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TheCompetitivenessandInnovativeCapacityoftheUnitedStates
January2012
PreparedbytheU.S.DEPARTMENTOFCOMMERCEInconsultationwiththeNATIONALECONOMICCOUNCIL
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TableofContentsForeword .......................................................................................................... iiiExecutive Summary......................................................................................... v1. Rising to the Challenge ............................................................................... 1 1
Exceptional Performance .......................................................................................... 1 1Alarms ....................................................................................................................... 1 4Addressing the Alarms .............................................................................................. 1 10
2. Keys to Innovation, Competitiveness, and Jobs ...................................... 2 1Concepts and Definitions........................................................................................... 2 2What Made the United States So Successful in the Past? ........................................ 2 4Interconnections ........................................................................................................ 2 9
3. Federal Support for Research and Development ..................................... 3 1
The Economic Justification for the Federal Governments Role in Fundingfor Basic Research .................................................................................................... 3 1
The Federal Government: A Key Force Driving Major Innovations ........................... 3 7
Cracks in the Federal Research Foundation ............................................................. 3 13
Preserving and Extending Federal Support for Science and Industrial R&D in the21st Century ............................................................................................................... 3 14
Appendix 1. Definitions of Relevant Terms................................................................ 3 18
Appendix 2. The Theoretical Underpinnings for a Federal Role in ResearchFunding...................................................................................................................... 3 19
4. Educating Our Workforce ........................................................................... 4 1The STEM Workforce is Expanding........................................................................... 4 2STEM Skills in Demand Throughout the Economy ................................................... 4 4Many U.S. Universities Are Outstanding But Our Production of U.S. STEM Graduates Is Not ....................................................................................................... 4 6The High Cost of College and Poor Academic Preparation Deter Students.............. 4 9Demographics Create Challenges and Opportunities for Growth ............................. 4 12The Foreign-Born Are Key Members of the STEM Workforce .................................. 4 14The Administration is Lowering the Barriers to a College Education......................... 4 15
5. Infrastructure for the 21st Century .............................................................. 5 1Introduction................................................................................................................ 5 1Definitions of 21st Century Infrastructure ................................................................... 5 3How Does Our 21st Century Infrastructure Stack Up? ............................................... 5 4Ensuring the United States 21st Century Infrastructure is Sound.............................. 5 12
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6. Revitalizing Manufacturing ......................................................................... 6 1
A Strong Manufacturing Sector is Uniquely Important to the U.S. Economy.............. 6 1
The Current State of U.S. Manufacturing: A Crossroads for AmericanCompetitiveness......................................................................................................... 6 4
Economic Rationales for Federal Government Support for U.S. Manufacturing........ 6 8
Longstanding Federal Government Support for U.S. Manufacturing ......................... 6 9
Federal Initiatives to Revive Manufacturing ............................................................... 6 16
7. The Private Sector as the Engine of Innovation ....................................... 7 1
Introduction ................................................................................................................ 7 1
Regional Clusters and Entrepreneurship ................................................................... 7 1
Startup America.......................................................................................................... 7 6
Promoting Americas Exports and Improving Access to Foreign Markets.................. 7 8Corporate Taxes......................................................................................................... 7 10
Ensuring a Well-Functioning Intellectual Property Rights System ............................. 7 11
Moving Forward ............................................................................................... M 1
Supplemental Materials................................................................................... S 1
Innovation Advisory Board Members ......................................................................... S 3
Section 604 of the America COMPETES Reauthorization Act of 2010...................... S 4
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Foreword On January 4, 2011, President Barack Obama signed into law the AmericaCOMPETES Reauthorizaton Act of 2010 (COMPETES). Secton604 of COMPETESmandates that the Secretary of Commerce complete a study that addresses the
economic compettveness and innovatve capacity of the United States (see Sup-
plemental Materials). Congress directed that this report address a diverse array
of topics and policy optons, including: tax policy; the general business climate in
the U.S.; regional issues such as the role of state and local governments in higher
educaton; barriers to seng up new firms; trade policy, including export promo-
ton;the effectveness of Federal research and development policy; intellectualproperty regimes in the U.S. and abroad; the health of the manufacturing sector;
and science and technology educaton.
In conductng this study, COMPETES specified that the Secretary of Commerce es-
tablish a process for obtaining comments. One part of that process was to estab-
lish a 15 member Innovaton Advisory Board (IAB) for purposes of obtaining
advice with respect to the conduct of the study. The Department of Commerceannounced the members of the IAB (listed in the Supplementary Materials sec-
ton of this report) on May 4, 2011, and the inaugural meetng of the IAB was on
June 6, 2011, in Alexandria, Virginia. A second meetng of the IAB was held Sep-
tember 23, 2011, in Boulder, Colorado. IAB members provided input into the pro-
cess throughout the summer. Additonally, some IAB members generously hosted
COMPETES-related events in Washington, D.C.; Youngstown, Ohio; Morgantown,
West Virginia; Philadelphia, PA; and New York, NY. These events brought together
community and business leaders, and experts in a wide variety of areas, to share
their ideas on compettveness. Department of Commerce and Administratonstaffaended all of these meetngs.Additonally, we received input from a number of other groups at various events.
These included an all day event with a group of prominent academic economists
in Cambridge, Massachuses, and a conference at the Silicon Flatrons Center
for Law, Technology, and Entrepreneurship at the University of Colorado. Other
groups, as well as the general public, provided additonal input.
We are very grateful for the generosity of all contributors, but special thanks go
to the InnovatonAdvisory Board membersthey passionately care about the fu-ture of this country and have been willing to give their valuable tmeand exper-tseto enrich this process.Sincerely,
John E. Bryson
Secretary of Commerce
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ExecutiveSummary
TheU.S.economyreignedsupremeinthe20thcentury,becomingthelargest,mostproductive,andmostcompetitiveintheworld;amazingnewtechnologieswereinventedandcommercialized;theworkforcebecamethemosteducatedinthe
world;
and
incomes
soared
while
alarge
middle
class
emerged
and
thrived.
Asthe21stcenturyapproached,however,alarmsbegantosoundabouttheU.S.economysabilitytoremaininthispreeminentposition.Incomesstagnatedandjobgrowthslowed.Othercountriesbecamebettereducatedandourmanufacturingsectorlostgroundtoforeigncompetitors.Observershaveexpressedconcernthatthescientificandtechnologicalbuildingblockscriticaltooureconomicleadershiphavebeenerodingatatimewhenmanyothernationsareactivelylayingstrongfoundationsinthesesameareas.Inshort,someelementsoftheU.S.economyarelosingtheircompetitiveedgewhichmaymeanthatfuturegenerationsofAmericanswillnotenjoyahigherstandardoflivingthanisenjoyedintheUnitedStatestoday.Innovationisthekeydriverofcompetitiveness, wageandjobgrowth,andlongtermeconomicgrowth.Therefore,onewaytoapproachthequestionofhowtoimprovethecompetitivenessoftheUnitedStatesistolooktothepastandexaminethefactorsthathelpedunleashthetremendousinnovativepotentialoftheprivatesector.Amongthesefactors,threepillarshavebeenkey:Federalsupportforbasicresearch,education,andinfrastructure.Federallysupportedresearchlaidthegroundworkfortheintegratedcircuitandthesubsequentcomputerindustry;theInternet;andadvancesinchemicals,agriculture,andmedicalscience.Millionsofworkerscantracetheirindustriesandcompaniesbacktotechnologicalbreakthroughsfundedbythegovernment.TheU.S.educationalsysteminthe20thcenturyproducedincreasingnumbersofhighschoolandcollegegraduates,moresothananywhereelseintheworld.Thesehighlyskilledworkers,inturn,boostedinnovation.Thetransformation ofinfrastructureinthe20thcenturywasnothingshortofamazing:thecountrybecameelectrified,cleanwaterbecamewidelyavailable,airtransportbecameubiquitous,andtheinterstatehighwaysystemwasplannedandconstructed.Allofthesedevelopmentshelpedbusinessescompetebyopeningupmarketsandkeepingcostslow.Commontoallthreepillarsresearch,education,andinfrastructureis thattheyareareaswheregovernmenthasmade,andshouldcontinuetomake,significantinvestments.Foravarietyofreasons,theprivatesectorunderinvestsinthese areas sothegovernmentneedstostepintobringinvestmentuptothesociallyoptimallevels.Anadditionalcommonthreadbetweenthesethreepillars
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isthatthebenefitsoftheseinvestmentstookyearstobefullyrealized.Forinstance,wearestillbenefitingtodayfrominvestmentsmadeinthe19thcentury,suchastheMorrillActof1862,whichlaidthefoundationforthelandgrantuniversity
system
in
all
states.
In
the
20
thcentury,
World
War
II
eraresearch
became
thebasisofthetransistor;andinthe1960s,allofthebenefitsfrominvestinginsciencemadetheUnitedStatestheleaderofthespaceraceaswellastheinformationtechnologyindustry.Thislongtermoutlookshouldnotbeforgotten.Theneedfor theFederalgovernmenttoplayanimportantroleinthefirstpillarresearch,particularlybasicresearchderivesfromthefactthatthereisadivergencebetweentheprivateandsocialreturnsofresearchactivitieswhichleadstolessinnovativeactivityintheprivatesectorthaniswhatisbestforourcountry.However,governmentsupportofbasicresearchcanremedythisproblem.ThebenefitsfromFederalresearchanddevelopment(R&D)supportarenotjusttheoretical:asmentionedabove,theFederalgovernmenthasplayedacrucialroleinthedevelopmentofmanykeyinnovationsofthemid tolate20thcentury.Federalfundingforbasicresearchhasbeenincreasing,butataslowerpacethaneconomicgrowth.To improvethetrajectoryofAmericaninnovation,thoughtful,decisive,andtargetedactionsareneeded,someofwhichalreadyhavebeenproposed.TheseactionsincludesustainingthelevelsoffundingforbasicresearchbytheFederalgovernment,extendingataxcreditforprivatesectorR&Dtogivecompaniesappropriateandwelldesignedincentivestoboostinnovationabovethebaselinelevelthatwouldhavebeenreachedabsenttheseincentives,andimprovingthemethodsbywhichbasicresearchistransferredfromthelabintocommercialproducts.Education,thesecondpillar,isalsocriticaltofosterinnovationandtoincreaselivingstandards.Theadvancesineducationinthe20thcenturyhelpedpropeltheeconomicriseoftheUnitedStatesasitbecametherichestnationontheplanet.However,bymanymeasures,theU.S.educationsystemhasslipped.Bysomeaccounts,theUnitedStatessystemofhighereducationremainsthebestintheworldandeducatesourcountrysandourcompetitorsfuturescientistsandengineers, factors such aspoorpreparationinmathandscienceandthehighcostofcollegetuitionandexpensesarerestrictingtheflowofAmericanscience,technology,engineeringandmathematics(STEM)graduatesfromouruniversities.
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OngoingandnewAdministrationinitiativesareaddressingthesechallengesbymakingcollegemoreaffordable,spurringclassroominnovationatalllevels,expandingthesizeandqualityoftheSTEMteacherranks,andencouragingandfacilitating
students
and
workers
continued
STEM
education.
Inthepast,theUnitedStatesledthewayinseveralkeyareasofinfrastructuredevelopment,thethirdpillarofinnovativecapacity,startingwiththerailroadsystemofthe1800s.Intodayseconomy,thenatureofinfrastructure neededtocompeteischangingandtheUnitedStatesislaggingbehindincertainkeyaspectsofa21stcenturyinfrastructure(suchasbroadbandInternetaccess)andfacingcapacityconstraintsforotheraspects(wirelesscommunications)giventhehighdemandfortheseservices.EnsuringthattheUnitedStateshastheinfrastructureitneedstobecompetitiveinthe21stcenturywillrequirebothadditionalsupportbythegovernmentandanappropriatepolicyframeworktoenabletheprivatesectortobuildonthegovernmentssupport.AcrucialcomponentoftheUnitedStatesfuturecompetitivestrengthisaflourishingmanufacturingsector.Manufacturingcreateshighpayingjobs,providesthebulkofU.S.exports,andspursinnovation.WhilemanufacturingcontinuestoplayavitalroleintheU.S.economyandprovidesjobsformillionsofAmericans,italsohasfacedsignificantchallenges,especiallyoverthelastdecade.ManufacturingsshareofGDPandthenumberofworkersinmanufacturinghasfallen,whilethetradebalanceinmanufacturedgoodshasworsened.Inthemanufacturingsector,theFederalgovernmenthashistoricallyplayedanimportantroleinprovidingalevelplayingfieldandmustdosowithrenewedvigortoensurethatmanufacturingcontinuestothriveintheUnitedStates.Thecurrentandfuturehealthofthemanufacturingsectorisstronglylinkedtotheinvestmentswemakeinresearch,education,andinfrastructure.Increasing the competitiveness and the capacity to innovate goesbeyondimproving research, education, infrastructure andmanufacturing.Manyotherpolicies thatensure theprivate sectorhas thebestpossibleenvironmentinwhichto innovatecontributetocompetitiveness, includingincentivestoformregionalclusters,promotionofexportsandaccesstoforeignmarkets,thelevelandstructureofcorporatetaxes,andaneffectiveintellectualpropertyregime(domesticallyandabroad).Ineachoftheseareas,theFederalgovernmenthasanimportantroletoplay.
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Thechallengesaregreat,buttheUnitedStateshasastrongbaseonwhichtobuildandtorisetothesechallenges.Thereareclearactionsthatcanhelpthisnationregainitsinnovativeandcompetitivefooting.Tosucceed,wemusthavethewill
to
implement
and
to
sustain
the
policies
that
will
prepare
the
United
States
tocontinuetobeaneconomicleaderinthe21stcentury.
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RisingtotheChallenge
TheU.S.economywastheworldleaderinthe20thcentury;movingintothe21stcentury,however,variouspartieshaveraisedalarmsaboutwhetherthisnationseconomycancontinuetobecompetitive.TheU.S.economyremainsthelargestin
the
world,
possessing
ahighly
skilled
work
force,
world
class
companies,
and,
accordingtosome,theworldsbesthighereducationsystem.Despitethesepositiveattributes,U.S.citizenshavebeenhitbystagnatingjobgrowthandfallingincomes,whilebusinesseshavefacedincreasingglobalcompetition.Inshort,theconcernisthatfuturegenerationsofAmericanswillnotenjoyahigherstandardoflivingthanisenjoyedtoday.Withtherightpoliciesandcommitment,theUnitedStatescancompetegloballyandprovideitscitizenswithbetterlives.ExceptionalPerformanceDuringthe20thcentury,thepaceofinnovationwasstaggering,leadingtonewindustriesandcompanies,suchasthoseinthebiotechandinformationtechnologyfields.Innovationalsospurredgrowthintraditionalindustries,asbusinessesfundamentallychangedthewaytheyproducedanddistributedtheirgoodsandservices.Intheprocess,theUnitedStatesbecametheworldsmostinnovative,mosteducated,andmostcompetitivenation.Since1980,theUnitedStatesmadeupbetween20and25oftheworldseconomywhilehavingonlyabout5percentoftheworldspopulation.1TheexceptionaleconomicperformanceoftheUnitedStates
helped
to
improve
the
lives
of
its
citizens,
particularly
during
the
decades
afterWorldWarII.Between1950and2000,incomessoared,withrealdisposablepersonalincomepercapitaincreasing213percent,from$9,240to$28,899.2TheU.S.economycreatedmillionsofnewjobs,manyinnewfirmsandindustries.Theseeconomicgainswerecoupledwithgainsinotherareas.TheUnitedStatesprovidedelectricityandphoneservicethroughoutthecountry,builttheInterstateHighwaySystem,providedcleanwatertohundredsofmillions,putmenonthemoon,developedtheInternet,anddecodedthehumangenome.(Box1.1describesinmoredetailtheconstructionoftheInterstateHighwaySystem.)AdvancesinmedicalsciencehelpedpropelsignificantincreasesinlifeexpectancyintheUnitedStates.Lifespans,asmeasuredatbirth,rosefrom47.3yearsin1900to77.9in2007.3Advancesinagriculturalscienceincreasedtheproductivityofourfarmsby150percentbetween1948and2008.4
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1 2 U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY
TheUnitedStateshasastrongtraditionofscientificadvancement;about40per
centofNobelPrizeshavebeenawardedtoU.S.citizens5anda2011studyplaced
40percentoftheworlds100mostinnovativecompaniesintheUnitedStates.6
Box 1.1 The Interstate Highway System
PerhapsnootherinfrastructureinvestmentintheUnitedStatessotransformed
societyastheInterstateHighwaySystem.TheFederalAidHighwayActof1956
wassignedintolawbyPresidentDwightD.Eisenhower,anditauthorized$25
billionfortheconstructionof41,000milesofhighways(seethemapbelow),at
thetimemakingitthelargestpublicworksprograminAmericanhistory.Asof
1991,constructioncost$128.9billionforabout43,000ofthesystemsmiles.
About90percentofthefundingcamefromtheFederalgovernment,generally
fromrevenue
raised
by
taxes
on
motor
fuel,
and
about
10
percent
from
the
states.
Today,aftermorethan50years,therearemorethan46,000milesintheInter
stateHighwaySystem.Itisoftentoutedasoneofthegreatestpublicworksin
vestments in thenationshistory.The InterstateHighway System replaced a
lowercapacity,lowerspeed,lesssafe,andmoreexpensive(permileoftravel)
highwaysystem.Thesystemthusallowedregionsandlocalitiesthatwerenot
partofthenationseconomytobecomeintegratedandopentoneweconomic
opportunities.1
Map of the United States Interstate Highway System
1.Source:mappery.com/maps/United StatesInterstateMap.
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StatesacrossthecountrycontributedtoandbenefittedfromtheU.S.economicstrengthduringthe20thcentury.From1963to2008,statelevelrealincomeperpersonincreasedineverystatebyatleast79percent,andsomestatesexperienced
gains
of
close
to
300
percent.
A
total
of
34
states
(including
the
District
of
Columbia,whichhadthehighestincrease)sawgrowthofmorethan150percent(seefigure1.1).
Figure 1.1
Growth in Real
GDP per Capita by
State, 19632008
79100%
100150%
220300%
150220%
Source: Bureau of Economic Analysis, Economics and Statistics Administration calculations.
Note: Percent change in real Gross Domestic Product per capita by state, 1963 (first available year of data) to 2008.
Successful,worldclasscompaniesarelocatedinvirtuallyeverystateintheUnitedStates;39statesarehometoatleastoneFortune500company. Withinstates,andacrossstateboundaries,regionalinnovationclustersarose.SiliconValleybecametheworldsinformationtechnology(IT)epicenter,butotherareasalsocontributedsignificantlytotheITrevolution,includingtheregionalindustry
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clustersinTexas,WashingtonState,Massachusetts,Georgia,NorthCarolina,Virginia,andMichigan(AutomationAlley,inSoutheastMichigan).Majormedicaladvanceshavebeenmadeinmanystates,includingAlabama,California,andPennsylvania.
Overtime,Americanscametotaketheseeconomicadvancesforgrantedandexpectedthesetrendstocontinueintothefuture.ThiseconomicprogressfueledbeliefinanimportantfacetoftheAmericandreamtheexpectationthatourchildrensqualityoflifewouldbebetterthanourown.AlarmsWhiletheUnitedStatesexitedthe20thcenturyastheundisputedeconomicandinnovationleader,thecompetitivelandscapewasshifting.7Astheeconomiesofmorecountriesaroundtheworldgrewanddeveloped,thesecountriesbecamestrongercompetitorstotheUnitedStates.ThoughtherearebenefitstotheUnitedStatesfromthesechanges,alarmsarebeingraisedaboutthesetrendsandthereisalsogrowingangstthattheUnitedStatesisnolongercompetingasstronglyontheworldeconomicstage.Onerecentpollfoundthat47percentofAmericansstronglyagreeand43percentsomewhatagreewiththestatementthattheUnitedStatesisindangeroflosingitsglobalcompetitiveedgeininnovation.8Anothersurveyfoundthat71percentofAmericansbelievethatourhighschoolsarefallingshortwhenitcomestopreparingstudentsforscienceandengineering
jobs
and
76
percent
believe
that
if
the
next
generation
does
not
worktoimproveitsscienceandmathskills,itrisksbecomingthefirstonethatisworseoffthanitsparentsgeneration.9Alarm1:JobsTheUnitedStatesabilitytocreatejobshasdeterioratedduringthepastdecade.Employmentincreasedatanannualrateofjust0.6percentbetweentheFebruary2001andJanuary2008employmentpeaks(figure1.2).Thisrateisonethirdasfastasthe1.8annualrateofemploymentgrowthbetweentheJune1990andFebruary2001employmentpeaks.ArecentstudybyMcKinseyGlobalInstitutefoundthattheUnitedStateshasbeenexperiencingincreasinglylengthyjoblessrecoveries:ittookroughly6monthsforemploymenttorecovertoitsprerecessionlevelaftereachpostwarrecessionthroughthe1980s,butittook15monthsafterthe199091recessionand39monthsafterthe2001recession.10
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Figure 1.2
Nonfarm Payroll
Employment,
19802011
1980 1985 1990 1995 2000 2005 2010
150
140
130
120
110
100
90
80
70
Source: Bureau of Labor Statistics.
Note: In millions of jobs.
Alarm2:WagesandtheMiddleClassThemiddleclassintheUnitedStateshasstruggledasincomesandwageshavegenerallystagnated.Onecommonlyreferencedmeasureofthefinancialwellbeingofthemiddleclassisrealmedianhouseholdincome;thatis,theincomeofhouseholdsinthemiddleoftheincomedistributionafteradjustingforinflation.From1980toitspeakin1999,realmedianhouseholdincomeincreasedabout20percent(seefigure1.3).Sincethatpeak,realmedianhouseholdincomehasstalled,andevenbeforetheGreatRecession,realmedianhouseholdincomefellfrom$53,252in1999to$52,823in2007(in2010dollars).Individualsattheverytopoftheincomedistributionhavefaredbetterduringthistimethanothers;onestudyfoundthatbetween1993and2008,incomegrewalmost4percentperyearforthosewithincomesinthetop1percentoftheincomedistribution.11Thelackofincomegrowthechoesthelackofearningsgrowthworkershaveexperiencedoverrecentdecades.Withfewexceptions(suchasthesecondhalfofthe1990s),thetypicalAmericanworkerhasexperiencedlongstretchesofflator
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Figure 1.3
U.S. Median
Household Income,
19772009
$53,000
$51,000
$49,000
$47,000
$45,000
$43,000
$41,000
1977 80 83 86 89 92 95 98 2001 04 07 10
Source: Household Median Income from the U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.
Note: In 2010 dollars.
evendecliningearningsforfulltimework,despiteanincredibleriseinhisorherproductivity.Betweenthefourthquarter1979andthefourthquarter2010(thatis,essentiallyoverthelengthofageneration),realmedianweeklyearningsoffulltimewageandsalaryworkersedgedupjust4.9percent,whileworkersproductivityincreased90.9percent.Reasonsofferedforthesewagetrendsincludethedeclineinthefractionofworkerscoveredbycollectivebargaining,increasedinternationalcompetition,technologicalchange,immigration,andminimumwages,amongothers.12Regardlessofthereasons,thisstagnationmakesitimpossibleformanyAmericanstoincreasetheirfinancialstandardoflivingandfeedstheperceptionthatthenextgenerationwillbenobetteroffthanitsparentsgeneration.Alarm3:ManufacturingTheseemploymentandwagetrendsalsoroughlycoincidewiththeincreasedpressurefromabroadfacedbytheU.S.manufacturingsector(thoughthemanufacturingsectorhasincreasinglyreliedonforeignmarkets).Themanufacturedgoodstradebalancehasworsened.In2010,thetradedeficitinmanufactured
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Figure 1.4
Advanced
Technology
Products TradeBalance,
19902010
goodswas$565.4billionandisontracktoexceedthatamountin2011,evenwithstrongexportgrowth.13TheUnitedStatescontinuestolosegroundinkeymanufacturingsectors,includingthosesectorsthatarelikelytodriveoureconomy
in
the
future.
The
United
States
ran
atrade
surplus
in
advanced
technology
products,whichincludesbiotechnologyproducts,computers,semiconductors,androbotics,until2002(seefigure1.4).14In2010,however,theUnitedStatesranan$81billiontradedeficitinthiscriticallyimportantsector.15
Source: U.S. Census Bureau, Foreign Trade Division.
Note: Billions of dollars. In nominal dollars.
Alarm4:InnovationAfterreviewing16keyindicatorssuchasthenumberofscientistsandengineers,corporateandgovernmentR&D,venturecapital,productivity,andtradeperformancetheJuly2011AtlanticCenturyreportindicatedthattheUnitedStateshadmadelittleornoprogressinitscompetitiveness since1999andnowranksfourthininnovationbasedcompetitiveness. 16Areportfrom2005,RisingAbovetheGatheringStormavolumeauthoredbyacommitteeconvenedin2005bytheNationalAcademyofSciencesexpresseddeepconcernthatthe
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K
orea
Fin
land
Switze
rland
Japan
Canada
Netherlands
New
Zea
land
Belgium
Australia
Germ
any
Estonia
Ice
land
Denmark
Slov
enia
Norway
France
SlovakRep
ublic
Au
stria
Po
land
Sweden
Czech
Rep
ublic
United
King
dom
Hun
gary
Luxemb
ourg
Unit
ed
State
s
Ire
land
Portugal
Italy
S
pain
Greece
Israel
Tu
rkey
Chile
Mexico
scientificandtechnologicalbuildingblockscriticaltotheeconomicleadershipoftheUnitedStateswereerodingatatimewhenmanyothernationswereactivelylayingstrongfoundationsinthesesameareas.17 Intheir2010followupreport,that
same
committee
unanimously
stated
that
our
nations
outlook
has
not
im
provedbutratherhasworsened.18Alarm5:EducationTheUnitedStatesisstrugglingtoprepareU.S.studentsinmathandscience.In2009,U.S.15yearoldshadanaveragescoreof487onthemathematicsliteracyscale, which was lower than the OECD average scoreof496(seefigure1.5).Seventeen OECD countries rankedabovetheUnitedStatesinmath,andsome11 othercountrieshadscoresthatwere not significantly different from theU.S.math score. Additionally, scienceandreadingscoreswere only averageandonan earlier assessment ofstudentproblemsolvingability(2003Program
Figure 1.5 550
U.S. Math TestScores for 8th 525
Graders Remain
Below OECD OECD average500Averages
475
450
425
400
Source: OECD, PISA 2009 database.
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Figure 1.6
Computer and
Internet Use by
Urban and Rural
Location, 2010
forInternationalStudentAssessment(PISA)),U.S.studentsscoredbehindmostoftheotherdevelopednationsintheworld.19Alarm6:InfrastructureDelaysatairports,timelostintrafficjams,bridgesinneedofrepair,andportsthatcannothandlethenewestshipsexemplifyhowtraditionalinfrastructureintheUnitedStateshasfailedtokeeppacewithitsgrowingpopulation.Theresultishighercostsforbusinessesandinconvenienceforall.Digitalinfrastructure,thoughstellarinsomerespects,hasnotyetreachedlargeportionsofourpopulation,makingitdifficultforthemtoparticipateinthe21stcenturyeconomy.Largeanddisturbingdifferencesinbroadbandadoptionstillpersistbyincome,raceandethnicity,andeducation.Also,somecommunitiesaredisadvantagedwithrespecttobroadbandaccessanduse.Forexample,thoselivinginurbanareasweremuchmorelikelytohaveaccesstobroadbandInternetconnectionsrelativetoruralconsumers(seefigure1.6).
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Urban (Metropolitan) Rural (Non-metropolitan)
22%
5%
30%
70%
8%
No computer
Computer, noInternet
Dial-up
Broadband
2%
57%
5%
Source: Economics and Statistics Administration and National Telecommunciations and Information Administration. Exploring the Digital Nation: Computer and Internet Use at Home. Washington, D.C:
U.S. Department of Commerce, November 2011.
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AddressingtheAlarmsSo,yes,theworldhaschanged.Thecompetitionforjobsisreal.Butthisshouldntdiscourageus.Itshouldchallengeus.Rememberforallthehitswevetakentheselastfewyears,forallthenaysayerspredictingourdecline,Americastillhasthelargest,mostprosperouseconomyintheworld.Noworkersnoworkersaremoreproductivethanours.Nocountryhasmoresuccessfulcompanies,orgrantsmorepatentstoinventorsandentrepreneurs.Werethehometotheworldsbestcollegesanduniversities,wheremorestudentscometostudythananyplaceonEarth.PresidentBarackObama,StateoftheUnionAddress,January2011
ToughproblemsneedtobetackledinorderfortheUnitedStatestoimproveitscompetitivenessandincreasegoodpayingjobs.Toaddresstheseissues,Chapter2,KeystoInnovation,Competitiveness, andJobsdelvesintowhatmadetheeconomycompetitiveinthepastanddemonstratesthattheFederalgovernmentplayedakeyroleinresearch,education,andinfrastructure, threecomponentsthatgreatlycontributedtotheeconomicvitalityoftheUnitedStatesinthe20thcentury.Putanotherway,thegovernment(Federal,state,andlocal)madeinvestmentsintothebuildingblocksofoureconomicgrowth,andtheseinvestmentsallowedtheprivatesectortoflourish.Chapters3,4,and5gointogreaterdetailforeachofthesebroadareas(research,education,andinfrastructure),discussingthechallengesfacedineachandproposedpoliciestokeeptheUnitedStatesattheinnovationandcompetitivenessfrontier.Inadditiontothesekeyareas,thereareotheravenuesbywhichthecompetitivenessoftheUnitedStatescanbeincreased.Forinstance,astrongmanufacturingsectoriscrucial,asthissectorconductsthemajorityofindustrialresearchanddevelopment,andtherearestronglinksbetweenthelocationofproductionandthelocationofresearchactivity.20Giventheimportanceofmanufacturingandsomeofitsuniqueproperties,Chapter6focusesonmanufacturingsolely.Althoughimprovingresearch,education,infrastructure,andthemanufacturingsectorareessentialtoincreasinginnovationandcompetitiveness, manyotherfactorsalsocontributetoeconomicsuccess.Perhapschiefamongthemisensuringthatbothestablishedfirmsandentrepreneursintheprivatesectorhavethebestpossibleenvironmentinwhichtoinnovate.Chapter7touchesuponsomeof
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theadditionalareaswherethegovernmentcanassisttheprivatesector,includingaidtoregionalclusters,promotingentrepreneurship,creatinganeffectiveintellectualpropertyregime(domesticallyandabroad),andreformingcorporatetaxes.
ThisreporttouchesuponsomeofthekeypolicyareasneededtomaketheU.S.economymoreinnovativeandcompetitive.Drawingupontheotherchaptersinthisreport,thelastchapter,MovingForward,highlights10areasthatdeservespecialattention.ImplementingtheserecommendationswillbetterpreparetheUnitedStatestomeettheeconomicchallengesofthe21stcenturyandprovideabetterfutureforourchildren.
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Endnotes
References
1.InternationalMonetaryFund,WorldEconomicOutlookdatabase,September2011.2.U.S.BureauofEconomicAnalysis2010,Table678.Note:Inchained2005dollars.3.NationalCenterforHealthStatistics2011,134.4.EconomicResearchService2011.5.Nobelprize.org,NobelPrizeFactswww.nobelprize.org/nobel_prizes/nobelprize_facts.html.6.ThomsonReuters2011.7.See,forexample,NationalAcademyofSciences2007.8.CharltonResearchCompany2011.9.PeterD.HartResearchAssociates,Inc.andTheWinstonGroup2006,2.10.Manyikaetal.2011,1.11.BasedonresearchbyAtkinson,Piketty,andSaez2011andPikettyandSaez2003.12.Muchhasbeenwrittenonthesubjectoftheforcesbehindchangesinwagesandrelativewagesoverthepastseveraldecades.Reasonsofferedforthevariouswagetrendsincludethedeclineinthefractionofworkerscoveredbycollectivebargaining,increasedinternationalcompetition,technologicalchange,immigration,minimumwages,amongothers.See,forexample,Sachdev2007fortablesupdatedto2008.13.U.S. CensusBureau,ForeignTradeDivision,U.S.InternationalTradeinGoodsandServices(FT900)www.census.gov/foreigntrade.14.Forthecompletedefinitionofthissector,seeU.S.CensusBureau,ForeignTradeDivision2011.15.Themanufacturingsectorisnottheonlypartoftheeconomythatisexposedtointernationalcompetition,asdocumentedbyJensen(2011).TheU.S.hasrunatradesurplusinservices,andweexportabout$500billionayearinservices(comparedwith$565billioninmanufacturedgoods),andincreasinglytheservicesectorwillbeopentointernationalcompetitionwhichmaycreateadditionalopportunitiesofU.Sserviceexports.Jensenestimatesthatroughlyathirdoftheservicesectorissubjecttointernationalcompetition.16.TheAtlanticCentury2009.17.NationalAcademyofSciences2007.18.NationalAcademyofSciences2010.19.Fleischman,H.L.,Hopstock,P.J.,Pelczar,M.P.,andShelley,B.E.2010.20.Delgado,Porter,andStern2011.Atkinson,RobertD.,andScottM.Andes.2009.TheAtlanticCentury:BenchmarkingEUandU.S.InnovationandCompetitiveness.TheInformationTechnology&InnovationFoundation;www.itif.org/publications/atlantic century
benchmarking
eu
and
us
innovation
and
competitiveness.
Atkinson,AnthonyB.,ThomasPiketty,andEmmanuelSaez.2011.TopIncomesintheLongRunofHistory.JournalofEconomicLiterature49,no1:371.2011.BureauofLaborStatistics.EstablishmentData.TableB1.Employeesonnonfarmpayrollsbyindustrysectorandselectedindustrydetail.www.bls.gov/webapps/legacy/cesbtab1.htm CharltonResearchCompanyforResearch!America.YourCongressYourHealthSurvey,March2011.www.yourcongressyourhealth.org/where_america.php?qq=509Delgado,Mercedes,MichaelE.Porter,andScottStern.2011.,Clusters,Convergence,andEconomicPerformance.March;www.isc.hbs.edu/pdf/DPS_Clusters_Performance_2011 0311.pdf.EconomicResearchService.2011.AgriculturalProductivityintheUnitedStates:Overview.Washington,DC:U.S.DepartmentofAgriculture,May;www.ers.usda.gov/Data/AgProductivity/. Fleischman,H.L.,Hopstock,P.J.,Pelczar,M.P.,andShelley,B.E.2010.HighlightsFromPISA2009:PerformanceofU.S. 15YearOldStudentsinReading,Mathematics,andScienceLiteracyinanInternationalContext(NCES2011004).U.S.DepartmentofEducation,NationalCenterforEducationStatistics.Washington,DC:U.S.GovernmentPrintingOffice.International Monetary Fund. 2011. World Economic Outlook Database. September 2011;www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx. Jensen,J.Bradford.2011.GlobalTradeinServices:Fear,Facts,andOffshoring.Washington,DC:PetersonInstituteforInternationalEconomics.Manyika,James,SusanLund,ByronAuguste,LennyMendonca,TimWelshandSreenivasRamiswamy.2011.AnEconomythatWorks:JobCreationandAmericasFuture.McKinseyGlobalInstitute,1;www.mckinsey.com/mgi/publications/us_jobs/pdfs/MGI_us_jobs_full_report.pdf.
1 12 U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY
http://www.isc.hbs.edu/pdf/DPS_Clusters_Performance_2011-0311.pdfhttp://www.isc.hbs.edu/pdf/DPS_Clusters_Performance_2011-0311.pdfhttp://www.isc.hbs.edu/pdf/DPS_Clusters_Performance_2011-0311.pdf8/3/2019 Competitiveness and Innovative Capacity of the US_USDOC
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NationalAcademyofSciences.2010.RisingAbovetheGatheringStorm,Revisited:RapidlyApproachingCategory5.Washington,DC:NationalAcademiesPress.NationalAcademyofSciences.2007.RisingAbovetheGatheringStorm:EnergizingandEmployingAmericaforaBrighterEconomicFuture.Washington,DC:NationalAcademiesPress;www.nap.edu/catalog/11463.html. NationalCenterforEducationStatistics,MathematicsAge15,2009OECDPISAData,InternationalDataExplorer,nces.ed.gov/surveys/international/ide/.NationalCenterforHealthStatistics.2011.Table22.Lifeexpectancyatbirth,at65yearsofage,andat75yearsofage,byraceandsex,19002007inHealth,UnitedStates,2010:WithSpecialFeatureonDeathandDying.Washington,DC:U.S.GovernmentPrintingOffice;www.cdc.gov/nchs/data/hus/hus10.pdf#022.NobelPrizeFacts.AccessedonNovember30,2011;www.nobelprize.org/nobel_prizes/nobelprize_facts.html.PeterD.HartResearchAssociates,Inc.andTheWinstonGroup.2006.KeepingOurEdge:AmericansSpeakonEducationandCompetitiveness.2006.Washington,DC:Hart/Winston;www.ets.org/Media/Education_Topics/ pdf/HW_KeepingOurEdge2006.pdf. Piketty,Thomas,andEmmanuelSaez.2003.IncomeInequalityintheUnitedStates,19131998.QuarterlyJournalofEconomics118(February):141.Sachdev,Nikhil.2007.AnExaminationoftheWageProductivityGap.WorkingPaper.StanfordUniversity.ThomsonReuters.2011.Top100GlobalInnovators;www.top100innovators.com/home. UnitedStatesNobelPrizeWinners.AccessedonNovember30,2011;www.jinfo.org/US_Nobel_Prizes.html.U.S.
Bureau
of
Economic
Analysis.
2010.
Survey
of
Current
Businessess.
Accessed
14
November
2011;
April.
U.S.CensusBureau,ForeignTradeDivision.AccessedNovember29,2011.AdvancedTechnologyProductDefinitionsinForeignTradeStatistics;www.census.gov/foreign trade/reference/glossary/a/atp.html#general.
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KeystoInnovation,
Competitiveness,
andJobs
Innovationisakeydriverofcompetitiveness, jobgrowth,andahigherstandardoflivingforfuturegenerations.To improvethecompetitiveness oftheUnitedStates,itisinstructivetoexaminethefactorsthatpreviouslyunleashedthetremendous
innovative
potential
of
the
private
sector.
The
list
of
those
factors
is
long,anditisnotsurprisingthattherecipeforsuccessfulinnovationandcompetitivenessiscomplex,evolving,anddiffersbyproductandindustry.ToaddressthequestionofwhatmadetheUnitedStatesinnovativeandcompetitiveinthepast,andalsowhatwillmaketheUnitedStatesinnovativeandcompetitiveinthefuture,thisreportprimarilyfocusesonthreeimportantfactorsthatformedthefoundationofastronginnovativeenvironment:supportforresearch,education,andinfrastructure.
Jobs Newindustries Newbusinesses
Innovation Competitiveness Expansionofexistingbusi
nesses Goodjobs(highwages)
Acommonthreadbetweenthesethreeelementsisthattheyareareaswheregovernmenthasmade,andshouldcontinuetomake,significantinvestments. Inallthreeoftheseareas,investmenthasasocialreturnthatexceedsthereturntoanyonecompanyorperson.Basicresearchoftenhasmanyapplications,beyondthosewhichmotivatedtheinitialresearch.Amoreeducatedworkforcemeansnotjustmoreincomeforthosewhoattendschoollonger,butalsomeansgreaterproductivityinbusinessandamoreeffectivecitizenry.Improvedinfrastructureprovidesabenefitforthegreatergoodandfacilitatesproductivity.Becauseofthesebroaderbenefits,privateinvestmentisoftentoolowsinceprivateinvestorscannotcapturethebroadersocialreturns.Asaresult,almostallgovernmentsindevelopedcountriesfundinvestmentintheseareas.
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ConceptsandDefinitionsBeforedelvingintothesethreeareas,itisimportanttotakeastepbackanddefineseveralterms.TheCOMPETESReauthorizationActdirectstheDepartmentofCommercetocompleteacomprehensivestudyoftheeconomiccompetitivenessandinnovativecapacityoftheUnitedStates.Itissomewhatironic,therefore,thattheimportanceofinnovationandcompetitivenessarematchedbythelackofcommonlyaccepteddefinitionsandempiricalmeasuresovertimeandacrosscountries.Beginningwithinnovation,a2008AdvisoryCommitteereporttotheSecretaryofCommerce,InnovationMeasurement:TrackingtheStateofInnovationintheAmericanEconomy,definesitas:
Thedesign,invention,developmentand/orimplementationofneworalteredproducts,services,processes,systems,organizationalstructures,orbusinessmodelsforthepurposeofcreatingnewvalueforcustomersandfinancialreturnsforthefirm.1
Therearetwomainapproachestomeasuringinnovation.2Thefirstistheproxymethod,whereratherthanmeasuringinnovationdirectly,patentsorspendingonR&Daretrackedasaproxyforthelevelorrateofchangeofinnovation.Althoughtheseproxiescanbeusefultoolsforunderstandinginnovation,theyarenecessarilyimperfectmeasures.Forexample,manyinnovationsarenotpatented,andinnovativeactivityoccurseveninindustriesthatconductlittleformalR&D.Thesecondapproachreliesoneconomicaccountingwhereeconomicgrowthisexplainedbyfactorsthataremeasurable,suchasthelaborforceanditsquality.Theportionofeconomicgrowththatcannotbeexplainedbymeasurablefactorsisreferredtoastechnologicalchange,innovation,orineconomicjargon,multifactorproductivityortotalfactorproductivity.Usingthissecondapproach,itisestimatedthatbetweenoveronethirdtoahalfofeconomicgrowthintheUnitedStatescanbeattributedtoinnovation.3Similartoinnovation,competitivenesshasalsoproveddifficulttodefineandmeasure.A competitivebusiness isone that issuccessfulinthemarketplacesuccessbeingmeasuredinvariouswayssuchasmarketshareorprofitability.AstheMcKinseyGlobalInstitutestates,competitivenessinasectorcanbedefinedasthecapacitytosustaingrowththrougheitherincreasingproductivityorexpandingemployment.4Thoughthereisnotacommondefinitionofcompetitiveness atthecountrylevel,awidelyrecognizedrankingofthiscomesfromtheWorldEconomicForum(WEF).Theydefinecompetitivenessasthesetofinstitutions,policies,andfactorsthatdeterminethelevelofproductivityofa
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country.5Thus,theconceptsofproductivityandcompetitivenessoftengohandinhand.Inthisreport,thetermcompetitivenessisgenerallyused,butoftenincreasingcompetitiveness requiresincreasingproductivity,andviceversa.Thecompetitiveness ofacountryandthecompetitiveness ofbusinessesarealsocloselylinkedconcepts.Competitivebusinessesneedtoinnovate;otherwise,theywillnotbeabletogrowandremainviable.Whencountriesarecompetitivethatis,whentheyhaveasetofinstitutions,policiesandfactorsthatareconducivetoproductivitygrowththenbusinessesarepositionedtogrowandbeeffectivecompetitorsagainstotherdomesticandforeignfirms.AccordingtotheWEF,(t)hisrequiresanenvironmentthatisconducivetoinnovativeactivity,supportedbyboththepublicandtheprivatesectors.Inparticular,itmeanssufficientinvestmentinresearchanddevelopment(R&D),especiallybytheprivatesector;thepresenceofhighqualityscientificresearchinstitutions;extensivecollaborationinresearchbetweenuniversitiesandindustry;andtheprotectionofintellectualproperty.6Giventhepaceofchangeintodaysglobaleconomy,investmentstopromoteinnovationdeservemoreemphasisthanatanytimeinthepast.Ensuringacountryiscompetitiveandhassufficientcapacitytoinnovateisalsocrucialbecausethenumberandqualityofjobsisstronglydependentonthesetwoconcepts.Ascompetitivebusinessesgrow,theyhiremoreworkersandtheyalsotendtopaywell;anumberofstudieshaveshownthathighlyproductivefirmspayaboveaveragewages. Innovationleadstonewindustries.Overthelongerterm,newideas,prod
ucts,ordiscoveriescanleadtonewindustries.Examplesincludethewirelesscommunicationsindustry(290,000workersin2007),softwareandInternetpublishingfirmsandInternetserviceproviders(500,000workers),andpharmaceuticalfirmsalongwithcompaniesinbiotechnologyresearchanddevelopmentservices(350,000workers).
Innovationleadstonewfirms.Between1980and2007,onaverageover500,000newbusinesseswithemployeesstartedeachyear.Thesenewfirmsproducedanaverageof3millionnewjobsayear.
Competitiveandinnovativefirmsexpand.Between1980and2007,existingbusinessesthatgrewaddedroughly13.3millionjobsayear,whichtranslatesintoanaverageemploymentgrowthrateof13.9percent.
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Competitiveandinnovativefirmscreategoodjobs.Wagesforworkersininnovativeandcompetitivefirmstendtobehigherthanwageselsewhere.Forinstance,firmsthatexport(thatis,firmsthatsuccessfullycompeteinternationally)
have
been
found
to
pay
significant
wage
premiums.
7Similarly,
a
recentreportshowsthatthescience,technology,engineering,andmathematics(STEM)workforceearnedabout26percentmorethantheircounterpartsinnonSTEMoccupations.STEMworkersalsowerelesslikelytoexperiencejoblessness,andSTEMjobgrowthoverthepast10yearswasthreetimesfasterthangrowthinnonSTEMjobs.
WhatMadetheUnitedStatesSoSuccessfulinthePast?ManydifferentfactorsaffectinnovationandcompetitivenessandvolumeshavebeenwrittenontheeconomichistoryoftheUnitedStatesand,moregenerally,oninnovation.However,thereiswidespreadagreementonatleastthreefactorsthatcontributedgreatlytotheeconomicstrengthoftheUnitedStatesduringthelastcentury,factorswherethegovernmentplayedanimportantrole:supportforresearch,education,andinfrastructure.Giventheimportanceofeachofthesefactors,eachreceivesmoreindepthtreatmentinsubsequentchapters.Belowisabriefdescriptionofhowimportanttheywereinthepastcentury.ResearchFederallyfundedR&Dhasresultedininnovationsanddiscoveries,leadingtonewcompaniesandentireindustriesthathavemadeAmericansmoreprosperous,healthier,andsafer.Forexample,thefirstfullyelectronicU.S.digitalcomputertheENIACwasfundedbytheU.S.Federalgovernment.FormoreontheFederalroleintheevolutionofthecomputer(seebox2.1).Federalinvestmentsinlifescienceshavedecreasedmortalityandmorbidityrates,drivinginnovationsthatareatthecuttingedgeoffightingheartdisease,diabetes,cancer,andHIV/AIDS.Forexample,thebiopharmaceuticalindustrydrawsupon(andcomplements)anexceptionallylargepubliclyfundedbasicresearcheffortinthelifesciences.8TheinvestmentsinhealthandmedicineattheNationalInstitutesofHealth(NIH)continuetocontributeheavilytoadvancesinthefield,andtheworkofNIHscientistshasproducedmultipleNobelPrizewinners.Cumulativegainsinlifeexpectancyafter1900wereworthover$1.2milliontotherepresentativeAmericanin2000,whereaspost1970gainsaddedabout$3.2
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Box 2.1 The ENIAC and the IBM 650:Federally Funded Research and the Birth of an Industry
TheENIACorElectronicNumericalIntegratorAndComputerwasdevelopedtosolvetheveryspecificproblemofcalculatinginformationrelatedtotheproperfiringofartillery.TheENIACwasdevelopedintheearly1940sbyJ.PresperEckertandJohnW.MauchlyattheUniversityofPennsylvania,andwasfundedbytheU.S.Army.1From1945to1955collaborationsbetweentheU.S.military,universities,andtheprivatesectorledtoatleast19projectsrelatedtothedevelopmentofcomputers.Thiscollaborativeenvironmenthelpeddrive theexplosion in innovation, but the bulk of the funding for this research came from the Federalgovernment,withFederalfundsaccountingfor59percentofcomputerrelatedR&DspendingbyGeneralElectric,IBM,SperryRand,AT&T,Raytheon,RCA,andComputerControlCorporationfrom1949to1959.2ThoughthefundingforthesecomputersprimarilycamefromtheFederalgovernment,companieswereabletoquicklytranslatethetechnologicaladvancesintocommercialapplications.Forexample,IBMwasabletocombinethebenefitsofthisFederalR&Dwith itsprowessasanexistingofficeequipmentproducertocreatetheIBM650,thatsold1,800unitsinthe1950smakingitthemostcommerciallysuccessfulcomputerofthatperiod.TheseearlyFederalinvestmentswereundertakenwithoutthecommercialapplications inmind,yettheyprovidedthefoundationfortheevolutionofthecomputerindustry.Seventyyearslater,theUnitedStates.isstillreapingtherewardsoftheseearlyinvestments.Today,thelivesofnearlyeveryAmericanareimpactedinsomewaybythebenefitsofadvancesincomputertechnology.ThebasicresearchinvestmentsthatledtothecreationoftheearlycomputerareexactlythetypeofinvestmentsthattheUnitedStatesneedstobemakingtodaysothatfuturegenerationswillstillbereapingtherewardsoftodaysinvestmentsfordecadesintothefuture.1.DavidC.Mowery.2011.FederalPolicyandtheDevelopmentofSemiconductors,ComputerHardware,andComputerSoftware:APolicyModelforClimateChangeR&D?AcceleratingEnergyInnovation Insightsfrom Multiple Sectors.Chicago:UniversityofChicagoPress, for theNationalBureauofEconomicResearch;159188.2.KennethFlamm.1987.TargetingtheComputer:GovernmentSupportandInternationalCompetition.Washington,DC:BrookingsInstitution.
trillionperyeartonationalwealth,equaltoabouthalfofGDP.Potentialgainsfromfuturehealthimprovementsarealsolarge;forexample,itisestimatedthata1percentreductionincancermortalitywouldbeworth$500billion.9Federalinvestmentsinmaterialsandmilitarytechnologyunderpinthemodernmilitaryaswellasprofitableinnovationsintheprivatesector.Advancementsin
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chemicals,suchasthespikeintheproductionofsyntheticrubberduringWorldWarIIundertheSyntheticRubberResearchProgram,havespurredinnovationsinmanufacturingthathavedirectlysupportednationalsecurity.Federalinvestments
in
atomic
physics
in
the
1930s
and
1950s
gave
rise
to
the
creation
of
GPS
systems,foreverchangingthedeploymentofthemilitary,nottomentionourdailytravels.10Thecompaniesthatcantracetheirrootstofederallyfundedresearchspanawidevarietyofindustries.IntheirreportSparkingInnovation:Howfederallyfundeduniversityresearchcreatesinnovation,newcompaniesandjobs,theScienceCoalitionidentifiesover100companiesthatFederallyfundedresearchhelpedlaunch.ToprovideaflavorofthewidearrayofcompaniesincludedinSparkingInnovation,Table2.1listsahandfulofexamplesthatvarygreatlybysize,location,industry,andFederalfundingsource.EducationAtthebeginningofthe20thcentury,Americaledtheworldineducation,andoverthefollowingdecadestheaveragelevelofschoolingintheUnitedStatesincreasedsignificantly.Americansborninthe1870shad,onaverage,lessthan8yearsofformaleducation.Forthecohortbornin1910,thisaveragehadrisentonearly10years.Forthecohortbornin1940,thisaveragehadrisenpast12.11Forcohortsbornbetween1876and1951,averageeducationalattainmentgrewsteadilybynearly1yearperdecade12(seefigure2.1,page28).Bythe1950s,theUnitedStatesenrolledcloseto80percentofitsyouthinfulltimesecondaryschools.13ThecomparisonwithindustrialWesternEuropewasstark.Among18Europeannationsinthe1950sincludingFrance,Italy,andGreatBritain,eachenrolledlessthan30percentofyouthingeneraleducationsecondaryschools;allbutone(Sweden)wereunder20percent.Whenyouthintechnicalschoolsisadded,secondaryenrollmentinEuropedidnotsurpass40percent.14Thisgapextendedintohighereducation.Inthe1950s,AmericanenrollmentinhighereducationwasexpandingrapidlyandAmericasuniversityattainmentrateswerefarhigherthananyEuropeancountry.Manyfactorscontributedtotheincreasedcollegeattainmentrates,includingtheGIBillandanextensivepublicuniversitysystem,especiallylandgrantschoolsthathadafootprintineverystate.Additionally,thecollegeanduniversitysystemintheUnitedStatescontainsadisproportionateshareoftheworldsmostprestigiousuniversities.Forexample,
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Table 2.1
CompaniesCompany Location
YearStarted
Employ-ment
InnovationFederalFunding
Arbor Networks Chelmsford, 2000 125 Network security DOD,Created as a Result MA technologies NSF
of Discoveries in Audyssey Los Angeles, 2002 75 Technology fixes impact of NSFLaboratories CA room acoustics on soundFederally Funded reproductionUniversity Buffalo BioBlower Buffalo, NY 2005 8 Air sterilization technology DOD
Technologies LLC for healthcare, homelandLaboratories 9security, battlefields
Cognex Natick, MA 1981 729 Industrial machine vision NSFCorporation technology
CREE, Inc. Durham, NC 1987 3,168 Semiconductor technology DODincreases efficiency of LED,power, and communicationsproducts
Fingerlakes Groton, NY 1996 11 Aquafilter for economical, USDA
Aquaculture, Inc. large-scale production offarm-raised fish
Google Mountain 1998 19,835 Internet search technology NSFView, CA and Web-based applications
Image Sensing St. Paul, MN 1984 80 Software for monitoring DOTSystems, Inc. traffic conditions
ImagiSonix Sterling, MA 2006 3 Wireless ultrasound for DODrural, emergency, military,and disaster settings
iRobot Corporation Bedford, MA 1990 538 Robots for military, DOD,industrial, and consumer NASAuse
Molecular Austin, TX 2001 125 Step and Flash nano- DOD
Imprints, Inc. lithography makes smaller,faster computer chips
SenSound, LLC Detroit, MI 2003 8 Technology pinpoints exact NSFsource of noise for use inproduct design, develop-ment, and manufacturing
TomoTherapy, Madison, WI 1997 665 Machine targets radiation to NIHIncorporated cancer cells and limits
damage to healthy ones
Universal Display Ewing, NJ 1994 80 Organic LED technology for DOD,Corporation flat panel displays, lasers, DOE
and other light generatingdevices
Webscalers Binghamton, 2002 7 Metasearch engines probe NSF
NY deeper into the Web thantraditional search engines
Xenogen Hopkinton, 1994 489 In vivo imaging allows DOD,(acquired by MA scientists to evaluate drugs NIHCaliper Life by observing their effects inSciences) living animals
Source:TheScienceCoalition,SparkingInnovation:Howfederallyfundeduniversityresearchcreates innovation,newcompaniesandjobs.
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15Figure 2.1
Years of Schooling14
at Age 30, by Birth
Cohorts, 1318701979
12
11
10
9
8
7
Source: Economics and Statistics Administration (ESA) calculations based on the Integrated
Public Use Microdata Series, Minnesota Population Center, University of Minnesota
(see http://usa.ipums.org/usa/).
Note: Data for this figure were based on ESA calculations of mean years of education for
U.S.-born individuals by birth year for those who were 30 years or older. Because the
education variable was coded by category of educational attainment, such as grade levels
and higher education levels, it was necessary to transform the data into a continuous variable
to calculate a mean. The methodology used to recode the education variable into an estimated
number of years of education was based partly on work by Goldin and Katz (2008).
accordingtoonesetofrankings,in20112012,18outofthetop25universitiesand30outofthetop50universitieswereintheUnitedStates;theUnitedKingdomwasnextwithfourinthetop25andseveninthetop50.15Inaddition,theUnitedStatesisthetopdestinationforstudentsstudyingabroad.16InfrastructureThroughoutthelastcentury,infrastructureinvestments,supportedbythepublicsector,havebeencriticaltotheincreasedstandardoflivingandeconomicgrowthexperiencedintheUnitedStates.Forexample,watertreatmentanddistributionsystemssavedlivesandfacilitatedcommerce.Earlywatertreatmentsystemsweremostlytargetedtoprotectthepublicfromwaterbornediseases,suchastyphoid,dysentery,andcholera,17butlaterpublicwaterutilitiesalsoprovidedaconsistentanddedicatedwatersupplythatwasimportantforindustrial
1870 80 90 1900 10 20 30 40 50 60 70 80
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Figure 2.2
The Innovation
Ecosystem
productionandthegenerationofpower,whileitalsoprotectedthepublicfromenvironmentalcontaminants.18Theinterstatehighwaysystem,highlightedinbox1.1,wasthelargestpublicworksprojectofitstimeanddidmorethananyotherprogram
to
connect
our
country.
InterconnectionsResearchanddevelopment,education,andinfrastructurearediscussedseparatelyinthechaptersthatfollow,buttheyarenotseparateanduniqueentities.Assomecommentatorshavenoted,theelementsofcompetitiveness andinnovationarelesslikesilosandmorelikeanetworkorecosystem.Changesinonepartofthenetworksayeducationripple throughthesystemsatisfyingdemandsforresearchers,creatingdemandsforinfrastructure, andfeedingbackintotheschoolsviathecreationofdemandfornewanddifferentskills.U.S.industries,likethosediscussedinthemanufacturingchapter,sitinacriticaljunctureinthisnetworkcreating demandforlaborwithspecificskillsandparticipatingintegrallyinresearchandinthecreationandbuildoutofnewinfrastructure(seefigure2.2).Thus,althoughthisreportaddressesinnovationandcompetitiveness topicssequentiallyinseparatechapters,theirinterconnectednessisasubtextthatthereadershouldkeepinmind.
Chapter 3
Federal Support for
Research and
Development
Chapter 6
Revitalizing
Manufacturing
Chapter 5
Infrastructure for
the 21st century
Chapter 4
Educating our
Future Workforce
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Endnotes
References
1.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy2008,i.2.Historically,thesetwomeasureshavebeenusedasproxiesforinnovation,butrecentlyeffortshavebeenmadetomeasureinnovationmoredirectlythroughinnovationsurveys.Seewww.nsf.gov/statistics/infbrief/nsf09304/.Itshouldalsobementionedthattherearesomeobjectionstotheseproxies.Forexample,theOECD,initsguidelinesoncollectingandinterpretinginnovationdata(oftenreferredtoastheOsloManual)statesthatpatentsarenotgoodproxiesforinnovationbecausetheyareinputstoinnovationratherthanoutputsandbecausepatentscanlackanyeconomicvalue.However,eventheOECDrecognizesthatadeeperunderstandingofinnovationnecessarilyrequireslearningmoreaboutpatents.3.ForanexplanationofproductivitychangeseeJorgensonandGriliches1967,249283.FordiscussionofintangiblecapitalandeconomicgrowthseeCorrado,HultenandSichel2009.SeealsoBureauofLaborStatisticsmultifactorproductivitynewsreleases2011a,2011b,and2011c.4.Manyikaetal.2010,10.5.WorldEconomicForum20112012,4.(WEF)quantifiesawidevarietyoffactorsunderits12PillarsofCompetitiveness.Thosepillarsare:(1)Institutions;(2)Infrastructure;(3)Macroeconomicenvironment;(4)Healthandprimaryeducation;(5)Highereducationandtraining;(6)Goodsmarketefficiency;(7)Labormarketefficiency;(8)Financialmarketdevelopment;(9)Technologicalreadiness;(10)Marketsize;(11)Businesssophistication;and(12)Innovation.AccordingtotheWEFGlobalCompetitivenessReport20112012,theUnitedStatesrankedfourthoverallin2010andthenfifthin2011.However,thefactorsthatwentintotheWEFranking,howthosefactorsarecomputed,andthenhowthefactorsareaddedtogetherallrequiresubjectivejudgments.6.WorldEconomicForum20112012,8.7.Bernard,Jensen,andSchott2009,514.8.Cockburn,Stern,andZausner2011,115.9.MurphyandTopel2006.10.CommitteeonScience,Engineering,andPublicPolicy1999,31.11.Figure1.4,GoldinandKatz2008,20.12.GoldinandKatz2008,19.13.GoldinandKatz2008,26.14.Figure1.7,GoldinandKatz2008,24.15.TimesHigherEducation20112012.16.OECDIndicators2011,321.17.U.S.Environmental ProtectionAgency2000.18.Finn2002.Bernard,AndrewB.,J.BradfordJensen,andPeterK.Schott.2009.Importers,ExportersandMultinationals:APortraitofFirmstheU.S.thatTradeGoods.ProducerDynamics:NewEvidencefromMicroData,editedbyTimothyDunne, J.Bradford Jensen,andMark J.Roberts,513552.Chicago:UniversityofChicagoPress,fortheNationalBureauofEconomicResearch.BureauofLaborStatistics.2011a.MultifactorProductivityTrends2009.NewsRelease,March30;www.bls.gov/news.release/archives/prod3_03302011.pdf. BureauofLaborStatistics.2011b. MultifactorProductivityTrendsinManufacturing2009.NewsRelease,August11;www.bls.gov/news.release/pdf/prod5.pdf. BureauofLaborStatistics,2011c.MultifactorProductivityTrendsforDetailedIndustries,2009.NewsRelease,September23;www.bls.gov/news.release/pdf/prin3.pdf. Cockburn,IainM.,ScottStern,andJackZausner.2011.FindingtheEndlessFrontier:LessonsfromtheLifeSciencesInnovationSystemforEnergyR&D.AcceleratingEnergyInnovation:InsightsfromMultipleSectors,editedbyRebeccaM.HendersonandRichardG.Newell,113157.Chicago:UniversityofChicago,fortheNationalBureauofEconomicResearch.Corrado,CarolA.,CharlesR.Hulten,andDanielE.Sichel.2009.IntangibleCapitalandU.S.EconomicGrowth.TheReviewofIncomeandWealth,553;661685.CommitteeonScience,Engineering,andPublicPolicy,NationalAcademyofSciences,NationalAcademyofEngineering,InstituteofMedicine.1999.EvaluatingFederalResearchPrograms:ResearchandtheGovernmentPerformanceandResultsAct.Washington,DC:NationalAcademyPress;www.nap.edu/catalog/6416.html.Finn,BernardS.2002.OriginofElectricalPowerinPoweringthePast:ALookBack.NationalMuseumofAmericanHistory,WashingtonDC;americanhistory.si.edu/powering/past/prehist.htm.Goldin,Claudia,andLawrenceF.Katz.2008.TheRacebetweenEducationandTechnology.Cambridge,MA:HarvardUniversityPress.
2 10 U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY
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Jorgenson,D.W.andZviGriliches.1967.TheExplanationofProductivityChange.TheReviewofEconomicStudies.Stockholm,Sweden:InstituteforInternationalEconomicStudies:343;249283.Manyika,James,LennyMendonca,JaanaRemes,StefanKlubmann,JorgSchubert,VitalyKlintsov.2010.HowtoCompeteandGrow:ASectorGuidetoPolicy.McKinseyGlobalInstitute;www.mckinsey.com/Insights/MGI/Re search/Productivity_Competitiveness_and_Growth/How_to_compete_and_grow.Murphy,KevinMandRobertH.Topel.2006.TheValueofHealthandLongevity.JournalofPoliticalEconomy,1145;871904.OECDIndicators.2011.EducationataGlance2011.IndicatorC3:Whostudiesabroadandwhere?Accessed2December2010;www.oecd.org/dataoecd/61/2/48631582.pdf.TimesHigherEducation.2011.WorldUniversityRankings20112012.ThomsonReuters.Accessed28December2011;www.timeshighereducation.co.uk/world universityrankings/.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy.2008.InnovationMeasurement:TrackingtheStateofInnovationintheAmericanEconomy.U.S.DepartmentofCommerce,WashingtonDC.U.S.Environmental ProtectionAgency.2000.TheHistoryofDrinkingWaterTreatment.FactSheet;www.epa.gov/safewater/consumer/pdf/hist.pdf. WorldEconomicForum.2011.TheGlobalCompetitivenessReport20112012;Geneva,Switzerland.reports.weforum.org/global competitiveness.
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FederalSupportfor
ResearchandDevelopment
Thekeytooursuccessasithasalwaysbeenwillbetocompetebydevelopingnewproducts,bygeneratingnewindustries,bymaintainingourroleastheworldsengineofscientificdiscoveryandtechnologicalinnovation.Itsabsolutelyessentialtoourfuture.PresidentBarackObama,November17,2010
Althoughithashelpedspawnmanyinventionsthat,inturn,haveledtonewfirms,newindustries,andnewjobs,Federalfundingofresearchcannotdriveinnovationbyitself.Ahealthyprivatesectormustactinpartnershipwithuniversityandresearchlabstofundthetransferofnewtechnologiestothemarket,creatingnewbusinessesbuiltoninnovation.Itisalsocrucialforinstitutionstoencourageresearch,suchasthroughastrongeducationsystemanduptodateinfrastructure.Astrongeducationsystemensuresthereisaworkforcewiththenecessaryskillstoturnresearchintopractical,marketdrivenconcepts,tomakeproductsfromthoseconceptsthatsatisfyconsumerpreferencesandthatenhancecompetition,andtousetheseproductseffectively.Infrastructureisnecessarytomakesurethatthereisafreeflowofideas,aswellasgoodsandservices.1However,theinnovativeperformanceoftheUnitedStateshasslippedduringthepastdecadecomparedtoothercountries.Lookingatanumberofmeasurementsofinnovationdrivers,suchasgrowthincorporateandgovernmentresearchanddevelopment(R&D)andthenumberofscientificandtechnicaldegreesandworkers,
the
United
States
has
fallen
relative
to
other
countries.
2Therefore,
after
describinginmoredetailtheroleofR&DindrivinginnovationandtheroleoftheFederalgovernmentinR&D,thischapterconcludeswithrecommendationstohelpensurethatourcountrycontinuestohavetheinnovativecapacityitneedstothriveinthe21stcentury.TheEconomicJustificationfortheFederalGovernmentsRoleinFundingBasicResearchMuchoftheeconomicgrowthofrecentdecadeshasbeendrivenbyinnovation.3ThecentralroleofinnovationineconomicgrowthwasestablishedthroughthepioneeringworkbyAbramowitz(1956)andSolow(1957).4 Increasinglysophisticatedmodelsofeconomicgrowthinadvancedeconomieshaveemphasizedthecrucialroleinnovationplays.5Inaddition,studieshaveshownthatbettertrainingandfundingfostersinnovation.6
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Figure 3.1
The Research
Landscape in theUnited States
Innovation,inturn,isdriveninlargepartbytheR&Dprocess,whichconsistsofbasicresearch,appliedresearchanddevelopment(fordefinitionsoftheseitems,seeAppendix1).Allthreeofthesestagesneedtothriveinorderforinnovationtolead
to
new
firms
and
new
jobs.
In
2008,
about
60
percent
of
total
public
and
pri
vateR&Dspendingwenttodevelopment,withtheremainingsplitaboutevenlybetweenbasicandappliedresearch(seefigure3.1).Theseproportionshavestayedrelativelyconstantoverroughlythelast30years.
Development
17%
Applied
22%
60%
NationalScienceFoundation,Division ofScienceResources Statistics.2010.NationalPatterns ofR&DResources:2008DataUpdate.NSF10314.Arlington,Va.Availableatwww.nsf.gov/statistics/nsf10314/.
Basic
Basiceconomicprinciples,discussedinmoredetailinAppendix2ofthischapter,establishtheneedforaFederalroleinfundingR&D,especiallyintheareaofbasicresearch.Theknowledgegeneratedbybasicresearchand,toalesserdegree,theapplicationofthatknowledge,oftensharesthecharacteristicsofwhatisknownasapublicgood.Apublicgoodhastwomaincharacteristics:1)onepersonsconsumptionofthatgooddoesnotreducetheamountavailableforotherstoconsumeand2)itisdifficulttoexcludeothersfromconsumingthegood.Alighthouseisoftenconsideredaclassicexampleofapublicgood.Onceitisbuilt
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Table 3.1
andoperating,everybodysailingintheareawillbenefitfromthelighthousesoperation.Itisnotpossibletoselllighthouseservicesonlytothoseboatoperatorsthatpayforthem;theirservicesareavailabletoallwhopass.Whatthismeans,particularlyforbasicresearch,isthatitmaynotbepossibleforthoseconductingtheresearchtofullyappropriatethebenefitsfromresearchandinnovation.Insuchcases,thesocialbenefits(thosethataccruetosocietyasawhole)fromtheseinnovativeactivitieslikelyexceedtheprivatebenefits(thosethataccruejusttotheentityconductingtheresearch).AseriesofstudiesshowastarkdivergencebetweenprivateandsocialreturnstoR&D(seetable3.1).ThesocialreturnmeasuredinthesestudiesincludestheprivaterateofreturnplusthechangeinprofitduetoR&Dspilloverseitherwithinanindustryorbetweenindustries.Becauseindividualresearcherscannotrecoupthefullvalueoftheirwork,theincentivetoproduceasociallyoptimalamountofinnovativeactivityislacking.Thiscreatesapotentialroleforgovernmenttofundinnovativeactivitytoraisethisactivityclosertothesocialoptimum.Toaccomplishthis,thegovernment could directly fund basic research throughsupportofgovernmentlabsorgrants to universities or private research laboratories. Additionally,governmentpolicycouldincreasethereturnsearnedbytheprivatesectoronbasicresearchthroughpoliciessuchastaxcreditsandawellfunctioningpatentsystemandencouragetheprivatesectortodomorebasicresearch.Giventhepublicgoodnatureofbasicresearch,itisnotsurprisingthattheFederalgovernmentplaysastrongerroleinbasicresearchthaninappliedresearchorinthedevelopmentprocess.Asdiscussedinmoredetailbelow,innovationin
Researcher Private Social
Annual Rates of Mansfield (1997) 25 56
Return on Private Sveikauskas (1981) 725 50
R&D Investment Scherer (1982, 1984) 2943 64147
Bernstein-Nadiri (1991) 1528 20110
Source: Center for Strategic and InternationalStudies. Global Innovation/National Competitiveness.Washington,D.C:CSIS,1996.
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Figure 3.2
Sources and
Location of Basic
Research, 2008
theUnitedStateshasthrivedasaresultofaresearchecosystemcomprisedofthreemainsectors:theFederalgovernment,thecollegeanduniversitysystemandtheprivatesector.However,theFederalgovernment,universities,andtheprivate
sector
all
play
adifferent
role
in
terms
of
the
type
of
research
they
fund
andthetypeofresearchtheyconduct.Forexample,theFederalgovernmenthasbeentheprimaryfunderofbasicresearch,butonlyconductsasmallfractionofallthebasicresearchdoneintheUnitedStates(seefigure3.2).Ontheotherhand,universitiesconductabouthalfofthebasicresearchintheUnitedStates,butfundarelativelysmallamountofthisresearch.Theprivatesector,meanwhile,especiallythemanufacturingsector,fundsandconductsmostoftheappliedresearchanddevelopmentactivity.ThetotaldollarsspentbyprivateindustryforR&DhasbeenincreasingovertimeandtheFederalgovernmentmustensurethattheuniversityandprivatesectorshavetheappropriateincentivestoinvestinR&D.7ThebenefitsfromFederalsupportofacademicresearchgobeyondthedevelopmentofnewandinterestingconcepts.Thisisbecause,whenitcomestoresearch
Sources of Funding Amount of Basic Research
for Basic Research Conducted by Location
Other14%
Universities& Colleges11%
FederalGovt.57%
Industry18%
Other14%
Universities& Colleges58%
Federal
Govt.7%
Industry21%
Source: National Science Foundation, Division of Science Resources Statistics. 2010. National
Patterns of R&D Resources: 2008 Data Update. NSF 10-314. Arlington, VA. Available atwww.nsf.gov/statistics/nsf10314/
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Figure 3.3
The Research
Ecosystem
andinnovation,theFederalgovernment,collegesanduniversities,andtheprivatesectorallareinterconnected(seefigure3.3).Federalsupportofresearchhaspositivespillovereffectsintotheothertwosectors,andtherearealsopositive
spillovers
between
universities
and
the
private
sector.
Universities
have
suc
cessfullypartneredwiththeprivatesectortocommercializetechnology,withmanynewcompaniesandjobsresultingfromtheserelationships.Animportantpartofadvancedundergraduate andgraduatelevelstudentseducationisassistingfacultyinfederallysponsoredresearch.Suchexperiencepreparesstudentstobecomepartofthenationsscienceandengineeringworkforceandtohelpprivatefirmsdevelopandrolloutnewtechnologies.
FederalGovernment
TrainedworkersResearchtocommercialize
Private Colleges and
Sector Universities
FundingforresearchRoyalties
A strong research university can also serve as an anchor for thedevelopmentofaregionalinnovationcluster(RIC).Onewaytothinkaboutsuchclustersis that(r)egionalinnovation(orindustry)clustersaregeographicconcentrations of interconnected businesses,suppliers,serviceproviders,coordinating
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intermediaries,andassociatedinstitutionslikeuniversitiesorcommunitycollegesinaparticularfield(e.g.,informationtechnologyinSeattle,aircraftinWichita,andadvancedmaterialsinNortheastOhio).8Newbusinessesarealsogenerated
by
RICs;
the
more
than
150
clusters
that
exist
around
the
country
have
resultedinincreasedspinoffs,creatingnewcommercialactivity.9Forexample,theCleanTECHSanDiegoclusterinitiativelaunchedin2007focusesonenergyefficiency,renewableenergy,transportationandwatermanagement.ThisinitiativehasgeneratedtremendousstartupactivityandSanDiegonowboastsmorethan650cleantechcompanies,supportedbysixworldclassuniversitiesandanetworkofinvestors.Evidenceshowsthatareaswithstrongclustersperformbettereconomicallythanareaswithouttheseclusters;theyhavehigherjobgrowth,higherwagegrowth,morebusinesses,andahigherrateofpatenting10 (seeChapter7formoredetailonRICs).Thesynergiesareparticularlystronginthemanufacturingsector,asectorthathasbeenanimportantdriverofinnovation.Forexample,bytrainingworkersandsupportingR&Dinanumberofareas,themanufacturingsectorprovidesacatalystforproductandprocessinnovationsforthebroadereconomy.Anationsabilitytomanufactureproductsisinterconnectedwithitsintellectualandinnovativecapacity.Manyinnovativemethodsandideasaregeneratedandperfectedthroughtheprocessofmakingthings.Also,themanufacturingsectorhastendedtoplayasignificantroleinthecommunitieswherefirmsarelocated,asmanufacturingplantstendtobelargeandconcentrated,anddriveclustersofeconomicstrengthwithinageographicregion.Thus,manufacturingalsohasproventobeacatalystforregionalclusters,bringinganareabenefitssuchashigherwages.TheFederalgovernmentplaysaroleinfacilitatingthetransferofresearchintothemarketplace.RecentlythePresidentdirectedFederalagenciestoestablishmeasurestomonitorthenumberandthepaceofeffectivetechnologytransferfromFederallabstononfederalentities.11AgenciesarerequiredtodevelopcommercializationplansfortheirlabsthatwillbemonitoredbyOMBinconsultationwithOSTPandCommerce.Inaddition,CommercewillmaintaintechtransfermetricstohelpidentifyneworcreativeapproachestoacceleratethetechnologytransferfromFederallaboratoriestoindustry.Newinitiativesalsoincludeeffortstostreamlinelicensingprocedures,therebyexpandingaccesstofederallyownedinventions,andtousebestpracticestoimproveprogramsdirectedtowardsmallbusinesses,suchastheSmallBusiness
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TechnologyTransferprogram.Agenciesarealsoencouragedtolaunchnewprogramstosupportregionalinnovationclustersby,forexample,havingtheirFederallabsshareexpertisewithbusinessesandbyencouragingthelocationofincubators
and
research
parks
near
Federal
labs.
Federal
labs
and
other
research
facilitieswillalsobeencouragedtoengageinpublicprivatepartnershipsthatwillstrengthencommercializationactivitiesinlocalregions.TheOfficeofInnovationandEntrepreneurshipattheDepartmentofCommerce,inconjunctionwithitsNationalAdvisoryCouncilonInnovationandEntrepreneurship(NACIE)isworkingtoimprovecommercializationthroughitsi6ChallengeGrants,acompetitionthatfundsthebestideasfortechnologycommercialization.In2011,thei6GreenChallengefollowedsuit,promotingProofofConceptcenters,whichsupportallstagesofentrepreneurship,fromassistingwithfeasibilitystudiesandbusinessplandevelopment,toprovidingaccesstoearlystagecapitalandmentorship.TheAdministrationwillcontinuetofocusonusingprizestoencouragenewwaystospeedcommercialization.AdditionalinitiativesinthisareaincludeajointeffortbytheAdministration,theAssociationofAmericanUniversities,andtheAssociationofPublicandLandgrantUniversitiestoencourageuniversityleaderstoworkmorecloselywithindustry,investors,andagenciestoincreaseentrepreneurship,encouragemorecollaborationbetweenuniversitiesandindustry,andincreaseeconomicdevelopment.TheFederalGovernment:AKeyForceDrivingMajorInnovationsThebenefitsfromFederalR&Dsupportarenotjusttheoretical;whetherthroughfundingeducationalandbusinessorganizationsorthroughresearchinFederallabs,theFederalgovernmenthasplayedacrucialroleinthedevelopmentofmanykeyinnovationsofthemid tolate20thcentury.Forexample,Federalfunding,coupledwithprivateindustryfunding,wascriticalforthedevelopmentofthetransistorbyBellLabsinthe1950s,thegrowthofthesemiconductorindustry,andthebirthofSiliconValleyinthe1980s.TheFederalgovernmenthasalsousedpublicprivatepartnershipstoadvancemarkets for key technologiessuchastheintegratedcircuitmemorychip.Forexample,theSEMATECHconsortiumwasapartnershipcreatedinthelate1980s
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betweentheDefenseAdvancedResearchProjectsAgency(DARPA)and14U.S.basedsemiconductormanufacturers, includingIntel,IBM,HewlettPackard,andTexasInstruments.TheFederalgovernmentmatchedthespendingputintotheventure
by
SEMATECH
member
firms
and
the
venture
advanced
the
research
neededforthenextgenerationofchipsandalsofundedatestfacilitytodevelopprototypesusingthesenewinnovations.MostofSEMATECHsmembersbelievedtheybenefitedfromthisarrangement.Onemember,Intel,invested$17millionintheventureandthenreportedsaving$200to$300millionasaresultofimprovedyieldsandgreaterproductionefficiencies.12OneoftheleadingexamplesofhowFederalgovernmentresearchsupportledtosignificantqualityoflifeimprovementsintheUnitedStatesisthedevelopmentoftheInternet.TheinnovationcameaboutlargelybecauseoflongtermfundingfromDARPAintheearly1960s,andthenlaterfundingbytheNationalScienceFoundation(NSF).13Thistechnologysdevelopmentreliedonbasicscientificresearchthatprovidedevidenceitcouldbeusedinactivitiessuchaspacketswitchingandnetworkinginfrastructure. Thefinancialreturnfromtheseinvestmentswouldhavebeendifficultforanysinglecompanytocapture,andthereturncouldonlybeseenaftermanyyears,makingthisanidealcandidateforgovernmentinvolvement.OthertechnologiesandbusinessesrelatedtotheInternetalsohavedevelopedastheresultofFederalsupport,includingGoogle(seebox3.1).Advancesinmedicalscienceprovideparticularlyimportantbenefits,giventheirdirectimpactontheexpectedlengthandqualityoflife.Ithasbeenarguedthatadvancesinmedicalsciencehaveprobablyraisedhumanwelfareasmuchinrecentdecadesashaveinnovationsinallotherareasputtogether.14TheNationalInstitutesofHealth(NIH),inparticular,hasbeenthesourceofmanysignificantadvancesinmedicalscience,advancesthathaveimprovedthewellbeingoftheU.S.population,aswellaspopulationsaroundtheworld(seebox3.2forasmallsampleofthemanyadvancesmadeatNIHovertheyearsandseebox3.3foradiscussionofhowFederalsupportforresearchledtothecreationandexpansionofthebiotechnologyindustry.)
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Box 3.1 How the NSF Seeded Google 1
IntheearlystagesofdevelopingtheInternet,whentherewereonlyafewhundredactiveWeb sites,theNationalScienceFoundation(NSF)recognizedtheneed for accessible interfaces for growingonlinedatacollections.This ledamultiagency Digital Library Initiative (DLI) that made its first six researchawardsin1994.OneofthoseNSFawardssupportedaStanfordUniversityprojectledbyProfessorsHectorGarciaMolinaandTerryWinograd.OneoftheStanfordgraduatestudentssupportedbythisDLIprojectwasLarryPage.Pagewasinterestedinthestructureofcitationsinscientificpapersandthewaythatthecitationstructuremappedouttheknowledgenetworks inalarge and expanding body of scientific literature. He believed the structuremappedoutby the linkagesacross Web sitescould facilitate theprocessofsearchingfortherightsite.Pagewasjoined inthisprojectbyanotherStanfordgraduatestudent,SergeyBrin.BrinsstudiesatStanfordweresupportedbyanNSFGraduateStudentFellowship.Together,PageandBrinconstructedaprototypeintheirStanfordstudentoffices.Theequipmentfortheprototype,calledBackrub,wasfundedbytheDLIprojectandotherindustrialcontributions.ThisprototypenotonlycreatedatextindexoflinkagesacrossWebpagesitalsoutilizedthestructureoflinkagesacrosspagestocreateawebortreeofcrosslinkagesthatcouldfacilitatesearch.To weightthese linkagesaccordingtotheir importance,PageandBrindevelopedthePageRankmethod,inwhichtherankingofaparticularWebpagedependsonthedegreetowhichitisreferencedbyotherfrequentlyreferencedWebsites.PageandBrinwroteanearlypaperontheirideasandtestedtheiralgorithmondatafromseveralmillionWebpages.Theresultswerehighlyencouraging.By 1998, Page and Brin obtained funding that allowed them to move theirgrowingoperation fromStanford intoanoffcampus site.They incorporatedGoogle,Inc.WhatbeganasanNSFfundedresearchproject,undertakenbytwoNSFsupportedgraduatestudents,turned intoaphenomenonthatbillionsofpeoplearoundtheworlduseeveryday.1. Thisaccount drawsheavily from an online summaryofOn theOriginsofGoogle, by DavidHart,posted August 17, 2004, on the NSF Web site at www.nsf.gov/discoveries/disc_summ.jsp?cntn_ id=100660.
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MostFederalR&Dfundingstillgoestodefenserelatedactivities,whilealmosthalfoftheFederalnondefenseR&DbudgetgoestoNIH(seefigure3.4),withNationalAeronauticsandSpaceAdministration (NASA)adistantsecondfollowedby
Box 3.2 The Case for Federal R&D Funding:National Institutes of Health (NIH)
Throughout itslonghistory,NIHhasbeenresponsiblefornumerousresearchbreakthroughs thathavecontributedgreatly to thewellbeingof theUnitedStatesandworldpopulation.Tonamejustafew:11968:ANobelPrizewasawardedtoDr.MarshallW.Nirenbergfordiscoveringthekeytodecipheringthegeneticcode.HewasthefirstNIHNobellaureate,andthefirstFederalemployeetoreceiveaNobelPrize.1984:InMay,scientistsuncoveredstrongevidencethatvariantsofahumancancer virus called HTLVIII are the primary cause of acquired immunodeficiencysyndrome(AIDS).1991:OnJanuary29,NIHscientiststreatedthefirstcancerpatientswithhumangenetherapy.1996:The firstmulticenter trialofbonemarrow transplantation in childrenwithsicklecelldiseasedemonstratedthattheprocedurecanprovideacureforyoungpatientsthathaveamatchedsibling.2000:ANationalInstituteofAllergyandInfectiousDiseasesstudyshowedthatanasalsprayfluvaccinenotonlyprotectedyoungchildrenagainstthethreestrainsofinfluenzaforwhichthevaccinewasdesignedbutalsoaflustrainnotcoveredbythevaccine.Italsoprotectedthechildrenagainstflurelatedmiddleearinfections.2000:TheinternationalHumanGenomeProjectpublicconsortiumfundedbyNIH,DOE,andothersassembledaworkingdraftofthesequenceofthehumangenome;itwasimmediatelyandfreelyreleasedtotheworld.2005:Alongterm,multicentertrialoftherapiesforhighbloodpressurefoundthatdiureticsworkbetterthannewertherapiesintreatinghighbloodpressureandreducingtheriskofheartdiseaseandshouldbethefirsttherapyformostpatients.2006:NCIfundedresearchspanningnearly2decadeshelpedleadtotheFDAapprovalforavaccinetopreventcervicalcancer,adiseasethatclaimsthelivesofnearly4,000womeneachyearintheUnitedStates.1.Thefulllistofaccomplishmentscanbefoundatwww.nih.gov/about/almanac/historical/chronology_of_events.htm.
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AllOtherFederalagencies,theDepartmentofEnergy,andNSF.Also,Federalspendingonbasicandappliedresearchhasshifteddramaticallytowardslifesciencesresearch,primarilyatNIH,overthepasttwodecades.Withinjustafewyears
in
the
late
1990s
and
early
2000s,
NIH
spending
doubled,
while
over
the
sameperiodFederalresearchexpendituresoutsideofthelifesciencesgrewmuchlesssignificantly(seefigure3.5).Thisallocationofresearchfundscontributedtothesignificantadvancesachievedthroughfederallysupportedhealthcarerelatedresearch.
Box 3.3 The Federal Government and Basic Research:
BiotechnologyThecreationandsuccessof thebiotech industry in theU.S. isdue, ingreatmeasure, to theFederal governments support of basic research through itsfunding of the National Institutes of Health (NIH) and the National ScienceFoundation(NSF).1Fromthisfundingemergedourunderstandingofthefundamental structure of the human genome and the tools of recombinant DNAtechnology,withoutwhichthebiotechnologyindustry,andthelifesavingmedicinesitisyielding,wouldnotexistasweknowit.ThetoolsofrecombinantDNAtechnologywerepioneeredbyHerbertBoyer,aprofessoratUCSanFrancisco,andStanleyCohenatStanfordUniversity.Oneoftheearlypioneersandleadersinthisfield,BoyerwentontocofoundGenentech, together with venture capitalist Bob Swenson. NIH and NSF researchfundingwerethereforeinstrumentalinGenentechscreation.Todate,thecompanyemploysmorethan11,000peopleandproducesavarietyofdrugs forasth
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