[CRS Issue Brief for Congress]

89056: Cooperative R&D: Federal Efforts to Promote Industrial Competitiveness

Updated December 2, 1996

Wendy H. Schacht
Science Policy Research Division

CONTENTS

SUMMARY

MOST RECENT DEVELOPMENTS

BACKGROUND AND ANALYSIS

Rationale
Joint Industrial Research
Industry-University Cooperative Efforts
Federal Laboratory-Industry Interaction
Federal Initiatives in Cooperative R&D
Issues
Development
Manufacturing
Defense vs. Civilian Support
Access by Foreign Firms
Direct vs. Indirect Support

LEGISLATION


SUMMARY

In response to the foreign challenge in the global marketplace, the United States Congress has explored ways to stimulate technological advancement in the private sector. To increase the competitiveness of American industry and to encourage the generation of new products, processes, and services, the government has supported various efforts to promote cooperative research and development activities among industry, universities, and the federal R&D establishment. The issues before Congress are whether joint ventures contribute to industrial competitiveness and what role, if any, the government has in facilitating such arrangements.

Cooperative ventures are intended to accommodate the strengths and responsibilities of all sectors involved in innovation and technology development. Academia, industry, and government often have complementary functions. Joint projects allow for the sharing of costs, risks, facilities, and expertise.

Cooperative activity covers various different institutional and legal arrangements including industry-industry, industry-university, and industry-government efforts. Proponents of joint ventures argue that they permit work to be done which is too expensive for one company to support and allow for R&D which crosses traditional boundaries of expertise and experience. They also make use of existing, and support the development of new, resources, facilities, knowledge, and skills. Opponents argue that it dampens competition necessary for innovation. Federal efforts to encourage cooperative activities include the National Cooperative Research Act; the National Cooperative Production Act; tax changes permitting credits for industry payments to universities for R&D and deductions for contributions of equipment used in academic research; and amendments to the patent laws vesting title to inventions made under federal funding in universities. Technology transfer from the government to the private sector is facilitated by several laws. In addition, there are various ongoing cooperative programs supported by various federal departments and agencies.

Given the increased popularity of cooperative programs, questions might be raised as to whether they are meeting expectations. It may be too soon to determine the effectiveness of the cooperative R&D venture as a mechanism to increase technological advancement in the United States. There is often a long time lag between research and the availability of a product, process, or service. Many of the cooperative activities fostered by the federal government are of recent origin and therefore have not had sufficient time to generate measurable results. However, raising certain issues might serve to develop a framework for addressing future, near-term decisions concerning technology development and cooperative R&D. These include questions about the emphasis on cooperative ventures in research rather than in technology development; cooperative manufacturing; defense vs. civilian support; and access by foreign companies.


MOST RECENT DEVELOPMENTS

The promotion of cooperative research and development among industry, universities, and the federal R&D establishment is part of President Clinton's articulated technology policy. In the 103rd Congress, various laws supplemented this approach and augmented support for various cooperative efforts including technology transfer from federal laboratories, as well as the Advanced Technology Program (ATP) and the Manufacturing Extension Partnership (MEP) of the Commerce Department, National Institute of Standards and Technology (NIST). However, many of these efforts were revisited in the 104th Congress given the Republican majority's statements in favor of (1) indirect measures such as tax policies, intellectual property rights, and antitrust laws to promote technology development; (2) increased government support for basic research; and (3) decreased direct federal funding for private sector technology initiatives. No FY1996 authorizing legislation for these Commerce Department efforts was enacted. The President vetoed the original FY1996 appropriations bill, in part, because it contained no support for ATP. However, the final version, P.L. 104-134, provided the Advanced Technology Program with $221 million and $80 million for Manufacturing Extension. The President's FY1997 budget request included $105 million for the MEP and $345 million for ATP. The House Budget Resolution for the this fiscal year recommended elimination of these programs, and again there was no authorizing legislation. The Omnibus Consolidated Appropriations Act (P.L. 104-208) provides $225 million for ATP and $99.9 million for MEP. Technology transfer at the Department of Energy, which has been a line item in the agency's budget, received FY1996 appropriations of $18 million for the energy research office (decreasing from $57 million) and $160 million for defense programs (down from $229 million). In this session, P.L. 104-206, which appropriates FY1997 funds, no longer contains a line item for the non-defense energy programs, but does offer programmatic support for these activities. In the defense portion of the appropriations, $59.4 million is provided for technology transfer. P.L. 104-201 authorizes DOE defense technology transfer at $49.4 million. In addition, the 104th Congress passed P.L. 104-113, the Technology Transfer Improvements and Advancement Act, to clarify the dispensation of intellectual property rights under a CRADA negotiated between federal laboratories and the private sector. P.L. 104-188, the Small Business Job Protection Act, reinstates the research and experimentation tax credit from July 1 to May 31, 1997.


BACKGROUND AND ANALYSIS

Rationale

As concern grows over competition from foreign firms, the U.S. Congress has increasingly looked for ways the federal government can stimulate technological innovation in the private sector. This technological advancement is critical in that it contributes to economic growth and long term increases in our standard of living. New technologies can create new industries and new jobs; expand the types and geographic distribution of services; and reduce production costs by making more efficient use of resources. The development and application of technology also plays a major role in determining patterns of international trade by affecting the comparative advantages of industrial sectors. Since technological progress is not necessarily determined by economic conditions, it can have effects on trade independent of shifts in macroeconomic factors that may affect the marketplace.

Joint ventures are an attempt to facilitate technological advancement within the industrial community. Academia, industry, and government can play complementary roles in technology development. While opponents argue that cooperative ventures stifle competition, proponents assert that they are designed to accommodate the strengths and responsibilities of these sectors. Collaborative projects attempt to utilize and integrate what the participants do best and to direct these efforts toward the goal of generating new goods, processes, and services for the marketplace. They allow for shared costs, shared risks, shared facilities, and shared expertise.

The lexicon of current cooperative activity covers various different institutional and legal arrangements. These ventures might include industry-industry joint projects involving the creation of a new entity to undertake research, the reassignment of researchers to a new effort, and/or hiring new personnel. Collaborative industryuniversity efforts may revolve around activities in which industry supports centers (sometimes cross-disciplinary) for research at universities, funds individual research projects, and/or exchanges personnel. Cooperative activities with the federal government might include projects that use federal facilities and researchers, federal funding for industry-industry or industry-university efforts, or financial support for centers of excellence at universities to which the private sector has access.

There are many different types of cooperative arrangements. The flexibility associated with this concept can allow for the development of institutional and organizational plans tailored to the specific needs of the particular project. Issues of patent ownership, disclosure of information, licensing, and antitrust are to be resolved on an individual basis within the general guidelines established by law governing joint ventures.

Collaborative ventures can be structured either "horizontally" or "vertically." The former involves efforts in which companies work together to perform research and then use the results of this research within their individual organizations. The latter involves activities where researchers, producers, and users work together. Both approaches are seen as ways to address some of the perceived obstacles to the competitiveness of American firms in the marketplace.

Joint Industrial Research

Traditionally, the federal government has funded research and development to meet mission requirements; in areas where the government is the primary user of the results; and/or where there is an identified need for R&D not being performed in the private sector. Most government support is for basic research which is often long-term and highly risky for individual companies; yet research can be the foundation for breakthrough achievements which can revolutionize the marketplace. Studies have shown that inventions based on R&D are the more important ones. However, thesocietal benefits of research tend to be greater than those that can be captured by the firm performing the work. Thus the rationale for federal funding of research in industry.

The major emphasis of legislative activity has been on augmenting research in the industrial community. This focus is reflected in efforts to encourage companies to undertake cooperative research arrangements and expand the opportunities available for increases in research activities. Collaboration permits work to be done which is too expensive for one company to fund and also allows for R&D that crosses traditional boundaries of expertise and experience. A joint venture makes use of existing, and supports development of new resources, facilities, knowledge, and skills.

The concentration on increased research as a prelude to increased technological advancement was based upon the "pipeline model" of innovation. This process was understood to be a series of distinct steps from an idea through product development, engineering, testing, and commercialization to a marketable product, process, or service. Thus increases at the beginning of the pipeline -- in research -- were expected to result in analogous increases in innovation at the end.

However, this model is no longer considered valid. Innovation is rarely a linear process and new technologies and techniques often occur that do not require basic or applied research or development. Most innovations are actually incremental improvements to existing products and processes. In some areas, particularly biotechnology, research is closer to a commercial product than this conception would indicate. In others, the differentiation between basic and applied research is artificial. The critical factor is the commercialization of the technology. Economic benefits accrue only when a technology or technique is brought to the marketplace where it can be sold to generate income and/or applied to increase productivity.

In recent years, it has been increasingly common to find that foreign companies are commercializing the results of U.S. funded research at a faster pace than American firms. In the rapidly changing technological environment, the speed at which a product, process, or service is brought to the marketplace is often a crucial factor in its competitiveness. The recognition that more than research needs to be done has lead to other approaches at cooperative efforts aimed at expediting the commercialization of the results of the American R&D endeavor. These include industry-university joint activities, use of the federal laboratory system by industry, and industry-industry development efforts where manufacturers, suppliers, and users work together.

Industry-University Cooperative Efforts

Industry-university cooperation in R&D is one important mechanism intended to facilitate technological innovation. Traditionally, universities perform much of the basic research integral to certain technological advancements. They are generally able to undertake fundamental research because it is part of the educational process and because they do not have to produce for the marketplace. The risks attached to work in this setting are fewer than those in industry where companies must earn profits. Universities also educate and train the scientists, engineers, and managers employed by companies.

Academic institutions do not have the commercialization capacity available in industry and necessary to translate the results of research into products and processes that can be sold in the marketplace. Thus, if the work performed in the academic environment is to be integrated into goods and services, a mechanism to link the two sectors must be available. Prior to World War II, industry was the primary source of funding for basic research in universities. This financial support helped shape priorities and build relationships. However, after the war the federal government supplanted industry as the major financial contributor and became the principal determinant of the type and direction of the research performed in academic institutions. This situation resulted in a disconnection between the university and industrial communities. Because industry and not the government is responsible for commercialization, the difficultiesin moving an idea from the research stage to a marketable product or process appear to have been compounded.

Efforts to encourage increased collaboration between the academic and industrial sectors might be expected to augment the contribution of both parties to technological advancement. Company support for research within the university provides additional funds and information on the concerns and direction of industry. For many companies, access to expertise and facilities outside of the firm expands or complements available internal resources. Yet, such cooperation should not necessarily be seen as a panacea. As pointed out in a September-October 1991 Research-Technology Management article, Alan Heininger, Corporate Vice President of Monsanto, noted that the firm's 12-year cooperative venture with Harvard and Washington universities has not resulted in any new product ideas.

Federal Laboratory-Industry Interaction

The federal government can share its extensive facilities, expertise, knowledge, and new technologies with partners in a cooperative venture. In certain cases, the government laboratories have scientists and engineers with experience and skills, as well as equipment, not available elsewhere. The government also has a vested interest in technology development. It does not have the mandate or resources to manufacture goods but has a stake in the availability of products and processes to meet mission requirements. In addition, technological advancement contributes to the economic growth vital to the health and security of the Nation.

Collaboration between government laboratories and industry is not, however, just a one way street. In several technological areas, particularly electronics and computer software, the private sector is more advanced in technologies important to the national defense and welfare of this country. Interaction with industry offers federal scientists and engineers valuable information to be used within the government R&D enterprise.

Federal Initiatives in Cooperative R&D

The cooperative venture concept is not new. In the early 1970s, the National Science Foundation established its Industry-University Cooperative Research Centers program. The Electric Power Research Institute, a research organization supported by the electric power utilities, has been in operation since 1973. In the private sector, the Microelectronics and Computer Technology Corporation (MCC), which performs research for its member firms, and the Semiconductor Research Corporation (SRC), which funds research in universities, were created in the early 1980s. The difference today is the number of projects and the scope of legislative activity designed to promote cooperative ventures.

Faced with pressures from foreign competition, the government's interest appears to be expanding beyond that of funding R&D, to meeting other critical national needs including the economic growth that flows from new commercialization in the private sector. While acknowledging that the commercialization of technology is the responsibility of the business community, in the past several years the government has attempted to stimulate innovation and technological advancement in industry. These activities often involve the removal of barriers to technology development in the private sector, thereby permitting market forces to operate and the provision of incentives to encourage increased innovation related efforts in industry. Cooperative R&D efforts are a part of both these trends.

The National Cooperative Research Act (P.L. 98-462) is designed to encourage companies to undertake joint research which is typically long-term, risky, and often too expensive for one company to finance. This legislation clarifies the antitrust laws and requires that the "rule of reason" standard be applied in determinations of violations of these laws; that cooperative research ventures are not to be judged illegal "per se". It also eliminates treble damage awards for those research ventures found in violation of the antitrust laws if prior disclosure (as defined in the law) has been made. In addition, P.L. 98-462 makes some changes in the way attorney fee awards are made to discourage frivolous litigation against joint research ventures without simultaneously discouraging suits of plaintiffs with valid claims. Several hundred joint ventures have filed with the Justice Department since this law was enacted.

P.L. 103-42, the National Cooperative Production Amendments Act of 1993, amends the National Cooperative Research Act by, among other things, extending the original law's provisions to joint manufacturing ventures. These provisions are only applicable, however, to cooperative production when (1) the principal manufacturing facilities are "located in the United States or its territories, and (2) each person who controls any party to such venture...is a United States person, or a foreign person from a country whose law accords antitrust treatment no less favorable to United States persons than to such country's domestic persons with respect to participation in joint ventures for production."

The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418) created the Advanced Technology Program (ATP) at the Department of Commerce's National Institute of Standards and Technology. This program provides seed funding, matched by private sector investment, to companies or consortia comprised of universities, companies, and/or government laboratories for the development of generic technologies that have broad application across industrial sectors. Eleven initial R&D programs were selected for funding, almost half of which involved consortia. Twenty-seven awards were made to programs in the second year; approximately one third were consortia. In December 1992, 21 new ATP awards were made, including three joint ventures. Thirty additional projects were funded in 1993, and, in October 1994, 41 awards were made in four key technology areas: information infrastructure for healthcare; tools for DNA diagnostics; component-based software; and computerintegrated manufacturing for electronics. Fourteen are cooperative efforts. In November 1994, 47 additional awards were made in the general competition and in the area of manufacturing composite structures. Twenty-four involve collaborative R&D. Of the 24 awards announced on July 13, 1995, 35% of the projects in the general competition were joint ventures and 29% in the focused competition. The following month 21 additional awards were made of which 9 were cooperative efforts. In early September, another 44 grants were awarded including 19 joint ventures. Later in that month, 10 more awards were made of which three were to cooperative efforts. On January 25, 1996, an additional four projects received awards; three involved multiple firms. In May, NIST announced that it would provide between $20 and $25 million to support another general competition. (For more information see CRS Report 95-36 SPR.)

Appropriations for the Advanced Technology Program were $35.9 million in FY1991, $47.9 million in FY1992, and $67.9 million in FY1993. FY1994 appropriations expanded significantly to $199.5 million and even further to $431 million in FY1995. However, P.L. 104-6, the DOD Emergency Supplemental Appropriations and Rescissions Act, rescinded $90 million of this amount. The President's FY1996 budget request for ATP was $490.9 million. The House did not authorize any FY1996 funding for this program, while on the Senate side, S. 1141, which was reported from the Committee on Commerce, Science, and Transportation, funded NIST Industrial Technology Services (ATP, Manufacturing Extension, and Quality Awards) at $427 million but did not break down the allocation between programs. With respect to appropriations, H.R. 2076, which was passed by the Congress but vetoed by the President, provided no support for ATP. However, the final appropriations legislation, P.L. 104-134, funds the Advanced Technology Program at $221 million for FY1996. The President's FY1997 budget request for this activity is $345 million. The Omnibus Civilian Science Act (H.R. 3322), which passed the House on May 30, 1996, did not authorize any funding for ATP. However, the Omnibus Consolidated Appropriations Act (P.L. 104-208) provides financing of $225 million for this program without any restrictions on the use of the funds.

Several laws have attempted to facilitate industry-university cooperation. Title II of the Economic Recovery Tax Act of 1981 (P.L. 97-34) provided, in part, a temporary 25% tax credit for 65% of all company payments to universities for the performance of basic research. Firms were also permitted a larger tax deduction for charitable contributions of equipment used in scientific research at academic institutions. The Tax Reform Act of 1986 (P.L. 99-514) kept this latter provision, but reduced the credit for university basic research to 20% of all corporate expenditures for this work over the sum of a fixed research floor plus any decrease in non-research giving.

The 1981 Act also provided an increased charitable deduction for donations of new equipment by a manufacturer to an institution of higher education. This equipment must be used for research or training for physical or biological sciences within the United States. The tax deduction was equal to the manufacturer's cost plus one-half the difference between the manufacturer's cost and the market value, as long as it does not exceed twice the cost basis.

This Research and Experimentation Tax Credit expired in June 1992 when an extension contained in H.R. 11, the Enterprise Zone Tax Act, was vetoed by former President Bush. The Omnibus Budget Reconciliation Act, P.L.103-66, reinstated the credit through July 1995 and made it retroactive to the date of its previous expiration. The credit again expired. However, P.L. 104-188, the Small Business Job Protection Act, reinstates the tax credit for application between July 1, 1996 and May 31, 1997. Amendments to the patent and trademark laws contained in P.L. 96-517 also were designed to foster interaction between academia and the business community. This law provides, in part, for title to inventions made by contractors receiving federal R&D funds to be vested in the contractor if it is a university, not-for-profit institution, or a small business. Certain rights to the patent are reserved for the government and these organizations are required to commercialize within a predetermined and agreed upon time frame. Providing universities with patent title is expected to encourage licensing to industry where the technology can be manufactured or utilized, thereby creating a financial return to the academic institution. University patent applications and licensing have increased since this law was enacted. (For more discussion on this topic see: CRS Report 94-501, The Bayh-Dole Act: Patent Policy and the Commercialization of Technology.)

Many cooperative industry-industry or industry-university programs are supported and/or organized by the federal departments and agencies. These include, but are not limited to, the National Science Foundation's Engineering Research Centers, the approximately 40 Industry-University Cooperative Research Programs, and the more recent Science and Technology Centers. A program to match parties interested in cooperative small business manufacturing technology has been created in the Department of Commerce.

While most of these legislative activities are intended to facilitate technological advance across industries, there have been several recent efforts to provide direct assistance for cooperative ventures in a particular industry. These initiatives are based, in part, on national defense and economic security concerns over specific technologies that are, or are perceived as, potentially critical to a wide range of businesses. Among the joint ventures, funded primarily by the Department of Defense, are SEMATECH (a joint private sector semiconductor manufacturing research effort), the National Center for Manufacturing Sciences, and the steel initiative. In addition, DOD supports the Software Engineering Institute and the Department of Energy assists in the Partnership for a New Generation Vehicle initiative which -- among other things -- encourages joint R&D between federal laboratories and private firms leading to commercialization.

Cooperation between industry and the federal R&D enterprise is another facet of the effort to increase industrial competitiveness through joint ventures. The federal government funded approximately $70 billion for research and development in FY1995 to meet the mission requirements of the federal departments and agencies. This has led to many technologies and techniques, as well as to the generation of knowledge and skills, which may have applications beyond their original intent. To foster their development and commercialization in the industrial community, various laws have established institutions and mechanisms to facilitate the movement of ideas and technologies between the public and private sectors.

The Stevenson-Wydler Technology Innovation Act (P.L. 96-480), as amended by the Federal Technology Transfer Act (P.L. 99-502) and the Department of Defense FY1990 Authorizations (P.L. 101-189), provides, in part, a legislative mandate for technology transfer from the federal government to the private sector, establishes a series of offices in the agencies and/or laboratories to administer transfer efforts, provides incentives for federal laboratory personnel to actively engage in technology transfer, and creates new contractual means for industry to work with the laboratories including cooperative research and development agreements. P.L. 104-113, the National Technology Transfer and Advancement Act, attempts to clarify existing policy with respect to the dispensation of intellectual property under a CRADA by amending the StevensonWydler Act. (For additional information see: CRS Issue Brief 85031, Technology Transfer: Use of Federally Funded Research and Development.)

The Omnibus Trade and Competitiveness Act (P.L. 100-418) established a program of regional Centers for the Transfer of Manufacturing Technology (now part of the Manufacturing Extension Partnership effort) to facilitate the movement to the private sector of knowledge and technologies developed under the aegis of the National Institute of Standards and Technology. In addition, the law required that NIST provide technical assistance to state technology extension programs in an effort to improve private sector access to federal technology. (For additional Information see: CRS Issue Brief 91132, Industrial Competitiveness and Technological Advancement: Debate over Government Policy.) Government-industry collaboration is further facilitated by a provision of the FY1991 National Defense Authorization Act (P.L. 101-510) which amends Stevenson-Wydler to allow government agencies and laboratories to develop partnership intermediary programs to augment the transfer of laboratory technology to the small business community. The FY1993 Defense authorization and appropriation legislation augmented cooperative efforts by creating and funding various initiatives in dual-use and critical technology development (P.L. 102-396 and P.L. 102- 484). A pilot program under the Small Business Development Act of 1992 facilitates cooperative work between small companies and federal labs leading to the commercialization of new technology.

Issues

It is not yet known whether federal support of cooperative ventures signals a long-term commitment to the development of technology. However, statements issued by President Clinton and Vice President Gore (see: A Vision of Change for America and Technology for America's Economic Growth, A New Direction to Build Economic Strength) indicate that the Administration will actively promote joint development activities as well as joint research. The proposed initiatives discussed above are part of the Administration's strategy to provide both direct and indirect federal support for expanded cooperative R&D leading to commercialization. Given the federal deficit, it is unlikely that large sums of government money will be forthcoming for such efforts in the future. However, other actions may reflect federal concern with the process of technological advancement. The use of the extensive government R&D system, with its expensive state-of-the-art facilities, can provide both academia and industry with resources that may be beyond their financial ability. And despite the often short-term focus of budget decisions, federal funds and non-monetary contributions to cooperative ventures may be leveraged by contributions from state and local agencies and the private sector.

If the proliferation of programs is any indication, state and local jurisdictions have been in the forefront of cooperative endeavors. Many state and local economic development activities focus on increasing innovation and the use of technology in the private sector. Instead of competing for companies to relocate, many of these jurisdictions now see additional benefits accruing from the creation of new firms and the modernization of existing ones through the application of new technology. Various states and localities are attempting to foster an entrepreneurial climate by undertaking the development and support of a variety of programs to assist existing high technology businesses, to promote the establishment of new companies, and to facilitate the use of new technologies and processes in traditional industries. While these efforts vary by state and locality, many of them include industry-university-government cooperation. Several of the President's proposals for increasing cooperative ventures build upon existing state and local activities in these areas.

Proponents of cooperative work argue that certain benefits are associated with joint ventures. The increased popularity of this concept, and the increasing federal support for this approach, however, might suggest some questions be raised to assess whether cooperative ventures are meeting expectations. Are there drawbacks to this effort in general and in specific instances? Are cooperative projects addressing the problems associated with the competitiveness of U.S. industry? Are they moving technology development in the right direction?

It is perhaps too soon to determine whether the cooperative R&D venture is an effective, or the most effective, mechanism to increase technological advancement. The time between research and the availability of a marketable product or process is generally thought to be from 10-15 years; less in those areas such as biotechnology where research and commercial commodity tend to be more closely linked. Many of the cooperative activities fostered by the federal government are of recent origin and therefore have not had sufficient time to generate measurable results. However, raising certain issues and/or questions might serve to develop a framework within which future, near term decisions concerning technology development and cooperative R&D might be addressed.

It might be expected that an increasing number of industries and/or companies will come to the federal government for assistance in supporting cooperative R&D activities. Despite opposition by some to what has been described as "picking winners or losers," various sectors of the government have chosen to provide funding for cooperative ventures in specific industries while requiring that the private sector generate matching funds. At the same time, there are programs and policies that attempt to facilitate cooperative efforts across industry in general. Decisions might need to be made whether one approach is better than the other, or if both should continue.

If part of government policy is to respond to individual industry requests for assistance, Congress may wish to consider developing procedures to select between industries and/or companies competing for limited federal funds. Can, and should, federal guidelines be established? In addition, is it possible to determine at this time what type of cooperative ventures are the most effective and efficient? Is there, in fact, one best model or should each venture be tailored to the specific situation? And finally, what are the implications of these decisions for policymaking in Congress?

Development

As noted above, innovation is a dynamic process that can involve idea origination, research, development, commercialization, and diffusion throughout the economy. However, it is not a linear process and an innovation may occur without developing through these steps. In fact, most innovations are actually incremental changes in existing goods and services in response to unmet market needs. The most crucial factor is the availability or use of the technology or technique in the marketplace.

The commercialization and diffusion of products and processes often stand out as significant problems in terms of the ability of U.S. industries to compete. Recently, firms in several other countries, particularly Japan and the East Asian newly industrializing countries, have been more successful in commercializing the results of R&D. Often this is research which was initially performed in the United States, as evidenced by the VCR and semiconductor chips.

Basic research and the pursuit of science are done successfully in the United States as indicated, in part, by the number of Nobel prizes awarded to Americans. However, excellence in science does not necessarily assure leadership in world markets. In Science and Product, Gomory and Schmitt noted that the United States was the world's premiere economic power in the 1920s when this nation was far from being in the forefront of science. Instead, market leadership is significantly affected by the development and application of technology to make the goods and services the consumers want to purchase.

Thus, questions may be raised as to whether programs and policies encouraging increased cooperative research, without concomitant efforts to facilitate the development and commercialization of technologies and techniques, will be an effective mechanism to increase the competitiveness of American industry. Do we need to know more about how to encourage the application of the research resulting from joint ventures in the manufacture of products and processes and in the delivery of services? Do these cooperative activities include mechanisms to facilitate the effective and timely transfer of the results back to the companies where they can be developed into goods for the marketplace? Since the major portion of the costs associated with bringing out a new product occur at the development and marketing stages, not in the research phase, should there be additional government incentives to encourage companies to spend funds for commercialization in addition to research? (For additional discussion see: CRS Report 96-90, U.S. Industrial R&D: Trends and Analysis.)

Manufacturing

It is in the manufacturing arena where American companies appear to be the most vulnerable to foreign competition. Process technologies (those used in manufacturing) can significantly lower the costs of production and increase the quality of goods and services. In Global Competition, the President's Commission on Industrial Competitiveness concluded that "... competitive success in many industries today is as much a matter of mastering the most advanced manufacturing processes as it is in pioneering new products."

The costs associated with the development and purchase of new manufacturing equipment are high. This is particularly true for the 350,000 small companies which make up a major segment of the manufacturing community. Several of the changes to the tax law contained in P.L. 99-514 may have compounded the problem. For example, some studies have indicated that the elimination of the investment tax credit initially slowed capital spending on robotics. Alterations in depreciation allowances have tended to limit the incentive to purchase capital goods, including automated technology. If firms are not buying new equipment, there is little motivation to invest in the development of new process technologies.

Several of the cooperative efforts supported by the federal government address these manufacturing concerns. The SEMATECH program, the Manufacturing Technology program of the Department of Defense, the Advanced Manufacturing Technical Initiative of the Department of Energy, and the regional Manufacturing Technology Centers, while all different, are examples of government activities devoted to facilitating the development of new manufacturing techniques and their use in industry.

Considering the importance of manufacturing, the existing cooperative programs may not be sufficient to increase the competitiveness of American industry. Are there more effective types of joint ventures? Cooperative efforts, where resources could be pooled and the equipment shared, may be one way to improve the manufacturing capability of U.S. firms, large or small. Will joint manufacturing prove to be a viable option? Should existing cooperative manufacturing programs in certain agencies be expanded or should new efforts in other departments be developed? Should one government agency have the lead in policy determinations; if so, which federal department?

Defense vs. Civilian Support

Many of the industries interested in cooperative ventures with federal financial support have approached the Department of Defense and, to a lesser extent, the Department of Energy's Defense Programs because these agencies have the greatest amount of available resources and/or funding. They also tend to have the expertise to operate large-scale programs and maintain close ties with certain industrial sectors which could be encouraged to increase cooperation. In addition, both DOD and DOE have a vested interest in the availability of certain technologies which could be provided by a healthy domestic commercial market. However, questions remain whether sponsorship of certain cooperative ventures by DOD and the Department of Energy's defense-related programs will lead to increased commercialization in the civilian marketplace.

Critics argue that defense spending is not an effective mechanism to increase industry's ability to innovate and develop new technologies. Much of the research and development in the defense arena may be too specialized, overdesigned, and/or too costly to have value for commercial markets. The R&D also tends to concentrate on weapon systems and other defense hardware rather than on process technologies that are often necessary to improve manufacturing productivity. One reason cited for the competitive problems of the machine tool industry was its focus on defense needs rather than on the commercial market which is larger in the aggregate.

On the other hand, the U.S. commitment to military R&D has contributed to a favorable balance of trade in the defense and aerospace industries. In the SEMATECH effort, the purpose of DOD support is to facilitate the commercial development of technologies with critical defense applications. The companies involved in SEMATECH are experienced semiconductor manufacturers and are knowledgeable about the markets' needs and operations. Thus, while the work performed by this semiconductor consortium may be partially funded by the Defense Advanced Research Project Agency, it is designed to result in new products and processes in the civilian marketplace where both defense and commercial demand can be met.

The issue of cooperative work between the Defense Department and the private sector leading to commercial technologies is being addressed in the former Technology Reinvestment Project and new Dual-Use Partnership Project. In addition, the Department of Energy is expanding its technology transfer and cooperative R&D activities in its Defense Program laboratories in conjunction with an expansion of all DOE collaborative efforts with industry. (For more information see CRS Report 93-844, Department of Energy Laboratories: A New Partnership With Industry?)

Access by Foreign Firms

With worldwide communications systems, it is virtually impossible to prevent the flow of scientific and technical information. What is critical to competitiveness is the speed at which this knowledge is used to make products, processes, and services for the marketplace. However, it appears that many foreign firms are willing and able to take the results of research performed both in the United States and their own countries and rapidly make high quality commercial goods. Many of these companies are purchasing American businesses or establishing U.S. subsidiaries to access American expertise. With the increased activity in research consortia, particularly those with federal support, questions might be asked as to whether or not foreign companies should or could be barred from access to the results. A larger issue is how to define an "American company." Is it determined by majority ownership, manufacturing, location, value added to the U.S. economy, or by some other definition? In addition, since technology is most effectively transferred by person-to-person interaction, would cooperative activities between American industry and foreign firms produce an outflow of information which could be used to increase competitive pressures?

Direct vs. Indirect Support

Government efforts to facilitate cooperative ventures have included both indirect supports and direct federal funding. Indirect measures include such things as tax policies, intellectual property rights, and antitrust laws that create incentives for the private sector. Other initiatives include government financing (on a cost shared basis) of joint efforts such as the Advanced Technology Program and Manufacturing Extension Partnerships. In the past, participants in the legislative process generally did not make definite (or exclusionary) choices between these two approaches. However, given the philosophies embodied in the House Republican Contract with America and the associated budget proposals, these activities may well be revisited in the 104th Congress. For example, early statements of intent to eliminate the Advanced Technology Program, funding for flat panel displays, and agricultural extension may reflect concern about the role of government in developing commercial technologies and potentially result in major reductions in direct federal financing of such public-private partnerships. While it is not yet clear whether this agenda will prevail, it implies a significant change from the past. (For more information see CRS Report 95-50, The Federal Role in Technology Development.)


LEGISLATION

P.L. 104-6, H.R. 889
Makes supplemental appropriations and rescinds certain budget authority including $90 million from the Advanced Technology Program of the Commerce Department's National Institute of Standards and Technology, among other things. Introduced February 10, 1995; referred to Committee on Appropriations. Passed House, amended, February 22, 1995. Passed Senate, amended, March 16, 1995. House and Senate agreed to conference report on April 6 and the bill was signed into law April 10, 1995.

P.L. 104-19, H.R. 1944
Makes supplemental appropriations and rescinds certain budget authority, including $16.3 million from the MEP and Quality Award program at the National Institute of Standards and Technology. Introduced June 28, 1995; referred to Committees on Appropriations; and Budget. Passed House, amended, June 29. Passed Senate July 21, 1995. Signed into law July 27, 1995.

P.L. 104-46, H.R. 1905
A bill to appropriate funding for the Department of Energy. Decreases appropriations for the technology transfer activities of the DOE weapons laboratories from $219 million in FY1995 to $25 million for FY1996. Introduced June 20, 1995; referred to Committee on Appropriations. Reported June 20, 1995. Passed House, amended, July 12 and received in Senate July 13. Referred to Committee on Appropriations. Ordered reported, amended, July 27. Passed Senate, amended (including $229 million for technology transfer), August 1, 1995. Conference report filed October 26. House and Senate agreed to conference report October 31 and the bill was signed into law November 13, 1995.

P.L. 104-113, H.R. 2196
Technology Transfer Improvements and Advancement Act. A amends the StevensonWydler Act with respect to inventions made under CRADAs, and for other purposes. Introduced August 4, 1995; referred to Committee on Science. Reported, amended, December 7, 1995. Passed House, amended, December 12, 1995. Received in Senate December 13; referred to Committee on Commerce, Science, and Transportation. Passed Senate, amended, February 7, 1996. House agreed to Senate amendment on February 27 and signed into law March 7, 1996.

P.L. 104-134, H.R. 3019
Provides FY1996 appropriations for the National Institute of Standards and Technology, among other things. Funding for the Advanced Technology Program is $221 million while $80 million is for support of the Manufacturing Extension Partnership. Introduced March 5, 1996; referred to Committees on Appropriations and Budget. Passed House, amended, March 7 and passed Senate, amended, March 19, 1996. House and Senate agreed to conference report April 25, 1996. Signed into law April 26, 1996.

P.L. 104-188, H.R. 3448
Small Business Job Protection Act. Reinstates the research and experimentation tax credit from July 1, 1996 through May 31, 1997. Introduced May 14, 1996; referred to the House Committee on Ways and Means. Passed House, amended, May 22 and referred to the Senate Committee on Finance on May 24. Passed the Senate, amended, on July 9, 1996. Conference held July 30. On August 2, 1996 both the House and Senate agreed to the Conference report. Signed into law on August 20, 1996.

P.L. 104-201, H.R. 3230
Authorizes FY1997 funding for the defense programs of the Department of Energy, among other things. Introduced April 15, 1996; referred to Committee on National Security. Reported, amended, May 7. Passed House, amended, May 15, 1996 and sent to Senate. On July 10, the Senate substituted the language of S. 1745 and passed the bill, amended. Conference report filed on July 30. The House agreed to the Conference report on August 1, 1996. The Senate agreed to the Conference report on September 10 and the bill was signed into law on September 23, 1996.

P.L. 104-206, H.R. 3816
Energy and Water Appropriations for FY1997. Provides programmatic support for nondefense technology transfer in the Department of Energy and appropriates $54.4 million for technology transfer and education in the defense-related programs of that agency. Introduced July 16, 1996; referred to Committee on Appropriations. Committee reported an original measure July 16, which passed House, amended, July 25, 1996. Received in Senate the following day. On July 30, 1996 the Senate incorporated this bill, as amended, into H.R. 3816 and passed the latter bill in lieu. The House agreed to the Conference report on September 12; the Senate agreed on September 17, 1996. The bill was signed into law on September 30, 1996.

P.L. 104-208, H.R. 3610 Omnibus Consolidated Appropriations Act. Provides FY1997 appropriations of $225 million for the Advanced Technology Program and $99.9 million for the Manufacturing Extension Partnership at the National Institute of Standards and Technology, Department of Commerce, among other things. This funding was added to the conference report on H.R. 3610 (H. Rept. 104-863). The House approved the report on September 28; the Senate agreed on September 30, 1996. The bill was signed into law by the President on September 30, 1996.