Industrial Competitiveness and Technological Advancement: Debate Over Government Policy

Order Code IB91132
CRS Issue Brief for Congress
Received through the CRS Web
Industrial Competitiveness and
Technological Advancement:
Debate Over Government Policy
Updated May 30, 2006
Wendy H. Schacht
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Technology and Competitiveness
Federal Role
Legislative Initiatives and Current Programs
Increased R&D Spending
Industry-University Cooperative Efforts
Joint Industrial Research
Commercialization of the Results of Federally Funded R&D
Different Approach?
LEGISLATION

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Industrial Competitiveness and Technological Advancement: Debate
Over Government Policy
SUMMARY
There is ongoing interest in the pace of
appropriation responsibilities. The use of line
U.S. technological advancement due to its
item funding for these activities, including
influence on U.S. economic growth, produc-
the Advanced Technology Program and the
tivity, and international competitiveness.
Manufacturing Extension Program of the
Because technology can contribute to eco-
National Institute of Standards and
nomic growth and productivity increases,
Technology, as well as for the Undersecretary
congressional interest has focused on how to
for Technology at the Department of
augment private-sector technological develop-
Commerce, is viewed by proponents as a way
ment. Legislative activity over the past two
to ensure that the government encourages
decades has created a policy for technology
technological advance in the private sector.
development, albeit an ad hoc one. Because
of the lack of consensus on the scope and
Some legislative activity, beginning in
direction of a national policy, Congress has
the 104th Congress, has been directed at
taken an incremental approach aimed at creat-
eliminating or significantly curtailing many of
ing new mechanisms to facilitate technologi-
these federal efforts. Although this approach
cal advancement in particular areas and mak-
has not been adopted, the budgets for several
ing changes and improvements as necessary.
programs have declined. Questions have been
raised concerning the proper role of the fed-
Congressional action has mandated
eral government in technology development
specific technology development programs
and the competitiveness of U.S. industry. As
and obligations in federal agencies that did not
the 109th Congress continues to develop its
initially support such efforts. Many programs
budget priorities, how the government encour-
were created based upon what individual
ages technological progress in the private
committees judged appropriate within the
sector again may be explored and/or redefined.
agencies over which they had authorization or
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MOST RECENT DEVELOPMENTS
Over the past 25 years, congressional initiatives have supported technological
advancement in U.S. industry. This approach has involved both direct measures that concern
budget outlays and the provision of services by government agencies (such as the Advanced
Technology Program (ATP) and the Manufacturing Extension Partnership (MEP) of the
National Institute of Standards and Technology) and indirect measures that include financial
incentives and legal changes. Many of these efforts, however, have been revisited since the
104th Congress given the Republican majority’s statements in favor of indirect strategies such
as tax policies, intellectual property right protection, and antitrust laws to promote
technological advancement; increased government support for basic research; and decreased
direct federal funding for private sector technology initiatives. Beginning in FY2000, the
original House-passed appropriation bills have not included funding for ATP. In addition,
the President’s FY2003 budget for the first time requested a significant reduction in support
for MEP based on the idea that all manufacturing extension centers operating more than six
years should continue without federal funding. While no program has been eliminated,
several have been financed at reduced levels. For FY2006, P.L. 109-108 appropriated $97.6
million for MEP and $79 million for ATP (after mandated rescissions). The Administration’s
FY2007 budget proposal again includes a reduction in funding to $46.3 million for MEP and
no support for ATP. However, in the 2006 State of the Union Address, the President
announced his “American Competitiveness Initiative” which involves several innovation-
related activities including making the research and experimentation tax credit permanent,
increased basic research funding, and improved math and science education. Various bills,
including H.R. 4654, S. 2109, S. 2199, and S. 2720, also would make the research and
experimentation tax credit permanent. H.R. 250, passed by the House on September 21,
2005, establishes several new manufacturing technology programs for small and medium-
sized firms, as does S. 2134. H.R. 3331 would create and authorize funding for a grant
program in the National Science Foundation to assist universities in promoting the
application of new inventions developed within their institutions. S. 1581 and S. 2198
provide financing and other assistance for the development of science parks. The National
Innovation Act (S. 2109, S. 2802, and H.R. 4654) has provisions to promote innovation
including the establishment of a President’s Council on Innovation, innovation acceleration
grants, and programs for regional economic development. Similar measures are contained
in S. 2802, the American Innovation and Competitiveness Act.
BACKGROUND AND ANALYSIS
Technology and Competitiveness
Interest in technology development and industrial innovation increased as concern
mounted over the economic strength of the nation and over competition from abroad. For
the United States to be competitive in the world economy, U.S. companies must be able to
engage in trade, retain market shares, and offer high quality products, processes, and services
while the nation maintains economic growth and a high standard of living. Technological
advancement is important because the commercialization of inventions provides economic
benefits from the sale of new products or services; from new ways to provide a service; or
from new processes that increase productivity and efficiency. It is widely accepted that
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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 growth and increases in living standards.
Technological advances can further economic growth because they contribute to the
creation of new goods, new services, new jobs, and new capital. The application of
technology can improve productivity and the quality of products. It can expand the range of
services that can be offered as well as extend the geographic distribution of these services.
The development and use 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 also can
be influenced by advances in science, the organization and management of firms,
government activity, or serendipity — it can have effects on trade independent of shifts in
macroeconomic factors. New technologies also can help compensate for possible
disadvantages in the cost of capital and labor faced by firms.
Federal Role
In the recent past, American companies faced increased competitive pressures in the
international marketplace from firms based in countries where governments actively promote
commercial technological development and application. In the United States, the generation
of technology for the commercial marketplace is primarily a private sector activity. The
federal government traditionally becomes involved only for certain limited purposes.
Typically these are activities which have been determined to be necessary for the “national
good” but which cannot, or will not, be supported by industry.
To date, the U.S. government has funded research and development (R&D) to meet the
mission requirements of the federal departments and agencies. It also finances efforts in
areas where there is an identified need for research, primarily basic research, not being
performed in the private sector. Federal support reflects a consensus that basic research is
critical because it is the foundation for many new innovations. However, any returns created
by this activity are generally long term, sometimes not marketable, and not always evident.
Yet the rate of return to society as a whole generated by investments in research is
significantly larger than the benefits that can be captured by the firm doing the work.
Many past government activities to increase basic research were based on 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, this linear concept is no longer considered valid. Innovations often
occur that do not require 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. 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 or applied to increase productivity. Yet, while the United States has a
strong basic research enterprise, foreign firms appear as, if not more, adept at taking the
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results of these scientific efforts and making commercially viable products. Often U.S.
companies are competing in the global marketplace against goods and services developed by
foreign industries from research performed in the United States. Thus, there has been
increased congressional interest in mechanisms to accelerate the development and
commercialization processes in the private sector.
The development of a governmental effort to facilitate technological advance has been
particularly difficult because of the absence of a consensus on the need for an articulated
policy. Technology demonstration and commercialization have traditionally been considered
private sector functions in the United States. While over the years there have been various
programs and policies (such as tax credits, technology transfer to industry, and patents), the
approach had been ad hoc and uncoordinated. Much of the program development was based
upon what individual committees judged appropriate for the agencies over which they have
jurisdiction. Despite the importance of technology to the economy, technology-related
considerations often have not been integrated into economic decisions.
There have been attempts to provide a central focus for governmental activity in
technology matters. P.L. 100-519 created within the Department of Commerce a Technology
Administration headed by a new Under Secretary for Technology. In November 1993,
former President Clinton established a National Science and Technology Council to
coordinate decisionmaking in science and technology and to insure their integration at all
policy levels. However, technological issues and responsibilities remain shared among many
departments and agencies. This diffused focus has sometimes resulted in actions which, if
not at cross purposes, may not have accounted for the impact of policies or practices in one
area on other parts of the process. Technology issues involve components which operate
both separately and in concert. While a diffused approach can offer varied responses to
varied issues, the importance of interrelationships may be underestimated and their
usefulness may suffer.
Several times, Congress has examined the idea of an industrial policy to develop a
coordinated approach on issues of economic growth and industrial competitiveness.
Technological advance is both one aspect of this and an altogether separate consideration.
In looking at the development of an identified policy for industrial competitiveness,
advocates argue that such an effort could ameliorate much of the uncertainty with which the
private sector perceives future government actions. It has been argued that consideration and
delineation of national objectives could encourage industry to engage in more long-term
planning with regard to R&D and to make decisions as to the best allocation of resources.
Such a technology policy could generate greater consistency in government activities.
Because technological development involves numerous risks, efforts to minimize uncertainty
regarding federal programs and policies may help alleviate some of the disincentives
perceived by industry.
The development of a technology policy, however, is a contentious issue. There is
widespread resistance to what could be and has been called national planning, due variously
to doubts as to its efficacy, to fear of adverse effects on our market system, to political beliefs
about government intervention in our economic system, and to the current emphasis on short-
term returns in both the political and economic arenas. Opponents of a national industrial
policy may see this approach as government interference in the marketplace to “pick winners
and losers.” Instead, it is argued, measures that would occasion a better investment
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environment for industry to expand innovation-related efforts would be preferable to
government decisionmaking in technological advancement.
Consideration of what constitutes government policy (both in terms of the industrial
policy and technology policy) covers a broad range of ideas from laissez-faire to special
government incentives to target specific high-technology, high-growth industries.
Suggestions have been made for the creation of federal mechanisms to identify and support
strategic industries and technologies. Various federal agencies and private sector groups
have developed critical technology lists. However, others maintain that such targeting is an
unwanted, and unwarranted, interference in the private sector which will cause unnecessary
dislocations in the marketplace or a misallocation of resources. The government does not
have the knowledge or expertise to make business-related decisions. Instead, they argue, the
appropriate role for government is to encourage innovative activities in all industries and to
keep market related decisionmaking within the business community that has ultimate
responsibility for commercialization and where such decisions have traditionally been made.
The relationship between government and industry often is a major factor affecting
innovation and the environment within which technological development takes place. This
relationship can be adversarial, with the government acting to regulate or restrain the
business community, rather than to facilitate its positive contributions to the nation.
However, this may be changing as the benefits of industry/government cooperation become
more apparent. There are an increasing number of areas where the traditional distinctions
between public and private sector functions and responsibilities are becoming blurred. Many
assumptions have been questioned, particularly in light of the increased internationalization
of the U.S. economy. The business sector is no longer viewed in an exclusively domestic
context; the economy of the United States is often tied to the economies of other nations.
The technological superiority long held by the United States in many areas has been
challenged by other industrialized countries in which economic, social, and political policies
and practices foster government-industry cooperation in technological development.
A major divergence from the past was evident in the approach taken by the former
Clinton Administration. Articulated in two reports issued in February 1993 (A Vision of
Change for America and Technology for America’s Economic Growth, A New Direction to
Build Economic Strength), the proposal called for a national commitment to, and a strategy
for, technological advancement as part of a defined national economic policy. This detailed
strategy offered a policy agenda for economic growth in the United States, of which
technological development and industrial competitiveness were critical components.
In articulating a national technology policy, the approach initially recommended and
subsequently followed by the Administration was multifaceted and provided a wide range
of options while for the most part reflecting then current trends in congressional efforts to
facilitate industrial advancement. This policy increased federal coordination and augmented
direct government spending for technological development. While many past activities
focused primarily on research, the new initiatives shifted the emphasis toward development
of new products, processes, and services by the private sector for the commercial
marketplace. In addition, a significant number of the proposals aimed to increase both
government and private sector support for R&D leading to the commercialization of
technology.
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To facilitate technological advance, the Clinton approach focused on increasing
investment; investment in research, primarily civilian research, to meet the Nation’s needs
in energy, environmental quality, and health; investment in the development and
commercialization of new products, processes, and services for the marketplace; investment
in improved manufacturing to make American goods less expensive and of better quality;
investment in small, high technology businesses in light of their role in innovation and job
creation; and investment in the country’s infrastructure to support all these efforts. To make
the most productive use of this increased investment, the Administration supported increased
cooperation between all levels of government, industry, and academia to share risk, to share
funding, and to utilize the strengths of each sector in reaching common goals of economic
growth, productivity improvement, and maintenance of a high living standard. On
November 23, 1993, President Clinton issued Executive Order 12881 establishing a National
Science and Technology Council (NSTC), a cabinet-level body to “... coordinate science,
space, and technology policies throughout the federal government.”
The approach adopted by the former Administration has been questioned by recent
Congresses and by the current Bush Administration. Instead, policies have appeared to
support indirect strategies such as tax incentives, intellectual property protection, and
antitrust laws to promote technology advancement, increased government support for basic
research, and decreased direct federal funding for private sector technology activities. In the
2006 State of the Union Address, President Bush announced the “American Competitiveness
Initiative” to facilitate innovation and provide “. . .our nation’s children a firm grounding in
math and science.” To achieve these goals, the President has called for doubling over the
next 10 years the amount of federal funding for basic research, particularly in the National
Science Foundation, the Office of Science in the Department of Energy, and in the core
programs of the National Institute of Standards and Technology, Department of Commerce.
In addition, the Initiative would increase the number of math and science teachers and make
the research and experiment tax credit permanent.
Despite the continuing debate on what is the appropriate role of government and what
constitutes a suitable government technology development policy, it remains an undisputed
fact that what the government does or does not do affects the private sector and the
marketplace. The various rules, regulations, and other activities of the government have
become de facto policy as they relate to, and affect, innovation and technological
advancement.
Legislative Initiatives and Current Programs
Legislative initiatives have reflected a trend toward expanding the government’s role
beyond traditional funding of mission-oriented R&D and basic research toward the
facilitation of technological advancement to meet other critical national needs, including the
economic growth that flows from new commercialization and use of technologies and
techniques in the private sector. An overview of recent legislation shows federal efforts
aimed at (1) encouraging industry to spend more on R&D; (2) assisting small
high-technology businesses; (3) promoting joint research activities between companies; (4)
fostering cooperative work between industry and universities; (5) facilitating the transfer of
technology from the federal laboratories to the private sector; and (6) providing incentives
for quality improvements. These efforts tend toward removing barriers to technology
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development in the private sector (thereby permitting market forces to operate) and providing
incentives to encourage increased private sector R&D activities. While most focus primarily
on research, some also involve policies and programs associated with technology
development and commercialization.
Increased R&D Spending
To foster increased company spending on research, the 1981 Economic Recovery Tax
Act (P.L. 97-34) mandated a temporary incremental tax credit for qualified research
expenditures. The law provided a 25% tax credit for the increase in a firm’s qualified
research costs above the average expenditures for the previous three tax years. Qualified
costs included in-house expenditures such as wages for researchers, material costs, and
payments for use of equipment; 65% of corporate grants towards basic research at
universities and other relevant institutions; and 65% of payments for contract research. The
credit applied to research expenditures through 1985.
The Tax Reform Act of 1986 (P.L. 99-514) extended the research and experimentation
(R&E) tax credit for another three years. However, the credit was lowered to 20% and made
applicable to only 75% of a company’s liability. The 1988 Tax Corrections Act (P.L.
100-647) approved a one-year extension of the research tax credit. The Omnibus Budget
Reconciliation Act (P.L. 101-239) extended the credit through September 30, 1990 and made
small start-up firms eligible for the credit. The FY1991 Budget Act (P.L. 101-508) again
continued the tax credit provisions through 1992. The law expired in June 1992 when
former President Bush vetoed H.R. 11 that year. However, P.L. 103-66, the Omnibus Budget
Reconciliation Act of 1993, reinstated the credit through July 1995 and made it retroactive
to the former expiration date. The tax credit again was allowed to expire until P.L. 104-188,
the Small Business Job Protection Act, restored it from July 1, 1996 through May 31, 1997.
P.L. 105-34, the Taxpayer Relief Act of 1997, extended the credit for 13 months from June
1, 1997 through June 30, 1998. Although it expired once again at the end of June, the
Omnibus Consolidated Appropriations Act, P.L. 105-277, reinstated the tax credit through
June 30, 1999. During the 105th Congress, various bills were introduced to make the tax
credit permanent; other bills would have allowed the credit to be applied to certain
collaborative research consortia. On August 5, 1999, both the House and Senate agreed to
the conference report for H.R. 2488, the Financial Freedom Act, which would have extended
the credit for five years through June 30, 2004. This bill also would have increased the credit
rate applicable under the alternative incremental research credit by one percentage point per
step. While the President vetoed this bill on September 23, 1999, the same provisions were
included in Title V of P.L. 106-170 signed into law on December 17, 1999. P.L. 108-311
extended the research tax credit through December 31, 2005.
The Small Business Development Act (P.L. 97-219), as extended (P.L. 99-443),
established a program to facilitate increased R&D within the small-business, high-
technology community. Each federal agency with a research budget was required to set aside
1.25% of its R&D funding for grants to small firms for research in areas of interest to that
agency. P.L. 102-564, which reauthorized the Small Business Innovation Research (SBIR)
program, increased the set-aside over a five-year period to 2.5% by 1997. Funding is, in part,
dependent on companies obtaining private sector support for the commercialization of the
resulting products or processes. The authorization for the program was set to terminate
October 1, 2000. However, the SBIR activity was reauthorized through September 30, 2008
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by P.L. 106-554, signed into law on December 21, 2000. P.L. 102-564 also created a pilot
effort, the Small Business Technology Transfer (STTR) program, to encourage firms to work
with universities or federal laboratories to commercialize the results of research. This
program initially was funded by a 0.15% (phased in) set-aside. Set to expire in FY1997, the
STTR originally was extended for one year until P.L. 105-135 reauthorized this activity
through FY2001. Subsequently, P.L. 107-50 extended the program through FY2009 and
expanded the set-aside to 0.3% beginning in FY2004. Also in FY2004, the amount of
individual Phase II grants increased to $750,000. (See CRS Report 96-402, Small Business
Innovation Research Program, by Wendy H. Schacht.)
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. ATP provides seed funding, matched by private sector
investment, for companies or consortia of universities, industries, and/or government
laboratories to accelerate development of generic technologies with broad application across
industries. The first awards were made in 1991. As of the end of 2004, 768 projects had
been funded representing approximately $2.3 billion in federal dollars matched by $2.1
billion in private sector financing. About 66% of the awardees are small businesses or
cooperative efforts led by such firms. (For more information, see CRS Report 95-36, The
Advanced Technology Program, by Wendy H. Schacht.)
Appropriations for the ATP included $35.9 million in FY1991, $47.9 million in
FY1992, and $67.9 million in FY1993. FY1994 appropriations increased significantly to
$199.5 million and even further in FY1995 to $431 million. However, P.L. 104-6, rescinded
$90 million from this amount. The original FY1996 appropriations bill, H.R. 2076, which
passed the Congress, was vetoed by President Clinton, in part, because it provided no support
for ATP. The appropriations legislation finally enacted, P.L. 104-134, did fund the
Advanced Technology Program at $221 million. For FY1997, the President’s budget request
was $345 million. However, P.L. 104-208, the Omnibus Consolidated Appropriations Act,
provided $225 million for ATP, later reduced by $7 million to $218 million by P.L. 105-18.
The Administration’s FY1998 budget requested $276 million in funding; P.L. 105-119
appropriated $192.5 million for ATP, again at a level less than the previous year. The
President’s FY1999 budget proposal included $259.9 million for this program, a 35%
increase. While not providing such a large increase, P.L. 105-277 did fund ATP at $197.5
million, 3% above the previous year. This figure reflected a $6 million rescission contained
in the same law that accounted for “deobligated” funds resulting from early termination of
certain projects.
In FY2000, the Administration proposed $238.7 million for ATP, an increase of 21%
over the previous year. H.R. 2670, as passed by the House, provided no funding for the
activity. The report to accompany the House bill stated that there was insufficient evidence
“. . . to overcome those fundamental questions about whether the program should exist in the
first place.” S. 1217, as passed by the Senate, would have appropriated $226.5 million for
ATP. P.L. 106-113 eventually did finance the program at $142.6 million, 28% below prior
year funding. The following year, the President’s FY2001 budget included $175.5 million
for ATP, an increase of 23% over the earlier fiscal year. Once again, the original version of
the appropriations bill that passed the House did not contain any financial support for the
activity. However, P.L. 106-553 provided $145.7 million in FY2001 support for ATP, 2%
above the previous funding level.
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For FY2002, President Bush’s budget proposed suspending all funding for new ATP
awards pending an evaluation of the program. In the interim, $13 million would have been
provided to meet the financial commitments for on-going projects. H.R. 2500, as initially
passed by the House, also did not fund new ATP grants but offered $13 million for prior
commitments. The version of H.R. 2500 that originally passed the Senate provided $204.2
million for the ATP effort. P.L. 107-77 funded the program at $184.5 million, an increase
of almost 27% over the previous fiscal year.
The Administration’s FY2003 budget request would have funded ATP at $108 million;
35% below the FY2002 appropriation level. While no relevant appropriations legislation
was passed by the 107th Congress, a series of Continuing Resolutions funded the program
until the 108th Congress enacted P.L. 108-7 which financed ATP at $178.8 million for
FY2003 (after a mandated 0.65% across the board recision).
In its FY2004 budget, the Administration proposed to provide $17 million to cover on-
going commitments to ATP; however no new projects would be funded. H.R. 2799, the
FY2004 appropriations bill initially passed by the House, included no support for ATP.
Subsequently incorporated into H.R. 2673, which became P.L. 108-199, the legislation
funded ATP at $179.2 million (prior to a mandated 0.59% across the board rescission). As
reported to the Senate from the Committee on Appropriations, S. 1585 would have financed
the program at $259.6 million.
The President’s FY2005 budget, as well as H.R. 4754, the Commerce, Justice, State
Appropriations bill originally passed by the House, did not include any funding for ATP. As
reported to the Senate from the Committee on Appropriations, S. 2809 would have provided
$203 million for the program, 19% above the previous fiscal year. P.L. 108-447, the FY2005
Omnibus Appropriations Act, funded ATP at $136.5 million (after several rescissions
mandated in the legislation), 20% below FY2004.
For FY2006, the Administration’s budget and H.R. 2862, as originally passed by the
House, again did not include funding for the Advanced Technology Program. The version
of H.R. 2862 initially passed by the Senate would have provided ATP with $140 million.
The final FY2006 appropriation legislation, P.L. 109-108, finances the program at $79
million (after mandated rescissions), 42% less than the last fiscal year.
The President’s FY2007 budget does not include funding for ATP.
Industry-University Cooperative Efforts
The promotion of cooperative efforts among academia and industry is aimed at
increasing the potential for the commercialization of technology. (For more information, see
CRS Issue Brief IB89056, Cooperative R&D: Federal Efforts to Promote Industrial
Competitiveness, by Wendy Schacht.) Traditionally, basic research has been performed in
universities or in the federal laboratory system while the business community focuses on the
manufacture or provision of products, processes, or services. Universities are especially
suited to undertake basic research. Their mission is to educate and basic research is an
integral part of the educational process. Universities generally are able to undertake these
activities because they do not have to produce goods for the marketplace and therefore can
do research not necessarily tied to the development of a commercial product or process.
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Subsequent to World War II, the federal government supplanted industry as the primary
source of funding for basic research in universities. It also became the principal determinant
of the type and direction of the research performed in academia. This resulted in a
disconnect between the university and industrial communities. The separation and isolation
of the parties involved in the innovation process is thought by many observers to be a barrier
to technological progress. The difficulties in moving an idea from the concept stage to a
commercial product or process may be compounded when several entities are involved.
Legislation to stimulate cooperative efforts among those involved in technology development
has been viewed as one way to promote innovation and facilitate the international
competitiveness of U.S. industry.
Several laws have attempted to encourage industry-university cooperation. Title II of
the Economic Recovery Tax Act of 1981 (P.L. 97-34) provided, in part, a 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 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 research training for physical or biological sciences within the United
States. The tax deduction is 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. These provisions were extended through July 1995 by the Omnibus Budget
Reconciliation Act of 1993, but then expired until restored by the passage of P.L. 104-188,
P.L. 105-277, and P.L. 106-170 as noted above.
Amendments to the patent and trademark laws contained in P.L. 96-517 (commonly
called the “Bayh-Dole Act”) 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 they are small
businesses, universities, or not-for-profit institutions. 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
used thereby creating a financial return to the academic institution. University patent
applications and licensing have increased significantly since this law was enacted. (See CRS
Report RL32076, The Bayh-Dole Act: Selected Issues in Patent Policy and the
Commercialization of Technology; CRS Report RL30320, Patent Ownership and Federal
Research and Development: A Discussion on the Bayh-Dole Act and the Stevenson-Wydler
Act; and CRS Report 98-862, R&D Partnerships and Intellectual Property: Implications for
U.S. Policy, all by Wendy Schacht.)
The CREATE Act, P.L. 108-453, makes changes in the patent laws to promote
cooperative research and development among universities, government, and the private
sector. The bill amends section 103(c) of title 25, United States Code, such that certain
actions between researchers under a joint research agreement will not preclude patentability.
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Joint Industrial Research
Private sector investments in basic research are often costly, long term, and risky.
Although not all advances in technology are the result of research, it is often the foundation
of important new innovations. To encourage increased industrial involvement in research,
legislation was enacted to allow for joint ventures in this arena. It is argued that cooperative
research reduces risks and costs and allows for work to be performed that crosses traditional
boundaries or expertise and experience. Such collaborative efforts make use of existing and
support the development of new resources, facilities, knowledge, and skills.
The National Cooperative Research Act (P.L. 98-462) encourages companies to
undertake joint research. The legislation clarifies the antitrust laws and requires that a “rule
of reason” standard be applied in determinations of violations of these laws; cooperative
research ventures are not to be judged illegal “per se.” It 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. P.L. 98-462 also makes changes in the way attorney
fees are awarded. Defendants can collect attorney fees in specified circumstances, including
when the claim is judged frivolous, unreasonable, without foundation, or made in bad faith.
However, the attorney fee award to the prevailing party may be offset if the court decides that
the prevailing party conducted a portion of the litigation in a manner which was frivolous,
unreasonable, without foundation, or in bad faith. These provisions were included to
discourage frivolous litigation against joint research ventures without simultaneously
discouraging suits of plaintiffs with valid claims. Between 1985 (when the law went into
effect) and 2003, 913 joint research ventures have filed with the Department of Justice.
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.”
Commercialization of the Results of Federally Funded R&D
Another approach to encouraging the commercialization of technology involves the
transfer of technology from federal laboratories and contractors to the private sector where
commercialization can proceed. Because the federal laboratory system has extensive science
and technology resources and expertise developed in pursuit of mission responsibilities, it
is a potential source of new ideas and knowledge which may be used in the business
community. (See CRS Issue Brief IB85031, Technology Transfer: Utilization of Federally
Funded Research and Development, by Wendy Schacht for more details.)
Despite the potential offered by the resources of the federal laboratory system, however,
the commercialization level of the results of federally funded R&D remained low. Studies
indicated that only approximately 10% of federally owned patents were ever utilized. There
are many reasons for this low level of usage, one of which is the fact that some technologies
and/or patents have no market application. However, industry unfamiliarity with these
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technologies, the “not-invented-here” syndrome, and perhaps more significantly, the
ambiguities associated with obtaining title to or exclusive license to federally owned patents
also contribute to the low level of commercialization.
Over the years, several governmental efforts have been undertaken to augment
industry’s awareness of federal R&D resources. The Federal Laboratory Consortium for
Technology Transfer was created in 1972 (from a Department of Defense program) to assist
in transferring technology from the federal government to state and local governments and
the private sector. To expand on the work of the Federal Laboratory Consortium, and to
provide added emphasis on the commercialization of government technology, Congress
passed P.L. 96-480, the Stevenson-Wydler Technology Innovation Act of 1980. Prior to this
law, technology transfer was not an explicit mandate of the federal departments and agencies
with the exception of the National Aeronautics and Space Administration. To provide
“legitimacy” to the numerous technology activities of the government, Congress, with strong
bipartisan support, enacted P.L. 96-480 which explicitly states that the federal government
has the responsibility, “...to ensure the full use of the results of the nation’s federal
investment in research and development.” Section 11 of the law created a system within the
federal government to identify and disseminate information and expertise on what
technologies or techniques are available for transfer. Offices of Research and Technology
Applications were established in each federal laboratory to distinguish technologies and ideas
with potential applications in other settings.
Several amendments to the Stevenson-Wydler Technology Innovation Act have been
enacted to provide additional incentives for the commercialization of technology. P.L.
99-502, the Federal Technology Transfer Act, authorizes activities designed to encourage
industry, universities, and federal laboratories to work cooperatively. It also establishes
incentives for federal laboratory employees to promote the commercialization of the results
of federally funded research and development. The law amends P.L. 96-480 to allow
government-owned, government-operated laboratories to enter into cooperative R&D
agreements (CRADAs) with universities and the private sector. This authority is extended
to government-owned, contractor-operated laboratories by the Department of Defense
FY1990 Authorization Act, P.L. 101-189. (See CRS Report 95-150, Cooperative Research
and Development Agreements (CRADAs), by Wendy Schacht.) Companies, regardless of
size, are allowed to retain title to inventions resulting from research performed under
cooperative agreements. The federal government retains a royalty-free license to use these
patents. The Technology Transfer Improvements and Advancement Act (P.L. 104- 113),
clarifies the dispensation of intellectual property rights under CRADAs to facilitate the
implementation of these cooperative efforts. The Federal Laboratory Consortium is given
a legislative mandate to assist in the coordination of technology transfer. To further promote
the use of the results of federal R&D, certain agencies are mandated to create a cash awards
program and a royalty sharing activity for federal scientists, engineers, and technicians in
recognition of efforts toward commercialization of this federally developed technology.
These efforts are facilitated by a provision of the National Defense Authorization Act for
FY1991 (P.L. 101-510), which amends the Stevenson-Wydler Technology Innovation Act
to allow government agencies and laboratories to develop partnership intermediary programs
to augment the transfer of laboratory technology to the small business sector.
Amendments to the Patent and Trademark law contained in Title V of P.L. 98- 620
made changes which are designed to improve the transfer of technology from the federal
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laboratories — especially those operated by contractors — to the private sector and increase
the chances of successful commercialization of these technologies. This law permits the
contractor at government-owned, contractor-operated laboratories (GOCOs) to make
decisions at the laboratory level as to the granting of licenses for subject inventions. This has
the potential of effecting greater interaction between laboratories and industry in the transfer
of technology. Royalties on these inventions are also permitted to go back to the contractor
to be used for additional R&D, awards to individual inventors, or education. While there is
a cap on the amount of the royalty returning directly to the lab in order not to disrupt the
agency’s mission requirements and congressionally mandated R&D agenda, the
establishment of discretionary funds gives contractor-operated laboratories added incentive
to encourage technology transfer.
Under P.L. 98-620, private companies, regardless of size, are allowed to obtain
exclusive licenses for the life of the patent. Prior restrictions allowed large firms use of
exclusive license for only 5 of the 17 years (now 20 years) of the life of the patent. This was
expected to encourage improved technology transfer from the federal laboratories or the
universities (in the case of university operated GOCOs) to large corporations which often
have the resources necessary for development and commercialization activities. In addition,
the law permits GOCOs (those operated by universities or nonprofit institutions) to retain
title to inventions made in the laboratory within certain defined limitations. Those
laboratories operated by large companies are not included in this provision.
P.L. 106-404, the Technology Transfer Commercialization Act, altered practices
concerning patents held by the government to make it easier for federal agencies to license
such inventions. The law amends the Stevenson-Wydler Technology Innovation Act and the
Bayh-Dole Act to decrease the time delays associated with obtaining an exclusive or partially
exclusive license. Previously, agencies were required to publicize the availability of
technologies for three months using the Federal Register and then provide an additional 60
day notice of intent to license by an interested company. Under this legislation, the time
period was shorten to 15 days in recognition of the ability of the internet to offer widespread
notification and the necessity of time constraints faced by industry in commercialization
activities. Certain rights are retained by the government. The bill also allows licenses for
existing government-owned inventions to be included in CRADAs.
The Omnibus Trade and Competitiveness Act (P.L. 100-418) mandated the creation of
a program of regional centers to assist small manufacturing companies to use knowledge and
technology developed under the auspices of the National Institute of Standards and
Technology and other federal agencies. Federal funding for the centers is matched by
non-federal sources including state and local governments and industry. Originally, seven
Regional Centers for the Transfer of Manufacturing Technology were selected. The initial
program was expanded in 1994 to create the Manufacturing Extension Partnership (MEP)
to meet new and growing needs of the community. In a more varied approach, the
Partnership involves both large centers and smaller, more dispersed organizations sometimes
affiliated with larger centers as well as the NIST State Technology Extension Program which
provides states with grants to develop the infrastructure necessary to transfer technology from
the federal government to the private sector (an effort which was also mandated by P.L.
100-418) and a program which electronically ties the disparate parties together along with
other federal, state, local, and academic technology transfer organizations. There are now
centers in all 50 states and Puerto Rico. Since the manufacturing extension activity was
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created in 1989, awards made by NIST have resulted in the creation of approximately 350
regional offices. [It should be noted that the Department of Defense also funded 36 centers
through its Technology Reinvestment Project (TRP) in FY1994 and FY1995. When the TRP
was terminated, NIST took over support for 20 of these programs in FY1996 and funded the
remaining efforts during FY1997.]
Funding for this program was $11.9 million in FY1991, $15.1 million in FY1992, and
$16.9 million in FY1993. In FY1994 support for the expanded Manufacturing Technology
Partnerships was $30.3 million. The following fiscal year, P.L. 103-317 appropriated $90.6
million for this effort, although P.L. 104-19 rescinded $16.3 million from this amount.
While the original FY1996 appropriations bill, H.R. 2076, was vetoed by the President, the
$80 million funding for MEP was retained in the final legislation, P.L. 104-134. The
President’s FY1997 budget request was $105 million; P.L. 104-208 appropriated $95 million
for manufacturing extension while temporarily lifting the six-year limit on federal support
for individual centers. For FY1998, the Administration requested funding of $123 million.
The FY1998 appropriations bill, P.L. 105-119, financed the MEP program at $113.5 million.
This law also permitted government funding, at one-third the centers total annual cost, to
continue for additional periods of one year over the original six-year limit, if a positive
evaluation is received. The President’s FY1999 budget included $106.8 million for the
MEP, a 6% decrease from current funding. The Omnibus Consolidated Appropriates Act,
P.L. 105-277, appropriated the $106.8 million. The decrease in funding reflected a reduced
federal financial commitment as the centers mature, not a decrease in program support. In
addition, the Technology Administration Act of 1998, P.L. 105-309, permits the federal
government to fund centers at one-third the cost after the six years if a positive, independent
evaluation is made every two years.
For FY2000, the Clinton Administration requested $99.8 million in support for MEP.
Again, the lower federal share indicated a smaller statutory portion required of the
government. S. 1217, as passed by the Senate, would have appropriated $109.8 million for
the Manufacturing Extension Partnership, an increase of 3% over FY1999. H.R. 2670, as
passed initially by the House, would have appropriated $99.8 million for this activity. The
version of the H.R. 2670 passed by both House and Senate provided FY2000 appropriations
of $104.8 million. While the President vetoed that bill, the legislation that was ultimately
enacted, P.L. 106-113, appropriated $104.2 million after a mandated rescission. The
President’s FY2001 budget requested $114.1 million for the Partnership, an increase of
almost 9% over the earlier fiscal year. P.L. 106-553 appropriated $105.1 million.
The FY2002 Bush Administration budget proposed providing $106.3 million for MEP.
H.R. 2500, as originally passed by the House, would have funded MEP at $106.5 million.
The initial version of H.R. 2500 passed by the Senate would have provided $105.1 million
for the program. The final legislation, P.L. 107-77 funded the Partnership at $106.5 million.
For FY2003, the Administration’s budget included an 89% decrease in support for
MEP. According to the budget document, “...consistent with the program’s original design,
the President’s budget recommends that all centers with more than six years experience
operate without federal contribution.” A number of Continuing Resolutions supported the
Partnership at FY2002 levels until the 108th Congress enacted P.L. 108-7 which appropriated
$105.9 million for MEP in FY2003 (after a mandated recision).
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The President’s FY2004 budget requested $12.6 million for MEP to finance only those
centers that have not reached six years of federal support. H.R. 2799, as initially passed by
the House, would have appropriated $39.6 million for the Partnership. This bill was
subsequently incorporated into H.R. 2673, which became P.L. 108-199, the FY2004
Consolidated Appropriations Act. This legislation financed MEP at $38.7 million after a
mandated rescission. S. 1585, reported to the Senate by the Committee on Appropriations,
would have funded the program at $106.6 million.
The Administration proposed funding MEP at $39.2 million in FY2005. H.R. 4754, as
originally passed by the House, would have appropriated $106 million for this program. As
reported by the Senate Committee on Appropriations, S. 2809 would have provided $112
million for MEP to “fully fund” existing centers and provide assistance to small and rural
states. P.L. 108-447, supported manufacturing extension at $107.5 million (after several
mandated rescissions included in the legislation).
For FY2006, the President’s budget requested $46.8 million for the Manufacturing
Extension Partnership, 56% below funding for the current fiscal year. H.R. 2862, as
originally passed by both the House and the Senate, would have provided $106 million for
the program. The final appropriation included in P.L. 109-108 was $97.6 million (after
mandated rescissions).
The Administration’s FY2007 budget includes $46.3 million for MEP. (For additional
information see CRS Report 97-104, Manufacturing Extension Partnership Program: An
Overview, by Wendy Schacht.)
Different Approach?
As indicated above, the laws affecting the R&D environment have included both direct
and indirect measures to facilitate technological innovation. In general, direct measures are
those which involve budget outlays and the provision of services by government agencies.
Indirect measures include financial incentives and legal changes (e.g., liability or regulatory
reform; new antitrust arrangements). Supporters of indirect approaches argue that the market
is superior to government in deciding which technologies are worthy of investment.
Mechanisms that enhance the market’s opportunities and abilities to make such choices are
preferred. Advocates further state that dependency on agency discretion to assist one
technology in preference to another will inevitably be subjected to political pressures from
entrenched interests. Proponents of direct government assistance maintain, conversely, that
indirect methods can be wasteful and ineffective and that they can compromise other goals
of public policy in the hope of stimulating innovative performance. Advocates of direct
approaches argue that it is important to put the country’s scarce resources to work on those
technologies that have the greatest promise as determined by industry and supported by its
willingness to match federal funding.
In the past, while Republicans tended to prefer reliance on free market investment,
competition, and indirect support by government, participants in the debates generally did
not make definite (or exclusionary) choices between the two approaches, nor consistently
favor one over the other. For example, some proponents of a stronger direct role for the
government in innovation are also supporters of enhanced tax preferences for R&D spending,
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an indirect mechanism. Opponents of direct federal support for specific projects (e.g.,
SEMATECH, flat panel displays) may nevertheless back similar activities focused on more
general areas such as manufacturing or information technology. However, beginning with
the 104th Congress, legislators directed many of their efforts toward eliminating or curtailing
some of the programs that previously had enjoyed bipartisan support. Initiatives to terminate
the Advanced Technology Program, funding for flat panel displays, and agricultural
extension reflected concern about the role of government in developing commercial
technologies. The Republican leadership stated that the government should directly support
basic science while leaving technology development to the private sector. Instead of federal
funding, changes to the tax laws, proponents argue, will provide the capital resources and
incentives necessary for industry to further invest in R&D. Many of the same issues were
considered in subsequent Congresses. While funding for several programs decreased,
support for most on-going activities continued, some at increased levels. How the debate
over federal funding evolves in the 109th Congress may serve to redefine thinking about the
government’s efforts in promoting technological advancement in the private sector.
LEGISLATION
P.L. 109-108 (H.R. 2862)
Makes appropriations for science and the Departments of State, Justice, and Commerce.
As passed by the House, the bill would provide $106 million for the Manufacturing
Extension Partnership and no financing for the Advanced Technology Program. The version
of the legislation reported to the Senate from the Committee on Appropriations would fund
MEP at $106 million and provide $140 for ATP. Introduced June 10, 2005; referred to the
House Committee on Appropriations. Passed the House, amended, on June 16, 2005.
Received in the Senate on June 16, 2005; referred to the Senate Committee on
Appropriations. Reported to the Senate, with an amendment in the nature of a substitute, on
June 23, 2005. Passed the Senate, amended on September 15, 2005. Conference report filed
November 7, 2005. House agreed to conference report on November 9, 2005; Senate agreed
on November 16, 2005. Signed into law by the President on November 22, 2005.
H.R. 250 (Ehlers)/S. 2134 (Smith)
Manufacturing Technology Competitiveness Act. Creates an interagency committee
to coordinate federal manufacturing R&D. Establishes and authorizes funding for a pilot
collaborative manufacturing research grants program to promote the development of new
manufacturing technologies through cooperative applied research among the private sector,
academia, states, and other non-profit institutions. Mandates and authorizes financing for
a manufacturing fellowship program. Creates and authorizes support for a manufacturing
extension center competitive grants program to focus on new or emerging manufacturing
technologies. Authorizes funding for the Manufacturing Extension Partnership, among other
things. Introduced January 6, 2005; referred to the Committee on Science. Reported to the
House, amended, May 23, 2005. Passed House on September 21, 2005. Received in Senate
and referred to the Senate Committee on Commerce, Science, and Transportation on
September 22, 2005. S. 2134 introduced December 16, 2005; referred to the Senate
Committee on Commerce, Science, and Transportation.
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H.R. 3331 (Miller, B.)
Creates and authorizes funding for a grant program in the National Science Foundation
to assist universities in promoting the application of new inventions developed within their
institutions. Introduced July 27, 2005; referred to the House Committee on Science.
S. 1581 (Bingaman)
Provides financing and other assistance (including tax incentives for private sector
investments) for the development of science parks, among other things. Introduced July 29,
2005; referred to the Senate Committee on Finance.
S. 2109 (Ensign)/H.R. 4654 (Schiff)/S. 2390 (Ensign)
National Innovation Act. Establishes a President’s Council on Innovation and provides
innovation acceleration grants. Promotes innovation through regional economic
development and makes permanent the research and experimentation tax credit, among other
things. S. 2109 introduced December 15, 2005; referred to the Senate Committee on
Finance. H.R. 4654 introduced January 3, 2006; referred to the House Committees on
Science, Energy and Commerce, Ways and Means, Armed Services, Judiciary,
Transportation and Infrastructure, and Financial Services. S. 2390 introduced March 8,
2006; referred to the Senate Committee on Commerce, Science, and Transportation.
S. 2198 (Domenici)
Protecting America’s Competitive Edge Through Education Act. Among other things
creates mechanisms to develop and fund Science Parks. Introduced January 26, 2006;
referred to the Senate Committee on Health, Education, Labor, and Pensions. Hearings held
on February 28, 2006 and March 1, 2006.
S. 2199 (Domenici)
Protecting America’s Competitive Edge Through Tax Incentives Act. Expands and
makes permanent the research and development tax credit, among other things. Introduced
January 26, 2006; referred to the Senate Committee on Finance.
S. 2720 (Baucus)
Research Competitiveness Act of 2006. Simplifies the research tax credit and makes
it permanent. Allows for tax exempt financing of research park facilities, among other
things. Introduced May 4, 2006; referred to the Senate Committee on Finance.
S. 2802 (Ensign)
American Innovation and Competitiveness Act of 2006. Among other things,
establishes the President’s Council on Innovation and Competitiveness, provides innovation
acceleration grants, and facilitates regional economic development. Introduced May 15,
2006; referred to the Senate Committee on Commerce, Science, and Transportation. Ordered
reported, with amendments, on May 18, 2006.
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