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Industrial Innovation in the United States:
The Complementary Role of the Federal Government

Presented at the APEC R&D Leaders Forum
Taipei, Taiwan
March 12, 1998

Dr. Robert E. Hebner, Acting Deputy Director, National Institute of Standards and Technology, U.S. Department of Commerce, Gaithersburg, MD U.S.A.


Thank you very much for inviting me here today. It gives me great pleasure to be speaking to this international community of friends.

Not too many years ago, many of my countrymen and my bosses in government might have questioned the relevance of an international forum on industrial innovation. The U.S. system of innovation was doing quite well, thank you. At least we thought so, but appearances proved to be deceiving.

Fortunately, we have learned much since then, largely from the experiences of Asian economies. One of the key lessons we learned is that companies can cooperate and still compete compete vigorously, in fact. So, a special purpose of this talk is to acknowledge the contributions that many APEC nations have made to the contemporary American view of technology development and economic growth. You have been an inspiration and good teachers.

Reaffirming the Role of Technology

Today, science and technology are very much on the minds of Americans. The experience of the United States is that science and technology are inextricably linked to industrial innovation and development. The three key ingredients of economic growth are capital, labor, and technology, and of these, technology is the most important.

Leading economists estimate that technical progress has accounted for as much as one half of economic growth in the United States over the past 50 years. We see the growth-inducing power of technology at the industry level. Our research-intensive industries aerospace, chemicals, communications, computers, pharmaceuticals, scientific instruments, semiconductors, and software have been growing at about twice the rate of the economy as a whole in the past two decades. These high-technology industries also account for a growing share of world trade.

We also see technology's growth-inducing power at the level of the individual firm. A recent analysis shows that firms using advanced technologies outperform firms that do not. They are more productive and profitable, pay higher wages, and increase employment more rapidly. The differences between the extremes are large. For example, plants that used eight or more advanced technologies grew nearly 15 percent more than did plants that used no advanced technologies.

The evidence is convincing. At the macroeconomic level, the industry level, and the firm level, technology is the engine of economic growth.

Changes in the Technical Economy

The American perspective on the process of innovation has adapted to changing times. At the start of this century, the crucible of technology was held by the great inventors: [such as] Edison and Westinghouse, Eastman and Bell. Their efforts were heroic, and their companies were their castles. Their work brought unprecedented benefits to all our citizens. Government, while supportive, rarely got involved.

In the middle of the century, America learned that the power of government spending could end an economic depression and advance national goals. First in war, and later in peace, the model was clear and widely accepted: the government, as the primary consumer of leading-edge science and technology, would set its requirements and pay what it took to meet them. The resulting technology would further the goals of Federal missions, chiefly national defense, the exploration of space, health and medicine, and development of energy sources.

The byproducts of this process were a developed infrastructure, educated workers, and a river of innovation within the corporate castles that meandered eventually into civilian goods. Perhaps the effects were indirect, but prosperity proved that it worked. Many still regard the 1940s, 1950s, and early 1960s as the "golden age" of science and technology in America.

In the late 1960s, winds of change were felt. Trends in trade of high technology products indicated that, contrary to the prevailing view at the time, technology leadership was not self-perpetuating. Firms in other nations often were the first to master new technologies and turn them into products. Growth rates in other nations exceeded ours. Troubling questions triggered a period of self examination in government and industry.

The first response was that innovations stemming from government projects were not reaching the commercial marketplace fast enough. Agencies were encouraged and, in some cases, ordered, to accelerate the pace at which "spin-offs" were developed. The public was promised maximum value in return for their taxes. Results, however, did not match expectations. In retrospect, we realize that market forces were already selecting those technologies ready for wide deployment. Much of the rest was too specialized to have independent commercial value.

By the 1980s, the situation had become clearer. The fastest growing companies did not operate from castles. Instead, smaller firms that were interdependent and specialized often had the natural advantage. The old view that the dynamics of science stood apart from the dynamics of technology began to fade as well. To build advantage and seize opportunities, the best entrepreneurs used rapid iterations of invention, development, and deployment.

The idea of "leverage" took on new meaning: using alliances between firms to increase the value of each's portfolio. This process also applied to new relationships between business and universities. Business valued the creative process of higher education as a source of innovation; universities valued business for their support and to validate their relevance. The technology transfer that most helped business was borne by college graduates on their own feet.

The U.S. Congress also sought to foment change. It passed laws to encourage collaboration among government, universities, and commercial firms. It removed legal barriers to certain joint technical work. And most important at least from my perspective it redefined the role of government. From being solely a consumer of advanced technology, government became also an active proponent of advanced technology.

Business has responded well to these new opportunities. For example, industrial funding of university research grew by nearly 600 percent in constant dollars between 1970 and 1993, from $173 Million to $1.2 Billion. There are now more than 1000 formal university-industry research centers on more than 200 university campuses.

Results of a recent survey by the Industrial Research Institute also point to greater collaboration. IRI members account for the bulk of industrial R&D in the United States. Half said they expect to increase their joint ventures and alliances, while just 4 percent expect a decrease. About a third expect to increase licensing to others, and a fifth expect to increase their licensing from others. Sixty percent of research managers said that the responsibility for research and development in their companies was continuing to shift from central laboratories to business units.

These findings only reinforce many other indicators that show that a process of fundamental change is, indeed, under way. The joint trends of decentralization and interdependence do not stop at national borders. Companies seek the best ideas and technologies wherever they might be found. Today, U.S. firms invest nearly $15 billion per year in R&D conducted in other nations, about 10 percent of their total. And since each component of their products is another opportunity for improvement, new opportunities for small business are created in each small area of specialty. It matters little whether their home countries are advanced or emerging. American industry is as prepared as never before to shop in the world market. In return, all we ask is equal consideration for the best America has to offer.

Defining the Role of Government

In the context of this fundamental change in the U.S. economy, the federal government's technology role has been hotly debated. Important changes have occurred, and there may be more to come. In fact, the Congress has just begun a review of our national science and technology policy. The goal is develop a "policy that is concise, comprehensive, and coherent."

Clearly among the issues that must be addressed are the effectiveness of public investments, the often artificial line drawn between research and development, and the role of the free market. Key questions for government center on incentives, infrastructure, and investment horizons.

Businesses make rational decisions about the futures of markets to which they are committed or might choose to enter. They pretty much know their cost of capital and hence can estimate rates of return from alternative investments at least up to a point. A problem arises because firms cannot capture all the benefits that their investments create. Economists today call this the "spillover" effect. The total return on investment may be much greater than what the company earns. The rest benefits others: the new knowledge that can be exploited; the new industries that will arise, creating new jobs; the efficiencies that will improve other industries; and the economic growth that will be felt throughout many communities.

I have witnessed this time and time again with measurement technology. For example, NIST was late in developing linewidth standards the rulers that the semiconductor industry uses to manufacture integrated circuits. Some of the larger companies developed their own. When NIST finally issued a standard, those companies abandoned their own. Why? Because for the standard to be useful, it had to be available to suppliers and customers and, quickly, went to competitors. Thus, the whole enterprise benefited but only a few paid not good business for the few who pay.

More broadly, especially for new technologies, businesses cannot justify the costs of development on their own. Particularly for long-term projects, the inability of the investors to reap a sufficient portion of the benefits can be a deterrent to investment in essential research. Most affected are technologies that are still many years away from the market and are likely to find many commercial uses. These include infrastructural technologies akin to the roads, bridges, and rails of transportation systems.

Government has constructive roles to play in these areas. Government, recognizing that spillover benefits fuel economic growth and, typically, industrial progress, has a powerful incentive to encourage research with the potential to deliver broad-based benefits.

Ten years ago, the Congress came to this conclusion, and made fundamental change in its policy of leveraging our science and technology for the purpose of industrial innovation. The mission of my agency, then the National Bureau of Standards, was enlarged to implement this strategy. We became the National Institute of Standards and Technology, NIST, with a new charge "to assist industry in the development of technology ... needed to improve product quality, to modernize manufacturing processes, to ensure product reliability ... and to facilitate rapid commercialization ... of products based on new scientific discoveries."

I hasten to add that our budget for this venture is only 1 or 2 percent of the total investment that the United States Government makes in the research that spawns emerging technologies, about $25 to $30 billion per year. This larger enterprise includes the National Science Foundation, which supports university research and student education; the Departments of Defense and Energy and NASA, which still engineer large projects for national goals; and the National Institutes of Health and other organizations that develop new technology to fight disease.

However, it is NIST that has the unique mission to work with American industry as it strives to overcome technological barriers, setting the stage for long-term economic growth.

About NIST

Let me spend the rest of my time describing how NIST carries out this mission. We have four major programs. The first is National Quality Program, which we administer. Suffice it to say that Japan's Deming Prize was one of the inspirations for our highly prized Malcolm Baldrige National Quality Award. The award has had a powerful motivational and catalytic effect on the way U.S. views quality and continuous improvement.

The second is the Manufacturing Extension Partnership, our young industrial modernization program focused on manufacturing companies with fewer than 500 employees about 99 percent of all U.S. manufacturing establishments. This program seeks to assure that these companies have access to appropriate technology.

ATP

Our third program is the Advanced Technology Program, or ATP. The ATP is a unique partnership between government and private industry. The aim is to accelerate development of high-risk technologies that promise significant commercial payoffs and widespread benefits for the economy. ATP focuses on generic, cutting-edge technologies that are seeds for future growth. It co-funds with industry research projects that companies will not tackle on their own because of high technical risks, market uncertainties, and spillover effects.

One example is the manufacture of advanced composite materials for non-military applications. Industry evaluations and proposals indicate that the prospects are extraordinary but major barriers loom large. Candidate applications are offshore oil platforms, bridges, cars and other structures, for which light weight and reduced maintenance are desired features. The economic payoff to the nation would be huge. But the development of advanced composites had been driven by the needs of the defense industry. Performance not cost has been the driving force.

The ATP focused program on manufacturing composite structures is helping U.S. companies develop the technical capability for producing vast amounts of affordable high-performance composites for large-scale commercial applications. It is a technology partnering program that is making solid progress.

We have several years of interim results, and they are more promising with each new assessment. One economic study projects the possible impact on the U.S. economy by a project to develop technologies that allow U.S. auto manufacturers to routinely control the fit of auto body components to world-class levels.

Already, the results have helped to reduce production and maintenance costs, improve product quality, and decrease time to launch new models. Within the next four years, benefits are expected to exceed project costs many times over, and the benefits will flow broadly to the automotive sector one of our largest sources of jobs and to consumers. Plans are under way to further diffuse this technology to the manufacturers of furniture and appliances, where it also is expected to improve quality and productivity. These are the kinds of broad-based benefits that ATP was designed to produce.

As we go forward with ATP, we will place increased emphasis on joint ventures and support for small and mid-sized firms. An unexpected benefit of ATP is that applicants who team together whether they eventually win an award or not tend to continue building their relationships. By acting as matchmaker to build consortia and to team companies with universities, we facilitate technology transfer and additional innovation.

Measurement and Standards Laboratories

Finally, the NIST Measurement and Standards Laboratories are essential to the economy and the historical core of our agency. The founding fathers of the United States recognized the importance of weights and measures to a strong and efficient economy. Our Constitution assigns to the federal government the responsibility "to fix the standard of weights and measures" immediately following the responsibility "to coin money."

Domestic and international commerce requires agreed-upon methods for measuring a host of chemical, physical, and engineering properties of goods. That is why the NIST laboratories are of prime importance in thousands of industrial settings all over America. Without the standards of measurement developed and maintained by NIST, and the technical advice NIST provides to hundreds of U.S. organizations that work on voluntary standards, our businesses would suffer a crippling disadvantage when it comes to certifying products for global markets. Further, we provide the links to the measurements and standards systems in other nations, to provide the trust that measurements made in those nations are equivalent to ours.

Our laboratory work on optical fibers is a good example. It has had a remarkable impact, demonstrating that measurements and standards are crucial in enabling technologies that ultimately make a difference in the marketplace. Since 1981, NIST has been working closely with the Telecommunications Industry Association to advance both standards and technology for the optical fiber industry. The tally thus far is more than 25 standard measurement methods.

One outcome is a Standard Reference Material that NIST issues to industry, an optical fiber whose diameter has been more accurately measured and certified than any other fiber in the world. The uncertainty of its diameter is about 50 nanometers. For optical fiber plant engineers, it serves as the ruler by which they monitor the uniformity of their own commercial fibers. For customers, it helps to assure reliable, high-quality communication service.

Measurement standards are only part of the story of the NIST Laboratories. Another part concerns voluntary, consensus standards. These agreements describe the expected attributes of products. They provide the confidence necessary for many firms buyers and sellers to interact and cooperate. They are the basis for trust and efficient transactions.

We believe that it is vital for all stakeholders manufacturers, buyers, governments, etc. -- to participate in the process of setting these standards, to promote equal opportunities around the globe. NIST promotes the harmonization of standards, codes, and regulations, and the development of international standards. Such activities clear the way for a fair and open global marketplace a benefit to all nations.

Conclusion

We gathered here today to discuss how the wise stewardship of science and technology has helped our nations to build wealth and a better standard of living. I conclude with perhaps the most important lesson of all: the easiest product to transport is a good idea.

American business has replaced the dictum of self-sufficiency with a new respect for cooperation. Increased cooperation with suppliers and customers not only strengthens the enterprise, but when practiced on a global scale, it provides access to the best ideas and technologies that the world has to offer. We are still learning how to do this better, and the learning will never stop. Continuing thought and attention must be devoted to the mechanics and dynamics of international technology partnerships.

The lessons and experiences of the United States and other APEC nations are enduring and applicable to all of us. We have profited, and indeed we will all continue to profit, from trust and cooperation. Our citizens all have unmet needs, our scientists all have unrealized dreams, and our industries all have uncertain risks as they strive to grow our nations. Working together, I am optimistic about what the future will bring.