U.S. DEPARTMENT OF COMMERCE

on

Science and Technology -- Preparing for Changes in the Year 2015

Before the Committee on Science U.S. House of Representatives

JANUARY 6, 1995

Mr. Chairman, Mr. Brown and members of the Committee.

Let me begin, Mr. Chairman, by commending you for holding this hearing and, even more importantly, for asking exactly the right question: How can our efforts today lay the groundwork for a strong and vibrant economy twenty years hence?

Today, we are harvesting the results of research and technology investments made ten, twenty and thirty years ago. These are stories of remarkable success, due to the foresight of our predecessors who recognized that support of research and development and technology deployment is a fundamental mechanism for achieving national missions and a stronger economy.

Our vision twenty years from now is one of a United States economy sustained by growth, creating economic opportunities for all Americans. A place where U.S. businesses use globally competitive advanced processes to produce the goods and services that world consumers will demand -- success stories of the 21st Century built on the farsighted actions of today and tomorrow.

We now have the opportunity to begin these stories. But to do so requires that we understand the nature of our economy and the lessons of our past support for science and technology efforts.

I. New Economic Realities

At the same time, a new battlefield has emerged in the form of a global marketplace, and able competitors from around the world are fighting for a share. Technology is racing ahead at a breath-taking pace, with each advance more staggering than the last.

And, in the wake of these forces, the way we live, learn, work, and play is being forever transformed. Each of these changes alone would be revolutionary but, together, they have produced results that are deeply felt by Americans in all walks of life.

These changes create uncertainties -- and opportunities. We must confront the basic challenge of our time: Will we try to hold change at arms-length or will we take advantage of the opportunities that change will bring? And we must answer that challenge with this strategy: to empower Americans with the tools that they need to take advantage of economic opportunity.

We must work as a nation -- with our businesses, with our workers, with our communities -- to ensure that the United States remains the locus of dynamic firms, strong communities and skilled workers. In today's economy, it is not just companies, it is also nations that compete.

Consider the ingredients of sustainable national economic growth: investment, a skilled workforce, open markets and innovation. Together, they form the basic equation of international competitiveness.

Today's hearing focuses on preparing for a vibrant economy twenty years from now. My principal emphasis will be on innovation, which I will discuss in detail. It is important, however, that we bear in mind our responsibility to further the national interest in each of the four ingredients.

First, investment. Private investment drives competition and growth. It is critical to support private investment through sustained progress on budget deficits. That is why President Clinton fought so hard -- and so successfully -- for a deficit reduction package that got government out of businesses' way in our capital markets. The result: since the end of 1992, business investment in plant and equipment has increased at an annual rate of 14%.

Private investment provides a lifeline for those dynamic firms that spur technological innovation, create jobs and foster economic growth. For example, two-thirds of the manufacturing jobs created each year originate in plants that grow by 25 percent or more in that year alone. The basic lesson is clear: Our economy is only as strong as the best firms that populate it.

Second, a skilled workforce. For firms to succeed in the economy, however, it is necessary that we have an educated, well-trained workforce. Traditional economists might view knowledge and labor as two distinct sources of economic growth but, in today's information-based economy, the prowess of our workforce is increasingly bound to the success of education and training. We cannot capitalize on advances in science and technology without a workforce able to harness these innovations. That is why the President's middle class tax cut is focused on education and training.

Third, open markets -- both foreign and domestic. As you know, Mr. Chairman, opening foreign markets to the effective participation of U.S. businesses has been a priority of this Administration, of the Department of Commerce and of my own activities. Of course, our leadership in science and technology will only bear fruit if we have markets open to our innovative products.

The passage of the North American Free Trade Agreement (NAFTA) and of the Uruguay Round GATT agreement will create enormous potential for world trade and economic growth. NAFTA has begun to take economic hold. U.S. exports to Mexico shot up 23 percent in the first 10 months of 1994 compared to the same period a year earlier. Mexico and Canada alone accounted for nearly half the growth of global U.S. exports during this period. When fully implemented, GATT should add as much as $100 billion to $200 billion to the U.S. gross domestic product annually; raise total U.S. employment by hundreds of thousands of jobs; save individual U.S. consumers hundreds of dollars annually in lower costs of food and other important items; and boost real wages and living standards in the U.S. and around the world.

The framework of open markets is, however, not enough. Exploiting those opportunities is just as critical. That is why the inter-agency Trade Promotion Coordinating Committee, which I chair, issued the first National Export Strategy in 1993 and refined that strategy in a report issued last September. The purpose of the National Export Strategy is clear: to help U.S. companies -- small, medium and large -- realize their full export potential.

Boosting U.S. exports is a core mission of the Department of Commerce. Our advocacy, and that of President Clinton, on behalf of U.S. businesses competing for foreign government procurements is beginning to bear fruit:

• in Saudi Arabia's intent to purchase aircraft from the Boeing Co. and McDonnell Douglas Corp., valued at $6 billion, and that country's $4 billion contract for telecommunications network modernization awarded to AT& T;
• in Brazil's award of the $1.5 billion SIVAM rain-forest protection contract to the Raytheon Company, a defense contractor moving into civilian production; and
• in China's agreement to purchase $6 billion worth of goods and services from U.S. companies, including two Westinghouse contracts worth $450 million, an Applied Energy Services contract worth $1.5 billion, and an AT& T agreement valued at $500 million to provide telecommunications equipment.

Of course, markets here at home must be dynamic and competitive as well. We live in a global era in which success at home will often translate into success abroad but in which, conversely, failure to achieve success at home will leave domestic firms at risk in the United States and at a competitive disadvantage abroad. That is why, for example, the Administration has placed such emphasis on the passage of telecommunications legislation that will deregulate and open new markets. We look forward to working with the 104th Congress to reform our 60-year old communications law to remove legal and regulatory impediments to competition while still safeguarding the public interest.

The importance of this effort is too obvious to ignore. Last year the Council of Economic Advisors issued a report detailing the economic benefits that would be derived from telecommunications reform. The CEA predicts a boom in the telecommunications and information sector of the economy over the next ten years, doubling its share of the GDP, adding more than $100 billion to the economy, and employing another 1.4 million workers in that sector.

Fourth, innovation. Technological innovation is vital in the new knowledge-based global economy. Rapid and continuous improvements in products, and the techniques to manufacture and bring them to market more efficiently, give businesses -- and nations -- a competitive edge today and twenty years from now.

In this environment, it is easy to see why the high-technology sector and firms that adopt advanced technologies are critical to economic prosperity. Average annual compensation in the high technology sector, for example, exceeds by twenty percent the average for all manufacturing. High-technology products also account for a rapidly increasing share of the manufacturing output of industrial countries -- 35 percent in 1992, nearly double the 1980 figure.

The close connection between innovation and economic performance has been confirmed by new research from my own Department released only last month. Our report, entitled "Technology, Economic Growth and Employment," found that firms that use advanced technologies are more productive, pay higher wages, offer more secure jobs, and increase employment more rapidly than firms that do not.

The importance of this conclusion cannot be overstated. It is central to our economic fate. That is why my Department has focused its attention on this central question: How can we stimulate innovation in the U.S. economy?

Part of the answer comes from the connection between and among the four basic ingredients of growth that I have outlined. Each of the other three ingredients -- investment, a skilled workforce and open markets -- is integrally linked to the fourth, innovation. A sound macroeconomic environment, educated workers and markets in which innovation can produce competitive success are all necessary to the successful promotion of innovation.

Indeed, in each of the these areas, the Administration has taken action that is focused directly on the importance of innovation, including:

• winning Congressional approval for a three-year extension of the R& E tax credit and a targeted capital gains reduction for investments in small business;
• working with Congress to create the School-to-Work transition program for young people who choose not to go directly to college, and establishing Goals 2000 standards for K through 12 education;
• improving access to college loans so that our future scientists and engineers can get the education they need;
• freeing $32 billion in exports by reducing controls on U.S. computer and telecommunications products;
• stimulating major sales of technology-based products for U.S. companies through high-profile industry- government trade missions that helped close contracts worth more than $17 billion in U.S. exports, involving 275,000 American jobs -- many of them technology related;
• developing a new Presidential policy on commercial remote sensing that allows private firms to build and operate high-resolution satellite imaging systems, which will create manufacturing and operation jobs;
• negotiating commercial space launch trade agreements with the governments of Russia and China to create a level playing field on which U.S. providers can compete;
• application of new technologies, from satellites to doppler radars, for better weather warnings and the protection of life and property.

We should recognize at the outset that the Contract with America would jeopardize that technology policy. Among the possible offsets proposed by the Contract are the elimination of our Advanced Technology Program and a freeze on funding for our National Oceanic and Atmospheric Administration, which conducts much of the Department's basic research. Moreover, generalized reductions in the President's investment spending, totalling more than $1 billion over five years, would further threaten our research and technology initiatives. For reasons that I will explain in detail, I hope that the Congress, after full consideration of our efforts, will continue the pro- science, pro-technology path that the President has forged and that is essential to our long-term economic prosperity.

Through all of these efforts, innovation can be spurred. But, for reasons that I will explain below, these measures alone are not sufficient.

II. The Need for Pro-Innovation Policies

The United States must remain the world's leader in innovation. To do that requires an understanding of the incentives that create -- and the barriers that can stop -- both the development and deployment of technology.

Technological innovation is a complex process. It is so complex that each industry -- and even each firm within an industry -- must grapple with a different set of concerns. For example, strengthening intellectual property protection is a key concern, particularly for the software industry. Cold war era export controls have hurt the US computer and telecommunications industries. Regulation can be a major impediment by increasing the time and capital it takes to bring a new product to market -- especially in biotechnology and pharmaceuticals. Both capital availability and access to technical expertise are continuing struggles, especially for our small- and medium-sized companies.

In short, there is no "one size fits all" formula for ensuring that our companies lead the world in innovation. Our national competitiveness strategy must address the broad range of factors that affect our companies' ability to develop technology, turn innovations into products and services and bring them to global markets at a rapid pace.

While innovation must continue to come from the private sector, government must work to maximize opportunities for private businesses to innovate -- by reducing export controls, reforming regulations to give our companies and our workers elbow room to compete, by opening markets, by improving education, and by creating incentives for private industry to invest in long-range, high- risk research.

My department is pursuing a broad range of initiatives to improve the climate for private sector innovation. We are listening to industry as we establish departmental priorities, and serving as industry's advocate in shaping regulatory, export control and environmental policies. And we are partnering with industry to work on the nation's 21st century technological infrastructure.

This partnership continues a long history of cooperation between the public and private sectors. For the greater part of two centuries, the government has worked as a junior partner with industry to build or encourage American infrastructure. That infrastructure has created a "playing field" upon which private enterprise built the most successful economy in the world. Government has built lighthouses and harbors for private sector shipping, offered federal rights-of-way for private sector railroads, built interstate highways, airports, advanced radar for aircraft, next generation doppler radar, and GOES satellites. By making investments that individual entrepreneurs, or even large companies, could not afford to make themselves, the government enabled everyone to become more efficient and productive.

And the government's investments in infrastructure have not been limited to our physical infrastructure. Since World War II, our national government has invested in science and technology as part of key national missions--defense of the nation, health, space, and the quest for new knowledge. And, for years, we have seen a steady flow of new commercial technologies emerge from these government investments as an extra benefit.

As a result of government's technology investments, the U.S. computer industry is the world's leader. We have seen a flow of blockbuster drugs and medical therapies, and the birth of the biotechnology industry--all of which can be traced to earlier government investments in defense technology or medical research. NASA's aeronautics research program provides America's aircraft industry with the mid- and long-term technology development that a single company, no matter how large, could not afford to do on its own.

Development of technology is not enough. We must also consider the extent it actually reaches those who can employ it effectively. That is why, as a nation, we have supported the deployment of technology to people who might not have the resources to find it on their own. For example, beginning this January, the Department's National Meteorological Center will issue experimental seasonal climate forecasts for the contiguous United States and Alaska. These forecasts will lead to substantial immediate benefits to the U.S., including the agriculture and water resources management sectors, and other sectors dependent on seasonal variability.

The development and deployment of technology are both part of today's great national mission of providing all Americans with the tools of economic opportunity.

First, we must focus on the national interest. In the past, federal action was focused on specific missions: defense, aeronautics, energy or health. But today, our focus must be broader, because we do not have the luxury of three separate industrial bases for military, mission-oriented and commercial purposes. Today, instead of looking for spin-offs down the road from some non-commercial purpose, we must examine the pursuit of civilian technology as a mission in and of itself, but we must do that only as a partner with industry.

Second, in examining that goal, we must recognize that all research and development and technology deployment is not the same. In this regard, we might usefully consider the nation's R&D expenditures as building a portfolio for the future.

In 1993, industry funded nearly 55% of all U.S. R&D. More than 90% of that industrial research was concentrated on short-term commercial development and applied research. And properly so, for it is only the private sector that can connect today's market demands to immediate product development.

About 59% of the Federal government's $69.7 billion R&D funding in 1993, and about one-quarter of all national R&D related to the mission of defense. Health-related R&D accounted for about 15% of the Federal government's R&D spending, while about 10% went to the space mission.

Only about 4% of Federal R& D spending in 1993 went to civilian industrial technology and less than one percent went to the development of early-stage, pre-competitive civilian technologies. NSF figures show that less than one- tenth of industry R&D funds go to early stage, longer term, higher risk research. The Industrial Research Institute survey of industry R&D performance confirms press accounts that industry is reducing the level of investment in early stage research, with only 8% of firms expecting increases in this category of research in 1995.

The discovery of fundamental new knowledge, basic research, is a vital component of our innovation portfolio. But it is not enough. We have learned over the past twenty years that, all too often, U.S. discoveries of basic knowledge were better exploited by other countries that were better able to develop applicable technologies and transform them into competitive products and services. The market place alone will not invest sufficient resources into mid-and longer-term broad-based technology development needed by the private sector to fully exploit basic knowledge. Our industry-led technology development partnerships are an important link between basic science and private sector commercialization. We should continue to expand these efforts, not abandon them.

Although it is an oversimplification, we can think of basic research as providing the basis for commercial products a decade from now. Industry R&D focuses on short-term product delivery, often no more than 18 months hence. In between are needed efforts to move fundamental knowledge into technologies that industries can turn into new processes and products. In addition, a strong technology base often feeds back into scientific inquiry in a way that leads to fundamental advances in our understanding. Science and technology support one another. The importance of the technology development activities has not been lost on our international competitors. We are meeting the competition through our own industry-led partnerships. We should not abandon them.

Like any portfolio, the mix of R& D activities must reflect a balance between long-term and short-term goals. Good research and development is like a fruit tree; it must be planted years before it can be harvested. Thus, although the private sector does a good job of planting short-term crops, there is insufficient incentive in the marketplace to engage in the development of long-term, higher risk enabling.

The majority of the R& D in which American businesses invest offer strong promises of quick return -- in other words, less risky, product-oriented and bottom-line effective projects applauded by the Chief Operating Officer. Good for business in the short term, but lacking the long-range scope of high-risk but high-payoff technologies that American business must develop to be competitive in the future.

Third, we must examine the extent to which technology, once developed, is actually available to those who can build our nation's economic strength. This goal, of bringing technology to users who can make it work for our country, is as American as the agricultural extension service, perhaps the most successful governmental technology program in our history. Today, that goal is being served through our Manufacturing Extension Partnership, which brings to our nation's small and medium-sized manufacturers access to information resources, and expertise on modern manufacturing technologies and production processes which they need to remain competitive.

Some have argued that more generalized incentives for research and development -- such as R&E tax credits -- are more effective than the Advanced Technology Program (ATP) at encouraging private sector research. I want to emphasize once again that there is no one policy or program that ensures competitive success. The R&E tax credit is an important tool for encouraging greater private sector investment in research and development. That is why the Clinton Administration has supported making the R&E tax credit permanent. However, the R& E tax credit does not differentiate between investments directed toward short-term product delivery and longer term, higher risk investments that will yield products fifteen or twenty years into the future. We need both of these tools as part of our pro- innovation strategy.

Our national capability to engage successfully in international competition is dependent upon our national technological prowess. Where government should get out of the way, we will. Where government should work in partnership with the private sector, we must do so. Any other course would be to forego a critical element of national competitiveness.

Continued Testimony of Secretary Ron Brown

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