R&D Partnerships: Government-Industry Collaboration

R&D Partnerships: Government-Industry Collaboration

95-499 SPR
Updated November 17, 1998
CRS Report for Congress
Received through the CRS Web
R&D Partnerships: Government-Industry
Collaboration
Wendy H. Schacht
Specialist in Science and Technology
Science, Technology, and Medicine Division
Summary
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Over the past 15 years, congressional initiatives have created programs and policies
encouraging the establishment of government-industry-university research and
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development (R&D) partnerships to stimulate technological innovation and economic
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growth. Efforts to eliminate several of these activities during the 104th Congress
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reflected opposition to certain programs designed to facilitate the commercialization of
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technology, particularly those involving direct federal funding. Many of the same
questions were raised in the 105th Congress; however, established program continued
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to receive support. Within the context of budget decisions, the 106th Congress is
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expected to again debate the government’s role in promoting collaborative ventures
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focused on generating new products and processes for the marketplace.
Policy Development
There were several attempts during the 104th Congress, and to a lesser extent in the
105th Congress, to terminate government programs that provide direct, and sometimes
indirect, federal assistance to facilitate the commercialization of technology by the private
sector. Such efforts were based upon the rationale articulated in a March 16, 1995 House
Budget Committee statement that argued that while the federal government has a role in
basic research, “... it should not be engaged in applied research.” This was a major
change from various policies supported in the past by both Republicans and Democrats
in Congress and by previous Administrations. Over the past 15 years, federal programs,
mandated by congressional legislation, have acted to expand basic research as well as
encourage industry application of the results of this research.
Traditionally, the U.S. government has extensively funded research and development
to meet the mission requirements of the federal departments and agencies. It also
supports work in areas where there is an identified national need for research, primarily
basic research, not being performed in the private sector. Federal financing is based
principally upon a consensus that while basic research is the foundation for many
Congressional Research Service ˜ The Library of Congress

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innovations, the rate of return to society as a whole generated by investments in such work
is significantly larger than the benefits that can be captured by those performing the
research. This often leads to underinvestment by the private sector.1
In the past, government efforts to expand basic research leading to new technology
development had been based upon a “linear” model of innovation. This theory viewed
technological advancement as a series of sequential steps starting with idea origination
and moving through basic research, applied research, development, commercialization,
and diffusion into the economy. Increases in federal funds in the basic research stage
were expected to result in concomitant increases in new products and processes.
However, the linear concept is no longer considered accurate. Innovations often occur
that do not require new basic or applied research or development; in fact most innovations
are incremental improvements to existing products or processes. In certain areas, such
as biotechnology, the distinctions between basic research and commercialization are small
and shrinking. In others, the differentiation between basic and applied research is
artificial. For the economy, the critical factor is the commercialization of the technology,
the speed at which a product, process, or service is brought to the marketplace. Economic
benefits accrue only when new or improved technologies are sold in the marketplace or
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when a new or improved process can be utilized to increase quality and productivity. It
is widely accepted that technological progress is responsible for up to one-half the growth
of the U.S. economy and is one principal driving force in long-term economic expansion
and increases in the nation’s standard of living.
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The dilemma faced by policymakers in the 1980s was that while the United States
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had a strong basic research enterprise, foreign firms often appeared more adept at taking
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the results of these scientific efforts and making commercially viable products. At times,
U.S. companies competed in the global marketplace against goods and services developed
by foreign industries from research performed in the United States. In 1985, the
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President’s Commission on Industrial Competitiveness (under President Reagan) found
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that “foreign firms have increased the speed with which they adopt and commercialize
technology developed in the United States and they have also improved their ability to
develop technology on their own.”2 In an increasingly interconnected world, it is
extremely difficult to keep technologies and knowledge within domestic borders. Thus,
there was expanded congressional interest in mechanisms to accelerate the development
and commercialization processes in the American industrial community.

By the late 1980s, the changing world order—with changing defense needs,
increased market competition, and the globalization of the economy—led Congress to
reassess the federal contribution to the national science and technology enterprise. The
traditional role of the government in supporting basic research expanded toward
advancing the development of technology to meet other national needs, including the
economic growth that flows from the commercialization and use of new products and
production processes. This approach involves creation of an environment within which
1For a detailed discussion of government initiatives see: Congressional Research Service,
Industrial Competitiveness and Technological Advancement: Debate Over Government Policy,
by Wendy H. Schacht, CRS Issue Brief 91132.
2President’s Commission on Industrial Competitiveness, Global Competition, The New Reality,
Vol. II, Washington, D.C.: G.P.O., 1985, p. 22.

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government-industry-university cooperation is achieved. The idea of such partnerships
reflects the thesis that while commercialization is the responsibility of the private sector,
academia, industry, and government often have complementary functions and can
contribute to the goal of generating new goods and services for the marketplace. Joint
projects allow for the sharing of costs, risks, facilities, and expertise.
A bipartisan legislative approach evolved that was intended to facilitate collaboration
among the three sectors.3 This included the creation and support of various programs that
provide direct federal funding, on a cost-shared basis with the private sector, for
government-industry efforts. The Advanced Technology Program (ATP) of the National
Institute of Standards and Technology (NIST), Department of Commerce, provides
federal seed financing, matched by private sector investment, to companies or consortia
of universities, businesses, and government laboratories for development of pre-
competitive, generic technologies that have potential application within a range of
industries. Awards are made on technical, scientific, and business merit. New selection
requirements encourage joint ventures that include both small and large firms. Also
managed by NIST, the Manufacturing Extension Partnership (MEP) is a program of
regional centers designed to facilitate the movement to the private sector of knowledge
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and technologies developed under the auspices of NIST and other federal agencies in
pursuit of mission requirements. The centers receive at least half their funding from U.S.-
based, non-profit institutions or organizations. The Small Business Technology Transfer
pilot program provides federal support for research proposals that are developed and
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executed cooperatively between a small firm and a scientist in a university, government
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laboratory, or non-profit institution.
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In addition, Congress has enacted various laws that offer indirect measures to
encourage collaborative activities leading to technology commercialization. Included in
this is the research and experimentation tax credit which provides a credit for incremental
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increases in a company’s R&D expenditures as well as for payments to universities for
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basic research. Changes to the antitrust laws are designed to clarify their application in
regard to cooperative research and manufacturing ventures thereby removing certain
barriers to such activities. Other laws facilitating technology transfer and establishing
patent ownership incentives were enacted to stimulate industrial and academic use of the
results of federally-funded R&D. The “Bayh-Dole” Act has been of major significance
to the evolution of cooperative R&D. Providing title to inventions made under federal
financing to small business, university, or non-profit contractors has encouraged
collaborative efforts to further develop products and processes based on these patents and
bring them to the marketplace.4
A New Approach?
The 104th Congress signaled the beginning of a challenge to a significant part of this
approach. The role of government in partnerships was called into question as were
activities that involve federal funding to promote collaborative ventures. Government
3For additional information see: Congressional Research Service, Cooperative R&D: Federal
Efforts to Promote Industrial Competitiveness, by Wendy H. Schacht, CRS Issue Brief 89056.
4See: Congressional Research Service, R&D Partnerships and Intellectual Property: Implications
for U.S. Policy, by Wendy H. Schacht, CRS Report 98-862.

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programs were seen by opponents as financing applied technology development and
“picking winners and losers” for the business sector. It has been argued that
commercialization choices should be market-driven and agency discretion in selecting
technologies would inevitably be subjected to political pressures. In a March 15, 1995
letter to Budget Committee Chairman John Kasich, the 27 Republican members of the
House Science Committee condemned partnership activities as “... product development
using taxpayer resources [imposing] federal control over market decisions ...”5 Speaker
of the House Newt Gingrich stated that while he favored long run increases in federal
R&D support, the country should spend “... much less trying to have the U.S. government
as a `partner’ with industry.”6
In place of such efforts, many in Congress suggested the creation of tax incentives
that, proponents argued, would provide the capital resources necessary for industry to
invest in additional R&D. According to Mr. Gingrich, capital formation is the largest
barrier to American innovation. He and former House Science Committee Chairman
Robert Walker foresaw a permanent and expanded research and experimentation tax
credit as a substitute for government cost-shared programs.7 Changes in the capital gains
tax were also intended to increase the amount of funding available for industrial use. Mr.
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Walker stated that he believed changes in the capital gains tax to be more important to
start-up companies than the government-industry programs currently in operation.8
Opponents of plans to terminate government-industry partnerships argued that this
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reflects a misunderstanding of current programs. They maintained that such federal
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activities are industry-led and support the advancement of technologies in areas chosen
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by the private sector which are expected to have applications across different sectors of
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the economy. Merit based awards are for work that is high-risk and past the basic
research stage but not yet ready for commercialization. Claims have been made that
manufacturing extension is a response to industry needs as defined by actual private sector
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requests for assistance and is designed for small and medium sized companies which do
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not have the resources of major firms.
It was also argued that the government has traditionally played a role in the
development of critical technologies. Industries in which American companies enjoy a
favorable balance of trade (e.g., commercial aviation, pharmaceuticals, weapons) tend to
be those which have received federal agency mission R&D support over the years. When
a statement was made at March 23, 1995 hearings (Technology Subcommittee, House
Committee on Science) to the effect that IBM internally financed work on artificial
intelligence because it was a wise business decision, then Undersecretary of Commerce
for Technology, Mary Good, responded that, in actuality, much of funding came from the
Department of Defense and the National Science Foundation.
Agency spokesmen have disputed the charge that these cooperative programs are
“corporate welfare” for large companies. At the same hearings, Arati Prabhaker, then
5McGraw-Hill’s Federal Technology Report, March 30, 1995, p. 6.
6New Technology Week, March 13, 1995, p. 2.
7Ibid., p. 1.
8McGraw-Hill’s Federal Technology Report, March 30, 1995, p. 2.

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Director of NIST, testified that while many big firms are involved in collaborative
programs, the cooperative nature of these efforts means that many who actually receive
assistance are the smaller suppliers to these large corporations. Recent information
provided by the National Institute of Standards and Technology indicates that of the 413
awards made by the Advanced Technology Program between 1990 and 1998 almost one-
half went to joint ventures. In the last solicitation (October 1998), the 79 projects
receiving awards involved more than 150 companies, 11 universities, and several federal
laboratories.
Also at issue is the question whether tax treatments alone will achieve their goals.
Critics charged that tax relief is at the expense of federal support for education, R&D,
training, and cooperative industry-university-government ventures that are at the core of
the innovation process as they see it. Agreeing that tax incentives can be beneficial, they
maintained that this approach should not be implemented to the exclusion of other
activities. Proponents of on-going federal programs pointed to studies they claim indicate
that the R&E tax credit promotes continuation of research already performed by firms and
does not necessarily encourage new, high risk work. In addition, such tax credits are of
little use to a company which has no taxable income, a situation often encountered when
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small firms are in the process of developing innovative, leading-edge technologies.
Responding to arguments that tax incentives will increase the amount of capital
available to companies such that government funding for programs like ATP would no
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longer be necessary, opponents maintained that venture capitalists are interested in
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investing in technologies which have reached the prototype stage. However, they noted,
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current federal programs provide support to companies for work prior to prototype
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development. The venture capital that would be necessary to finance this long-term, high
risk R&D is not currently available, and the assumption that a pool of funds to serve this
function will be created in response to these tax proposals, they stated, is not borne out
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by any evidence.
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These deliberations were revisited in the 105th Congress. However, there was
significantly less opposition to on-going federal activities. The Advanced Technology
Program remains operational, due, in part, to strong support by President Clinton.
Funding levels declined for FY1998, but increased 6% for FY1999. The Manufacturing
Extension Partnership also received continued funding at an increased level for FY1998.
Appropriations for FY1999 declined, but the figure reflects a decrease in the federal share
of center funding not reduced support for the MEP effort. The research and
experimentation tax credit was renewed for one year through June 30, 1998 by the
Taxpayer Relief Act of 1997 and again through June 30, 1999 by the Omnibus
Consolidated Appropriations Act (P.L. 105-277). The Small Business Technology
Transfer program has been extended through FY2001.
Issues For Consideration
An assessment of the potential impact of any changes in approach to cooperative
R&D is partially dependent on an understanding of the environment within which such
work is performed by the private sector. The focus of industrial research and
development tends to be short term; concentrating on R&D which will bring investors
quick returns. Small innovative firms tend to need early stage venture capital to fund
work as well as business assistance to translate viable ideas into commercially acceptable

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goods and services. Larger companies may be financially capable of supporting R&D,
but the nature of this work has changed from large centralized laboratories which
performed fundamental research (e.g., Bell Labs, David Sarnoff Research Laboratory) to
smaller, decentralized facilities performing applied R&D tied to operating units.
Increasingly, companies are looking to government laboratory establishments and to
universities to provide the basic research needed for innovation and long term
technological advances. Within this context, what legislative initiatives might be most
effective?
To date, Congress has determined that providing title to inventions made under
federal funding to contractors and /or collaborating parties should be used to support
technology development and commercialization. In return for patent ownership, Congress
has accepted as satisfactory the anticipate payback to the country through goods and
services to improve our health, welfare, and standard of living. These benefits have been
considered more important than the initial cost of the technology to the government or any
potential unfair advantage of one company over another in a cooperative venture.
However, as such effort become more widespread and as new issues emerge, additional
decisions may need to be made on how to maintain a balance between the importance of
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bringing new products and processes to the marketplace and protecting the public
investment in R&D.
The role of state governments in cooperative R&D might be another consideration.
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Increasingly, these jurisdictions are providing resources to augment local participation in
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related federal programs, particularly the Advanced Technology Program, the
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Manufacturing Extension Partnership, and the Small Business Technology Transfer
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Program. To this end, the U.S. Innovation Partnership has been established between the
National Governor’s Association and the federal departments designed “... to create an
environment that promotes innovation, creates new jobs, and helps to advance 21st
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century technologies.” What might be the result of state and local activities on federal
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efforts to facilitate government-industry collaboration?
Among the additional questions which may be addressed as this issue is debated are:
Do programs such as ATP and MEP actually shift private sector decisionmaking to the
public sector? Do they address imperfections in the marketplace? What results have
these programs achieved? What are the benefits and costs of such efforts? Will
companies expand their R&D expenditures if the research and experimentation tax credit
is made permanent? If so, will this additional R&D support the type of long-term, high
risk technology development which current federal programs are designed to facilitate?
What will such a tax credit cost the U.S. Treasury relative to current R&D activities?
Will capital gains tax changes provide increased funding for private sector research and
development? Can and/or should the capital gains tax be structured to encourage the
formation of venture capital for early stage R&D? Should it be tied to longer term
investments often necessary for innovation?