Policy Issues for R&D Investment in a Knowledge-Based Economy

The "Internet Revolution" induced an unbalanced perspective on future economic growth strategies. Because information technology (IT) largely constitutes an infrastructure upon which other economic activity is based, its economic role is to facilitate the productivity of investment in a wide range of products and services that meet final demand. Other economies around the world can and are investing in the same infrastructure, so the efficiency advantages now being realized by the U.S. economy will be fleeting unless U.S. R&D efforts produce a new and broad range of innovative products and services that take advantage of this infrastructure. A deep and diverse technology-based manufacturing sector must be a core objective of a national R&D strategy. United States' manufacturing contributes $1.5 trillion to GDP, employs 20 million workers, accounts for more than 70% of industrial R&D, and constitutes the main source of technology for the larger service sector. While knowledge-based services are the largest source of economic growth for the U.S. economy, their long-term performance is highly dependent on synergies with a domestic manufacturing sector. These synergies will be even more important in the future because services are increasingly exposed to foreign competition. Knowledge-based services can be supplied from anywhere in the world--as long as these foreign sources can rapidly access and assimilate the necessary technology components. This caveat is the critical point for economic growth policy. Considerable research supports the argument that hardware and software components are most efficiently supplied to services by a manufacturing sector that is geographically close and institutionally integrated with the service applications. Policy debates have raged for decades over the nature and magnitude of underinvestment in manufacturing R&D. The need to resolve the relevant policy issues has increased, as industry is funding less of the long-term, high-risk research that creates the technology platforms supporting new industries and future economic growth. Unfortunately, only about a third of U.S. manufacturing is high-tech by conventional definitions. Some of the remaining industries develop technologies internally, but most purchase a large proportion of their technology from the high-tech sector. Because a technology acquisition strategy can be more easily imitated by foreign competitors, traditional industries are much more susceptible to exchange rate variations, global economic cycles, and secular shifts in foreign competition. Thus, with global technological capabilities relentlessly increasing, the long-term prospects for the moderate and low R&D-intensive portions of U.S. manufacturing are not good. This paper presents a conceptual framework and available data as inputs for the analysis of Federal R&D investment strategies. Such strategies must recognize the full range of public and private technology assets constituting a national innovation system. A developed and efficient innovation system has characteristics making imitation by foreign competitors difficult and thereby enables sustained competitive advantage.