Posted on 12/03/2003 8:28:34 AM PST by ckilmer
Technology and Economic Analysis Group
February 2002 U.S Department of Commerce Technology Administration R&D and Long-Term Competitiveness:
Manufacturing’s Central Role in a Knowledge-Based Economy Gregory Tassey Senior Economist National Institute of Standards and Technology Technology Administration Department of Commerce tassey@nist.gov 301-975-2663 February 2002
Abstract The “Internet Revolution” induced an unbalanced perspective on future economic growth strategies. Because information technology (IT) largely constitutes an infrastructure upon which other economic activity is based, its economic role is to facilitate the productivity of investment in a wide range of products and services that meet final demand. Other economies around the world can and are investing in the same infrastructure, so the efficiency advantages now being realized by the U.S. economy will be fleeting unless U.S. R&D efforts produce a new and broad range of innovative products and services that take advantage of this infrastructure.
A deep and diverse technology-based manufacturing sector must be a core objective of a national R&D strategy. U.S. manufacturing contributes $1.5 trillion to GDP, employs 20 million workers, accounts for more than 70 percent of industrial R&D, and constitutes the main source of technology for the larger service sector. While knowledge-based services are the largest source of economic growth for the U.S. economy, their long-term performance is highly dependent on synergies with a domestic manufacturing sector. These synergies will be even more important in the future because services are increasingly exposed to foreign competition.
Knowledge-based services can be supplied from anywhere in the world—as long as these foreign sources can rapidly access and assimilate the necessary technology components. This caveat is the critical point for economic growth policy. Considerable research supports the argument that hardware and software components are most efficiently supplied to services by a manufacturing sector that is geographically close and institutionally integrated with the service applications. Policy debates have raged for decades over the nature and magnitude of underinvestment in manufacturing R&D. The need to resolve the relevant policy issues has increased, as industry is funding less of the long-term, high-risk research that creates the technology platforms supporting new industries and future economic growth.
Unfortunately, only about a third of U.S. manufacturing is high-tech by conventional definitions. Some of the remaining industries develop technologies internally, but most purchase a large proportion of their technology from the high-tech sector. Because a technology acquisition strategy can be more easily imitated by foreign competitors, traditional industries are much more susceptible to exchange rate variations, global economic cycles, and secular shifts in foreign competition. Thus, with global technological capabilities relentlessly increasing, the long-term prospects for the moderate and low R&D-intensive portions of U.S. manufacturing are not good.
This report presents a conceptual framework and available data as inputs for the analysis of Federal R&D investment strategies. Such strategies must recognize the full range of public and private technology assets constituting a national innovation system. A developed and efficient innovation system has characteristics making imitation by foreign competitors difficult and thereby enables sustained competitive advantage.
Executive Summary Broad enthusiasm for information technology (IT) in general and information services based on the Internet in particular has overshadowed the critical role that a technologically advanced manufacturing sector plays in stimulating technological change and consequently economic growth. While IT is essential for a modern economy, manufactured products and their underlying technologies drive IT. Moreover, most IT is infrastructural in nature, which means that it facilitates other economic activity— including manufacturing. Ultimately, however, a technology-based economy needs steady and broad flows of new products and services to remain internationally competitive.
Manufacturing therefore remains a technological center of the U.S. economy and will continue to help drive long-term economic growth because:
• The 17 percent of GDP contributed by manufacturing amounts to approximately $1.5 trillion in profits and in wages and salaries for 20 million workers.
• Industry conducts 75 percent of all U.S. R&D and the manufacturing sector accounts for more than 70 percent of this performance. Thus, manufacturing supplies much of the economy’s technology, including components of information technologies.
• The service sector more efficiently assimilates and uses technology from sources in close geographical proximity—namely, from domestic manufacturing firms.
• Similarly, co-development of technologies by manufacturing and service firms, especially through partnering (virtual integration), is aided by proximity and access to the same technical infrastructure. Thus, overall economic growth requires a diverse and competitive manufacturing sector. In this regard, technology-related policies need to be continually examined and adjusted to provide an environment in which private-sector incentives to invest in technology are strong. Technology-related policies include intellectual property protection, several categories of regulation, fiscal and tax incentives, workforce development, trade facilitation, and R&D funding.
This report focuses on the critical and often controversial issue of Federal R&D funding. R&D policies require accurate models of industrial innovation and these models must be driven by adequate data. The analyses in this report provide input for both requirements.
Barriers to Attaining Long-Term Competitive Advantage.
A major challenge facing R&D policies is the complexity of modern manufacturing technology. Most important technologies today are essentially systems of components that must work together in a highly efficient manner. The components themselves are often based on scientific knowledge from several disciplines. Industry has found the development of such technological systems increasingly challenging, especially in the face of greater global R&D capability. As a result, several barriers to attaining long-term competitive advantage have emerged:
(1) An increased segmentation of R&D is occurring across industries making up the various supply chains of the manufacturing sector, so that private sector R&D is more specific and less coordinated. In economic terms, this means a failure to capture both economies of scale and scope, with a major consequence being underinvestment in new, broadly applicable technology platforms.
(2) Private sector investment is pushed forward in the R&D cycle, with the result that traditional funding gaps found in the early phases of R&D are magnified.
(3) Private sector underinvestment in a range of critical technical infrastructure, including infratechnologies for R&D productivity and the technical bases for many essential standards, has become more pronounced.
Two major policy implications result.
First, the amount of U.S. R&D is too low in most industries and too concentrated geographically to spawn enough economic clusters to achieve high, long-term national growth rates and thereby maintain corporate profit growth and consistently raise real incomes of workers. Second, regardless of the amount of R&D, the composition of most areas of technology research has shifted toward applied, short-term investments and away from the longer-term, higher-risk research that fosters sustained growth.
The resulting shortfall in the amount and composition of investment in the technology infrastructure for future high-tech industries is accentuated by an educational system that provides too few scientists and engineers each year compared to the needs of a broad, technology-based economy.
In sum, the national innovation system is not as broad and deep as it should be.
A number of trends explain why the amount and composition of manufacturing R&D are increasingly serious issues:
(1) The United States has experienced trade deficits in manufactured goods for the past 18 years, with 2000’s deficit reaching $324 billion. Some of the expansion of the trade deficit in the late 1990s can be explained by the fact that the U.S. business cycle has been out of phase with most other economies. However, the persistent nature of these deficits points to a long-term competitive problem at the sector level.
(2) Although different definitions exist of what is loosely referred to as the “high-tech sector” of the economy, they all represent a small portion of GDP—only 7–10 percent. The manufacturing industries falling into this category constitute at most about one-third of total manufacturing sector output. The implications are that the rest of the manufacturing sector is highly vulnerable to foreign competition (as the trend in trade balances shows) and that the broader economy (mainly services) is highly dependent on access to external (outside the industry) sources of technology.
(3) Although manufacturing productivity has been increased by information technology in general and communication networks in particular, such process enhancing infrastructure is spreading rapidly. The continued worldwide diffusion of the Internet over the next decade will significantly equalize global wages and prices. As this process becomes widespread, the development and utilization of technology to create new products and services will become ever more important for competitive advantage among nations.
(4) Although IT-driven productivity gains have been substantial, they may be overstated. Most public discussions of productivity trends have been based on labor productivity, which is more readily available than the more accurate measure—total factor productivity (TFP). TFP growth has accelerated in recent years, but at less than half the rate of growth in labor productivity.
(5) Economists and financial analysts have focused on the inability to hold on to intellectual property as the main reason for underinvestment in R&D. However, the complexity of modern R&D and the industrial and market systems that it drives create additional barriers. In fact, as described in the main body of this report, six different sources of underinvestment in R&D can be identified.
The Need for a Broader and Deeper R&D Establishment. Success in the global marketplace depends on cost, quality (superior performance), and timing (first to market).
Technology drives all three factors and therefore the R&D process that produces it is a key strategy and policy instrument. Thus, a competitive manufacturing sector requires a broad and deep technological base, which currently does not exist for manufacturing as a whole.
Maintaining an adequate technology base requires investment in different amounts and types of R&D over a technology’s life cycle by multiple levels in high-tech supply chains. This R&D is essential both to develop new technology and to assimilate technology from sources external to individual companies.
The technology life cycle concept is critical because the increasing global competition in R&D is shortening windows of opportunity, while at the same time the complexity of new technologies demands long lead times for development. A key policy construct is the fact that private R&D investment and investment in technical infrastructure interact in an iterative manner over a life cycle, so government R&D policy must be reasonably dynamic to be effective.
Virtual supply chain integration is important because synergies made possible by an integrated domestic information infrastructure at all stages in the economic process (R&D, production, and marketing) theoretically allow the value added by a domestic supply chain to be greater than the sum of its individual levels (industries) operating in isolation. Unfortunately, achieving virtual integration is proving to be difficult because of a number of factors, including technological complexity and increasing vertical disintegration (specialization). The latter is distributing R&D across companies and industries, which is accentuating a trend toward more focused applied R&D by individual firms. The result is less long-term, high-risk technology research and major institutional barriers to attaining potential R&D synergies through research collaboration.
Policy Implications.
With global technological capabilities relentlessly increasing, the longterm prospects for the moderate and low R&D-intensive portions of U.S. manufacturing are not good, so a policy solution must be found to restructure the R&D investment strategies of the manufacturing sector. Underinvestment in the amount of R&D can be addressed to a significant degree with tax incentives. However, while tax incentives have the advantage of being neutral with respect to areas of technology, they have the disadvantage of subsidizing all technologies, regardless of need. Moreover, it is reasonable to question whether the size of the current tax incentive is large enough to have meaningful impact on long-term corporate R&D spending. Equally important, to the extent this policy instrument does have an impact, it provides incentives for more private sector investment in the same type of R&D. It thus does not measurably mitigate the skewing of R&D toward shorter term and more applied objectives; that is, it does not address the R&D composition issue.
The R&D composition problem therefore requires a different policy response. Federal funding programs can provide an environment for sustained investment by industry in innovation through support for long-term, high-risk generic or fundamental technologies. Such support helps provide generic technology platforms, which enable the much larger private sector investments in applied R&D that lead to multiple commercial applications.
These programs must be timed to coincide with the emergence of new technology life cycles and directed to industries in the relevant supply chains that will ultimately conduct the applied R&D to achieve commercialization. Similarly, Federal programs must be designed and implemented to provide industry with a range of infratechnologies that provide the basis for the technical infrastructure (standards, for example) needed to execute R&D, production, and market penetration strategies. The examples of Federal R&D funding given in this report show that the critical issues are the timing and the type of government funding for new technology research relative to the industry’s changing capacity or willingness to undertake this research. In such a policy model, risk reduction in the early phases of R&D coupled with the availability of efficiency-increasing infratechnologies will enable industry to apply conventional R&D decision-making processes to a broader set of technology options and to do so earlier in the global technology life cycle. Industry takes over an increasingly larger portion of total R&D funding as the technology’s life cycle evolves. To be successful in providing an environment conducive to private sector investment in new technologies, R&D policy must apply a portfolio management approach, which supports a broad array of technology platforms. Funding the development and transfer of appropriate portions of technology infrastructure in a timely fashion will both stimulate and leverage much larger flows of private sector R&D investment.
Therefore, the Federal role in R&D investment is to fund the gaps, that is, to supply the public good elements of the typical industrial technology. These gaps vary across technologies and over time, so their identification, characterization, and matching with appropriate policy responses require constant collaborative planning with industry. The industrial revolution was successful to a relatively greater extent in the United States because of substantial investment in economic infrastructure (roads, bridges, canals, railroads, telephone networks). This infrastructure allowed regional specialization based on natural or acquired comparative advantage because companies could efficiently access national markets and thereby capture economies of scale. Today, investment in technical infrastructure and the broad competition it spawns is having the same effect on global markets.
Domestic industries are specializing at particular levels in a supply chain, while clustering geographically to take advantage of supporting infrastructure. The resulting value added occurs in that nation’s economy at the expense of similar industries elsewhere. Thus, intense competition is underway among the world’s economies to be the source of value added at each level of every supply chain, including the high-tech portions.
Clearly, superior long-term rates of economic growth depend on emphasizing the high value added portions of supply chains. Achieving this objective will require significantly larger amounts of R&D investment than are currently being made. Industry has responded by steadily increasing its investment in applied R&D. As a complement, the composition of publicly funded R&D should be reassessed to ensure industry is being provided with the technology platforms for the range of emerging technologies needed by a large, diversified economy.
for the rest of the article go here http://www.nist.gov/director/prog-ofc/report02-2.pdf)
(Excerpt) Read more at nist.gov ...
This article proposes more Federal solutions when its the culprit, leaking tech research to the world.
Go figure.
The article assumes an upside-down premise: that high-tech R&D "trickles down" to promote industrial development.
This is not true.
High-tech exists only as the pinnacle of a vast industrial infrastructure. It is the icing on the cake and heavily dependent on the cumulative expertise within the weblike network of industrial suppliers, many of which appear to be engaged in "mundane" activities to the uninformed general public.
As our manufacturing infrastructure is shifted overseas, high-tech and R&D is lost as well. Present Government policies assure that we will be a technological backwater in the future, not among the world leaders.
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