Competitiveness and Innovative Capacity of The US - USDOC

TheCompetitivenessandInnovative
CapacityoftheUnitedStates
January2012
Preparedbythe U.S.DEPARTMENTOFCOMMERCE Inconsultationwiththe NATIONALECONOMICCOUNCIL
TableofContents
Foreword .......................................................................................................... iii
Executive Summary......................................................................................... v
1. Rising to the Challenge ............................................................................... 1 1
Exceptional Performance .......................................................................................... Alarms ....................................................................................................................... Addressing the Alarms .............................................................................................. 1 1

1 4
1 10
2. Keys to Innovation, Competitiveness, and Jobs ...................................... 2 1
Concepts and Definitions........................................................................................... What Made the United States So Successful in the Past? ........................................ Interconnections ........................................................................................................ 2 2
2 4
2 9
3. Federal Support for Research and Development ..................................... 3 1

The Economic Justification for the Federal Governments Role in Funding for Basic Research .................................................................................................... The Federal Government: A Key Force Driving Major Innovations ........................... Cracks in the Federal Research Foundation ............................................................. Preserving and Extending Federal Support for Science and Industrial R&D in the 21st Century ............................................................................................................... Appendix 1. Definitions of Relevant Terms ................................................................ Appendix 2. The Theoretical Underpinnings for a Federal Role in Research Funding...................................................................................................................... 31 37 3 13 3 14 3 18 3 19
4. Educating Our Workforce ........................................................................... 4 1
The STEM Workforce is Expanding........................................................................... STEM Skills in Demand Throughout the Economy ................................................... Many U.S. Universities Are Outstanding But Our Production of U.S. STEM
Graduates Is Not ....................................................................................................... The High Cost of College and Poor Academic Preparation Deter Students.............. Demographics Create Challenges and Opportunities for Growth ............................. The Foreign-Born Are Key Members of the STEM Workforce .................................. The Administration is Lowering the Barriers to a College Education......................... 4 2
4 4
4 6
4 9
4 12
4 14
4 15
5. Infrastructure for the 21st Century.............................................................. 5 1
Introduction ................................................................................................................ Definitions of 21 Century Infrastructure ...................................................................

st
5 1
5 3
5 4
5 12
How Does Our 21 Century Infrastructure Stack Up? ...............................................

st
Ensuring the United States 21 Century Infrastructure is Sound..............................

st
U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY
6. Revitalizing Manufacturing .........................................................................
6 1
A Strong Manufacturing Sector is Uniquely Important to the U.S. Economy.............. 6 1

The Current State of U.S. Manufacturing: A Crossroads for American
Competitiveness......................................................................................................... 6 4
Economic Rationales for Federal Government Support for U.S. Manufacturing........ 6 8
Longstanding Federal Government Support for U.S. Manufacturing ......................... 6 9
Federal Initiatives to Revive Manufacturing ............................................................... 6 16
7. The Private Sector as the Engine of Innovation .......................................
7 1
Introduction ................................................................................................................ 7 1
Regional Clusters and Entrepreneurship ................................................................... 7 1
Startup America.......................................................................................................... 7 6
Promoting Americas Exports and Improving Access to Foreign Markets.................. 7 8
Corporate Taxes ......................................................................................................... 7 10
Ensuring a Well-Functioning Intellectual Property Rights System ............................. 7 11
Moving Forward ............................................................................................... Supplemental Materials...................................................................................
M 1
S 1
Innovation Advisory Board Members ......................................................................... S 3

Section 604 of the America COMPETES Reauthorization Act of 2010...................... S 4
ii
Foreword
On January 4, 2011, President Barack Obama signed into law the America COMPETES Reauthorization Act of 2010 (COMPETES). Section 604 of COMPETES mandates that the Secretary of Commerce complete a study that addresses the economic competitiveness and innovative capacity of the United States (see Supplemental Materials). Congress directed that this report address a diverse array of topics and policy options, including: tax policy; the general business climate in the U.S.; regional issues such as the role of state and local governments in higher education; barriers to setting up new rms; trade policy, including export promotion; the eectiveness of Federal research and development policy; intellectual property regimes in the U.S. and abroad; the health of the manufacturing sector; and science and technology education. In conducting this study, COMPETES specied that the Secretary of Commerce establish a process for obtaining comments. One part of that process was to establish a 15 member Innovation Advisory Board (IAB) for purposes of obtaining advice with respect to the conduct of the study. The Department of Commerce announced the members of the IAB (listed in the Supplementary Materials section of this report) on May 4, 2011, and the inaugural meeting of the IAB was on June 6, 2011, in Alexandria, Virginia. A second meeting of the IAB was held September 23, 2011, in Boulder, Colorado. IAB members provided input into the process throughout the summer. Additionally, some IAB members generously hosted COMPETES-related events in Washington, D.C.; Youngstown, Ohio; Morgantown, West Virginia; Philadelphia, PA; and New York, NY. These events brought together community and business leaders, and experts in a wide variety of areas, to share their ideas on competitiveness. Department of Commerce and Administration sta attended all of these meetings. Additionally, we received input from a number of other groups at various events. These included an all day event with a group of prominent academic economists in Cambridge, Massachusetts, and a conference at the Silicon Flatirons Center for Law, Technology, and Entrepreneurship at the University of Colorado. Other groups, as well as the general public, provided additional input. We are very grateful for the generosity of all contributors, but special thanks go to the Innovation Advisory Board membersthey passionately care about the future of this country and have been willing to give their valuable time and expertise to enrich this process. Sincerely,
John E. Bryson Secretary of Commerce
iii
Executive
Summary
TheU.S.economyreignedsupremeinthe20thcentury,becomingthelargest, mostproductive,andmostcompetitiveintheworld;amazingnewtechnologies wereinventedandcommercialized;theworkforcebecamethemosteducatedin theworld;andincomessoaredwhilealargemiddleclassemergedandthrived. Asthe21stcenturyapproached,however,alarmsbegantosoundabouttheU.S. economysabilitytoremaininthispreeminentposition.Incomesstagnatedand jobgrowthslowed.Othercountriesbecamebettereducatedandourmanufac turingsectorlostgroundtoforeigncompetitors.Observershaveexpressedcon cernthatthescientificandtechnologicalbuildingblockscriticaltooureconomic leadershiphavebeenerodingatatimewhenmanyothernationsareactivelylay ingstrongfoundationsinthesesameareas.Inshort,someelementsoftheU.S. economyarelosingtheircompetitiveedgewhichmaymeanthatfuturegenera tionsofAmericanswillnotenjoyahigherstandardoflivingthanisenjoyedinthe UnitedStatestoday. Innovationisthekeydriverofcompetitiveness,wageandjobgrowth,andlong termeconomicgrowth.Therefore,onewaytoapproachthequestionofhowto improvethecompetitivenessoftheUnitedStatesistolooktothepastandexam inethefactorsthathelpedunleashthetremendousinnovativepotentialofthe privatesector.Amongthesefactors,threepillarshavebeenkey:Federalsupport forbasicresearch,education,andinfrastructure.Federallysupportedresearch laidthegroundworkfortheintegratedcircuitandthesubsequentcomputerin dustry;theInternet;andadvancesinchemicals,agriculture,andmedicalscience. Millionsofworkerscantracetheirindustriesandcompaniesbacktotechnologi calbreakthroughsfundedbythegovernment.TheU.S.educationalsysteminthe 20thcenturyproducedincreasingnumbersofhighschoolandcollegegraduates, moresothananywhereelseintheworld.Thesehighlyskilledworkers,inturn, boostedinnovation.Thetransformationofinfrastructureinthe20thcenturywas nothingshortofamazing:thecountrybecameelectrified,cleanwaterbecame widelyavailable,airtransportbecameubiquitous,andtheinterstatehighway systemwasplannedandconstructed.Allofthesedevelopmentshelpedbusi nessescompetebyopeningupmarketsandkeepingcostslow. Commontoallthreepillarsresearch,education,andinfrastructureisthat theyareareaswheregovernmenthasmade,andshouldcontinuetomake,signif icantinvestments.Foravarietyofreasons,theprivatesectorunderinvestsin these areas so thegovernmentneedstostepintobringinvestmentuptothe sociallyoptimallevels.Anadditionalcommonthreadbetweenthesethreepillars
isthatthebenefitsoftheseinvestmentstookyearstobefullyrealized.Forin stance,wearestillbenefitingtodayfrominvestmentsmadeinthe19thcentury, suchastheMorrillActof1862,whichlaidthefoundationforthelandgrantuni versitysysteminallstates.Inthe20thcentury,WorldWarIIeraresearchbecame thebasisofthetransistor;andinthe1960s,allofthebenefitsfrominvestingin sciencemadetheUnitedStatestheleaderofthespaceraceaswellastheinfor mationtechnologyindustry.Thislongtermoutlookshouldnotbeforgotten. Theneed for theFederalgovernmenttoplayanimportantroleinthefirstpil larresearch,particularlybasicresearchderivesfromthefactthatthereisadi vergencebetweentheprivateandsocialreturnsofresearchactivitieswhich leadstolessinnovativeactivityintheprivatesectorthaniswhatisbestforour country.However,governmentsupportofbasicresearchcanremedythisprob lem.ThebenefitsfromFederalresearchanddevelopment(R&D)supportarenot justtheoretical:asmentionedabove,theFederalgovernmenthasplayedacru cialroleinthedevelopmentofmanykeyinnovationsofthemid tolate20thcen tury. Federalfundingforbasicresearchhasbeenincreasing,butataslowerpacethan economicgrowth.ToimprovethetrajectoryofAmericaninnovation,thoughtful, decisive,andtargetedactionsareneeded,someofwhichalreadyhavebeenpro posed.Theseactionsincludesustainingthelevelsoffundingforbasicresearchby theFederalgovernment,extendingataxcreditforprivatesectorR&Dtogive companiesappropriateandwelldesignedincentivestoboostinnovationabove thebaselinelevelthatwouldhavebeenreachedabsenttheseincentives,andim provingthemethodsbywhichbasicresearchistransferredfromthelabinto commercialproducts. Education,thesecondpillar,isalsocriticaltofosterinnovationandtoincrease livingstandards.Theadvancesineducationinthe20thcenturyhelpedpropelthe economicriseoftheUnitedStatesasitbecametherichestnationontheplanet. However,bymanymeasures,theU.S.educationsystemhasslipped.Bysomeac counts,theUnitedStatessystemofhighereducationremainsthebestinthe worldandeducatesourcountrysandourcompetitorsfuturescientistsandengi neers, factors such as poor preparationinmathandscienceandthehighcost ofcollegetuitionandexpensesare restrictingtheflowofAmericanscience,tech nology,engineeringandmathematics(STEM)graduatesfromouruniversities.
vi
OngoingandnewAdministrationinitiativesareaddressingthesechallengesby makingcollegemoreaffordable,spurringclassroominnovationatalllevels,ex pandingthesizeandqualityoftheSTEMteacherranks,andencouragingandfa cilitatingstudentsandworkerscontinuedSTEMeducation. Inthepast,theUnitedStatesledthewayinseveralkeyareasofinfrastructurede velopment,thethirdpillarofinnovativecapacity,startingwiththerailroadsys temofthe1800s.Intodayseconomy,thenatureofinfrastructureneededto competeischangingandtheUnitedStatesislaggingbehindincertainkeyas pectsofa21stcenturyinfrastructure(suchasbroadbandInternetaccess)andfac ingcapacityconstraintsforotheraspects(wirelesscommunications)giventhe highdemandfortheseservices.EnsuringthattheUnitedStateshastheinfra structureitneedstobecompetitiveinthe21stcenturywillrequirebothaddi tionalsupportbythegovernmentandanappropriatepolicyframeworkto enabletheprivatesectortobuildonthegovernmentssupport. AcrucialcomponentoftheUnitedStatesfuturecompetitivestrengthisaflour ishingmanufacturingsector.Manufacturingcreateshighpayingjobs,provides thebulkofU.S.exports,andspursinnovation.Whilemanufacturingcontinuesto playavitalroleintheU.S.economyandprovidesjobsformillionsofAmericans, italsohasfacedsignificantchallenges,especiallyoverthelastdecade.Manufac turingsshareofGDPandthenumberofworkersinmanufacturinghasfallen, whilethetradebalanceinmanufacturedgoodshasworsened.Inthemanufac turingsector,theFederalgovernmenthashistoricallyplayedanimportantrolein providingalevelplayingfieldandmustdosowithrenewedvigortoensurethat manufacturingcontinuestothriveintheUnitedStates.Thecurrentandfuture healthofthemanufacturingsectorisstronglylinkedtotheinvestmentswemake inresearch,education,andinfrastructure. Increasing the competitiveness and the capacity to innovate goes beyondim proving research, education, infrastructure and manufacturing. Many other policies that ensure the private sector has the best possible environmentin which to innovatecontributetocompetitiveness,includingincentivestoform regionalclusters,promotionofexportsandaccesstoforeignmarkets,thelevel andstructureofcorporatetaxes,andaneffectiveintellectualpropertyregime (domesticallyandabroad).Ineachoftheseareas,theFederalgovernmenthasan importantroletoplay.
vii
Thechallengesaregreat,buttheUnitedStateshasastrongbaseonwhichto buildandtorisetothesechallenges.Thereareclearactionsthatcanhelpthisna tionregainitsinnovativeandcompetitivefooting.Tosucceed,wemusthavethe willtoimplementandtosustainthepoliciesthatwillpreparetheUnitedStates tocontinuetobeaneconomicleaderinthe21stcentury.
viii
Risingtothe Challenge
TheU.S.economywastheworldleaderinthe20thcentury;movingintothe21st century,however,variouspartieshaveraisedalarmsaboutwhetherthisnations economycancontinuetobecompetitive.TheU.S.economyremainsthelargest intheworld,possessingahighlyskilledworkforce,worldclasscompanies,and, accordingtosome,theworldsbesthighereducationsystem.Despitetheseposi tiveattributes,U.S.citizenshavebeenhitbystagnatingjobgrowthandfallingin comes,whilebusinesseshavefacedincreasingglobalcompetition.Inshort,the concernisthatfuturegenerationsofAmericanswillnotenjoyahigherstandard oflivingthanisenjoyedtoday.Withtherightpoliciesandcommitment,the UnitedStatescancompetegloballyandprovideitscitizenswithbetterlives.
ExceptionalPerformance
Duringthe20thcentury,thepaceofinnovationwasstaggering,leadingtonewin dustriesandcompanies,suchasthoseinthebiotechandinformationtechnology fields.Innovationalsospurredgrowthintraditionalindustries,asbusinessesfun damentallychangedthewaytheyproducedanddistributedtheirgoodsandser vices. Intheprocess,theUnitedStatesbecametheworldsmostinnovative,mostedu cated,andmostcompetitivenation.Since1980,theUnitedStatesmadeupbe tween20and25oftheworldseconomywhilehavingonlyabout5percentof theworldspopulation.1TheexceptionaleconomicperformanceoftheUnited Stateshelpedtoimprovethelivesofitscitizens,particularlyduringthedecades afterWorldWarII.Between1950and2000,incomessoared,withrealdisposable personalincomepercapitaincreasing213percent,from$9,240to$28,899.2The U.S.economycreatedmillionsofnewjobs,manyinnewfirmsandindustries. Theseeconomicgainswerecoupledwithgainsinotherareas.TheUnitedStates providedelectricityandphoneservicethroughoutthecountry,builttheInter stateHighwaySystem,providedcleanwatertohundredsofmillions,putmenon themoon,developedtheInternet,anddecodedthehumangenome.(Box1.1de scribesinmoredetailtheconstructionoftheInterstateHighwaySystem.)Ad vancesinmedicalsciencehelpedpropelsignificantincreasesinlifeexpectancyin theUnitedStates.Lifespans,asmeasuredatbirth,rosefrom47.3yearsin1900 to77.9in2007.3Advancesinagriculturalscienceincreasedtheproductivityof ourfarmsby150percentbetween1948and2008.4
11
TheUnitedStateshasastrongtraditionofscientificadvancement;about40per centofNobelPrizeshavebeenawardedtoU.S.citizens5anda2011studyplaced 40percentoftheworlds100mostinnovativecompaniesintheUnitedStates.6
Box 1.1
The Interstate Highway System

PerhapsnootherinfrastructureinvestmentintheUnitedStatessotransformed societyastheInterstateHighwaySystem.TheFederalAidHighwayActof1956 wassignedintolawbyPresidentDwightD.Eisenhower,anditauthorized$25 billionfortheconstructionof41,000milesofhighways(seethemapbelow),at thetimemakingitthelargestpublicworksprograminAmericanhistory.Asof 1991,constructioncost$128.9billionforabout43,000ofthesystemsmiles. About90percentofthefundingcamefromtheFederalgovernment,generally from revenue raised by taxes on motor fuel, and about 10 percent from the states. Today,aftermorethan50years,therearemorethan46,000milesintheInter stateHighwaySystem.Itisoftentoutedasoneofthegreatestpublicworksin vestments in the nations history. The Interstate Highway System replaced a lowercapacity,lowerspeed,lesssafe,andmoreexpensive(permileoftravel) highwaysystem.Thesystemthusallowedregionsandlocalitiesthatwerenot partofthenationseconomytobecomeintegratedandopentoneweconomic opportunities.1
Map of the United States Interstate Highway System
1.Source:mappery.com/maps/UnitedStatesInterstateMap.
12
StatesacrossthecountrycontributedtoandbenefittedfromtheU.S.economic strengthduringthe20thcentury.From1963to2008,statelevelrealincomeper personincreasedineverystatebyatleast79percent,andsomestatesexperi encedgainsofcloseto300percent.Atotalof34states(includingtheDistrictof Columbia,whichhadthehighestincrease)sawgrowthofmorethan150percent (seefigure1.1).
Figure 1.1
Growth in Real GDP per Capita by State, 19632008
79100% 100150% 150220% 220300%
Source: Bureau of Economic Analysis, Economics and Statistics Administration calculations.

Note: Percent change in real Gross Domestic Product per capita by state, 1963 (first available
year of data) to 2008.
Successful,worldclasscompaniesarelocatedinvirtuallyeverystateinthe UnitedStates;39statesarehometoatleastoneFortune500company.Within states,andacrossstateboundaries,regionalinnovationclustersarose.Silicon Valleybecametheworldsinformationtechnology(IT)epicenter,butotherareas alsocontributedsignificantlytotheITrevolution,includingtheregionalindustry
13
clustersinTexas,WashingtonState,Massachusetts,Georgia,NorthCarolina,Vir ginia,andMichigan(AutomationAlley,inSoutheastMichigan).Majormedical advanceshavebeenmadeinmanystates,includingAlabama,California,and Pennsylvania. Overtime,Americanscametotaketheseeconomicadvancesforgrantedandex pectedthesetrendstocontinueintothefuture.Thiseconomicprogressfueled beliefinanimportantfacetoftheAmericandreamtheexpectationthatour childrensqualityoflifewouldbebetterthanourown.
Alarms
WhiletheUnitedStatesexitedthe20thcenturyastheundisputedeconomicand innovationleader,thecompetitivelandscapewasshifting.7Astheeconomiesof morecountriesaroundtheworldgrewanddeveloped,thesecountriesbecame strongercompetitorstotheUnitedStates.Thoughtherearebenefitstothe UnitedStatesfromthesechanges,alarmsarebeingraisedaboutthesetrends andthereisalsogrowingangstthattheUnitedStatesisnolongercompetingas stronglyontheworldeconomicstage.Onerecentpollfoundthat47percentof Americansstronglyagreeand43percentsomewhatagreewiththestate mentthattheUnitedStatesisindangeroflosingitsglobalcompetitiveedgein innovation.8Anothersurveyfoundthat71percentofAmericansbelievethatour highschoolsarefallingshortwhenitcomestopreparingstudentsforscienceand engineeringjobsand76percentbelievethatifthenextgenerationdoesnot worktoimproveitsscienceandmathskills,itrisksbecomingthefirstonethatis worseoffthanitsparentsgeneration.9
Alarm1:Jobs
TheUnitedStatesabilitytocreatejobshasdeterioratedduringthepastdecade. Employmentincreasedatanannualrateofjust0.6percentbetweentheFebru ary2001andJanuary2008employmentpeaks(figure1.2).Thisrateisonethird asfastasthe1.8annualrateofemploymentgrowthbetweentheJune1990and February2001employmentpeaks.ArecentstudybyMcKinseyGlobalInstitute foundthattheUnitedStateshasbeenexperiencingincreasinglylengthyjobless recoveries:ittookroughly6monthsforemploymenttorecovertoitsprereces sionlevelaftereachpostwarrecessionthroughthe1980s,butittook15months afterthe199091recessionand39monthsafterthe2001recession.10
14
Figure 1.2
Nonfarm Payroll Employment, 19802011
150 140 130 120 110 100 90 80 70 1980 1985 1990 1995 2000 2005 2010
Source: Bureau of Labor Statistics. Note: In millions of jobs.
Alarm2:WagesandtheMiddleClass
ThemiddleclassintheUnitedStateshasstruggledasincomesandwageshave generallystagnated.Onecommonlyreferencedmeasureofthefinancialwellbe ingofthemiddleclassisrealmedianhouseholdincome;thatis,theincomeof householdsinthemiddleoftheincomedistributionafteradjustingforinflation. From1980toitspeakin1999,realmedianhouseholdincomeincreasedabout20 percent(seefigure1.3).Sincethatpeak,realmedianhouseholdincomehas stalled,andevenbeforetheGreatRecession,realmedianhouseholdincomefell from$53,252in1999to$52,823in2007(in2010dollars).Individualsatthevery topoftheincomedistributionhavefaredbetterduringthistimethanothers;one studyfoundthatbetween1993and2008,incomegrewalmost4percentper yearforthosewithincomesinthetop1percentoftheincomedistribution.11The lackofincomegrowthechoesthelackofearningsgrowthworkershaveexperi encedoverrecentdecades.Withfewexceptions(suchasthesecondhalfofthe 1990s),thetypicalAmericanworkerhasexperiencedlongstretchesofflator
15
Figure 1.3
U.S. Median Household Income, 19772009
$53,000
$51,000
$49,000
$47,000
$45,000
$43,000
$41,000 1977 80 83 86 89 92 95 98 2001 04 07 10
Source: Household Median Income from the U.S. Census Bureau, Current Population Survey,
Annual Social and Economic Supplements.
Note: In 2010 dollars.
evendecliningearningsforfulltimework,despiteanincredibleriseinhisorher productivity.Betweenthefourthquarter1979andthefourthquarter2010(that is,essentiallyoverthelengthofageneration),realmedianweeklyearningsof fulltimewageandsalaryworkersedgedupjust4.9percent,whileworkerspro ductivityincreased90.9percent.Reasonsofferedforthesewagetrendsinclude thedeclineinthefractionofworkerscoveredbycollectivebargaining,increased internationalcompetition,technologicalchange,immigration,andminimum wages,amongothers.12Regardlessofthereasons,thisstagnationmakesitim possibleformanyAmericanstoincreasetheirfinancialstandardoflivingand feedstheperceptionthatthenextgenerationwillbenobetteroffthanitspar entsgeneration.
Alarm3:Manufacturing
Theseemploymentandwagetrendsalsoroughlycoincidewiththeincreased pressurefromabroadfacedbytheU.S.manufacturingsector(thoughthemanu facturingsectorhasincreasinglyreliedonforeignmarkets).Themanufactured goodstradebalancehasworsened.In2010,thetradedeficitinmanufactured
16
goodswas$565.4billionandisontracktoexceedthatamountin2011,even withstrongexportgrowth.13TheUnitedStatescontinuestolosegroundinkey manufacturingsectors,includingthosesectorsthatarelikelytodriveourecon omyinthefuture.TheUnitedStatesranatradesurplusinadvancedtechnology products,whichincludesbiotechnologyproducts,computers,semiconductors, androbotics,until2002(seefigure1.4).14In2010,however,theUnitedStatesran an$81billiontradedeficitinthiscriticallyimportantsector.15
Figure 1.4
Advanced Technology Products Trade Balance, 19902010
Source: U.S. Census Bureau, Foreign Trade Division.

Note: Billions of dollars. In nominal dollars.
Alarm4:Innovation
Afterreviewing16keyindicatorssuchasthenumberofscientistsandengi neers,corporateandgovernmentR&D,venturecapital,productivity,andtrade performancetheJuly2011AtlanticCenturyreportindicatedthattheUnited Stateshadmadelittleornoprogressinitscompetitivenesssince1999andnow ranksfourthininnovationbasedcompetitiveness.16Areportfrom2005,Rising AbovetheGatheringStormavolumeauthoredbyacommitteeconvenedin 2005 by theNational AcademyofSciencesexpresseddeepconcernthatthe
17
scientificandtechnologicalbuildingblockscriticaltotheeconomicleadershipof theUnitedStateswereerodingatatimewhenmanyothernationswereactively layingstrongfoundationsinthesesameareas.17Intheir2010followupreport, thatsamecommitteeunanimouslystatedthatournationsoutlookhasnotim provedbutratherhasworsened.18
Alarm5:Education
TheUnitedStatesisstrugglingtoprepareU.S.studentsinmathandscience.In 2009,U.S.15yearoldshadanaveragescoreof487onthemathematicsliteracy scale, which was lower than the OECD average scoreof496(seefigure1.5). Seventeen OECD countries rankedabovetheUnitedStatesinmath,andsome 11 othercountrieshadscoresthatwere not significantly different from the U.S.math score. Additionally, scienceandreadingscoreswere only average andonan earlier assessment ofstudentproblemsolvingability(2003Program
Figure 1.5
U.S. Math Test
Scores for 8th Graders Remain Below OECD Averages
550
525
500
OECD average
475
450
425
400
Kor ea F Swi inland tzer lan Jap d an C Net anada herl an New Zea ds l Belgand Aus ium t Ger ralia man Esto y n Ice ia Den land m Slov ark en Nor ia way Slov ak R France epu bl Aus ic tr Pol ia Sweand Cze d c Uni h Rep en ted u King blic dom L Hun Un uxemb gary ited ou Sta rg te Irela s Por nd tuga l Ital Spa y Gre in ece Isra Tur el key Chi Mex le ico
Source: OECD, PISA 2009 database.
18
forInternationalStudentAssessment(PISA)),U.S.studentsscoredbehindmost oftheotherdevelopednationsintheworld.19
Alarm6:Infrastructure
Delaysatairports,timelostintrafficjams,bridgesinneedofrepair,andports thatcannothandlethenewestshipsexemplifyhowtraditionalinfrastructurein theUnitedStateshasfailedtokeeppacewithitsgrowingpopulation.Theresult ishighercostsforbusinessesandinconvenienceforall.Digitalinfrastructure, thoughstellarinsomerespects,hasnotyetreachedlargeportionsofourpopula tion,makingitdifficultforthemtoparticipateinthe21stcenturyeconomy.Large anddisturbingdifferencesinbroadbandadoptionstillpersistbyincome,race andethnicity,andeducation.Also,somecommunitiesaredisadvantagedwithre specttobroadbandaccessanduse.Forexample,thoselivinginurbanareaswere muchmorelikelytohaveaccesstobroadbandInternetconnectionsrelativeto ruralconsumers(seefigure1.6).
Figure 1.6
Computer and Internet Use by Urban and Rural Location, 2010
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Urban (Metropolitan) Rural (Non-metropolitan)
70% 57% 5% 2% 8% 5% 22% 30%
No computer Computer, no Internet Dial-up Broadband
Source: Economics and Statistics Administration and National Telecommunciations and Information
Administration. Exploring the Digital Nation: Computer and Internet Use at Home. Washington, D.C:
U.S. Department of Commerce, November 2011.
19
AddressingtheAlarms
So,yes,theworldhaschanged.Thecompetitionforjobsisreal.But thisshouldntdiscourageus.Itshouldchallengeus.Rememberfor allthehitswevetakentheselastfewyears,forallthenaysayerspre dictingourdecline,Americastillhasthelargest,mostprosperous economyintheworld.Noworkersnoworkersaremoreproductive thanours.Nocountryhasmoresuccessfulcompanies,orgrantsmore patentstoinventorsandentrepreneurs.Werethehometothe worldsbestcollegesanduniversities,wheremorestudentscometo studythananyplaceonEarth. PresidentBarackObama,StateoftheUnionAddress,January2011
ToughproblemsneedtobetackledinorderfortheUnitedStatestoimproveits competitivenessandincreasegoodpayingjobs.Toaddresstheseissues,Chapter 2,KeystoInnovation,Competitiveness,andJobsdelvesintowhatmadethe economycompetitiveinthepastanddemonstratesthattheFederalgovernment playedakeyroleinresearch,education,andinfrastructure,threecomponents thatgreatlycontributedtotheeconomicvitalityoftheUnitedStatesinthe20th century.Putanotherway,thegovernment(Federal,state,andlocal)madeinvest mentsintothebuildingblocksofoureconomicgrowth,andtheseinvestmentsal lowedtheprivatesectortoflourish.Chapters3,4,and5gointogreaterdetailfor eachofthesebroadareas(research,education,andinfrastructure),discussing thechallengesfacedineachandproposedpoliciestokeeptheUnitedStatesat theinnovationandcompetitivenessfrontier. Inadditiontothesekeyareas,thereareotheravenuesbywhichthecompetitive nessoftheUnitedStatescanbeincreased.Forinstance,astrongmanufacturing sectoriscrucial,asthissectorconductsthemajorityofindustrialresearchand development,andtherearestronglinksbetweenthelocationofproductionand thelocationofresearchactivity.20Giventheimportanceofmanufacturingand someofitsuniqueproperties,Chapter6focusesonmanufacturingsolely. Althoughimprovingresearch,education,infrastructure,andthemanufacturing sectorareessentialtoincreasinginnovationandcompetitiveness,manyother factorsalsocontributetoeconomicsuccess.Perhapschiefamongthemisensur ingthatbothestablishedfirmsandentrepreneursintheprivatesectorhavethe bestpossibleenvironmentinwhichtoinnovate.Chapter7touchesuponsomeof
1 10
theadditionalareaswherethegovernmentcanassisttheprivatesector,includ ingaidtoregionalclusters,promotingentrepreneurship,creatinganeffectivein tellectualpropertyregime(domesticallyandabroad),andreformingcorporate taxes. ThisreporttouchesuponsomeofthekeypolicyareasneededtomaketheU.S. economymoreinnovativeandcompetitive.Drawingupontheotherchaptersin thisreport,thelastchapter,MovingForward,highlights10areasthatdeserve specialattention.Implementingtheserecommendationswillbetterpreparethe UnitedStatestomeettheeconomicchallengesofthe21stcenturyandprovidea betterfutureforourchildren.
1 11
Endnotes
1.InternationalMonetaryFund,WorldEconomicOutlookdatabase,September2011. 2.U.S.BureauofEconomicAnalysis2010,Table678.Note:Inchained2005dollars. 3.NationalCenterforHealthStatistics2011,134. 4.EconomicResearchService2011. 5.Nobelprize.org,NobelPrizeFactswww.nobelprize.org/nobel_prizes/nobelprize_facts.html. 6.ThomsonReuters2011. 7.See,forexample,NationalAcademyofSciences2007. 8.CharltonResearchCompany2011. 9.PeterD.HartResearchAssociates,Inc.andTheWinstonGroup2006,2. 10.Manyikaetal.2011,1. 11.BasedonresearchbyAtkinson,Piketty,andSaez2011andPikettyandSaez2003. 12.Muchhasbeenwrittenonthesubjectoftheforcesbehindchangesinwagesandrelativewagesoverthepast severaldecades.Reasonsofferedforthevariouswagetrendsincludethedeclineinthefractionofworkerscov eredbycollectivebargaining,increasedinternationalcompetition,technologicalchange,immigration,minimum wages,amongothers.See,forexample,Sachdev2007fortablesupdatedto2008. 13.U.S. Census Bureau, Foreign TradeDivision,U.S.InternationalTradeinGoodsandServices(FT900) www.census.gov/foreigntrade. 14.Forthecompletedefinitionofthissector,seeU.S.CensusBureau,ForeignTradeDivision2011. 15.Themanufacturingsectorisnottheonlypartoftheeconomythatisexposedtointernationalcompetition,as documentedbyJensen(2011).TheU.S.hasrunatradesurplusinservices,andweexportabout$500billiona yearinservices(comparedwith$565billioninmanufacturedgoods),andincreasinglytheservicesectorwillbe opentointernationalcompetitionwhichmaycreateadditionalopportunitiesofU.Sserviceexports.Jensenesti matesthatroughlyathirdoftheservicesectorissubjecttointernationalcompetition. 16.TheAtlanticCentury2009. 17.NationalAcademyofSciences2007. 18.NationalAcademyofSciences2010. 19.Fleischman,H.L.,Hopstock,P.J.,Pelczar,M.P.,andShelley,B.E.2010. 20.Delgado,Porter,andStern2011. Atkinson,RobertD.,andScottM.Andes.2009.TheAtlanticCentury:BenchmarkingEUandU.S.Innovationand Competitiveness.The Information Technology & InnovationFoundation;www.itif.org/publications/atlantic centurybenchmarkingeuandusinnovationandcompetitiveness. Atkinson,AnthonyB.,ThomasPiketty,andEmmanuelSaez.2011.TopIncomesintheLongRunofHistory.Jour nalofEconomicLiterature49,no1:371.2011. BureauofLaborStatistics.EstablishmentData.TableB1.Employeesonnonfarmpayrollsbyindustrysectorand selectedindustrydetail.www.bls.gov/webapps/legacy/cesbtab1.htm CharltonResearchCompanyforResearch!America.YourCongressYourHealthSurvey,March2011.www.your congressyourhealth.org/where_america.php?qq=509 Delgado,Mercedes,MichaelE.Porter,andScottStern.2011.,Clusters,Convergence,andEconomicPerformance. March;www.isc.hbs.edu/pdf/DPS_Clusters_Performance_20110311.pdf. EconomicResearchService.2011.AgriculturalProductivityintheUnitedStates:Overview.Washington,DC:U.S. DepartmentofAgriculture,May;www.ers.usda.gov/Data/AgProductivity/. Fleischman,H.L.,Hopstock,P.J.,Pelczar,M.P.,andShelley,B.E.2010.HighlightsFromPISA2009:Performanceof U.S. 15YearOldStudentsinReading,Mathematics,andScienceLiteracyinanInternationalContext(NCES 2011004).U.S.DepartmentofEducation,NationalCenterforEducationStatistics.Washington,DC:U.S.Gov ernmentPrintingOffice. International Monetary Fund. 2011. World Economic Outlook Database. September 2011; www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx. Jensen,J.Bradford.2011.GlobalTradeinServices:Fear,Facts,andOffshoring.Washington,DC:PetersonInsti tuteforInternationalEconomics. Manyika,James,SusanLund,ByronAuguste,LennyMendonca,TimWelshandSreenivasRamiswamy.2011.An EconomythatWorks:JobCreationandAmericasFuture.McKinseyGlobalInstitute,1;www.mckinsey.com/mgi/ publications/us_jobs/pdfs/MGI_us_jobs_full_report.pdf.
References
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NationalAcademyofSciences.2010.RisingAbovetheGatheringStorm,Revisited:RapidlyApproachingCategory 5.Washington,DC:NationalAcademiesPress. NationalAcademyofSciences.2007.RisingAbovetheGatheringStorm:EnergizingandEmployingAmericafora

BrighterEconomicFuture.Washington,DC:NationalAcademiesPress;www.nap.edu/catalog/11463.html.
NationalCenterforEducationStatistics,MathematicsAge15,2009OECDPISAData,InternationalDataExplorer,
nces.ed.gov/surveys/international/ide/.
NationalCenterforHealthStatistics.2011.Table22.Lifeexpectancyatbirth,at65yearsofage,andat75years
ofage,byraceandsex,19002007inHealth,UnitedStates,2010:WithSpecialFeatureonDeathandDying.
Washington,DC:U.S.GovernmentPrintingOffice;www.cdc.gov/nchs/data/hus/hus10.pdf#022.
NobelPrizeFacts.AccessedonNovember30,2011;www.nobelprize.org/nobel_prizes/nobelprize_facts.html.
PeterD.HartResearch Associates, Inc.andTheWinstonGroup.2006.KeepingOurEdge:AmericansSpeakon
EducationandCompetitiveness.2006.Washington,DC:Hart/Winston;www.ets.org/Media/Education_Topics/
pdf/HW_KeepingOurEdge2006.pdf.
Piketty,Thomas,andEmmanuelSaez.2003.IncomeInequalityintheUnitedStates,19131998.Quarterly
JournalofEconomics118(February):141.
Sachdev,Nikhil.2007.AnExaminationoftheWageProductivityGap.WorkingPaper.StanfordUniversity.
ThomsonReuters.2011.Top100GlobalInnovators;www.top100innovators.com/home.
UnitedStatesNobelPrizeWinners.AccessedonNovember30,2011;www.jinfo.org/US_Nobel_Prizes.html.
U.S.BureauofEconomicAnalysis.2010.SurveyofCurrentBusinessess.Accessed14November2011;April.
U.S.CensusBureau,ForeignTradeDivision.AccessedNovember29,2011.AdvancedTechnologyProductDefini tionsinForeignTradeStatistics;www.census.gov/foreigntrade/reference/glossary/a/atp.html#general.
1 13
Keysto Innovation, Competitiveness, andJobs
Innovationisakeydriverofcompetitiveness,jobgrowth,andahigherstandard oflivingforfuturegenerations.ToimprovethecompetitivenessoftheUnited States,itisinstructivetoexaminethefactorsthatpreviouslyunleashedthetre mendousinnovativepotentialoftheprivatesector.Thelistofthosefactorsis long,anditisnotsurprisingthattherecipeforsuccessfulinnovationandcom petitivenessiscomplex,evolving,anddiffersbyproductandindustry.Toaddress thequestionofwhatmadetheUnitedStatesinnovativeandcompetitiveinthe past,andalsowhatwillmaketheUnitedStatesinnovativeandcompetitiveinthe future,thisreportprimarilyfocusesonthreeimportantfactorsthatformedthe foundationofastronginnovativeenvironment:supportforresearch,education, andinfrastructure.
Jobs

Newindustries Newbusinesses Expansionofexistingbusi nesses Goodjobs(highwages)
Innovation
Competitiveness
Acommonthreadbetweenthesethreeelementsisthattheyareareaswhere governmenthasmade,andshouldcontinuetomake,significantinvestments.In allthreeoftheseareas,investmenthasasocialreturnthatexceedsthereturnto anyonecompanyorperson.Basicresearchoftenhasmanyapplications,beyond thosewhichmotivatedtheinitialresearch.Amoreeducatedworkforcemeans notjustmoreincomeforthosewhoattendschoollonger,butalsomeansgreater productivityinbusinessandamoreeffectivecitizenry.Improvedinfrastructure providesabenefitforthegreatergoodandfacilitatesproductivity.Becauseof thesebroaderbenefits,privateinvestmentisoftentoolowsinceprivateinvestors cannotcapturethebroadersocialreturns.Asaresult,almostallgovernmentsin developedcountriesfundinvestmentintheseareas.
21
ConceptsandDefinitions
Beforedelvingintothesethreeareas,itisimportanttotakeastepbackandde fineseveralterms.TheCOMPETESReauthorizationActdirectstheDepartmentof Commercetocompleteacomprehensivestudyoftheeconomiccompetitive nessandinnovativecapacityoftheUnitedStates.Itissomewhatironic,there fore,thattheimportanceofinnovationandcompetitivenessarematchedby thelackofcommonlyaccepteddefinitionsandempiricalmeasuresovertimeand acrosscountries.Beginningwithinnovation,a2008AdvisoryCommitteereport totheSecretaryofCommerce,InnovationMeasurement:TrackingtheStateof InnovationintheAmericanEconomy,definesitas: Thedesign,invention,developmentand/orimplementationofnew oralteredproducts,services,processes,systems,organizationalstruc tures,orbusinessmodelsforthepurposeofcreatingnewvaluefor customersandfinancialreturnsforthefirm.1 Therearetwomainapproachestomeasuringinnovation.2Thefirstistheproxy method,whereratherthanmeasuringinnovationdirectly,patentsorspending onR&Daretrackedasaproxyforthelevelorrateofchangeofinnovation.Al thoughtheseproxiescanbeusefultoolsforunderstandinginnovation,theyare necessarilyimperfectmeasures.Forexample,manyinnovationsarenotpat ented,andinnovativeactivityoccurseveninindustriesthatconductlittleformal R&D.Thesecondapproachreliesoneconomicaccountingwhereeconomic growthisexplainedbyfactorsthataremeasurable,suchasthelaborforceandits quality.Theportionofeconomicgrowththatcannotbeexplainedbymeasurable factorsisreferredtoastechnologicalchange,innovation,orineconomicjar gon,multifactorproductivityortotalfactorproductivity.Usingthissecond approach,itisestimatedthatbetweenoveronethirdtoahalfofeconomic growthintheUnitedStatescanbeattributedtoinnovation.3 Similartoinnovation,competitivenesshasalsoproveddifficulttodefineand measure. A competitive business is one that is successful inthemarket placesuccessbeingmeasuredinvariouswayssuchasmarketshareorprofit ability.AstheMcKinseyGlobalInstitutestates,competitivenessinasectorcan bedefinedasthecapacitytosustaingrowththrougheitherincreasingproduc tivityorexpandingemployment.4Thoughthereisnotacommondefinitionof competitivenessatthecountrylevel,awidelyrecognizedrankingofthiscomes fromtheWorldEconomicForum(WEF).Theydefinecompetitivenessastheset ofinstitutions,policies,andfactorsthatdeterminethelevelofproductivityofa
22
country.5Thus,theconceptsofproductivityandcompetitivenessoftengohand inhand.Inthisreport,thetermcompetitivenessisgenerallyused,butoftenin creasingcompetitivenessrequiresincreasingproductivity,andviceversa. Thecompetitivenessofacountryandthecompetitivenessofbusinessesarealso closelylinkedconcepts.Competitivebusinessesneedtoinnovate;otherwise, theywillnotbeabletogrowandremainviable.Whencountriesarecompeti tivethatis,whentheyhaveasetofinstitutions,policiesandfactorsthatare conducivetoproductivitygrowththenbusinessesarepositionedtogrowand beeffectivecompetitorsagainstotherdomesticandforeignfirms.Accordingto theWEF,(t)hisrequiresanenvironmentthatisconducivetoinnovativeactivity, supportedbyboththepublicandtheprivatesectors.Inparticular,itmeanssuffi cientinvestmentinresearchanddevelopment(R&D),especiallybytheprivate sector;thepresenceofhighqualityscientificresearchinstitutions;extensivecol laborationinresearchbetweenuniversitiesandindustry;andtheprotectionof intellectualproperty.6Giventhepaceofchangeintodaysglobaleconomy,in vestmentstopromoteinnovationdeservemoreemphasisthanatanytimeinthe past. Ensuringacountryiscompetitiveandhassufficientcapacitytoinnovateisalso crucialbecausethenumberandqualityofjobsisstronglydependentonthese twoconcepts.Ascompetitivebusinessesgrow,theyhiremoreworkersandthey alsotendtopaywell;anumberofstudieshaveshownthathighlyproductive firmspayaboveaveragewages.

Innovationleadstonewindustries.Overthelongerterm,newideas,prod ucts,ordiscoveriescanleadtonewindustries.Examplesincludethewireless communicationsindustry(290,000workersin2007),softwareandInternet publishingfirmsandInternetserviceproviders(500,000workers),andphar maceuticalfirmsalongwithcompaniesinbiotechnologyresearchanddevel opmentservices(350,000workers). Innovationleadstonewfirms.Between1980and2007,onaverageover 500,000newbusinesseswithemployeesstartedeachyear.Thesenewfirms producedanaverageof3millionnewjobsayear. Competitiveandinnovativefirmsexpand.Between1980and2007,existing businessesthatgrewaddedroughly13.3millionjobsayear,whichtranslates intoanaverageemploymentgrowthrateof13.9percent.
23
Competitiveandinnovativefirmscreategoodjobs.Wagesforworkersin innovativeandcompetitivefirmstendtobehigherthanwageselsewhere.For instance,firmsthatexport(thatis,firmsthatsuccessfullycompeteinterna tionally)havebeenfoundtopaysignificantwagepremiums.7Similarly,a recentreportshowsthatthescience,technology,engineering,andmathe matics(STEM)workforceearnedabout26percentmorethantheircounter partsinnonSTEMoccupations.STEMworkersalsowerelesslikelyto experiencejoblessness,andSTEMjobgrowthoverthepast10yearswasthree timesfasterthangrowthinnonSTEMjobs.
WhatMadetheUnitedStatesSoSuccessfulinthePast?
Manydifferentfactorsaffectinnovationandcompetitivenessandvolumeshave beenwrittenontheeconomichistoryoftheUnitedStatesand,moregenerally, oninnovation.However,thereiswidespreadagreementonatleastthreefactors thatcontributedgreatlytotheeconomicstrengthoftheUnitedStatesduringthe lastcentury,factorswherethegovernmentplayedanimportantrole:supportfor research,education,andinfrastructure.Giventheimportanceofeachofthese factors,eachreceivesmoreindepthtreatmentinsubsequentchapters.Belowis abriefdescriptionofhowimportanttheywereinthepastcentury.
Research
FederallyfundedR&Dhasresultedininnovationsanddiscoveries,leadingtonew companiesandentireindustriesthathavemadeAmericansmoreprosperous, healthier, and safer. Forexample, thefirstfullyelectronicU.S.digitalcom putertheENIACwasfundedbytheU.S.Federalgovernment.Formoreonthe Federalroleintheevolutionofthecomputer(seebox2.1). Federalinvestmentsinlifescienceshavedecreasedmortalityandmorbidity rates,drivinginnovationsthatareatthecuttingedgeoffightingheartdisease,di abetes,cancer,andHIV/AIDS.Forexample,thebiopharmaceuticalindustry drawsupon(andcomplements)anexceptionallylargepubliclyfundedbasicre searcheffortinthelifesciences.8Theinvestmentsinhealthandmedicineatthe NationalInstitutesofHealth(NIH)continuetocontributeheavilytoadvancesin thefield,andtheworkofNIHscientistshasproducedmultipleNobelPrizewin ners. Cumulativegainsinlifeexpectancyafter1900wereworthover$1.2millionto therepresentativeAmericanin2000,whereaspost1970gainsaddedabout$3.2
2 4
Box 2.1
The ENIAC and the IBM 650: Federally Funded Research and the Birth of an Industry
TheENIACorElectronicNumericalIntegratorAndComputerwasdevelopedto solvetheveryspecificproblemofcalculatinginformationrelatedtotheproper firingofartillery.TheENIACwasdevelopedintheearly1940sbyJ.PresperEck ert and John W. Mauchly at the University of Pennsylvania, and was funded by theU.S.Army.1 From 1945 to 1955 collaborations between the U.S. military, universities, and theprivatesectorledtoatleast19projectsrelatedtothedevelopmentofcom puters. This collaborative environment helped drive the explosion in innova tion, but the bulk of the funding for this research came from the Federal government,withFederalfundsaccountingfor59percentofcomputerrelated R&DspendingbyGeneralElectric,IBM,SperryRand,AT&T,Raytheon,RCA,and ComputerControlCorporationfrom1949to1959.2 Though the funding for these computers primarily came from the Federal gov ernment, companies were able to quickly translate the technologicaladvances intocommercialapplications.Forexample,IBMwasabletocombinethebene fits of this Federal R&D with its prowess as an existing office equipment pro ducer to create the IBM 650, that sold 1,800 units in the 1950s making it the mostcommerciallysuccessfulcomputerofthatperiod. These early Federal investments were undertaken without the commercial ap plications in mind, yet they provided the foundation for the evolution of the computerindustry.Seventyyearslater,theUnitedStates.isstillreapingthere wardsoftheseearlyinvestments.Today,thelivesofnearlyeveryAmericanare impactedinsomewaybythebenefitsofadvancesincomputertechnology.The basic research investments that led to the creation of the early computer are exactly the type of investments that the United States needs to be making to daysothatfuturegenerationswillstillbereapingtherewardsoftodaysinvest mentsfordecadesintothefuture.
1. David C. Mowery. 2011. Federal Policy and the Development of Semiconductors, Computer Hard ware, and Computer Software: A Policy Model for Climate Change R&D? Accelerating Energy Innova tion Insights from Multiple Sectors. Chicago: University of Chicago Press, for the National Bureau of EconomicResearch;159188. 2. Kenneth Flamm. 1987. Targeting the Computer: Government Support and International Competition. Washington,DC:BrookingsInstitution.
trillionperyeartonationalwealth,equaltoabouthalfofGDP.Potentialgains fromfuturehealthimprovementsarealsolarge;forexample,itisestimatedthat a1percentreductionincancermortalitywouldbeworth$500billion.9 Federalinvestmentsinmaterialsandmilitarytechnologyunderpinthemodern militaryaswellasprofitableinnovationsintheprivatesector.Advancementsin
25
chemicals,suchasthespikeintheproductionofsyntheticrubberduringWorld WarIIundertheSyntheticRubberResearchProgram,havespurredinnovations inmanufacturingthathavedirectlysupportednationalsecurity.Federalinvest mentsinatomicphysicsinthe1930sand1950sgaverisetothecreationofGPS systems,foreverchangingthedeploymentofthemilitary,nottomentionour dailytravels.10 Thecompaniesthatcantracetheirrootstofederallyfundedresearchspana widevarietyofindustries.IntheirreportSparkingInnovation:Howfederally fundeduniversityresearchcreatesinnovation,newcompaniesandjobs,theSci enceCoalitionidentifiesover100companiesthatFederallyfundedresearch helpedlaunch.Toprovideaflavorofthewidearrayofcompaniesincludedin SparkingInnovation,Table2.1listsahandfulofexamplesthatvarygreatlyby size,location,industry,andFederalfundingsource.
Education
Atthebeginningofthe20thcentury,Americaledtheworldineducation,andover thefollowingdecadestheaveragelevelofschoolingintheUnitedStatesin creasedsignificantly.Americansborninthe1870shad,onaverage,lessthan8 yearsofformaleducation.Forthecohortbornin1910,thisaveragehadrisento nearly10years.Forthecohortbornin1940,thisaveragehadrisenpast12.11For cohortsbornbetween1876and1951,averageeducationalattainmentgrew steadilybynearly1yearperdecade12(seefigure2.1,page28). Bythe1950s,theUnitedStatesenrolledcloseto80percentofitsyouthinfull timesecondaryschools.13ThecomparisonwithindustrialWesternEuropewas stark.Among18Europeannationsinthe1950sincludingFrance,Italy,andGreat Britain,eachenrolledlessthan30percentofyouthingeneraleducationsecond aryschools;allbutone(Sweden)wereunder20percent.Whenyouthintechni calschoolsisadded,secondaryenrollmentinEuropedidnotsurpass40 percent.14Thisgapextendedintohighereducation.Inthe1950s,Americanen rollmentinhighereducationwasexpandingrapidlyandAmericasuniversityat tainmentrateswerefarhigherthananyEuropeancountry.Manyfactors contributedtotheincreasedcollegeattainmentrates,includingtheGIBillandan extensivepublicuniversitysystem,especiallylandgrantschoolsthathadafoot printineverystate. Additionally, the collegeanduniversitysystemintheUnitedStatescontainsa disproportionateshareoftheworldsmostprestigiousuniversities.Forexample,
26
Table 2.1
Companies Created as a Result of Discoveries in Federally Funded University Laboratories 9
Company Arbor Networks Audyssey Laboratories
Location Chelmsford, MA
Year EmployStarted ment 2000 125 75 8 729
Innovation Network security technologies Technology fixes impact of room acoustics on sound reproduction Air sterilization technology for healthcare, homeland security, battlefields Industrial machine vision technology
Federal Funding DOD, NSF NSF DOD NSF DOD
Los Angeles, 2002 CA 2005 1981
Buffalo BioBlower Buffalo, NY Technologies LLC Cognex Corporation CREE, Inc. Natick, MA
Durham, NC 1987
3,168 Semiconductor technology increases efficiency of LED, power, and communications products 11 Aquafilter for economical, large-scale production of farm-raised fish
Fingerlakes Aquaculture, Inc. Google Image Sensing Systems, Inc. ImagiSonix
Groton, NY Mountain View, CA
1996 1998
USDA
19,835 Internet search technology NSF and Web-based applications 80 Software for monitoring traffic conditions DOT DOD DOD, NASA DOD NSF
St. Paul, MN 1984 Sterling, MA 2006
3 Wireless ultrasound for rural, emergency, military, and disaster settings 538 Robots for military, industrial, and consumer use 125 Step and Flash nanolithography makes smaller, faster computer chips
iRobot Corporation Bedford, MA 1990 Molecular Imprints, Inc. SenSound, LLC Austin, TX Detroit, MI 2001 2003
8 Technology pinpoints exact source of noise for use in product design, development, and manufacturing 665 80 Machine targets radiation to cancer cells and limits damage to healthy ones Organic LED technology for flat panel displays, lasers, and other light generating devices Metasearch engines probe deeper into the Web than traditional search engines In vivo imaging allows scientists to evaluate drugs by observing their effects in living animals
TomoTherapy, Incorporated Universal Display Corporation Webscalers Xenogen (acquired by Caliper Life Sciences)
Madison, WI 1997 Ewing, NJ 1994
NIH DOD, DOE NSF DOD, NIH
Binghamton, 2002 NY Hopkinton, MA 1994
7 489
Source: The Science Coalition, Sparking Innovation: How federally funded university research creates innova tion,newcompaniesandjobs.
27
Figure 2.1
Years of Schooling at Age 30, by Birth Cohorts, 18701979
15 14
13
12
11
10
9
8
7
1870 80 90 1900 10 20 30 40 50 60 70 80
Source: Economics and Statistics Administration (ESA) calculations based on the Integrated Public Use Microdata Series, Minnesota Population Center, University of Minnesota (see http://usa.ipums.org/usa/). Note: Data for this figure were based on ESA calculations of mean years of education for U.S.-born individuals by birth year for those who were 30 years or older. Because the education variable was coded by category of educational attainment, such as grade levels and higher education levels, it was necessary to transform the data into a continuous variable to calculate a mean. The methodology used to recode the education variable into an estimated number of years of education was based partly on work by Goldin and Katz (2008).
accordingtoonesetofrankings,in20112012,18outofthetop25universities and30outofthetop50universitieswereintheUnitedStates;theUnitedKing domwasnextwithfourinthetop25andseveninthetop50.15Inaddition,the UnitedStatesisthetopdestinationforstudentsstudyingabroad.16
Infrastructure
Throughoutthelastcentury,infrastructureinvestments,supportedbythepublic sector,havebeencriticaltotheincreasedstandardoflivingandeconomic growthexperiencedintheUnitedStates.Forexample,watertreatmentanddis tributionsystemssavedlivesandfacilitatedcommerce.Earlywatertreatment systemsweremostlytargetedtoprotectthepublicfromwaterbornediseases, suchastyphoid,dysentery,andcholera,17butlaterpublicwaterutilitiesalsopro videdaconsistentanddedicatedwatersupplythatwasimportantforindustrial
28
productionandthegenerationofpower,whileitalsoprotectedthepublicfrom environmentalcontaminants.18Theinterstatehighwaysystem,highlightedinbox 1.1,wasthelargestpublicworksprojectofitstimeanddidmorethananyother programtoconnectourcountry.
Interconnections
Researchanddevelopment,education,andinfrastructurearediscussedsepa ratelyinthechaptersthatfollow,buttheyarenotseparateanduniqueentities. Assomecommentatorshavenoted,theelementsofcompetitivenessandinno vationarelesslikesilosandmorelikeanetworkorecosystem. Changesinonepartofthenetworksayeducationripplethroughthesystem satisfyingdemandsforresearchers,creatingdemandsforinfrastructure,and feedingbackintotheschoolsviathecreationofdemandfornewanddifferent skills.U.S.industries,likethosediscussedinthemanufacturingchapter,sitina criticaljunctureinthisnetworkcreatingdemandforlaborwithspecificskills andparticipatingintegrallyinresearchandinthecreationandbuildoutofnew infrastructure(seefigure2.2).Thus,althoughthisreportaddressesinnovation andcompetitivenesstopicssequentiallyinseparatechapters,theirinterconnect ednessisasubtextthatthereadershouldkeepinmind.
Figure 2.2
The Innovation Ecosystem
Chapter 3 Federal Support for Research and Development
Chapter 6 Revitalizing Manufacturing
Chapter 4 Educating our Future Workforce
Chapter 5 Infrastructure for the 21st century
29
Endnotes
1.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy2008,i. 2.Historically,thesetwomeasureshavebeenusedasproxiesforinnovation,butrecentlyeffortshavebeen madetomeasureinnovationmoredirectlythroughinnovationsurveys.Seewww.nsf.gov/statistics/infbrief/ nsf09304/.Itshouldalsobementionedthattherearesomeobjectionstotheseproxies.Forexample,theOECD, initsguidelinesoncollectingandinterpretinginnovationdata(oftenreferredtoastheOsloManual)states thatpatentsarenotgoodproxiesforinnovationbecausetheyareinputstoinnovationratherthanoutputsand becausepatentscanlackanyeconomicvalue.However,eventheOECDrecognizesthatadeeperunderstanding ofinnovationnecessarilyrequireslearningmoreaboutpatents. 3.ForanexplanationofproductivitychangeseeJorgensonandGriliches1967,249283.Fordiscussionofintan giblecapitalandeconomicgrowthseeCorrado,HultenandSichel2009.SeealsoBureauofLaborStatisticsmul tifactorproductivitynewsreleases2011a,2011b,and2011c. 4.Manyikaetal.2010,10. 5.WorldEconomicForum20112012,4.(WEF)quantifiesawidevarietyoffactorsunderits12PillarsofCom petitiveness.Thosepillarsare:(1)Institutions;(2)Infrastructure;(3)Macroeconomicenvironment;(4)Health andprimaryeducation;(5)Highereducationandtraining;(6)Goodsmarketefficiency;(7)Labormarketeffi ciency;(8)Financialmarketdevelopment;(9)Technologicalreadiness;(10)Marketsize;(11)Businesssophistica tion;and(12)Innovation.AccordingtotheWEFGlobalCompetitivenessReport20112012,theUnitedStates rankedfourthoverallin2010andthenfifthin2011.However,thefactorsthatwentintotheWEFranking,how thosefactorsarecomputed,andthenhowthefactorsareaddedtogetherallrequiresubjectivejudgments. 6.WorldEconomicForum20112012,8. 7.Bernard,Jensen,andSchott2009,514. 8.Cockburn,Stern,andZausner2011,115. 9.MurphyandTopel2006. 10.CommitteeonScience,Engineering,andPublicPolicy1999,31. 11.Figure1.4,GoldinandKatz2008,20. 12.GoldinandKatz2008,19. 13.GoldinandKatz2008,26. 14.Figure1.7,GoldinandKatz2008,24. 15.TimesHigherEducation20112012. 16.OECDIndicators2011,321. 17.U.S.EnvironmentalProtectionAgency2000. 18.Finn2002. Bernard,AndrewB.,J.BradfordJensen,andPeterK.Schott.2009.Importers,ExportersandMultinationals:A PortraitofFirmstheU.S.thatTradeGoods.ProducerDynamics:NewEvidencefromMicroData,editedbyTimo thy Dunne, J. Bradford Jensen, and Mark J. Roberts, 513552.Chicago:UniversityofChicagoPress,forthe NationalBureauofEconomicResearch. BureauofLaborStatistics.2011a.MultifactorProductivityTrends2009.NewsRelease,March30;www.bls. gov/news.release/archives/prod3_03302011.pdf. BureauofLaborStatistics.2011b. MultifactorProductivityTrendsin Manufacturing2009. News Release, August11;www.bls.gov/news.release/pdf/prod5.pdf. BureauofLaborStatistics,2011c.MultifactorProductivityTrendsforDetailedIndustries,2009.NewsRelease, September23;www.bls.gov/news.release/pdf/prin3.pdf. Cockburn,IainM.,ScottStern,andJackZausner.2011.FindingtheEndlessFrontier:LessonsfromtheLifeSci encesInnovationSystemforEnergyR&D.AcceleratingEnergyInnovation:InsightsfromMultipleSectors,edited byRebeccaM.HendersonandRichardG.Newell,113157.Chicago:UniversityofChicago,fortheNationalBu reauofEconomicResearch. Corrado,CarolA.,CharlesR.Hulten,andDanielE.Sichel.2009.IntangibleCapitalandU.S.EconomicGrowth. TheReviewofIncomeandWealth,553;661685. CommitteeonScience,Engineering,andPublicPolicy,NationalAcademyofSciences,NationalAcademyofEngi neering,InstituteofMedicine.1999.EvaluatingFederalResearchPrograms:ResearchandtheGovernmentPer formanceandResultsAct.Washington,DC:NationalAcademyPress;www.nap.edu/catalog/6416.html. Finn,BernardS.2002.OriginofElectricalPowerinPoweringthePast:ALookBack.NationalMuseumofAmer icanHistory,WashingtonDC;americanhistory.si.edu/powering/past/prehist.htm. Goldin,Claudia,andLawrenceF.Katz.2008.TheRacebetweenEducationandTechnology.Cambridge,MA:Har vardUniversityPress.
References
2 10
Jorgenson,D.W.andZviGriliches.1967.TheExplanationofProductivityChange.TheReviewofEconomicStud ies.Stockholm,Sweden:InstituteforInternationalEconomicStudies:343;249283. Manyika,James,LennyMendonca,JaanaRemes,StefanKlubmann,JorgSchubert,VitalyKlintsov.2010.Howto CompeteandGrow:ASectorGuidetoPolicy.McKinseyGlobalInstitute;www.mckinsey.com/Insights/MGI/Re search/Productivity_Competitiveness_and_Growth/How_to_compete_and_grow. Murphy,KevinMandRobertH.Topel.2006.TheValueofHealthandLongevity.JournalofPoliticalEconomy, 1145;871904. OECDIndicators.2011.EducationataGlance2011.IndicatorC3:Whostudiesabroadandwhere?Accessed2 December2010;www.oecd.org/dataoecd/61/2/48631582.pdf. TimesHigherEducation.2011.WorldUniversityRankings20112012.ThomsonReuters.Accessed28Decem ber2011;www.timeshighereducation.co.uk/worlduniversityrankings/. TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy.2008.InnovationMeasurement: TrackingtheStateofInnovationintheAmericanEconomy.U.S.DepartmentofCommerce,WashingtonDC. U.S.EnvironmentalProtectionAgency.2000.TheHistoryofDrinkingWaterTreatment.FactSheet; www.epa.gov/safewater/consumer/pdf/hist.pdf. WorldEconomicForum.2011.TheGlobalCompetitivenessReport20112012;Geneva,Switzerland. reports.weforum.org/globalcompetitiveness.
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Federal Supportfor Researchand Development
Thekeytooursuccessasithasalwaysbeenwillbetocompeteby developingnewproducts,bygeneratingnewindustries,bymaintain ingourroleastheworldsengineofscientificdiscoveryandtechno logicalinnovation.Itsabsolutelyessentialtoourfuture. PresidentBarackObama,November17,2010
Althoughithashelpedspawnmanyinventionsthat,inturn,haveledtonew firms,newindustries,andnewjobs,Federalfundingofresearchcannotdrivein novationbyitself.Ahealthyprivatesectormustactinpartnershipwithuniversity andresearchlabstofundthetransferofnewtechnologiestothemarket,creat ingnewbusinessesbuiltoninnovation.Itisalsocrucialforinstitutionstoencour ageresearch,suchasthroughastrongeducationsystemanduptodate infrastructure.Astrongeducationsystemensuresthereisaworkforcewiththe necessaryskillstoturnresearchintopractical,marketdrivenconcepts,tomake productsfromthoseconceptsthatsatisfyconsumerpreferencesandthaten hancecompetition,andtousetheseproductseffectively.Infrastructureisneces sarytomakesurethatthereisafreeflowofideas,aswellasgoodsandservices.1 However,theinnovativeperformanceoftheUnitedStateshasslippedduringthe pastdecadecomparedtoothercountries.Lookingatanumberofmeasurements ofinnovationdrivers,suchasgrowthincorporateandgovernmentresearchand development(R&D)andthenumberofscientificandtechnicaldegreesand workers,theUnitedStateshasfallenrelativetoothercountries.2Therefore,after describinginmoredetailtheroleofR&Dindrivinginnovationandtheroleofthe FederalgovernmentinR&D,thischapterconcludeswithrecommendationsto helpensurethatourcountrycontinuestohavetheinnovativecapacityitneeds tothriveinthe21stcentury.
TheEconomicJustificationfortheFederalGovernmentsRole inFundingBasicResearch
Muchoftheeconomicgrowthofrecentdecadeshasbeendrivenbyinnovation.3 Thecentralroleofinnovationineconomicgrowthwasestablishedthroughthe pioneeringworkbyAbramowitz(1956)andSolow(1957).4Increasinglysophisti catedmodelsofeconomicgrowthinadvancedeconomieshaveemphasizedthe crucialroleinnovationplays.5Inaddition,studieshaveshownthatbettertraining andfundingfostersinnovation.6
31
Innovation,inturn,isdriveninlargepartbytheR&Dprocess,whichconsistsof basicresearch,appliedresearchanddevelopment(fordefinitionsoftheseitems, seeAppendix1).Allthreeofthesestagesneedtothriveinorderforinnovationto leadtonewfirmsandnewjobs.In2008,about60percentoftotalpublicandpri vateR&Dspendingwenttodevelopment,withtheremainingsplitaboutevenly betweenbasicandappliedresearch(seefigure3.1).Theseproportionshave stayedrelativelyconstantoverroughlythelast30years.
Figure 3.1
The Research Landscape in the United States
Basic 17% Development 60%
Applied 22%
National Science Foundation, Division of Science Resources Statistics. 2010. National Patterns of R&D Resources: 2008 Data Update. NSF 10314. Arlington, Va. Available at www.nsf.gov/statistics/ nsf10314/.
Basiceconomicprinciples,discussedinmoredetailinAppendix2ofthischapter, establishtheneedforaFederalroleinfundingR&D,especiallyintheareaofba sicresearch.Theknowledgegeneratedbybasicresearchand,toalesserdegree, theapplicationofthatknowledge,oftensharesthecharacteristicsofwhatis knownasapublicgood.Apublicgoodhastwomaincharacteristics:1)oneper sonsconsumptionofthatgooddoesnotreducetheamountavailableforothers toconsumeand2)itisdifficulttoexcludeothersfromconsumingthegood.A lighthouseisoftenconsideredaclassicexampleofapublicgood.Onceitisbuilt
32
and operating,everybodysailingintheareawillbenefitfromthelighthouses operation.Itisnotpossibletoselllighthouseservicesonlytothoseboatopera torsthatpayforthem;theirservicesareavailabletoallwhopass. Whatthismeans,particularlyforbasicresearch,isthatitmaynotbepossiblefor thoseconductingtheresearchtofullyappropriatethebenefitsfromresearch andinnovation.Insuchcases,thesocialbenefits(thosethataccruetosocietyas awhole)fromtheseinnovativeactivitieslikelyexceedtheprivatebenefits(those thataccruejusttotheentityconductingtheresearch).Aseriesofstudiesshowa starkdivergencebetweenprivateandsocialreturnstoR&D(seetable3.1).The socialreturnmeasuredinthesestudiesincludestheprivaterateofreturnplus thechangeinprofitduetoR&Dspilloverseitherwithinanindustryorbetween industries.Becauseindividualresearcherscannotrecoupthefullvalueoftheir work,theincentivetoproduceasociallyoptimalamountofinnovativeactivityis lacking.Thiscreatesapotentialroleforgovernmenttofundinnovativeactivityto raisethisactivityclosertothesocialoptimum.Toaccomplishthis,thegovern ment could directly fund basic research through supportofgovernmentlabs orgrants to universities or private research laboratories. Additionally,govern mentpolicycouldincreasethereturnsearnedbytheprivatesectoronbasicre searchthroughpoliciessuchastaxcreditsandawellfunctioningpatent systemandencouragetheprivatesectortodomorebasicresearch. Giventhepublicgoodnatureofbasicresearch,itisnotsurprisingthattheFed eralgovernmentplaysastrongerroleinbasicresearchthaninappliedresearch orinthedevelopmentprocess.Asdiscussedinmoredetailbelow,innovationin
Table 3.1
Annual Rates of Return on Private R&D Investment
Researcher Mansfield (1997) Sveikauskas (1981) Scherer (1982, 1984) Bernstein-Nadiri (1991)
Private 25 725 2943 1528
Social 56 50 64147 20110
Source: Center for Strategic and International Studies. Global Innovation/National Competitiveness. Washington,D.C:CSIS,1996.
33
theUnitedStateshasthrivedasaresultofaresearchecosystemcomprisedof threemainsectors:theFederalgovernment,thecollegeanduniversitysystem andtheprivatesector.However,theFederalgovernment,universities,andthe privatesectorallplayadifferentroleintermsofthetypeofresearchtheyfund andthetypeofresearchtheyconduct.Forexample,theFederalgovernmenthas beentheprimaryfunderofbasicresearch,butonlyconductsasmallfractionof allthebasicresearchdoneintheUnitedStates(seefigure3.2).Ontheother hand,universitiesconductabouthalfofthebasicresearchintheUnitedStates, butfundarelativelysmallamountofthisresearch.Theprivatesector,mean while,especiallythemanufacturingsector,fundsandconductsmostoftheap pliedresearchanddevelopmentactivity.Thetotaldollarsspentbyprivate industryforR&DhasbeenincreasingovertimeandtheFederalgovernment mustensurethattheuniversityandprivatesectorshavetheappropriateincen tivestoinvestinR&D.7 ThebenefitsfromFederalsupportofacademicresearchgobeyondthedevelop mentofnewandinterestingconcepts.Thisisbecause,whenitcomestoresearch
Figure 3.2
Sources and Location of Basic Research, 2008
Sources of Funding for Basic Research
Amount of Basic Research Conducted by Location

Federal Govt. 7% Industry 21%
Other 14% Universities & Colleges 11% Industry 18%
Other 14%
Federal Govt. 57% Universities & Colleges 58%
Source: National Science Foundation, Division of Science Resources Statistics. 2010. National Patterns of R&D Resources: 2008 Data Update. NSF 10-314. Arlington, VA. Available at www.nsf.gov/statistics/nsf10314/
34
and innovation,theFederalgovernment,collegesanduniversities,andthepri vatesectorallareinterconnected(seefigure3.3).Federalsupportofresearch haspositivespillovereffectsintotheothertwosectors,andtherearealsoposi tivespilloversbetweenuniversitiesandtheprivatesector.Universitieshavesuc cessfullypartneredwiththeprivatesectortocommercializetechnology,with manynewcompaniesandjobsresultingfromtheserelationships.Animportant partofadvancedundergraduate andgraduatelevelstudentseducationisassist ingfacultyinfederallysponsoredresearch.Suchexperiencepreparesstudentsto becomepartofthenationsscienceandengineeringworkforceandtohelppri vatefirmsdevelopandrolloutnewtechnologies.
Figure 3.3
The Research Ecosystem
Federal Government
Trainedworkers Researchtocommercialize Private Sector Fundingforresearch Royalties Colleges and Universities
A strong research university can also serve as an anchor for thedevelop mentofaregionalinnovationcluster(RIC).Onewaytothinkaboutsuchclusters is that (r)egional innovation(orindustry)clustersaregeographicconcentra tions of interconnected businesses, suppliers, serviceproviders,coordinating
35
intermediaries,andassociatedinstitutionslikeuniversitiesorcommunitycol legesinaparticularfield(e.g.,informationtechnologyinSeattle,aircraftinWich ita,andadvancedmaterialsinNortheastOhio).8Newbusinessesarealso generatedbyRICs;themorethan150clustersthatexistaroundthecountryhave resultedinincreasedspinoffs,creatingnewcommercialactivity.9Forexample, theCleanTECHSanDiegoclusterinitiativelaunchedin2007focusesonenergyef ficiency,renewableenergy,transportationandwatermanagement.Thisinitiative hasgeneratedtremendousstartupactivityandSanDiegonowboastsmorethan 650cleantechcompanies,supportedbysixworldclassuniversitiesandanet workofinvestors.Evidenceshowsthatareaswithstrongclustersperformbetter economicallythanareaswithouttheseclusters;theyhavehigherjobgrowth, higherwagegrowth,morebusinesses,andahigherrateofpatenting10(seeChap ter7formoredetailonRICs). Thesynergiesareparticularlystronginthemanufacturingsector,asectorthat hasbeenanimportantdriverofinnovation.Forexample,bytrainingworkersand supportingR&Dinanumberofareas,themanufacturingsectorprovidesacata lystforproductandprocessinnovationsforthebroadereconomy.Anationsabil itytomanufactureproductsisinterconnectedwithitsintellectualandinnovative capacity.Manyinnovativemethodsandideasaregeneratedandperfected throughtheprocessofmakingthings.Also,themanufacturingsectorhastended toplayasignificantroleinthecommunitieswherefirmsarelocated,asmanufac turingplantstendtobelargeandconcentrated,anddriveclustersofeconomic strengthwithinageographicregion.Thus,manufacturingalsohasproventobea catalystforregionalclusters,bringinganareabenefitssuchashigherwages. TheFederalgovernmentplaysaroleinfacilitatingthetransferofresearchinto themarketplace.RecentlythePresidentdirectedFederalagenciestoestablish measurestomonitorthenumberandthepaceofeffectivetechnologytransfer fromFederallabstononfederalentities.11Agenciesarerequiredtodevelopcom mercializationplansfortheirlabsthatwillbemonitoredbyOMBinconsultation withOSTPandCommerce.Inaddition,Commercewillmaintaintechtransfer metricstohelpidentifyneworcreativeapproachestoacceleratethetechnology transferfromFederallaboratoriestoindustry. Newinitiativesalsoincludeeffortstostreamlinelicensingprocedures,thereby expandingaccesstofederallyownedinventions,andtousebestpracticestoim proveprogramsdirectedtowardsmallbusinesses,suchastheSmallBusiness
36
TechnologyTransferprogram.Agenciesarealsoencouragedtolaunchnewpro gramstosupportregionalinnovationclustersby,forexample,havingtheirFed erallabsshareexpertisewithbusinessesandbyencouragingthelocationof incubatorsandresearchparksnearFederallabs.Federallabsandotherresearch facilitieswillalsobeencouragedtoengageinpublicprivatepartnershipsthatwill strengthencommercializationactivitiesinlocalregions. TheOfficeofInnovationandEntrepreneurshipattheDepartmentofCommerce, inconjunctionwithitsNationalAdvisoryCouncilonInnovationandEntrepre neurship(NACIE)isworkingtoimprovecommercializationthroughitsi6Chal lengeGrants,acompetitionthatfundsthebestideasfortechnology commercialization.In2011,thei6GreenChallengefollowedsuit,promoting ProofofConceptcenters,whichsupportallstagesofentrepreneurship,from assistingwithfeasibilitystudiesandbusinessplandevelopment,toprovidingac cesstoearlystagecapitalandmentorship. TheAdministrationwillcontinuetofocusonusingprizestoencouragenewways tospeedcommercialization.Additionalinitiativesinthisareaincludeajointef fortbytheAdministration,theAssociationofAmericanUniversities,andtheAs sociationofPublicandLandgrantUniversitiestoencourageuniversityleadersto workmorecloselywithindustry,investors,andagenciestoincreaseentrepre neurship,encouragemorecollaborationbetweenuniversitiesandindustry,and increaseeconomicdevelopment.
TheFederalGovernment:
AKeyForceDrivingMajorInnovations

ThebenefitsfromFederalR&Dsupportarenotjusttheoretical;whetherthrough fundingeducationalandbusinessorganizationsorthroughresearchinFederal labs,theFederalgovernmenthasplayedacrucialroleinthedevelopmentof manykeyinnovationsofthemid tolate20thcentury.Forexample,Federalfund ing,coupledwithprivateindustryfunding,wascriticalforthedevelopmentof thetransistorbyBellLabsinthe1950s,thegrowthofthesemiconductorindus try,andthebirthofSiliconValleyinthe1980s. TheFederalgovernmenthasalsousedpublicprivatepartnershipstoadvance markets for key technologies suchasthe integrated circuitmemorychip.For example,theSEMATECHconsortiumwasapartnershipcreatedinthelate1980s
37
betweentheDefenseAdvancedResearchProjectsAgency(DARPA)and14U.S. basedsemiconductormanufacturers,includingIntel,IBM,HewlettPackard,and TexasInstruments.TheFederalgovernmentmatchedthespendingputintothe venturebySEMATECHmemberfirmsandtheventureadvancedtheresearch neededforthenextgenerationofchipsandalsofundedatestfacilitytodevelop prototypesusingthesenewinnovations.MostofSEMATECHsmembersbelieved theybenefitedfromthisarrangement.Onemember,Intel,invested$17millionin theventureandthenreportedsaving$200to$300millionasaresultofim provedyieldsandgreaterproductionefficiencies.12 OneoftheleadingexamplesofhowFederalgovernmentresearchsupportledto significantqualityoflifeimprovementsintheUnitedStatesisthedevelopmentof theInternet.Theinnovationcameaboutlargelybecauseoflongtermfunding fromDARPAintheearly1960s,andthenlaterfundingbytheNationalScience Foundation(NSF).13Thistechnologysdevelopmentreliedonbasicscientificre searchthatprovidedevidenceitcouldbeusedinactivitiessuchaspacketswitch ingandnetworkinginfrastructure.Thefinancialreturnfromtheseinvestments wouldhavebeendifficultforanysinglecompanytocapture,andthereturncould onlybeseenaftermanyyears,makingthisanidealcandidateforgovernmentin volvement.OthertechnologiesandbusinessesrelatedtotheInternetalsohave developedastheresultofFederalsupport,includingGoogle(seebox3.1). Advancesinmedicalscienceprovideparticularlyimportantbenefits,giventheir directimpactontheexpectedlengthandqualityoflife.Ithasbeenarguedthat advancesinmedicalsciencehaveprobablyraisedhumanwelfareasmuchinre centdecadesashaveinnovationsinallotherareasputtogether.14TheNational InstitutesofHealth(NIH),inparticular,hasbeenthesourceofmanysignificant advancesinmedicalscience,advancesthathaveimprovedthewellbeingofthe U.S.population,aswellaspopulationsaroundtheworld(seebox3.2forasmall sampleofthemanyadvancesmadeatNIHovertheyearsandseebox3.3fora discussionofhowFederalsupportforresearchledtothecreationandexpansion ofthebiotechnologyindustry.)
38
Box 3.1
How the NSF Seeded Google 1

IntheearlystagesofdevelopingtheInternet,whentherewereonlyafewhun dred active Web sites, the National Science Foundation (NSF) recognized the need for accessible interfaces for growing online data collections. This led a multiagency Digital Library Initiative (DLI) that made its first six research awardsin1994.OneofthoseNSFawardssupportedaStanfordUniversityproj ectledbyProfessorsHectorGarciaMolinaandTerryWinograd. One of the Stanford graduate students supported by this DLI project was Larry Page. Page was interested in the structure of citations in scientific papers and the way that the citation structure mapped out the knowledge networks in a large and expanding body of scientific literature. He believed the structure mapped out by the linkages across Web sites could facilitate the process of searchingfortherightsite. Page was joined in this project by another Stanford graduate student, Sergey Brin.BrinsstudiesatStanfordweresupportedbyanNSFGraduateStudentFel lowship.Together,PageandBrinconstructedaprototypeintheirStanfordstu dent offices. The equipment for the prototype, called Backrub, was funded by the DLI project and other industrial contributions. This prototype not only cre atedatextindexoflinkagesacrossWebpagesitalsoutilizedthestructureof linkages across pages to create a web or tree of crosslinkages that could fa cilitatesearch. To weight these linkages according to their importance, Page and Brin devel opedthePageRank method, in whichthe ranking of a particular Web page de pends on the degree to which it is referenced by other frequently referenced Websites.PageandBrinwroteanearlypaperontheirideasandtestedtheiral gorithm on data from several million Web pages. The results were highly en couraging. By 1998, Page and Brin obtained funding that allowed them to move their growing operation from Stanford into an offcampus site. They incorporated Google,Inc.WhatbeganasanNSFfundedresearchproject,undertakenbytwo NSFsupported graduate students, turned into a phenomenon that billions of peoplearoundtheworlduseeveryday.
1. This account draws heavily from an online summary of On the Origins of Google, by David Hart, posted August 17, 2004, on the NSF Web site at www.nsf.gov/discoveries/disc_summ.jsp?cntn_ id=100660.
3 9
MostFederalR&Dfundingstillgoestodefenserelatedactivities,whilealmost halfoftheFederalnondefenseR&DbudgetgoestoNIH(seefigure3.4),withNa tionalAeronauticsandSpaceAdministration(NASA)adistantsecondfollowedby
Box 3.2
The Case for Federal R&D Funding: National Institutes of Health (NIH)
Throughout its long history, NIH has been responsible for numerous research breakthroughs that have contributed greatly to the wellbeing of the United Statesandworldpopulation.Tonamejustafew: 1
1968: A Nobel Prize was awarded to Dr. Marshall W. Nirenberg for discovering the key to deciphering the genetic code. He was the first NIH Nobel laureate, andthefirstFederalemployeetoreceiveaNobelPrize. 1984: In May, scientists uncovered strong evidence that variants of a human cancer virus called HTLVIII are the primary cause of acquired immunodefi ciencysyndrome(AIDS). 1991: On January 29, NIH scientists treated the first cancer patients with hu mangenetherapy. 1996: The first multicenter trial of bone marrow transplantation in children withsicklecelldiseasedemonstratedthattheprocedurecanprovideacurefor youngpatientsthathaveamatchedsibling. 2000:ANationalInstituteofAllergyandInfectiousDiseasesstudyshowedthat a nasal spray flu vaccine not only protected young children against the three strainsofinfluenzaforwhichthevaccinewasdesignedbutalsoaflustrainnot covered by the vaccine. It also protected the children against flurelated mid dleearinfections. 2000:TheinternationalHumanGenomeProjectpublicconsortiumfundedby NIH, DOE, and othersassembled a working draft of the sequence of the hu mangenome;itwasimmediatelyandfreelyreleasedtotheworld. 2005:Alongterm,multicentertrialoftherapiesforhighbloodpressurefound thatdiureticsworkbetterthannewertherapiesintreatinghighbloodpressure and reducing the risk of heart disease and should be the first therapy for most patients. 2006: NCIfunded research spanning nearly 2 decades helped lead to the FDA approvalforavaccinetopreventcervicalcancer,adiseasethatclaimsthelives ofnearly4,000womeneachyearintheUnitedStates.
1. The full list of accomplishments can be found at www.nih.gov/about/almanac/historical/chronology _of_events.htm.
3 10
AllOtherFederalagencies,theDepartmentofEnergy,andNSF.Also,Federal spendingonbasicandappliedresearchhasshifteddramaticallytowardslifesci encesresearch,primarilyatNIH,overthepasttwodecades.Withinjustafew yearsinthelate1990sandearly2000s,NIHspendingdoubled,whileoverthe sameperiodFederalresearchexpendituresoutsideofthelifesciencesgrew muchlesssignificantly(seefigure3.5).Thisallocationofresearchfundscontrib utedtothesignificantadvancesachievedthroughfederallysupportedhealth carerelatedresearch.
Box 3.3
The Federal Government and Basic Research: Biotechnology

The creation and success of the biotech industry in the U.S. is due, in great measure, to the Federal governments support of basic research through its funding of the National Institutes of Health (NIH) and the National Science Foundation(NSF). 1Fromthisfundingemergedourunderstandingofthefunda mental structure of the human genome and the tools of recombinant DNA technology,withoutwhichthebiotechnologyindustry,andthelifesavingmed icinesitisyielding,wouldnotexistasweknowit. The toolsofrecombinantDNA technologywerepioneered by HerbertBoyer,a professoratUCSanFrancisco,andStanleyCohenatStanfordUniversity.Oneof the early pioneers and leaders in this field, Boyer went on to cofound Genen tech, together with venture capitalist Bob Swenson. NIH and NSF research fundingwerethereforeinstrumentalinGenentechscreation.Todate,thecom pany employs more than 11,000 people and produces a variety of drugs for asthma,rheumatoidarthritis,andotherseriousmedicalailments. ProteaBiosciences,acompanyfoundedin2001,specializesintheidentification of new proteins in the human body. This is important because most pharma ceuticals are small proteins themselves or are small molecules designed to in teract with proteins. Todays drugs target fewer than 500 of the estimated 23,000humanproteincodinggenes.ThetechnologyusedtofoundProteaBio sciences was developed at West Virginia University with support of the WVU ResearchCorporationandthroughNIHfunding.
1. Science Coalition, Sparking Economic Growth: How Federally Funded Research Creates Innovation, NewCompaniesandJobsApril2010.
3 11
Figure 3.4
Federal R&D Budget
Defense versus Non-Defense

NIST 1% NOAA 1% Agriculture 4%
Non-Defense 42%
Non-Defense by Agency
All Other 11% National Institutes of Health 49%
Defense 58%
National Science Foundation, 8% NASA 15%

Energy 11%
Source: National Science Foundation, Federal R&D Funding by Budget Function: Fiscal
Years 200911.
Note: Fiscal year 2010 (preliminary).
Figure 3.5
Federal Obligations for Research, by Field
$60
$50
$40
$30 Life Sciences $20
Other Sciences
$10
$0 1986 1989 1992 1995 1998 2001 2004 2007
Source: CBO based on NSF, Division of Science Resources Statistics, Federal Funds for R&D: FY 2003, 2004, and 2005 and SEI 2006 (Arlington, VA). Note: Billions of fiscal year 2000 dollars.
3 12
CracksintheFederalResearchFoundation
AlthoughtheFederalgovernmentssupportforresearchhasledtosignificantin novation,accordingtothe2011EconomicReportofthePresident,thereare cracksinthefoundationsofAmericasgrowththatneedtobeaddressed.TheNa tionsinnovationsystemrelieslargelyontheprivatesectorbutalsodependson criticalpublicinputs.Forexample,basicscientificbreakthroughsinengineering, genetics,chemistry,andmanyotherfieldsunderpincommercialinnovationbut providelittleornodirectprofitthemselves,sobasicscientificresearchrelies heavilyonpublicsupport.15 Morespecifically,in1980theFederalgovernmentprovided70.3percentofall dollarsspentonbasicresearch,mostofwhichwenttouniversitiesanduniver sitybasedFederalresearchcenters.Sincethen,theFederalgovernmentsshare ofbasicresearchfundinggiventoallentitieshasfallento57.0percentandits shareoffundingofbasicresearchatuniversitieshasfallentoabout60percent, largelyduetoincreasedfundingfromtheprivatesector.16 TherealsohasbeenaslowdownincommercializationoftechnologiesbyU.S. universitiessince2000.In1980,CongresspassedtheBayhDoleAct,whichgave ownershipoftheintellectualpropertytotheuniversitiesandinstitutionsthat createdit,eveniftheyusedFederaldollarstoconducttheresearch.Thiswas meanttoprovideastrongincentiveforuniversitiestoofferusefultechnologyto industry,whowouldthenquicklytransformitintoproducts.Bythelate1980s, universitypatenting,licensingoftechnologytoindustry,andtheproliferationof universitylinkedstartupcompaniesallbegantoaccelerate,reachingespecially highgrowthratesinthelate1990s.However,thepaceoftheseactivitiesslowed startingin2000,aslowdownthatpersistedafterthebriefrecessionoftheearly 2000s.17 Anotherareathatmaybesufferingfromalackofsufficientfundingforresearch andinnovationismanufacturing,particularlyintheareaofadvancedtechnol ogyproducts(ATPs).ATPsincludegoodssuchasbiotechnologyproducts,solar cells,photosensitivediodes,computers,semiconductors,androbotics18anditis crucialforoureconomythatweremainstrongintheseareas.AsSusanHockfield, presidentofM.I.T.putit,(t)omakeoureconomygrow,sellmoregoodstothe worldandreplenishtheworkforce,weneedtorestoremanufacturingnotthe assemblylinejobsofthepast,butthehightechadvancedmanufacturingofthe
3 13
future.19TheUnitedStateswasrunningatradesurplusinthesemanufacturing productsuntil2002,whenitlostitsadvantageinATPs;in2010,theUnitedStates ranan$81billiontradedeficitinthiscriticallyimportantsector.20
PreservingandExtendingFederalSupportforScienceand IndustrialR&Dinthe21stCentury
AstheAdministrationhasstated,therearedisturbingsignsthatAmericasinno vativeperformanceslippedsubstantiallyduringthepastdecade.Acrossarange ofinnovationmetricsincludinggrowthincorporateandgovernmentR&D,the numberofscientificandtechnicaldegreesandworkers,accesstoventurecapi tal,andthecreationofnewfirmsournationhasfalleninglobalinnovation rankedcompetitiveness.21Forexample,accordingtotheWorldEconomicFo rum,theUnitedStateswasranked7thintheworldinitsinnovativecapacity.22 Tosomedegree,thisisinevitableasothercountriesbecomemoredeveloped andwealthspreadsmoreequallyaroundtheworld.However,manycountries recognizethatinnovationisthekeytolongtermeconomicgrowthandaremak ingproinnovationinvestmentsandadoptingproinnovationpolicies.Without thoughtful,decisive,andtargetedactions,wecannotexpectthattheindustries ofthefuturewillemergeandprosperintheUnitedStates.23Therefore,weare recommendingthefollowingpoliciessothattheUnitedStatescanmaintainits positionasaworldleaderininnovation.
Continuetoincreasegovernmentfundingforbasicresearch
Variousdocuments,includingtheAmericaCOMPETESReauthorizationActof 2010whichmandatedthisreport,havehighlightedthecriticalimportanceofthe NSF,theDepartmentofEnergysOfficeofScience(DOESC)andtheNationalIn stituteofStandardsandTechnology(NIST)laboratoriesintheareaofmaintaining theUnitedStatesleadershiproleininnovation.Theseentitiesneedcontinued support.Also,basicbiomedicalresearchsuchasthatdonebyNIH,alsocontrib utessignificantlytoinnovationanddeservescontinuedsupport.
Sustaingovernmentfundingforresearch
Inthelongrun,scientificoutputwillbe,toagreatextent,afunctionofthequan tity andqualityofindividualswhoareinducedtochoosescienceasacareer. However, a quality scientific education takes a long time, so rapid increases inpublicfundinginparticularfields,followedbysharpcutbacks,cannegatively
3 14
affectthecareerprospectsofyoungdoctoratesinthefieldanddiscourage youngerstudentswhomightconsidergoingontothenextleveloftraining(see box3.4).Stablefundingwouldhelpensurethatthenationreceivesthefullbene fitofitslongruninvestmentsinR&D.
Box 3.4
The Changing Nature of Scientific Endeavors

The nature of scientific endeavors has changed greatly and policies to improve R&Dneedtokeepupwiththesechanges.Forexample,thetimerequiredtoed ucateandtrainnewscientistshasincreasedgreatly. 1Thebodyofknowledgea newresearchermustabsorbhasincreasedandyoungerscientistsmustspecial ize in narrower technical areas. Yet, the solutions to technical problems typi cally lie outside any one field and scientists must collaborate in teams. 2 Agencies like the National Science Foundation (NSF) and National Institutes of Health (NIH) have recognized these changes, and are actively working to pro mote team science and young investigators through a number of new funding strategies. Ontopofthis,talentedyoungpeoplemustchoosebetweenscience,whichre quires an evergrowing period of education and apprenticeship, and careers in fields such as law and finance, which require a shorter period of education. Thus, it may be necessary to change how young scientists are educated, com pensated, and evaluated for research grants to preserve adequate incentives foroutstandingyoungpeopletoenterscientificfieldsofstudy. 3
1. Benjamin F. Jones Age and Great Invention, Review of Economics and Statistics 92 (February 2010) 114. 2. SeeJones(2010). 3. Former NIH director Elias Zerhouni identified this age trend as the most important challenge for Americanscienceanditsfundingagencies.SeeJocelynKasierZerhounisPartingMessage:MakeRoom forYoungScientists,Science322(November2008),83435.
IncentivizeandrewardprivatesectorR&Dinvestmentwithanenhanced andextendedR&Dtaxcredit
AlthoughtheFederalgovernmentsroleinR&Discrucial,privateR&Dinvest mentremainsessentialifideasaretomovefromuniversitylabsandfactoriesto commercialization.Therefore,theAdministrationhasproposedsimplifying,en hancing,andextendingacorporateR&Dtaxcredit,onethatisproperlystruc turedsothatitawardsfirmsforundertakingadditionalR&D,notjustactivitythat
3 15
wouldhaveoccurredevenwithoutthecredit.Thiswouldrewardprivateindustry forundertakingtherisksassociatedwithR&Dspending,anditwouldaddressthe realitythatprivatesectorinventorsoftencreatesocialbenefitsthatfarexceed theprivatereturnstoR&D.TheAdministrationexpectsthistaxcreditwouldpro videover$100billioninbenefitstoindustryoverthenextdecade.
Supportinnovativeentrepreneurs
Entrepreneursandnewfirmsplayanessentialroleintheprocessofhowscien tificdiscoveriesaretranslated.Theydevelopnewindustries,createjobs,and spureconomicgrowth.Thefinancialcrisisandtherecessionfromwhichweare stillrecoveringdisruptedthenormalfinancialandsupportchannelsfortheseen trepreneurs.PassageoftheSmallBusinessJobsActprovidedanadditional$44 billioninloansthroughtheSmallBusinessAdministrationandTreasury,andit alsoprovided$12billionintaxrelieftosmallbusinesses.TheAdministration seekstobuildonitseffortsinthisareathroughitsStartupAmericainitiative, whichwillcontinuetoimproveaccesstocapitalforstartupsandacceleratecom mercializationofnewtechnology.
Speedthemovementofideasfrombasicsciencelabstocommercial application
TheAdministrationiscommittedtocontinueitsi6GreenChallengestodevelop ProofofConceptcenterstosupportallstagesoftheentrepreneurshipprocess. Asventurecapitalistsofteninvestinenterprisesthatareclosetomarketinga product,researcherscanfinditdifficulttogetearlystagefundingfortheirideas. ProofofConceptcenterscanhelpbridgethatgap.InSeptember2011,6initial winnersofthesegrantswereannounced,includingtheIowaInnovationCouncil, whoseProofofConceptcenterismeanttoimproveinteractionsbetweenentre preneurs,businesses,anduniversities;acceleratetechnologytransfer;andfacili tatecompanyandjobcreation.24 TheAdministrationsAdvancedManufacturingPartnershipseekstoidentifyop portunitiesforindustry,academia,andgovernmenttocollaborateinordertoac celeratethedevelopmentanddeploymentofemergingtechnologieswiththe potentialtotransformandreinvigorateadvancedmanufacturingintheUnited States.25NIHhascreatedanewNationalCenterforAdvancingTranslationalSci ences that willspeedthedevelopmentofnewdiagnostics,treatments,and curesbybuildingnewbridgesbetweenthelabandclinic.Inaddition,theAdmin istrationisdeveloping a BioeconomyBlueprint detailingwaystousebiological
3 16
researchinnovationstoaddresschallengesinareassuchashealth,food,energy, andtheenvironment.TheBlueprintwillfocusonhowtospeedupcommercial izationandopennewmarketsandmoreworkforcetrainingtodevelopmoresci entistsandengineers.
Unleashacleanenergyrevolution
Newandimprovedenergytechnologieswillbecentraltothe21stcenturyglobal economy,andtheObamaAdministrationiscommittedtofosteringAmerican leadershipinthisarea.Thesetechnologieswillprovideeconomicgrowth,create jobs,reducemanufacturingcosts,andconfrontenvironmentalchallengeswhile enhancingenergysecurity.Industrialprogressinthisareawillrequireanew foundationoffundamentalbreakthroughsonwhichitcanbuild.Asapartofthe visionfordoublingAmericasuseofcleanenergyby2035,theAdministrationis alsocommittedtoacceleratingthedeploymentofcleanenergyoptionsthatare commerciallyviabletodaythroughsuchactivitiesastheRenewablesRapidRe sponseTeamortheRapidResponseTeamforTransmission.TheAdministration alsosupportspolicies,suchasaCleanEnergyStandard,whichprovidecertainty andguidanceforfutureprivatesectorinvestmentinenergygeneration.
Acceleratebiotechnology,nanotechnology, andadvancedmanufacturingR&D
Variousadvancedtechnologiesarealreadyshowinggreatpromiseandefforts shouldbeexpandedtoensurethesetechnologiesreachtheirfullpotential.For example,intheareaofbiotechnology,Federalfundingisbeingprovidedtoin creasethenumberofindividualhumangenomessequencedfrom34toover 1,800,withthegoalofprovidinginsightintothecausesandtreatmentsofmajor diseasesandtobringdownthecostofsequencing.TheNationalNanotechnology Initiativeisalsohelpingtofosterpromisingdevelopmentsintheareaofnano technology,thestudyandapplicationofextremelysmallthings.26Materials thataremadeatthenanoscalehavedesirableproperties,suchaslighterweight, morestrength,andgreaterchemicalreactivity.Nanotechnologymaterialsareal readyusedinawiderangeofproducts,suchassurfacetreatmentsoffabricsto resistwrinklesorstainingandhighpowerrechargeablebatteriesforcars.Nano technologyhasalsoshownpromiseinareassuchasdiseaseprevention(nano devicestotransporthealthygeneticmaterialtocells),selfmanagementinter ventions(noninvasivedetectionofglucoselevelsindiabeticpatients),anddis easedetection(quantumdotstodetectcancercells).Thegoaloftheinitiativeis
3 17
tofurtheradvancesinthisfield.27Asmentionedabove,theAdvancedManufac turing Partnership will seek to develop and deployadvancedmanufacturing processesandtechnologiestohelpUnitedStatesmanufacturingcontinueitsout sizedcontributiontoAmericaseconomicrecovery.
Developwaystomeasurethevalueandeffectiveness ofresearchinvestment
InordertoensurethatR&Dfundingisbeingspentwisely,itiscrucialthatmean ingfulmeasurementtoolsaredevelopedtotracktheeffectivenessofthisspend ing.Currently,suchmeasuresgenerallydonotexistorarenotcollectedona regular,systematicbasis.OneexceptiontothisistheScienceandTechnologyfor AmericasReinvestment:MeasuringtheEffectofResearchonInnovation,Com petitivenessandScience(STARMETRICS).ApilotventureledbyNIH,NSF,and OSTP,STARMETRICSwillcollectdatafromanumberoflargeresearchinstitutions fundedbytheFederalgovernmenttocalculateemploymenteffectsgenerated fromcertainFederalscienceresearchfundingandinvestigatewaystomeasure outputssuchaspatents,businessstartups,andpublicationsattheseinstitu tions.28Goingforward,additionalmeasuresneedtobedevelopedandcollected onaregularandtimelybasis.
Appendix1
DefinitionsofRelevantTerms
Innovationisthedesign,invention,development,and/orimplementationofnew oralteredproducts,services,processes,systems,organizationalstructures,or businessmodelsforthepurposeofcreatingnewvalueforcustomersandfinan cialreturnsforthefirm.29 R&D,alsocalledresearchandexperimentaldevelopment,comprisescreative workundertakenonasystematicbasistoincreasethestockofknowledgein cludingknowledgeofman,culture,andsocietyanditsusetodevisenewappli cations. Researchisthesystematicstudydirectedtowardfullerscientificknowledgeor understandingofthesubjectstudied.Researchisclassifiedaseitherbasicorap pliedaccordingtotheobjectivesofthesponsoringagency.
3 18
Basicresearchisthesystematicstudydirectedtowardfullerknowledgeorunder standingofthefundamentalaspectsofphenomenaandofobservablefactswith outspecificapplicationstowardsprocessesorproductsinmind. Appliedresearchisthesystematicstudytogainknowledgeorunderstanding necessarytodeterminethemeansbywhicharecognizedandspecificneedmay bemet. Developmentisthesystematicapplicationofknowledgeorunderstandingdi rectedtowardtheproductionofusefulmaterials,devices,andsystemsormeth ods,includingdesign,development,andimprovementofprototypesandnew processestomeetspecificrequirements(seewww.nsf.gov/statistics/nsb1003/ definitions.htm).
Appendix2
TheTheoreticalUnderpinningsforaFederalRoleinResearch Funding
Economicgrowthresultsfromseveralfactors,butamongthemostimportantin recentdecadeshasbeeninnovation,whichwewilldefineasthedesign,inven tion,anddevelopmentofneworalteredproducts,services,andprocessesfor thepurposeofcreatingnewvalueforcustomersandfinancialreturnsforthe firm.30Economistsestablishedthecentralroleplayedbyinnovationineconomic growthinthe1950s,whenearlyempiricaleffortstoaccountforgrowthinU.S. outputbymeasuringlaborandcapitalinputsleftthelargestpartofgrowthunex plained.PioneeringworkbyAbramowitz(1956)andSolow(1957)pointedtoim provementsintechnologyasconstitutingthesinglemostimportantdriverof increasesinU.S.outputperperson.31Inthe1980sand1990s,increasinglysophis ticatedeffortsbyeconomiststodefinethegrowthprocessinadvancedindustrial economiesplacedtheprocessofinventionatthecenteroftheirmodels.32Inad dition,studieshaveshownthatimprovementsintechnologyarethemselvesthe outcomeofdeliberateeffortstoinventand/oradoptnewtechnology;thatis,in novationdoesnotneedtobelefttoitsowndevicesbutcanbefosteredthrough trainingandfunding.33 Atleastinthelongrun,effortstoraisepercapitaincomethroughadditionalin vestmentsinphysicalcapitalwillrunintodiminishingreturns.Butinnovation
3 19
neednotbesubjecttothesediminishingreturns.Technologicalprogresscan,in principle,driveeconomicgrowthwithoutlimit,thankstotheuniqueproperties oftechnologicalknowledgeasaneconomicasset.Inaddition,innovationisnon rival,inthesensethatonepersoncanconsumeitwithoutdiminishingthecon sumptionofanotherparty.ThomasJeffersongaveacharacteristicallypoetic expressionofthisideawhenheobservedthat,hewhoreceivesanideafrom me,receivesinstructionhimselfwithoutlesseningmine;ashewholightshista peratmine,receiveslightwithoutdarkeningme.34Butknowledgealsotendsto be,atleastinpart,nonexcludable,whichmeansthatitisdifficulttopreventan otherpartyfromusingthegoodandderivingbenefits. Becauseinnovationcancreateknowledgewiththeattributesofnonrivalryand nonexcludability,itcanhavesomeoftheclassicaspectsofapublicgoodand maybeundersuppliedbythemarketeconomy.Selfinterestedagentsinamarket driveneconomywillinvestonlyinwhattheycanderiveprofitfrom.Whenthe benefitscreatedbyaninventioncannotbefullyappropriatedbytheinventor,she willcreatelessperhapsfarlessthanissociallyoptimal.Weareleftwithaclas sicmarketfailure,inwhichtheprivatevalueofinnovativeactivityislowerper hapsfarlowerthanthesocialvalue.Thatdivergencecreatesapotentialrolefor governmentinterventiontopromoteinnovativeactivity.
3 20
Endnotes
1.Theseinstitutionsmakeupwhatissometimescalledacountrysinnovativecapacity.See,forexample,Fur man,Porter,andScott2002. 2.AtkinsonandAndes2009citedinNationalEconomicCouncil2011,AStrategyforAmericanInnovation,8. 3.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy2008. 4.SeeAbramowitz1956andSolow1957.

5.Romer1986and1990isoftencreditedwithrevivinginterestinthestudyofinventiondrivengrowth.Alead ingtextbookthatreviewsthenowextensiveliteratureinthisdomain,boththeoreticalandempirical,isthework
byAcemoglu2008.
6.ImportantpapersbyArrow1962andGriliches1957,1958,1979,amongmanyothers,recognizedthattechni calprogresswastheoutcomeofdeliberateinvestmentinR&Dorinrefinementofaproductionprocess.
7.SincetheprivatesectoralongwithprivatepublicpartnershipsplayanimportantroleininnovationandR&D,
theAdministrationiscommittedtoprovidingtheincentivesfortheprivatesectortoengageinR&Dtohelpfuel
continuedinnovationintheUnitedStates.Forexample,theAdministrationiscommittedtoextendingtheR&D
taxcredit.
8.MuroandKatz2010,11.
9.Seeendnote30inMuroandKatz2010,51.
10.Delgado,Porter,andStern2011.
11.OfficeofScienceandTechnologyPolicy2011andWhiteHouse,OfficeofthePressSecretary2011a.
12.Burrows1992citedinIrwinandKlenow1996,12740.
13.RegulatorydecisionsbytheFederalCommunicationsCommission,suchasexemptingearlyprovidersfrom
payingaccesschargesandallowingterminalstobeconnectedtothetelecommunicationsnetwork,werealsoin strumentalinpromotingthedevelopmentoftheInternet.
14.Nordhaus2005.
15.CouncilofEconomicAdvisers2011,56.
16NationalScienceFoundation2010.
17.Foroneindependentstudyofthisslowdown,seeLitan,Mitchell,andReedy2007.
18.Forthedefinitionofthissector,seeU.S.CensusBureau2010.
19.Hockfield2011.
20.SeeU.S.CensusBureaufordataonforeigntradeofadvancedtechnologyproducts,www.census.gov/foreign trade/balance/c0007.html.
21.NationalEconomicCouncil,AStrategyforAmericanInnovation,8.
22.WorldEconomicForum2011,514.
23.NationalEconomicCouncil,AStrategyforAmericanInnovation,8.
24.EconomicDevelopmentAdministrationPressRelease2011.
25.WhiteHouse,OfficeofthePressSecretary2011b.
26Foradditionalinformation,seeNationalNanotechnologyInitiative,WhatisNanotechnology?
27.Foradditionalinformation,seeNationalNanotechnologyInitiative,BenefitsandApplications.
28.U.S.DepartmentofHealthandHumanServices2010.
29.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy2008. 30.TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy2008. 31.Abramowitz1956andSolow1957. 32.Romer1986,1990andAcemoglu2008. 33.Arrow1962andGriliches1957,1958,1979. 34.ThomasJefferson,inhislettertoIsaacMcPherson,dated13August1813. Abramowitz,Moses.1956.ResourceandOutputTrendsintheUnitedStatesSince1870.TheAmericanEco nomicReview46(May):523. Acemoglu,Daron.2008.IntroductiontoModernEconomicGrowth.Princeton,NJ:PrincetonUniversityPress; press.princeton.edu/titles/8764.html. TheAdvisoryCommitteeonMeasuringInnovationinthe21stCenturyEconomy.2008.InnovationMeasurement: TrackingtheStateofInnovationintheAmericanEconomy.Washington,DC:EconomicsandStatisticsAdministra tion,U.S.DepartmentofCommerce;www.esa.doc.gov/sites/default/files/reports/documents/innovation_ measurement_0108.pdf.
References
3 21
Atkinson,RobertD.,andScottM.Andes.2009.TheAtlanticCentury:BenchmarkingEUandU.S.Innovationand Competitiveness.TheInformationTechnologyandInnovationFoundation;www.itif.org/publications/atlantic centurybenchmarkingeuandusinnovationandcompetitiveness. Arrow,KennethJ.1962,TheEconomicImplicationsofLearningbyDoing,ReviewofEconomicStudies29,no.3 (June):15573. Bernstein,JeffreyI.,andM.IshaqNadiri.1991.ProductDemand,CostofProduction,Spillovers,andtheSocial RateofReturntoR&D.WorkingPaperno.3625.Cambridge,Mass.:NationalBureauofEconomicResearch.Feb ruary. Burrows,Peter.1992.TQMRealityCheck:ItWorks,butIt'sNotCheaporEasy.ElectronicBusiness18,no.11 (August):4752. CouncilofEconomicAdvisers.2011.TheFoundationsofGrowth.InTheEconomicReportofthePresident. Washington,DC:U.S.GovernmentPrintingOffice,February,5379. Delgado,Mercedes,MichaelE.Porter,andScottStern.2011.Clusters,Convergence,andEconomicPerformance (March);www.isc.hbs.edu/pdf/DPS_Clusters_Performance_20110311.pdf. EconomicDevelopmentAdministration.2011.ObamaAdministrationAnnounces$12Million16GreenInvest menttoPromoteCleanEnergyInnovationandJobCreation.PressRelease.September29;www.eda.gov/News Events/PressReleases/20110929_i6GreenChallenge.xml. Furman,JeffreyL.,MichaelE.Porter,andScottStern.2002.TheDeterminantsofNationalInnovativeCapacity. ResearchPolicy31,no.6(August):899933. Griliches,Zvi.1979.IssuesinAssessingtheContributionofResearchandDevelopmenttoProductivityGrowth. BellJournalofEconomics10,no.1(Spring):92116. Griliches,Zvi.1958.ResearchCostandSocialReturns:HybridCornandRelatedInnovations.JournalofPoliti calEconomy66,no.5(October):419431. Griliches,Zvi.1957.HybridCorn:AnExplorationintheEconomicsofTechnologicalChange.Econometrica25,no. 4(October):501522. Hockfield,Susan.2011.ManufacturingaRecovery.NewYorkTimes,August29.www.nytimes.com/2011/08/30/ opinion/manufacturingarecovery.html. Irwin,DouglasA.,andPeterJ.Klenow.1996.,SEMATECH:PurposeandPerformance.InProceedingsoftheNa tionalAcademyofSciences(November12):1273912742.www.ncbi.nlm.nih.gov/pmc/articles/PMC34130/. Litan,Robert,LesaMitchell,andE.J.Reedy.2007.CommercializingUniversityInnovations:AlternativeAp proaches.InInnovationPolicyandtheEconomy,ed.AdamJaffe,JoshuaLerner,andScottStern,3157.Chicago: UniversityofChicagoPress,fortheNationalBureauofEconomicResearch. Muro,Mark,andBruceKatz.2010.TheNewClusterMoment:HowRegionalInnovationClustersCanFoster theNextEconomy.MetropolitanPolicyProgramatBrookingsInstitution,September;www.brookings.edu/~/ media/Files/rc/papers/2010/0921_clusters_muro_katz/0921_clusters_muro_katz.pdf. NationalEconomicCouncil,CouncilofEconomicAdvisers,andOfficeofScienceandTechnologyPolicy.2011.A StrategyforAmericanInnovation:SecuringOurEconomicGrowthandProsperity.Washington,DC,February; www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf. NationalNanotechnologyInitiative.AccessedNovember2011.BenefitsandApplications.nano.gov/you/nano technologybenefits. NationalNanotechnologyInitiative.AccessedNovember2011.WhatisNanotechnology?nano.gov/nanotech 101/what/definition. National Science Foundation. 2010. National Patterns of R&D Resources,2008DataUpdate;www.nsf.gov/ statistics/nsf10314/content.cfm?pub_id=4000&id=2. Nordhaus,William.2005.IrvingFisherandtheContributionofImprovedLongevitytoLivingStandards.The AmericanJournalofEconomicsandSociology64,no.1(January):36792. OfficeofScienceandTechnologyPolicy,ExecutiveOfficeofthePresident.2011.LabtoMarketInitiativesTrans forming New IdeasintoNewJobs.PostedonOctober28;www.whitehouse.gov/blog/2011/10/28/labmarket initiativestransformingnewideasnewjobs. Romer,Paul.1990.EndogenousTechnologicalChange.JournalofPoliticalEconomy98(October):S71S102. Romer,Paul.1986.IncreasingReturnsandLongRunGrowth.JournalofPoliticalEconomy94,no.5(October): 10021037. Scherer,FredericM.1984.UsingLinkedPatentandR&DDatatoMeasureInterindustryTechnologyFlows. Chapter20inR&D,Patents,andProductivity,ZviGriliches,ed.Chicago:UniversityofChicagoPress. Scherer,FredericM.1982.InterIndustryTechnologyFlowsandProductivityGrowth.ReviewofEconomicsand Statistics,vol.64,no.4(November):627634. Solow,RobertM.1957.TechnicalChangeandtheAggregateProductionFunction.ReviewofEconomicsand Statistics39(August):312320.
3 22
Sveikauskas,Leo.1981.TechnologyInputsandMultifactorProductivityGrowth.ReviewofEconomicsandSta tistics.vol.63,no.2(May):275282. ThomasJeffersontoIsaacMcPherson.1813.InTheWritingsofThomasJefferson[volume3],editedbyAndrew A.LipscombandAlbertElleryBergh,333335.Washington,DC:ThomasJeffersonMemorialAssociation,1905; presspubs.uchicago.edu/founders/documents/a1_8_8s12.html. U.S.CensusBureau,ForeignTradeDivision.2010.AdvancedTechnologyProductDefinitions.InForeignTrade Statistics;www.census.gov/foreigntrade/reference/glossary/a/atp.html#general. U.S.DepartmentofHealthandHumanServices,NationalInstitutesofHealth,STARMETRICS:NewWaytoMea suretheImpactofFederallyFundedResearch,PressRelease,June1,2010;www.nih.gov/news/health/jun2010 /od01.htm. WhiteHouse,OfficeofthePressSecretary.2011a.AcceleratingTechnologyTransferandCommercializationof Federal Research in Support of HighGrowth Businesses. Presidential Memorandum. October 28; www.whitehouse.gov/thepressoffice/2011/10/28/presidentialmemorandumacceleratingtechnologytransfer andcommerciali. WhiteHouse,OfficeofthePressSecretary.2011b.PresidentObamaLaunchesAdvancedManufacturingPart nership.NewsRelease.June24;www.whitehouse.gov/thepressoffice/2011/06/24/presidentobamalaunches advancedmanufacturingpartnership. WorldEconomicForum.2011.TheGlobalCompetitivenessReport,20112012.Geneva,Switzerland:Centrefor GlobalCompetitivenessandPerformance;reports.weforum.org/globalcompetitiveness20112012.
3 23
EducatingOur Workforce
Ifwewanttowinthefutureifwewantinnovationtoproducejobs in Americaandnotoverseasthenwealsohavetowintheraceto educateourkids. PresidentBarackObama,StateoftheUnionAddress,

January25,2011

Educationisakeyelementforpromotingeconomicgrowthandincreasingthein novativecapacityofafirmoracountry.Economicgrowthcloselydependson thesynergiesbetweennewknowledgeandhumancapital,whichiswhylargein creasesineducationandtraininghaveaccompaniedmajoradvancesintechno logicalknowledgeinallcountriesthathaveachievedsignificanteconomic growth.1OurnationseducationsystemunderpinstheUnitedStatesrisetothe positionofrichestnationontheplanetinthelastcentury.2However,wemust recognizeandaddresscracksinthisbuildingblockofAmericaninnovation,lest wefallbehindcountriesthathaveplacedahigherpriorityondevelopingaskilled workforce. Itisnotsufficientintodaysglobaleconomyforanationtohaveagenerally skilledandeducatedworkforce.Increasingly,thespecificskillsembodiedinsci ence,technology,engineering,andmathematics(STEM)educationfueltheinno vativeprocessesthatareespeciallyvaluabletooureconomy.Theseskillsare soughtbycompaniesacrosstheeconomyastheylooktoexpandtheirwork forces.TheseSTEMskillsarenotonlyimportantforthoseworkingtowardsad vanceddegrees.Alllevelsoftheeducationsystemshouldincorporatethecritical thinkingandotherskillsthatarethehallmarkofSTEMeducation.3 ThischaptercomparestheUnitedStatestoothernationsonthedimensionsof access to education andtrainingand academicoutcomes,withaparticularfo cusonSTEM.Furthermore,itoutlinesthediverseandcriticalroleoftheFederal
41
governmentinbuildingaskilledandcompetitiveworkforce.Areastobead dressedaresummarizedbelow:

The United States must sustain the quality of its postsecondary education system, which is the top destination for students from abroad, while also removingbarriersthathavelimitedthepostsecondaryparticipationandper formance of U.S. students. It is essential that the United States equip future and current workers with the skills needed to compete in a global labor mar ket. Giventheimportanceoftheroleplayedbytechnologicalprogressandinnova tion in promoting economic growth, investment in STEM education is espe cially important. Yet the United States is falling behind in this area at all educationlevels,andaddressingthisshortcomingisneededifwearetocon tinue to produce not only a workforce with the technical skills needed to fill current job openings, but persons with the unique blend of technical exper tise and entrepreneurial spirit who will create the products and industries of thefuture.
Educationisacomplexandmultifacetedprocessthatspanspreschoolthrough lifelonglearningandinvolvespolicyissuesrangingfromaffordabilityandtech nology,toquestionsofsupportforhighereducation,classroomsize,equalac cess,andteachercompensation.Thischapterprimarilyandnarrowlyfocusesits attentiontoSTEMbecauseofthestronglinkbetweenSTEMskills,STEMoccupa tions,andinnovation.However,ournarrowattentiontoSTEMinnowayimplies thatotheraspectsofeducationpolicyarenotimportantinmakingourcountry moreinnovativeandcompetitive.Indeed,ourattentiontoSTEMshouldbe viewedasonlyoneexampleofanareawhereconcernhasbeenraisedaboutthe nationsperformancerelativetoothercountriesintheworld.
TheSTEMWorkforceIsExpanding
TheSTEMworkforceistypicallydefinedasthesetofprofessionalandtechnical supportoccupationsinthefieldsofcomputerscienceandmathematics,engi neering,andlifeandphysicalsciences.In2010,therewere7.6millionSTEM workersintheUnitedStates,representingabout1in18workers.Computerand mathoccupationsaccountforclosetohalfofSTEMemployment,followedbyen gineeringwith32percentofSTEMjobs,physicalandlifescienceswith13per cent,andSTEMmanagementjobswith9percent.Overthepast10years,growth
4 2
inSTEMjobs(7.9percent)wasthreetimesasfastasgrowthinnonSTEMjobs (2.6percent).Lookingaheadoverthecomingyears,STEMemploymentisex pectedtocontinuetogrowatafasterrate(seefigure4.1).
Figure 4.1
Recent and Projected Growth in STEM and NonSTEM Employment
STEM
9%
6%
3%
0%

STEMworkersfillournationsresearchanddevelopmentfacilitiesanddriveour nationsinnovationandcompetitivenessbygeneratingnewideas,newcompa nies,andnewindustries.Notsurprisingly,morethanthreefourthsofthemost celebratedinventorsandentrepreneurssince1800haddegreesinengineering, physics,chemistry,computerscience,ormedicine.4 Commensuratewiththeirimportanceindrivingeconomicproductivityand growth,workersinSTEMfieldsearnmoreonaveragethanworkersinother fields.Asaresult,providingmorestudentswiththeskillstoworkinSTEMfields is crucial both to the nations economic futureandtoimprovingtheincomes ofourworkers.STEMworkersenjoylargeearningspremiumsovernonSTEM
43
workers.Forexample,in2010,theSTEMpremiumearnedbyworkerswitha bachelorsdegreewas27percent,andforworkerswithagraduatedegree,itwas 12percent5(seetable4.1).STEMworkersarealsolesslikelytoexperiencejob lessnessthantheirnonSTEMcounterparts.
Table 4.1
Average Hourly Earnings of Workers in STEM Occupations, 2010
Education High school diploma or less Some college or associate degree Bachelors degree only Graduate degree
STEM $24.82 $26.63 $35.81 $40.69
Non-STEM $15.55 $19.02 $28.27 $36.22
Difference 59.6% 40.0% 26.7% 12.3%
Source: Economics and Statistics Administration calculations using Current Population Survey public usemicrodata. Note:Fulltimeprivatewageandsalaryworkers.
STEMSkillsinDemandThroughouttheEconomy
Justasinnovativeprocessestakeplacebothinsideandoutsidethetraditional spheresofresearchanddevelopment(R&D),STEMisnowoftendefinedbothin sideandoutsidethetraditionalsetofscienceandengineeringjobs.Thus,STEM canbedefinednotjustasagroupofworkersinscienceandengineeringjobs,but alsoasasetofworkerswithSTEMeducationorSTEMknowledgeandskills, whetherornottheyworkinSTEMjobs.Thehumancapitalembodiedinthework thatSTEMworkersperformisvaluedinothersectorsoftheeconomy.Thiscapital includesknowledgeofmathematics,computers,andelectronicsandmoregen eralskills,suchascriticalthinking,troublingshooting,andvariousformsofrea soning.6Moregenerally,agrowingnumberofoccupationsintheeconomyhave beenfoundtorequireagreaterintensityofnonroutineanalyticalandinteractive tasksthatis,onesrequiringreasoningandhighexecutivefunctioningwhilea decliningnumberofoccupationsrelymoreheavilyonmanualandroutinetasks.7 Nearly twothirds of workers with undergraduate degrees in a STEM fieldare working in nonSTEM occupations, such as healthcare, education,thesocial
44
sciences,andmanagement8(seefigure4.2).Theseworkersarenotunderper forming,noraretheymismatchedintheircurrentjobs.Rather,thesamehuman capitalthatdrivesinnovativeprocessesthroughtraditionalR&Drelatedemploy mentisneededacrossoureconomy,asuggestionthatisconfirmedinsurveysof theseworkersaswell.9Furthermore,manySTEMeducatedworkerswhochoose educationjobsarelikelyteachingSTEMskillstoothers.
Figure 4.2
The Overlap Between STEM Jobs and STEM Degrees
STEM JOB
Non-STEM degree 1.4 million workers STEM job & degree 3.3 million workers
STEM DEGREE
Non-STEM job 5.9 million workers
Source: Economics and Statistics Administration calculations from American Community Survey microdata.
ThevalueofSTEMhumancapitalisreflectedintheearningspremiumenjoyedby collegeeducatedworkerswithaSTEMdegree.Allelseequal,workerswitha STEMdegreeearn11percentmoreperhourinfulltimenonSTEMjobsthan workerswithotherundergraduatedegrees.WhenSTEMmajorsworkinSTEM jobs,theirearningspremiumrisesto20percent,relativetopersonswithnon STEMdegreesworkinginnonSTEMjobs.10 GiventhatmorethantwothirdsofSTEMworkershaveatleastacollegedegree andthatdemandforSTEMworkersandworkerswithSTEMdegreescontinuesto grow,theU.S.collegeanduniversitysystemisacornerstoneofourSTEMfuture. Fortunately, at the college level, the UnitedStates continuestosetthestan dardofthequalityoftheeducationalsystemandinthevalueofobtainingacol legedegree.However,theUnitedStatesislosinggroundtoothercountriesin
45
importantareasofeducation,specificallyincreatingopportunitiesforstudents togainexpertiseinSTEMskills.Improvementsarerequiredatalleducationlev els,includingpostsecondaryschool,iftheUnitedStatesistoremaininternation allycompetitiveandforittocontinuetoexcelinpreparingitsworkforceforan increasinglyknowledgeintensiveeconomy.
ManyU.S.UniversitiesAreOutstandingButOurProductionof U.S.STEMGraduatesIsNot
EliteinstitutionswithintheUnitedStatescollegeanduniversitysystemtypically dominateglobalrankingsofprestigioushighereducationinstitutions.In2011 2012,inaworldwideranking,18outofthetop25universitiesand30outofthe top50universitieswereintheUnitedStates.TheUnitedKingdomwasnextwith fourinthetop25andfiveinthetop50.11Theserankingsmakeourcountrya magnetforthebeststudentsfromaroundtheworld.TheUnitedStatesisstillthe topdestinationforstudentsstudyingabroad,althoughitssharehasfallensome whatovertime(seefigure4.3).
Figure 4.3
Distribution of Foreign Tertiary Students Across OECD Countries
35% 30% 25% 20% 15% 10% 5%

0%

tes
2000 2009
dom Aus trali a Ger man y Fra nce Can ada Jap an Spa in New Zea land
Aus tria
Italy
Source: OECD Education at a Glance 2011, Table C3.6.

Note: OECD member countries with fewer than 1% of foreign students are not shown.

46
Uni
land Belg ium Net herl and s Swe den Cze ch R epu blic
Sta
Kor
ea
ted
King
Uni
ted
Swi
tzer
AnotherwaytolookatthedesirabilityoftheUnitedStatesasadestinationfor studyisinexportterms:whenstudentsfromabroadcometotheUnitedStatesto study,thatisanexportofeducationalservices(seefigure4.4).In2010,receipts fromeducationexportsexceeded$21billion,morethandoublingovertheprevi ous10yearsinkeepingwiththerisingcostofattendingU.S.collegesanduniver sities.ClosetohalfofthereceiptscamefromChina($4.0billion),India($3.3 billion),andKorea($2.2billion)(seefigure4.5).Roughly40percentofinterna tionalstudentsin20102011werestudyinginSTEMrelatedfields,suchasengi neering(18.7percent),mathandcomputersciences(8.9percent),andphysical andlifesciences(8.8percent).Businessandmanagementrankedthemostpopu larindividualfield(21.5percent).12
Figure 4.4
Exports of Educational Services, 19902010
$25
$20
$15
$10
$5
$0 1990 92 94 96 98 2000 02 04 06 08 2010
Source: Bureau of Economic Analysis. Note: Data are in billions of current dollars.
47
Figure 4.5
Exports of Educational Services to

Selected

Countries, 2010
$4.5 $4.0 $3.5 $3.0 $2.5

$2.2 $4.0
$3.3
$2.0 $1.5 $1.0 $0.5 $0.0

ico an a na ea ada an a y man Ger Uni ted Taiw Jap Kor Chi rabi Indi Can Mex King di A dom
$0.9 $0.8
$0.7 $0.4 $0.4 $0.3 $0.3
Source: Bureau of Economic Analysis.

Note: Data are for 2010 and are in billions of current dollars.

WhiletheUnitedStatescontinuestohavetopflighthighereducationinstitu tions,fundamentalproblemsinthekindergartenthroughcollegesystem threatenourabilitytoincreasetheskillsofourworkforceasrapidlyasneeded. Amonghighschoolgraduateswhodoenrollincollege,aremarkablyhighpropor tion20percenttakesatleastoneremedialcoursetheirfreshmanyear.13Stu dentswhotakeremedialcourseworkoftendonotfullycatchupwiththeirother collegegoingpeers:comparedwithcollegestudentswhoneednoremediation, studentswhotakeevenasingleremedialcoursearelesslikelytoearntheirbach elorsdegreethanstudentswhodidnottakeanyremedialcourses.14Moregen erally,theUnitedStateshasslippedbehindothercountriesintermsofcollege attainmentratesoverthesecondhalfofthe20thcentury.Thecohortbornbe tween1943and1952hadthehighestshareofbachelordegreeholdersinthe
48
Sau
world.Sincethenseveralothercountrieshavenotonlycaughtupbutsurpassed theUnitedStatesintheproportionofadultswhohavecompletedcollege.Cur rently,theshareoftheU.S.populationaged2534thathasattainedpostsec ondaryeducationisonlyslightlyabovetheOECDaverage.15 Ofthosewhograduatefromcollege,theUnitedStatesproducesfewerSTEM graduatesrelativetootherdevelopedcountries.OECDdatashowthatin2009 12.8percentofU.S.graduateswithbachelorsdegreeswereinSTEMfields.This placestheUnitedStatesnearthebottomofOECDcountriesintermsoftheper centageofSTEMgraduatesproduced.Significanteconomiccompetitorssuchas SouthKorea(26.3percent),Germany(24.5percent),Canada(19.2percent),and theUnitedKingdom(18.1percent)areonthelonglistofcountriesproducinga muchhigherpercentageofSTEMgraduates.16 Astheyadvancethroughtheeducationsystem,U.S.studentschoosenottoenter STEMfieldsor,iftheydopursuethesestudies,donotcontinue.Threeoutoffour highschoolstudentswhotestinthetopmathquartiledontstartwithaSTEM majorincollege,andonlyhalfofallstudentswhostartinaSTEMmajorgraduate withaSTEMdegree.17Whilenosinglereasoncanaccountforthelowshareof studentsinSTEMfields,studentspoorK12mathandsciencepreparationand theirunwillingnesstocommittheadditionalstudytimeneededformathandsci encecoursesrelativetootherclassesarelikelycontributingfactors.18Asdetailed below,theDepartmentofEducationandtheNationalScienceFoundationhave developedinitiativestoimproveK12andcollegelevelSTEMinstructionandto reducethenumberofstudentsexitingSTEMmajorsforothermajors.
TheHighCostofCollegeandPoorAcademicPreparationDeter Students
Giventheimportanceofacollegeeducationtoaworkersproductivityandearn ings,particularlyforSTEMeducatedworkers,itisstrikingthatonly70percentof highschoolgraduatesin2009wentontosomehighereducationaratelower thanthatofthehighestperformingcountries,suchasNorwayandNewZea land.19 Onebarriertocollegeattendanceisthehighpriceoftuitionandfees.Whether fora2yearor4yeardegree,tuitionhasclimbedmuchfasterthanconsumer
49
pricesandhouseholdincomes.Overthepastdecade,instatepublicuniversity tuitionandfeesmorethandoubledwhiletuitionandfeesfor2yearschoolsrose 71percent.Duringthesameperiod,overallconsumerpricesincreased27per centandnominalmedianhouseholdincomerose18percent(seefigure4.6).In otherwords,householdincomeovertheperiodwasnotabletokeepupwiththe overallincreaseinconsumerprices,letalonethesoaringstickerpriceofacollege education.Thecostofroomandboard(notincludedintuitionandfees)wasno moreforgiving.Betweenthe19992000and20092010schoolyears,thecostof stayinginacollegedormitoryrose80percentwhileboardincreased55percent. Grantaidfrompublicandprivatesources,includingFederalPellGrantsandFed eraleducationtaxcreditsanddeductions,however,havehelpedsoftenthefinan cialblowtofamilies.Asaresult,thenetpriceofacollegeeducationthatis,the publishedpriceoftuitionandfeesminusallformsoffinancialaidhasnotin creasedasfastasthestickerprices.20Infact,inconstantdollarsthenetpricefor fulltimestudentsattendingpublic,fouryearinstitutionsin20112012increased just$60relativeto20072008,whilethenetpriceforpublic,twoyearschools andprivateschoolsin20112012waslowerthanin20072008.21
Figure 4.6
Percentage Growth Since 2000 in College Tuition, Consumer Prices, and Median Household Income
University tuition and fees
125%
100%
2-year college tuition and fees
75%
50%
Overall consumer prices
25%
Median household income
0% 2000 01 02 03 04 05 06 07 08 09 2010
Source: National Center for Education Statistics, Census Bureau, and Bureau of Labor Statistics.
4 10
Anotherbarriertoattendingcollege(andanexplanationforthehighrateofre medialeducationincollege)isinadequateK12preparation.Theprimaryand secondaryeducationsystemintheUnitedStatesmustpreparestudentswho wishtogotocollegeandspecializeinaSTEMfieldwiththeskillstodoso.Simi larly,thosestudentswhochoosetoentertheworkforcedirectlyafterhighschool andnotattendcollegemustbeequippedwiththeskillsnecessarytobetrained forSTEMjobsthatdonotrequireacollegeeducation.Yetprecollegeprepara tionintheskillsthatwillallowstudentstospecializeinSTEMcourseworkincol legeortoenterSTEMjobsrightoutofhighschoolislagging.TheProgramfor InternationalStudentAssessment(PISA)testscoresrevealthatU.S.studentscon sistentlyscoredbelowtheOECDaverageinmathin2003,2006,and2009(the pastthreetestingcycles).Inscience,whileU.S.studentsscoredlowerthanthe OECDaverageinscienceliteracyin2006,theaveragescoreofU.S.studentsin 2009wasnotmeasurablydifferentfromthe2009OECDaverage(seefigure4.7). Further,U.S.studentsscoredlowerthanthestudentsin12OECDcountries,and notsignificantlydifferentfromstudentsin12othercountries.Theseconclusions
Figure 4.7
Math and Science Test Scores in the U.S. and OECD
510

United States

OECD Average
500
490
480
470 2003 2006

Mathematics
2009
2003
2006
Science
2009
Source: OECD, PISA 2003, 2006, and 2009 databases.
4 11
abouttheworldrankingofU.S.studentsissupportedbytheresultsofthemost recentNationalAssessmentforEducationalProgressstudy,whichshowsthatal thoughU.S.studentshaveimprovedinmathoverthepast30years,only26per centof12thgradersareproficientorbetterinmath.Inreading,38percentof studentsscoredattheproficientlevelorhigherin2009.Whileoverallmathand readingscoresfor12thgradershaveimprovedbetween2005and2009(thelatest tworeportsavailable),thereremainnotableandpersistentdisparitiesbyrace, ethnicityandgender.22Thelatestsciencescoresmayalsogivereasonforpauseas only21percentof12thgraderswerefoundtobeproficientorbetter.23Overall thesescoressuggestthatwhileweneedtobooststudentachievementinalldi mensions,weareparticularlypoorrightnowinskillsthatpreparestudentsfor postsecondarySTEMeducationandtraining. AlthoughpostsecondaryeducationistheprincipalpathintoaSTEMjob,a4year degreeisjustoneoptionforfutureorcurrentworkerswhowanttogainSTEM relatedknowledgeandskills.Withrelativelylowtuition,widedispersionthrough theUnitedStates,convenientclasstimes,andcourseofferingsaimedatstudents fromdiversehighschoolbackgrounds,ournationscommunitycollegeslower thebarrierstopostsecondaryeducation.ArecentstudyofFloridacommunity collegeshighlightstheirdualroleinincreasingeconomicmobilitybyenabling students(particularlylowincomestudentswithgoodgradesinhighschool)to transferto4yearcollegesandinteachingworkenhancingskills(whichparticu larlybenefitlowincomestudentswhowerelesssuccessfulinhighschool).24As theFloridastudyandothershighlight,thepayoffofchoosingmoretechnically orientedfieldsisconsiderable.Thisbecomesparticularlyclearwhenexamining trainingprogramsaimedatdislocatedworkers,forwhom1yearoftechnical trainingcanincreaseworkersreemploymentearningsby$1,600,compared with$800forothertypesoftraining.25Notethattheseresultsrelatedtojust1 yearofstudy,asopposedtoa2yeardegree.
DemographicsCreateChallengesandOpportunitiesfor Growth
GiventheadvantagesofworkinginaSTEMoccupationandhavinganeducational backgroundinSTEM,therearedisturbingdemographicdisparitiesinSTEMedu cationandinthecompositionofworkersinSTEMoccupations.Womenarevastly underrepresentedamongSTEMworkers.Despitemakingupnearlyhalfofthe
4 12
U.S.workforce,womenholdlessthan25percentofSTEMjobs,andthisdisparity haspersistedthroughoutthepastdecade,evenascollegeeducatedwomenhave increasedtheirshareoftheoverallworkforce(seefigure4.8).Thoughthisvaries byfieldofstudy,overallwomenholdadisproportionatelylowshareofSTEMun dergraduatedegrees.Forexample,thisisparticularlytrueinengineering,though womenreceivethemajorityofdegreesinbiology.Also,womenwithaSTEMde greearelesslikelythantheirmalecounterpartstoworkinaSTEMoccupation andmorelikelytoworkineducationorhealthcare.Thishasrealconsequences, aswomenwithSTEMjobsearned33percentmorethancomparablewomenin nonSTEMjobsconsiderablyhigherthantheSTEMpremiumformensothe genderwagegapissmallerinSTEMjobsthaninnonSTEMjobs.26 Likewomen,mostracialandethnicminoritiesareunderrepresentedamong STEMworkers.AnoticeableexceptionisnonHispanicAsians.Fifteenpercentof allnonHispanicAsiansworkinSTEMjobs,almost3timestheoverallshareof STEMworkersintheeconomy.ThisreflectsnonHispanicAsiansgreaterlikeli hoodofgraduatingfromcollege,majoringinaSTEMdiscipline,andworkingina STEMjobgivenadegreeinaSTEMmajor.Forexample,nonHispanicAsiansare
Figure 4.8
Gender Distribution Between STEM and All Employment, 2009
100%
Men Women
80%
52% 76%
60%
40%
48%
20%
24%
0% All jobs STEM jobs
Source: Economics and Statistics Administration calculations from American Community Survey microdata.
4 13
mostlikely(42percent)tograduatefromcollegewithaSTEMdegree,whilethe propensitiesofothergroupsareallfairlysimilar(1722percent).Halfofallnon HispanicAsianworkerswithSTEMdegreeshaveSTEMjobs,comparedto30per centofHispanics,nonHispanicblack,andAmericanIndianandAlaskaNative workers.Interestingly,onaverage,allminoritygroupshavehigherwagepremi umsfromhavingaSTEMjobthandononHispanicwhites(31to39percentver sus22percent).Withgreaterequalityineducationalattainment,demographic disparitieswithintheSTEMworkforcecanbediminished,helpingtoboostSTEM employmentandU.S.leadershipintechnologyandinnovation.27
TheForeignBornAreKeyMembersoftheSTEMWorkforce
ManyinnovationsthatwereborninAmericahavebeendevelopedbypersons whowerenotborninAmerica.OneinfiveSTEMworkersisforeignborn,with63 percentcomingfromAsia.TheforeignbornshareofSTEMworkerswithgradu atedegrees(44percent)isabouttwicetheforeignbornshareofSTEMworkers foralleducationlevelsandhasnearlydoubledoverthepast17years,ashasthe foreignbornshareofSTEMworkerswithjustabachelor'sdegree alsohasposted stronggains28(seefigure4.9). The growth inthe foreignbornSTEMworkforce
Figure 4.9
Foreign-Born Share of STEM and Non-STEM Employment, by Education
STEM with graduate degree
45% 40% 35% 30% 25%

STEM with bachelors degree Non-STEM with graduate degree
20% 15% 10% 5% 0%
Non-STEM with bachelors degree
1994
96
98
2000
02
04
06
08
2010
Source: Economics and Statistics Administration calculations using Current Population Survey public-use microdata.
4 14
reflectsmultiplefactorsaffectingthesupplyofanddemandforSTEMworkers. Onefactoristhedifficultythatemployersoftenreportinfindingapplicantswith therighttechnicalskillstofilltheirjobopenings.Evenasweemergefromahis toricallydeeprecession,employersreportshortagesofskilledworkersincluding engineersandsoftwaredevelopers.29 Inaglobaleconomy,thepayofftoattractingthebrightestmindstotheUnited Stateshasbeenconsiderable.Consider,forexample,thatnearly20percentof theFortune500firmsfoundedbetween1985and2010werestartedbyanimmi granttotheUnitedStates.30 ManyoftheforeignbornstudentseducatedinSTEMdisciplinesintheUnited Stateswanttoremainherelawfullystartingtheirownfirmsorcontributingto thegrowthofexistingfirms.TheUnitedStatesmustdevelopimmigrationpolicies toensurethatthiscountryiswelcomingtotheworldsbestandbrightest.
TheAdministrationIsLoweringtheBarrierstoaCollege Education
Statesandlocalities,likeAmericanfamilies,facedifficultbudgetsituationsfol lowingtherecentdeeprecession.Thishasledtodifficultchoicesregardingedu cation.TheObamaAdministrationrecognizesthesedifficultiesandhasworked onseveralfrontstomakecriticalinvestmentsinoureducationsysteminvest mentsthatmakecollegeaffordableandincreasethequalityandpayoffoftheed ucationinvestmentthatAmericanfamiliesaremaking.Theseinitiativeswill strengthenourfutureandcurrentworkforceandmorefundamentallybuildour overallinnovativecapacity.
MakingCollegeMoreAffordable
Sinceitsoriginin1972,theFederalPellGrantprogramhasbecomethemostsig nificantsourceofFederalgrantaidtocollegestudentsandthelargestsingle sourceofaidatpubliccollegesanduniversities.TheObamaAdministrationhas workedtoraiseboththemaximumPellGrantamountandexpandthenumberof grantsawarded.ThroughamendmentstoHigherEducationActof1965(HEA)by theAmericanRecoveryandReinvestmentAct(ARRA)andtheStudentAidand FiscalResponsibilityAct(SAFRA),themaximumPellGrantawardwasraisedfrom $4,731in2008to$5,550in2010.Beginningin2013,themaximumPellgrantwill increasewiththeConsumerPriceIndex.SAFRAalsomadeFederalloansavailable directlytostudents,endingwastefulsubsidiesoncepaidtolendersandother
4 15
state guaranty agencies.Overall,theAdministrationhasmaintainedextraordi narycommitmenttothePellprogram,withtotalaidtostudentsincreasingfrom $18billionin2008tomorethan$30billionin2011.31 Theseinitiativeshavesucceededinholdingdownthegrowthintheoutofpocket costsstudentsandtheirfamiliesarepayingforcollege.Over9millioncollegestu dentsreceivedanaverageof$3,700inPellGrantawardsinthemostrecentaca demicyear,ascomparedto5.5millioncollegestudentswhoreceivedanaverage PellGrantawardof$2,650intheyearbeforePresidentObamatookoffice.32 InadditiontoexpandingandincreasingPellGrantavailabilityandawards,ARRA establishedtheAmericanOpportunityTaxCredit(AOTC),whichprovidesupto $2,500ayearforcollegetuitionandrelatedexpensesforAmericanfamilies.This taxcreditimprovesnotablyupontheHopeScholarshipcreditthatitreplaced. AOTChasahighermaximumbenefit,anditcanbeclaimedforuptofouryears ratherthanonlytwoyearsofundergraduateeducation.Furthermore,AOTChasa higherincomeeligibilitycutoff,thusmakingitavailabletomoremiddleclass families,anditispartiallyrefundable,makingitmorebeneficialtolowerincome families.Thiscreditwasexpectedtobenefit9.4millionstudentsandtheirfami liesin2011.InDecember2010,thePresidentsignedanextensionoftheAOTC throughtheendof2012. TheSAFRAActalsogreatlyimprovedthetermsofanincomebasedrepayment programestablishedin2007forstudentloans.Undertheseimprovements,bor rowerswillhavetheirstudentloanpaymentscappedat10percentratherthan 15percentoftheirdiscretionaryincome.Thisnewcapwasoriginallygoingtobe availableonlytonewborrowersafterJuly1,2014,butPresidentObamarecently announcedtheavailabilityofasimilarpayasyouearnplantwoyearsearlier. Borrowerswhokeepuptheirpaymentsfor20yearswillseetheirremaining debtsforgivenor10yearsforpersonswithpublicservicejobs.33
AddressingSTEMShortcomings
ToaddressthepoorSTEMparticipationandperformanceinournationsschools, theAdministrationhaslaunchedmultipleinitiatives(seebox4.1foradiscussion ontheeffortsmandatedbyCOMPETEStodevelopaninventoryofallSTEMedu cationalinitiatives).EducatetoInnovateestablishesfivemajorpublicprivate partnershipstoharnessthepowerofmedia,interactivegames,handsonlearn ing,andcommunityvolunteerstoreachmillionsofstudentsandexpandSTEM
4 16
educationandopportunitiestoallstudents,particularlythoseofunderrepre sentedgroups. AnecessarysteptoimprovingourstudentsunderstandingofSTEMfields,which should,inturn,leadtomorecollegegraduateswithSTEMtrainingandmore STEMworkers,istotrainadditionalSTEMteachers.Ofcourse,havingmore teachersisonlyeffectiveifitdoes,infact,leadtoanincreaseincollegegradua tionratesinSTEMfields.TheWideningImplementationandDemonstrationof EvidencebasedReforms(WIDER)programatNSFwillhelpimproveundergradu ateSTEMinstructionandoutcomesatuniversities. Finally,STEMeducationandcareeropportunitiesforunderrepresentedgroups, includingminoritiesandwomenandgirls,needtobeexpanded.Tothisend,the NSFCareerLifeBalanceInitiative,hasbeenannounced.Thisisa10yearplan designedtogiveflexibilitytowomenandmenwhopursueresearchcareers.For example,NSFwillexpandaprogramthatwillallowresearcherstodelayorsus pendtheirgrantsforuptooneyearinordertocareforanewbornornewlyad optedchildorfulfillotherfamilyobligations.
Box 4.1
Inventory of Federal STEM Educational Programs

Section101ofCOMPETESrequirestheWhiteHouseOfficeofScienceandTech nology Policy (OSTP) to prepare an annual report to Congress describing STEM educational programs and activities by Federal agency in the prior and current fiscal years as well as in the Presidents budget. 1 The report will also list the programsfundinglevels,evaluatetheirduplicationandfragmentation,andde scribe how participating Federal agencies will disseminate information about federally supported resources to STEM educators. In partial fulfillment of this requirement, OSTP has developed a detailed inventory covering all 13 Federal agencies that sponsor such programs. The inventory tallied 252 specific pro gramswithatotalFederalinvestmentof$3.5billion.About$1billionofthatis being spent to train individuals for activities specific to the mission of those funding agencies, including National Institutes of Health training programs to help develop the next generation of biomedical researchers and US Depart mentofAgricultureprogramstotrainagriculturalscientists.
1.OfficeofScienceandTechnologyPolicyPressRelease,FederalScience,Technology,Engineering,and Math Education Inventory Highlighted, September 19, 2011; www.whitehouse.gov/sites/default/ files/microsites/ostp/ostpsteminventory_91911.pdf, and America COMPETES Reauthorization Act of 2010, Pub L. No. 115358, January 4, 2011; www.gpo.gov/fdsys/pkg/PLAW111publ358/pdf/PLAW 111publ358.pdf.
4 17
HelpingCommunityCollegesAssistWorkersandBusinesses
TheHealthCareandEducationReconciliationAct(HCRA)includesa$2billionin vestmentinournationscommunitycolleges,enablingeligibleinstitutionsof highereducationtoexpandtheircapacitytoprovidequalityeducationandtrain ingservicestoTradeAdjustmentAssistance(TAA)eligibleworkersaswellas otherindividualstoimprovetheirknowledgeandskillsandenablethemtoob tainhighqualityemployment.Already$500millioningrantshavebeenawarded tocommunitycollegesaroundthecountrytoexpandandimprovetheirabilityto delivereducationandcareertrainingprogramsthatcanbecompletedintwo yearsorless.Thesegrantssupportpartnershipsbetweencommunitycolleges, communityorganizations,andemployerstodevelopprogramsthatprovidepath waystogoodjobs,includingbuildinginstructionalprogramsthatmeetspecific industryneeds. Furtherservingdisplacedworkers,theSkillsforAmericasFutureinitiative,anin dustryledinitiativeannouncedinOctober2010,willbuildandimprovepartner shipsbetweenbusinessesandeducationalinstitutionstotrainAmericanworkers for21stcenturyjobs.Theinitiativewascreatedtofostercollaborativeeffortsbe tweentheprivatesector,communitycolleges,laborunions,andotherinstitu tions,withacommitmenttoscalingupmeaningfulandmeasurablesolutions. Thegoalistobuildanationwidenetworkofstakeholderswhowillworktomaxi mizeworkforcedevelopmentstrategies,jobtrainingprograms,andjobplace ment.TheSkillsforAmericasFutureTaskForcehasbeencreatedandcochaired bytoplevelAdministrationpolicymakers,tocoordinateFederalefforts.34
TheRacetotheTopInitiativeRewardsStatewideReform
TheRacetotheTopFundusescompetitivegrantstoencouragecomprehensive stateandlocalreformthatresultinincreasedstudentachievement,narrowed achievementgaps,andimprovedhighschoolgraduationandcollegeenrollment rates.35AspartofRacetotheTop,theDepartmentofEducationhasawarded$4 billionincompetitivegrantsto11statesandtheDistrictofColumbiaovertwo phasesthatwilldirectlyimpact13.6millionstudentsand980,000teachersin 25,000schools.36Anadditional$700millionwasmadeavailablein2011,$200 millionofwhichwasusedtomakeadditionalawardstoenablestatestocarryout meaningfulportionsoftheirambitiousreformplans.Theremaining$500million
4 18
wasawardedtoninestatesthroughforthenewRacetotheTopEarlyLearning Challenge,acompetitiontosupportthestateswiththemostambitiousplansto ensurethathighneedchildrenfrombirthtoagefiveenterkindergartenreadyto succeed.37
EnhancingOurNationsEducationalInfrastructure
AstheUnitedStatesemergesfromtheGreatRecession,statesandlocalitiesstill facereducedrevenuesandarecontinuingtoreducebudgets.Localschools,for example,cutnearly235,000jobsfromMay2009toNovember2011.Atthesame time,budgetstomaintainournationsmorethan100,000publicschoolshave beenparedback,whichhasledtoa$270billionbacklogofdeferredmaintenance andrepair.Thecostofheatingandcoolingantiquatedandinefficientbuildings leaddistrictstospendmoreeachyearontheirenergybillsthanoncomputers andtextbookscombined.Increasingclasssizescombinedwithagingbuildingsre sultinovercrowdedschoolsthathavecrumblingceilingsandinadequatewiring tosupporttodaysinformationtechnologyinfrastructure.Morefundsareneeded toenhanceourpublicschools,withapriorityplacedonhighneedandrural schools,BureauofIndianEducationschoolsandcommunitycolleges(including tribalcolleges).
4 19
2008. Endnotes

1.BeckerandKatz2008. 2. Goldin 3.Theseincludeskillssuchasmathematics,science,criticalthinking,activelearning,complexproblemsolving, operationsanalysis,systemsanalysis,andproblemsolving.SeeCarnevale,Smith,andMelton2011,710. 4.Baumol,Schilling,andWolff2009,723724. 5.Langdonetal.2011,3. 6.Carnevale,Smith,andMelton2011,710and1060. 7.CouncilofEconomicAdvisers2009,910. 8.Langdonetal.2011,4. 9.NationalScienceFoundation2010,3.173.20. 10.Langdonetal.2011,45. 11.TimesHigherEducation2011. 12.InstituteofInternationalEducation2011. 13.NationalCenterforEducationStatistics2010a,Table241. 14.Adelman1998. 15.CouncilofEconomicAdvisers2010,223225. 16.OrganisationofEconomicCooperationandDevelopment(OECD)2011b. 17.Carnevale,Smith,andMelton2011,4647. 18.SilvermanandLight2011.Inaddition,manyresearchpapershavefoundthatthequalityofundergraduate teaching is a factor that influences thenumberofSTEMstudents.Seeforexample:www4.ncsu.edu/unity/ lockers/users/f/felder/public/Papers/long5.html. 19.OECD2011a,ChartC2.1.Entryintopostsecondaryeducationisofcoursenottheonlyobstacletoobtaining moreSTEMworkers.Attentionmustalsobepaidtoensuringstudentscompletetheirpostsecondaryeducation. 20.CollegeBoard2011,Table7. 21.CouncilofEconomicAdvisers2011b,1. 22.NationalCenterforEducationStatistics2010b,Figure13andFigure3,26and9. 23.NationalCenterforEducationStatistics2011,Figure37,46. 24.FurchtgottRoth,Joacobson,andMokher2009,6. 25.TheHamiltonProject2010,3. 26.Beedeetal.2011b,45. 27.Beedeetal.2011a,35and78. 28.Beedeetal.2011a,56. 29.See,forexample,summaryreportsfromFederalReserveBoardBeigeBook. 30.PartnershipforaNewAmericanEconomy2011,9. 31.U.S.DepartmentofEducation2011b. 32.U.S.DepartmentofEducation2011b. 33.WhiteHouse2010. 34.CouncilofEconomicAdvisers2011a,79. 35.U.S.DepartmentofEducation,RacetotheTopFund. 36.U.S.DepartmentofEducation2011a. 37.U.S.DepartmentofEducation2011c. Adelman,Clifford.1998.TheKissofDeath?AnAlternativeViewofCollegeRemediation.NationalCrosstalk; www.highereducation.org/crosstalk/ct0798/voices0798adelman.shtml. Baumol,WilliamJ.,MelissaA.Schilling,andEdwardN.Wolff.2009.TheSuperstarInventorsandEntrepreneurs: HowWereTheyEducated?JournalofEconomicsandManagementStrategy18,no.3(Fall):711728. Becker,GaryS.2008.HumanCapital.TheConciseEncyclopediaofEconomics.LibraryofEconomicsandLiberty. AccessedDecember4,2011;www.econlib.org/library/Enc/HumanCapital.html.
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Beede,David,TiffanyJulian,BeethikaKhan,RebeccaLehrman,GeorgeMcKittrick,DavidLangdon,andMark Doms.2011a.EducationSupportsRacialandEthnicEqualityinSTEM.ESAIssueBrief0511.Washington,DC: U.S.DepartmentofCommerce,EconomicsandStatisticsAdministration(ESA),September;www.esa.doc.gov/ sites/default/files/reports/documents/educationsupportsracialandethnicequalityinstem_0.pdf. Beede,David,TiffanyJulian,DavidLangdon,GeorgeMcKittrick,BeethikaKhan,andMarkDoms.2011b.Women inSTEM:AGenderGaptoInnovation.ESAIssueBrief0411.Washington,DC:U.S.DepartmentofCommerce, ESA,August;www.esa.doc.gov/sites/default/files/reports/documents/womeninstemagaptoinnovation8311.pdf. Carnevale,Anthony,NicoleSmith,andMichelleMelton.2011.STEM.Report.Washington,DC:CenteronEduca tionandtheWorkforce,GeorgetownUniversity,October;www9.georgetown.edu/grad/gppi/hpi/cew/pdfs/stem complete.pdf. CollegeBoard.2011.TrendsinCollegePricing2011.NewYork,NY:AdvocacyandPolicyCenter;trends.college board.org/college_pricing/indicator/index. CouncilofEconomicAdvisers.2009.PreparingtheWorkersofTodayfortheJobsofTomorrow.July;www.white house.gov/administration/eop/cea/JobsoftheFuture. CouncilofEconomicAdvisers.2010.EconomicReportofthePresident.Washington,DC:U.S.GovernmentPrint ingOffice,February;www.whitehouse.gov/sites/default/files/microsites/economicreportpresident.pdf. CouncilofEconomicAdvisers.2011a.TheEconomicReportofthePresident.Washington,DC:U.S.Government PrintingOffice,February;www.gpoaccess.gov/eop/2011/pdf/ERP2011.pdf. CouncilofEconomicAdvisers.2011b.MakingCollegeMoreAffordable:ImplicationsofNewData.October26; www.whitehouse.gov/sites/default/files/20111026ceareportmakingcollegemoreaffordable.pdf. FederalReserveBoard.2011.Summary.InTheBeigeBook.ReportforSeptember7,2011,www.federalre serve.gov/fomc/beigebook/2011/20110907/default.htmandReportforOctober19,2011,www.federalreserve. gov/fomc/beigebook/2011/20111019/default.htm. FurchtgottRoth,Diana,LouisJacobson,andChristineMokher.2009.StrengtheningCommunityCollegesInflu enceonEconomicMobility.EconomicMobilityProject,PewCharitableTrusts,October;www.economicmobility. org/assets/pdfs/PEW_EMP_COMMUNITY_COLLEGES.pdf. Goldin,Claudia,andLawrenceF.Katz.2008.TheRacebetweenEducationandTechnology.Cambridge,MA:Har vardUniversityPress. TheHamiltonProject.2010.RetrainingDisplacedWorkers.PolicyBrief.Washington,DC:TheBrookingsInstitu tion,October;www.brookings.edu/~/media/Files/rc/papers/2010/10_renew_communities_greenstone_looney/ 10_displaced_workers_lalonde.pdf. InstituteofInternationalEducation.2011.OpenDoorsData,20092010.AccessedNovember28,2011; www.iie.org/ResearchandPublications/OpenDoors/Data/InternationalStudents/FieldofStudy/200810.aspx. PartnershipforaNewAmericanEconomy.2011.TheNewAmericanFortune500.June2011;www.renewour economy.org/sites/all/themes/pnae/img/newamericanfortune500june2011.pdf. Langdon,David,GeorgeMcKittrick,DavidBeede,BeethikaKhan,andMarkDoms.2011.STEM:GoodJobsNow andfortheFuture.ESAIssueBrief0311.Washington,DC:U.S.DepartmentofCommerce,ESA;www.esa.doc. gov/sites/default/files/reports/documents/stemfinalyjuly14_1.pdf. NationalCenterforEducationStatistics.2010a.Chapter2:PostsecondaryEducation.2010DigestofEducation Statistics;nces.ed.gov/programs/digest/d10/ch_3.asp. NationalCenterforEducationStatistics.2010b.TheNationsReportCard:Grade12ReadingandMathematics 2009NationalandPilotStateResults.NationalAssessmentofEducationalProgress.November2010;nces.ed. gov/nationsreportcard/pdf/main2009/2011455.pdf. NationalCenterforEducationStatistics.2011.TheNationsReportCard:Science2009.NationalAssessmentof EducationalProgressatGrades4,8,and12.January2011;nces.ed.gov/nationsreportcard/pdf/main2009/ 2011451.pdf. NationalScienceFoundation.2010.ScienceandEngineeringLaborForce.InScienceandEngineeringIndica tors:2010;www.nsf.gov/statistics/seind10/pdfstart.htm. OrganisationofEconomicCooperationandDevelopment(OECD).2011a.EducationataGlance2011:OECDIn dicators;www.oecd.org/dataoecd/61/2/48631582.pdf. OrganisationofEconomicCooperationandDevelopment(OECD).2011b.GraduatesbyFieldofEducation.Ac cessedNovember28,2011atOECD.StatExtract;stats.oecd.org/Index.aspx?DatasetCode=RGRADSTY. Silverman,RachelEmma,andJoeLight.2011.GenerationJobless:StudentsPickEasierMajorsDespiteLess Pay.WallStreetJournal,November9;online.wsj.com/article/SB100014240529702037335045770262127985 73518.html. TimesHigherEducation.2011.WorldUniversityRankings20112012.ThomsonReuters.AccessedDecember28; www.timeshighereducation.co.uk/worlduniversityrankings.
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U.S.DepartmentofEducation.RacetotheTopFund.AccessedNovember28,2011;www2.ed.gov/programs/ racetothetop/index.html. U.S.DepartmentofEducation.2011a.U.S.DepartmentofEducation:TheFY2010SummaryofPerformance andFinancialInformation.February2011;www2.ed.gov/about/reports/annual/2010report/summary.pdf. U.S.DepartmentofEducation.2011b.20092010FederalPellGrantProgramEndofYearReport.Officeof PostsecondaryEducation.May2011;www2.ed.gov/finaid/prof/resources/data/pell200910/pelleoy09 10.pdf. U.S.DepartmentofEducation.2011c.EDReview.May2011;www2.ed.gov/news/newsletters/edreview/2011/ 0527.html. WhiteHouse.2010.EnsuringthatStudentLoansareAffordable.FactSheet.January;www.whitehouse.gov/ sites/default/files/100326ibrfactsheet.pdf.
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Infrastructure forthe 21stCentury
Itsthebroadbandnetworksbeneathusandthewirelesssignals aroundus,thelocalnetworksinourschoolsandhospitalsandbusi nesses,andthemassivegridsthatpowerournation.It'stheclassified militaryandintelligencenetworksthatkeepussafe,andtheWorld WideWebthathasmadeusmoreinterconnectedthanatanytimein humanhistory. President Barack Obama, Remarks on Securing Our NationsCyber Infrastructure,May29,2009
Introduction
Providingandmaintaininginfrastructureisoneofgovernmentsmostimportant roles,andperhapsoneofthemostunderappreciated.Infrastructureimproves thelivesofindividualseveryday,providingelectricityandwater,theroadsand publictransportationneededforcommutingandshopping,andthetelecommu nicationsnetworksneededforthefreeflowofinformationandideas.Businesses relyonthatsameinfrastructuretointeractwithsuppliers,toproducetheirgoods andservices,andtoprovidethosegoodsandservicestotheircustomers.In short,infrastructurefreightports,airports,bridges,roads,railandtransitnet works,waterandsewersystems,webofchannelcommunicationsisthecon nectivetissueofournationandithasadramaticeffectontheeconomic competitivenessofournation,thehealthofourenvironmentandourqualityof life.1 Inthepast,theUnitedStatesledthewayinseveralkeyareasofinfrastructurede velopment,startingwiththerailroadsystemofthe1800s,aninnovationthat greatlyreducedtraveltimesandallowedmorerobustcommercebetweenthe statesandtherestoftheworld.Duringthe20thcentury,electricitywasbrought tonearlyallhomesandbusinesses;thetelephonesystembroughttheabilityto communicateinstantlytovirtuallyeveryone;pavedroadsandhighwayswere vastlyincreased,withtheEisenhowersInterstateHighwaySystematthecenter; andanairtransportationsystememergedtoenableunprecedentedpersonal mobilityandaccesstoglobalproductsandservices.TheUnitedStatesmuststill bemindfulabouttheconditionofitsexistinginfrastructure,astheseinvestments remaincrucialtoitseconomichealthandinvestmentsintheseassetscanprovide high levels of return. Thus, repairing roads andbridges and maintainingthe energygridandthetelecommunicationsnetworksneedtoremainpriorities.Fur thermore,thesecrucialinvestmentsinrepairingandrebuildingtheexistinginfra structureshouldincorporateprinciplesofsustainabledesign.
51
However,intodayseconomywithglobalsupplychains,exportstoforeignmar kets,telework,andjustintimeinventoriesthenatureofinfrastructureneeded tocompeteischanging,andtheUnitedStatesneedsa21stcenturyinfrastructure toensurethatitremainscompetitive.Thisincludesimprovementstoexistingin frastructure,suchasintroducingadvancesintothehighwaysystemthatwillpro videsafety,mobilityandenergyefficiency.Infrastructureforthe21stcenturyis ledbytheevergrowingpresenceandinfluenceofbroadbandInternet.Defini tionsofwhatconstitutesbroadbandcandiffer,butoneusefulmeasureput forthbytheFederalCommunicationsCommission(FCC)initsrecentNational BroadbandPlansetsagoalofensuringthat100millionhouseholdshaveaccess tobroadbandInternetwithactualdownloadspeedsof50megabitspersecond (mbps)andactualuploadspeedsof20mbpsby2015,andthat100million householdsshouldhaveaccesstoactualdownloadspeedsof100mbpsandac tualuploadspeedsof50mbpsby2020.Inaddition,theFCChassetasagoalthat everycommunityshouldhaveaffordableaccesstoservicewithspeedsofatleast onegigabitpersecondatschools,hospitalsandgovernmentbuildings.2 BroadbandInternetisusedbymorethan2billionpeopleandisstillgrowing.In ternetrelatedconsumptionandexpenditureisnowbiggerthanagricultureor energy.ResearchhasshownthattheInternetaccountsfor,onaverage,3.4per centofGDPacrossmanymajorcountries,reachingasmuchas6percentofGDP inadvancedcountriessuchasSwedenandtheUnitedKingdom.3TheInternetis alsoacriticalelementofgrowth;inastudyofmatureeconomies,theInternet accountedfor10percentofGDPgrowthoverthepast15years,andthiscontri butionhasbeenincreasingovertime;theInternetscontributiontoGDPgrowth was21percentinthelastfiveyears.4 Smallandmediumsizedenterprises(SMEs),inparticular,havebenefittedfrom theInternet.SMEswithastrongwebpresencehavebeenfoundtogrowfaster andexportmorethanthosethathadminimalornopresence.Onesurveyfound thesefirmsalsocreatedmorethantwicethenumberofjobsasfirmswithoutan Internetpresence,creating2.6jobsforeachoneeliminated.5TheInternetalso hascreatedlargeamountsofconsumervalue.Forexample,itisestimatedthat theInternetgenerated$64billioninconsumervalueintheUnitedStatesin 2009.6 Also, a strong 21st century infrastructure is crucial becauseitiscloselylinked totheotherkeybuildingblocks of competitiveness. Additional basic andap pliedresearch will lead toimprovements in information infrastructure, and that
52
infrastructureisnecessarytoensurethatadvancesinresearchofalltypescanbe efficientlysharedamongtheresearchcommunity.Educationisalsocloselylinked toinfrastructure.Notonlydoestraditionalinfrastructure,namelyschoolbuild ings,needtobeingoodshapeinorderforstudentstolearn,butinformationin frastructure,suchasbroadband,canhelpdeliverneweducationtechnologiesto theclassroom. Althoughprivateindustryhasledthewayinmanyformsofinfrastructure(most utilitiesareprivatelyownedcompanies,forexample),governmentmaintainsan importantrolebecauseinfrastructurecanhavepositivespillovereffectsthata privateinvestorwouldnottakeintoaccountwhendecidingwhetherornottoin vestintheproject.AswithR&D,itislikelythattoolittlemoneywouldbespent oninfrastructurewithoutgovernmentintervention.7Inaddition,oursocietyhas affirmedrepeatedlythatwewouldlikeallofourcitizenstohaveaccesstocertain technologies.Inthepast,thismeantprovidingphoneaccessorelectricitytoall partsofthecountry.Today,expandedhighspeedInternetaccesswouldnotbe availabletocertainareaswithoutgovernmentassistance. Asdiscussedbelow,thoughtheUnitedStateshasmadegreatstridesinharness ingthetransformationalandeconomicpoweroftheInternetandotheraspects ofastrong21stcenturyinfrastructure,thereremainssubstantialuntappedpoten tial.
Definitionof21stCenturyInfrastructure
Infrastructureisabroadconceptandthereisnosinglecommonlyaccepteddefi nition.Traditionally,infrastructurereferstothephysicalpathwaysusedtotrans portgoods,people,andbasicutilityservices.Mostcommonly,thisincludes roads,bridges,seaports,airports,raillines,theelectricalgrid,pipelines,andthe waterandsewagesystem.However,morerecently,oureconomyandsociety havebecomemoreinformationintensiveandinformationinfrastructurehas gainedinimportance.Untilrelativelyrecently,informationinfrastructurewas limitedtovoicecommunicationoverthephysicalwiresofourtelephonesystem butnowincludesourbroadbandInternetconnections(includingfiber,cablemo demanddigitalsubscriberline(DSL)service)aswellassatellitesandcellphone towers.Further,informationinfrastructurealsoencompassesourburgeoning cloudcomputingcapabilitiesandtraditionalformsofinfrastructurethatcanbe improvedwhenusedinconjunctionwith21stcenturyinfrastructure,suchasthe SmartGridforelectricity.
53
HowDoesOur21stCenturyInfrastructureStackUp?
ElectricityGrid
Muchofournationstraditionalelectricityinfrastructurehaschangedlittlefrom itsoriginaldesignandformattheendofthe19thcentury.8Theresult,according toU.S.EnergySecretaryStevenChu,isthattheabilityoftheUnitedStatesto meetthegrowingdemandforreliableelectricityischallenged.9Successfullyad dressingthischallengeiscritical.Americacannot,SecretaryChuhasstated, builda21stcenturyeconomywitha20thcenturyelectricitysystem.Byworking withstates,industryleaders,andtheprivatesector,wecanbuildaclean,smart, nationalelectricitysystemthatwillcreatejobs,reduceenergyuse,andexpand renewableenergyproduction.10 PresidentObamahasoutlinedavisionfordoublingAmericasuseofcleanenergy by2035andachievingthegoalofputtingonemillionelectricvehiclesonthe roadby2015.Havingamodernized,smarterelectricsystemisanimportantstep tomeetingthesegoals.Buildingthenecessarytransmissioninfrastructureand utilizingsmartgridtechnologieswillfacilitatetheintegrationofrenewablere sourcesintothegrid,accommodateagrowingnumberofelectricvehicles,help avoidblackouts,restorepowermorequicklywhenoutagesoccur,andreducethe needfornewpowerplants.Smartgridtechnologiesalsoprovideafoundationfor innovationbyentrepreneursandotherswhocandeveloptoolstoempowercon sumersandhelpthemmakeinformeddecisionsaboutenergyusage. Tolayoutapathforward,theFederalgovernment,inJune2011,releasedAPol icyFrameworkforthe21stCenturyGrid:EnablingOurSecureEnergyFuture.11This frameworkfeaturesfourpillars,whicharesupportedbyAdministrationactions, andincludesfurtherpolicyrecommendationstopromoteinvestment,innova tion,andjobgrowth: 1.Enablingcosteffectivesmartgridinvestmentsbydisseminatinglessons learnedfromAmericanRecoveryandReinvestmentActinvestments. 2.Unlockingthepotentialofinnovationintheelectricitysectorthrougha greaterfocusonstandardsandinteroperability(seebox5.1). 3.Empoweringconsumersandenablinginformeddecisionmakingwithen hancedinformationtosaveenergy,ensureprivacy,andshrinkbills.
54
4.Securingthegridfromcyberattacksandimprovingitsrecoverabilityinthe eventofsuchanattack. TheAdministrationistakinganumberofconcretestepstoputtheseprinciples intoaction.Forexample:

TheDepartmentofAgriculturesRuralUtilityServiceisinvestingupto$250 millionincosteffectivesmartgridtechnologyinruralAmericabyJune2012.
Box 5.1
NIST and the Smart Grid 1

Deploying an interoperable and secure Smart Grid cannot be accomplished withoutestablishinginteroperabilitystandards.Toacceleratethedevelopment ofthesestandards,Congress,undertheEnergyIndependenceandSecurityAct of 2007 (EISA), assigned the National Institute of Standards and Technology (NIST) the primary responsibility to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of Smart Grid devices and systems... [EISA Title XIII, Section1305].
Recent Accomplishments The Smart Grid Program has made significant progress in its mission to coordi nate the development of interoperability standards over the course of its his tory.Belowisanabbreviatedlistofrecentaccomplishments:
NISTestablishedtheSmartGridInteroperabilityPanelinNovember2009as a publicprivate partnership to provide technical support and provide an openforumforSmartGridstakeholders. NISTpublishedtheFrameworkandRoadmapforSmartGridInteroperability, aninitiallistof75interoperabilitystandards,inJanuary2010. NISTpublishedGuidelinesforSmartGridCyberSecurityinSeptember2010, providing the technical background and details that inform organizations effortstosecurelyimplementSmartGridtechnologies. NIST created a Smart Grid Advisory Committee in September 2010 to pro videinputonSmartGridstandardsandNISTsresearchactivitiesinthisarea. In July 2011, the Smart Grid Interoperability Panel approved the first set of Smart Grid standards, including standards focused on Internet protocols, energy usage information, vehicle charging stations, smart meter upgrade ability,andwirelesscommunicationdevices.
1.Formoreinformationgotowww.nist.gov/smartgrid/index.cfm.
55
TheAdministrationhasalsolaunchedEnergy.Data.gov,anopengovernment platformthatbringstogetherfreehighvaluedatasetsandtools,maps,and appstoincreaseawarenessofanddeepeninsightsintoournationsenergy performance. TheDepartmentofDefense,throughitsmicrogridinitiatives,isworkingto testdistributedgenerationandelectricitydistributionsystemsthatwillhelp enhancethesecurityandefficiencyofmilitarybasesbothathomeand abroad.
Toempowerconsumersandfosterinnovation,theAdministrationwillcontinue topromotetheGreenButtonchallengetoindustrythecommonsenseidea thatconsumersshouldbeabletogetaccesstoanddownloadtheirownenergy usageinformation.Andfinally,theAdministrationisworkingtoimprovethe overallqualityandtimelinessofelectrictransmissioninfrastructurepermitting throughtheinteragencyRapidResponseTeamforTransmission.
InformationInfrastructure
Recentdevelopmentsininformationandcommunicationstechnology(ICT),such ashighspeedorbroadbandInternetaccesshavetransformedthesocialandeco nomicenvironmentinwhichwelive.Itprovidesanoutstandingchannelforgath eringanddisseminatinginformation,entertainment,commerce,andeducation, anditcanbringsubstantialbenefitstooureconomy.Forexample,electronic healthrecordscouldalonesavemorethan$500billionover15years.Muchof theelectricgridisnotconnectedtobroadband,eventhoughaSmartGridcould prevent360millionmetrictonsofcarbonemissionsperyearby2030,equivalent totaking65millionoftodayscarsofftheroad.Onlinecoursescandramatically reducethetimerequiredtolearnasubjectwhilegreatlyincreasingcoursecom pletionrates.12 IntheUnitedStates,68percentofhouseholdshadbroadbandInternetaccessin 2010,analmosteightfoldincreasesince2001.13However,therearestillalarge numberofAmericanswhodonotuseorlackaccesstothelatestbroadbandand informationtechnologies;a68percentadoptionratestillleavesapproximately onethirdofAmericanhomescutofffromthedigitaleconomy.Furthermore,de spiteimpressivegains,theUnitedStatestrailsbehindanumberofothernations inhouseholdlevelbroadbandadoption14(seefigure5.1).
5 6
Figure 5.1
OECD Fixed (Wired) Broadband Subscriptions per 100 Inhabitants
40
Other
35 30 25 20 15 10 5 0
Fibre/LAN Cable DSL
OECD average
Source: OECD Broadband Portal, Table 1d, June 2011.
Moreover, the use of broadband continuestovarysubstantiallyacrossdiffer ent demographic groups and geographic areas.Peoplewithlowerhousehold incomes,peoplewithlesseducation,thosewithdisabilities,aswellasBlacks, Hispanics,andruralresidentsgenerallylaginbroadbanduse(seetable5.1). Bridgingthesesocioeconomicgapsinhouseholdlevelbroadbandconnectivityin theUnitedStatesiscriticaltocapturingthepotentialeconomicandsocialgains thataccompanymorewidespreadadoptionofbroadbandservices. Atleastpartofthesedisparitiesislikelyexplainedbythefactthat,insomecases, particularlyinruralpartsofthecountry,broadbandissimplynotavailable,15 largelyduetotheeconomicchallengesfacedbycommercialprovidersseekingto profitablyservelargegeographicareasthataresparselypopulated.Thegovern menthassoughttoaddresstheseneeds,typicallywithgrantandloanprograms toproviderssuchastheBroadbandTechnologyOpportunitiesProgram(BTOP)at
Net he Swi rlands tzer Den land mar Kor k Nor ea wa Fra y nce Uni ted Icelan King d Ger dom m S any Lux wede emb n o Belg urg iu Can m ada Un ited Finlan Sta d tes New Japa Zea n lan Aus d tria Isra Est el Aus onia trali a Sp Slov ain enia Ita Irela ly Gre nd Hun ece g Cze Port ary ch R uga epu l blic Slov ak R Poland epu blic Chi Mex le ic Tur o key
57
Table 5.1
Household Computer and Broadband Use
All households
Computer Use Urban 78% Rural 70%
Broadband Access Urban 70% Rural 57%
Race and Ethnicity White, non-Hispanic Black, non-Hispanic Hispanic 82% 66% 67% 72% 53% 57% 75% 57% 58% 60% 41% 46%
Household Income $25,000 or less $25,001$50,000 $50,001$75,000 $75,001$100,000 $100,001 or more 56% 76% 88% 93% 96% Education Less than a high school degree High school degree Some college College degree or more 46% 68% 84% 93% 39% 64% 82% 89% 35% 59% 75% 88% 26% 50% 69% 80% 49% 74% 87% 91% 94% 45% 67% 82% 89% 93% 35% 60% 76% 82% 87%
Source: EconomicsandStatisticsAdministrationandNationalTelecommunicationandInformationAdministra tion. 2011. Exploring the Digital Nation: Computer and Internet Use at Home. Washington, D.C: U.S. Depart ment of Commerce, November 2011; www.esa.doc.gov/sites/default/files/reports/documents/exploringthe digitalnationcomputerandinternetuseathome.pdf.
theDepartmentofCommerce,whichhasbeensuccessfulinextendingbroad bandtounderservedcommunities(seebox5.2).Further,theFCCrecentlyre viseditsuniversalservicefund,whichtraditionallyhassubsidizedtheprovisionof basictelephoneservicetoruralandhighcostareas,sothatitwillbegintosup portbroadbandservicebycommercialprovidersinthoseareas.16Thelessons fromthesepolicyeffortsshouldproveinstructiveaspublicandprivatestakehold erscontinuetobringbroadbandtomoreAmericans. Broadbandalsocanbeprovidedwirelessly,andtherapidgrowthofmobilecom municationsclearlyshowshowimportantthistechnologyhasbecometothe Americanwayoflife.Wirelessbroadband,likewiredbroadband,hasthepoten tialtotransformmanydifferentareasoftheAmericaneconomybyprovidinga platformfornewinnovation.Thespreadofwirelessbroadbandwillincreasethe
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Box 5.2
Broadband Technology Opportunities Program

The Broadband Technology Opportunities Program (BTOP) was created as part oftheAmericanRecoveryandReinvestmentAct(ARRA)withthepurposeofin creasing broadband access and adoption in unserved and underserved areas; providing broadbandtrainingandsupport toschools, libraries,healthcarepro viders, and other organizations; improving broadband access to public safety agencies; and stimulating demand for broadband. The Department of Com merces National Telecommunications and Information Administration (NTIA) administerstheBTOPprogram1andhasinvested$4billionin233BTOPprojects throughout all U.S. states, territories and the District of Columbia. Funds are awardedinthreecategories:
Infrastructure. $3.5 billion to 123 projects for the construction of broad bandnetworks Public Computer Centers. $201 million to 66 projects that will provide access to broadband, computer equipment and training to the public and vulnerablepopulations Sustainable Broadband Adoption. $251 million to 44 projects that pro motebroadbandadoption,especiallyamongvulnerablepopulations
ExamplesofBTOPprojectsinclude: 2
The University Corporation for Advanced Internet Development (UCAID), also known as Internet2, began upgrading its advanced middlemile backbone network in March 2011. This upgraded network will extend across 50 states and will enable highspeed broadband connectivity for up to 121,000 addi tional community anchor institutions such as schools and libraries. This large scale, publicprivate partnership will interconnect more than 30 existing re searchandeducationnetworks,creatingadedicatedfiberopticbackbonethat will enable advanced broadband capabilities such as video multicasting, tele medicine, distance learning, and other lifechanging Internetbased applica tions. As of July 2011, more than 4,828 miles of its proposed 16,312 mile fiber networkhasbeenupgradedandactivatedwiththeentirenetworkexpectedto becompletedbyearly2013. The State Library of Louisianas BTOP project, Louisiana Libraries: Connect ingPeopletoTheirPotential,hasheldmorethan1,200freedigitalliteracyand softwareclassesandsupplied640laptopcomputerstolibrariesthroughoutthe statebytheendof2011.Theprimarygoalistopromotebroadbandusesothat citizens may become comfortable and familiar with this technology. The State LibraryalsoseekstoimprovetheworkforceskillsofLouisianacitizensandpro videasolideconomicfoundationforstrengtheningLouisianacommunities.
1. U.S. Department of Commerce, National Telecommunications and Information Administration 2010, ExpandingBroadband Access and Adoption in Communities Across AmericaOverview ofGrantAwards; www.ntia.doc.gov/files/ntia/publications/ntia_report_on_btop_12142010_0.pdf. 2. AdditionalBTOPprojectsandgrantsawarded,bystate,canbefoundatwww2.ntia.doc.gov/.
5 9
rateofgrowthinpercapitaincomeandwillspureconomicactivitythroughnew businessinvestment.Thereisthepotentialformanynewhighqualityjobstobe created,bothdirectlythroughinvestmentsinwirelessinfrastructure,andindi rectlythroughasyetunanticipatedapplications,servicesandmorerapidinnova tionenabledbyadvancedwirelessplatforms.Althoughtheseeffectsaredifficult toquantifyprecisely,evidencefromtheeconomicsliteraturesuggeststhatthey arelikelytobesubstantial.Areaswhereinnovationsusingwirelesstechnologies arelikelytohavesignificanteffectsincludeconsumerproductsandservices; productstoenhancebusinessproductivity,includingbusinessprocessreengi neering;healthcare,throughproductslikepatientphysicianvideoconferencing, personalhandheldbiosensorstogeneratediagnosticinformation,andremote transmissionofdiagnosticinformationandimages;education;andpublicsafety, whereanationwideinteroperablewirelessbroadbandnetworkforpublicsafety willensurethatfirstrespondershaverealtimeaccesstocriticalinformationin anemergency. Thespectrumnecessaryforwirelesscommunications,includingbroadband,has thusbecomeanimportantresourcetobeintegratedintotheICTinfrastructure. Thus,asensiblepolicyformanagingthisspectrumiscrucialiftheUnitedStatesis toimproveitscompetitiveposition.Thesupplyofspectrumislimited,however, andtherapidgrowthindemanddrivenbythehighdataconsumptionofsmart phonesandothermobiledevicescouldresultinaspectrumcrunchinthreeto fiveyears,severelyinhibitingthedevelopmentofnextgenerationhighspeed wirelesstechnologies.Techniquessuchasimprovementsinspectralefficiency,in creasesinnetworkdensitythroughcellsiteconstruction,andoffloadingtrafficto wirelinenetworkswillnotbesufficienttoallowcapacitytokeepupwithde mand.Inotherwords,wirelesscarrierswillnotbeabletoaccommodatethis surgingdemandwithoutaccesstoadditionalpartsofthespectrum.Itisvitalthat thegovernmentcontinuetoaddressthesespectrumchallengesbyreallocating spectrumfromexistingtomoreefficientuses.18Oneaspectofthisreallocationis havingCongressauthorizetheFCCtouseauctionstoreallocatespectrumfrom TV broadcasterstowirelessbroadbandproviders.Thiscanalsoinvolvefurther researchanddevelopmentoftechnologiesthatenablemoreefficientuseof spectrum.19 ICTalsoallowsfirmstocollecthugeamountsofdataabouttheiroperationsand usethesedatatoimproveproductivityandincreaseinnovation.20Bigdatade finedasthelargedatasetsgeneratedfromeverycustomerinteraction,every wiredobject,andeverysocialnetwork21aswellasscientificandsurveillance
5 10
data,suchasweatherdatafromsatellites,havethepotentialtoprovideinforma tiontoimprovegreatlytheefficacyofbusinesses,governments,healthcareand education.22Theproductionofglobaldataisexpectedtogrowatanannualrate of40percent,providingatreasuretrovetobusinessesandindustrysectorsthat caneffectivelyusethesedatatocreatenewbusinessmodels,newproductsand services,improvemarketingstrategies,andgainacompetitiveadvantage.23Re searchhasshownthatfirmsthatmakeeffectiveuseoftheselargedatasetsim provetheirproductivityby5or6percent.24 However,totakeadvantageofthesedatacapabilities,firmsneedaccessto broadbandInternetnetworkswithsufficientcapacitytocollectanddistribute thisinformationquicklyandefficiently.Theyalsoneedtohaveaccesstovarious computingresourcessuchasservers,storage,applications,andservices.These servicesincreasinglyarebeingmadeavailablethroughcloudcomputing,which providecompanieswithconvenient,ondemandaccesstoasharedpoolofthese necessaryresources.Withcloudcomputing,innovatorsandsmallbusinessescan offernewproductsandservicestoaglobalmarketwithaverylowinvestmentof upfrontresources,enablingthemtocompetewithmuchlargerproviders.Afinal, closelyrelatedelementofasoundICTpolicyisanopenInternet,onethatpro tectsconsumersandinnovators.Innovatorsneedtobeabletocompeteontheir meritsandnotfaceanticompetitivebarriers.Internetprivacyisalsocrucial,and cybersecurityconcernsneedtobeaddressed.25 PresidentObamahaspledgedtopreservethefreeandopennatureoftheInter nettoencourageinnovation,protectconsumerchoice,anddefendfreespeech. TheAdministrationhascreatedanInternetPolicyTaskForcetobringtogetherin dustry,consumergroups,andpolicyexpertstoidentifywaysofensuringthatthe Internetremainsareliableandtrustworthyresourceforconsumersandbusi nessesandhasrecentlycalledforanOnlinePrivacyBillofRights.InJuly2011,the ObamaAdministrationjoinedwithrepresentativesfrombusiness,civilsociety, andInternettechnicalcommunitiesfrom34countriestoreaffirmtheimportance ofInternetpolicyprinciplesthathaveenabledtheopenInternettoflourishwith innovationandhumanconnectionsbeyondourwildestexpectations. AmericansdeserveanInternetthatissafeandsecure,sotheycanshop,bank, communicate,andlearnonlinewithoutfeartheiraccountswillbehackedor theiridentitiesstolen.PresidentObamahasdeclaredthatthecyberthreatis oneofthemostseriouseconomicandnationalsecuritychallengeswefaceasa nationandthatAmerica'seconomicprosperityinthe21stcenturywilldepend
5 11
oncybersecurity.TohelpthecountrymeetthischallengeandtoensuretheIn ternetcancontinueasanengineofgrowthandprosperity,theAdministrationis implementingtheNationalStrategyforTrustedIdentitiesinCyberspace.TheAd ministrationalsoreleasedtheInternationalStrategyforCyberspacetopromote thefreeflowofinformation,thesecurityandprivacyofdata,andtheintegrityof theinterconnectednetworks,whichareallessentialtoAmericanandglobaleco nomicprosperityandsecurity. TheObamaAdministrationhasmadecybersecurityatFederaldepartmentsand agenciesapriorityanditismovingforwardonthegovernmentsimplementation oftheFederalInformationSecurityManagementAct(FISMA).Inaddition,the ObamaAdministrationisworkingonthedevelopmentoftheNationalInitiative forCybersecurityEducation,whichwillestablishanoperational,sustainable,and continuallyimprovingpubliccybersecurityeducationprogramtopromotesound cyberpracticeswithintheUnitedStates.
Satellites
AnincreasinglyimportantpartoftheinfrastructureoftheUnitedStatescanbe foundorbitingtheearthintheformofoursatellitesystem.Satellitesareusedfor manycrucialtasks,suchasimprovingweatherforecastingsothatbusinesses havethemostreliableanduptodateinformationforplanningpurposes.To meetthesegoals,theAdministrationisacquiringandoperatingthesatellites neededtosupportweatherforecasting,climatemonitoring,andoceanand coastalobservations.TheAdministrationalsoplanstolaunchanewgeneration ofglobalpositioningsatellitesandservicesinordertoimplementadvanced navigationandtimingapplicationsthatcansupportinnovationinmanysectors, includingagriculture,communications,airtravel,andhighwaysafety.26Forexam ple,asdiscussedbelow,globalpositioningsatelliteswillbeakeypartofanew, NextGeneration(NextGen)airtrafficcontrolsystem.Finally,theAdministration iscommittedtomaintaininginternationalpartnershipstofurtherimproveonour capabilitiesintheseareas.27
EnsuringtheUnitedStates21stCenturyInfrastructure isSound
Ournationfacessignificantchallengesinrebuildingitsinfrastructureandwisein vestmentsintheseareashavetobemade.Belowareseveralspecificpolicypro posalsthatwilladdresstheproblemsdiscussedabove.
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NextGenAirTrafficControlSystem
Sincethereareoftenconstraintsonincreasingthenumberofairportsandrun ways,anotherwaytoincreasethecapacityoftheexistingphysicalairtrafficinfra structureisbymakingitmoreefficient;thatis,byincreasingthenumberof flightsthatcanbehandledonexistingrunways.Thiscanbeachievedthroughthe adoptionoftheNextGenairtrafficcontrolsystem,acomprehensiveoverhaulof theexistingsystem.28Thecurrentsystemisbasedonradar,whereasNextGenwill employglobalpositioningsystemsandnewgroundbasedandairbornetechnol ogiestodelivernewcommunications,navigation,surveillance,andinformation managementcapabilities.Asaresultofthismoreaccurateinformation,NextGen willallowmoreaircraftstoflysafelyclosertogetheronmoredirectroutes,re ducingfuelusage,noise,andflightandgrounddelaysby35percent.Thisreduc tionindelayswilltranslateto$23billionincumulativebenefitstotheFederal AviationAdministration,airlines,andtravelers.Inaddition,aviationfuelusage woulddeclineby1.4billiongallonsandcarbondioxideemissionswouldfallby14 milliontons.29 WhileNextGensoverallbenefitsarecompelling,adoptionofNextGenfacessig nificanthurdles,suchasthemergingofvaryingtechnologiesandinterfaces, maintainingandretainingaskilledFAAworkforce,andkeepingtothecurrent rolloutschedulegiventhecurrentbudgetclimate.FAAauthorizationhasbeen temporarilyextended22timessincethepreviouslongtermFAAauthorization expiredin2007.ThecurrentextensionissettoexpireonJanuary31,2012.30
WirelessCommunications
TheObamaAdministrationhasmadeitaprioritytoimprovethewirelessbroad bandinfrastructureintheUnitedStates.ANationalWirelessInitiativewasan nouncedinFebruary2011withthestatedgoalsofdoublingtheamountof spectrumavailableforwirelessbroadbandservicesandhelpingruralareasgain access to wireless broadband services through reform of the FCC Universal ServiceFundsothatitfocusesmoreonwirelessserviceratherthantraditional phoneservice.
CloudComputing
Variousinitiativesareunderwaytohelpcompaniesprocesslargeamountsof datathroughcloudcomputing.Forexample,NSFhasbeenworkingwithMicro soft to provide free access to Microsofts cloud products to researcherswho
5 13
eitherwanttoinvestigatefurtherthepossiblewaysinwhichcloudcomputing canbeusedorhaveprojectsrelatedtobiotechnologyorotherindustriesthatre quirelargeamountsofdatastorage.NASAhascreatedacloudcomputingplat formcalledNebulathatallowsNASAscientiststosharelarge,complexdata setswithresearchpartnersandthegeneralpublic.
OpenInnovationStrategy
DataisacriticalcomponentininformationtechnologyandtheAdministrations openinnovationstrategyismeanttoincreaseaccesstodatatohelpspurinnova tion.Thisstrategyincorporatesfourmajorcomponents:

ImproveAccesstoGovernmentData.Onhisfirstfulldayinoffice,President Obamasignedamemorandumontransparencyandopengovernment.Partof thisinitiativewasthelaunchofdata.gov,aplatformthatprovidespublic accesstohighvalue,machinereadabledatasets,nownumberinginexcessof 390,000. EncourageMarketTransparency.Atransparentmarketplacewilllowerbar rierstoentryandunleashthecreativityofentrepreneurstocompeteinthe developmentofnewconsumerorientedproductsandservices.TheObama Administrationisworkingwiththehealth,energy,andeducationsectors (amongothers)tosimplifyaccesstohighvaluedataby,forexample,encour agingthecreationofstandards. CultivateInnovationCommunities.Bringingtogethercommunitiesofinnova torswillhelpspurinnovation.Tosupportthesecommunities,theAdministra tionhaspartneredwithorganizationstoinspireparticipationininnovative activitiesthroughtheuseofchallengesandprizes. CreateCapacityforInnovation.Tomanagethesepolicytools,theAdministra tionhasactivelyrecruitedagroupoftechnologyandinnovationleaderswith directreportingrelationshipstotheCabinetSecretaries.Inturn,theseleaders arerecruitingthreetofivepersoninnovationteamstotackleanidentified problemwithrapidresults.
OneexampleoftheimplementationofthisstrategyisHealthCare.gov,which launchedonJuly1,2010.Itsmarqueeattraction,theInsuranceFinder,asksthe userafewsimplequestionsandthenproducesacustomizedmenuofinsurance
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choicesthatdrawsfromahugeinventoryofofferingsfromover1,000insurance companiesandeverymajorpublichealthcoverageprograminthecountry.
SmartGrids
Asmentionedabove,theFederalgovernmentrecentlyreleasedapolicyframe worktohelppromoteinvestment,innovation,andjobgrowthintheareaof SmartGrids.Themainelementsofthisframeworkincludeenablingcosteffective SmartGridInvestments;ensuringthatthereareappropriatestandardsinplace sothatgridscaninterconnectwitheachother;givingconsumerstheinformation neededtosaveenergy;andensuringthatSmartGridsareprotectedfromcyber attacksand,intheeventofsuchanattack,thesystemscanquicklyrecover.
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Endnotes
References
1.KatzandPuentes2008. 2.FederalCommunicationsCommission2011a,25. 3.PlissiduRausasetal.2011,2. 4.PlissiduRausasetal.2011,2. 5.PlissiduRausasetal.2011,3. 6.PlissiduRausasetal.2011,3. 7.Foradiscussionoftheseconcepts,seeAppendix2inchapter3. 8.EdisonElectricInstitute2011,6. 9.U.S.DepartmentofEnergy2010. 10.CouncilonEnvironmentalQuality2011. 11.NationalScienceandTechnologyCouncil2011. 12.FederalCommunicationsCommission2011a,20. 13.EconomicsandStatisticsAdministrationandNationalTelecommunicationsandInformationAdministration 2011,1. 14.Householdadoptionisbutonemeasureofhowbroadbandcontributestoacountrysproductivity.According toastudythattakesaccountofawiderarrayoffactors,suchasuseofbroadbandbybusinessesanduseofcom plementarytechnologies,theUnitedStatesmakesmuchmoreproductiveuseofbroadbandthanalmostevery othercountryintheworld.SeeCouncilofEconomicAdvisers2011,67andWaverman,etal.2011. 15.TheNationalBroadbandMap,acreationoftheDepartmentofCommercesNationalTelecommunications andInformationAdministration(NTIA),depictsbroadbandavailabilityforeverycommunityinthecountry;goto broadbandmap.gov. 16.FederalCommunicationsCommission2011b. 17.Amongotherprojects,theDepartmentsofCommerceandAgricultureinvestedabout$7billioninbroad bandprojectsundertheAmericanRecoveryandReinvestmentAct.Formoreinformation,seeBroadbandUSAat www2.ntia.doc.govandBroadbandInitiativesProgramatwww.rurdev.usda.gov/utp_bip.html. 18.NationalTelecommunicationsandInformationAdministration2011. 19.Forexample,theWirelessSpectrumR&D(WSRD)SeniorSteeringGroupcoordinatesspectrumrelatedR&D activitiesacrosstheFederalgovernment;formoreinformation,seewww.nitrd.gov/subcommittee/wireless spectrumrd.aspx 20.Brownetal.2011. 21.ManyikaandRoxburgh2011,6. 22.Manyikaetal.2011. 23.Manyikaetal.2011,46and16. 24.Brynjolfssonetal.2011,1. 25.NationalEconomicCouncil,AStrategyforAmericanInnovation,24. 26.NationalEconomicCouncil,AStrategyforAmericanInnovation,28. 27.WhiteHouse,NationalSpacePolicyoftheUnitedStatesofAmerica2010,12. 28.FederalAviationAdministration2011. 29.FederalAviationAdministration2011,5. 30.Reilly2011. Brown,Brad,MichaelChui,andJamesManyika.2011AreYouReadyfortheEraofBigData.McKinseyQuar terly(October):513. Brynjolfsson,Erik,LorinM.Hitt,andHeekyungHellenKim.2011.StrengthinNumbers:HowDoesDataDriven DecisionmakingAffectFirmPerformance?WorkingPaperSeries.(April):128;papers.ssrn.com/sol3/papers. cfm?abstract_id=1819486. CouncilofEconomicAdvisers.2011.TheEconomicReportofthePresident.Washington,DC:U.S.Government PrintingOffice,February. CouncilonEnvironmentalQuality.2011.AdministrationAnnouncesGridModernizationInitiativestoFostera CleanEnergyEconomyandSpurInnovation.PressRelease;www.whitehouse.gov/administration/eop/ceq/ Press_Releases/June_013_2011.
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EconomicsandStatisticsAdministrationandNationalTelecommunicationsandInformationAdministration. 2011.ExploringtheDigitalNation:ComputerandInternetUseatHome.Washington,DC:U.S.Departmentof Commerce,November;www.esa.doc.gov/sites/default/files/reports/documents/exploringthedigitalnation computerandinternetuseathome.pdf. EdisonElectricInstitute.2011.ElectricUtilities:ThePowerofOpportunities.2011WallStreetBriefing(Febru ary9):19;www.eei.org/ourissues/finance/Documents/Wall_Street_Briefing_2011.pdf. FederalAviationAdministration.2011.NextGenImplementationPlan.Washington,DC:NextGenIntegrationand ImplementationOffice,March:5;www.faa.gov/nextgen/media/ng2011_implementation_plan.pdf. FederalCommunicationsCommission.2011a.ConnectingAmerica:TheNationalBroadbandPlan.Washington, DC:March;download.broadband.gov/plan/nationalbroadbandplanchapter1introduction.pdf. FederalCommunicationsCommission.2011b.ConnectAmericaFund&IntercarrierCompensationReformOrder andFNPRM.Washington,DC:October;eratecentral.com/archive/Bulletins/2011_10_27.pdf. Katz,Bruce,andRobertPuentes.2008.AmericasInfrastructure:RampingUporCrashingDown.Washington, DC:TheBrookingsInstitution,January;www.brookings.edu/papers/2008/01_infrastructure_katz_puentes.aspx. Manyika,JamesandCharlesRoxburgh.2011.TheGreatTransformer:TheImpactoftheInternetonEconomic GrowthandProsperity.McKinseyGlobalInstitute.October;www.mckinsey.com/Insights/MGI/Research/ Technology_and_Innovation/The_great_transformer. Manyika,James,MichaelChui,JacquesBughin,BradBrown,RichardDobbs,CharlesRoxburgh,andAngelaHung Byers.2011.BigData:TheNextFrontierforInnovation,Competition,andProductivity.McKinseyGlobalInstitute. May;www.mckinsey.com/Insights/MGI/Research/Technology_and_Innovation/Big_data_The_next_ frontier_for_innovation. NationalEconomicCouncil,CouncilofEconomicAdvisers,andOfficeofScienceandTechnologyPolicy.2011.A StrategyforAmericanInnovation:SecuringOurEconomicGrowthandProsperity.Washington,DC,February; www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf. National Science and Technology Council. 2011. A Policy Framework for the 21st CenturyGrid:EnablingOur SecureEnergyFuture.Washington,DC:ExecutiveOfficeofthePresident,June;www.whitehouse.gov/sites/de fault/files/microsites/ostp/nstcsmartgridjune2011.pdf. NationalTelecommunicationsandInformationAdministration.2011.SecondInterimProgressReportontheTen YearPlanandTimetable.Washington,DC:October;www.ntia.doc.gov/files/ntia/publications/second_interim_ progress_report_on_the_ten_year_plan_and_timetable.pdf. Plissi du Rausas, Matthieu,JamesManyika,EricHazan,JacquesBughin,MichaelChui,andRmiSaid.2011. InternetMatters:TheNetsSweepingImpactonGrowth,JobsandProsperity.McKinseyGlobalInstitute.May; www.mckinsey.com/Insights/MGI/Research/Technology_and_Innovation/Internet_matters. Reilly,Sean.2011.CongressExtendsFundingforFAAthroughJanuary,PreventsFurloughs,FederalTimes,up datedSeptember16.AccessedDecember4,2011;www.federaltimes.com/article/20110916/AGENCY02/ 109160302/. U.S.DepartmentofEnergy.2010.StatementofSecretaryStevenChuBeforetheSenateCommitteeonEnergy andNaturalResourcesFY2011BudgetHearing.February4;energy.gov/sites/prod/files/ciprod/documents/24 10_Final_Testimony_%28Chu%29.pdf. Waverman,Leonard,KalyanDasgupts,andJanneRajala.2011.ConnectivityScorecard2011.Report.Emeryville, CA:BerkeleyResearchGroup.May;www.connectivityscorecard.org/images/uploads/mediaTheConnectivity Report2011.pdf. WhiteHouse.2010.NationalSpacePolicyoftheUnitedStatesofAmerica.June28;www.whitehouse.gov/ sites/default/files/national_space_policy_62810.pdf.
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Revitalizing Manufacturing
Buildithere.Selliteverywhere. JohnE.Bryson,SecretaryofCommerce,December15,2011
AStrongManufacturingSectorisUniquelyImportanttothe U.S.Economy
AflourishingmanufacturingsectorintheUnitedStatesiscrucialtoitsfuture competitivestrength.Throughoutitshistory,manufacturinghasbeenasourceof prosperity,innovation,andpridefortheUnitedStates.Manufacturingpays higherthanaveragewages,providesthebulkofU.S.exports,contributessub stantiallytoU.S.R&D,andprotectsnationalsecurity. ManufacturingremainsavitalpartoftheU.S.economy.In2009,manufacturing madeup11.2percentofgrossdomesticproduct(GDP)1and9.1percentoftotal U.S.employment,2directlyemployingalmost12millionworkers.Thissectoralso hasindirectemploymenteffectsonothersectorsoftheU.S.economywhenit purchasesinputsforproductionsuchasrawmaterials(suchasfromtheagricul turalandminingsectors),buildings(fromtheconstructionandrealestatesec tors),andservices(includingwarehousingandtransportation;professional, scientific,andtechnicalservices;andfinancialservices).Intheseways,manufac turingsupportsmillionsofadditionalsupplychainjobsacrosstheeconomy. Inaddition,manyofthejobsprovidedbythissectorarehighquality.Totalhourly compensationinthemanufacturingsectoris,onaverage,22percenthigherthan thatintheservicessectorandabout91percentoffactoryworkershaveem ployerprovidedbenefitscomparedtoabout71percentofworkersacrossallpri vatesectorfirms.3 ManufacturingisalsothelargestcontributortoU.S.exports.In2010,theUnited Statesexportedover$1.1trillionofmanufacturedgoods,whichaccountedfor86 percentofallU.S.goodsexportsand60percentofU.S.totalexports(seefigure 6.1).Inordertosupportmillionsmorejobs,PresidentObamasNationalExport InitiativesettheambitiousgoalofdoublingU.S.exportsbytheendof2014. Moreover,theUnitedStatesrunsatradesurplusintheservicessector,asurplus thathastripledsince20034;however,thoughtheservicessectorwillcontinueto beimportant,increasesinservicesalonewillnotlikelydoubleU.S.exportsby
61
Figure 6.1
U.S. Exports by Sector, Share of Total, 19912010
Manufacturing
70% 60% 50% 40%

Services
30% 20% 10% 0%
1999 2000
01
02
03
04
05
06
07
08
09
2010
Source: Bureau of Economic Analysis and Census, U.S. International Trade in Goods and Services; excluding Agriculture and Non-agriculture/Non-Manufacturing goods.
2014.Indeed,withoutastrongmanufacturingsector,theU.S.tradesurplusin servicesmayerode(seebox6.1). Astrongmanufacturingsectorisalsocrucialbecausesuccessfulinnovationin manysectorsiscloselylinkedtotheabilitytomanufactureproductsasinnova tivemethodsandideasaregeneratedandperfectedthroughtheprocessofmak ingthings.IntherecentReporttothePresidentonEnsuringAmericanLeadership inAdvancedManufacturing,5thePresidentsCouncilofAdvisorsonScienceand Technology(PCAST)andthePresidentsInnovationandTechnologyAdvisory Committee(PITAC)emphasizethecriticalimportanceofadvancedmanufacturing indrivingknowledgeproductionandinnovationintheUnitedStates.ThePCAST researchedthecurrentstateofmanufacturingandconcludedthatU.S.leader shipinmanufacturingisdecliningandthatthisisdetrimentaltothewellbeingof thenationoverall.ManufacturingcompaniesintheUnitedStatesareresponsible forovertwothirdsoftheindustrialR&D6andemploythemajorityofdomestic scientistsandengineers.7Furthermore,manufacturingR&Disthedominant
62
Box 6.1
Tradable Sectors: A Source of Good Jobs

Manufacturing is generally a tradable sector; that is, an activity that can be transactedacrossdistancesthusmakingitvulnerabletoimportcompetition. Sincethejobsinmanufacturinggenerallypaywell,thelossofthesejobsdueto import competition can have severe negative effects on the wellbeing of the U.S.workforce. Service activities at one time were not considered tradable, but some service industrieshavebecomeanimportantandexpandingcomponentofU.S.trade. Tradableservicejobsarealsohighquality,withhighereducationandwagelev elsthanjobsinnontradableservices. 1 Given the recent decline in U.S. manufacturing, in part due to offshoring, a concerniswhetherthiswillhappentotheservicesector.Infact,itcouldbear guedthatmanyofthecurrenttradableservicesexistbecausevariousfirmshad a strong manufacturing capability that also provided a source of highlytrained engineers and technical staff that could export these services. Without a core manufacturingcapabilityfeedingthatengineeringbaseitcouldbearguedthat longtermgrowthintradableservicesisnotsustainable. On the other hand, rather than lose jobs, the comparative advantage of the UnitedStatesinhighskill,highwageservicejobssuchasengineeringandbusi ness services points to potential opportunities to expand services exports and increasejobsintheseareas.
1. Jensen, J. Bradford. August 2011. Global Trade in Services: Fear, Facts, and Offshoring. Peterson In stituteforInternationalEconomics,Washington,DC.bookstore.piie.com/bookstore//6017.html.
sourceofinnovativenewservicesectortechnologies,8henceitsbenefitsreach beyondthemanufacturingarena. Thecolocationofmanufacturing,research,andothersectorscanalsobeimpor tant.InitsrecentreportthePCASTstates:Proximityisimportantinfosteringin novation.WhendifferentaspectsofmanufacturingfromR&Dtoproductionto customerdeliveryarelocatedinthesameregion,theybreedefficienciesin knowledgetransferthatallownewtechnologiestodevelopandbusinessestoin novate.9Thus,evenifR&DfacilitiesarekeptintheUnitedStates,therelocation ofmanufacturingfacilitiesoverseasmaylimittheUnitedStatesabilitytoinno vate. Finally, an innovative and secure domestic manufacturing base iscriticalto national security. An inability toproducedomesticallytheadvanceddefense
63
systemsofthemodernmilitarywouldputthenationalsecurityoftheUnited Statesatrisk.Asitsmilitarycomestorelymoreheavilyoncomplexandadvanced technologysystems,itisimportantthattheUnitedStatesretainthemanufactur ingcapacityandknowledgenecessarytoproducethesegoods.Ourcontinuedse curitynotonlyrestsontheabilitytoproducemilitaryproducts,butwemustalso considerhowthesourcingofallcriticalinfrastructurecomponents,fromcommu nicationsequipmenttopowergeneration,affectsourabilitytoprotectagainst potentiallycatastrophicsupplychaindisruptions.
TheCurrentStateofU.S.Manufacturing:ACrossroadsfor AmericanCompetitiveness
WhilemanufacturingcontinuestoplayavitalroleintheU.S.economyandpro videsmillionsofAmericanjobs,theU.S.manufacturingsectorhasfacedsignifi cantchallengesinrecentdecades.AsafractionofU.S.GDP,manufacturing declinedfrom27percentin1957toabout11percentby200910(seefigure6.2).
Figure 6.2
Manufacturing Value Added as a Percentage of GDP, 19572010
30
25
20
15
10
5 1960 1970 1980 1990 2000 2010
Source: Bureau of Economic Analysis, Gross Domestic Product-by-Industry Data
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Since2000,increasesinthemanufacturingofhightechequipment(semiconduc torsandrelatedcomponents,computers,andcommunicationsequipment)have hiddenaslightdeclineinoutputofallothermanufacturingsectors(seefigure 6.3).11Manufacturingemploymenthasseendramaticdeclines;inthelastdecade alone,employmentlevelsinmanufacturinghavedeclinedbyaboutathird(see figure6.4),andtheimpactofthisdeclineinmanufacturingemploymenthas beenfeltinmanystatesacrossthecountry,withseveralstatesexperiencingnear collapseoftheirmanufacturingsectors(seefigure6.5). Thereasonsforthedeclineinmanufacturingemploymentarevariedandcom plex;themanufacturingsectorisnotmonolithicandthereasonsforthedecline varyindustrybyindustry.However,somecommonthemescanbediscerned.One likelyfactoristhelargeimprovementinproductivityinmanufacturing.Between 1987and2010,laborproductivityinmanufacturingroseata3.4percentannual rate,almost50percenthigherthanthe2.3percentannualrateintheentirenon farmbusinesssector.12Thoughthisincreasedproductivityiscriticalintermsof
Figure 6.3
High-Tech Manufacturing Production Versus Manufacturing Production Excluding High-Tech, 19802010
140
120
Manufacturing Excluding High-Tech
100
80
60
High-tech
40
20
0
1980 82 84 86 88 90 92 94 96 98 2000 02 04 06 08 2010
Source: Federal Reserve and Haver Analytics

Note: 2007=100, Indexed.
6 5
Figure 6.4
Manufacturing Employment, (Thousands) 19902010
19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 1990 92 94 96 98 2000 02 04 06 08 10
Source: Bureau of Labor Statistics, Employment Nonfarm payrolls
Figure 6.5
Percent Change in Manufacturing Employment, 19902007
2477% decrease 024% decrease 020% increase 20110% increase
Note: Percent Change in Manufacturing Employment by state, 1990 (first year of data) to 2007. Source: Bureau of Labor Statistics, Economics and Statistics Administration calculations.
66
maintainingthecompetitivenessofthemanufacturingsector,italsohasmeant thatcompaniescannowdothesameworkwithfewerworkersandpartiallyex plainsthedropinemploymentoverthepasttwodecades.However,giventhat employmentinmanufacturingheldrelativelysteadyduringthe1990swhilepro ductivitywasstillhigh,otherfactorsmustalsoplayaroleinthedeclineofmanu facturingsince2000.Further,alargeportionoftheoverallgainsinproductivity areattributabletotheproductionofcomputerandelectronicsproducts,sopro ductivitygainsarelesslikelytoexplainemploymentdeclinesinotherindustries. Inaddition,thisoverallimprovementinproductivitymaybeslightlyoverstated duetothefactthatlowcostforeigninputsarenotadequatelycapturedinexist ingpriceindices.13 Anotherfactorintheemploymentlosses,particularlyinsomelessefficientin dustries,isgreatercompetitionfromlowwagecountries,leadingtotheoffshor ingoflowskilledjobstolowercostlocations.Forexample,onestudyhasshown thatbetweenonequartertomorethanonehalfofthelostmanufacturingjobs inthe2000swastheresultofimportcompetitionfromChina.14Whiletherehas beenanoveralldeclineinmanufacturingemployment,asstatedabove,thereis evidencethattheextenttowhichemploymenthasfallenvariesaccordingtothe amountofcompetitionanindustryfacesfromimportsfromlowwagecountries. Infact,between1972and2001,industriesthatfacedthemostimportcompeti tionfromlowwagecountriessawanaveragedecadelongdeclineinemploy mentof12.8percent,whileindustriesthatfacedlittlelowwageimport competitionsawanincreaseinaveragedecadelongemploymentof2.3per cent.15 Whilemuchhasbeenwrittenaboutthedeclineinjobsforunskilledlaborwithin traditionalmanufacturing,thisisonlypartofthestory.TheUnitedStatesisalso losinggroundinthemanufactureofhightechgoodsthatrequireskilledlabor (seefigure6.6).PCASTnotes,theUnitedStateshasnotsimplylostlowvalue jobs,suchasassembly,inthehightechsector,butalsosophisticatedengineering andadvancedmanufacturingactivities.16Thiscouldbeduetovariousfactors; othercountriesmayhaverelativelymoreskilledlabor,mayproducehigherqual ityproducts,orhavebettercustomerservice.TherelativestrengthoftheU.S. dollarcanalsoplayarole. Whilesomemightsuggestthatanadvancedcountry,suchastheUnitedStates, will inevitably losemanufacturingshareasthecountryshiftstowardsamore servicesorientedeconomy,thisisnotaforegoneconclusion.AstheEconomic
67
Figure 6.6
Trade Balance of High-Tech Goods, 19952008
China
EU
United States
of
ReportofthePresidentnotes,experiencefromotherhighincomecountries showsthatashiftintheworldshareofexportedgoodsdoesnotmeanashiften tirelyoutofmanufacturingandintoaserviceonlyeconomy.Germany,thesec ondplacegoodsexporter,maintainsasubstantialshareofmanufacturinginits economyandexportsmanyoftheseproductsmanufacturing,especiallyofcom plexproducts,continuestoplayasubstantialroleinadvancedeconomies.17
EconomicRationalesforFederalGovernmentSupportforU.S. Manufacturing
AnoverarchingU.S.manufacturinginnovationpolicyshouldinvesttoovercome marketfailuresandtoensuretechnologybasedenterpriseshavetheinfrastruc tureneededtobesuccessful.TheFederalgovernmentcanhelpfacilitatethisby supportingresearchprogramsinnewtechnologies;supportingthecreationand dissemination of powerful design methodologies that dramaticallyexpandthe ability of entrepreneurs to design products and processes which any given entrepreneurmaynothavetheincentivetoinvestinonitsown;andinvestingin
68
sharedtechnologyinfrastructurethatwouldhelpU.S.companiesimprovetheir manufacturing. Themanufacturedgoodsmarketisglobalandcompaniesfrommoreandmore countriesareparticipating.ItisnotanoptionordesiredoutcomefortheUnited Statestocloseitsborderstogoodsproducedabroad;however,wemustbecon sciousoftheimpactsthatourgovernmentsactionsandthoseofourtrading partnershaveonthecompetitivenessofthissector.(Thewaysinwhichforeign governmentssupportindustryarediscussedmoreinChapter7). TheFederalgovernmenthashistoricallyplayedanimportantsupportiverolein themanufacturingsector.AsAFrameworkforRevitalizingAmericanManufactur ingnoted,thekeytosuccess(inmanufacturing)liesinAmericanworkers,busi nesses,andentrepreneursbutthefederalgovernmentcanplayasupportive roleinprovidinganewfoundationforAmericanmanufacturing.18 Justasthereisnosingleexplanationforwhymanufacturinghasdeclinedinthe UnitedStates,noonepolicyprescriptionwillreversethedecline.Successfulman ufacturingpolicyactionsmustreflectthediversityofthemanufacturingsector whilenotcreatinganindustrialpolicythatinefficientlyseekstopickwinnersand losers.
LongstandingFederalGovernmentSupportforU.S. Manufacturing
TradePolicies
TheUnitedStatesworkstoopenmarketsforU.S.goodsandservicesthroughfree tradeagreementsandotheractivities.TheFederalgovernmentalsotakessteps toenforceexistingtraderuleswithintheWorldTradeOrganizationframework. Unfairforeignpricingandgovernmentsubsidiesdistortthefreeflowofgoods andadverselyaffectsomeAmericanbusinessesintheglobalmarketplace.Free trademustbepremisedonfairtrade.
InvestmentsinResearchandDevelopmentInfrastructure
AsnotedinChapter3,FederalsupportforR&Dprovidesavitalandnecessary public good that individual private companiesmaybeunwillingorunableto undertake. Federal support for R&D, particularly support forlongtermbasic research,hashelpedtheadvancementofimportantinnovativetechnologiesthat
69
havethenspawnedmanysuccessfulcompaniesandevenentireindustries(foran example,seebox6.2).IntheirReporttothePresident,PCASTnotes,TheFederal Governmenthashistoricallymadevisionaryinvestmentsthathavefacilitatedthe birthofnewtechnologybasedindustriesandstrengthenedthedevelopmentof existingindustries.Theseinvestmentshavepaidenormousfinancialandsocial returnstotheNation.19 TheFederalgovernmentsupportsR&DthroughagenciessuchasNSF,DARPA, NIST,andtheDOEsOfficeofEnergyEfficiencyandRenewableEnergy(seebox 6.3foradetaileddescriptionofNISTsmanufacturingrelatedactivitiesandsee box6.4foranexampleofacompanythathasbenefittedfrommultipleFederal programs). TheFederalgovernmentalsohasplayedarolebyhelpingtofundlargescalere searchlabsaspartofpublicprivatepartnerships.AsnotedbyarecentPCASTre port,inthepasttheFederalgovernmentfundedinpartthemajorcorporate laboratoriesthatlaidthefoundationsfortheU.S.economicleadershipandinno
Box 6.2
A123 Systems: Supporting the Future of the Auto Industry

In2001ProfessorYetMingChiangoftheMassachusettsInstituteofTechnology cofounded A123 Systems, a producer of rechargeable lithiumion batteries thatpowerhybridandelectricvehiclesandothertechnologies.Thefirmsfoun dationwasenabledbyaSmallBusinessInnovationResearchgrantfromtheDe partment of Energy. The firm subsequently raised more than $300 million in capitalfrominvestorslikeSequoiaCapitalandcorporationslikeGEandMotor ola. It also received a $5 million loan from the Massachusetts Clean Energy Center. 1ItwentpublicinSeptember2009. InFebruary2010,itembarkedona$6.0millionresearchprogram,withfunding from the NIST Technology Innovation Program (TIP), to develop a new nano composite material for lithium ion battery electrodes together with improved manufacturingprocess technologiesto enablebothsignificantlyimprovedbat tery performance and lower manufacturing costs. With help from the Depart ment of Energy it opened a manufacturing plant in Michigan in September 2010. 2TodayA123Systemsemploysapproximately1,700people.
1. National Economic Council and the Office of Science and Technology Policy. A Strategy for American Innovation: Securing Our Economic Growth and Prosperity. February 2011, 58. www.whitehouse.gov/ sites/default/files/uploads/InnovationStrategy.pdf. 2. The Science Coalition, Sparking Economic Growth: How federally funded university research creates innovation, new companies and jobs. April 2010, 35. www.sciencecoalition.org/successstories/ resources/pdf/Sparking%20Economic%20Growth%20Full%20Report%20FINAL%204510.pdf.
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Box 6.3
The National Institute of Standards and Technology (NIST)

TheNationalInstituteofStandardsandTechnology(NIST)helpsmanufacturers ofallkindsfromshipbuilderstosemiconductormakersstreamlinetheirop erations, improve quality, reduce environmental impacts, and develop innova tiveproductsandprocesses. The NIST Laboratory programs also provide critical support for manufacturers through research, standards activities, and the development and delivery of measurement services. Efforts are underway in partnership with industry and academia, to produce measurement technologies, standards, and services in areasincludingnano andbiomanufacturing,advancedrobotics,additiveman ufacturing, cyberphysical systems, advanced materials development, and a numberofotherareasthatwillbroadlyimpacttechnologiesthatarecriticalto advancedmanufacturingacross industrysectors. NIST is committedtoadvanc ingtheAdministrationsvisionforadvancedmanufacturingandwillcontinueto provide:
Unique and enabling measurements to industry, particularly in support of emergingtechnologies.IntheareaofadvancedmaterialsNISTisworkingto developmodelingandcharacterizationtoolsthatwillhelpreducematerials design time from the current 10 year timeframe to a timescale more com patiblewiththeaverage18monthproductdevelopmentcycle. Support to strategic standards development and adoption. In the area of robotics NIST is working to provide the measurement framework that will support the adoption of standards to enable safer, closer proximity human robotinteractionsonthefactoryfloor. Support to technology transfer and commercialization of technology. In the areaofnanomanufacturingtheNISTnanofabricationfacilityprovidesakey facility for users to test new manufacturing methods and techniques that canhelpspeedtheintroductionofnewnanomaterialsintonewproducts.
In addition, NISTs Hollings Manufacturing Extension Partnership (MEP) and its nationwidenetworkofcentershaveaproventrackrecordofhelpingmanufac turers.AccordingtoNISTresearchevery$1ofFederalinvestmentinMEPgen erates $32 of return in sales growth, a total of $3.6 billion in new sales nationally.20 MEP centers offer access to market intelligence, trends, and data about manufacturing; outreach assistance to existing manufacturing firms in theregiontogettheminvolvedinclusterinitiatives(particularlysmallandme dium sized manufacturers); technical assistance to companies in targeted clus ters to enhance their competitiveness and accelerate growth opportunities (technology development, sustainability, etc.) leading to job creation; and tracking of performance measures (e.g., jobs created/retained, cost savings, newsales,newinvestments).
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Box 6.4
West Paw Designs: Sustainable Manufacturing in Montana

WestPawDesignisasmallmanufacturerbasedinBozeman,MTthatmakespet toys and beds. 1 West Paw uses IntelliLofta fiber created from 100 percent postconsumer recycled plastic soda bottlesto fill their stuffed pet beds and toys. Since 2006, the company has helped divert more than 5 million plastic bottlesfromlandfillsthroughthispractice. WestPawhastakenadvantageofFederalprogramsandservicesforsmallbusi nesses,forsustainablemanufacturing,andforexporting.Theyvebeenableto utilizethevarietyofservicesavailabletothem,includingSBAloansthroughthe Recovery act, the Hollings Manufacturing Extension Partnership program at NIST, and some export assistance from the Department of Commerces U.S. Commercial Service. 2 In 2010 West Paw doubled the size of its manufacturing facility by focusing on a green line of products and by looking to the interna tionalmarketplace,withthehelpofvariousFederalgovernmentprogramsand services.
1. West Paw Design, The West Paw Design Story. Accessed November 15, 2011 www.westpaw design.com/articles/westpawstory/westpawdesignstory. 2. Williams, Spencer. Invited Testimony before the United States Senate Committee on Finance. Febru ary23,2010finance.senate.gov/imo/media/doc/022310swtest.pdf.
vationinthe20thcentury,includingXeroxPARC,RCADavidSarnoffResearchCen ter,andAT&TBellLabs.21
InvestmentsinEducation
AsoutlinedinChapter4,investmentsineducation,particularlySTEMeducation, arecriticaltothefuturecompetitivenessoftheUnitedStates.Thisisespecially trueformodernmanufacturing,whichrequiresanincreasinglyskilledworkforce. Justasthemanufacturingsectortodayisdiverseandnotamonolithicsetoffac toriesbangingoutwidgets,todaysmanufacturingworkforceisdiverse,witha widerangeofskills.Theshareofmanufacturingemploymentaccountedforby thosewithatleastsomecollegeeducationhasbeenincreasingovertimeandex ceededhalfoftheoverallmanufacturinglaborforceduringthelastfewyears (seefigure6.7). Communitycollegesareeducatingmanyofthesehigherskilledmanufacturing workerseitherasacontinuationoftheirformalK12educationoraspartofthe workforcedevelopmentsystem.TheUnitedStatespublic,2yearcollegesystem hasmorethan7.1millionstudentsenrolledandawards790,000associatede
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Figure 6.7
Manufacturing Employment by Education Level, 19792010
80% 70%
High School or less
60% 50% 40% 30% 20% 10% 0%
Some college or more
1979
1984
1989
1994
1999
2004
2009
Source: CPS public use Merged Outgoing Rotation Group files from NBER
greesannually.22Moreover,communitycollegesawardhugenumbersofnonde greecertificatesinspecificscientific,technical,andcomputingskills.Inaddition, manyoftheseinstitutionsoffercontracttrainingforthepublicsectorandem ployers,providingmultipleopportunitiesforstudentsandworkerstogainskills thatcanfacilitatetheirjobsearchorallowthemtobecomemore productive in their current jobs. Students have been flocking topublic2yearcolleges,with enrollmentupby75percentbetween1979and2009,andby12percentbe tweenDecember2007andJune2009.23 Employmentprojectionsthrough2018showthatjobsthatrequireatleastsome postsecondaryeducationwillbegrowingfasterthanthosethatrequireworkers withjustahighschooldiplomaorless;however,thefastestgrowthwillbeinjobs forwhichanassociatedegreeisthebestpathwayofentry.24Communitycolleges arealsoaneedednexusbetweenindustryandhighereducation,providingedu cationinacademicfields,includingSTEM,combinedwithvocationalstudies(see box6.5foranexampleofprivatepublicpartnershipatcommunitycolleges).
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Box 6.5
10,000 Small Businesses

This Goldman Sachs initiative is a $500 million, fiveyear program that aims to unlockthegrowthandjobcreationpotentialof10,000smallbusinessesacross the UnitedStates.Itprovides access to business education, mentors, networks and financial capital. The program is anchored at local community colleges. At year end 2011, the program was operating in New York, Los Angeles, Chicago, NewOrleans,Houston,andLongBeach,CA,andfocusedonhistoricallyunder servedcommunities. Economic development experts believe that a combination of education, capi tal and support services best address the barriers to growth for small busi nesses. The current environment of fiscal austerity is notably impeding the budgetsofmanypublicpostsecondaryschoolprograms,includingcommunity colleges that often provide support to new business owners and vocational trainingtoothers. The Goldman Sachs program has thus far targeted disadvantaged urban areas. The board of 10,000 Small Businesses, which includes Warren Buffet and Pro fessor Michael Porter, has laid out the mandate for the initiative which is to meet the vital need for training, tools and relationships to help local entrepre neurscreateaselfreinforcingcycleofeconomicopportunity.
Communitycollegesdependmuchmorethan4yearpublicuniversitiesonstate andlocalgovernmentappropriations.Inthe20082009schoolyear,47percent oftotalrevenuesofpublic2yearschoolscamefromtheseappropriations,com paredwith24percentforpublic4yearschools.25Giventheirdependenceon stateandlocalbudgets,communitycollegesareespeciallyvulnerabletogovern mentcutbacks.TheObamaAdministrationrecognizedearlyontheessentialrole playedbycommunitycolleges,andthe$2billionHealthCareReformActinvest mentincommunitycollegesisoneessentialandtimelyinvestmentthatwillhelp strengthennotjustthecollegesthemselves,butalsotheirtiestolocalindustries. Whilecommunitycollegesbydefinitionoperateatalocallevel,theseneeded Federalgovernmentinvestmentssupportworkers,theircommunities,andthe nationsindustrialbase.
InvestmentsinTransportation,Energy,andCommunications Infrastructure
Finally,theFederalgovernmentcansupportAmericanmanufacturersbyinvest ingina21stcenturyinfrastructure,asoutlinedinChapter5.Thisisbecausethe costtomovegoodsfromonefactorytoanotherandtotheirfinaldestination,
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thecosttomoveenergyfromwhereitiscreatedtowhereitisused,thecostof movingpeopleandthecosttotransportinformationareallsignificantfactorsin themanufacturingprocessnotestheAdministrationsAFrameworkforRevital izingAmericanManufacturing.26Also,PCASTnotesthatsmallandmediumsized firmswouldbenefitfromreadilyaccessiblesharedinfrastructure,providing bothequipmentandexpertise.InfrastructurecurrentlyprovidedatFederallabo ratories,forexample,forthefabricationofmicroelectromechanicalsystems,has allowedfornewproductstobedeveloped.27 InadditiontoprogramsthatarestrictlyFederal,partnershipsandcoordination withgovernmentsatthestateandlocallevelhavealsoprovedeffective.Forex ample,CommercesNISTMEP,alongwiththeEconomicDevelopmentAdminis tration(EDA),recentlypartneredwiththeNationalGovernorsAssociation(NGA) tolaunchaPolicyAcademythatwillencouragethegrowthofadvancedmanufac turingindustries(seebox6.6). TheseexamplesclearlyillustratetheimportantroleoftheFederalgovernmentin supportingU.S.manufacturing.Thissupporthasbeenimportantinthepastand willlikelybeevenmoreimportantintheincreasinglycompetitivemarketplaceof thefuture.
Box 6.6
EDA, NIST, NGA Collaborate To Form a Policy Academy

The U.S. Commerce Departments NIST Manufacturing Extension Partnership (MEP), in collaboration with EDA, have partnered with the National Governors Association (NGA) to launch a Policy Academy to encourage coordination amongststakeholdersinbothFederalandstategovernmentalongwithleaders in industry and academia, to spur the growth of advanced manufacturing in dustriesandsupportAmericanjobs. The states will receive guidance and technical assistance from NGA staff, ex pertsfromMEP,EDAandtheStateScienceandTechnologyInstitute,aswellas consultantsfromtheprivatesector,researchorganizationsandacademia.Colo rado, Connecticut, Illinois, Kansas, Massachusetts, New York and Pennsylvania have been selected to participate, and the strategies and policies that are de velopedatthePolicyAcademyareintendedtobenefitallstates. ___________________
Formoreinformation,visitwww.nga.org/cms/center/ehsw.
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FederalInitiativestoReviveManufacturing
ManyinitiativesareunderwaytorevitalizetheU.S.manufacturingsector.They include:

TheWhiteHouseOfficeofManufacturingPolicy.Toimprovethecoordination ofmanufacturingpolicyacrosstheFederalgovernment,PresidentObama announcedonDecember12,2011thatCommerceSecretaryJohnBrysonand NationalEconomicCouncilDirectorGeneSperlingwillbecochairsofthe WhiteHouseOfficeofManufacturingPolicy.Theofficewillconvenecabinet levelmeetingstoimplementandcoordinateprioritymanufacturinginitiatives. TheAdvancedManufacturingPartnership(AMP).LaunchedinJune2011,AMP identifiesopportunitiesforindustry,academia,andgovernmenttocollabo rateinordertoacceleratethedevelopmentanddeploymentofemerging technologieswiththepotentialtotransformandreinvigorateadvancedmanu facturingintheUnitedStates.

TheAMPSteeringCommittee(AMPSC)iscochairedbySusanHockfield oftheMassachusettsInstituteofTechnologyandAndrewLiverisofDow Chemicalandincludesleadingexpertsfromindustryandacademia, includingCEOsofmajormanufacturingfirmsandpresidentsofleading universities.TheAMPSCconductedfourregionalmeetingsfromOcto bertoDecemberof2011,andwillbeissuingafinalreportinthespring of2012. Inaddition,tosupporttherapidlyadvancingworkoftheAMP,the AdministrationisestablishingaNationalProgramOffice(NPO)thatwill resideatCommercesNISTandwillbestaffedbyabroadrepresentation fromseveralkeyFederalagenciesinvolvedinU.S.manufacturingin ordertoprovideacoordinatedwholeofgovernmentresponse.The AMPNPOwillsupporttheongoingworkoftheAMPpartners,support interagencycoordinationofadvancedmanufacturingprograms,and providealinktothegrowingprivatesectorpartnershipsbetweenmanu facturers,universities,stateandlocalgovernments,andothermanufac turingrelatedorganizations.
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TheMaterialsGenomeInitiative.ThisprogrammodeledontheHuman Genomeprojectthatdecipheredthebuildingblocksofhumangenetics,will speedunderstandingoffundamentalissuesrelatedtomaterialsscienceby investinginresearch,trainingandinfrastructuretoenableU.S.companiesto discover,develop,manufacture,anddeployadvancedmaterials.Forexample, theinitiativewillfundvariouscomputationaltoolsandsoftwaretohelp understandthepropertiesofthesematerialsandopenstandardsanddata basestohelpfacilitatethesharingofknowledge. SelectUSAwasestablishedbyExecutiveOrderonJune15,2011.Itisthefirst Federaleffortdesignedwithexecutiveauthoritytosupportforeignand domesticbusinessinvestmentintheUnitedStates.ItshowcasestheUnited Statesastheworldspremierbusinesslocation,complementingtheactivities ofstatesandregionstheprimarydriversofeconomicdevelopmenttospur economicgrowthandjobcreation.SelectUSAcoordinatesexistingresources andfunctionsacrossallFederalagenciesthathaveoperationsrelevantto businessinvestmentdecisions. SelectUSAencouragesbusinessinvestmentbyconductingfourcriti cal,inherentlygovernmentalfunctions:

Outreachandengagement.Leadingandcoordinatingoutreachand engagementbytheFederalgovernmenttopromotetheUnitedStatesas thebestmarketforbusinessoperationsintheworld; Ombudsman.Servingasombudsmantofacilitatetheresolutionofspe cificissuesinvolvingFederalprogramsoractivitiesrelatedtopending investmentsandaddressingtheFederalregulatoryclimatethroughan interagencyinvestmentfacilitationtaskforce; Informationclearinghouse.Providinginformationtofirmsregarding itemssuchasFederalprogramsandincentivesavailabletoinvestorsand stateandlocaleconomicdevelopmentpointsofcontact;and, Policyadvisementandengagement.AdvisingtheWhiteHouse,Federal agencies,andtheU.S.economicdevelopmentcommunityonbusiness
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investmentpolicyissuesbasedonfeedback,solicitedandunsolicited, thatisreceivedfrominvestorsandstakeholders.

NewFederalsupportforR&D.InitiativestheObamaAdministrationischampi oning include funding for DOE to support R&D inareassuchasflexible electronicsforcomponentslikebatteriesandsolarcellsandultralightmateri alsforcarsandfundingforNSFtosupportresearchinadvancedmanufactur ingareassuchasnanomanufacturing,nextgenerationroboticsandsmart buildingsandbridges. TheNationalNanotechnologyInitiative(NNI).TheNNIistheU.S.Federalgov ernmentsinteragencyprogramforcoordinatingR&Dandenhancingcommu nicationandcollaborativeactivitiesinnanoscalescience,engineeringand technology. NationalDigitalEngineeringandManufacturingConsortium(NDEMC). NDEMCisapublicprivatepartnershiplaunchedinMarch2011thatbrings togethermanufacturers,industryassociations,Federalagencies,nationallabs, andresearchuniversitiestomakemodelingandsimulationcapabilitiesavail abletosmallandmediumsizedmanufacturers.
Themanufacturingsectorwouldalsogreatlybenefitfromsomeofthepolicies outlinedelsewhereinthisreport,suchasrobustbasicresearchfunding,anex pandedandenhancedcorporateR&Dtaxcredit,andacceleratedR&D,specifi callyinbiotechnology,nanotechnology,cleanenergyandadvanced manufacturing(Chapter3);initiativestosupportSTEMeducation,suchasthe SkillsforAmericasFutureInitiativeandtheDepartmentofEducationsRaceto theTopInitiative(Chapter4);infrastructureinvestments(Chapters5and7);and supportingRegionalInnovationClusters,theNationalExportInitiative,corporate taxreform,andaneffectiveintellectualpropertyregime(domesticallyand abroad)(Chapter7).
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Endnotes
1.BureauofEconomicAnalysis,SURVEYOFCURRENTBUSINESSJanuary2011,Table2. 2.BureauofLaborStatistics,1961to2011,TableB1. 3.ExecutiveOfficeofthePresidentoftheUnitedStates2009,7. 4.BureauofEconomicAnalysis,TradeinGoodsandServices. 5.PCASTReportonAdvancedManufacturing2011. 6.NationalScienceFoundation,2011.DetailedStatisticalTablesNSF11301. 7.Wolfe,RaymondM.2009.Table3.AscitedbyTassey,290. 8.Tassey,2010,283333. 9.PCASTReportonAdvancedManufacturing2011,11. 10.BureauofEconomicAnalysis,GDPbyIndustryData2011. 11.BoardofGovernorsoftheFederalReserveSystem,IndustrialProductionandCapacityUtilizationG172011. 12.BureauofLaborStatistics,LaborProductivityandCosts,ascitedbyExecutiveOfficeofthePresident2009,6. 13.Houseman,et.al.2011,115. 14.Autor,DornandHansen,2011,21. 15.Bernard,JensenandSchott2004,9. 16.PCASTReportonAdvancedManufacturing2011,3. 17.CouncilofEconomicAdvisers2011,95. 18.ExecutiveOfficeofthePresidentoftheUnitedStates2009,11. 19.PCASTReportonAdvancedManufacturing2011,24. 20.NationalInstitutesofStandardsandTechnology,2011,1. 21.PCASTReportonAdvancedManufacturing2011,17. 22.NationalCenterforEducationStatistics2010,Tables196and198. 23.NationalCenterforEducationStatistics2010,Table198. 24.LaceyandWright2009,88,Table3. 25.NationalCenterforEducationStatistics,IPEDS,2010,Table362. 26.ExecutiveOfficeofthePresidentoftheUnitedStates2009,3. 27.PCASTReportonAdvancedManufacturing2011,20.
References
Autor,David,DavidDorn,andGordonHansen.2011.TheChinaSyndrome:TheLocalLaborMarketEffectsof ImportCompetitionMITWorkingPaper;econwww.mit.edu/files/6613. Bernard,AndrewB.,J.BradfordJensenandPeterK.Schott.2004.FacingtheDragon:ProspectsforU.S.Manu facturersintheComingDecade.YaleSchoolofManagementWorkingPaper,faculty.som.yale.edu/peterschott/ files/research/papers/dragon.pdf. BoardofGovernorsoftheFederalReserveSystem,(AccessedDecember2011)IndustrialProductionandCapac ityUtilizationG17,IndustrialProduction:Market,IndustryGroups,andIndividualSeries,DatafromJanuary 1986topresent(Tables1,2,and10);www.federalreserve.gov/releases/g17/table1_2.htm. BureauofLaborStatistics.(AccessedNovember2011)TableB1.Employeesonnonfarmpayrollsbymajorindus trysector,1961todate;ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt. BureauofLaborStatistics.(AccessedDecember2011)LaborProductivityandCostsData,IndustryLaborProduc tivityandCosts:Indexes;www.bls.gov/lpc/iprprodydata.htm. BureauofEconomicAnalysis.2011.SurveyofCurrentBusiness20062009.January;www.bea.gov/scb/pdf/ 2011/01January/0111_indy_accts_tables.pdf. BureauofEconomicAnalysis.(AccessedDecember2011).GDPbyIndustryData.www.bea.gov/industry/ gdpbyind_data.htm. BureauofEconomicAnalysis.(AccessedDecember2011).InternationalEconomicAccounts,TradeinGoodsand Services1992Present;www.bea.gov/international/index.htm. CouncilofEconomicAdvisers.2011.EconomicReportofthePresident.Washington,DC:U.S.GovernmentPrint ingOffice.February.www.gpoaccess.gov/eop/2011/pdf/ERP2011.pdf.
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ExecutiveOfficeofthePresidentoftheUnitedStates.2009.AFrameworkforRevitalizingAmericanManufactur ing.December;www.whitehouse.gov/sites/default/files/microsites/20091216manufacturingframework.pdf. Houseman,Susan,ChristopherKurz,PaulLengermannandBenjaminMandel.2011.OffshoringBiasinU.S. Manufacturing,JournalofEconomicPerspectives.Vol.25,no.2.Spring;pubs.aeaweb.org/doi/pdfplus/10.1257/ jep.25.2.111. Lacey,T.Alan,andBenjaminWright.2009.OccupationalEmploymentProjectionsto2018.MonthlyLaborRe view(November):82123,Table3. NationalCenterforEducationStatistics.2010.2010DigestofEducationStatistics;nces.ed.gov/programs/digest/ 2010menu_tables.asp. NationalCenterforEducationStatistics.IntegratedPostsecondaryEducationDataSystem(IPEDS).Spring2006to Spring2010;nces.ed.gov/programs/digest/d10/tables/dt10_362.asp. NationalInstitutesofStandardsandTechnology.2011.TheManufacturingExtensionPartnership:Partnering for Manufacturing Innovation and Growth 2011,www.nist.gov/mep/upload/MEPPARTNERING IMPACTS FEB2011.pdf. NationalScienceFoundation,NationalCenterforScienceandEngineeringStatistics.2011.ResearchandDevel opmentinIndustry:200607.DetailedStatisticalTablesNSF11301.Arlington,VA.Availableatwww.nsf.gov/ statistics/nsf11301/. PresidentsCouncilofAdvisorsonScienceandTechnology.2011.ReporttothePresidentonEnsuringAmerican LeadershipinAdvancedManufacturing.June;www.whitehouse.gov/sites/default/files/microsites/ostp/pcast advancedmanufacturingjune2011.pdf. Tassey,Gregory.2010.RationalesandMechanismsforRevitalizingU.S.ManufacturingR&DStrategies.Journal ofTechnologyTransfer35:283333. Wolfe,RaymondM.2009.U.S.BusinessR&DExpendituresIncreasein2007;SmallCompaniesPerform19%of Nations Business R&D.InfoBriefNSF09316.Washington,DC:NationalScienceFoundation;www.nsf.gov/ statistics/infbrief/nsf09316/.
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ThePrivate Sectorasthe Engineof Innovation
Introduction
IncreasingthecompetitivenessandthecapacityoftheUnitedStatestoinnovate goesbeyondimprovingresearch,education,infrastructure,andthemanufactur ingsector.Manyotherfactorscanalsoleadtosuccess,butperhapschiefamong themisensuringthatbothestablishedfirmsandentrepreneursintheprivate sectorhavethebestpossibleenvironmentinwhichtoinnovate.Oneofthema jorstrengthsoftheAmericaneconomyisthatitsdecentralized,competitivemar ketsprovidethebestmethodfordeterminingthevalueofinnovative opportunitiesandenablingtheirdiffusionthroughouttheeconomy.Thischapter exploresthefollowingareasthathelpprovideagoodenvironmentforprivate sectorinnovation: 1

Supportregionalclusters AcceleratehighgrowthentrepreneurshipthroughStartupAmericaspublic andprivatesectorinitiatives Promoteexportsandaccesstoforeignmarkets Restructurecorporatetaxes Provideaneffectiveintellectualpropertysystem
RegionalClustersandEntrepreneurship
Despitemoreopenmarkets,fasterandcheapertransportation,andanincreas inglyrobustdigitalinfrastructure,locationhascontinuedtobecentraltocompet itivenessandinnovation.2Theprimeexampleofhowlocationstillmattersis regionalclusters,whicharegeographicconcentrationsofinterconnectedbusi nesses,suppliers,serviceproviders,coordinatingintermediaries,andassociated institutionslikeuniversitiesorcommunitycollegesinaparticularfield(e.g.,infor mationtechnologyinSeattle,aircraftinWichita,andadvancedmaterialsin NortheastOhio).3Regionalclusterscanalsobethoughtofasaninnovationeco systemthatismadeupofcommunitiesofpeoplewithdifferenttypesofexper tiseandskillsets.Scientists,administrators,businessleaders,engineers,writers, educators,healthcareprofessionals,andotherindividualsallplayarole.4
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Onceacriticalmassoffirmssharesacommonlocationtheyderivemanytypesof advantagesfromthisproximity.Thesefirmsdevelopcloserelationships,giving thembetteraccesstoinformationandallowingthemtointeractmoreefficiently. Firmsinclusterscanmoreeasilyfindworkerswithrelevantexperience,andsup pliersmayalsoclusternearby,loweringinputcosts.Theseadvantagesarediffi cult,ifnotimpossible,totakeadvantageofwhenfirmsarenotclosetoeach other.5Evidenceindicatesthatareaswithstrongclustersperformbettereconom icallythanareaswithouttheseclusters;theyhavehigherjobgrowth,higher wagegrowth,morebusinessesandahigherrateofpatenting.6 Multiplestudieshighlightthepositivecorrelationbetweentheexistenceofre gionalinnovationclusters(RICs)andwages.WheatonandLewis(2002)examined theeffectsofindustrialandoccupationalspecializationonmanufacturingwage levelsacross220metropolitanareas.7Theyfoundthatforthetypicalmetropoli tanarea,adoublinginemploymentconcentrationinaparticularindustry(similar towhatwouldoccurwhenindustryclustersaredeveloped)isassociatedwitha2 percentincreaseinwages.GibbsandBernat(2001)foundthatwagesforworkers inindustryclusterswereabout6percenthigherthanforworkersinthesamein dustryinanonclusteredlocation.8AKansasclusterfocusedonaviationmanu facturinganddevelopmentprovidesyetanotherexampleofthewagebenefitsof RICs.TheKansasaviationclusterboasts17.8percentofallKansasmanufacturing employment,withaverageannualwagesof$63,000,comparedwith$40,000in averageannualwagesforallU.S.industriesin2006.9 RICscanalsoimprovetheproductivityoffirmsoperatingintheclusters.Green stoneandMoretti(2004)evaluatedtheimpactoflargeplantsclusteringto gether.10Bycomparingtheproductivityandemploymentgrowthofsitesselected bylargeplantstothoseofrunnerupsiteswithsimilarcharacteristics,they foundthatfirmsclusteringtogetherincreasedproductivityby12percentand employmentby9percent. NewbusinessesarealsogeneratedbyRICs;fromthemorethan150clustersthat existaroundthecountry,RICshaveresultedinincreasedspinoffs,creatingnew commercialactivity.Forexample,theCleanTECHSanDiegoclusterinitiativethat waslaunchedin2007andfocusedonenergyefficiency,renewableenergy,trans portation,andwatermanagementhasgeneratedtremendousstartupactivity.
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SanDiegonowboastsmorethan800cleantechnologycompanies,supportedby worldclassuniversitiesandanetworkofinvestors. ThecleareconomicbenefitsgeneratedbyRICssuggesttheneedtoencourage thegrowthoftheseclusters.TheFederalgovernmentisworkinginpartnership withstateandlocaleffortsthroughagenciessuchastheSmallBusinessAdminis tration(SBA)andtheU.S.DepartmentofCommercesEconomicDevelopment Administration(EDA).OneexampleofEDAfundingthathelpsclustersachievesu periorresultsisapublicprivatepartnershipthatledtothecreationofanew proofofconceptcenterattheUniversityCityScienceCenterinPhiladelphia(see box7.1).Thisexamplehighlightsinnovationoccurringataregional,economicde velopmentlevel.Anotherexampleofaneconomicdevelopmentagencyworking atthegrassrootslevelisNorTechbasedinNorthernOhio(seebox7.2). AnotherDepartmentofCommerceefforttopromoteentrepreneurshipatthere gionallevelistheestablishmentoftheOfficeofInnovationandEntrepreneurship (OIE).ThegoaloftheOIEistopromoteinnovationbased,highgrowthentrepre neurshipbyincreasingtheefficiencyandeffectivenessofeffortstocommercial izetechnologydevelopedthroughuniversityandfederallyfundedresearch.The OIEmanagesthei6Challenge,amultiagencycompetitivegrantprogramthaten couragesinnovativepartnershipmodelsthatacceleratetechnologycommercial ization,newventureformation,andjobcreation.ItalsomanagestheNational AdvisoryCouncilonInnovationandEntrepreneurship,whosemissionistoadvise onthebestmethodstofosterentrepreneurshipandtodevelopinnovationeco systemssuchasRICs. Othereffortsinclude:theSBAseffortwiththeDepartmentofDefensetode velopclustersfocusingonadvancedtechnologiessuchasrobotics,energy,and cybersecurity;EDAsRICeffortsinareassuchasbestpracticesand21stcentury infrastructure,aswellasitsworkthroughtheTaskforcefortheAdvancementof RegionalInnovationClusters;andtheDepartmentofAgriculturesinitiativesto bringregionalstrategiestoruralareasthatinvolveregionalfoodsystems,renew ableenergy,broadband,andrecreation.Finally,anotherrecentsignificantdevel opmentisthereauthorization,foranother6years,oftheSBAsSmallBusiness InnovationResearchandSmallBusinessTechnologyTransferprograms, which are setaside programs for small businesses toengageinFederalR&Dandto
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facilitate cooperative R&D between small businesses and research institu tions, respectively. The programswerealsoexpandedtoallowfirmsthatare
Box 7.1
Example of a Public-Private Partnership: QED

QED is a unique multiinstitutional proofofconcept mechanism that supports academiclifescienceresearchersastheytransitiontheirdiscoveriesintoprod ucts for end users. The University City Science Center in Philadelphia, Pennsyl vania,(theoldestandlargesturbanresearchparkintheUnitedStates)created the QEDprogram in2009 to bridgethe gap between academicresearch grants and commercial seed funding. The goals of the program are to engage Greater Philadelphias academic institutions, research scientists, entrepreneurs, inves tors, and industry in earlystage commercialization, and ultimately to increase thepaceandvalueoftechnologytransferintheregionbydevelopingapipeline ofnewtechnologiesthatcouldsignificantlyimprovehumanhealth. QED provides key resources, including business guidance, bridge funding, and access to industry and investor representatives, to competitively selected proj ects. Currently, 19 research institutions participate in the program under a common set of terms and conditions that govern funding, indirect costs, intel lectual property, and revenue sharing for program sustainability. Funding deci sionsaremadebyaregionalselectionteamcomposedofrepresentativesfrom pharmaceutical,medicaldeviceandmedicaldiagnosticscompanies,privateeq uity and venture capital firms, and economic development organizations. Each project selected for funding receives up to $200,000 over 12 months, with half of the funding provided by the Science Center and the other half by the scien tistshostinstitution. To date, QED has received and evaluated more than 227 proposals. Proofof concept plans have been developed, with the assistance of business advisors, for40lifesciencetechnologiesat15institution,and12projectsateightinstitu tions have been selected to receive funding. Of the nine projects that have beensubstantiallycompleted,fivehaveresultedinthelicensingoroptioningof technologies to the private sector, either through startup or established com panies. One of the licensed technologies represents the first example of tech nology from The Childrens Hospital of Philadelphia, the Nations first hospital forchildren,beingcommercializedviastartupcompanyformation. Currently in the fourth cycle of its pilot phase, QED has received funding from the Commonwealth of Pennsylvanias Ben Franklin Technology Development Authority, the William Penn Foundation, the U.S. Department of Commerces EconomicDevelopmentAdministrationandWexfordScience+Technology. QEDs early successes demonstrate the programs potential for meaningful im pact on the regions innovation ecosystem through the collective engagement of academic, private sector, and entrepreneurial stakeholders. The program is both scalable and transferrable, and could serve as a template for similar ef fortsinothersectorsandinotherregions.
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majority owned by venture capital and that have private capital support to participate.
Box 7.2
Regional Innovation Clusters: NorTech

Oneexcellentexampleofhowregionalinnovationclusterscanworktoimprove the economic climate of an area through the support of emerging technology industries is NorTech.1 A regional nonprofit technologybased economic devel opment organization serving 21 counties in NortheastOhio, NorTech is funded by public and private partners of regional businesses and philanthropic com munities and supported by the U.S. Department of Commerces Economic and Development Administration. As a catalyst for developing regional innovation clusters, NorTech is currently focused on two industries: advanced energy and flexibleelectronics.Theorganizationsclusterdevelopmentmodelservesallor ganizationsinthevaluechainandthosethatsupportthevaluechaincompa nies of all sizes; research institutions; universities; public, private and philanthropic funding sources; all levels of government, industry associations; andothereconomicdevelopmentorganizations. NorTechs approach is to engage in activities at three levels: the cluster com pany and project level, the regional level, and the national level. Based on the NortheastOhiosuniquestrengthsandassets,NorTechdrivesthedevelopment ofregionalinnovationclustersby:
AttractingnewmemberstotheclusterbypromotingNortheastOhiostech nologystory; Building relationships among cluster members for funding, research, and revenueopportunities; Engaging with Federal and state governments and policy leaders to develop strategiestoimprovethelikelihoodclusterswillcontinuetogrow;and Collecting, reporting, and utilizing data that creates and influences cluster growth.
NorTechbelievesinthevalueofregionalinnovationclustersasabottomsup approachtocreatingjobsandmakingtheUnitedStatesmoregloballycompeti tive, specifically in Northeast Ohio. Clusters result in numerous benefits for a region such as creating new, higher wage jobs; providing regional business op portunitiesthatarelesssusceptibletooffshoring;stabilizingdiversecommuni tiesbyrepurposingidleassetsandhumancapital;andincreasingtheexportof regionallyproducedmanufacturedgoodstoothermarkets.
1. See www.nortech.org/clusters/regionalinnovationcluster and www.nortech.org/aboutus/whatwe doformoreinformation.
7 5
StartupAmerica
IntheUnitedStates,firmsyoungerthan5yearscreateasignificantfractionof newjobs.11However,manyyoungfirmsstruggletosurvivebeyondthestartup period.Therateofnewbusinessstartupshasbeendecliningoverthepasttwo andahalfdecades,meaningfewerwouldbeentrepreneursarerisingtothe challengeofturningnewideasintonewbusinesses(seefigure7.1).
Figure 7.1
U.S. Private Business Startup Rate, 19802009
14
13
12
11
10
9
8
7
1980 1984 1988 1992 1996 2000 2004 2008
Source: U.S. Census Bureau, Center for Economic Studies, Business Dynamics Statistics.
LaunchedinJanuary2011,StartupAmericaisaWhiteHouseinitiativetoacceler atehighgrowthentrepreneurshipthroughouttheNation.PresidentObamahas calledonboththeFederalgovernmentandtheprivatesectortodramaticallyin creasetheprevalenceandsuccessofentrepreneursacrossthecountry.
76
First,theObamaAdministrationsStartupAmericainitiativeisanongoingseries ofpolicyactionstoimprovetheenvironmentforhighgrowthentrepreneurship infivekeyareas: (1)Increasingaccesstocapitalforhighgrowthcompanies(includingzerocapital gainstaxonqualifiedsmallbusinessinvestmentsandstreamlinedrulesforpri vatefundsthatinvestinlowerincomecommunities); (2)Creatingmentorshipandeducationalopportunitiesforentrepreneurs(in cludingnewopportunitiesforcleanenergyentrepreneurs,militaryveterans,and undergraduateengineers); (3)Reducingbarriersthatcanlimitthegrowthofentrepreneursthroughtheso licitationofrecommendationsregardingthemodificationoreliminationofregu lations; (4)AcceleratinginnovationfromlabtomarketforfederallyfundedR&D(includ inglowercostaccesstogovernmentpatentedenergytechnology,andnewfund ingforregionalproofofconceptcentersandregionallyinterconnectednetworks ofresearchers,managersandcapitalacrossthebusiness,educationandgovern mentsectors);and (5)DrivinganationwideeffortbytheAdministrationtoengagepotentialnew opportunitiesinindustrieslikehealthcare,cleanenergy,andlearningtechnolo gies. Second,theStartupAmericaPartnershiphasbeenlaunched,whichconsistsofal liancesofentrepreneurs,corporations,universities,foundations,andotherlead erswhosegoalistoencourageinnovative,highgrowthU.S.startups.TheStartup AmericaPartnershiphascreatedanationalonlinenetworkwherehighgrowth entrepreneurscanestablishfreemembershipprofilesandunlockresourcesfrom dozensofcompaniesfromfreesoftwaretofreebusinessfilingtosteeplydis countedcomputerhardware.Thetotalvalueoftheseresourcesisover$730mil lionandclimbing.
77
PromotingAmericasExportsandImprovingAccess toForeignMarkets
Avibrantandexpandingexportmarketisessentialforeconomicgrowthandfor creatingnewjobs.Manyoftherecommendationspreviouslydiscussedtoin creaseinnovationintheUnitedStatesmayalsoleadtomoreexports,whichin turnshouldstimulatefurtherinnovationintheUnitedStates.IftheUnitedStates canproducehigherqualitygoodsandservicesmoreefficiently,itwillbemore competitiveinforeignmarkets.However,U.S.exporters,particularlymanufactur ingfirms,oftenarenotonlycompetingagainstprivatesectordomesticfirmsbut arealsocompetingagainstforeignfirmsthatmaybenefitfromforeigngovern mentsupportforparticularmanufacturingsectors.Forexample,insomein stances,countriesdonotallowtheforeignexchangeratesoftheircurrenciesto befullyflexibleandmarketdetermined.ThiscanmakeU.S.goodsmoreexpen sivethantheyotherwisewouldbe,limitingU.S.exportgrowth.12 EnsuringthatU.S.businesseshavefairandopenaccesstoforeignmarketsisan importantcomponentofincreasingU.S.exports.Enforcingtheobligationsof othercountrieswithrespecttomarketaccesscannotfalltobusinessesthatex portbutmustbedonebytheU.S.government.Thisisyetanotherareawhere thereisaclearroleforgovernmenttoimprovethecompetitivenessoftheUnited States.Someprogressalreadyhasbeenmadeonthisfront. Therefore,inadditiontopursuingpoliciestoimproveinnovation,theFederal governmentcanplayaroleinpromotingU.S.exports.InMarch2010,President ObamalaunchedtheNationalExportInitiative(NEI),whichbringsasustained, vigorouscommitmenttoensurefairandopenexportmarketforAmericanbusi nessesandisanambitiousefforttohelpAmericanbusinessesthatselltheir goodsandservicesabroad.ByunlockingforeignmarketsforU.S.goodsandser vices,improvingaccesstocreditforU.S.businesses,andundertakingothermea sures,theNEIseekstodoubleU.S.exportsinfiveyearsandsupportmillionsof additionaljobs.13 Additionally,Congressapprovedthreefreetradeagreements,withPanama,Co lombia,andSouthKoreainquicksuccessioninthefallof2011,markingthebig geststepforwardinopeningforeignmarketstoAmericangoodsandservices sincetheNorthAmericanFreeTradeAgreementandtheUruguayRoundofthe
78
mid1990s.Oftheseagreements,themostcommerciallysignificantwastheKo reaUnitedStatesfreetradeagreement(KORUS).AstudybytheInternational TradeCommissionestimatedthattherenegotiatedagreementwithKoreacould boostannualU.S.goodsexportstoKoreabyasmuchas$11billion.14Theagree mentalsoincludedKoreancommitmentsexpectedtoresultinconsiderableex pansionofU.S.servicesexports. InNovember2009,PresidentObamaannouncedtheUnitedStatesintentionto participateintheTransPacificPartnership(TPP)negotiations,withthegoalof concludingahighstandardfreetradeagreementwithcountriesinthehugeand growingmarketsoftheAsiaPacificregion.Thisnextgenerationagreement wouldaddressnotonlythecoreissuestraditionallyincludedintradeagree ments,butalsonewissuessuchasmakingtheregulatorysystemsofTPPcoun triesmorecompatiblesoU.S.companiescanoperatemoreseamlesslyinTPP markets,andhelpinginnovative,jobcreatingsmallandmediumsizedenter prisesparticipatemoreactivelyininternationaltradeandininvestmentininno vativeproductsandservices,includingdigitaltechnologies,andmechanismsto ensurestateownedenterprisescompetefairlywithprivatecompanies.Inaddi tiontotheUnitedStates,theothercountriesparticipatinginthenegotiations currentlyincludeAustralia,Chile,Peru,Singapore,BruneiDarussalam,Malaysia, NewZealand,andVietnam.Tenroundsofnegotiationsamongtheseprospective partnershavealreadytakenplace,withthemostrecentroundhavingbeenheld inMalaysiainDecember2011.InNovember2011,Japan,Canada,andMexico announcedtheirinterestinjoiningthenegotiations. Thecostsoffinancingexportoperationsposeanadditionalbarrierforsmaller firms.Financialinstitutionsmayerroneouslyregardasmallfirmthatishighlyde pendentonexportsasariskierborrowerthanonethatisentirelydomesticinits focus.ThemissionoftheExportImportBank(ExIm),alongwithotherinstitu tions,istoproactivelysupportsmallandmediumsizedfirms.Infiscalyear2010, ExImauthorized$5billion20percentofauthorizationstosupportsmallbusi nessesasprimaryexporters.15ThetwoExImproductsmostusedbyU.S.small businessesareexportcreditinsuranceandworkingcapitalguarantees.Export creditinsuranceprotectsexportersandlendersfromtheriskofbuyernonpay mentforcommercialorpoliticalreasonsandenablesexporterstoextendcredit tointernationalcustomers.Workingcapitalguaranteescover90percentofthe outstandingbalanceofworkingcapitalloanstoexporterssupportedbyexport
79
relatedinventoryandaccountsreceivable.Infiscalyear2010,theBankissued 2,524insurancepoliciestosmallbusinessexporters90percentofthetotal numberofpoliciesfortheyear.TheBankalsoauthorizedarecord$2.2billionin workingcapitalguarantees,70percentofwhichsupportedsmallbusiness.16
CorporateTaxes
TheUnitedStateshasthesecondhigheststatutorycorporateincometaxratein theOrganisationforEconomicCooperationandDevelopment(OECD).Japanhas thehighest.However,theUnitedStatesdoesnotrankashighintermsoftheav erageeffectivetaxratepaidbycorporations.17Onereasonisthatthecorporate taxcodehasnumerousprovisionsforspecialdeductions,credits,andothertax expendituresthatbenefitcertainactivities. Thecombinationofahighstatutoryrateandnumerousdeductionsandexclu sionsresultsinaninefficienttaxsystem.Thehighstatutoryratediscouragessav ingandinvestment,whilethefeaturesthatlimitthetaxbasefavordebtover equity,encourageinvestmentincertainfavoredassetsoverotherkindsofinvest ment,anddrivecapitaloutofthecorporatesectorintononcorporateformsof business.TherearealsoinefficienciesduetothewaytheUnitedStatestaxesthe foreignincomeofU.S.multinationalcorporations.Thelowerforeigncorporate taxrates,alongwiththefactthatothercountriesuseaterritorialsystemofcor poratetaxation,placesU.S.multinationalcompaniesatacostdisadvantage. Finally,accordingtothePresidentsEconomicRecoveryAdvisoryBoard,thecom plexityofthecodeanditsincentivesfortaxavoidanceresultincoststofirmsthat areestimatedtoexceed$40billionperyearormorethan12percentoftherev enuescollected.AllofthesefactorsacttoreducetheproductivityofAmerican businessesandAmericanworkers,increasethelikelihoodandcostoffinancial distress,anddrainresourcesawayfrommorevaluableuses.18 Giventheinefficienciesdescribedabove,proposalstoreformthecorporatetax codewouldlikelytradealowerstatutoryrateforabroadertax(thatis,fewer provisionsthatfavoronetypeofinvestmentoveranother)whilealso,perhaps, dealingwiththeunequaltreatmentofU.S.multinationalsrelativetoothercoun tries.However,therearetradeoffstomovingtoamoresimplifiedcorporatetax
7 10
code,andchangescoulddampeninnovation.19Forexample,R&Dcurrentlyre ceivespreferentialtreatmentthroughataxcredit,andtheAdministrationhasar guedforsimplifying,enhancing,andexpandingtheR&Dtaxcreditasawayof helpingcompaniescreatejobsandincreaseproductivity.20
EnsuringaWellFunctioningIntellectualPropertyRights System
Awellfunctioningintellectualpropertyrights(IPR)systemiscrucialforencour aginginnovationandcreatingjobs.Absenteffectivelegalprotectionsforinnova tors,otherbusinessescanimmediatelyexploitaninnovatorsidea,undermining theincentivetoinventinthefirstplace.Publicpolicysolvesthisproblemthrough intellectualpropertyrightsallowinglimited,shortrungrantsofexclusiverights tocatalyzeinventiveactivity.21Andtosafeguardthoseintellectualproperty rights,theAdministrationissuedaWhitePaperinMarch2011with20recom mendationsforlegislativechangesbasedonitscomprehensivereviewofexisting lawinordertoensurethatAmericanworkersandbusinessesareprotected,ex emplifyingtheAdministrationscommitmenttogrowjobsandexportsaswellas toprotectthehealthandsafetyoftheAmericanpeople.22 IntheUnitedStates,intellectualproperty(IP)significantlyinfluencesinnovation andeconomicgrowth.IndustriesthatarethemostintensiveusersofIPprotec tionsdirectlysupportmillionsofjobsacrossallsectorsoftheeconomy.Unfortu nately,theU.S.patentsystemhasnotalwaysfunctionedinamannerconducive toencouraginginnovation.23Inparticular,itiscrucialthattheUnitedStatesim proveitsIPsystembyreducingbothreviewtimesaswellasthecostoflitigation relatedtopatents.Fortunately,significantprogresshasbeenmadeinreforming thepatentsystemintheUnitedStates.WiththepassageoftheAmericaInvents ActinSeptember2011,theUnitedStatesPatentandTrademarkOffice(USPTO) willbeabletooffer,underaprioritizedexaminationprocess,anewfasttrackfor reviewingpatentswithaguaranteed12monthapprovaltimetableforcertain patents.24AdditionalresourcesareprovidedintheAct,allowingUSPTOtocon tinuereducingthebacklogofpatentapplicationsandthetimeittakestoreview them.USPTOwillofferentrepreneursnewwaystomakelitigationregardingpat entvaliditylessburdensomeandatcostssignificantlylessexpensivethangoing tocourt.
7 11
IPprotectionabroadisalsocrucialforU.S.firms.InfringementofIPRinmarkets abroadcausessignificantfinanciallossesforrightsholdersandlegitimatebusi nessesaroundtheworldandundermineskeyU.S.comparativeadvantagesinin novationandcreativitytothedetrimentofAmericanbusinessesandworkers. TheAdministrationsJointStrategicPlanonIntellectualPropertyEnforcement,is suedinJune2010bytheWhiteHouseIntellectualPropertyEnforcementCoordi nator,laysoutacomprehensivestrategyfortheU.S.Governmenttostrengthen enforcementofintellectualpropertyrights,bothathomeandabroad.25Initia tivesontheinternationalfrontincludetheU.S.governmentaggressivelypursu ingmeaningfulimprovementsintheprotectionandenforcementofU.S. intellectualpropertywithourtradingpartners.Thisincludesdirectbilateralen gagementtoincreaseenforcement,participationinregionalandmultilateral fora,andthenegotiationofnewIPRsrelatedinstruments,suchastheAntiCoun terfeitingTradeAgreement,and,whereappropriate,enforcingourrightsusing thedisputesettlementproceduresoftheWorldTradeOrganization. TheU.S.governmentisalsoalerttoemergingconcernsregardinginnovationand industrialpoliciesinsomeofourtradingpartnersthatmaydisadvantageU.S.IP rightsholders.Suchpoliciesincludemeasuresthatconditiongovernmentbene fitsonthelocaldevelopmentorownershipofIPR,orthatconditionmarketac cessorotherbenefitsonthetransferoftechnology,IPRorotherproprietary informationfromforeigncompaniestodomesticentities.Theymayalsoinclude measurestorestricttheabilityofU.S.rightsholderstofreelynegotiatetheterms andconditionsoftheuseoftheirIPRorimpedimentstoenforcecontractualar rangements. The Obama Administration is committed to an intellectual property rightssys tem that recognizes thatIPrightsarefullyconsistentwithandindeeden ableothercorevaluessuchasthenormsoflegitimatecompetition,free speech,fairprocess,andtheprivacyofusers.TheAdministrationisalsocom mitted to addressing international health and public safety challenges. For exam ple,theUSPTOhasissuedarequestforinformationtodevelopstrategiesto incentivizehumanitariantechnologiesthroughtheintellectualpropertysystem.
7 12
Endnotes
1.TheObamaAdministration,throughitsStrategyforAmericanInnovation,iscommittedtosupportingthesear eas,aswellasothers.SeeAStrategyforAmericanInnovation:SecuringOurEconomicGrowthandProsperity, www.whitehouse.gov/innovation/strategy. 2.Porter1998. 3.MuroandKatz2010. 4.Estrin2009. 5.Porter1998,8183. 6.Delgado,Porter,andStern2011. 7.WheatonandLewis2002. 8.GibbsandBernat2001. 9.CenterforEconomicDevelopmentandBusinessResearch2008. 10.GreenstoneandMoretti2004;Greenstone,HornbeckandMoretti,2010. 11.Haltiwanger,Jarmin,andJavier2010. 12.EzellandAtkinson2011,26. 13.NationalEconomicCouncil2011,AStrategyforAmericanInnovation,5and24. 14.UnitedStatesInternationalTradeCommission2007. 15.ExportPromotionCabinet2010,4. 16.ExportPromotionCabinet2010,4. 17.ThePresidentsEconomicRecoveryAdvisoryBoard2010,65. 18.ThePresidentsEconomicRecoveryAdvisoryBoard2010,65. 19.Atkinson2011. 20.NationalEconomicCouncil2011,AStrategyforAmericanInnovation,42.
21.NationalEconomicCouncil2011,AStrategyforAmericanInnovation,11.
22.WhiteHouse2011a.
23.NationalAcademyofSciences.NationalAcademyofEngineering,andInstituteofMedicine2010,57.
24.WhiteHouse2011b.
25.WhiteHouse2010.
References
Atkinson,RobertD.2011.TheCaseforIncentivesintheU.S.CorporateTaxCode.Washington,DC:TheInforma tionTechnologyandInnovationFoundation,September27;www.itif.org/files/2011atkinsontaxincentives.pdf. CenterforEconomicDevelopmentandBusinessResearch.2008.KansasAviationManufacturing.Wichita,KS:W. FrankBartonSchoolofBusiness,WichitaStateUniversity,September;webfiles.wichita.edu/cedbr/AvFINAL.pdf. Delgado,Mercedes,MichaelE.Porter,andScottStern.2011.,Clusters,Convergence,andEconomicPerformance. (March);www.isc.hbs.edu/pdf/DPS_Clusters_Performance_20110311.pdf.[Seereferenceinchapter1.] Estrin,Judy.2009.ClosingtheInnovationGap:ReignitingtheSparkofCreativityinaGlobalEconomy.NewYork: McGrawHill. TheExportPromotionCabinet.2010.ReporttothePresidentontheNationalExportInitiative:TheExportPro motionCabinetsPlanforDoublingU.S.ExportsinFiveYears.Washington,DC:U.S.DepartmentofCommerce, September2010;www.whitehouse.gov/sites/default/files/nei_report_91610_full.pdf. Ezell,StephenJ.,andRobertD.Atkinson.2011.TheCaseforaNationalManufacturingStrategy.Washington,DC: TheInformationTechnologyandInnovationFoundation,April. Gibbs,RobertM.,andG.AndrewBernat,Jr.2001.RuralIndustryClustersRaiseLocalEarnings.RuralDevelop mentPerspectives12(March):1825;www.ers.usda.gov/Publications/RDP/RDP697/RDP697d.pdf. Greenstone,Michael,andEnricoMoretti.2004.BiddingforIndustrialPlants:DoesWinningaMillionDollar PlantIncreaseWelfare?DepartmentofEconomicsWorkingPaper0439.Cambridge,MA:MassachusettsInsti tuteofTechnology. Greenstone,Michael,RichardHornbeckandEnricoMoretti,"IdentifyingAgglomerationSpillovers:Evidence fromWinnersandLosersofLargePlantOpenings"JournalofPoliticalEconomy,118(3),2010.
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Haltiwanger, John C., Jarmin, Ron S. andMiranda,Javier.2010.WhoCreatesJobs?Smallvs.Largevs.Young. National Bureau of Economic Research, Working PaperNo.16300(August2010,RevisedNovember2011): 2425;www.nber.org/papers/w16300.pdf. Muro,Mark,andBruceKatz.2010.TheNewClusterMoment:HowRegionalInnovationClustersCanFoster theNextEconomy.MetropolitanPolicyProgramatBrookingsInstitution,September2010.www.brookings.edu /~/media/Files/rc/papers/2010/0921_clusters_muro_katz/0921_clusters_muro_katz.pdf. NationalAcademyofSciences,NationalAcademyofEngineering,andInstituteofMedicine.2010.RisingAbove theGatheringStorm,Revisited:RapidlyApproachingCategory5.Washington,DC:NationalAcademiesPress. NationalEconomicCouncil,CouncilofEconomicAdvisers,andOfficeofScienceandTechnologyPolicy.2011.A StrategyforAmericanInnovation:SecuringOurEconomicGrowthandProsperity.Washington,DC,February. Porter,MichaelE.1998.ClustersandtheNewEconomicsofCompetition.HarvardBusinessReviewwww.nap. edu/catalog/11463.html(NovemberDecember):8183. ThePresidentsEconomicRecoveryAdvisoryBoard.2010.TheReportonTaxReformOptions:Simplification, Compliance, and Corporate Taxation. Washington, DC: White House, August; www.whitehouse.gov/sites/ default/files/microsites/PERAB_Tax_Reform_Report.pdf. UnitedStatesInternationalTradeCommission(USITC).U.S.KoreaFreeTradeAgreement:PotentialEconomy wideandSelectedSectoralEffects.InvestigationNo.TA210424.USITCPublication3949.September2007; www.usitc.gov/publications/docs/pubs/2104F/pub3949.pdf. Wheaton,WilliamC.,andMarkJ.Lewis.2002.UrbanWagesandLaborMarketAgglomeration.JournalofUr banEconomics51(May):542562. WhiteHouse.OfficeofthePressSecretary.2010.JointStrategicPlanonIntellectualPropertyEnforcement.2010; www.whitehouse.gov/sites/default/files/omb/assets/intellectualproperty/intellectualproperty_strategic_plan. pdf. WhiteHouse.OfficeofthePressSecretary.2011a.AdministrationsWhitePaperonIntellectualPropertyEn forcement Legislative Recommendations. March 2011; www.whitehouse.gov/sites/default/files/ip_white_ paper.pdf. WhiteHouse.OfficeofthePressSecretary.2011b.PresidentObamaSignsAmericaInventsAct,Overhaulingthe PatentSystemtoStimulateEconomicGrowth,andAnnouncesNewStepstoHelpEntrepreneursCreateJobs. Press Release, September 16; www.whitehouse.gov/thepressoffice/2011/09/16/presidentobamasigns americainventsactoverhaulingpatentsystemstim.
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Moving
Forward
Throughoutitshistory,theUnitedStateshasfacednumerouschallengesthat havethreatenedtoderailitseconomicgrowthandprosperity.However,the UnitedStatesalwayshasbeenabletomeetandovercomethesechallenges,and insodoing,increasethestandardoflivingofitscitizens.Theprivatesectorhas beentheprimarydriverofthisincreasedprosperity,asbusinessesinnovatetore maincompetitive. Workingwiththeprivatesector,governmenthasalsoplayedakeyroleinsup portinginnovationbyprovidingthenecessarybuildingblocks.Inparticular,the Federalgovernmenthasprovidedfundingandsupportforbasicresearch,fund ingthathasbeenimportanttomanyofthemajorinnovationsofthe20thcentury. TheFederalgovernmentalsohelpedencouragethecreationofarguablythe worldsleadingsystemofhighereducation.Firstratecollegesanduniversities traintheworkersneededtoleadinnovativeactivitiesintheprivatesector.Thein frastructureneededbybusinesstoinnovateandcompete,fromrailroadsinthe 19thcenturytobroadbandInternetnetworksinthelate20thandearly21stcen tury,wasbuiltwithsupportfromtheFederalgovernment.Inthesethreeareasa governmentroleisnecessary,astheprivatesectorwillnotinvestsufficientlyon itsown. Inthefirstdecadeofthe21stcentury,theU.S.economywasnolongergrowingas rapidlyasithadinthepast:jobcreationslowed,andincomelevelsstagnatedfor largesegmentsofthepopulation.Itisnocoincidencethattheabilityofthe UnitedStatestoinnovatealsosufferedduringthisperiod.Federalsupportforba sicresearchhasnotkeptpacewiththegrowthoftheeconomy,theeducation systemhasnotdoneagoodenoughjobpreparingstudentstobecomeskilled workers,andthenationsinfrastructurehasnotkeptupwithgrowingneedsof theU.S.populationandU.S.businesses. OtherfactorshavealsodiminishedtheinnovativecapacityoftheUnitedStates. Themanufacturingsector,akeydriverofinnovationinthepast,hasbeenexperi encingalongperiodofdecline.Atthesametime,theUnitedStateshashaddiffi cultyaccessingcertainforeignmarkets,enforcingintellectualpropertyrights aroundtheworld,andachievingabalancedtaxsystem.Eachofthesefactors,as wellasothershighlightedinthisreport,needtobeaddressediftheUnitedStates istoregainitspreeminentinnovativecapacity.
Moving Forward 1
Althoughthelistofproblemsislong,andthoughitwilltaketimetoovercome them,thereisalsoalonglistofpolicytoolsthatwillallowtheUnitedStatesto addressandcorrecttheseproblems.Anysensibleandsuccessfulapproachto overcomingtheseproblemsmuststartbyimplementingthefollowing10keypol icyproposals:
1.Continuetosupportgovernmentfundingforbasicresearch
FortheUnitedStatestomaintainaleadershiproleininnovation,itiscriticallyim portantthattheFederalgovernmentcontinueitssupportforbasicresearch. Also,sincequalityscientificeducationandscientificadvancestakemanyyears, investmentsinresearchshouldbestabletoimprovecareerprospectsofnewsci encedoctoratesandtoencourageyoungerstudentstochoosescienceasaca reer.
2.EnhanceandextendtheR&Dtaxcredit
AlthoughtheFederalgovernmentsroleinR&Discrucial,privateR&Dinvest mentremainsimportantandasimplified,enhanced,andextendedcorporate R&Dtaxcreditwouldcreatetheproperincentivesforprivateindustrytounder taketherisksassociatedwithR&Dspending.
3.Speedthemovementofideasfrombasicsciencelabsto commercialapplication
Entrepreneurscanfinditdifficulttogetearlystagefundingfortheirideas.Other barrierstocommercializationexist,suchaslackofbusinessexperienceonthe partofwouldbeentrepreneurs.ProofofConceptcenterscanhelpovercome thisbarrierbysupportingentrepreneursatallstagesofthedevelopmentprocess andthesecentersneedfurtherencouragement.TheAdministrationiscommitted tocontinuingitsi6GreenChallengestohelpdevelopthesecenters.Otherinitia tivesthatshouldbeencouragedincludetheAdvancedManufacturingPartner shipwhereindustry,academiaandgovernmentcancollaborateandaccelerate thedevelopmentofemergingtechnologies.
4.AddressSTEMshortcomings
Poor STEM participation and performance in thenationsschoolsmustberem edied,asstudentsareleavingsecondaryschoolspoorlytrainedtocontinue
2 Moving Forward
studyinginSTEMfields.Oneavenuetoaddresstheseproblemsisinitiativessuch asEducatetoInnovate,publicprivate partnerships that expand STEMeduca tiontoallstudents,particularlythoseof underrepresented groups, through interactive games andothermethods.Another avenue to promote and prepare disadvantaged youthanddislocatedworkersforSTEMcareers,whilesi multaneouslyenhancingthecompetitivepositionoflocalandregionalemploy ers,wasDOLsSTEMOpportunitiesintheWorkforceSystemInitiative.These 2009grantsfocusedprimarilyonexpandingandaligningcurrentandnewSTEM workforceeducationandtrainingstrategies,activities,andresourcesinOneStop CareerCenters.Also,additionalfundingisneededtotrainmoreSTEMteachers. ProgramssuchasNSFsWideningImplementationandDemonstrationofEvi dencebasedReforms(WIDER)shouldbeimplementedtoimproveundergradu ateSTEMinstructionandoutcomesatuniversities.
5.Increasespectrumforwirelesscommunications
TheUnitedStatesfacesaspectrumcrunchinthecomingyears,whichcouldse verelyconstraininnovation.ThegoalssetbytheNationalWirelessInitiative,in cludedoublingtheamountofspectrumavailableforwirelessbroadbandservices andhelpingruralareasgainaccesstowirelessbroadbandservices.
6.Increaseaccesstodatatohelpspurinnovation
Openaccesstodataisacrucialcomponentofasuccessfulinnovationpolicy,and stepstakentoencouragethisincludethelaunchofdata.gov,aplatformthatpro videspublicaccesstovaluabledatasets;aninitiativetosimplifyaccesstohigh valuedataby,forexample,creatingstandards;andtheuseofchallengesand prizestobringtogethercommunitiesofinnovatorstohelpspurnewtechnolo gies.Theseeffortsneedtobecontinuedandexpanded.
7.CoordinateFederalsupportformanufacturing
Forthemanufacturingsectortoreverseitsdecline,itisvitaltocontinuefunding andsupportingmanufacturingspecificprogramslikeNISTsMEP,SelectUSA,and theindividualpiecesoftheAdvancedManufacturingPartnership.Inaddition,it isimportanttorefocusandimprovecoordinationofmanufacturingprograms undertheOfficeofManufacturingPolicysnewstructureledbycochairsNEC DirectorSperlingandCommerceSecretaryBryson.
Moving Forward 3
8.Continueandstrengtheneffortstofosterregionalclusters andentrepreneurship
Evidenceshowsthatregionalinnovationclustersincreasejobsandwages.Multi pleeffortsarealreadyunderwaywithintheFederalgovernmenttopromoteand encourageentrepreneurshipandclustersandtheseeffortsmustcontinue.Inthe areaofencouragingclusters,effortsincludethei6Challenge(acompetitivegrant programthatencouragesinnovativepartnershipmodels),EDAseffortsthrough theTaskforcefortheAdvancementofRegionalInnovationClusters,theDepart mentofAgriculturesinitiativestobringregionalstrategiestoruralareasandthe recentlyreauthorizedSBASmallBusinessInnovationResearchandSmallBusiness TechnologyTransferprograms.Toencourageentrepreneurs,theStartupAmerica initiativeisincreasingaccesstocapitalandfacilitatingmentorshipsandthe StartupAmericaPartnershiphaslaunchedanonlinenetworkthatprovidesentre preneursaccesstovaluableresourcesfromdozensofcompanies.Effortslike thesewillneedcontinuedsupportintheyearsaheadinordertoensureentre preneurshavetheresourcestheyneedtohelpdriveinnovation.
9.PromoteAmericasexportsandimproveaccesstoforeign markets
ItisvitalthatU.S.businesseshavefairandopenaccesstoforeignmarkets.To helpensurefirmshavethisaccess,theAdministrationlaunchedtheNationalEx portInitiative(NEI),andCongressenactedlegislationthePresidentsubmittedto implementfreetradeagreementswithPanama,Colombia,andSouthKorea.To buildonthismomentum,theUnitedStatesisparticipatingintheTransPacific Partnershipnegotiations,afreetradeagreementwithkeypartnersintheAsia Pacificregion.Thisagreement,whenfinalized,willbeasignificantstepforward asitnotonlyaddressestraditionaltradeissues,butalsoincludesregulatoryhar monization,tradeandinvestmentininnovativeproductsandservices(including digitaltechnologies),andmechanismstoensurestateownedenterprisescom petefairlywithprivatecompanies.
10.Ensurethattheconditionsexistinwhichprivate enterprisecanthrive
TheprivatesectoristheengineofinnovationintheUnitedStatesanditiscrucial thatbothestablishedfirmsandentrepreneursintheprivatesectorhavethebest possibleenvironmentinwhichtoinnovate.Tothisend,areasthatshouldbethe
4 Moving Forward
focusofattentionintheUnitedStatesintheyearsaheadincludereformingthe corporatetaxsystem,andensuringthattheintellectualpropertysystemcontin uestofunctioninawaythatencouragesgrowth. TheUnitedStatesisfacingeconomicchallengesasimportantandconcerningas anywehavefacedinourhistory.Meetingthesechallengeswillrequireeffortand theenactmentofpolicies,suchasthoselistedaboveandothersmentioned throughoutthisreport.However,thereislittledoubtthattheUnitedStatescan meetthesechallengesandsubsequentlybecomemoreinnovativeandcompeti tive,providingnewjobs,newbusinesses,andnewindustries.
Moving Forward 5
SupplementalMaterials
Supplemental Materials 1
2 Supplemental Materials
Innovation Advisory Board Members
RobertAtkinson FounderandPresident,InformationTechnologyandInnovationFoundation RebeccaO.Bagley President&CEO,NorTech JimClements President,WestVirginiaUniversity AbbyJosephCohen PresidentoftheGlobalMarketsInstituteandSeniorInvestmentStrategist,

GoldmanSachs
LarryCohen President,CommunicationsWorkersofAmerica JudyEstrin CEO,JLabs RebeccaHenderson SenatorJohnHeinzProfessorofEnvironmentalManagement attheHarvardBusinessSchool IrwinJacobs Director(CofounderandformerCEO),Qualcomm ArthurLevinson Chairman,Genentech,Inc.; Apple, Inc. JamesManyika Director(SeniorPartner),McKinsey&Company;Director,
McKinseyGlobalInstitute
NataliaOlsonUrtecho President&CEO,EG(formerlyEcolibriumGroup) KimPolese Chairman,ClearStreetInc. LucySanders CEOandCoFounder,NationalCenterforWomen&InformationTechnology JulieShimer President&CEO,WelchAllyn StephenTang President,CEO&Director,UniversityCityScienceCenter
Section604of theAmerica COMPETES Reauthorization Actof2010
STUDYONECONOMICCOMPETITIVENESSANDINNOVATIVECAPACITYOF UNITEDSTATESANDDEVELOPMENTOFNATIONALECONOMICCOMPETITIVE NESSSTRATEGY. (a)Study (1)INGENERAL Notlaterthan1yearafterthedateoftheenactmentofthis Act,theSecretaryofCommerceshallcompleteacomprehensivestudyofthe economiccompetitivenessandinnovativecapacityoftheUnitedStates. (2)MATTERSCOVERED Thestudyrequiredbyparagraph(1)shallincludethefol lowing: (A)AnanalysisoftheUnitedStateseconomyandinnovationinfrastructure. (B)Anassessmentofthefollowing: (i)ThecurrentcompetitiveandinnovationperformanceoftheUnited Stateseconomyrelativetoothercountriesthatcompeteeconomicallywith theUnitedStates. (ii)Economiccompetitivenessanddomesticinnovationinthecurrentbusi nessclimate,includingtaxandFederalregulatorypolicy. (iii)ThebusinessclimateoftheUnitedStatesandthoseofothercountries thatcompeteeconomicallywiththeUnitedStates. (iv)Regionalissuesthatinfluencetheeconomiccompetitivenessandinno vationcapacityoftheUnitedStates,including (I)therolesofStateandlocalgovernmentsandinstitutionsofhigher education;and (II)regionalfactorsthatcontributepositivelytoinnovation. (v)TheeffectivenessoftheFederalGovernmentinsupportingandpromot ingeconomiccompetitivenessandinnovation,includinganyduplicativeef fortsof,orgapsincoveragebetween,Federalagenciesanddepartments. (vi)Barrierstocompetitivenessinnewlyemergingbusinessortechnology sectors,factorsinfluencingunderperformingeconomicsectors,uniqueis suesfacingsmallandmediumenterprises,andbarrierstothedevelop mentandevolutionofstartups,firms,andindustries. (vii)Theeffectsofdomesticandinternationaltradepolicyonthecompeti tivenessoftheUnitedStatesandtheUnitedStateseconomy. (viii)UnitedStatesexportpromotionandexportfinanceprogramsrelative toexportpromotionandexportfinanceprogramsofothercountriesthat competeeconomicallywiththeUnitedStates,includingCanada,France, Germany,Italy,Japan,Korea,andtheUnitedKingdom,withnotingofex portpromotionandexportfinanceprogramscarriedoutbysuchcountries thatarenotanalogoustoanyprogramscarriedoutbytheUnitedStates. (ix)Theeffectivenessofcurrentpoliciesandprogramsaffectingexports,in cluding anassessmentofFederaltraderestrictionsandState andFederal exportpromotion activities. (x) Theeffectiveness of the FederalGovernmentand Federallyfundedre search anddevelopmentcenters insupportingandpromotingtechnology commercialization andtechnologytransfer.
(xi)Domesticandinternationalintellectualpropertypoliciesandpractices. (xii)Manufacturingcapacity,logistics,andsupplychaindynamicsofmajor exportsectors,includingaccesstoaskilledworkforce,physicalinfrastruc ture,andbroadbandnetworkinfrastructure. (xiii)FederalandStatepoliciesrelatingtoscience,technology,andeduca tionandotherrelevantFederalandStatepoliciesdesignedtopromote commercialinnovation,includingimmigrationpolicies. (C)Developmentofrecommendationsonthefollowing: (i)HowtheUnitedStatesshouldinvestinhumancapital. (ii)HowtheUnitedStatesshouldfacilitateentrepreneurshipandinnova tion. (iii)Howbesttodevelopopportunitiesforlocallyandregionallydrivenin novationbyprovidingFederalsupport. (iv)Howbesttostrengthentheeconomicinfrastructureandindustrialbase oftheUnitedStates. (v)HowtoimprovetheinternationalcompetitivenessoftheUnitedStates. (3)CONSULTATION (A)INGENERAL Thestudyrequiredbyparagraph(1)shallbeconductedin consultationwiththeNationalEconomicCounciloftheOfficeofPolicyDevel opment,suchFederalagenciesastheSecretaryconsidersappropriate,andthe InnovationAdvisoryBoardestablishedundersubparagraph(B).TheSecretary shallalsoestablishaprocessforobtainingcommentsfromthepublic. (B)INNOVATIONADVISORYBOARD (i)INGENERAL TheSecretaryshallestablishanInnovationAdvisoryBoard forpurposesofobtainingadvicewithrespecttotheconductofthestudy requiredbyparagraph(1). (ii)COMPOSITION TheAdvisoryBoardestablishedunderclause(i)shallbe comprisedof15members,appointedbytheSecretary (I)whoshallrepresentallmajorindustrysectors; (II)amajorityofwhomshouldbefromprivateindustry,includinglarge andsmallfirms,representingadvancedtechnologysectorsandmore traditionalsectorsthatusetechnology;and (III)whomayincludeeconomicorinnovationpolicyexperts,Stateand localgovernmentofficialsactiveintechnologybasedeconomicdevel opment,andrepresentativesfromhighereducation. (iii)EXEMPTIONFROMFACA TheFederalAdvisoryCommitteeAct(5U.S.C. App.)shallnotapplytotheadvisoryboardestablishedunderclause(i). (b)Strategy (1)INGENERAL Notlaterthan1yearafterthecompletionofthestudyrequired bysubsection(a),theSecretaryshalldevelop,basedonthestudyrequiredby subsection(a)(1),anational10yearstrategytostrengthentheinnovativeand competitivecapacityoftheFederalGovernment,Stateandlocalgovernments, UnitedStatesinstitutionsofhighereducation,andtheprivatesectorofthe UnitedStates.
(2)ELEMENTS Thestrategyrequiredbyparagraph(1)shallincludethefollow ing: (A)ActionstobetakenbyindividualFederalagenciesanddepartmentstoim provecompetitiveness. (B)ProposedlegislativeactionsforconsiderationbyCongress. (C)Annualgoalsandmilestonesforthe10yearperiodofthestrategy. (D)AplanformonitoringtheprogressoftheFederalGovernmentwithrespect toimprovingconditionsforinnovationandthecompetitivenessoftheUnited States. (c)Report (1)INGENERAL Uponthecompletionofthestrategyrequiredbysubsection(b), theSecretaryofCommerceshallsubmittoCongressandthePresidentareport onthestudyconductedundersubsection(a)andthestrategydevelopedunder subsection(b). (2)ELEMENTS Thereportrequiredbyparagraph(1)shallincludethefollowing: (A)ThefindingsoftheSecretarywithrespecttothestudyconductedunder subsection(a). (B)Thestrategyrequiredbysubsection(b).

Competitiveness and Innovative Capacity of The US - USDOC

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Competitiveness and Innovative Capacity of The US - USDOC

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TheCompetitivenessandInnovative

Preparedbythe U.S.DEPARTMENTOFCOMMERCE Inconsultationwiththe NATIONALECONOMICCOUNCIL

2. Keys to Innovation, Competitiveness, and Jobs ...................................... 2 1

3. Federal Support for Research and Development ..................................... 3 1

4. Educating Our Workforce ........................................................................... 4 1

5. Infrastructure for the 21st Century.............................................................. 5 1

Introduction ................................................................................................................ Definitions of 21 Century Infrastructure ...................................................................

How Does Our 21 Century Infrastructure Stack Up? ...............................................

Ensuring the United States 21 Century Infrastructure is Sound..............................

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

6. Revitalizing Manufacturing .........................................................................

A Strong Manufacturing Sector is Uniquely Important to the U.S. Economy.............. 6 1

7. The Private Sector as the Engine of Innovation .......................................

Moving Forward ............................................................................................... Supplemental Materials...................................................................................

Innovation Advisory Board Members ......................................................................... S 3

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

John E. Bryson Secretary of Commerce

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

TheUnitedStateshasastrongtraditionofscientificadvancement;about40per centofNobelPrizeshavebeenawardedtoU.S.citizens5anda2011studyplaced 40percentoftheworlds100mostinnovativecompaniesintheUnitedStates.6

The Interstate Highway System

Map of the United States Interstate Highway System

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

79100% 100150% 150220% 220300%

Source: Bureau of Economic Analysis, Economics and Statistics Administration calculations.

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

Source: Bureau of Labor Statistics. Note: In millions of jobs.

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

$41,000 1977 80 83 86 89 92 95 98 2001 04 07 10

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

Source: U.S. Census Bureau, Foreign Trade Division.

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

Source: OECD, PISA 2009 database.

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

No computer Computer, no Internet Dial-up Broadband

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

NationalAcademyofSciences.2010.RisingAbovetheGatheringStorm,Revisited:RapidlyApproachingCategory 5.Washington,DC:NationalAcademiesPress. NationalAcademyofSciences.2007.RisingAbovetheGatheringStorm:EnergizingandEmployingAmericafora

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

Keysto Innovation, Competitiveness, andJobs

Newindustries Newbusinesses Expansionofexistingbusi nesses Goodjobs(highwages)

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

U.S. COMPETITIVENESS AND INNOVATIVE CAPACITY

Company Arbor Networks Audyssey Laboratories

Year EmployStarted ment 2000 125 75 8 729

Federal Funding DOD, NSF NSF DOD NSF DOD

Los Angeles, 2002 CA 2005 1981

Fingerlakes Aquaculture, Inc. Google Image Sensing Systems, Inc. ImagiSonix

Groton, NY Mountain View, CA

St. Paul, MN 1984 Sterling, MA 2006

Madison, WI 1997 Ewing, NJ 1994