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Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future (2007)

Chapter:8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?

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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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8
What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?

INCENTIVES FOR INNOVATION

Recommendation D: Ensure that the United States is the premier place in the world to innovate; invest in downstream activities such as manufacturing and marketing; and create high-paying jobs based on innovation by such actions as modernizing the patent system, realigning tax policies to encourage innovation, and ensuring affordable broadband access.


As Wm. A. Wulf, President of the National Academy of Engineering, points out, “There is no simple formula for innovation. There is, instead, a multi-component ‘environment’ that collectively encourages, or discourages, innovation.”1 That environment encompasses such factors as research funding, an educated workforce, a culture that encourages risk taking, a financial system that provides patient capital for entrepreneurial activity, and intellectual property protection.2 For more than a century, the United States has been a world leader in the development of new technology and the creation of new products. Its international competitive advantage rests in large part on a favorable environment for discovery and application of knowledge—its intellectual property.

1

Wm. A. Wulf. “Review and Renewal of the Environment for Innovation.” Unpublished paper, 2005.

2

An alternative point of view is presented in Box 8-1.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

Setting a policy framework that supports innovation is critical for at least two reasons. First, it enhances the competitiveness of US-based industries and supports domestic economic growth. Second, the nation stands to benefit from well-paying jobs if multinational corporations see the United States as the best place to perform research and development (R&D) and other activities related to innovation and ultimately to build factories and offices here.3

Our own history and contemporary international examples show that leadership in research is not a sufficient condition for gaining the lion’s share of benefits from innovation. Recent developments in Japan illustrate what can happen to a science- and technology-based economy that does not adapt its innovation environment to changing conditions. Japan’s growth trajectory in various science and engineering inputs and outputs (R&D investment, science and engineering workforce, patents) since the early 1990s has been similar to what it was before that time.4 Yet its ability to profit from innovation in the form of higher productivity and income has recently fallen. Part of the explanation for the change is in the dual nature of the Japanese economy: World-class manufacturing that serves a global market exists side-by-side with inefficient industries, such as construction.5 Economic mismanagement and a lack of flexibility in labor and capital markets also are to blame.

In contrast, in the middle 1990s the United States saw a jump in productivity growth from that which had prevailed since the first oil shock of the early 1970s.6 In addition to continuous gains in manufacturing productivity and productivity growth generated by the use of information technology, the creation of new business methods that took advantage of information technology were widespread here.

Science and technology and the innovation process are not zero-sum games in the international context.7 The United States has proved adept in

3

National Research Council. A Patent System for the 21st Century. Washington, DC: The National Academies Press, 2004. P. 18.

4

B. Steil, D. G. V. Nelson, and R. R. Nelson. Technological Innovation and Economic Performance. Princeton, NJ: Princeton University Press, 2002.

5

D. W. Jorgenson and M. Kuroda. Technology, Productivity, and the Competitiveness of US and Japanese Industries. In T. Arrison, C. F. Bergsten, E. M. Graham, and M. C. Harris, eds. Japan’s Growing Technological Capability: Implications for the US Economy. Washington, DC: National Academy Press, 1992. Pp. 83-97.

6

W. Nordhaus. The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle. Working Paper 11354. Cambridge, MA: National Bureau of Economic Research, 2005.

7

Wm. A. Wulf. Observations on Science and Technology Trends: Their Potential Impacts on Our Future. In A. G. K. Solomon, ed. Technology Futures and Global Wealth, Power and Conflict. Washington, DC: Center for Strategic and International Studies, 2005. Pp. 9-16.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

BOX 8-1

Another Point of View: Innovation Incentives

Some critics say the argument that the US economy is lagging in innovation compared with other nations, or even compared with its own historical performance, is not supported by the evidence. Indeed, comparing the current situation with that of 1989 is instructive and striking in this regard.

In 1989, the US economy had been suffering from extremely poor overall productivity growth for almost two decades.a By 2005, the United States had experienced almost a decade of accelerated productivity growth, briefly interrupted by the 2001 recession.b

In 1989, a panel of experts documented a long-term decline in US industrial performance in several critical sectors.c A decade later, a similar assessment showed US industry to be resurgent across a variety of sectors, including several that had been troubled in 1989.d In 2005, US-based companies—Google, Apple, Boeing, Genentech—remain at the global forefront in commercializing new technology and creating new markets based on innovation.

In contrast, the economies of most other developed nations have suffered from slower growth in gross domestic product (GDP), productivity, and income—and from higher unemployment and inflation.e

What accounts for this “American economic miracle,” and will it continue? Various studies have identified key factors, although there is some disagreement over sustainability. In the area of innovation, structural US advantages include our system of research universities with both govern

the past at taking advantage of breakthroughs and inventions from abroad.8 But as other nations increase their innovation capacity, the United States must reassess its own environment for innovation and make adjustments to maintain leadership and to maximize the benefits of science and engineering for the public at large.

The innovation environment encompasses a broad range of policy areas. The Committee on Prospering in the Global Economy of the 21st century focused on intellectual property protection, the R&D tax credit, other tax incentives for innovation, and the availability of high-speed Internet access. Although some other important components of the innovation environment were not examined in detail, such as the corporate tax rate and tax-forgiveness policies in various nations, the committee believes the spe-

8

NAS/NAE/IOM. Capitalizing on Investments in Science and Technology. Washington, DC: National Academy Press, 1999.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

ment and private funding, the diverse portfolio of government-funded research awarded through peer review, strong intellectual property and securities regulation, and the financing of innovation “led by a uniquely dynamic venture capital industry.”f

It is generally considered important for the United States to continue to reassess the environment for innovation and to address shortcomings wherever possible; some believe current incentives for companies to innovate and commercialize are strong and not in need of a significant overhaul.

  

aP. W. Bauer. “Are WE in a Productivity Boom? Evidence from Multifactor Productivity Growth.” Cleveland, OH: Federal Reserve Bank of Cleveland, October 15, 1999. Table 1. Available at: http://www.clevelandfed.org/research/Com99/1015.pdf.

  

bD. W. Jorgenson, M. S. Ho, and K. J. Stiroh. “Projecting Productivity Growth: Lessons from the US Growth Resurgence.” Discussion Paper 02-42. Washington, DC: Resources for the Future, July 2002. Available at: http://www.Rff.org/Documents/RFF-DP-02-42.pdf#search=’U.S.%20productivity%20growth’; Bureau of Labor Statistics. “Productivity and Costs, 2nd Quarter 2005, Revised.” News Release, September 7, 2005. Available at: http://www.bls.gov/news.release/prod2.nr0.htm.

  

cM. Dertouzos, R. Lester, and R. Solow. Made in America: Regaining the Productive Edge. Cambridge, MA: MIT Press, 1989.

  

dNational Research Council. US Industry in 2000: Studies in Competitive Renewal. Washington, DC: National Academy Press, 1999.

  

eR. J. Gordon. Why Was Europe Left at the Station When America’s Productivity Locomotive Departed? Working Paper 10661. Cambridge, MA: National Bureau of Economic Research, August 2004. Available at: http://www.nber.org/papers/w10661/.

  

fR. J. Gordon. The United States. In B. Steil, D. G. Victor, and R. R. Nelson, eds. Technological Innovation and Economic Performance. Princeton, NJ: Princeton University Press, 2002. Pp. 49-73.

cific changes recommended here create significant opportunities. It should be noted that several focus-group members and reviewers raised product liability and tort reform as areas for potential improvement. However, the committee determined that the Class Action Fairness Act of 2005, which represents a major policy change, is a step forward in the national approach to issues of product liability.9

ACTION D-1:
ENHANCE THE PATENT SYSTEM

Enhance intellectual-property protection for the 21st century global economy to ensure that systems for protecting patents and other forms of intellectual property underlie the emerging knowledge economy but allow

9

Statement on S.5, the Class-Action Fairness Act of 2005. White House press statement. February 18, 2005.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

research to enhance innovation. The patent system requires reform of four specific kinds:

  • Provide the US Patent and Trademark Office with sufficient resources to make intellectual-property protection more timely, predictable, and effective.

  • Reconfigure the US patent system by switching to a “first-inventor-to-file” system and by instituting administrative review after a patent is granted. Those reforms would bring the US system into alignment with patent systems in Europe and Japan.

  • Shield research uses of patented inventions from infringement liability. One recent court decision could jeopardize the long-assumed ability of academic researchers to use patented inventions for research.

  • Change intellectual-property laws that act as barriers to innovation in specific industries, such as those related to data exclusivity (in pharmaceuticals) and those which increase the volume and unpredictability of litigation (especially in information-technology industries).

The US patent system is the nation’s oldest intellectual-property policy.10,11 A sound system for patents enhances social welfare by encouraging invention and the dissemination of useful technical information.12 It also provides incentives for investment in commercialization that promotes economic growth, creates jobs, and advances other social goals.13

Balance is a critical element of a sound patent system. Without adequate intellectual-property protection, incentives to create are compromised. On the other hand, too much protection slows the application of valuable ideas. Thus, it is imperative that the US Patent and Trademark

10

The US Patent and Trademark Office (USPTO), mandated by the US Constitution, awarded its first patent on July 31, 1790, to Samuel Hopkins for an improvement in “making Pot ash and Pearl ash by a new Apparatus and Process.”

11

Article I, section 8 of the Constitution reads, “Congress shall have power … to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Available at: http://www.uspto.gov/web/offices/pac/doc/general/#ptsc/.

12

The USPTO offers this simplified definition: “A patent is an exclusive right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem….” In addition, a patent item must be sufficiently different from what has been used or described before that it may be said to be non-obvious to a person having ordinary skill in the area of technology related to the invention. For example, the substitution of one color for another or changes in size, are ordinarily not patentable. Available at: http://www.uspto.gov/web/offices/pac/doc/general/#ptsc/.

13

M. Myers, quoted in Changes Needed to Improve Operation of US Patent System. National Research Council News Release. Washington, DC: The National Academies, April 19, 2004.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

Office (USPTO) and the courts scrupulously protect patent rights and rigorously enforce patent law.14

Concerns over questions of patent policy have previously led the National Academies to conduct an extensive study of the field, emphasizing questions related to innovation and technology.15 That study explored stresses in the system and suggested remedies to promote vitality and improve the functioning of the patent system. This committee believes that several of those recommendations are particularly important, and they are reflected in the first three patent system action items contained herein.

The first priority with regard to patent reform is for Congress and the administration to increase the resources available to the USPTO. Patents are now acquired more frequently and asserted and enforced more vigorously than at any time in the past. That surge in activity is indicative that business, universities, and public entities attach great importance to patents and are willing to incur considerable expense to acquire, exercise, and defend them. There is evidence that the increased workload at the USPTO, with no significant concomitant increase in examiner staffing or other resources, has resulted in a decline in the quality of patent examinations and increased litigation costs after patents are granted.16 Earlier reports by the National Academies and the Council on Competitiveness identify increasing USPTO capabilities having high priority.17

The National Academies report outlines how additional resources should be used. This includes having the USPTO hire and train additional examiners and implementing more capable electronic processing. It also notes that the USPTO should create a strong multidisciplinary analytical capability to assess management practices and proposed changes; provide an early warning of new technologies proposed for patenting; and conduct reliable, consistent reviews of reputable quality that address officewide performance and the performance of individual examiners.18

The second important action is to harmonize the US patent system with systems in other major economies by instituting postgrant review and moving from a first-to-invent to a first-inventor-to-file system. In addition to bringing the United States more in line with the patent policies of the rest of

14

See http://www.federalreserve.gov/boarddocs/speeches/2004/200402272/default/.

15

National Research Council. A Patent System for the 21st Century. Washington, DC: The National Academies Press, 2004. P. 18.

16

J. L. King. Patent Examination Procedures and Patent Quality. In W. M. Cohen and S. A. Merrill, eds. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press, 2003. Pp. 54-73.

17

See National Research Council. A Patent System for the 21st Century. Washington, DC: The National Academies Press, 2004, especially pp. 103-108; Council on Competitiveness. Innovate America. Washington, DC: Council on Competitiveness, 2004, especially p. 69.

18

See National Research Council. A Patent System for the 21st Century. Washington, DC: The National Academies Press, 2004. Pp. 103-108.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

the world, these changes would increase the efficiency and predictability of the US system. Increased harmonization would aid US inventors who seek global protection for their inventions.

The only way to challenge a patent under the current system is by litigation. This has led to abuses, such as laying broad claims—sometimes without reason or merit—to patents in hopes of receiving a generous settlement from a competitor who wishes to avoid long and expulsive litigation. Often, competitors or other interested parties are the best available source of information about the state of the art. Inviting their input in a process of administrative review—the so-called opposition system—would allow for “peer review” of recently granted patents to serve as a second check or quality assurance of the initial examination by the patent office. Such opposition is much less expensive than litigation, open to anyone, and much faster—decisions can sometimes be made in 1 day. The 2004 National Academies report explains, in considerable detail, how such a system, which it calls “Open Review,” would work.19

The United States still uses a first-to-invent rather than a first-to-file patent system. This requires a complex, expensive, and time-consuming (5-10 years) process to sort out who has the patent rights. It also absorbs the time of some of the most experienced patent examiners. Ultimately, the amount of resources devoted to resolving the priority question (which is resolved in favor of the first filer over two-thirds of the time)20 outweighs the benefits, and the time and personnel required could be put to better use improving the quality of basic examinations.

Some might argue that the proposed changes would put smaller inventors at a disadvantage. However, resolving disputes through an opposition process is far less expensive than is litigation, and that alone would constitute a significant benefit to small companies and individual inventors with worthy claims. Periodic surveys by the American Intellectual Property Law Association indicate that patent litigation costs—now millions of dollars for each party in a case where the stakes are substantial—are increasing at double-digit annual rates. The relatively low cost of filing provisional applications to establish priority under a first-to-file system would not constitute a significant burden on small inventors.

The third recommended action is to preserve some existing research exemptions from infringement liability.21 Until recently, it was widely be-

19

Ibid., pp. 95-103.

20

See http://www.oblon.com/media/index.php?id=181.

21

The committee recognizes the interest of some reviewers in re-examining aspects of the technology transfer process governed by the Bayh–Dole Act and related legislation, but issues related to Bayh–Dole are controversial and have been under discussion for years. The committee believes that establishing a research exemption for infringement liability is a higher priority.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

lieved, especially in the academic research community, that uses of patented inventions purely for research were shielded from infringement liability by an experimental-use exception first articulated in 19th-century case law. But in Madey v. Duke University,22 a suit brought by a former Duke University professor and laboratory director, the Federal Circuit Court upended that notion by holding that there is no protection for research conducted as part of the university’s normal “business” of investigation and education, regardless of its commercial or noncommercial character.

By the time Madey arrived before the court, most universities had established intellectual-property offices, and there were clear difficulties in distinguishing commercially motivated research from “pure” academic research. The court, without addressing that issue directly, decided that for a major research university even noncommercial research projects “unmistakably further the institution’s legitimate business objectives, including educating and enlightening students and faculty participating in these projects.”23 Activities that further “business objectives,” including research projects that “increase the status of the institution and lure lucrative research grants, students and faculty,” are ineligible for an experimental use defense.

Thus, the court regarded virtually all research as a means of advancing the “legitimate business objectives” of a university. The result, wrote one observer, “is a seemingly disingenuous opinion that neither conforms to the implications of precedent nor explains the reasons for steering the law in a different direction, but pretends that prior courts never meant to give research science special treatment.”24 Because the courts have not traced the experimental-use defense, case by case, as a tool for mediating between the private interests of patent owners and the public interest of open scientific progress, that issue awaits resolution.

The 2004 National Academies study offers two alternatives.25 The preferred solution would be the passage of appropriately narrow legislation to shield some research uses of patented inventions from infringement liability. If progress on the legislative front is delayed, the Office of Management and Budget might consider extending to grantees the “authorization and consent” protection that is provided to contractors, provided that such protection is strictly limited to research and does not extend to resulting commercial products or services.

22

Madey v. Duke Univ. 307 F.3d 1351. Available at: 2002 U.S. App. LEXIS 20823, 64 U.S.P.Q.2d. (BNA) 1737 (Fed. Cir. 2002).

23

Ibid.

24

R. Eisenberg. “Science and the Law: Patent Swords and Shields.” Science 299(5609)(2003): 1018-1019.

25

National Research Council. A Patent System for the 21st Century. Washington, DC: The National Academies Press, 2004. P. 82.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

The final action proposed herein for modernizing the patent system— and the only one our committee did not derive from the 2004 National Academies report—is to change intellectual-property laws that constitute barriers to innovation in specific industries. The two main problem areas are in the pharmaceutical and information-technology industries. It is particularly expensive to create and market new drugs and medicines, and the costs are unlikely to be recovered unless there is predictable intellectual-property protection of appropriate duration. The interaction of the US Food and Drug Administration (FDA) approval process and the patent system poses unique challenges to the pharmaceutical industry. The inherent risk to drug developers is illustrated by the reality that more than 90% of pharmaceutical candidates fail in clinical testing.26 Furthermore, only 1 in 1,000 new formulations tested reach clinical trials,27 and a relatively small minority of those, perhaps one-third, pay back the cost of even their own research.28 It is critical that a balance be struck in finding an appropriate period of exclusivity such that innovation is stimulated and sustained but patients have access to generic-drug-pricing structures.

Current intellectual-property protection for new medicines is governed under the Hatch–Waxman law, enacted in 1984, to give 14 years of patent protection after FDA approval of a new medicine. However, the law does not provide the same period for sustained marketing exclusivity. It curtails the ability to extend patents and provides opportunities for early patent challenges. The protection of data under the law is roughly one-half as long as the period afforded in Europe, creating a relative disadvantage for the United States in attracting pharmaceutical businesses29 (see Box 8-2).

In the near term, the United States should adopt the European period of 10-11 years. However, research should be undertaken to determine whether this period is adequate, given the complexity and length of drug development today.

Patent issues are also particularly important to the information-technology industry, especially in software and Internet-related activities. The volume and unpredictability of litigation have recently attracted considerable attention and are currently being reviewed by Congress. An

26

C. Austin, L. Brady, T. Insel, and F. Collins. “NIH Molecular Libraries Initiative.” Science 306(2004):1138-1139.

27

Tufts Center for the Study of Drug Development. “Backgrounder: How New Drugs Move Through the Development and Approval Process.” November 1, 2001. Available at: http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=4.

28

H. Grabowski, J. Vernon, and J. DiMasi. “Returns on Research and Development for 1990s New Drug Introductions.” Pharmacoeconomics 20(Supplement 3)(2002):11-29.

29

International Association of Pharmaceutical Manufacturers & Associations. “A Review of Existing Data Exclusivity Legislation in Selected Countries.” January 2004. Available at: http://www.who.int/intellectualproperty/topics/ip/en/Data.exclusivity.review.doc.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

BOX 8-2

A Data-Exclusivity Case Study

Incentives to innovate could be considerably improved by enhancing data-package exclusivity. In the case of incentives to develop new medicines, data-package exclusivity protects for a period of years an innovator’s regulatory submission package to the Food and Drug Administration from being used as a source of information by a company that produces generic products. The period in Europe is 10 years plus an additional year if the innovator has gained approval for more than one indication. The United States grants data exclusivity for a new chemical entity for 5 years; a second indication is entitled to 3 years of exclusivity. Those periods are generally too short to stimulate investment. Thus, innovation incentives in the United States are almost entirely patent-driven.

The current system has been successful in stimulating the creation of new molecules, but the limitations of the patent system sometimes result in denying patients the best that the pharmaceutical industry could offer. The limitations are due largely to the time constraints under which the patent system operates. Patents generally must be filed as quickly as possible after an invention occurs, and the ticking clock creates a tension with other aspects of drug development.a

The demands for data on a molecule’s safety and efficacy are increasing. The generation of the necessary data requires time and money. It is to patients’ benefit for as much time as appropriate to be devoted to the development of the data, but spending the time lessens the return on the developer’s investment because it encroaches on the patent term. Bringing a new medicine to patients requires a sequence of major breakthroughs, which in the current system must be accomplished well before the life of a patent runs out. Often, the clock does run out, and the innovator must start over with a new molecule simply to get time “back on the clock.” As a result, there is an ever-growing “graveyard” currently comprising more than 10 million compounds. There is no incentive to exhume these compounds in the absence of substantial data-package exclusivity, because patents will be either unavailable or of such narrow coverage that they would be easy to avoid in developing a related drug.

In addition, there is little incentive to pursue new indications for old molecules without appropriate data-package protection. Indeed, when no compound patent covers the product, there is a disincentive to develop new indications. Generic medicines may be approved for a smaller number of indications than those associated with the innovator’s drug. If there is no compound patent and one of the indications is unpatentable, the generic medicine may be approved only for the unpatented indication. The innovator’s entire market could then be eroded because

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

physicians have the latitude to prescribe the generic compound for any indications, including patented ones. Every reasonable effort should be made to encourage the development of new indications for known compounds because of the greater level of knowledge about safety for already-marketed compounds than for brand-new ones.

  

aThe pressure to file for patents as quickly as possible after an invention occurs is inevitable in a global knowledge economy, whether or not the United States stays with the current first-to-invent system or moves to a first-inventor-to-file system. Most of the world follows the latter system. Innovators seeking patent protection in the three major patenting regions (the United States, Europe, and Japan) must therefore manage their patent filings consistent with the first-inventor-to-file system.

additional complexity of sector-specific issues is that intellectual-property laws vary among nations, affecting innovation differently in different industries. The committee concludes that those issues are opportunities for Congress and other relevant federal entities to take productive actions, including those outlined above.

ACTION D-2:
STRENGTHEN THE RESEARCH AND EXPERIMENTATION TAX CREDIT

Enact a stronger research and development tax credit to encourage private investment in innovation. The current Research and Experimentation (R&E) Tax Credit goes to companies that increase their research and development spending above a base amount calculated from their spending in prior years. Congress and the Administration should make the credit permanent,30 and it should be increased from 20 to 40% of the qualifying increase so that the US tax credit is competitive with that of other countries. The credit should be extended to companies that have consistently spent large amounts on research and development so that they will not be subject to the current de facto penalties for having previously invested in research and development.


Much of the benefit of industry R&D spending accrues to society in ways that cannot be captured by individual firms. The R&E Tax Credit and similar policies in other nations are designed to promote more R&D investment and to encourage the creation and retention of jobs in the country that provides the tax incentive.

30

The current R&D tax credit expired in December 2005.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

Econometric studies have estimated that the tax credit encourages at least as much R&D spending as the credit costs in forgone tax revenue—and perhaps as much as twice that amount—particularly over the long term.31 Political and community leaders traditionally have viewed R&D incentives primarily as a tax issue, but their effect on jobs could be even more significant. R&D incentives directly create or sustain high-wage, high-skill jobs in places where the research is conducted. When long-term gains in productivity, income, and tax revenue are added to the immediate gain in R&D spending encouraged by the tax credit, it seems clear that the credit is a cost-effective mechanism for encouraging innovation and creating quality jobs.

The first change the committee recommends, namely making the credit permanent, is perhaps the most straightforward. Since the introduction of the tax credit in 1980, it has been extended repeatedly, allowed to lapse, and periodically modified, all without being formalized as a permanent, reliable element of policy.32 Over the years, numerous committees and groups have recommended that the credit be made permanent so that companies can plan longer term investments in US-based R&D with the knowledge that the credit will be available.33 The Council on Competitiveness recently echoed the call to make the tax credit permanent.34

The second change, increasing the credit from 20 to 40%, would be more controversial and, in the near term, more costly. The cost of the current tax credit is estimated at $5.1 billion for fiscal year (FY) 2005. The cost for FY 2006 is estimated at about $4.2 billion, assuming the current credit, due to expire December 31, 2005, is extended once again.35 The committee therefore estimated that permanent extension of the credit would cost about $5 billion per year (roughly what the credit currently costs), and that the other recommended changes (doubling the rate and expanding eligibility) could potentially result in doubling the cost.

There are several reasons to increase the rate, not the least of which is that the effective current credit is 13%, rather than 20%, for companies that deduct R&D expenses.36 A higher percentage would raise the incentive effect of the credit.

31

B. H. Hall and J. van Reenen. How Effective Are Fiscal Incentives for R&D? A Review of the Evidence. Working Paper 7098. Cambridge, MA: National Bureau of Economic Research, 1999.

32

As currently extended, the R&D tax credit will expire on December 31, 2005.

33

National Research Council. Harnessing Science and Technology for America’s Economic Future. Washington, DC: National Academy Press, 1999. P. 46.

34

Council on Competitiveness. Innovate America. Washington, DC: Council on Competitiveness, 2004. P. 59.

35

See Budget of the United States Government, Fiscal Year 2006, Analytical Perspectives. Washington, DC: US Government Printing Office, 2005. P. 65. Available at: http://a255.g.akamaitech.net/7/255/2422/07feb20051415/www.gpoaccess.gov/usbudget/fy06/pdf/spec.pdf.

36

This is due to the Section 280C limitation in the Internal Revenue Code. See J. R. Oliver. “Accounting and Tax Treatment of R&D: An Update.” The CPA Journal 73(7)(2003):46-49.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

It also is important to consider in international context the issue of whether the United States is keeping pace with other economies as an attractive location for R&D (see Table 8-1). Federal R&D tax credits rarely determine the type of research performed, but they can influence where the work is conducted.37,38 As of 2000, the most recent year for which data are available, foreign-based multinational corporations (MNCs) performed $26 billion in R&D in the United States. US-based MNCs performed $19.8 billion in R&D overseas.39 There is an obvious advantage in having MNCs locate operations in the United States as not only does it maintain the employment of the scientists and engineers at corporate research laboratories, but research activities are often located near production facilities that affect the employment of all workers where we already benefit from their contributions to US corporate R&D.40

The Organisation for Economic Co-operation and Development (OECD) has noted a trend in member countries toward more generous tax incentives for R&D investments.41 By moving to a higher, permanent tax credit, the United States will be better positioned to compete against credits already offered elsewhere.

Likewise, national policy must be conformed to ensure appropriate revisions of regulations interpreting and implementing the federal R&E tax credit. Practical and uniform guidelines for the conduct of tax audits related to the federal R&E tax credit must also be adopted. Federal research tax-credit regulations should be updated to reflect the changing impact of technology on the character of R&D, such as expanded use of databases provided by external parties and the greater conduct of R&D through joint ventures. Any national policy on tax credits and related incentives should recognize the importance of having states and localities also conform their laws to embrace a focus on research and innovation.

37

Organisation for Economic Co-operation and Development. “Tax Incentive for Research and Development: Trends and Issues.” Available at: http://www.oecd.org/dataoecd/12/27/2498389.pdf.

38

J. M. Poterba. Introduction. In J. M. Poterba, ed. Borderline Case: International Tax Policy, Corporate Research and Development, and Investment. Washington, DC: National Academy Press, 1997. P. 3. This is not to say that there is evidence that companies locate R&D in the country that has the best R&D tax credit. In fact, the industry perspectives in the Poterba volume suggest otherwise. And the second OECD paper referenced above indicates that the differential between the overall corporate tax rate and the credit is the key factor. For example, Ireland has a low overall corporate tax rate, so its R&D tax credit was not as effective as it would have been had the overall corporate tax rate been higher.

39

National Science Board. Science and Engineering Indicators 2004. NSB 04-01. Arlington, VA: National Science Foundation, 2004. Pp. 4-64–4-65.

40

Ibid., Tables 4-50, 4-51, and 4-52.

41

Organisation for Economic Co-operation and Development. Science, Technology, and Industry Outlook. Paris: OECD, 2004. P. 67.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

TABLE 8-1 Overview of R&D Tax Incentives in Other Countries

County

R&D Tax Incentive

Comment

Australia

  • Allows a 125% deduction for R&Dexpenditures

  • Plus a 175% deduction for R&D expenditures exceeding a base amount of prior-year spending.

The 125% deduction is the equivalent of a flat 7.5% R&D tax credit. In discussing its R&D-friendly environment, the Australian government’s website (http://investaustralia.com) concludes, “It’s little surprise then, that many companies from around the world are choosing to locate their R&D facilities in Australia.” The government also points out that “50% of the most innovative companies in Australia are foreign-based.”

Canada

  • Offers a permanent 20% flat (i.e., first-dollar) R&D tax credit.

  • Also, many provincial governments offer various incentives (e.g., refundable credits) for R&D activities conducted in their provinces.

In 2003, US subsidiaries spent $2.5 billion on R&D in Canada, which has mounted an aggressive marketing campaign, including television and print advertisements, to lure more US companies to locate R&D operations north of the border. An Ontario print ad discusses “R&D tax credits, among the most generous in the industrialized world” and “a cost structure which KPMG confirms as lower than the U.S. and Europe”; the ad concludes, “You’ll see why R&D in Ontario is clearly worth investigating.”

China

  • Offers foreign investment enterprises a 150% deduction for R&D expenditures, provided that R&D spending has increased by 10% from the prior year.

The 10% incremental-increase threshold should not be difficult to meet for US-owned companies growing start-up operations in China. China’s Ningbo Economic & Technical Development Zone (“NETD”) invites global companies to “enjoy a number of preferential taxation policies,” as well as other benefits.

France

  • Allows a 50% R&D credit, includes a 5% flat credit and a 45% credit for R&D expenditures in excess of average R&D spending over the two previous years.

As is the case with the China R&D deduction, the incremental threshold governing the French 50% credit should be easy to meet for “inbound” companies growing their operations in France. In 2003, US subsidiaries spent $1.8 billion on R&D in France. “This is the first time in our industry that Americans are coming to Europe to join the R&D of Europeans,” saysPasquale Pastore, President and CEO of STMicroelectronics, in The New France, Where the Smart Money Goes.

India

  • Companies carrying on scientific research and development are entitled to a 100% deduction of profits for 10 years.

“More than 100 global companies … have established R&D centers in India in the past 5 years, and more are coming…. As I see it from my perch in India’s science and technology leadership, if India plays its cards right, it can become by 2020 the world’s number-one knowledge production center,” Raghunath

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

County

R&D Tax Incentive

Comment

 

  • Automobile industry also is entitled to a 150% deduction for expenditures on in-house R&D facilities.

Mashelkar, Director General, Council for Scientific & Industrial Research, India, in Science Magazine.

Ireland

  • Offers a 20% R&D tax credit, plus a full deduction, as well as a low generally applicable 12.5% corporate income tax rate.

  • Capital expenditure may also quality for a separate flat credit.

According to IDA Ireland, the government agency with responsibility for the promotion of direct investment by foreign companies into Ireland, “Many leading global companies have found Ireland to be an excellent location for knowledge-based activities….” Nearly half of all IDA supported companies now have some expenditure on R&D and 7,300 people are engaged in the activity.

Japan

  • Offers a flat 10% R&D tax credit (a 15% flat credit is provided for small companies), in addition to other incentives.

In 2003, US subsidiaries spent $1.7 billion on R&D in Japan. Junichiro Mimaki, an official from Japan’s Ministry of Economy, Trade, and Industry, said in an August 26 interview with the Bureau of National Affairs that R&D and IT tax relief has created 400,000 jobs and boosted gross domestic product by 6.1 trillion yen ($55 billion) over 3 years.

Korea

  • Tax holidays, up to 7 years, are provided for high-technology business.

  • In addition, a variety of tax credits are provided for R&D-type expenditures.

Korea is moving aggressively to attract foreign R&D investment, promoting not only tax incentives but also other benefits for foreign companies locating R&D in the Incheon Free Economic Zone (“IFEZ”).

Singapore

  • “R&D and Intellectual Property Management Hub Scheme” offers US companies a 5-year tax holiday for foreign income earned with respect to Singapore-based R&D.

According to Singapore’s Economic Development Board Web site: “Singapore does not just welcome business ideas; it actually seeks and nurtures them. We play host to any shape and size of enterprise and innovation—startups with little more than the germ of an idea, global corporations with large R&D teams and complex production operations.”

United Kingdom

  • Allows a 125% deduction for R&D expenses, plus a 175% deduction for R&D expenditures exceeding a base amount of prior-year R&D spending.

The UK leads the world in attracting R&D investment by US affiliates—US subsidiaries spent more than $4 billion on UK-based R&D in 2003. The 125% deduction alone is the equivalent of a flat 7.5% R&D tax credit.

SOURCE: R&D Credit Coalition. “International R&D Incentives.” Fact Sheet. September 15, 2005. Available at: http://www.investinamericasfuture.org/factsheets.html. Accessed October 11, 2005.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

Finally, the definition of applicable expenses used to calculate the tax credit should be expanded to allow companies that have consistently maintained high levels of R&D spending to claim the credit. As currently written, the credit rewards companies that have high R&D expenditures compared with a base period. Companies that consistently invest large amounts, but do not appreciably increase those amounts over time, can be entitled to little or no credit. The formula should be amended so as not to penalize consistent R&D investors but rather to allow companies with significant and consistent R&D investments to receive tax credits.

Credit should be allowed for all relevant research expenditures (in contrast with the current incremental approach) by, for example, broadening the definition of qualifying expenditures. Qualifying expenditures could be broadened to include some legitimate costs of conducting research, such as employee benefit costs (defined benefits, retirement plans, healthcare plans, and so on) related to qualifying wages, as well as 100% of contract research costs (as opposed to the current 65%). In a different method, qualifying expenditures could be redefined to include all Internal Revenue Code (IRC) Section 174 expenditures (a much broader definition of R&D expenditures). A portion of the IRC ( the Section 280C limitation) that reduces the federal R&D credit by 35% might also be repealed (the limitation has the result that the 20% tax credit available in the United States today is really only a 13% credit).

ACTION D-3:
PROVIDE INCENTIVES FOR US-BASED INNOVATION

Many policies and programs affect innovation and the nation’s ability to profit from it. It was not possible for the committee to conduct an exhaustive examination, but alternatives to current economic policies should be examined and, if deemed beneficial to the United States, pursued. These alternatives could include changes in overall corporate tax rates and special tax provisions, providing incentives for the purchase of high-technology research and manufacturing equipment, treatment of capital gains, and incentives for long-term investments in innovation. The Council of Economic Advisers and the Congressional Budget Office should conduct a comprehensive analysis to examine how the United States compares with other nations as a location for innovation and related activities with a view to ensuring that the United States is one of the most attractive places in the world for long-term innovation-related investment and for the jobs resulting from that investment. From a tax standpoint, that is not now the case.


Countries around the world are working to bolster innovation, often by improving the tax environment for high-technology business activities (see Box 8-3, Finland; Box 8-4, South Korea; Box 8-5, Ireland; Box 8-6,

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

BOX 8-3

Finland

The rapid growth of Finland’s high-technology economy is often seen as testament to long-term strategic planning, systematic investment, and the ability to adopt innovative policies more quickly than other nations. In the 1970s, Finland’s political leaders, research community, and labor unions engaged in planning to focus R&D funding in electronics, biotechnology, and materials technology. Sustained government support paid off, as electronics-based exports grew from 4% of Finland’s economy in 1980 to 33% of all exports in 2003.a Today, Finland’s private and public sectors invest 3.5% of GDP into R&D programs (ranked second in the world), and the proportion of its population working as research scientists is the highest in the world.b

  

aOrganisation for Economic Co-operation and Development. Innovation Policy and Performance: A Cross-Country Comparison. Paris: OECD, 2005.

  

bOrganisation for Economic Co-operation and Development. Main Science & Technology Indicators. Paris: OECD, 2005.

BOX 8-4

South Korea

South Korea recently established an agency to coordinate innovation policies and R&D strategies within the Ministry of Science and Technology. Almost 40% of all postsecondary degrees awarded there are in science and engineering, compared with 15% in the United States.a The government is seeking to double its expenditures on R&D between 2002 and 2007.

  

aOrganisation for Economic Co-operation and Development. Education Database. Paris: OECD, 2005.

Singapore; and Box 8-7, Canada). There are strengthening signs that changes in US tax policy are needed to encourage investment in America. The flexibility of US capital markets, particularly for financing small, high-technology enterprises through venture capital and public stock offerings, had been one of our major strengths, encouraging companies to focus their innovation in the United States. The rapid rise of venture capital in the late 1990s, however, was followed by the precipitous collapse of the technology

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

BOX 8-5

Ireland

The success of the “Celtic Tiger” in the 1990s was remarkable, especially in comparison with other member nations of the European Union. In 1987, Irish GDP per capita was 69% of the European Union average, but by 2003 it had reached 136%.a Ireland’s unemployment fell from 17% to 4% over the same period. How did Ireland go from being one of Europe’s poorest nations to one of the richest? First, Ireland aggressively courted multinational corporations and maintained a business-friendly 12.5% corporate tax rate.b Most of the world’s top pharmaceutical, medical device, and software concerns now have operations in Ireland.c Second, the government placed a strong emphasis on secondary and higher education, and tuition has been free since 1996. Participation in Irish higher education surpasses the OECD average. Today, Ireland is focused on increasing its public R&D spending and production of scientists and engineers to complement strong growth in R&D performance by foreign multinational corporations. The goal is to increase total R&D intensity in the economy from 1.4% of GDP in 2002 to 2.5% by 2010.d

  

a“Tiger, Tiger, Burning Bright.” The Economist 373(8397)(2004):4-6.

  

bHeritage Foundation. “Ireland. 2005 Index of Economic Freedom.” 2005. Available at: http://www.heritage.org.

  

cT. Friedman. The End of the Rainbow. New York Times, June 29, 2005. P. A-23.

  

dOrganisation for Economic Co-operation and Development. Science, Technology, and Industry Outlook. Paris: OECD, 2005. P. 56.

BOX 8-6

Singapore

Singapore is continuing its long history of active government involvement to promote innovation. This includes a major investment in Biopolis, opened in October 2002, which Singapore intends to be a world-class biomedical sciences R&D hub for Asia.a It is backed with a portfolio of scholarships, fellowships, and grants to attract students and researchers from around the world. Another initiative is the Standards, Productivity, and Innovation Board,b which combines incentives and other help to increase the number of Singapore’s small and medium-size high-technology and e-commerce businesses, improve national productivity and entrepreneurship, and expand the nation’s position in retail markets.

  

aSee http://www.one-north.com/pages/lifeXchange/index.asp. Accessed September 15, 2005.

  

bSee http://www.spring.gov.sg/portal/main.html. Accessed September 15, 2005.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

BOX 8-7

Canada

Canada’s two-part innovation strategy covers almost every aspect of that nation’s economic and educational systems. The first part, called Achieving Excellence: Investing in People, Knowledge, and Opportunity, is a plan to expand the Canadian economy.a The second part is Knowledge Matters: Skills and Learning for Canadians, which outlines plans to improve Canadian education.b The overall goal of the programs is to strengthen Canada’s economy by improving quality in, and access to, elementary, secondary, and higher education; by promoting R&D in the sciences and engineering; and by extending the new programs and reforms from the federal government to the smallest township.

  

aGovernment of Canada. Achieving Excellence: Investing in People, Knowledge and Opportunity. Executive Summary. Ottawa, ON: Government of Canada, 2002. Available at: http://www.innovationstrategy.gc.ca/gol/innovation/site.nsf/en/in02425.html.

  

bGovernment of Canada. Knowledge Matters: Skills and Learning for Canadians. Executive Summary. Ottawa, ON: Government of Canada, 2002. Available at: http://www11.sdc.gc.ca/sl-ca/doc/summary.shtml.

stock bubble in 2001. Venture-capital investments have been fairly flat since then, so the United States no longer has that advantage.42 Perhaps equally important is the fact that investment capital tends to be highly mobile and to follow opportunity irrespective of national borders.

The committee believes that the United States can and should do more, particularly in tax policy, to encourage long-term investments in innovation, but it was not able to examine all options and their implications within the schedule mandated for our study. Several creative new approaches to capital-gains taxation were discussed, including the option of reducing rates for very-long-term investments or offering more liberal allowances for loss writeoffs. The overall corporate tax rate, which some industry groups see as high by international standards (although there is controversy about this), is important for determining where companies invest in R&D and downstream activities. Finally, incentives for the purchase of high-tech manufacturing and research equipment—through tax credits and accelerated depreciation—were considered.

Those new approaches would have widespread consequences for the economy as a whole and for our national fiscal position. It would be neces-

42

See the National Venture Capital Association Web site at: http://www.nvca.org.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

sary to structure any new incentives as a comprehensive, integrated package. It would also be useful to compare the effects of various options, especially with reference to what other nations are doing. Any such analysis should examine US and foreign tax systems with a view to developing a package of incentives to ensure that the United States remains a highly attractive place for long-term innovation-related investments and for location of the follow-on jobs they produce.

ACTION D-4:
ENSURE UBIQUITOUS BROADBAND INTERNET ACCESS

Several nations are well ahead of the United States in providing broadband access for home, school, and business. That capability can be expected to do as much to drive innovation, the economy, and job creation in the 21st century as did access to the telephone, interstate highways, and air travel in the 20th century. Congress and the administration should take prompt action—mainly in the regulatory arena and in spectrum management—to ensure widespread affordable broadband access in the near future.


The production of information-technology equipment and the use of information technology have been important engines for US productivity growth in a range of industries and for the resulting low-inflation economic expansion (briefly, but significantly, interrupted in 2001) that the nation has experienced since the mid-1990s.43 The OECD estimates that the percentage of total capital investment accounted for by spending on that equipment is significantly higher in the United States than it is in other OECD economies.44 Industries as diverse as financial services, retail, entertainment, and logistics and transportation are being transformed by information technology.

Although some believe that broadband access is not critical to US competitiveness, the committee disagrees. The information technology revolution will continue to fuel economic growth, the creation of high-paying jobs, and US leadership in science and engineering well into the future. Accelerating progress toward making broadband connectivity available and affordable for all US citizens and businesses is critical. Although penetration of broadband service in the United States is increasing rapidly, broadband leaders such as South Korea and Japan are still far ahead.45

43

R. J. Gordon. Technology and Economic Performance in the American Economy. Working Paper 8771. Cambridge, MA: National Bureau of Economic Research, 2002.

44

Organisation for Economic Co-operation and Development. The Economic Impact of ICT. Paris: OEDC, 2004. P. 67.

45

P. Gralla. “U.S. Lags in Broadband Adoption Despite VoIP Demand, Says Report.” EE Times Online, December 16, 2004. Available at: http://www.eet.com/showArticle.jhtml?articleID=55800449.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

President Bush has announced a national goal of ubiquitous broadband access in the United States.46 The committee urges the Administration and Congress to take the necessary steps to meet that goal. Many of the barriers to more rapid broadband penetration lie in the area of telecommunications regulation and spectrum policy, where in some cases entrenched industry interests are clashing to preserve and extend the advantages offered under policies promulgated in the past.47

Telecommunication infrastructure will be crucial to the competitiveness of any country in the 21st century. It is the medium by which data are accessed, consultations take place, and decisions are transmitted. One has only to look at the vast amounts of information transmitted by the financial community, the use of information in the retail market (for example, WalMart, the largest retailer in the world, owes much of its competitiveness to its information-technology infrastructure for tracking sales, inventory, and consumer purchasing trends in real time), and the growth of online sales in almost every business segment of the economy.

As the Internet becomes more dominant in communication, information access, commerce, education, and entertainment, the key infrastructural factor will be broadband access. The potential effects on society and individuals of distance learning, telemedicine, Internet entertainment, and delivery of government services demonstrates how great the impact of broadband on the competitiveness of any country could be. The United States was an early leader in Internet broadband penetration but recently has fallen out of the top 10 countries in per capita broadband access. In fact, vast rural regions of the United States are devoid of affordable bidirectional broadband capability. Just as the United States was a leader in providing ubiquitous telecommunication capability to its citizens in the 20th century and reaped the benefits of voice-connectivity technology, it should be a leader in facilitating broadband Internet connectivity to its citizens in the 21st century. That infrastructure not only will support existing commerce but will facilitate the growth of new industries.

Broadband access clearly is not a “big-company issue;” large companies can generally afford the technology, and many have already put it in place in order to compete. Broadband is an important issue for ordinary citizens (providing, for example, the ability to telecommute on a national and international scale) as well as small and medium-sized businesses. As many of us have found when calling a company to help fix our computer, making an airline reservation, or getting guidance on how to help a sick child in the middle of the night, the person we call may be virtually any-

46

“Bush Pushes Ubiquitous Broadband by 2007.” Reuters, March 26, 2004.

47

R. Hundt. “Why Is Government Subsidizing the Old Networks When ‘Big Broadband’ Convergence Is Inevitable and Optimal?” New America Foundation Issue Brief. December 2003.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×

where, whether rural or urban, at home or in a call center, in the United States or overseas. If we expect all of our citizens and companies to be competitive, universal availability of affordable broadband should be a matter of national policy.

Some of the programs and policies already being pursued in the United States, such as federal R&D funding and accelerated tax depreciation on equipment purchases, do cost the federal government money in terms of outlays and forgone direct revenue. However, the committee believes that the most important needed changes are in the regulatory and spectrum management areas. Policy changes in both of these areas have a broad impact on the incentives of private companies to invest in infrastructure and to develop competitive services. Recent examples of regulatory changes include Federal Communications Commission decisions to free newly deployed broadband infrastructure from legacy regulation and to develop a framework for deployment of Broadband over Power Lines (BPL). These sorts of regulatory changes do not entail financial investments by the federal government. The future of spectrum management is another particularly critical area.48 And, as is the case with regulatory policy, changes in spectrum policy would not necessarily entail costs to the federal government and might even result in additional revenue.

CONCLUSION

The United States, if it is to ensure the continued high standard of living and security of its citizens, must maintain its position as the world’s premier place for innovation, for investment in downstream activities such as manufacturing and marketing, and for creation of high-paying jobs. We can do this if, while implementing the other recommendations made herein, we modernize the patent system, realign tax policies to encourage innovation, and ensure the nation meets the goal of affordable broadband Internet access for all. The committee could not examine every possibility, but appropriate policy changes should be pursued in each of these areas. A comprehensive comparative analysis of tax rules, conducted by the Council of Economic Advisers and the Congressional Budget Office, could elucidate how we stack up against other nations as a location for innovation and related follow-on activities. The object of that examination and the adoption of the recommendations in this chapter would be to ensure that the United States provides the innovation-friendly environment needed to remain a highly attractive place to invest in the future.

48

See US Department of Commerce. Spectrum Policy for the 21st Century: The President’s Spectrum Policy Initiative. Report 1. Washington, DC: US Department of Commerce, June 2004. Available at: http://www.ntia.doc.gov/reports/specpolini/presspecpolini_report1_06242004.htm.

Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
×
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Suggested Citation:"8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?." National Academy of Sciences, National Academy of Engineering, and Institute of Medicine. 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, DC: The National Academies Press. doi: 10.17226/11463.
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Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future Get This Book
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In a world where advanced knowledge is widespread and low-cost labor is readily available, U.S. advantages in the marketplace and in science and technology have begun to erode. A comprehensive and coordinated federal effort is urgently needed to bolster U.S. competitiveness and pre-eminence in these areas. This congressionally requested report by a pre-eminent committee makes four recommendations along with 20 implementation actions that federal policy-makers should take to create high-quality jobs and focus new science and technology efforts on meeting the nation's needs, especially in the area of clean, affordable energy:

1) Increase America's talent pool by vastly improving K-12 mathematics and science education;

2) Sustain and strengthen the nation's commitment to long-term basic research;

3) Develop, recruit, and retain top students, scientists, and engineers from both the U.S. and abroad; and

4) Ensure that the United States is the premier place in the world for innovation.

Some actions will involve changing existing laws, while others will require financial support that would come from reallocating existing budgets or increasing them. Rising Above the Gathering Storm will be of great interest to federal and state government agencies, educators and schools, public decision makers, research sponsors, regulatory analysts, and scholars.

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