand for U.S.

goods and technology. Third, proceeds from

foreign sales of U.S. corporations help finance

their R&D. It is estimated that the foreign sales of

U.S. corporations (after consolidating their exports from the United States and overseas sales —

“See, for example, Raymond Vernon (cd.), The Technology Factor in International Trade (National Bureau of

Economic Research, New York, 1970).

62

of their foreign subsidiaries) accounted for almost

one-third of their total sales in 1976.24 Fourth,

technology transfer from abroad has stimulated

or complemented many U.S. innovations. To

cite a few examples, continuous casting and the

basic oxygen furnace in steelmaking, the jet

engine, float glass manufacturing, and penicillin

were all first introduced abroad and then brought

to the United States.

While many benefits for the U.S. economy

and for domestic innovation derive from internation commerce, there are clearly problems for

some U.S. industries also. Competition with

foreign producers, whether here or abroad, is a

dynamic process that creates a changing mix of

opportunities and problems for U.S. industries as

comparative technological advantages shift over

time. Coupled with other changing international

conditions, this has caused domestic job losses in

some sectors, or is threatening to do so, through

rising imports or declining exports.

Consumer electronics, steel, textiles, and

shoes are examples of industries severely undercut by imports and where domestic jobs have

been lost by the closing of plants in the United

States. In these sectors, there is strong labor and

business sentiment in favor of restricting imports.

In other manufacturing sectors, labor groups

have voiced forceful complaints against the export of jobs by U.S. companies transferring

technology and making direct investments in

foreign countries. Although some have argued

that these actions by U.S. businesses are defensive in nature and in response to changing international conditions and some have even argued

that there are net gains in U.S. jobs as a result of

U.S. direct investments overseas, ” there are

undeniable job losses for specific workers.

Although in the modern world of increasingly

interdependent economies international commerce is essential to national welfare, it results in

costs as well as benefits. Because of these costs,

there is mounting pressure on the U.S. Government to institute protectionist measures. How-

—.——

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

Sales Special Report, ” Standard and Poor’s industry

Surueys, July 28, 1977.

‘

s

See, for example, several studies summarized in Robert

Hawkins, Job Displacement and the Multination Firm –A

Methodo/ogica/ Reuiew, Center for Multinational Studies,

Occasional Paper No. 3, Washington, D. C., June 1972.
ever, protectionist measures alone are unsatisfactory and dangerous without accompanying actions to remedy basic structural weaknesses. Protectionist measures tend to generate inflationary

pressures domestically and invite international

retaliation against U.S. exports, both of which

will cause more job losses. They merely alleviate

symptoms and reinforce long-term rigidities in industrial structures, while denying U.S. consumers cheaper or better products. While shortterm protectionist measures may be necessary in

some cases, they should be accompanied by a

comprehensive package of technological/structural adjustment programs that can soften the

dislocations caused by declining industries, help

revive their competitiveness, or assist in their

transformation.

Although there are programs in existence for

labor and business adjustment administered by

the Departments of Commerce and Labor and

the International Trade Commission, they are inadequate and fragmented for this purpose. An

integrated policy towards technological/structural adjustment might include the following

components:

1. An early-warning system based perhaps on

2

3.

the kind of sector-specific microanalysis (see

issue #6) that would yield forewarnings

about declining industries and their problems and thus avoid crisis-triggered reactions (e.g. the recent case of steel). This

system should be part of a policy-formulating unit that will coordinate relief and adjustment assistance decisionmaking.

A comprehensive labor adjustment program that can help labor adjust, retrain, or

relocate (see issue #4).

A comprehensive business adjustment program which may include:

— Short-term protectionist support under

special circumstances (e. g., for vital or infant industries);

— Capital support for modernization and

restructuring (e. g., R&D funds, exemption from antitrust of joint R&D by industry);

— Regulatory support (relaxation or exemption of regulatory measures that impact on industry, e.g., in a recent case,

water pollution standards were relaxed

for parts of the steel industry); and

4.

5.

6.

—

—

Export support (e.g., use of Export Imeport Bank (EXIM) bank facilities or tax

provisions similar to the Domestic International Sales Corporation (DISC) to

promote industry exports).

An R&D support system that enhances the

technological competitiveness of U.S. industries by supporting:

—

.

—

—

Technological development based on

assessments of U.S. comparative advantages (see issue #8, sector-specific microanalysis);

Technological development that can

raise industrial productivity across many

sectors (see issue #1);

Technological development that can lead

to new industries or markets (both domestic and export); and

Adaptation and improvement of advanced foreign technologies by domestic

industries.

Selective use of incentives/disincentives to

inflows of technology through the channels

of trade, contractual arrangements, and

direct investment (as Japan did in the

1950’s and 1960’s through the Ministry of

International Trade and Industry).

Selective removal of barriers to technolocw

transfer from abroad, e.g., bias against

foreign testing data under Food and Drug

Administration regulations on introduction

of new drugs (see program area XI, chapter

111, for other tariff and nontariff barriers).

ISSUE 8

Support for Sector-Specific

Microanalysis

Should Congress consider support

for systematic and ongoing analyse s

of the social, economic, and technological issues pertaining to individual

industrial sectors as an input to public

decisionmaking?

The overall purpose of this report has been to

understand the relationship between technological innovation and Government action. One of

the major premises underlying its execution is

63
——

that this relationship can best be understood on a

sector-specific basis. This was a major reason for

undertaking a series of industry studies (see

chapter III). As the work progressed, however, it

became increasingly apparent that there are

serious deficiencies in the knowledge base:

●

●

On the industry side, there were often major gaps in the literature concerning the

technology-related problems of the sector,

such as obsolescence, capital needs, position in international trade, etc.

On the Government program side there existed an even greater lack of evidence about

the effects of various programs and serious

deficiencies in the knowledge base upon

which to make regulatory decisions.

These deficiencies arise in part from the fact

that there is no sector-specific microanalytical

capability of significant size in Government today. For example, the Domestic and International Business Administration, part of the

Department of Commerce, has concentrated

more on macroeconomic data than on sector

studies. The National Science Foundation has

funded some studies and the National Bureau of

Standards also has some capability along these

lines, but each is a very small effort. Regulatory

agencies also sometime fund such studies in

response to a crisis. While these studies may fulfill

an immediate regulatory need, they are generally

not readily applicable to other governmental

needs. Although existing studies performed in

firms might provide some useful information,

they are often proprietary and not designed to

suit governmental purposes.

Accordingly, there is a need for an expanded,

Government-supported capability. Most Government actions which significantly affect the

technology of an industry must be taken on a

sector-specific basis. For example, air and water

pollution control standards are, almost without

exception, different according to the sector affected. This is a natural consequence of the difference in hazards present and the different

technological and economic capabilities of the

relevant sectors. Energy conservation regulations

are another example of a Government function

that cannot proceed without sector-specific disaggregation. Concerns relating to export and import controls, productivity, and employment also

64

require detailed

decisionmaking.

microanalysis for Government

One example of a study that might be undertaken concerns the steel industry, whose health is

currently a subject of major national controversy

because of its position in international trade and

its ability to comply with environmental regulations. Good thorough studies of the technological

position of the U.S. steel industry will be needed

in order to develop and implement new policies

toward it. Another example might focus on the

effect of international trade and foreign direct investment by U.S. multinationals on domestic

employment. Because most existing studies only

examine net aggregate employment impacts and

provide no information as to where the employment gains and losses in fact occur, policies to

provide structural adjustment are severely hampered.

Other research needs might include analysis of

the capital investment needs in specific sectors,

the impact of regulation on technology in

selected industries, or the effectiveness of existing Government programs on a sector-specific

basis.

There are several institutional alternatives

possible to support such analysis including:

1.

2.

3.

Government financial support for sector

analyses performed in universities or research institutes;

Support for industry-performed analyses;

and

Performance of the analyses in one or more

Government agencies.

Irrespective of the institutional arrangement,

the analysis could be oriented either toward (1)

broad policy areas such as control of international

trade, but with particular reference to individual

sectors or (2) specific sectors, such as steel, for

use in a variety of policy contexts. In either event,

the analysis would be useful to the formulation of

public policy in regulation, planning, establishing

research priorities, etc; and could aid private

decisionmaking as well by providing a data base

and new syntheses of existing information.
ISSUE 9

Support for Hazard Analysis

Should Congress consider supporting additional national capability for

anticipating significant hazards arising from new and existing technologies?

Recognition and control of significant hazards

before they create damage is obviously a desirable goal. Several existing regulatory systems attempt to fulfill this purpose with regard to new

chemical products or uses (e.g. pharmaceutical,

pesticide, and toxic substance regulation—see

policy area 11 for this listing). In addition,

assessments that may have hazard identification

and analysis as a component are performed by

various agencies (e. g., the environmental impact

statement process required for major Federal actions, OTA studies, etc. —see program area I,

chapter 111).

While each individual program has its own virtues and drawbacks, the overall effort may lack

suffient purpose, coordination, and capability to

respond to the national need for hazard recognition and prevention, especially with regard to

hazards already in the marketplace or environment. There are several reasons for this.

First, is the existing programs coordination .2’

For example, although the dangers of a toxic

substance in the workplace may be recognized,

its control as a hazard in the atmosphere or in a

consumer product is often not coordinated with

the workplace regulatory effort. This may result

in transfer of the hazard from one location to

another (for example by ventilation from a factory into the atmosphere) rather than effective

control.

Second, hazard analysis is not contained

within the mission of many agencies. For example, the National Aeronautics and Space Administration and the Department of Defense had the

capability but not the responsibility to be concerned about satellite radioactivity before the recent Canadian incident involving the crash of a

Soviet satellite. Moreover, the hazard analysis

function that does exist is typically only incidental

“The recent voluntary cooperative effort in the toxics

area by OSHA, EPA, CPSC. and FDA is an encouraging

initial step at meeting this problem.

to the larger agency mission. For example, EPA’s

pesticide division attempts to prescribe labels,

register pesticides, prescribe standards for licensing applicators, as well as to prevent “unreasonable adverse effects” on the environment.

Third, hazard analysis is a relatively new

discipline and has so far achieved little recognition or support. Consequently, its analytical techniques are as yet underdeveloped.

For all these reasons, hazards typically go

unrecognized until a crisis develops. The record

of the environmental/safety movement is replete

with examples in this regard: vinyl chloride,

recombinant DNA, and most recently, radioactive debris from a Soviet satellite.

Several alternative policies may be undertaken

to expand and improve the existing hazard analysis capability, including:

1

2.

3.

4

5

6.

7.

A central hazard identification/analysis mission and capability located in a Government

agency, for example OTA or EPA. This

agency could either conduct or coordinate

hazard analysis efforts in Government.

Government financial support for hazard

analysis performed elsewhere (for example,

through NSF).

Government support for training a n d

research to develop a hazard analysis capability, for example, through curriculum development, support for students, publications, etc.

Hazard identification and analysis in firms—

although this is occuring already to some

extent as a result of regulatory and legal

(e.g. products liability) requirements, new,

more formal requirements could be imposed.

Education of workers and consumers in

hazard identification.

Systematic and ongoing monitoring of environmental and health research in the United

States and abroad to keep abreast of new

developments.

Adequate followup analyses or procedures

to ensure that hazards identified are controlled to the extend feasible and to monitor

the analysis capability.

65
- .— -

Whatever the mechanism, its existence may

be as important as its form. Although hazard

identification/analysis can be a systematic, scientific undertaking, it is also undeniable that it may

involve a good deal of serendipity. Therefore, a

consciousness about the problem and a mission

to be concerned with it may be as important as

the development of new analytical techniques.

ISSUE 10

Affecting the Demand for New

Technologies.

Should Congress consider increased use of programs of policies

that focus on the demand for new

technologies rather than on supply?

Most Federal programs intended to affect technological innovation have historically been concerned with the supply of new technologies. Accordingly, they have attempted to increase this

supply by, for example, reducing the cost of

development, undertaking research in publicly

supported laboratories, increasing the rewards

for innovation, etc. (See program areas IV

through VIII in chapter III. ) This policy emphasis

has resulted in part from a widely held, but overly

simple, view of the innovation process, which

sees R&D as the overridingly important aspect.

In contrast, recent research emphasizes the complex interconnectedness of various stages in the

innovation process and recognizes that market

demands are often a more important motivator

of innovation than technical discoveries.

Experience suggests that policies which work

through influences on demand may often be

more effective than those which concentrate on

increasing supply. One way of influencing demand is by Government procurement. Evidence

presented earlier in this report shows that an

assured Government market for new products

can be an effective stimulus to innovation. This

conclusion is also strongly supported by the

foreign experience. Another way of influencing

demand is to impose a Government requirement. Environmental regulation, for example,

had fostered innovation by creating a demand for

safer, nonpolluting technologies. Both of these

examples show programs that create new or expanded markets.

Most of the factors that mold consumer demand for new technologies arise from the private

market. Advertising, marketing techniques, and

various other kinds of market information play a

predominant role in this regard. Although advertising regulation has long existed, it has, until

recently, been limited in scope; however, new

Government initiatives are likely to influence

consumer demand more directly. For example,

recent developments in counter, corrective, and

comparative advertising attempt to ensure a

balance of viewpoints in the commercial marketplace.

Other existing programs also affect demand.

For example, product safety regulation may effectively shift consumer demand toward a preference for safe technologies embodied in consumer

products. Although such shifts may in fact occur,

they are largely unintended from the viewpoint of

the regulators, whose major interest is to remove

unsafe products from the market, and only incidentally to promote the development of new,

safe technologies. (These and other policies are

identified in program area XII. )

The potential importance of policies intended

to affect demand may be illustrated in the

development of energy conservation technology.

Decreases in demand (through conservation)

and shifts in the nature of demand (through a

preference for energy-efficient or nonconsumption alternatives) are both required for conservation to be successful. In order to achieve these

two goals, major changes may be required in existing products, production processes, and individual lifestyles. If this is indeed the case,

Government action may be necessary to (1) inform consumers fully about the means and benefits of energy conservation, (2) persuade them to

adopt different consumption patterns, and (3)

counteract or control existing advertising practices inimical to energy conservation .27 Moreover, the Government could vastly increase the

demand for energy-efficient technologies by subsidizing their users, for example, through a tax

credit for solar heating or low-interest home insulation loans. Similarly, Government purchase

of such products could speed their development

and commercialization.

“AS an example of this third option, France has recently

instituted a major program to prohibit any advertising that

encourages energy consumption.

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———— — — —— .—

Energy conservation is but one example of the

areas in which Government can affect technological change through influences on demand

rather than by encouraging supply. It is used as

an example not to advocate any specific program, but rather to illustrate how the Government can work through demand-side policies in a

variety of ways.

The existing imbalance between supply and

demand-based policies in the overall Government approach toward technological innovation

strongly suggests that consideration should be

given to increased use of programs focusing on

demand. Such programs might include the following components:

1. Greater emphasis on mechanisms that create new or expanded markets for certain

types of technology, for example:

—procurement,

—user subsidy,

—products liability, and

—regulation.

2. Greater emphasis on mechanisms that

directly influence the nature of consumer

demand, for example:

—counteradvertising,

—consumer information provision, and

—education.

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AID

ANVAR

ASRA

CAB

CEQ

CPSC

CWPS

DISC

DOC

DOD

DOE

DOJ

DOL

DOT

EIS

EPA

ERISA

ETIP

EXIM

FCC

FC[A

FDA

FTc

GAO

GATT

HEW

— —.—— — —

Glossary of Acronyms

–Agency for International

Development

—National Agency for the

Valorization of Research (French)

–Applied Science and Research

Applications, a directorate of the

National Science Foundation

–Civil Aeronautic Board

–Council on Environmental Quality

–Consumer Product Safety

Commission

—Council on Wage and price

Stability

—Domestic International Sales

Corporation

—Department of Commerce

—Department of Defense

–Department of Energy

—Department of Justice

—Department of Labor

— Department of Transportation

— Environmental impact statement

(also economic impact statement)

–Environmental Protection Agency

— Employee Retirement Income

Security Act

–Experimental Technology

Incentives Program

—Export Import Bank

—Federal Communications

Commission

—Foreign Export Credit Insurance

Association

—Food and Drug Administration

—Federal Trade Commission

–General Accounting Office

–General Agreement on Tariffs and

Trade

—Department of Health, Education,

and Welfare

HUD

IIs

ITC

IRS

MFN

NAE

NAS

NASA

NBS

NHTSA

NIH

NLRA

NRC

NRDC

NSF

NTIS

OPIC

OSHA

OSTP

OTA

PEFCO

SBA

SEC

STR

TOSCA

TUP

USDA

—Department of Housing and Urban

Development

—Inflationary impact statement

—International Trade Commission

—Internal Revenue Service

—Most Favored Nation

—National Academy of Engineering

—National Academy of Sciences

—National Aeronautics and Space

Administration

–National Bureau of Standards

–National Highway Traffic Safety

Administration

–National Institutes of Health

—National Labor Relations Act

—Nuclear Regulatory Commission

—National Research Development

Corporation (British)

—National Science Foundation

—National Technical Information

Service

—Overseas Private Investment

Corporation

–Occupational Safety and Health

Administration

–Office of Science and Technology

Policy

—Office of Technology Assessment

—Private Export Funding

Corporation

—Small Business Administration

—Securities and Exchange

Commission

—Special Trade Representative

—Toxic Substances Control Act

—Technology Utilization Program

—U.S. Department of Agriculture

69