April 27, 1986
"R&D Languishes in the Free Market - Under Reagan Administration,
Defense Industries Eat Up Boost in Research Spending"
San Jose Mercury News
By Timothy Taylor
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SILICON Valley might better be called "Research and Development Valley."
In fact, the Congressional Budget Office has defined high-technology industries
as those which perform an exceptionally high level of research and development.
But although the valley has become synonymous with entrepreneurs flourishing
in a free market, research and development is one activity where an unfettered
market tends to produce too little R&D investment, for two reasons.
First, if an individual company makes a discovery from an R&D project,
the benefits will spill over to other companies that will use that knowledge themselves.
As a result, no individual company receives enough benefit to do many R&D
projects that make sense from the standpoint of the whole economy.
There is an interesting analogy between R&D spending and environmental
regulation. Unless government policies force companies to recognize the negative
spillovers of pollution, companies will produce too much of it. Conversely, unless
government policies recognize and provide compensation for the positive spillovers
of research and development, companies will produce too little of it.
Second, individual companies avoid too risky R&D projects. Imagine that
a line of research has one chance in 10 of paying off, but if it doesn't pay off,
the company goes bankrupt. Although it may make sense for society as a whole to
undertake that project, in the chance it will be successful, individual companies
will not flock to that gamble. Especially if, in the event the research is successful,
other companies can appropriate the benefits.
With these economic justifications, as well as the easier-to-understand political
ones, federal support for R&D has come in three forms: direct federal payments,
an R&D tax credit and laws defining the extent of intellectual property.
Direct Federal Support
Direct government research support makes most sense for basic science or generic
research, where enormous benefits may be diffused through many companies, or for
research aimed at a particular government program, like defense.
Federal spending supports about half of the nation's R& D. At a recent
symposium organized by the Stanford Law and Technology Association, Dr. Karl Willenbrock
of Southern Methodist University said that about 90 percent of university research
funds come from the federal government.
The Reagan administration has made two major changes in federal R&D expenditures
since 1981, as the accompanying chart shows. Total R&D expenditures have increased
dramatically. But defense-related R&D has taken all of the increase, and then
some. Non-defense R&D, the part most relevant to helping economic growth,
has actually declined.
The local microelectronics industry has traditionally relied on government
to support basic research, because of the spillover and risk factors already described.
"Merchant (semiconductor) companies, unlike their larger counterparts, tend
to limit their R&D to the last stages of development," said an Office
of Technology Assessment background paper last month. "Their central concern
is getting the latest design and fabrication technologies into production."
But the microelectronics industry has survived the cutback in government-backed
civilian R&D fairly well. The National Science Foundation, the main non-defense
source for microelectronics R&D, has received modest increases. Also, some
of the military research does benefit commercial electronics in peripheral ways.
R&D Tax Credit
Half of the nation's total R&D, and the overwhelming bulk of its commercially
relevant R&D, is done by private companies. Numerous studies have demonstrated
that the credit is a cost-effective way to stimulate R&D, as Martin Neil Baily
and Robert Lawrence at the Brookings Institution, Jane Gravelle of the Congressional
Research Service, and Kenneth Black for the Joint Economic Committee have demonstrated.
Nonetheless, Congress let the R&D credit die at the end of 1985. There
seem to be two hang-ups.
One is in delimiting the credit. What activities qualify as R&D? How much
should the credit be? Should it be based on additional or total R&D? Should
it be superseded by a minimum tax? The second problem is how an R&D credit
fits into the effort to reform the entire tax code.
Kenneth Dam, a former deputy secretary of state who now works for IBM, estimated
at the Stanford symposium that 10 years ago, the United States did 75 percent
of the world's commercially relevant research. Now it does about half, and the
figure is headed for one-third.
The details deserve to be overshadowed by the fact that the nation needs a
permanent R&D tax credit, with or without a tax reform package. Japan has
had an R&D tax credit since 1966. The original Treasury Department tax reform
proposal released two years ago discarded tax loopholes right and left, but kept
the R&D tax credit intact as part of a sensible economic policy.
In fact, because new discoveries help many companies increase production, the
credit is one of the very few tax expenditures that actually pays for itself.
The Semiconductor Industry Association lists the R&D tax credit, quite
appropriately, as one of its top public policy objectives. While the credit was
in effect from 1981 to 1985, it helped semiconductor companies boost R&D expenditures
and stay competitive even in bad times.
Defining Intellectual Property
Patents, Copyrights, and trademarks are all ways of establishing a property right
in technology, design or reputation. Enforcing intellectual property rights encourages
R&D by helping to assure that the inventor can receive a greater share of
the benefit from a successful project.
These rights must be defined and enforced not only here, but abroad. Clayton
Yuetter, the U.S. trade representative, estimates that U.S. companies lose as
much as $20 billion of business a year to foreign counterfeits of products with
U.S. patent, Copyright or trademark protection. Taiwan and some other Asian countries
are the main offenders. The situation calls for vigilance and diplomatic pressure.
Some new technologies don't fit easily into past methods of protecting intellectual
property. The Semiconductor Chip Protection Act of 1984, for example, was designed
to protect the design of semiconductors, since they fell somewhere between patents
and Copyrights. As the United States moves toward ever-greater reliance on technology
and information, protection for intellectual property should expand.
Antitrust law has also been reformed to respect intellectual property. Companies
can now band together in joint research efforts like the Semiconductor Research
Corp. or the Microelectronics and Computer Technology Corp. A contributing company
pays part of the research cost and then has a right to use the research. As long
as only research is shared, companies can cooperate without fear of antitrust
"Intellectual property" is a trendy term just now. Defending it can
sound a little hypocritical here in the valley, where many companies were started
when people carried away their old employer's intellectual property in their heads.
Intellectual property rights must not strangle the interchange of people and information
that generates still more technological progress. But enforcing them more stringently
than in the past is an important new legal idea.
This R&D agenda does not require much money. Greater direct government
support for civilian R&D could be achieved by redirecting some of the military
research funds now aimed at nuclear testing or the Strategic Defense Initiative.
The R& D tax credit would pay for itself. The cost of enforcing intellectual
property rights is tiny compared to the economic benefits.
Perhaps the hardest hurdle to overcome is the belief that research and development
is just another special-interest subsidy, a way of favoring Silicon Valley and
"sunrise" industries. That point of view ignores the fact that the only
way autos and steel and other "sunset" industries will be able to compete
is by researching and developing new ways to improve their quality and productivity.
It also ignores the underlying economic reasons why government must encourage
R&D, not to help specific companies or industries, but to help the economy
and society as a whole.
|FEDERAL R&D SPENDING
|Although under the Reagan administration government spending
for research and development has returned to the level of the 1960s, non-defense
R&D has actually fallen. All figures are in billions and in 1986 dollars.
(s1) Includes military-related research in the Departments of Defense and Energy
Source: Office of Management and Budget Commerce Department
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