Government's Role in Innovation

Government's Role in Innovation

By Dennis Patrick Leyden University of North Carolina at Greensboro Albert N. Link University of North Carolina at Greensboro

~· '' Springer Science+Business Media, LLC

Librat·y of Congress Cataloging-in-Publication Data

Leyden, Dennis Patrick. Governrnent's role in innovation 1 by Dennis Patrick Leyden, Albert

N. Link. p. CITI.

Includes bibliographical references and index. ISBN 978-94-010-5304-4 ISBN 978-94-011-2936-7 (eBook) DOI 10.1007/978-94-011-2936-7 1. Technological innovations--Governrnent policy--United States.

1. Link, Albert N. II. Title. T173.8.L49 1992 338.97306--dc20 92-20984

CIP

Copyright © 1992 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1992 Softcover reprint ofthe hardcover lst edition 1992

Ali rights reserved. No part of this publication rnay be reproduced, stored in a retrieval systern or transmitted in any forrn or by any rneans, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher. Springer Science+Business Media, LLC.

Printed 011 acid-free pa per.

For Our Families

Table of Contents

List of Figures xi

List of Tables xiii

Acknowledgements xvii

Chapter 1 Derming Government's Role in Innovation 1

Chapter 2 The lnfluence of Federally-Financed R&D 13

History of Federal R&D Support 13 The Effect on Private R&D 15 The Effect on Productivity Growth 15

Chapter 3 The Production of Technical Knowledge 19

Theoretical Framework 21 • R&D Production Processes 21 • Decisionmaking With No Governmental R&D

Allocation 29 • Decisionmaking With a Governmental R&D

Allocation 35

viii Government's Role in Innovation

Empirica! Evidence 41 • Descriptive Analysis 41 • The Empirica! Model 44 • The Empirica! Results 47 Conclusions 49 Appendix:Government as a Risk-Averse Bureaucrat 55 • Governmental R&D Conducted In-House 56 • Contracting with a Risk-Neutral Firm 60 • Contracting with a Risk-Averse Firm 67 • Conclusions 68

Cbapter 4 Investments in lnfratecbnology Researcb 73

Investments in lnfratechnology 74 • Investments by Federal Laboratories 74 • Investments by Industrial Laboratories 75 Infratechnology and Productivity 76 Conclusions 80

Cbapter 5 Economic Impact of Federal lnvestments in lnfratecbnology 83

Evaluating Infratechnology Research 84 NIST's Investments to Implement Standards for Optical Fiber 87 • The Optical Fiber Industry 87 • Implementing Optical Fiber Standards 93 • Estimating the Economic Impacts of

NIST -Supported Standards 98 • Implications of the Findings 103 NIST's Research Program on Electromigration Characterization 106 • Electromigration Characterization 106 • The U.S. Semiconductor lndustry 110 • Estimating the Economic Impact of

Electromigration Research 113 • Implications of the Findings 118 Conclusions 120

Table of Contents ix

Cbapter 6 The Impact of External Research Relationships 127

Description of the Data 128 External Research Relationships 131 • University-Based Research Programs 131 • State-Funded Science and Technology

Center Research Programs 136 Empirical Analysis 143 • Explaining Utilization of External

Research 143 • External Research Relationships and

the Size Elasticity of R&D 144 • External Research Relationships and

the Efficiency of R&D 147 Conclusions 148

Chapter 7 Policy Initiatives to Support Innovation 153

The Research and Development Tax Credit 154 • Tax Incentives as a Policy Tool 154 • Tax Policies Affecting R&D 159 • Effectiveness of the R&E Tax Credit 164 Conclusions 166

Chapter 8 Restating Government's Role in Innovation 171

References 175

List of Figures

1.1 A Model of Technological Development 5 1.2 Effect of Governmental R&D 8 3.1 Production of Basic Knowledge 24 3.2 Production of Applied Knowledge 25 3.3 Production of Governmental Technological Knowledge 26 3.4 Infratechnology as a Function of Sharing 28 3.5 An Overview of the R&D Process 29 3.6 Revenues, Costs, and Profits 31 3.7 Firm's Problem in the Absence Of Governmental R&D 33 3.8 Governmental Versus Private Production of 'Y 34 3.9 Government's Problem with No Allocation to the Firm 35 3.10 Firm's Problem with a Governmental R&D Allocation 37 3.11 Government's Problem with an Allocation to aFirm 39 3.12 The Reduced-Form Private R&D Process 46 3A.1 Decision Time Line for In-House Production 57 3A.2 Decision Time Line with an R&D Allocation 62 3A.3 Determining the Cost of Insurance 63 3A.4 Determining When to Give an R&D Allocation 66 5.1 The Economic Impact of lnfratechnology Research 86 5.2 Basic Elements of Communication Systems 88

List of Tables

3.1 Descriptive Statistics 42 3.2 Sample Correlations Between Key Variables 44 3.3 2SLS Estimates of Equations (3.54)-(3.56) 48 4.1 Federal Laboratory Investment in Infratechnology

Research 76 4.2 Use of Federal Laboratory Infratechnology Research 77 4.3 Survey Sample of Manufacturing Companies 78 4.4 Manufacturing Investments in Infratechnology Research 79 4.5 TFP Growth and Infratechnology Research 80 5.1 U.S. Manufacturer Market Shares in the U.S. Optical

Fiber Market 91 5.2 U.S. Production Capacity for Optical Fiber 92 5.3 U.S. Capacity Utilization for Optical Fiber 93 5.4 Relative Ranking on Alternative Marketing Strategies 94 5.5 EIA Fiberoptic Test Procedures Influenced by NIST 95 5.6 Summary of Single-Mode and Multi-Mode EIA Standards

Evaluated or Written by NIST 98 5.7 Transaction-Cost Savings Attributable to

NIST -Sponsored Research 102 5.8 Past and Future Transaction-Cost Savings Attributable

to NIST -Sponsored Research 104 5.9 Costs Associated with NIST -Sponsored Research 106

xiv Government's Role in Innovation

5.10 Net Social Benefits from NIST's Research Program 107 5.11 Merchant Semiconductor Industry Market Share History 111 5.12 Evolution of Electronic Devices 114 5.13 Semiconductor Industry's Benefits from NIST's

Electromigration Research Program 117 5.14 NIST's Annual Costs for Activities Related to

Electromigration Through 1991 118 5.15 Net Social Benefit from NIST's Electromigration

Research Program 119 6.1 Distribution of Sample Firms by Industry 129 6.2 Distribution of Sample Firms by Total Employment 130 6.3 Sample Firms Reporting R&D Expenditures or R&D

Employment, by Total Employment 131 6.4 Sample-Firm R&D Expenditures, by Total Employment 132 6.5 Sample-Firm R&D Employment, by Total Employment 133 6.6 Sample-Firm Involvement with University-Based

Research Programs, by Total Employment 134 6.7 Sample-Firm Involvement with University-Based

Research Programs, by Activity Type and Total Employment 135

6.8 Sample-Firm Involvement with University-Based Research Programs, by Research Focus and Total Employment 136

6.9 Sample-Firm Incentives to Engage in University Research Relationships, by Total Employment 137

6.10 Sample-Firm Satisfaction in University Research Relationships, by Total Employment 138

6.11 Sample-Firm Involvement with State-Funded Science and Technology Centers, by Total Employment 139

6.12 Results of Research Relationships with State-Funded Science and Technology Centers for Sample Firms, by Total Employment 140

6.13 Sample-Firm Success in State-Funded Science and Technology Center Research Relationships, by Total Employment 142

6.14 Sample-Firm Utilization of Technical Expertise from Externa! Relationships, by Total Employment 143

List of Tables

6.15 Least-Squares Regression Results Explaining Interfirm Differences in the Utilization of Technical

XV

Expertise from External Research Relationships 145 6.16 Estimated Size Elasticities of R&D 147 6.17 Estimated Rates of Return to R&D Expenditures 149

Acknowledgements

The writing of this book was made substantially easier because of the help of a number of individuals. We thank Zachary Rolnik, Senior Editor at Kluwer, for his support of the project; Melissa Stone for her long hours spent creating and revising the word-processing files that have become this book; Toni Fields for the preparation of the art work; Puneet Kapur for creating the index; and Sabrina Woodbery for general editorial support.

Finally, we wish to especially thank our wives, Peggy and Carol, for their moral support and understanding throughout the process of writing this book.

Dennis Patrick Leyden Greensboro, North Carolina

Albert N. Link Greensboro, North Carolina