14 THE FIVE-YEAR OUTLOOK 



to convert seminal ideas into marketable products and 

 processes (NRC-Obs; NRC-14). The Japanese consumer 

 electronics industry, for example, owes much of its cur- 

 rent success to the successful adaptation of technologies 

 developed in the United States (AAAS-2). Japanese in- 

 dustry also appears to have made good use of organiza- 

 tional behavior data to streamline industrial processes. 

 Additionally, manufacturing processes in such key U.S. 

 industries as metallurgy and automotives do not employ 

 the best available computer-assisted technologies. Amer- 

 ican industry had, for example, some 2.000 robots at work 

 in assembly line production in 1980, compared with 

 13,000 in Japan (NS). 



It appears that one important reason for the lag in 

 innovation in some industrial sectors is a decrease in the 

 growth rate of industrial investments in long-term R&D 

 programs and in incorporating the results of R&D into 

 manufacturing processes (NRC-14; AAAS-2; ASTR-IJ: 

 Outlook/). Although, in absolute terms, there has been a 

 substantial increase in total industrial R&D outlays over 

 the past few years — compensating somewhat for a marked 

 reduction during the early and mid-I970s'^ — there appears 

 to be a major shift in the form of research and develop- 

 ment investments in some American industries. That shift 

 is away from long-range research and development toward 

 a concentration on short-term needs.* At least a part of this 

 has been due to the great increase in Government regula- 

 tions in the 1970s. The shift toward short-term problem 

 solving is likely to continue to have dramatic negative 

 effects on industrial innovation in the future (NRC-14). 



When viewed in comparison with other countries, total 

 R&D investments in the industries of most other major 

 industrialized nations have been increasing over the past 

 decade at a faster rate than those of the United States. That 

 difference is apparent both in terms of the amount of 

 money invested in R&D relative to the Gross National 

 Product and in terms of the number of scientists and 

 engineers as a proportion of the total labor force. More- 

 over, in West Germany and Japan. R&D investments are 

 more heavily concentrated in such areas as manufactur- 

 ing, transportation, and telecommunications that are di- 

 rectly related to economic growth fASTR-I: SI~80). Some 

 experts believe that the relative decline in research and 

 development investments in some American industries 

 has had and will continue to have major effects on the 

 international competitive position of many U.S. firms 

 (AAAS-2; AAAS-6). 



This background suggests that two kinds of related 

 actions may be needed if the rate of industrial innovation is 

 to be significantly stimulated in the long term. First, an 

 overall increase in industrial investments in R&D; sec- 

 ond, redirection of a larger part of those investments 

 toward long-range projects rather than toward short-term 

 problem solving. President Reagan's tax plan is designed 

 to accomplish precisely those goals. 



THE REASONS FOR CURRENT PATTERNS OF 

 INDUSTRIAL RESEARCH AND DEVELOPMENT 

 INVESTMENTS 



Any suggested mechanisms for changing current patterns 

 of industrial research and development investments as a 

 means for fostering innovation must consider the reasons 

 why current patterns exist. Two kinds of factors typically 

 are cited. One set of factors is largely beyond the control 

 of industry; the other set is inherent in current industrial 

 management practices. 



FACTORS EXTERNAL TO INDUSTRY CONTROL 



The first set of factors typically cited is largely external to 

 business and industry. It includes such things as energy 

 prices, high inflation rates. Federal tax and patent pol- 

 icies, and Federal regulations. Federal regulations, in 

 particular, can require that industrial resources be directed 

 toward meeting their requirements and away from invest- 

 ment in long-term R&D (NRC-Obs.; NRC-14). 



The nature of Federal regulations varies widely, as do 

 their efficacy and the degree to which they discourage 

 long-range R&D investments. In some cases, as in ener- 

 gy-related industries, regulations are concerned with 

 processes. In others, as in the food and drug industries, 

 they are concerned primarily with products. Some regula- 

 tions have spawned R&D aimed at profitable control tech- 

 nologies. That has been the case in industries — the chemi- 

 cal industry, for example — where regulations typically 

 specify control by the Use of the best available means 

 rather than by specifying a level of control without refer- 

 ence to any means to achieve that end (NRC-14). Despite 

 the wide variation in types of regulations, there is a strong 

 perception in industry, and in this Administration, that the 

 effect of the broad extension of Federal regulatory au- 

 thority during the 1970s has, on balance, been negative.' 

 In industries that both are capital intensive and produce a 

 complicated product (such as an automobile or an air- 

 plane), changes to meet specified regulatory ends are not 

 easily made. They involve redesign and testing of more 

 than one part and often necessitate major capital expendi- 

 tures. In many cases the funds for such changes are not 

 readily available, with the result that long-term R&D 

 programs are compromised to obtain them (NRC-14). For 

 somewhat different reasons, regulation of the phar- 

 maceuticals industry has been cited as a particularly noto- 

 rious example. Those regulations have increased mark- 

 edly both the cost and the time required to bring a new 

 drug to the market and, thereby, have raised the market 

 prices of new drugs. In addition, regulations have slowed 

 down the flow of new drugs and reduced the number of 

 companies with financial resources adequate to engage in 

 the development of new drugs. Those kinds of negative 

 effects have raised questions about whether regulation of 



