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News from the National Academies
Date: June 28, 1999
Contacts: Barbara Rice, Deputy Director
Dumi Ndlovu, Media Relations Assistant
(202) 334-2138; e-mail <news@nas.edu>

[ EMBARGOED: NOT FOR PUBLIC RELEASE BEFORE 5 P.M. EDT MONDAY, JUNE 28 ]

Publication Announcement

Trends in Research Investment Cause Concern
For Nation's Continued Industrial Growth

The performance of a wide spectrum of U.S. industries continues to surge while many foreign economies and competitors lag. The nation's economy has enjoyed seven years of uninterrupted growth, low inflation, record increases in new jobs, low unemployment, and the first federal budget surplus in more than 30 years. These developments stand in marked contrast to the gloomy diagnosis of the decline of U.S. manufacturing during the late 1980s. Were U.S. industries and firms really doing so poorly and foreign competitors performing so well? What can be learned from this apparent reversal that would help sustain the nation's growth?

Analysts in the 1980s mistook the high valuation of the dollar and other adverse economic conditions as signs of long-term structural deterioration, says a new report by the National Research Council's Board on Science, Technology, and Economic Policy (STEP). But U.S. industrial performance also improved in the 1990s, reflecting changes in private-sector strategies and supportive public policies. Many U.S. firms, for example, restructured their product lines instead of competing with the Japanese in established markets. Rather than pursue the market in memory chips, the semiconductor industry focused on the microprocessors and customized devices in which innovative design conferred an advantage. Cautious federal fiscal policies, deregulation, and trade liberalization were other factors that led to the country's economic resurgence. But Americans should not assume that this decade marks a long-lasting turnaround, the report warns.

STEP commissioned studies of 11 industries in the manufacturing and service sectors to examine the reasons for improved U.S. industrial performance in the 1990s. The industries examined were steel, chemicals, pharmaceuticals and biotechnology, banking, trucking, food retailing, powder metallurgy parts, apparel, computing, semiconductors, and computer disk drives. In previous studies of industry competitiveness, the service sector was overlooked because manufacturing was considered the backbone of the economy and more vulnerable to international competition. But because services generate three-quarters of the gross domestic product, employ 80 percent of the work force, and consume the entire production of commercial aircraft, drugs, and other goods, the board concluded that its analysis should be expanded to include the service sector.

Although STEP found that not all sectors of the economy and work force have benefited from the economic turnaround, this decade has seen positive trends in industrial performance, as demonstrated by increased output, export market share, and profitability. Competition at home and abroad compelled companies to switch product lines, downsize and move operations abroad, and improve their manufacturing processes. The trucking, banking, food retailing, and most manufacturing industries also invested heavily in information technology that enabled them to introduce new products and services and to operate more efficiently. As a result, the structure of most industries looks very different than it did in the 1980s. At the same time, public policies that emphasize federal budget deficit reduction and low domestic inflation, interest, and exchange rates have supported industrial growth.

But there is as much danger of misreading cyclical conditions for long-term trends when the overall picture is positive as when it is negative, the report says. Areas that need attention include:

Shifts in long-range research investment. National data and the board's case studies suggest a downward trend in public and private funding of certain research fields. As a result of budget deficit reduction and changes in agency missions, the federal government's support of electrical engineering research declined 36 percent between 1993, when research funding peaked, and 1997, the last year for which data on actual federal obligations are available. For electrical engineering research at universities, federal support dropped 32 percent during the same period. Other fields that experienced reductions of 20 percent or more in the same period include physics, mechanical engineering, and the geological sciences. Some of the industries that rely on the physical sciences and engineering fields -- electronics, chemicals, and computing -- improved profits while cutting back their support of research that could produce long-term benefits. The reasons for these shifts in priorities and their implications for the future need to be evaluated carefully.

More-reliable data for designing and evaluating public economic policies. Carefully chosen statistical data, collected nationally on a recurring basis, are needed to help track changes in research and innovation, as well as to help design and evaluate public policy. For example, science and technology indicators and data fall woefully short in illuminating the applications of information technologies in a cross-section of industries. Changes in current surveys are recommended.

An examination of the skills required of the high-technology work force and how well U.S. institutions and foreign sources are meeting the need, particularly for information technologies. Immigration quotas have been raised, some academic degree and skills training programs have expanded, and companies are paying higher premiums for skilled labor or seeking it abroad. Despite these measures, it is not clear whether there will remain a shortfall that may inhibit U.S. economic growth and innovation, and what should be done to alleviate it.

An assessment of the effects of intellectual property rights. Intellectual property is an increasingly valuable commodity, and protection of rights -- through patents, copyrights, and penalties for misappropriating trade secrets -- is a crucial incentive to investment and creativity. Strengthening and extending these rights in the United States and elsewhere in the past 25 years were appropriate and probably necessary, the report says. On the other hand, doing so has proved contentious, increasing litigation costs and sparking claims that these changes sometimes discourage competition, research, and the communication of research findings.

The study was sponsored by NASA and the National Science Foundation (NSF). The industry studies cited in the report appear in a companion volume that was supported by NASA, NSF, the U.S. Department of Energy, the Alfred P. Sloan Foundation, Ralph Landau, and the Lockheed Martin Corp. The National Research Council is the principal operating arm of the National Academy of Sciences and the National Academy of Engineering. It is a private, non-profit institution that provides independent advice on science and technology issues under a congressional charter. A committee roster follows.

Read the full text of Securing America's Industrial Strengthfor free on the Web, as well as more than 1,800 other publications from the National Academies. Printed copies are available for purchase from the National Academy Press Web site or at the mailing address in the letterhead; tel. (202) 334-3313 or 1-800-624-6242. Reporters may obtain a pre-publication copy from the Office of News and Public Information at the letterhead address (contacts listed above).


NATIONAL RESEARCH COUNCIL
Policy Division

Board on Science, Technology, and Economic Policy

Dale Jorgenson1 (chair)
Frederic Eaton Abbe Professor of Economics
Department of Economics
Harvard University
Cambridge, Mass.

William J. Spencer2 (vice chair)
Chair
SEMATECH
Austin, Texas

Bruce Alberts1 (ex officio)
President
National Academy of Sciences
Washington, D.C.

M. Kathy Behrens
Managing Partner
Robertson Stephens Investment Management
San Francisco

James F. Gibbons1,2
Professor of Electrical Engineering
Paul Allen Center for Integrated Systems
Stanford University
Stanford, Calif.

Ralph Landau2
Senior Fellow
Stanford Institute for Economic Policy Research
Stanford University
Stanford, Calif.

Richard C. Levin
President
Yale University
New Haven, Conn.

James T. Lynn
Adviser
Lazard Freres (retired)
Bethesda, Md.

Mark B. Myers
Senior Vice President
Xerox Corp.
Stamford, Conn.

Ruben Mettler2
Chairman and Chief Executive Officer
TRW Inc. (retired)
Los Angeles

Kenneth I. Shine3 (ex officio)
President
Institute of Medicine
Washington, D.C.

A. Michael Spence
Dean
Graduate School of Business
Stanford University
Stanford, Calif.

Joseph E. Stiglitz1
Senior Vice President and Chief Economist
The World Bank
Washington, D.C.

Alan Wm. Wolff
Managing Partner
Dewey Ballantine
Washington, D.C.

William A. Wulf2 (ex officio)
President
National Academy of Engineering
Washington, D.C.

RESEARCH COUNCIL STAFF

Stephen A. Merrill
Executive Director, Board on Science, Technology, and
Economic Policy


1 Member, National Academy of Sciences
2 Member, National Academy of Engineering
3 Member, Institute of Medicine