Federal R&D and Scientific Innovation - ACS Publications - American

5 Cooperative Agreements: A Key to Accelerated Industrial Innovation MICHAEL MICHAELIS

Downloaded by IMPERIAL COLLEGE LONDON on May 18, 2018 | https://pubs.acs.org Publication Date: July 6, 1979 | doi: 10.1021/bk-1979-0105.ch005

Arthur D. Little, Inc., 1735 Eye St., NW, Washington, D C 20006

Last May, President Carter charged the Department of Commerce with the responsibility for spearheading a multi-agency, cabinet-level, Domestic Policy Review of Industrial Innovation. By April, 1979, this Review is expected to present the President with highly focused policy options to assist him in forging a coherent strategy to influence the rate and direction of industrial innovation in the United States. That strategy -- whatever its principal thrusts -- can, I believe, be greatly strengthened if it takes advantage of the recently-enacted Federal Grant and Cooperative Agreements Act of 1977. This Act provides a legislative framework for those new institutional arrangements between industry and government that are so urgently needed to spur industrial innovation. The need for such new arrangements emerges from several recent studies, including one (1) that we undertook for the Department of Commerce. We concluded that: • "Policies for federal funding of civilian research and development should be formulated in the larger context of the complex process of industrial innovation." •

"Federally-funded c i v i l i a n research and development i s not s u f f i c i e n t — by i t s e l f — t o b r i n g about technol o g i c a l change i n the p r i v a t e s e c t o r t o any s i g n i f i c a n t extent." ^2) In an e a r l i e r report t o the N a t i o n a l Science Foundation— on " B a r r i e r s t o Innovation i n Industry," we noted t h a t recommendat i o n s f o r p u b l i c p o l i c y changes, o f f e r e d by i n d u s t r y , government, finance, and l a b o r , i n c l u d e d : • Designation o f a f o c a l p o i n t i n the Executive Branch of the Federal Government t o coordinate p u b l i c p o l i c i e s r e l a t e d t o t e c h n o l o g i c a l innovation. • C l a r i f i c a t i o n o f p u b l i c p o l i c y o b j e c t i v e s f o r technol o g i c a l innovation, e.g., i n t e r n a t i o n a l trade, prod u c t i v i t y , consumer s a t i s f a c t i o n , job c r e a t i o n , increased i n d u s t r i a l competition. • Increasing e f f e c t i v e n e s s o f p u b l i c p o l i c i e s by t a r g e t i n g them t o be i n d u s t r y - s e c t o r s p e c i f i c where necessary. 0-8412-0507-8/79/47-105-039$05.00/0 © 1979 American Chemical Society

Ault and Smith; Federal R&D and Scientific Innovation ACS Symposium Series; American Chemical Society: Washington, DC, 1979.

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A r t i c u l a t i o n and aggregation o f market demand f o r products and s e r v i c e s purchased with government funds, so as t o create a d d i t i o n a l market " p u l l " (to complement technology "push") i n those areas where p r i v a t e market f o r c e s are i n s u f f i c i e n t t o s u s t a i n innovation. For t h i s audience, I do not need t o dwell on the d i s t r e s s i n g symptoms and s t a t i s t i c s t h a t bespeak the l o s s o f American preeminence i n t e c h n o l o g i c a l innovation. A few i l l u s t r a t i v e p o i n t s w i l l s u f f i c e t o j o g — and shock — your memory: • The U.S. Balance o f Trade i n manufactured goods i s i n a serious d e c l i n e . The p r o j e c t e d d e f i c i t i n such goods i n 1978 i s a n t i c i p a t e d to be some $18 b i l l i o n as p a r t of the t o t a l p r o j e c t e d $44 b i l l i o n d e f i c i t . By c o n t r a s t , Japan enjoyed a $63 b i l l i o n trade surplus l a s t year i n manufactured goods. We had a $3.6 b i l l i o n trade d e f i c i t with Japan i n 1977 — i n high technology goods alone. • In r e a l terms (constant 1972 d o l l a r s ) , R&D spending i n the U.S. has been on a p l a t e a u o f s l i g h t l y under $30 b i l l i o n p e r year s i n c e 1965 (and much o f i t i s f o r nonc i v i l purposes). • The U.S. Patent O f f i c e i s s u e d fewer patents t o U.S. c i t i z e n s i n 1973 than i n 1963, but i s s u e d more than double the number o f patents t o f o r e i g n c i t i z e n s i n the same period. According t o the N a t i o n a l Science Foundation, the U.S. share o f i n i t i a t i n g important i n d u s t r i a l innovations d e c l i n e d from 80% i n the mid-50's t o 54% i n the mid-60 s. A l l signs are t h a t i t i s s t i l l on the d e c l i n e . • Brookings I n s t i t u t i o n reports t h a t qrowth i n U.S. prod u c t i v i t y has been c u t by 20-25% i n 1975 by environmental, s a f e t y , and h e a l t h r e g u l a t i o n s . In the mid-50 s, f e d e r a l r e g u l a t i o n had major r e s p o n s i b i l i t y i n four areas — a n t i t r u s t , f i n a n c i a l i n s t i t u t i o n s , t r a n s p o r t a t i o n , and communication. In the mid-70 s, some 83 f e d e r a l agencies are r e g u l a t i n g many aspects o f the p r i v a t e s e c t o r . Comp l y i n g with f e d e r a l r e g u l a t i o n s cost Dow Chemical Company, f o r instance, $186 m i l l i o n i n 1976, equivalent t o 50% of Dow s a f t e r - t a x p r o f i t s . Most d i s t u r b i n g l y , f e d e r a l r e g u l a t i o n produces l e s s w i l l i n g n e s s t o take high r i s k s i n commercializing new technology because o f the u n c e r t a i n t y o f the r e g u l a t o r y c l i m a t e . • SEC reports t h a t underwritings f o r companies with a net worth o f under $5 m i l l i o n d e c l i n e d from 418 i n 1972 t o four i n 1975. Yet, i t i s the small i n n o v a t i v e , hightechnology company t h a t has h i s t o r i c a l l y been so o f t e n the w e l l s p r i n g o f i n d u s t r i a l innovation. I could go on with more dismal d e t a i l s . But my purpose i n c i t i n g the evidence f o r d e c l i n i n g U.S. t e c h n o l o g i c a l c a p a b i l i t y and i n d u s t r i a l innovation i s merely t o spur you i n t o a c t i o n , s p e c i f i c a l l y with regard t o the r e c e n t l y enacted law which i s a "sleeper" i n that i t provides a remarkable opportunity f o r a t u r n around. 1

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Numerous s t u d i e s , a l l the way back to the White House C i v i l i a n Technology Panel i n the Kennedy A d m i n i s t r a t i o n (which I was p r i v i l e g e d to serve as Executive D i r e c t o r ) have c a l l e d f o r new " i n s t i t u t i o n a l arrangements" to s t i m u l a t e i n d u s t r i a l innova t i o n . The general perception i s that nothing has happened i n response t o these c a l l s , and t h a t apathy continues. This need not be. P r e s i d e n t C a r t e r signed i n t o law (on 2 February 1978) the Federal Grant and Cooperative Agreements Act of 1977 (P.L. 95-224). Even though i t was admittedly not i t s p r i n c i p a l i n t e n t , t h i s Act — I submit — provides a l e g i s l a t i v e framework f o r the long-sought new i n s t i t u t i o n a l arrangements t o spur innovation — provided that i n d u s t r y presses t h i s p o i n t i n the O f f i c e of Management and Budget (Executive O f f i c e o f the President). ΟΜΒ c u r r e n t l y i s developing g u i d e l i n e s f o r a l l f e d e r a l agencies to implement the new Act. Proposed guidance was pub l i s h e d i n the Federal R e g i s t e r on May 19, 1978, i n v i t i n g comments by June 20. P r a c t i c a l l y none were r e c e i v e d from i n d u s t r y . 0ΜΒ i s a l s o required by the Act t o study a l t e r n a t i v e means o f implementing f e d e r a l a s s i s t a n c e programs, provided f o r i n the Act. A plan f o r t h i s study was published i n the Federal Register on 23 June 1978, c a l l i n g f o r comments by 23 August. Some indus t r i a l response has been forthcoming, notably from the I n d u s t r i a l Research I n s t i t u t e . IRI suggested t h a t " a d d i t i o n a l emphasis be p l a c e d on e v a l u a t i o n of o p p o r t u n i t i e s provided by the Act f o r improving the e f f e c t i v e n e s s o f f e d e r a l involvement i n techno l o g i c a l innovation." I t a l s o recommended t h a t 0MB (in p u r s u i t o f i t s study under the terms of the Act) work c l o s e l y with t h a t Interagency Team of the Domestic P o l i c y Review o f I n d u s t r i a l Innovation which w i l l be addressing f e d e r a l procurement p o l i c y issues that impact i n d u s t r i a l innovation. I t has been — and s t i l l i s — an unfortunate feature o f our p o l i t i c a l l i f e t h a t i n d u s t r y appears r e t i c e n t to come forward with p r a c t i c a l suggestions f o r p u b l i c p o l i c i e s designed to improve the climate f o r r i s k - t a k i n g i n the p r i v a t e s e c t o r — a necessary prerequisite for i n d u s t r i a l innovation. To be sure, i n d u s t r i a l leaders p o i n t t o : • d e b i l i t a t i n g features of high c a p i t a l gains taxes, and inadequate i n c e n t i v e s f o r h i g h - r i s k business investment; • f a i l u r e t o enhance c a p i t a l formation and thus help expand and modernize productive s e c t o r s ; • government o v e r - r e g u l a t i o n t h a t s t i f l e s c r e a t i v i t y i n t e c h n o l o g i c a l progress and t h a t diminishes p r o d u c t i v i t y ; and a host of other f a c t o r s which can best be summarized by " u n c e r t a i n t y " of future market dynamics, induced by i n c r e a s i n g government i n t e r v e n t i o n . V a l i d though these p o i n t s are, t h e i r e f f e c t i v e n e s s i n impacting p u b l i c p o l i c y f o r i n n o v a t i o n i s weak ened by being aimed at widely s c a t t e r e d f e d e r a l t a r g e t s , each supported by powerful groups o f vested i n t e r e s t s . In t h i s context I am p o i n t i n g at the F e d e r a l Grants and Co operative Agreements Act as a unique and t i m e l y t a r g e t which deserves f u l l e s t and f o r c e f u l a t t e n t i o n by i n d u s t r y during t h i s



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year and next — when plans f o r i t s implementation are being made. I t i s a unique t a r g e t i n t h a t i t encompasses a l l f e d e r a l agencies and i n t h a t i t provides an opportunity f o r s i g n i f i c a n t l y i n c r e a s ing the p r o d u c t i v i t y o f taxpayers' d o l l a r s by s t i m u l a t i n g indust r i a l i n n o v a t i o n and thus improving our balance of trade, i n c r e a s ing employment, and reducing i n f l a t i o n . T h i s i s an opportunity we dare not l e t pass. Why do I consider t h i s Act as the l e g i s l a t i v e framework f o r the long-sought new i n s t i t u t i o n a l arrangement t o spur i n d u s t r i a l innovation? I can do no b e t t e r than t o quote from the recent r e p o r t by the O f f i c e o f Technology Assessment o f the U.S. Congress on " A p p l i c a t i o n s of R&D i n the C i v i l Sector: The Opportunity provided by the Federal Grant and Cooperative Agreements Act o f 1977," p u b l i s h e d on 20 June 1 9 7 8 ^ I t s f i n d i n g s are summarized as follows : "Federal R&D designed t o s t i m u l a t e t e c h n o l o g i c a l change i n areas l i k e energy, housing, and law enforcement are e f f e c t i v e only i f non-Federal users adopt the innovations produced. F e d e r a l management o f such R&D must t h e r e f o r e d i f f e r from t h a t appropriate where the F e d e r a l Government i s the end user, as i n defense and space R&D. "The r e c e n t l y enacted F e d e r a l Grant and Cooperative Agreement Act r e q u i r e s t h a t i n a l l t r a n s a c t i o n s with non-Federal ( c i v i l sector) p a r t i e s , F e d e r a l agencies d i s t i n g u i s h between procurement' — buying something f o r the F e d e r a l Government's d i r e c t use — and 'assistance' — supporting o r s t i m u l a t i n g a non-Federal a c t i v i t y i n the p u b l i c i n t e r e s t . Transactions t o support non-Federal R&D would g e n e r a l l y be f o r the purpose of a s s i s t a n c e . Yet, c u r r e n t l y , much nonFederal R&D i s funded through the Federal procurement process. The change r e q u i r e d by P.L. 95-224 presents an opportunity to develop management p e r s p e c t i v e s and p r a c t i c e s appropriate f o r cooperative Federal/non-Federal e f f o r t s t o stimulate technological innovation. "To c l a r i f y F e d e r a l r o l e s and r e s p o n s i b i l i t i e s , the Act e s t a b l i s h e d uniform c r i t e r i a f o r grants, c o n t r a c t s , and cooperative agreements. These uniform Government-wide c r i t e r i a have the e f f e c t of f o r c i n g F e d e r a l agencies t o declare c l e a r l y which r e l a t i o n s h i p with non-Federal p a r t i e s i s sought. " I f F e d e r a l agencies are to become e f f e c t i v e agents o f change through support o f R&D, they must i n v o l v e those non-Federal p a r t i e s — whether i n the p u b l i c or p r i v a t e s e c t o r — who have the i n c e n t i v e and c a p a c i t y t o go beyond the R&D stage and develop t e c h n o l o g i c a l innovations f o r widespread use and p u b l i c b e n e f i t . The cooperative agreement i s a new l e g a l instrument appropriate f o r such involvement. As i n a j o i n t business venture, F e d e r a l and non-Federal r i g h t s and o b l i g a t i o n s are n e g o t i a t e d i n the process of reaching such agreements . 1



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"The Act mandates the O f f i c e of Management and Budget t o make a comprehensive study o f Federal a s s i s t a n c e r e l a t i o n ships and report to Congress i n 2 years ( i . e . , i n e a r l y 1980). The study presents an important opportunity to develop the new p e r s p e c t i v e s and procedures appropriate f o r a s s i s t i n g t e c h n o l o g i c a l innovation. Because the 0ΜΒ study w i l l l a r g e l y determine how the Act i s implemented, Congress r e q u i r e d ΟΜΒ to i n v o l v e i n the study a wide range of poten t i a l l y a f f e c t e d p a r t i e s , i n c l u d i n g the Congress i t s e l f . Such involvement i s e s s e n t i a l i n order t o r e a l i z e the Act's p o t e n t i a l — which i s s t i l l not widely recognized — f o r applying science and technology t o a broad range of problems c o n f r o n t i n g the Nation." For the sake of p r e c i s i o n , as the OTA report notes, i t i s u s e f u l at t h i s p o i n t t o o f f e r two d e f i n i t i o n s . The term "tech nology" i s used here t o denote knowledge r e q u i r e d f o r the produc t i o n and d e l i v e r y o f goods and s e r v i c e s . This d e f i n i t i o n en compasses both p h y s i c a l and s o c i a l technologies. "Technological i n n o v a t i o n " (or " I n d u s t r i a l innovation") r e f e r s here t o the process by which knowledge i s developed and transformed i n t o marketable products, processes, and s e r v i c e s . The i n n o v a t i o n process i n c l u d e s the whole gamut of steps i n the development, t e s t i n g , f i n a n c i n g , production, marketing, d i f f u s i o n , and use o f a technology i n the commercial marketplace. Since World War I I , the great bulk of f e d e r a l R&D funding has been devoted to n a t i o n a l s e c u r i t y and space e x p l o r a t i o n . The p r i n c i p a l reason that government has been s u c c e s s f u l i n f o s t e r i n g innovation and t e c h n o l o g i c a l progress i n these two areas r e s t s on the f a c t that government was p r o c u r i n g not only R&D but was a l s o buying and using the products of that R&D. I t both pushed t e c h nology through R&D and i t p u l l e d technology through using i t i n accomplishing the nation's defense and space missions. In the l a s t two decades the government has sought i n c r e a s i n g l y to apply technology t o the s o l u t i o n of s o c i a l and economic problems. To t h i s end, i t has funded R&D i n such d i v e r s e f i e l d s as energy, environment, h e a l t h , housing, t r a n s p o r t a t i o n , educa t i o n , law enforcement, and manpower t r a i n i n g . What government f a i l e d t o r e a l i z e u n t i l r e c e n t l y i s t h a t what worked f o r defense and space — i . e . , R&D funding — does not n e c e s s a r i l y work i n these c i v i l areas where government i t s e l f i s g e n e r a l l y n e i t h e r the d e l i v e r y system nor the end user. Instead, i t i s p r i v a t e i n d u s t r y , f i n a n c i a l i n s t i t u t i o n s , and the consumer who determine what r i s k s to take i n the u t i l i z a t i o n of R&D, i . e . , i n the com m e r c i a l i z a t i o n of innovative products, processes, and s e r v i c e s . Our r e p o r t on "Federal Funding o f C i v i l i a n Research and Development," t h a t I a l l u d e d t o at the beginning o f my t a l k , pro vides ample evidence t h a t f e d e r a l R&D funding alone i s not s u f f i c i e n t t o b r i n g about i n d u s t r i a l , t e c h n o l o g i c a l i n n o v a t i o n i n the p r i v a t e s e c t o r . In large p a r t t h i s i s due t o the f a c t t h a t f e d e r a l o f f i c i a l s do not possess d e t a i l e d knowledge o f non f e d e r a l users' needs. Yet, such intimate knowledge o f users'



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needs i s recognized by entrepreneurs, and by s c h o l a r l y s t u d i e s of the innovation process, t o be an e s s e n t i a l p r e r e q u i s i t e f o r s u c c e s s f u l commercialization of technology, i . e . , o f the f r u i t s of R&D. Another handicap which besets f e d e r a l o f f i c i a l d o m i s i t s lack of understanding o f the c a l c u l u s o f r i s k - t a k i n g i n p r i v a t e i n d u s t r y and finance, p a r t i c u l a r l y under c o n d i t i o n s o f mounting u n c e r t a i n t i e s o f t e n engendered by the changing climate of f e d e r a l , s t a t e , and l o c a l government r e g u l a t i o n s . I t i s d i f f i c u l t enough t o t r a c k and p r e d i c t the course of any p a r t i c u l a r category o f regulation. I t i s w e l l - n i g h impossible t o a n t i c i p a t e the outcome of t r a d e - o f f s between c o n f l i c t i n g r e g u l a t i o n s — an outcome more o f t e n than not governed by p o l i t i c a l power p l a y s . For instance — and without implying any value judgment of my own — many OSHA, EPA, and FDA r e g u l a t i o n s appear as a n t i competitive, p u t t i n g them i n d i r e c t c o n f l i c t with FTC and J u s t i c e Department e f f o r t s to promote competition. EPA and I n t e r i o r Department r e g u l a t i o n s on mining and burni n g o f c o a l and on production of shale o i l , f o r i n s t a n c e , run d i r e c t l y counter to Energy Department programs to encourage the use o f c o a l and t o develop domestic resources o f l i q u i d hydrocarbon f u e l s . A l l too o f t e n r e g u l a t i o n s mandate design and product or process standards. This s t i f l e s the search f o r innovative s o l u t i o n s to s o c i a l and economic problems. Make no mistake, I do not challenge the worthiness o f s o c i a l o b j e c t i v e s o f government regul a t i o n s . But t h i s worthiness does not j u s t i f y government c l o s e l y r e g u l a t i n g every f a c e t o f p r i v a t e behavior. There i s a r e a l need f o r i n d u s t r y and academia t o p a r t i c i p a t e with government i n the debates on r e g u l a t i o n . W i l l i a m Baker o f B e l l L a b o r a t o r i e s has suggested t h a t they work as equal p a r t n e r s i n d e f i n i n g a p p r o p r i ate r e g u l a t o r y systems. One feature o f such systems could be to work towards performance standards — improved s a f e t y , b e t t e r energy e f f i c i e n c y , reduced a i r p o l l u t i o n — l e t t i n g i n d u s t r y reach these standards i n i t s own way, i n s i s t i n g only t h a t i t reach them. To repeat, lack o f d e t a i l e d knowledge o f non-federal users' needs and of the c a l c u l u s o f r i s k - t a k i n g i n the p r i v a t e s e c t o r on the p a r t o f f e d e r a l agencies has demonstrably l e d t o t e c h n o l o g i c a l pathways being pursued t h a t — with h i n d s i g h t — were found not t o meet the d e s i r e d o b j e c t i v e . Two examples, taken at random from a sadly long l i s t of such f a i l u r e s were "Operation Breakthrough" i n housing and much-vaunted "people-mover" systems f o r urban p u b l i c t r a n s p o r t a t i o n . Recognizing these fundamental d e f i c i e n c i e s , we can see how the F e d e r a l Grant and Cooperative Agreements Act can provide the l e g i s l a t i v e framework f o r new i n s t i t u t i o n a l arrangements between the f e d e r a l government and non-federal p a r t i e s of a l l kinds i n p u r s u i t of not only commercializing f e d e r a l l y - f u n d e d R&D, but a l s o i n s p u r r i n g i n d u s t r i a l innovation at l a r g e . I t can provide a government-wide, i n s t i t u t i o n a l means o f broadening the scope and concern o f f e d e r a l R&D program managers t o the e n t i r e process



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of t e c h n o l o g i c a l innovation i n the p r i v a t e s e c t o r , r a t h e r than j u s t the s e t t i n g and meeting o f t e c h n o l o g i c a l goals. The Act d i s t i n g u i s h e s between three b a s i c r e l a t i o n s h i p s . The f i r s t type i s that o f procurement. This mode i s indeed the c u r r e n t l y p r e v a i l i n g one. Here the executive agency i s u l t i m a t e l y r e s p o n s i b l e f o r a s s u r i n g performance. The agency t h e r e f o r e must e s t a b l i s h the s p e c i f i c requirements t o be met, judge the accepta b i l i t y o f the product o r s e r v i c e against those standards, monitor the work, and be i n v o l v e d t o the extent necessary t o assure prompt and s a t i s f a c t o r y performance. I t has the r i g h t u n i l a t e r a l l y t o change the work and terminate i t f o r d e f a u l t , i f necessary. The Act requires that only c o n t r a c t s be used f o r procurement r e l a t i o n ships as h i t h e r t o . The second type o f r e l a t i o n s h i p i s an a s s i s t a n c e r e l a t i o n ship where the f e d e r a l agency has l i t t l e o r no need f o r i n v o l v e ment during the performance o f the a c t i v i t y a s s i s t e d . The agency's r e s p o n s i b i l i t y l i e s i n d e f i n i n g the scope o f the work and i n such monitoring as may be necessary t o assure that the work i s performed w i t h i n the agreed-upon scope. I t i s the r e c i p i e n t who u l t i m a t e l y i s r e s p o n s i b l e f o r a s s u r i n g performance and expending funds w i t h i n t h i s agreed-upon scope, as i n a b a s i c research grant. The A c t r e q u i r e s t h a t a type o f grant be used t o r e f l e c t this relationship. The t h i r d type o f r e l a t i o n s h i p a l s o i s an a s s i s t a n c e r e l a t i o n s h i p , but one i n which the f e d e r a l agency i s s u b s t a n t i a l l y i n v o l v e d during performance. In t h i s case, the r e s p o n s i b i l i t y f o r a s s u r i n g performance i s shared by the agency and the r e c i p i ent. Correspondingly, d e f i n i n g the performance r o l e s o f the r e s p e c t i v e p a r t i e s a l s o i s a shared r e s p o n s i b i l i t y . As i n a j o i n t venture between two p r i v a t e p a r t i e s the whole range o f f a c t o r s a f f e c t i n g the venture and i t s outcomes i s the subject o f negotiation. These i n c l u d e : performance r e s p o n s i b i l i t i e s , cost s h a r i n g and cost recoupment, data and patent r i g h t s , termination r i g h t s and procedures, c o s t accounting, subcontracting, and l i a b i l i t y and i n d e m n i f i c a t i o n . The A c t r e q u i r e s that a type o f cooperative agreement be used t o r e f l e c t these r e l a t i o n s h i p s . The A c t places no r e s t r i c t i o n s whatsoever upon candidates for a s s i s t a n c e awards. Thus profit-making o r g a n i z a t i o n s t h a t were p r e v i o u s l y excluded from many a s s i s t a n c e awards are now e l i g i b l e f o r them. And as the OTA r e p o r t notes, "In view o f t h e i r c e n t r a l r o l e i n t e c h n o l o g i c a l change, they are c l e a r l y important candidates." While there may be problems i n g i v i n g f e d e r a l a s s i s t a n c e t o p r i v a t e f i r m s , s i n c e i f e f f e c t i v e i t would give the firms a t l e a s t a temporary competitive advantage and run the r i s k o f d i s p l a c i n g p r i v a t e funds with p u b l i c funds, the r e p o r t concludes t h a t openly competitive a s s i s t a n c e awards would minimize these d i f f i c u l t i e s . I t i s the t h i r d type o f r e l a t i o n s h i p — the j o i n t venture mode i f I may so c a l l i t — t h a t seems t o me t o be the most promising f o r commercializing f e d e r a l l y - f u n d e d R&D and f o r stimul a t i n g i n d u s t r i a l innovation.



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There have been precedents f o r such j o i n t ventures — albeit under wartime c o n d i t i o n s and not i n a l l respects i d e n t i c a l t o foreseeable a s s i s t a n c e r e l a t i o n s h i p s i n a c i v i l i a n , peacetime economy. Nonetheless, they are i n s t r u c t i v e to r e c a l l , as James B r i a n Quinn d i d l a s t year before the I n d u s t r i a l Research I n s t i t u t e : (1) "One o f the main t h r u s t s o f S&T p o l i c y should be on d e v i s i n g and experimenting with new i n s t i t u t i o n a l arrangements appropriate to our p r i o r i t y problems and f u t u r e demands. These w i l l doubtless r e q u i r e r e t h i n k i n g and reshaping new r e l a t i o n s h i p s between government and d e c e n t r a l i z e d , p r i v a t e , research and technology groups. In our i n v e s t i g a t i o n s we found t h a t the c a t a l y t i c c r a c k i n g , s y n t h e t i c rubber, and B e l l Laboratories programs o f f e r e d some f a s c i n a t i n g i n s i g h t s and g u i d e l i n e s f o r these r e l a t i o n s h i p s . Key elements i n these programs are o u t l i n e d as 'vignettes' below. "· In the summer o f 1941 the Petroleum A d m i n i s t r a t i o n f o r War was e s t a b l i s h e d to coordinate the development o f p e t r o leum products f o r the World War I I e f f o r t . In four years a massive cooperation between the government and the o i l i n d u s t r y increased 100 octane output 1000-fold. The government's main r o l e was t o provide 'the d i r e c t i o n , c o o r d i n a t i o n , red tape s l a s h i n g , and encouragement to accomplish the impossible.' Although a l l the t e c h n i c a l work was performed by p r i v a t e i n d u s t r y the PAW s e t c l e a r p r i o r i t i e s , e l i m i n a t e d f u e l s with octanes above 100, c u r t a i l e d a l t e r n a t i v e uses o f benzene and other aromatics t h a t would c o n t r i b u t e to 100 octane q u a l i t y , broke t r a n s p o r t a t i o n b o t t l e n e c k s , and establ i s h e d i n c e n t i v e s to o f f s e t the i n d u s t r y ' s l o s s e s on i t s production of other petroleum products. These i n c l u d e d l o s s e s from f a c i l i t i e s conversion, mix changes, and s p e c i f i c a t i o n changes. PAW arranged f i r m commitments f o r the government t o buy 100 octane f o r a p e r i o d long enough f o r i n d u s t r y t o j u s t i f y the enormous investments i t would make. PAW pressed the development o f r e f i n e r y processes 'not yet beyond the l a b o r a t o r y and p i l o t p l a n t stages. . . . In order that the f u l l e s t cooperation of the i n d u s t r y might be p o s s i b l e — without conf l i c t o f a n t i t r u s t laws — PAW obtained Department o f J u s t i c e approval f o r j o i n t research and f o r exchange between compan i e s and i n d i v i d u a l s of information concerning processes, products, patents, experimental data and general knowledge.' The i n i t i a l endeavor was c o o r d i n a t i o n o f a v a i l a b l e product i v e processes. L a t e r , the cost of r i s k y s c a l e ups o f known development approaches was undertaken by the government. Through these processes, h y d r o f l u o r i c and s u l f u r i c a c i d a l k y l a t i o n , h y d r o c a t a l y t i c reforming, and f l u i d i z e d c a t a l y t i c c r a c k i n g were a l l a c c e l e r a t e d . And processes emerged which could produce 100 octane g a s o l i n e at commercial p r i c e s .



5.

MiCHAELis


"· P r i o r t o World War II v a r i o u s U.S. companies had been working on s y n t h e t i c rubber processes. But no urgency was foreseen because the government's view was 'with the l a r g e s t f l e e t i n the world raw rubber would be a c c e s s i b l e i n a crisis.' But P e a r l Harbor e l i m i n a t e d access t o some 95% o f such s u p p l i e s . A government agency, the Rubber Reserve Company, was s e t up t o h e l p finance and b r i n g on l i n e synt h e t i c rubber c a p a c i t y f o r the war e f f o r t . But the agency lacked s u f f i c i e n t p o l i t i c a l c l o u t t o a i d the f l e d g l i n g i n dustry get needed c o n t r o l l e d m a t e r i a l s f o r p l a n t s . The few p l a n t s Reserve Rubber got b u i l t i n i t s f i r s t year were m i n i s c u l e i n output r e l a t i v e t o needs. In 1942 P r e s i d e n t Roosevelt appointed the Baruch Committee t o study needs and recommend a c t i o n . The Baruch Committee s e t high p r i o r i t i e s f o r the program and e s t a b l i s h e d a Rubber D i r e c t o r , Mr. J e f f e r s , with great powers. He cont a c t e d a l l c o r p o r a t i o n s i n the f i e l d , t o l d them the government was t o serve the i n d u s t r y , and the i n d u s t r y was t o press f o r what i t needed t o meet s p e c i f i e d war and e s s e n t i a l c i v i l i a n demands. He decided t h a t each company would adapt t h e i r f a c i l i t i e s t o whatever rubber they c o u l d best handle. But they must guarantee the q u a l i t y and volume o f output. Because o f the c r i s i s s i t u a t i o n , cost c o n s i d e r a t i o n s were s a c r i f i c e d f o r output, and processes i n development and p i l o t p l a n t stages were pressed i n t o p r o d u c t i o n . The government r e l i e v e d a shortage o f tank cars f o r butadiene by having these b u i l t under p r i o r i t y c o n d i t i o n s . The Rubber D i r e c t o r ' s O f f i c e a l s o arranged an a n t i t r u s t accommodation w i t h the J u s t i c e Department, and process i n f o r m a t i o n was shared, with r o y a l t i e s — i f any — to be worked out l a t e r . Exxon made i t s patents a v a i l a b l e r o y a l t y f r e e . The Rubber D i r e c t o r s e t p r i o r i t i e s : t o concentrate on b a s i c rubber not s p e c i a l t i e s , t o break the b o t t l e n e c k on butadiene, and t o produce rubber at whatever c o s t . The government undertook most o f the development r i s k . I t financed and owned the p l a n t s b u i l t , but these were planned, constructed, and operated by p r i v a t e companies. Individual companies a l s o continued to develop t h e i r own processes s e p a r a t e l y i n some cases. Under p r i o r i t y pressure f o r both 100 octane and butadiene output from the same f u e l s t o c k s and f a c i l i t i e s , the o i l companies found a way to i n c r e a s e y i e l d s o f both simultaneously. Within 18 months i t became p o s s i b l e t o produce rubber on the s c a l e needed. On the recommendation o f rubber manufacturers a choice was u l t i mately made t o concentrate on Buna-S rubber, one o f many early p o s s i b i l i t i e s . T e c h n i c a l work was c a r r i e d on by the companies i n v o l v e d . The government's r o l e was l a r g e l y one o f c o o r d i n a t i o n , r i s k r e d u c t i o n , breaking b o t t l e n e c k s , s e t t i n g p r i o r i t i e s , and ensuring demand. By 1944, 51 p l a n t s had been b u i l t , rubber supply had caught up with demand, and the O f f i c e o f the Rubber D i r e c t o r was soon d i s s o l v e d .

American Chemical

Society Library

1155 16th St., N.W. Washington, D.C. Ault and Smith; Federal R&D and20036 Scientific Innovation ACS Symposium Series; American Chemical Society: Washington, DC, 1979.

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"· The B e l l Telephone L a b o r a t o r i e s (studied i n the l a t e 1950*3 and e a r l y I960 s) represented another p r o d u c t i v e r e l a t i o n s h i p between p r i v a t e and p u b l i c i n t e r e s t s . B e l l Laborat o r i e s was l a r g e l y financed by a fee — g e n e r a l l y about 1% at the time o f my study — allowed by r a t e s e t t i n g bodies i n customer b i l l i n g s t r u c t u r e s . B e l l L a b o r a t o r i e s ' product development and design a c t i v i t i e s were p a i d f o r by manufacturi n g ; costs were recovered through s a l e o f products. Because of the s c a l e of the program and i t s funding base, B e l l c o u l d take on long-term fundamental research programs t h a t others c o u l d not. However, s i n c e the research funds would be d i s a l l o w e d i f not spent f r u i t f u l l y , B e l l had t o demonstrate t h a t the g a i n t o i t s customers, i n the long run, s i g n i f i c a n t l y outweighed the program's c o s t s . Since r a t e s were pegged t o Return on Investment, the customer's b i l l would decrease with every e f f i c i e n c y g a i n by the B e l l System. But the company c o u l d g a i n through c r e a t i n g new s e r v i c e o p p o r t u n i t i e s f o r growth, a v o i d i n g p o s s i b l e preemption o f communication technologies by o t h e r s , and enhancing i t s regu l a t o r y c l i m a t e by improving the q u a l i t y and c o s t o f i t s services. To ensure that i t s programs were c l o s e l y matched to customer needs B e l l L a b o r a t o r i e s developed a complex o f i n f o r m a t i o n flows, p l a n n i n g processes, and budgetary reviews t h a t brought Advanced Systems, Operating Company, Western E l e c t r i c , and i n d i v i d u a l customer preferences i n t o r e s e a r c h , development, and design processes. And t o make sure these and s c i e n t i f i c demands reached i n d i v i d u a l researchers the l a b o r a t o r i e s had the most c a r e f u l l y worked out goal communic a t i o n process I had ever seen i n an R&D s e t t i n g . " What do these — and s i m i l a r examples — suggest as e f f e c t i v e g u i d e l i n e s about p o t e n t i a l p a r t n e r s h i p r e l a t i o n s h i p s between business and government i n meeting our f u t u r e demands f o r l a r g e s c a l e commercial systems? With some s l i g h t m o d i f i c a t i o n s I agree with Jim Quinn t h a t the government seems most e f f e c t i v e i n s t i m u l a t i n g i n n o v a t i o n when i t :


1

(1) Creates or Guarantees an I n i t i a l Demand: 100 octane gas, s y n t h e t i c rubber, computers, and cargo a i r c r a f t provide good examples. Once p r i v a t e i n d u s t r y can foresee such a demand i t can i n v e s t i t s own money, become f a m i l i a r with the product and i t s p r o d u c t i o n c h a r a c t e r i s t i c s , and begin t o develop t e c h n i c a l cadres that c o u l d support i t i n the p r i v a t e market phase. Competition f o r the e a r l y market achieves the m u l t i p l e competing designs, p e r s o n a l m o t i v a t i o n , and problem s o l v i n g i n c e n t i v e s necessary f o r innovation. I n t e r e s t i n commercialization introduces economic c o n s i d e r a t i o n s e a r l y i n the R&D and design process — and t h a t i s c r i t i c a l l y important. (2) Breaks Down B o t t l e n e c k s : S y n t h e t i c rubber and c a t a l y t i c c r a c k i n g provide e x c e l l e n t examples o f the government's c a p a c i t i e s to break down b a r r i e r s o f secrecy, a n t i t r u s t , t r a n s p o r t a t i o n o r investment b o t t l e n e c k s when t h i s i s i n the p u b l i c i n t e r e s t . By



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developing b e t t e r data on aggregate resources and s e t t i n g p r i o r i t i e s f o r use o f scarce resources, development times can be s i g n i f i c a n t l y shortened. (3) Aggregates Demand: By s t a n d a r d i z i n g a v i a t i o n gas, a s s u r i n g demand f o r s y n t h e t i c rubber t i r e s , or through other a c t i o n s (such as a p p r o p r i a t e l y formulated standards f o r s a n i t a t i o n , food contamination, commercial broadcast, o r waste d i s p o s a l ) government can aggregate market s t r u c t u r e s , making i t e a s i e r and l e s s r i s k y f o r p r i v a t e p a r t i e s t o innovate f o r o r product r e s p o n s i b l y i n those markets. When — and t h a t should r e a l l y read " i f " — p r o p e r l y formulated, today's environmental standards o r p u b l i c purchases (as through the highway t r u s t fund) can do the same. (Note my e a r l i e r remarks on performance standards!) (4) Aggregates Resources: The B e l l L a b o r a t o r i e s ' concept o f aggregating research monies t o serve the l a r g e - s c a l e needs o f a d i v e r s e u s i n g s e c t o r has been p a r a l l e l e d i n the development o f EPRI f o r the e l e c t r i c u t i l i t i e s . This concept c o u l d be extended i n t o other areas where a fragmented i n d u s t r y — l i k e c o a l o r n a t u r a l gas — has l a r g e - s c a l e system needs t h a t i t s i n d i v i d u a l companies could not f i n a n c e . (5) Extends Time Horizons: The B e l l L a b o r a t o r i e s ' f i n a n c i n g example and other a c t i o n s ( l i k e the s e t t i n g o f 27-1/2 mpg f l e e t mileage standards f o r 1985 autos) u s e f u l l y extend the time h o r i z o n o f both government and p r i v a t e groups. Unfortunately p o l i t i c a l pressures — and our p r i v a t e s e c t o r reward systems — too o f t e n do the opposite, compressing time horizons t o the 2-4 year frame o f the e l e c t i o n c y c l e , o r the s i m i l a r l y short-time module o f corporate top management. But through longer-term goal s e t t i n g — i n c o n j u n c t i o n with i n d u s t r y , and through quasi p u b l i c f i n a n c i n g — with i n d u s t r y - c o n t r o l l e d t e c h n i c a l development, government c o u l d a c t i v e l y s t i m u l a t e i n n o v a t i o n i n p r i o r i t y areas. (6) Takes Unusual R i s k s : By underwriting prototypes no one company c o u l d r i s k and f o r c i n g a l t e r n a t i v e t e c h n o l o g i e s i n t o being t o decrease o v e r a l l n a t i o n a l r i s k , the government s t i m u l a t e d r a p i d advance i n the s t a t e o f the a r t o f s y n t h e t i c rubber, c a t a l y t i c c r a c k i n g , computers, and advanced communications systems. Once the c h a r a c t e r i s t i c s o f these systems were known, the r i s k f o r p r i v a t e i n d u s t r y t o c a r r y them f u r t h e r became s i g n i f i c a n t l y reduced. S i m i l a r r i s k r e d u c t i o n i s p o s s i b l e today. (7) Provides Incentives : When the government has p r o v i d e d adequate i n c e n t i v e s — through allowed p r o f i t s , t a x r e l i e f , deplet i o n allowances, o r other means — i t has tapped the nation's e x t r a o r d i n a r y t e c h n i c a l - i n n o v a t i v e c a p a c i t i e s , both small and l a r g e s c a l e . When these i n c e n t i v e s are removed — as they o f t e n have been through tax, p r i c e c o n t r o l , o r r e g u l a t o r y a c t i o n i n recent years — t a l e n t n a t u r a l l y flows t o areas where i t w i l l be rewarded. One has only t o look a t the new venture investment f i g u r e s mentioned e a r l i e r o r a t the e f f e c t s o f the o v e r - r e g u l a t e d gas and r a i l r o a d i n d u s t r i e s t o see the consequences o f removing incentives.



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FEDERAL R&D AND SCIENTIFIC INNOVATION

I t i s these kinds o f government r o l e s t h a t need t o be explored more f u l l y and t h a t need t o be adapted t o each s p e c i f i c a s s i s t a n c e - t y p e r e l a t i o n s h i p , through c o o p e r a t i v e agreements with n o n - f e d e r a l p a r t i e s as p r o v i d e d f o r i n the new Act. Most impor t a n t l y , t h i s e x p l o r a t i o n and adaptation must r e f l e c t a m u t u a l i t y of purpose and understanding between government and i n d u s t r y t h a t i s f i n a l l y embodied through n e g o t i a t i o n i n the " j o i n t ventures" of cooperative agreements. I t i s along these l i n e s t h a t I b e l i e v e i n d u s t r y should urge ΟΜΒ t o proceed as i t develops g u i d e l i n e s f o r a l l f e d e r a l agencies to implement the new Act. At the very l e a s t , these g u i d e l i n e s should make i t mandatory f o r a l l agencies t o d e c l a r e — and sub s t a n t i a t e — which procurement o r a s s i s t a n c e mode i t intends t o s e l e c t f o r each o f i t s s p e c i f i c programs t h a t bears on commercial i z a t i o n o f new technology and why i t b e l i e v e s i t t o be the most e f f e c t i v e i n b r i n g i n g about commercialization. We do know a good d e a l about what makes i n s t i t u t i o n s inno v a t i v e and, indeed, what i t takes t o b r i n g t o bear our technolog i c a l resources on our most p r e s s i n g s o c i a l and economic problems. I b e l i e v e t h a t , p r o v i d e d the new A c t i s implemented i m a g i n a t i v e l y and f l e x i b l y , p r i v a t e i n d u s t r y w i l l respond v i g o r o u s l y i n coop e r a t i n g with government t o undertake j o i n t ventures, and i s thus l i k e l y t o shoulder more f i n a n c i a l , r e l a t i v e l y long-term, r i s k s a s s o c i a t e d w i t h t e c h n o l o g i c a l i n n o v a t i o n i n the c i v i l s e c t o r — i n c l u d i n g the c o s t o f R&D which, a f t e r a l l , i s g e n e r a l l y o n l y a r e l a t i v e l y s m a l l percentage o f a l l the funds a t stake i n the whole process o f i n n o v a t i o n . I t may w e l l be that f e d e r a l funding o f R&D w i l l thus become l e s s e s s e n t i a l — i n the c i v i l s e c t o r — than i t now appears t o be t o those who shape our N a t i o n a l Science and Technology P o l i c i e s . But we must have the p o l i t i c a l w i l l — both i n i n d u s t r y and i n government — t o focus necessary e f f o r t s . We must unshackle our l a t e n t c a p a b i l i t y t o d i s c o v e r and t o i n v e n t — p a r t i c u l a r l y i n those areas v i t a l t o our i n t e r n a t i o n a l commerce and t o our domestic economy. And we must modify our i n s t i t u t i o n a l arrange ments between government and i n d u s t r y — with s u b s t a n t i v e c o n t r i b u t i o n s made f o r c e f u l l y by i n d u s t r y i t s e l f — t o encourage innova t i o n , u s i n g a l l we know about t h i s process. The F e d e r a l Grants and Cooperative Agreements A c t o f 1977 provides us with a unique o p p o r t u n i t y t o begin and t o accomplish these v i t a l t a s k s .


5.

MICHAELIS

Cooperative

Agreements

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LITERATURE CITED

1. Arthur D. Little, Inc. (Michael Michaelis), "Federal Funding of Civilian Research and Development," Report to Experimental Technology Incentives Program, U.S. Department of Commerce; Westview Press, Boulder, Colorado, 1976. 2. Arthur D. Little, Inc., and Industrial Research Institute Inc., "Barriers to Innovation in Industry: Opportunities for Public Policy Changes," Report to National Science Foundation, 1973; available from National Technical Information Service, Washington,D.C.,Reference Nos. PB 229899/AS (Executive Summary) , PB 229898/AS (Full Report). 3. Office of Technology Assessment, U.S. Congress, "Applications of R&D in the Civil Sector: The Opportunity provided by the Federal Grant and Cooperative Agreements Act of 1977," 1978. 4. Quinn, Prof. James Brian, The Amos Tuck School of Business Administration, Dartmouth College, Hanover, N.H. "National Policies for Science and Technology: Managing Science and Technology for Future Growth." Speech before Industrial Research Institute (New York, N.Y.) at Greenbriar, West Virginia, May 31, 1977. RECEIVED March 14, 1979.


Federal R&D and Scientific Innovation - ACS Publications - American

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