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April 27, 1986 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 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 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 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 penalties. "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.
Source: Office of Management and Budget Commerce Department << Back to 1986 menu |
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© 2010 Timothy Taylor |