competitiveness and innovative capacity of the us_usdoc

8/3/2019 Competitiveness and Innovative Capacity of the US_USDOC

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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

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY i


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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

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITYii


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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

U.S. COMPETITIVENESS AN D INNOVATIVE CAPACITY iii


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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

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY v


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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

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY 1 1


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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.

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.pdf


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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.



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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

competitiveness and innovative capacity of the us_usdoc

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