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8 What Actions Should America Take in Economic and Technology Policy to Remain Prosperous in the 21st Century?
Pages 182-203

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From page 182...
... 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.
From page 183...
... 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.
From page 184...
... 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 8NAS/NAE/IOM.
From page 185...
... 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 9Statement on S.5, the Class-Action Fairness Act of 2005.
From page 186...
... • 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.
From page 187...
... 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.
From page 188...
... 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 19Ibid., pp.
From page 189...
... 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.
From page 190...
... 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.
From page 191...
... 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 in creasing.
From page 192...
... 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.
From page 193...
... 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.
From page 194...
... 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.
From page 195...
... and Europe"; the ad concludes, "You'll see why R&D in Ontario is clearly worth investigating." • Offers foreign investment enterprises a China The 10% incremental-increase threshold should not be difficult to meet for US 150% deduction for R&D expendi- owned companies growing start-up operations in China. China's Ningbo Eco tures, provided that R&D spending nomic & Technical Development Zone ("NETD")
From page 196...
... only tax incentives but also other benefits for foreign companies locating R&D in • In addition, a variety of tax credits are the Incheon Free Economic Zone ("IFEZ")
From page 197...
... 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.
From page 198...
... The flexibility of US capital markets, particularly for financing small, hightechnology 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
From page 199...
... First, Ireland aggres sively courted multinational corporations and maintained a business friendly 12.5% corporate tax rate.b Most of the world's top pharmaceuti cal, medical device, and software concerns now have operations in Ireland.c Second, the government placed a strong emphasis on second ary and higher education, and tuition has been free since 1996. Partici pation in Irish higher education surpasses the OECD average.
From page 200...
... 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)
From page 201...
... 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)
From page 202...
... 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.
From page 203...
... 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.


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