[Senate Hearing 109-1131]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1131
 
               INNOVATION AND COMPETITIVENESS LEGISLATION

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 15, 2006

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
             Kenneth R. Nahigian, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 15, 2006...................................     1
Statement of Senator Allen.......................................     7
Statement of Senator Ensign......................................     1
    Prepared statement...........................................     2

                               Witnesses

Augustine, Norman R., Chairman/Chief Executive Officer (Retired), 
  Lockheed Martin Corporation; Chair, Committee on Prospering in 
  the Global Economy of the 21st Century, National Academies.....    20
    Prepared statement...........................................    22
Baucus, Hon. Max, U.S. Senator from Montana......................     4
    Prepared statement...........................................     5
Barrett, Dr. Craig R., Chairman of the Board, Intel Corporation..    28
    Prepared statement...........................................    29
Kelly III, Dr. John E., Senior Vice President, Technology and 
  Intellectual Property, IBM Corporation.........................    32
    Prepared statement...........................................    34
Lieberman, Hon. Joseph I., U.S. Senator from Connecticut.........    42
    Prepared statement...........................................    44
Wince-Smith, Deborah L., President, Council on Competitiveness...     8
    Prepared statement...........................................    11

                                Appendix

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    51
Institute of Electrical and Electronics Engineers--United States 
  of America (IEEE-USA), prepared statement......................    53
Letter, dated May 31, 2006, from Norman R. Augustine to Hon. 
  Gordon H. Smith................................................    63
Response to written questions submitted to the Panel by Hon. 
  Gordon H. Smith................................................    59
R&D Credit Coalition, prepared statement.........................    55
Smith, Hon. Gordon H., U.S. Senator from Oregon, prepared 
  statement......................................................    51
Sununu, Hon. John E., U.S. Senator from New Hampshire, article 
  from The Washington Times, dated May 10, 2006, entitled 
  Scientific R&D--Congress Should Rethink Its ``Fix''............    52

 
               INNOVATION AND COMPETITIVENESS LEGISLATION

                              ----------                              


                        WEDNESDAY MARCH 15, 2006

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 1:50 p.m. in room 
SD-562, Dirksen Senate Office Building, Hon. John Ensign, 
presiding.

            OPENING STATEMENT OF HON. JOHN ENSIGN, 
                    U.S. SENATOR FROM NEVADA

    Senator Ensign. [presiding] I want to welcome everybody to 
today's full Commerce Committee hearing on innovation and 
competitiveness legislation. Thank you all for attending. I 
want to thank Senator Stevens for allowing me to chair this 
hearing on this very important topic for America's future.
    Today the world is becoming dramatically more 
interconnected and competitive, and in order to remain globally 
competitive the United States must continue to lead the world 
in innovation. Innovation fosters the new ideas, technologies 
and processes that lead to better jobs, higher wages, and a 
higher standard-of-living for Americans.
    Unfortunately in the disciplines that foster innovation in 
the 21st century: science, technology, engineering, and 
mathematics, America is steadily losing its global edge. The 
trouble signs are numerous. Fewer than 6 percent of our high 
school seniors plan to pursue engineering degrees, down from 36 
percent a decade ago. In 2004, China graduated approximately 
500,000 engineers and India graduated over 200,000 engineers. 
At the same time the United States graduated less than 70,000 
engineers. If this present trend continues 90 percent of all 
the world's scientists and engineers will be living in Asia, by 
the year 2010.
    We must address these long-term competitive challenges to 
America's economic vitality and national security now, or risk 
losing our essential leadership position on innovation. The 
National Innovation Act, which I introduced with Senator 
Lieberman in December 2005, will help America meet these 
interconnected challenges. The legislation responds to the 
recommendations contained in the National Innovation Initiative 
report entitled, ``Innovate America.'' This report was 
circulated last year by the Council on Competitiveness. The 
Council is a distinguished nonpartisan group of leaders from 
industry and academia.
    In responding to the Council's report, the National 
Innovation Act focuses on three primary areas of importance to 
maintaining and improving United States innovation in the 21st 
century. The first is increasing research investment, the 
second is increasing science and technology talent, and the 
third is developing an innovation infrastructure. Many, who 
know me, know that I am a fiscal conservative. Current Federal 
budget constraints will require prioritization in spending. New 
programs must be funded through existing funds, or through 
identifiable funding offsets, whenever possible.
    I look forward to working with Senator Lieberman, others on 
this committee, and other co-sponsors as we go forward. 
However, I do believe that increased support of basic research 
though should be a national priority. Accordingly my bill would 
increase the national commitment to basic research by nearly 
doubling research funding for the National Science Foundation 
by Fiscal Year 2011.
    The National Science Foundation plays a critical role in 
underwriting basic research at colleges, universities, and 
other institutions throughout our Nation. NSF-supported basic 
research in chemistry, physics, nanotechnology, genomics, and 
semi-conductor manufacturing has brought about some of the most 
significant innovations of the last 20 years.
    For example the World Wide Web, magnetic resonance imaging, 
and fiber optics technology all emerged through basic research 
projects that received NSF funding. Research supported by NSF 
accounts for approximately 40 percent of non-life science basic 
research at U.S. academic institutions, while representing less 
than 4 percent of funding for R&D.
    I will submit the rest of my statement for the record.
    [The prepared statement of Senator Ensign follows:]

    Prepared Statement of Hon. John Ensign, U.S. Senator from Nevada

    Welcome. Thank you for attending this full Committee hearing on 
innovation and competitiveness legislation. In addition, I would like 
to thank Senator Stevens for allowing me to chair this hearing on a 
very important topic for America's future.
    Today, the world is becoming dramatically more interconnected and 
competitive. In order to remain globally competitive, the United States 
must continue to lead the world in innovation. Innovation fosters the 
new ideas, technologies, and processes that lead to better jobs, higher 
wages, and a higher standard-of-living.
    Unfortunately, in the disciplines that foster innovation in the 
21st century--science, technology, engineering, and mathematics--
America is steadily losing its global edge. The trouble signs are 
numerous. Less than 6 percent of high school seniors plan to pursue 
engineering degrees, down from 36 percent from a decade ago. In 2000, 
only 17 percent of undergraduate degrees earned in the United States 
were in the hard sciences. In the same year 56 percent of China's 
undergraduate degrees were in the hard sciences. In 2004, China 
graduated 500,000 engineers and India graduated approximately 200,000 
engineers. The United States, by contrast, graduated less than 70,000 
engineers. If present trends continue, 90 percent of all the world's 
scientists and engineers will be living in Asia by 2010.
    We must address these long-term competitive challenges to America's 
economic vitality and national security now or risk losing our 
essential leadership position on innovation.
    The National Innovation Act that I introduced with Senator 
Lieberman in December 2005, will help America meet these interconnected 
challenges. The legislation responds to the recommendations contained 
in the National Innovation Initiative Report, entitled Innovate 
America. This report was circulated last year by the Council on 
Competitiveness. The Council is a distinguished, nonpartisan group of 
leaders from industry and academia.
    In responding to the Council's report, this legislation focuses on 
three primary areas of importance to maintaining and improving United 
States' innovation in the 21st century: (1) research investment, (2) 
increasing science and technology talent, and (3) developing an 
innovation infrastructure.
    I am a fiscal conservative, and current Federal budget constraints 
will require prioritization of spending. New programs must be funded 
through existing funds or through identifiable funding offsets whenever 
possible. I look forward to working with Senator Lieberman, members of 
this committee, and other co-sponsors in this effort.
    I believe, however, that increased support of basic research 
through should be a national priority. Accordingly, my bill would 
increase the national commitment to basic research by nearly doubling 
research funding for the National Science Foundation (NSF) by Fiscal 
Year 2011.
    NSF plays a critical role in underwriting basic research at 
colleges, universities, and other institutions throughout our Nation. 
NSF-supported basic research in chemistry, physics, nanotechnology, 
genomics, and semiconductor manufacturing has brought about some of the 
most significant innovations of the last 20 years. For example, the 
World Wide Web, magnetic resonance imaging and fiber optics technology 
all emerged through basic research projects that received NSF funding.
    Research supported by NSF accounts for approximately 40 percent of 
non-life-science basic research at U.S. academic institutions while 
representing less than 4 percent of the Federal funding for research 
and development.
    Because our Nation's long-term future economic strength depends in 
large part on the support we give to basic research projects now, the 
National Innovation bill also establishes the Innovation Acceleration 
Grants Program, which encourages Federal agencies funding research in 
science, technology, engineering, and mathematics to allocate at least 
3 percent of their research and development (R&D) budgets to grants 
directed toward high-risk frontier research. All grants provided 
through this program will be assessed with metrics and no grants will 
be renewed unless the agency distributing the grant determines that all 
metrics have been satisfied.
    In addition, the National Innovation bill addresses the need to 
encourage more American students from kindergarten through graduate 
school to pursue careers in science, technology, engineering, or 
mathematics. Although scientists and engineers make up less than 5 
percent of our population, they create up to 50 percent of our Gross 
Domestic Product. Especially as our current scientific workforce ages, 
we need to encourage more American students to pursue careers in these 
fields. The National Innovation bill does this by creating more 
graduate fellowships and graduate traineeships.
    Today, we are pleased to have one panel of witnesses here to 
testify on these important innovation and competitiveness issues.

    Senator Ensign. I do want to make a couple of other quick 
comments. First of all, I applaud the bipartisan effort that is 
underway on innovation and competitiveness issues. 
Bipartisanship is desperately needed in the Senate. Especially 
when addressing innovation, bipartisanship, really 
nonpartisanship is required. Innovation is an American issue. 
We need to look at how we are competing with the rest of the 
world. I applaud the President for including a lot of the ideas 
from the National Innovation Act in his State of the Union 
address and in his American Competitiveness Initiative. The 
reason this hearing's start-time was moved up, is because we 
had a meeting originally scheduled for a little after 3 o'clock 
at the White House to discuss a lot of these issues. That 
meeting has been postponed because we have votes on the budget 
today.
    So I'm very excited about what is happening here in the 
U.S. Senate, the House and the White House and I think that we 
can work together toward keeping America innovative and 
competitive in this world today. So that we can let our 
colleague go, if it is OK with you, Senator Allen, I would like 
to call on Senator Baucus. Senator Lieberman will be here 
around 2:30. When he comes we will allow him to testify as 
well. Senator Baucus?

                 STATEMENT OF HON. MAX BAUCUS, 
                   U.S. SENATOR FROM MONTANA

    Senator Baucus. Thank you Chairman. It works for me. I'm 
just a lowly witness; you're a member of the Committee.
    Senator Allen. I'm gonna be hospitable toward friends of my 
family.
    Thank you. I appreciate it very much, this good old 
Virginia hospitality. I appreciate it. Mr. Chairman and Senator 
Allen, thank you very much.
    By addressing American competitiveness now, I think this 
committee, the Commerce Committee is providing vital leadership 
and I'm very pleased to join you.
    Many are using the word ``competitiveness'' these days. But 
here's the real question: what action will we take to make 
competitiveness more than a word? What actions can we take to 
make competitiveness a way of thinking for this Nation's 
leaders, and a way of life for this Nation?
    The need to strengthen America's ``global competitiveness'' 
is a new idea for many Americans. Americans are used to global 
dominance. This is something that's not quite firmly imprinted 
in the frontal lobe of most Americans. We have to work at it.
    But take a look at the next 5-year-old you see. Our 
attention to competitiveness now will determine the kind of job 
that child can have in 20 years. Whether she can afford 
healthcare or pay her energy bills, and what standard-of-living 
her child will have even further down the road.
    India, China, and other nations are on the rise. These 
countries have committed to educating their children in math, 
science, and engineering. I might say, India not long ago, it 
stunned me that the President of India, has made every single 
Indian a Hallmark of his presidency in India. It's not Prime 
Minister Singh, it's the President of India, has said very 
clearly, that's his major goal, he's a very, very prestigious 
guy in India and he's going to, I'm quite sure go a long way in 
making that happen. They're preparing new generations to win 
high-skill, high-wage jobs. And it's working. They have plans 
in those countries.
    America's economic clock isn't being cleaned--just yet. Our 
infrastructure remains the strongest. Our workers remain the 
most productive. This committee, with its jurisdiction over 
science and technology, knows that our thinkers remain the most 
innovative. I heard it constantly when I was in India and 
China, talking to the public- and private-sector people, 2 
months ago; we're still ahead in creativity and innovation. 
Maybe not in other areas, but in creativity and innovation and 
I'm not too convinced how long that's going to last, frankly. 
We have to get on the stick here, to make sure it does last. In 
fact we make important advances in other areas as well.
    But to keep that the case--the best leadership; we need 
long-range leadership. We must make policy changes now to 
multiply America's strengths and reduce our liabilities in 
decades to come.
    Education is the place to start. I am introducing a 
comprehensive legislative package this year to improve American 
competitiveness. Education is not just one of the pillars of 
that agenda. It is the foundation. My bill will improve the 
system from pre-kindergarten all the way through college and 
worker retraining.
    But we cannot stop at education. We must take a 
comprehensive view of what competitiveness means for our 
country. America needs a strong hand in the world marketplace. 
I have introduced legislation with Senator Hatch to improve 
trade enforcement. Dramatically improve trade enforcement. 
America needs energy independence. As long as we are beholden 
to politically-unstable nations for our energy, we are less 
able to determine our own economic destiny.
    My new energy legislation promotes radical research and 
alternative energy strategies. America needs to save more. 
Tomorrow I will introduce legislation to help increase 
Americans' individual savings, and to restore fiscal 
responsibility for our government. Americans who save are 
Americans who can invest. A government out of debt is a 
government with resources to build a strong economic future.
    Other elements demand attention. High healthcare costs are 
shackles on the feet of this country, dragging down our ability 
to compete. And American thinkers need funding and 
encouragement to continue the innovation that first brought us 
to world leadership. Even America's international tax structure 
must bolster every company's ability to run with the world's 
big dogs. We have to look and restructure our tax structure, 
essentially, our international tax structure in America.
    These are tall orders. But ensuring American 
competitiveness is not a one-session or one-Congress 
accomplishment. It will take a long, slow, permanent shift of 
the rudder on our ship-of-state.
    I firmly believe that we are called, it is our obligation, 
it is our mission in this Congress, to begin to turn the wheel. 
And we must act not only this year; we must lay the groundwork 
for ever-bolder action in the years to come.
    And I'll make a confession. The bills I'm introducing this 
year won't finish the job. But nothing proposed in this 
Congress, nothing we've heard from the President, will finish 
the job either.
    Ensuring American competitiveness will take far-reaching 
energy and healthcare transformations. It will take fundamental 
fiscal changes. Those discussions have yet to commence. But we 
must make a start today.
    I am encouraged by this hearing. I know I am surrounded by 
partners in the quest for American competitiveness. One of the 
best things we can do for the people who elected us is to 
ensure the prosperity of their children and grandchildren. 
That's what the quest for competitiveness is really about. I 
will be proud to work with you, Mr. Chairman, Senator Allen, 
and others on this committee to achieve this important goal.
    If you have a question, I'm passionate about this stuff.
    [The prepared statement of Senator Baucus follows:]

    Prepared Statement of Hon. Max Baucus, U.S. Senator from Montana

    Thank you, Chairman Stevens and Co-Chairman Inouye, for allowing me 
to speak with you today. By addressing American competitiveness now, 
the Commerce Committee is providing vital leadership. I'm pleased to 
join you.
    Many are using the word ``competitiveness'' these days. But here's 
the real question: what action will we take to make competitiveness 
more than a word? What actions can make competitiveness a way of 
thinking for this Nation's leaders, a way of life for this Nation?
    The need to strengthen America's ``global competitiveness'' is a 
new idea for many. Americans are used to global dominance.
    But take a look at the next five-year-old you see. Our attention to 
competitiveness now will determine the kind of job that child can have 
in 20 years. Our attention to competitiveness now will determine 
whether she can afford healthcare or pay her energy bills, and what 
standard-of-living her child will have even farther down the road.
    India, China, and other nations are on the rise. These countries 
have committed to educating their children in math, science, and 
engineering. They're preparing new generations to win high-skill, high-
wage jobs. And it's working.
    America's economic clock isn't being cleaned--just yet. Our 
infrastructure remains the strongest. Our workers remain the most 
productive. This committee, with its jurisdiction over science and 
technology, knows that our thinkers remain the most innovative.
    But to keep that the case, we need long-range leadership. We must 
make policy changes now to multiply America's strengths and reduce our 
liabilities in decades to come.
    Education is the place to start. I am introducing a comprehensive 
legislative package this year to improve American competitiveness.
    Education is not just one of the pillars of that agenda. It is the 
foundation. My bill will improve the system from pre-kindergarten all 
the way through college and worker retraining.
    But we cannot stop at education. We must take a comprehensive view 
of what competitiveness means for our country.
    America needs a strong hand in the world marketplace. I have 
introduced legislation with Senator Hatch to improve trade enforcement.
    America needs energy independence. As long as we are beholden to 
politically-unstable nations for our energy, we are less able to 
determine our own economic destiny.
    My new energy legislation promotes radical research and alternative 
energy strategies.
    America needs to save more. Tomorrow I will introduce legislation 
to help increase Americans' individual savings, and to restore fiscal 
responsibility for our government.
    Americans who save are Americans who can invest. A government out 
of debt is a government with resources to build a strong economic 
future.
    Other elements demand attention. High healthcare costs are shackles 
on the feet of this country, dragging down our ability to compete. And 
American thinkers need funding and encouragement to continue the 
innovation that first brought us to world leadership.
    Even America's international tax structure must bolster every 
company's ability to run with the world's big dogs.
    These are tall orders. But ensuring American competitiveness is not 
a one-session or one-Congress accomplishment. It will take a long, 
slow, permanent shift of the rudder on our ship-of-state.
    I firmly believe that we are called, in this Congress, to begin to 
turn the wheel. And we must act not only this year. We must lay the 
groundwork for ever-bolder action in the years to come.
    I'll make a confession. The bills I'm introducing this year won't 
finish the job. But nothing proposed in this Congress, nothing we've 
heard from the President, will finish the job.
    Ensuring American competitiveness will take far-reaching energy and 
healthcare transformations. It will take fundamental fiscal changes. 
Those discussions have yet to commence. But we must make a start today.
    I am encouraged by this hearing. I know I am surrounded by partners 
in the quest for American competitiveness.
    One of the best things we can do for the people who elected us is 
to ensure the prosperity of their children and grandchildren. That's 
what the quest for competitiveness is really about. I will be proud to 
work with you to achieve this important goal.

    Senator Ensign. Thank you, we have limited time today, so I 
want to get to our panel. If I can call our panel forward as 
Senator Allen makes his opening statement.

              STATEMENT OF THE HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you. Thank you, Mr. Chairman, for 
holding this hearing, let me commend Senator Baucus and you, we 
have a convergence of similar views and missions, and also the 
urgency of making sure the United States is more competitive 
for investment and jobs, and that we are the world capital of 
innovation. I think it is our responsibility as legislators and 
leaders of this country, to make sure that we're implementing 
and fostering the policies that will make sure that we are 
effectively competitive. These policies mean everything from 
less taxation to less litigation, to less regulation. We need 
energy security. Clearly education will be the focus here 
that's important, the Internet being tax free and especially 
broadband is important. And our economic competitors around the 
world, particularly when you look at China and India, they're 
very focused. They know where they're going, they're determined 
to be leaders in innovation and technology. In fact China, 
nanotechnology working with Senator Wyden and myself, we've 
made that a leadership effort for us and for our country.
    I look Mr. Chairman at China, in nanotechnology like George 
Steinbrenner, when I was over there around Thanksgiving and 
nanotechnology is multifaceted it's everything from 
microelectronics, to life sciences, health sciences, energy, 
and materials engineering. That's where their most interest is 
in the materials engineering and they are buying or paying the 
very best scientists and engineers in the carbon nanotubes 
research which is important for materials engineering. And they 
are like George Steinbrenner, they're focused, they're 
determined, they're directed.
    You mentioned the difference in education, India graduating 
three to four times as many engineers every year as we are; 
China, it's seven times or more engineers. Then you look at our 
engineers at this country, and oh maybe a third or more are 
from another country. Which is fine, I want America to be the 
magnet for the best minds of the world, and if somebody gets a 
science or technology or engineering degree, I think we ought 
to staple a green card, or a Visa to that diploma.
    But one also looks into it, and you see that out of the 
engineers only about 15 percent or so are women, only 6 percent 
are Latino, or African-American. And so these initiatives that 
I'm proud to co-sponsor with you and Senator Lieberman, and 
this is a nonpartisan, or bipartisan effort, is one where we do 
need to get the infrastructure, the incentives for young people 
to recognize that if they do well in math and science, they can 
get these scholarships and these degrees. It struck me talking 
to the India Institutes of Technology leaders that the young 
people in India where there's a great deal of heartbreaking 
poverty, those kids in middle school they're focused on passing 
the end of high school exam so they can get into the India 
Institutes of Technology. That's their ticket out of poverty. 
In this country, it may be baseball, football, basketball, 
something like that, which is fine, but it's maybe one out of 
10 million chance of hitting it there. Whereas obviously in 
engineering and science and technology is more important, so we 
need to incent people regardless of their gender, regardless of 
their race, or ethnicity to get interested in science and 
technology, engineering which are all important for our future. 
It's been said before, but it needs to be said for the record. 
We've faced these sorts of challenges in the past, President 
Eisenhower saw it with Sputnik, and this country with the 
National Defense Education Act responded. And that's the same 
sort of urgency we need right now for our country.
    And I appreciate your leadership Mr. Chairman, it's always 
a pleasure to be working with you and our colleagues on this, 
because this--we need to protect so to speak, our freedom and 
secure our freedom. But one of the key ways that we're going to 
do it is by being that world capital of innovation using this 
intellectual property, not just for national defense but 
improving people's lives. And I thank Mr. Augustine in 
particular for his leadership and it's good to see Mr. Barrett, 
has shown up here. I was just waiting for you to come.
    Senator Ensign. That's Dr. Barrett.
    Senator Allen. Dr. Barrett. Excuse me. And with that, since 
you're here, and he's even helping me give a St. Patrick's 
speech on giving an economic object lesson on how great Ireland 
is. Ireland's never been better. Lower taxes, better education, 
and so that's going to be the theme of my St. Patrick's Day, 
and St. Patrick's week speeches in various places. So I thank 
you Mr. Chairman, and I thank all our witnesses. And I've gone 
on just good timing, so that we can hear from them. And we're 
going to take action. The people of America expect us to take 
action. And it's essential for our future and I thank all our 
witnesses.
    Senator Ensign. Thank you, Senator Allen. Ms. Deborah 
Wince-Smith, if you could begin. Ms. Wince-Smith is President 
of the Council on Competitiveness. We welcome you here. If you 
could keep your comments to about 5 minutes, any full written 
statements that you and all other witnesses submit will be made 
part of the official record. So if you could summarize your 
testimony, we can have as much time for questions and 
discussion as possible.

  STATEMENT OF DEBORAH L. WINCE-SMITH, PRESIDENT, COUNCIL ON 
                        COMPETITIVENESS

    Ms. Wince-Smith. Thank you Mr. Chairman, Senator Allen, and 
other members of the Committee. I'm delighted to be here and to 
have this opportunity to present testimony on the National 
Innovation Act and related proposals for ensuring America's 
leadership and competitiveness in the 21st century. This 
hearing is at the heart of the Council on Competitiveness' 
mission to drive productivity and increase the standard-of-
living for all Americans. It's of great importance to our new 
Chairman, Chad Holliday, the CEO of DuPont.
    Our members across all universities, industry and labor 
know that America cannot compete on low wage, commodity 
products, or standardized services. Our prosperity depends on 
high-value economic activity. Above-the-line, new value 
creation that is transformational in scope and that commands a 
premium in fiercely contested global markets.
    Mr. Chairman, we do not stand on the cliff's edge, but we 
do stand at the crossroads. Complacency, and inaction, and 
incremental steps lead America down a path that will erode our 
economic leadership, reduce our standard-of-living and 
jeopardize our national security. Dramatic action will lead 
America to an innovation-driven future. A path that will 
turbocharge America's growth and prosperity, galvanize 
creativity, and exploration, fuel our unique entrepreneurial 
prowess, and revitalize the strategic investments and risk-
taking required to achieve success and reap reward for all our 
citizens.
    Later this year the Council will release our flagship 
publication, the 2006 Competitiveness Index, a comprehensive 
quantitative assessment of America's economic performance, and 
vitality. Benchmarked against global peers and an emerging 
competitors, the 2006 Index will highlight the divergent paths 
we face and the potential impacts of each on America's economic 
future.
    The National Innovation Act introduced by you, Mr. 
Chairman, and Senator Lieberman, and supported by so many 
members of this committee has indeed chosen commitment and bold 
action as the optimal path to our future. President Bush's 
Competitiveness Initiative has endorsed many of the same 
priorities. And with the recent introduction of the PACE 
legislation, based on the Academy's Gathering Storm report, 
there is now a tremendous convergence of the public and private 
sectors to implement a sustainable national competitive agenda 
fueled by the power of innovation, and the Council on 
Competitiveness wholeheartedly supports these efforts.
    Now, we approach this tipping point in American 
competitiveness from a position as a global leader and the 
benchmark for competitiveness. We have a strong foundation on 
which to build a dynamic and resilient innovation ecosystem. 
Consider, the U.S. has 5 percent of the world's population, 40 
percent of global wealth. The U.S. has been responsible for 98 
percent of global growth between 1995 and 2002. Our GDP per 
capita is among the highest in the world and has doubled since 
1970. Per worker, Americans are five times more productive than 
workers in China. We still lead the world in manufacturing 
output, as well as manufacturing value-added. Yet, the 
challenges are real, systemic and if ignored will undermine our 
foundation of strength and leadership.
    America is facing triple deficits: in savings, the Federal 
deficit and current account deficit. The trade is projected to 
reach 7 percent of GDP in 2007, constituting 70 percent of the 
world's deficits. Manufacturing output is lagging that of early 
economic recoveries. Federal funding of basic research is now 
only half of the mid-1960s peak of 2 percent of GDP.
    And as we know, 15-year-olds, rank 21st in international 
comparisons of mathematics and science. One-third of our 
scientists and engineers were born outside the U.S. and as 
Senator Baucus said, we are dealing with the unfunded, pension 
liability, healthcare costs, well into the future. But most 
importantly, other countries are adopting America's innovation-
led growth strategies. They're investing in their people. 
They're building world-class research enterprises, and enabling 
infrastructure. In short, they're creating high-potential 
innovation ecosystems.
    Low-wage nations have developed highly-skilled workforce 
and they are hungry for the world's work. Everyday, work that 
is routine, rule-based, and digitized, is being shipped around 
the world to a low-cost performer. But other nations know that 
the competitiveness advantages, once obtained through cost and 
quality are now table stakes. And that's why the Council 
launched the National Innovation Initiative, under the 
leadership of Duane Ackerman CEO of Bell South, and co-chaired 
by Sam Palmisano, the CEO of IBM, and Wayne Clough, the 
President of Georgia Institute of Technology. Today, building 
on the momentum of our report, downloaded over 300,000 times, 
leaders from across the private-sector are working hard to 
implement its recommendations. Our current Co-Chairs, Dr. Craig 
Barrett of Intel, and , Bill Brody of John Hopkins University, 
are focused on the Federal policy recommendations contained in 
the NII, complimentary reports and new legislation.
    Our new NII Leadership Council is already working on the 
next generation of policy, research and actions focused on 
high-leverage transformational challenges; 21st century 
advanced manufacturing; national deployment of a high-
performance computational network accessible to entrepreneurs 
and small and medium-sized businesses; catalyzing regional 
innovation hotspots and the longer-term competitiveness 
imperative for affordable access to energy. Underpinning all of 
these efforts is the Council's Green Field Innovation Metrics 
research that is developing for the first time new performance-
based measures to assess innovation outcomes. Currently, it is 
not possible to measure innovation given our reliance on 
today's static input-based metrics. And we're very proud that 
guiding this work is our NII Strategy Council, lead by Norm 
Augustine, Chuck Vest and David Baltimore.
    Our agenda has the three foundational platforms of talent, 
investment and infrastructure, the building blocks for a 
resilient innovation ecosystem as set forth in the Council's 
report and in the legislation under consideration today. 
Increased national investment and a balanced basic research 
portfolio, Innovation Acceleration Grants, regional economic 
development, and transition to an extended global manufacturing 
enterprise constitute critical components of a robust 
competitiveness plan.
    But let us not forget people innovate, not government, or 
companies and this is why our government must lead the way in 
investing in the vitality of our greatest asset, the American 
people. We must ensure that our children are equipped with the 
knowledge and problem-solving skills through better math-
science education that will allow them to reach their full 
potential as high-performing citizens and workers, creative 
entrepreneurs and leaders of global enterprises. Government 
must ensure that our universities, colleges, community 
colleges, and K-12 system remain preeminent in the world and 
accelerate its historic R&D investment at the frontiers of 
knowledge.
    And finally, the Federal Government in partnership with the 
private-sector and states must stimulate innovation-based 
growth in our regional economies where high-value investment 
and output activity is performed. So, as we stand on the 
threshold of a technological revolution in manufacturing, and 
its merger with high-value service solutions, the government 
has a pivotal role to play in accelerating the infrastructures 
of broadband, HPC networks, and 21st century patent systems 
collectively. This will enable America to capture the benefits 
from our strategic investments in our people, research and 
regions.
    Mr. Chairman, and members of the Committee, thank you and I 
would be pleased to answer any questions.
    [The prepared statement of Ms. Wince-Smith follows:]

       Prepared Statement of Deborah L. Wince-Smith, President, 
                       Council on Competitiveness

    Good morning, I'm Deborah Wince-Smith, the President of the Council 
on Competitiveness. Thank you, Chairman Stevens, Co-Chairman Inouye, 
Senator Ensign and the members of the Committee, for this opportunity 
to present testimony on the National Innovation Act and related 
proposals for assuring America's leadership and competitiveness in the 
21st century. The Council on Competitiveness is a membership 
organization of CEOs, university presidents and labor leaders committed 
to developing an action-agenda to drive U.S. competitiveness and 
productivity, so this hearing is of great interest to our organization 
and, in particular, our Chairman, Chad Holliday, President and CEO of 
DuPont. The Council has over 120 members including many Fortune 100 
companies and top research universities in the country.
    One of our members at the Council likes to say that when it comes 
to competitiveness, Americans tend to veer between complacency and 
hysteria. On the one hand, many Americans find it hard to conceive of a 
world where the U.S. is not the global innovation leader. But others 
point to increasing signs that America's leadership is being challenged 
in certain areas and could even fall behind if current trends continue. 
We, as a Nation, do not stand on the cliff's edge as some would argue, 
but instead at a crossroads. Complacency, a defense of the status quo, 
leads down a path that could take us to the cliff, but at the very 
least risks subjecting the United States to a slow erosion of economic 
leadership and a reduced standard-of-living for its citizens--our 
ultimate metric for competitiveness, established 20 years ago at the 
founding of the Council on Competitiveness. Down the other path lies 
entrepreneurship, risk-taking and a national commitment to innovation 
that can ensure continued economic growth and prosperity. This 
divergence will be highlighted later this year when we release the 
Council's flagship publication, the Competitiveness Index, a 
comprehensive measure of the health of America's economic vitality.
    The National Innovation Act introduced by Senator Ensign and 
Senator Lieberman, and supported by many members of this committee, is 
a critical part of an action-agenda to fuel America's innovation 
capacity. The Administration, through the President's American 
Competitiveness Initiative, has endorsed many of the same priorities 
and, in fact, a tremendous convergence of public- and private-sector 
support has coalesced around implementing a national competitiveness 
plan, underpinned by the power of innovation. The Council is pleased to 
wholeheartedly support these efforts.
A Strong Foundation
    Given America's still dominant position in the world and our 
leadership through most of the twentieth century, a certain amount of 
complacency is inevitable. Statistics indicate that our glass is more 
than half full and we have a strong foundation on which to build our 
future. Let me share a few key metrics:

   U.S. GDP per capita is among the highest in the world (It 
        has doubled since 1970).

   The U.S. consumer market is the largest in the world by far. 
        It is more than twice the size of Japan's--the next largest 
        consumer market.\1\
---------------------------------------------------------------------------
    \1\ Global Insight preliminary data for 2006 Competitiveness Index.

   While developing nations like China are growing much faster 
        than the U.S., the U.S. economy is still responsible for a 
        larger share of global economic growth than any other country. 
        Over the past 5 years China has grown more than three times as 
        fast as the U.S. But since the U.S. economy is 8 times larger 
        than the Chinese economy, that cumulative 3 percent growth over 
        5 years added $1.7 trillion to our economy (an amount that 
        exceeds the total size of China's economy).\2\
---------------------------------------------------------------------------
    \2\ Global Insight preliminary data for 2006 Competitiveness Index.

   Total U.S. R&D spending is greater than all of the other 
        countries combined and accounts for nearly 43 percent of all 
        R&D spending in the OECD.\3\
---------------------------------------------------------------------------
    \3\ NSF, Science and Engineering Indicators 2006, p. 4-40.

   The U.S. holds nearly 40 percent of the total global 
        financial stock.\4\
---------------------------------------------------------------------------
    \4\ McKinsey Global Institute, $118 Trillion and Counting: Taking 
Stock of the World's Capital Markets (Feb. 2005), p. 16.

   The United States still leads the world in manufacturing 
        output--as well as in manufacturing value-add. \5\
---------------------------------------------------------------------------
    \5\ NSF, Science and Engineering Indicators 2006, p. 6-12.

   Despite a dramatic drop in 2003, the United States remains 
        the top destination for Foreign Direct Investment. China nearly 
        overtook the U.S. in 2003, but the U.S. has bounced back--
        garnering almost $96 billion in inward investment in 2004 
        (compared to China's $61 billion).\6\
---------------------------------------------------------------------------
    \6\ UNCTAD, World Investment Report 2005, p. 303.

    So clearly, the United States is still a global leader and the 
benchmark for competitiveness. So it would seem as though the 
complacent among us would have the upper hand and say, continue to do 
what we have done and not rock the boat.
The Challenge
    But all of us in this room know that the waters we must navigate in 
the future 21st century are not those that propelled us to our safe 
harbor in the 20th century.
    Consider these statistics:

   In 1970 the U.S. enrolled approximately 30 percent of 
        tertiary level students in the world, and over half of science 
        and engineering (S&E) doctorates were granted by U.S. 
        institutions of higher education. In 2001-2002, UNESCO data 
        shows that U.S. enrolled just 14 percent of tertiary 
        students.\7\
---------------------------------------------------------------------------
    \7\ Richard B. Freeman, Does Globalization of the Scientific/
Engineering Workforce Threaten U.S. Economic Leadership? NBER Working 
Paper 11457, Cambridge, MA.: National Bureau of Economic Research, 
2005.

   Asia now spends as much on nanotechnology as the United 
        States.\8\
---------------------------------------------------------------------------
    \8\ Lux Research, The Nanotech Report 2004, August 15, 2004. 
https://www.global salespartners.com/lux/.

   Only six of the world's 25 most competitive information 
        technology companies are based in the United States; 14 are 
        based in Asia.\9\
---------------------------------------------------------------------------
    \9\ BusinessWeek, ``The Information Technology 100 Scoreboard,'' 
June 21, 2004. http://www.businessweek.com/pdfs/2004/0425_it100.pdf.

   Federal funding of basic research is now only half of its 
        mid-1960s peak of 2 percent of GDP.\10\
---------------------------------------------------------------------------
    \10\ NSF, Science and Engineering Indicators, 2006.

   Total scientific papers by American authors peaked in 1992 
        and have been flat ever since.\11\
---------------------------------------------------------------------------
    \11\ NSF, Science and Engineering Indicators, 2006.

   Manufacturing output is lagging that of earlier economic 
        recoveries.\12\
---------------------------------------------------------------------------
    \12\ Popkin, Joel and Kathryn Kobe, ``U.S. Manufacturing Innovation 
at Risk,'' Council of Manufacturing Associations and the Manufacturing 
Institute, February 2006.

    Finally, other countries are adopting America's innovation-led 
growth strategies and are rapidly moving up in the world rankings. And 
they are doing it with tremendous focus and intensity. This is a 
positive development generally, but can and is causing anxiety, 
particularly in the job market. Satchel Page once said, ``Don't look 
back; someone might be gaining on you.'' His point that it is important 
to focus your attention forward always striving to stay ahead is an 
important one in the context of global competition. While I would argue 
that a little paranoia is justified given the direction of current 
trends, we must remain focused on future opportunities to generate 
economic growth and jobs; not try and recapture the industries and jobs 
of the past.
    As Americans we know that we cannot, nor would we want to, compete 
on low wages, commodity products, or standardized services, but on 
high-value economic activity--above-the line activities--that commands 
a premium in fiercely contested global markets. There will always be a 
nation somewhere in the world willing to do the work for less. And 
those nations are hungry for the world's work. At the Council we say, 
if work is routine, rule-based, if it can be digitized, and reliably 
codified, there's going to be a low-cost source of labor somewhere in 
the world to compete for that work and for those jobs.

The Role of Innovation
    Innovation is the key to meeting these challenges. Beginning with 
its founding in 1986 in the face of increased competition from the 
economic engines of Japan, Germany and others, the Council has a long 
history of private-sector-led innovation initiatives. Our first 
innovation summit was held in 1998 at MIT under the leadership of MIT 
President Emeritus, Chuck Vest. Three years later the Council hosted a 
major innovation summit in San Diego and in 2003, we launched the 
National Innovation Initiative which culminated in the release of 
Innovate America at the National Innovation Summit in Washington, D.C. 
in December 2004.
    The National Innovation Initiative (NII), brought together over a 
15 month process over 500 of the country's most talented thinkers and 
leaders to ponder the changing nature of innovation, the evolution of 
the global economy, and, most importantly, what the United States needs 
to do to remain the world leader in innovation. They developed an 
action-agenda that calls on all sectors of society to work together to 
solve the great challenges of our day.
    Why focus on innovation? Well, our members--CEOs from across 
industrial sectors, university presidents and labor leaders--firmly 
believe that innovation will be the single most important factor in 
determining America's success through the 21st century.
    The NII defines innovation as the intersection between ideas, 
imagination, insight, invention and implementation. We call it, ``I'' 
to the fifth power. Fundamentally, it is about the creation of new 
value. And the Council's long-standing policy research has demonstrated 
that innovation has been the principal driver of U.S. GDP and 
productivity growth and a rising standard-of-living for the past 50 
years. More specifically, studies show that total factor productivity--
generally attributed to innovation--was responsible for 47 percent of 
U.S. economic growth between 2000 and 2004. \13\
---------------------------------------------------------------------------
    \13\ Global Insight preliminary data for 2006 Competitiveness 
Index.
---------------------------------------------------------------------------
    But, let me emphasize--for this is crucial to building the public 
institutions to support new policies and new behaviors--innovation is 
more than just a driver of economic growth. Innovation has always been 
the way people solved the great challenges facing society. Today, 
innovations not yet imagined may enable us to achieve dramatically 
higher levels of health across the planet; feed vast populations with 
the protein-based diets essential to health; meet the challenge of a 
rapidly aging population; find plentiful, affordable, environmentally-
friendly sources of energy; and, continually push the frontier of 
exploration. And innovation will lead to the solution of problems that 
do not even exist yet and to the opening of new vistas of undreamt of 
opportunities for ourselves and for future generations.
    Innovation has changed tremendously from the days of large 
industrial research laboratories and ivory tower universities. Where, 
how and why innovation occurs are in flux--across geography and 
industries, in speed and scope of impact, and even in terms of who is 
innovating. We see this transformation in a number of areas:

   The pace of innovation is increasing. For example: while it 
        took 55 years for a quarter of the country to get an 
        automobile, 35 years for the telephone, and 22 years for the 
        radio, it has only taken 16 years for the PC, 13 years for the 
        cell phone, and just 7 years for the Internet to penetrate a 
        quarter of the U.S. population (and those trends are just as 
        quick in other countries).

   Innovation has become multidisciplinary. It arises from the 
        intersections of different fields or spheres of activity.

   At the same time, it is collaborative--requiring active 
        cooperation and communication across organizations, companies, 
        regions and countries. ``Co-creation'' is the new buzzword.

   Consumers are now in charge as we have moved from a 
        production-driven world to one in which discerning customers 
        are in charge with choice and power.

   And it is rapidly becoming global in scope--with advances 
        coming from centers of excellence around the world.

   Manufacturing and services are merging:

        -- The sharp dividing line between manufacturing and services 
        is increasingly blurred.

        -- Manufacturing companies are transforming themselves from 
        product suppliers into solutions providers--melding services 
        seamlessly into product lines.

        -- When they blend like this we're actually creating whole new 
        markets and market opportunities.

    At the same time that innovation has become a global enterprise, 
the world economy has globalized and integrated at a pace few predicted 
even 10 years ago. In less than 20 years, many nations have at last 
embraced market economies and moved toward political democratic norms. 
And this is a fantastic metric of success for world stability and 
quality-of-life. It also means that countries can now compete on 
traditional cost and quality terms, but they know that it is 
innovation--the ability to create new value--that will confer a 
competitive advantage in the 21st century. The playing field is 
leveling, and the barriers to innovation are falling.
    My core message is that America's long-standing lead in innovation 
and entrepreneurship is by no means assured. We must create an 
environment in which innovation can flourish and transformational value 
can be achieved.

The National Innovation Initiative
    This challenge is why the Council launched the National Innovation 
Initiative--the NII--under the leadership of Duane Ackerman, CEO of 
BellSouth and Chairman of the Council from 2003-2005. To launch the NII 
in 2004, Duane asked Sam Palmisano, the Chairman and CEO of IBM, and 
Wayne Clough, the President of the Georgia Institute of Technology, to 
guide a Principals Committee of 17 other CEO's and university 
presidents representing organizations as diverse as American Airlines, 
AMD, Pepsi, GM, Morgan Stanley, Texas A&M, MIT, Rensselaer Polytechnic 
Institute, and the University of Michigan. Engaging more than 500 
leaders and experts across industry, academia, government and labor, 
the NII epitomizes the changing nature of 21st century innovation 
itself--exemplifying a dynamic process of collaboration and 
competition. This unprecedented group of thought-leaders came together 
to understand the changing nature of innovation in the 21st century, 
and--even more important--to generate a set of actions for companies, 
universities, community colleges, state and local government, and 
entrepreneurs to ensure that the United States stays at the leading 
edge of innovation. With the release of Innovate America, we laid out 
the challenges we face, the opportunities that lie ahead and the path 
to get us there.
    And since the beginning of 2005, we have worked hard to engage 
others across the private-sector in the work of the NII--starting with 
our new Co-Chairs: Dr. Craig Barrett, Chairman of Intel Corporation, 
and Dr. Bill Brody, President of The Johns Hopkins University; and, 
including not only many of the CEOs and leaders from the launch, but 
also new champions--Jeff Immelt of GE, John Chambers of Cisco, Bob 
Reynolds of Fidelity Investments, Doug McCarron of the United 
Brotherhood of Carpenters & Joiners, Dr. Karen Holbrook of Ohio State 
University, and many others.
    The Innovation Agenda advocated by our NII Leadership Council has 
three foundational platforms or building blocks--Talent, Investment and 
Infrastructure. Each platform has three primary objectives and specific 
recommendations, and collectively, these recommendations constitute an 
integrated sustainable path for 21st century prosperity. Let me just 
highlight one or two for each of the objectives.
    Talent addresses our human capital needs. In this area we have 
three objectives:

    1. Build the base of scientists and engineers;

     For example, by pioneering an extensive portable graduate 
            fellowship program to give control of educational choices 
            back to students. Attract the best and the brightest 
            students and workers from around the world by reforming our 
            immigration system.

    2. Catalyze the next generation of innovators;

     By funding internships for innovation-oriented students to 
            experience local startup and small business environments; 
            and

    3. Empower workers to succeed in the global economy;

     Ensure Federal job training programs have the flexibility 
            to target the skills needed for the jobs of the 21st 
            century.

    The Investment area addresses the balance between risk and reward 
and the incentives--or disincentives--for people and institutions to 
invest in innovation. Our priorities here are:

    1. Revitalize frontier and multidisciplinary research;

     Increase Federal funding of basic research, with an 
            emphasis on the physical sciences.

     By reallocating 3 percent of all Federal agency R&D 
            budgets toward ``Innovation Acceleration'' grants that 
            invest in novel, high-risk and exploratory research.

    2. Energize the entrepreneurial economy;

     Catalyze10 Innovation Hotspots TM at regional 
            locations across the United States over the next 5 years 
            through public-private partnerships explicitly focused on 
            supporting regional innovation; and

    3. Reinforce risk-taking and long-term investment;

     Make the R&D Tax credit permanent.

    And that brings me to a core reality. Investing in innovation 
demands adherence to two fundamental principles: a willingness to 
accept risk and a willingness to wait for the return on investment. 
Although America's entrepreneurial economy understands and embraces 
these principles, the much larger financial mainstream may be now 
moving in the opposite direction. Investment time horizons are getting 
shorter. Long-term innovation strategies remain undervalued. And 
business executives in publicly-held companies now face a regulatory 
climate that is blurring the line between business risk and legal risk. 
Intangible assets, which represent an increasingly large percentage of 
the value of corporations, still don't show up on the balance sheet, 
reducing incentives to invest in creating more value. The challenge is 
transparency, disclosure and corporate governance.
    The Infrastructure area covers not only the physical infrastructure 
that supports innovation but also to the political, regulatory and 
legal infrastructure that facilitates innovative behavior.

        1. Create a 21st century intellectual property regime;

        2. Strengthen America's advanced manufacturing capacity; and

        3. Put in place a national, coordinated innovation policy with 
        representatives from the public and private sector.

The National Innovation Act and Related Proposals
    The National Innovation Act (NIA) and S. 2390, which embodies the 
provisions of the NIA under the Commerce Committee's jurisdiction, are 
based largely upon the recommendations included in Innovate America, 
but also are consistent with many of the key recommendations included 
in reports by the National Academies, Business Roundtable and 
President's Council of Advisors on Science, and Technology to name a 
few. The bills recognize the importance of approaching innovation as an 
ecosystem requiring investments in talent, research and infrastructure. 
To be clear, these are still only the Federal component to what must be 
a public and private-sector initiative. We, in the private-sector, must 
lead as well and the gentlemen joining me on the panel today can ably 
describe the efforts their companies are undertaking to support the 
innovation enterprise.
    I will briefly comment on each of the major provisions included in 
S. 2390:
    The Presidents Council on Innovation (PCI)--To provide for 
America's future economic security, the President must develop a 
comprehensive agenda for strengthening U.S. innovation capabilities 
across government, academia, and the private sector. This cabinet-level 
council would direct innovation policy across the Executive Branch. The 
PCI would be chaired by the Secretary of Commerce and include other 
Cabinet Secretaries and Department Heads including Defense, Education, 
Energy, Heath and Human Services, Homeland Security among others. The 
PCI will develop a National Innovation Policy to foster a dynamic 
national environment for innovation capacity to ensure the attraction 
of high-value investment to build 21st century infrastructures across 
legal, digital, and physical systems. Among its objectives, the PCI 
should seek to strengthen America's talent pool of innovators and 
skilled workers, develop market-based incentives and rewards to fuel 
all stages of the innovation cycle, identify and remove barriers to 
America's innovative capacity and global competitiveness, and stimulate 
renewed adoption and deployment of innovative infrastructures.
    The PCI should:

        1. monitor implementation of proposals made in this and similar 
        legislation in the areas of research funding, taxation, 
        immigration, trade, education, regulatory reform and 
        infrastructure development.

        2. work with OMB to lead a process to assess the impact of 
        current and proposed policies and rules on U.S. innovation 
        capacity and outcomes.

        3. develop metrics for measuring the government's progress 
        toward improving conditions for innovation in the areas of 
        talent, investment, and infrastructure.

    To engage the many constituencies in the ``innovation ecosystem'' 
outside the Federal Government, the legislation appropriately calls for 
the PCI Chair to consult with advisors drawn from the private sector, 
academia and scientific organizations.
    Innovation Acceleration Grants--Investment in frontier research has 
always been the bedrock of American innovation. Many of the country's 
most innovative industries were built on decades of research that had 
no discernible applications. No one dreamed in the 1940s that the 
esoteric field of quantum mechanics would spawn the semiconductor and 
IT revolutions. Likewise, engineers working on time-sharing techniques 
probably never envisioned the World Wide Web and e-commerce. And 
scientists researching atomic motion certainly could not foresee the 
development of global positioning devices. The United States has led 
the world in science and engineering thanks in great part to public 
support of research. In the decades following World War II, industrial 
labs conducted frontier investigations alongside government agencies. 
However, in the 1980s, market pressures forced corporations to shift 
their research focus to projects offering near-term commercial benefit. 
The lengthy time frames and high risks associated with frontier 
research--coupled with the inability of investors to capture returns on 
investment--demanded that the U.S. Government bear the lion's share of 
responsibility for funding.
    In recent years, Washington's commitment to pursuing true 
discovery--so essential to innovation--has begun to erode. Funding 
decisions have become increasingly conservative, driven by consensus, 
precedent, and incremental approaches. Investigators early in their 
careers, who often have the freshest ideas, are frequently shut out of 
the peer review process. Further, most Federal grant programs have not 
kept pace with the changing nature of innovation: Major scientific 
advances of recent years have drawn from multiple disciplines, and the 
move from laboratory to marketplace has required creative partnering 
across the public and private sectors.
    At this time of intense global challenge, the Nation's leaders must 
reconnect with America's tradition of exploration and invest public 
resources in the type of research that, while promising little in the 
short-run, can lead to new knowledge and breakthrough innovation down 
the line. Innovation Acceleration Grants can go a long way toward 
meeting this lofty objective. The Council's report recommended 3 
percent of research agencies' budgets be set aside for these grants and 
this recommendation was echoed and expanded to 8 percent of research 
budgets by the National Academies.
    One example of this type of program with a successful track record 
is the Department of Energy's LDRD program in which Lab Directors have 
a small percentage of their budgets dedicated to a discretionary fund 
that can be used to support high-risk, projects outside-of-the-box and 
general mission of the labs with the potential for great return. 
Indeed, many of the breakthrough discoveries from our National 
Laboratories can be linked back to the LDRD investments.
    A National Commitment to Basic Research--Increasingly, innovation 
is occurring at the intersection of disciplines, with progress made in 
one area of scientific endeavor depending on advances in other areas. 
Medical breakthroughs, for example, now commonly combine modern 
biology, nanotechnology, information sciences, physical sciences, and 
engineering. Given the growing importance of multidisciplinary 
research, government R&D funding cannot be a zero-sum game that shifts 
resources from one field to another. Investment must be balanced across 
disciplines. However, recent appropriations have generated a 
significant imbalance: Federal funding for life sciences has increased 
four-fold since the 1980s. Over the same period, appropriations for the 
physical sciences, engineering, and mathematics have remained 
essentially flat.
    The legislative proposals before the Senate appropriately give 
special attention to the National Science Foundation, and the 
Departments of Energy and Defense. The President's ACI further 
highlights the critical role that the National Institute of Standards 
and Technology plays in this area. The National Science Foundation 
supports basic research across all disciplines. In FY 2002, Congress 
committed to doubling NSF's budget within 5 years, but so far, only 16 
percent of that commitment has been met. In addition to bringing much 
needed balance to the Federal research portfolio, this recommendation 
aims to strengthen the government's overall commitment to R&D so 
critical to the innovation enterprise. Whereas in the late 1960s, the 
Federal commitment approached a full 2 percent of GDP, the current 
commitment is only 0.8 percent, less than the percentages spent by 
Sweden, Finland, Japan, and South Korea. By boosting agency research 
budgets as proposed, the U.S. Government will move toward a more robust 
R&D funding level of 1 percent of GDP.
    Development of Advanced Manufacturing Systems--America must design 
and implement a new foundation for high-performance production. 
Although America remains the leading producer of manufactured goods, 
the Nation now trails other major regions of the world in manufacturing 
growth. In 2005, the U.S. trade deficit in manufactured goods was a 
record $781.6 billion. \14\ This imbalance not only speaks to the 
continuing erosion of manufacturing employment across the country, but 
also signals a growing risk to our ability to innovate.
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    \14\ U.S. Department of Commerce, Bureau of Economic Analysis, 
www.bea.gov.
---------------------------------------------------------------------------
    For U.S. manufacturers to regain their competitive edge, they must 
embrace and accelerate innovations now occurring in the sector. A new 
paradigm is emerging--the ``extended production enterprise''--in which 
services, design, and production are integrated in modular fashion. 
Manufacturers who grew up producing goods under one roof are now 
functioning as system integrators, managing supply chains or virtual 
networks of independent business process suppliers. They depend upon 
cutting-edge software, communications technology, and computing devices 
and sensors. Beyond technology, companies must adopt new 
organizational, marketing, and financial models to succeed--focusing on 
``above the line'' priorities to drive innovation and growth. A 
reinvigorated manufacturing sector is essential to U.S. global 
competitiveness and security. Viewed more broadly, America's 
fundamental ability to innovate depends upon the existence of a 
cutting-edge manufacturing infrastructure. The extended production 
enterprise is becoming an integral component of the innovation process, 
and the Nation must invest in research related to manufacturing 
technology in parallel with the pursuit of scientific breakthroughs.
    The Federal Government should work with industry and the research 
community to strengthen America's manufacturing capacity. The growing 
perception that the United States has ``lost its manufacturing edge for 
good'' need not--and cannot--become a reality. Federal resources should 
be targeted in the following areas: identifying and leveraging 
technological advantages, enhancing collaboration across the extended 
production enterprise, establishing shared, cutting-edge production 
facilities, improving the adaptive ability of small and mid-sized 
manufacturers, and charting the likely course of innovation in the 
sector.
    Regional Innovation--The United States is not an innovative 
country--it is an agglomeration of innovative, and less innovative, 
regions. To optimize our national innovation output regions must 
implement innovation-based growth strategies. The NIA embraces a key 
recommendation included in Innovate America that argues, for America to 
prosper, we must help all our regions reach their full potential to 
support innovative firms and organizations and better integrate 
economic development and workforce training strategies. Let me make 
clear that this must be a bottom-up process driven by those on the 
ground in the regions and I believe the language proposed in the NIA is 
consistent with this goal.

A Consensus for Action
    The issue of innovation and competitiveness has recently risen to 
the level of a first-tier economic priority. The President's 
announcement of his new American Competitiveness Initiative at the 
State of the Union represented the confluence of a number of trends. 
We've seen bipartisan legislation introduced in both the Senate and the 
House based on the Council's Innovate America report and the National 
Academies' Rising Above the Gathering Storm report. Last December the 
Department of Commerce hosted a meeting of CEO's and university 
presidents to address the issue with members of the President's 
Cabinet, and a few weeks ago, under the leadership of current NII 
Chairs, Dr. Craig Barrett, Chairman of Intel, and Dr. Bill Brody, 
President of Johns Hopkins, over 140 CEOs, university presidents, 
Governors and other leaders joined together to sign an ad that was 
placed in The Wall Street Journal and the Washington Post, jointly 
calling on Congress to act on the innovation issue, and providing an 
``innovation resource'' at www.innovateamerica.org--bringing together 
under one umbrella key information detailing the latest thinking and 
activities in the innovation and competitiveness space.
    This growing consensus for action is not going unnoticed around the 
world. Not a month goes by at the Council that we are not visited by 
representatives from other countries looking for guidance and insight 
on how to mimic the U.S. model for innovative growth. And we believe it 
is in America's best interest to tell them, for the global pie is 
growing and if we are smart and invest in our people, in the creation 
of new knowledge and in the infrastructure to glean value from these 
investments; our share of the pie will grow as well. Global competition 
is not a zero-sum game and this is why it is critically important to 
conclude the Doha Round of trade liberalizations to open global markets 
and expand the opportunities for global investment and high value 
economic activity. It has been reported that within a decade, nearly 80 
percent of the world's middle-income consumers could live in nations 
outside the currently industrialized world. To maintain our leadership 
and derive value, jobs and wealth for our citizens will require the 
commitment of the public and private sectors.
    Further, we must collaborate globally on issues such as the 
measurement of innovation. How we measure innovation, both in terms of 
inputs--like our investment in R&D, education, etc.--as well as in 
terms of performance will be critical to determining the value of our 
investments and, at a very basic level, what works and what does not. 
Many countries around the world are tackling these same concerns and we 
will be well served to cooperate even as we compete. Companies such a 
Cisco Systems--as well as our partners in the EU, Japan, Korea, Mexico 
and Brazil--are working closely with the Council to initiate research 
in this field.

The Path Forward
    Not resting on our laurels, the National Innovation Initiative 
continues to evolve and with the tremendous support of many of our 
members we are moving forward with the next generation of programs to 
build upon the findings and recommendations of Innovate America. During 
the development of the NII Report, Norm Augustine and Chuck Vest led a 
preeminent panel of advisors who contributed much of the intellectual 
capital to the final document. We have turned once again to these 
gentlemen along with Dr. David Baltimore, the President of the 
California Institute of Technology, to head a Strategy Council intended 
to guide our work in the innovation space going forward. Initiatives 
around the future of manufacturing, a national high-performance 
computational infrastructure, regional innovation, energy and 
sustainability in the 21st century, and innovation metrics are being 
developed as we map out tipping points facing our Nation and the 
actions needed to bolster long-term prosperity in America.
    We will follow-up on what we call the NII ``over the horizon'' 
initiatives. It is important that we work to extend this agenda at 
home, in new regions and across the globe in order to maximize the 
potential for collaborative efforts and the benefits of innovation to 
our economy. For example:
    21st Century Manufacturing--New value creation is the goal of the 
innovation continuum. This theme was echoed at a meeting held at the 
Council last week with 25 experts representing diverse fields of 
manufacturing. The meeting was a brainstorming session to begin the 
process of better understanding the role of manufacturing in the 
American economy and what the future might hold.
    We are on the cusp of a technological renaissance in advanced 
manufacturing with the emergence of desktop fabrication, touch-sense-
feel process controls, production slicing, nanoscale manipulation of 
matter, and the acceleration and transformation of product development 
through high-performance computing tools that will radically change the 
move from mass production to mass customization. The NII report warned 
that the Nation has been too quick to write-off manufacturing with the 
4Ds: dirty, dumb, dangerous--and disappearing.
    Indeed, in emerging areas like nano- and biotechnologies, we should 
balance our leadership in cutting-edge science with leadership in 
cutting-edge manufacturing (like the Japanese, Germans, and 
increasingly, the Chinese). In fact, Japan has been repatriating and 
``black boxing'' much of its most advanced manufacturing research, 
processes and technologies.
    We are also in the midst of a process revolution that will require 
a completely new set of skills and strategies. The Council is poised to 
undertake an effort to understand better this phenomenon and make 
recommendations to ensure America's future manufacturing capacity--a 
future that will focus increasingly on ``above the line'' issues (like 
design, efficient supplies chains, best-of-world customer service, 
etc.) that add value to the manufacturing extended enterprise.
    A critical part of this initiative is the power of high performance 
computing (HPC) to drive the manufacturing renaissance. The Council's 
groundbreaking 3-year initiative supported by DARPA, DOE, NSF and NSA 
to explore the untapped potential of HPC as a driver of economic growth 
has brought together industry leaders from across all sectors. The goal 
is to better understand the power of HPC to answer the ``what if'' 
questions that could not be addressed even a few years ago and to give 
the U.S. a competitive advantage.
    In today's competitive global market, HPC has become essential to 
accelerating innovation, which is one reason President Bush highlighted 
its importance in his State of the Union address earlier this year. We 
like to say that ``To Out Compete Is to Out Compute.'' HPC assists 
companies in creating new inventions and products; in designing better, 
more reliable products, processes and services; in minimizing the time 
to build engineering prototypes; and in streamlining production 
processes and reducing production costs.
    One of America's greatest comparative advantages is our global 
leadership in HPC . . . not only manufacturing these powerful systems 
but applying them to address our most challenging, and therefore, most 
competitively important problems. The Council has a major HPC 
initiative led by Dr. Karen Holbrook, the President of The Ohio State 
University, and David Shaw, of D.E. Shaw & Co., Inc., to identify the 
business and technical barriers preventing HPC from being used as 
aggressively as it could and should be by our companies, the important 
role of the private sector and what role public-private partnerships 
can play to address these challenges. HPC must be a key part of 
regional economic development strategies, as well.

Regional Innovation--Hotspots TM
    Building on the Council's long history in launching the national 
debate in the mid-1990s around ``clusters of innovation'' as well our 
more recent and groundbreaking work on ``regional innovation'' with the 
Department of Commerce, we are looking to catalyze the development of 
``Hotspots'' of regional innovation and economic growth across the 
country. We define a Hotspot as a region that successfully integrates 
four critical strategies to drive innovation and economic growth: 
economic development, workforce development, education, and 
entrepreneurship. HPC can also play a critical role in that process. 
While data shows that this technology is an important driver of 
innovation at the corporate and industry level, we also know that 
increasingly, innovation occurs at the intersection between businesses, 
research centers, universities, and skilled workers in innovation 
centers across the U.S. Linking regional HPC assets to address regional 
challenges can turbocharge the innovation process on the ground and 
optimize regional economic growth.
    Successful ``hotspots'' also require abundant talent. The good news 
is that both the Department of Commerce's Economic Development 
Administration and the Department of Labor (DOL), through their 
Workforce Innovation in Regional Economic Development (WIRED) program 
are adopting innovation as a guiding principle in regional economic 
development. The Council is proud to be a key partner with DOL in the 
design and implementation of the WIRED program. The NIA would go a long 
way toward codifying and strengthening this important progress, but 
most of the work is and should be down on the ground, in the regions.
    Since issuing Innovate America, the Council has been approached by 
numerous governors and others seeking to partner to spur regional 
innovation-based growth. The Council is planning regional summits in 
Massachusetts and Ohio in the near-term, and several other events are 
in the planning stage. The good news is that many states are moving 
beyond the view of economic development as a zero-sum game where one 
tax break might outdo another. Instead, they are turning to innovation 
as the driver of growth and looking to the assets they have in place to 
catalyze economic activity. Indeed, the reigning mantra in regional 
innovation is ``earn it, keep it, grow it.''
    Energy--A 21st century energy infrastructure is one of the 
linchpins of America's ability to compete in the global economy. The 
tight linkage between energy and the economy is not a new concept; 
every President since Nixon has made energy security, efficiency and 
diversification a national priority. What is new is that geo-strategic, 
geo-economic and bottom-line interests are converging with 
technological opportunity--creating a tipping point for action.
    At the same time, the technological options for energy efficiency 
and fuel and feedstock diversification create significant opportunities 
to effect real change in the marketplace. At the Federal level, the 
National Energy Plan lays out the urgency to develop reliable and 
affordable energy supplies. For the first time, perhaps, America's 
major energy providers are investing hundreds of billions of dollars in 
alternative energy sources while leading corporations are proving the 
business case for sustainability. DuPont's CEO, Chad Holliday, recently 
announced that he expects 25 percent (up from 10 percent) of Dupont's 
products to be made with non-petrochemical substances by 2010.
    The Nation can rise to the global energy challenge by applying both 
its capacity for innovation and it ability to forge public-private 
partnerships that share ideas, talent and investments. Never has it 
been so critical to create innovative energy solutions that will 
sustain both our global economic leadership and domestic prosperity. 
This year the Council will launch an initiative to create a private 
sector energy roadmap--grounding the Nation's investment and policy 
priorities in the business case for sustainability, diversification and 
energy efficiency.

Conclusion
    Government plays critical roles in enhancing and supporting the 
competitiveness of American businesses starting with ensuring there is 
an innovation-friendly climate for U.S. enterprises to develop and 
compete at home and abroad. Today, more than ever before, the 
government must invest in the long-term vitality of our greatest asset, 
the American people. We must ensure that our children are equipped with 
the knowledge and problem-solving skills through better math science 
education that will allow them to reach their full potential as high-
performing entrepreneurs. Another Council member once commented that 
``We need artists who can think like engineers, and engineers who can 
think like artists.'' These are the small and medium-sized business 
leaders that will drive America's economic growth in the future if 
government makes the investments in their future now.
    Government must accelerate its long-standing commitment to invest 
in research and development at the frontiers of knowledge and ensure 
that America's universities and colleges remain preeminent in the 
world. Finally, the government must look for avenues to support the 
development of an advanced manufacturing capability in the United 
States that will position us to take full advantage of the investments 
in research and human capital. At one of our recent meetings, Roger 
Enrico, former CEO of PepsiCo and now CEO of Dreamworks Animation, 
talked about the importance of making big changes to big things. Change 
and progress, he explained, will never come if you don't free yourself 
from the tyranny of incrementalism. Dramatic results do not come from 
undramatic action.

    Senator Ensign. Thank you. Our next witness will be Mr. 
Norman Augustine. Mr. Augustine is retired Chairman of the 
Board, and CEO of Lockheed-Martin Corporation. In addition, Mr. 
Augustine is making a lot of waves, with the Rising Above the 
Gathering Storm report with the rest of you. So we look forward 
to hearing your testimony today. Welcome.

  STATEMENT OF NORMAN R. AUGUSTINE, CHAIRMAN/CHIEF EXECUTIVE 
              OFFICER (RETIRED), LOCKHEED MARTIN 
   CORPORATION; CHAIR, COMMITTEE ON PROSPERING IN THE GLOBAL 
        ECONOMY OF THE 21st CENTURY, NATIONAL ACADEMIES

    Mr. Augustine. Thank you Mr. Chairman, Senator Allen, 
members of the Committee. I will submit for the record, if I 
may, a written copy of a statement. It was my privilege to 
chair the National Academy study on competitiveness, and also 
to co-chair the strategy board for the Council of 
Competitiveness study of the topic. The legislation that has 
been introduced already including certainly the PACE bill and 
the National Innovation Act are very compatible with the 
findings of our report as is the President's American 
Competitiveness Initiative. I'm here today on behalf of the 
National Academies and would briefly describe our work--it was 
performed by a panel of 20 members, whom my colleague Dr. 
Barrett on my left was one of the members. We were given 90 
days to undertake our work because of the urgency that the 
Academy and the Senate had assigned to us.
    Many of us have already been working on this topic for as 
long as 20 years. It's a particularly difficult topic, because 
of its importance and because of the fact that there's no Pearl 
Harbor here, there's no 9/11, there's no Sputnik. Our analogy 
is much more than of the frog being slowly boiled. It's our 
committee's unanimous view that America is facing a very, very 
serious problem.
    It's a problem that's been decades in the making and will 
take decades to resolve. This has been brought about partly 
because of our own inaction in many instances, but partly 
because the rest of the world is getting better and its often 
getting better by copying the things that we used to do well.
    The question of course comes up, is it not good that the 
rest of world is prospering and the answer has to be a 
resounding yes. Not only does that probably produce a more 
stable world for all of us, it creates customers for our 
products and it provides our consumers with less costly goods. 
Nonetheless, we want to be sure that America prospers too in 
this new world that is going to happen, whether we bring it 
about or someone else does.
    The question arises what has brought this situation that we 
find? I would cite four examples, or four primary forces. The 
first has been referred to as, ``The Death of Distance,'' which 
has been brought about by the advent of the airplane in the 
last century; telecommunications in this century, and the end 
of the last century, where the cost of storage and processing 
and transmission is almost negligible.
    What this means is that the parties to most transactions 
don't have to live near each other; they don't have to be in 
physical proximity. Many people think that may be true of 
assembly work in a factory. But it's increasingly becoming true 
throughout the job food chain. And whether you're a dentist or 
a researcher or an accountant this will affect you as well as 
an individual.
    The second factor is that 3 billion new capitalists have 
entered the labor force of the world in the last 15 years, 
these people are well educated. In many cases they're hungry, 
they're dedicated, they're very able. And they're seeking jobs 
just like our neighbors are.
    Third, there has been a change in the character of the 
funding of research in America. It used to be that government 
supported about two-thirds of the R&D, which fell to one-third. 
Industry picked up the missing third, but it did it with a very 
different nature and because of the pressures of the 
marketplace for short-term returns. What will do next quarter? 
Industry is abandoning slowing the R part of R&D, and investing 
heavily in the D. But somebody has to produce that seed-corn 
that benefits society as a whole. And that frankly is going to 
have to be our Federal Government, by and large.
    Finally there is the deterioration of the public K-12 
system about which much has been said, and so I won't repeat 
it, other than to point out that the problems are particularly 
true in the area of science and mathematics. What can we do 
about this? Our committee has proposed four recommendations, as 
a part of the package and it is a package. We proposed 20 
implementing actions; we propose energy dependence be one of 
the central themes of our overall effort. How do we reduce our 
dependence on foreign energy? In order of priority we propose 
solutions to some of the K-12 problems that we confront. We 
propose strengthening the basic research program, for example: 
by doubling the investment in aspects of that program over the 
next 10 years. We propose encouraging more people to go into 
science and technology and into the higher education system. 
Not because we want more scientists and technologists per se, 
only 4 percent of our workforce is made up of scientists and 
technologists. But science and technologists disproportionately 
produce jobs for the other 96 percent and that is why we have 
our interest in this area.
    And finally, we propose addressing issues in our 
competitiveness environment leading to patent policy, 
litigation, tax policy and so forth.
    So that is the proposal of the Academies report, and again 
I would say, it's very compatible with the bills that are being 
discussed in the Senate. Thank you very much.
    [The prepared statement of Mr. Augustine follows:]

  Prepared Statement of Norman R. Augustine, Chairman/Chief Executive 
  Officer (Retired), Lockheed Martin Corporation; Chair, Committee on 
    Prospering in the Global Economy of the 21st Century, National 
                               Academies

    Mr. Chairman and members of the Committee.
    Thank you for this opportunity to appear before you on behalf of 
the National Academies' Committee on Prospering in the Global Economy 
of the 21st Century. As you know, our effort was sponsored by the 
National Academy of Sciences, National Academy of Engineering and 
Institute of Medicine, which are collectively known as the National 
Academies. The National Academies were created by President Lincoln and 
chartered by Congress in 1863 to advise the government on matters of 
science and technology.
    Our study had as its origin a conversation which took place at the 
National Academies with Senator Lamar Alexander a number of months ago. 
As a result of that discussion, the Academies were requested by Senator 
Alexander and Senator Jeff Bingaman, members of the Senate Committee on 
Energy and Natural Resources, to conduct an assessment of America's 
ability to compete and prosper in the 21st century--and to propose 
appropriate actions to enhance the likelihood of success in that 
endeavor. This request was endorsed by the House Committee on Science.
    To respond to that request the Academies assembled twenty 
individuals with diverse backgrounds, including university presidents, 
public school educators, CEOs, Nobel Laureates and former Presidential 
appointees. The result of our committee's work was examined by 37 
highly qualified anonymous reviewers who were also designated by the 
Academies. In undertaking our assignment we considered the results of a 
number of prior studies which were conducted on various aspects of 
America's future prosperity. We also gathered over sixty subject-matter 
experts with whom we consulted for a weekend here in Washington and who 
provided over 100 recommendations related to their various fields of 
specialization.
    It is the unanimous view of our committee that America today faces 
a serious and intensifying challenge with regard to its future 
competitiveness and standard-of-living. Further, we appear to be on a 
losing path. We are here today hoping to elevate the Nation's awareness 
of this situation, which has been developing for several decades, and 
to propose constructive solutions.
    The thrust of our findings is straightforward. The standard-of-
living of Americans in the years ahead will depend to a very large 
degree on the quality of the jobs that they are able to hold. Without 
quality jobs our citizens will not have the purchasing power to support 
the standard-of-living which they seek and to which many have become 
accustomed; tax revenues will not be generated to provide for strong 
national security and healthcare; and the lack of a vibrant domestic 
consumer market will provide a disincentive for either U.S. or foreign 
companies to invest in jobs in America. Further, the weakening 
scientific and technological base in America will be diminished in its 
ability to meet such important challenges as the provision of clean, 
secure, sustainable, affordable energy.
    What has brought about the current situation? The answer is that 
the prosperity equation has a new ingredient, an ingredient that some 
have referred to as ``The Death of Distance.'' In the last century, 
breakthroughs in aviation created the opportunity to move people and 
goods rapidly and efficiently over very great distances. Bill Gates has 
referred to aviation as the ``World Wide Web of the twentieth 
century.'' In the early part of the present century, we are approaching 
the point where the communication, storage and processing of 
information are nearly free. That is, we can now move not only physical 
items efficiently over great distances, we can also transport 
information in large volumes and at little cost.
    The consequences of these developments are profound. Soon, only 
those jobs that require near-physical contact among the parties to a 
transaction will not be opened to competition from job seekers around 
the world. Further, with the end of the Cold War and the evaporation of 
many of the political barriers that previously existed throughout the 
world, nearly three billion new, highly-motivated, often well-educated, 
new capitalists entered the job market.
    Suddenly, Americans find themselves in competition for their jobs 
not just with their neighbors as was the case in the past but with 
highly-motivated and well-qualified individuals from around the world. 
The impact of this was initially felt in manufacturing, but soon 
extended to the development of software and the conduct of design 
activities. Next to be affected were administrative and support 
services. Today, ``high end'' jobs, such as professional services, 
research and management, are impacted. In short, few jobs seem 
``safe.'' Consider that--

   U.S. companies each morning receive software that was 
        written in India overnight in time to be tested in the U.S. and 
        returned to India for further production that same evening--
        making the 24-hour workday a practicality.

   Back-offices of U.S. firms operate in such places as Costa 
        Rica, Ireland and Switzerland.

   Drawings used by American architectural firms are produced 
        in Brazil.

   U.S. firm's call centers are based in India--where employees 
        are now being taught to speak with a mid-Western accent.

   U.S. hospitals have x-rays and CAT scans read by 
        radiologists in Australia and India.

   At some McDonald's drive-in windows, orders are transmitted 
        to a processing center a thousand miles away (currently in the 
        U.S.), where they are processed and returned to the worker who 
        actually prepares the order.

   Accounting firms in the U.S. have clients' tax returns 
        prepared by experts in India.

   Visitors to an office not far from the White House are 
        greeted by a receptionist appearing on a flat screen display 
        who controls access to the building and arranges contacts--she 
        is in Pakistan.

   U.S. patients have dental work performed in the Dominican 
        Republic, since an air fare is a minor part of the cost of such 
        treatment.

   Surgeons sit on the opposite side of the operating room and 
        control robots which perform the procedures. It is not a huge 
        leap of imagination to have highly-specialized, world-class 
        surgeons located not just across the operating room but across 
        the oceans.

    As Tom Friedman concluded in The World is Flat, globalization has 
``accidentally made Beijing, Bangalore and Bethesda next door 
neighbors''. And the neighborhood is one wherein able candidates for 
many jobs which currently reside in the U.S. are now just a ``mouse-
click'' away.
    How will America compete in this rough and tumble global 
environment that is approaching much faster than many had expected? The 
answer appears to be, ``not very well''--at least not unless we do a 
number of things differently from the way we have been doing them in 
the past. The Red Queen in Lewis Carroll's, ``Through the Looking 
Glass,'' offers us some sound advice, ``Now, here, you see, it takes 
all the running you can do to keep in the same place. If you want to 
get somewhere else, you must run at least twice as fast as that!''
    Why do we reach this conclusion? One need only examine the 
principal ingredients of competitiveness to discern that not only is 
the world flat, but in fact it may be tipping against us.
    One element of competitiveness is, of course, the cost of labor. I 
recently traveled to Vietnam, where the wrap rate for low-skilled 
workers is about twenty-five cents per hour, about one-twentieth of the 
U.S. minimum wage. And the problem is not confined to the so-called 
``lower-end'' of the employment spectrum. For example, five qualified 
chemists can be hired in India for the cost of just one in America. 
Eight engineers can be hired in India for the cost of one in America. 
Given such enormous disadvantages in labor cost, we cannot be satisfied 
merely to match other economies in those other areas where we do enjoy 
strength; rather we must excel markedly.
    The existence of a vibrant domestic market for products and 
services is another important factor in determining our Nation's 
competitiveness, since such a market helps attract business to our 
shores. But here, too, there are warning signs: Goldman Sachs analysts 
project that within about a decade, fully 80 percent of the world's 
middle-income consumers will live in nations outside the currently 
industrialized world. It is projected that in China alone there will be 
twice as many middle-class consumers as the entire population of the 
U.S. The availability of financial capital has in the past represented 
a significant competitive advantage for America. But the evolving 
mobility of financial capital is legion, as evidenced by the 
willingness of U.S. firms to build factories in Mexico, Vietnam and 
China if a competitive advantage can be derived by doing so. Capital, 
as we have repeatedly observed, crosses geopolitical borders at the 
speed of light. Consider that--

   In 2005, American investors put more new money in foreign 
        stock funds than in domestic stock portfolios.\1\
---------------------------------------------------------------------------
    \1\ Paul J. Lim. Looking Ahead Means Looking Abroad. New York 
Times. January 8, 2006.

   In 1995 (the most recent year for which data is available), 
        U.S. 12th graders performed below the international average for 
        21 countries on a test of general knowledge in mathematics and 
---------------------------------------------------------------------------
        science.

   U.S. 15-year-olds ranked 24th out of 40 countries that 
        participated in a 2003 examination administered by the Program 
        for International Student Assessment (PISA) of students' 
        ability to apply mathematical concepts to real-world problems.

    Human capital--the quality of our workforce--is a particularly 
important factor in our competitiveness. Our public school system 
comprises the foundation of this asset. But as it exists today, that 
system compares, in the aggregate, abysmally with those of many other 
developed--and even developing--nations. This is particularly true in 
the fields which underpin most innovation, namely science, mathematics 
and technology.
    Of the utmost importance to competitiveness is the availability of 
knowledge capital--``ideas.'' And once again, scientific research and 
engineering applications are crucial. But knowledge capital, like 
financial capital, is highly mobile. There is one major difference: 
being first-to-market, by virtue of access to new knowledge, can be 
immensely valuable--even if by only a few months. Dr. Craig Barrett, a 
member of our committee and Chairman of Intel, points out that ninety 
percent of the products his company delivers on December 31st did not 
even exist on January 1st of that same year. Such is the dependence of 
hi-tech firms on being at the leading edge of scientific and 
technological progress. And it is not simply so-called hi-tech firms 
that share this dependence. For example, the CEO of America's largest 
consumer products firm has characterized his firm as largely an R&D 
organization.
    There are of course many other factors influencing our Nation's 
competitiveness than those discussed above. These include patent 
processes, tax policy and overhead costs--such as healthcare, 
regulation and litigation--all of which tend to work against us today. 
On the other hand, America's version of the Free Enterprise System has 
proven to be a powerful asset, with its inherent aggressiveness in 
introducing new ideas and discipline and flushing out the obsolescent. 
But others have now recognized these virtues and are seeking to emulate 
many of the aspects of our system.
    But is it not a good thing that others are prospering? Our 
committee's answer to that question is a resounding ``yes.'' Broadly 
based prosperity can make the world more stable and safer for all; it 
can make less costly products available for American consumers; it can 
provide new customers for the products we produce. Yet it is inevitable 
that there will be relative winners and relative losers--and as the 
world prospers, we seek to assure that America does not fall behind in 
the race.
    The enigma is that in spite of all these factors, America seems to 
be doing quite well just now. Our Nation has the highest R&D investment 
intensity in the world. We have indisputably the finest research 
universities in the world. California alone has more venture capital 
than any nation in the world other than the United States. Total 
household net worth is now approaching $50 trillion. Two million jobs 
were created in America in the past year alone, and citizens of other 
nations continue to invest their savings in America at a remarkable 
rate.
    The reason for this prosperity is that we are reaping the benefits 
of past investments--many of them in the fields of science and 
technology. But the early indicators of future prosperity are generally 
heading in the wrong direction. Consider the following--

   The United States is today a net importer of high-technology 
        products. Its trade balance in high-technology manufactured 
        goods shifted from plus $54 billion in 1990 to negative $50 
        billion in just 11 years.\2\
---------------------------------------------------------------------------
    \2\ For 2001, the dollar value of high-technology imports was $561 
billion; the value of high-technology exports was $511 billion. See 
National Science Board. 2004. Science and Engineering Indicators 2004 
(NSB 04-01). Arlington, Virginia. National Science Foundation. Appendix 
Table 6-01. Page A6-5 provides the export numbers for 1990 and 2001 and 
page A6-6 has the import numbers.

   In one recent period, low-wage employers, such as Wal-Mart 
        (now the Nation's largest employer) and McDonald's, created 44 
        percent of the new jobs, while high-wage employers created only 
        29 percent of the new jobs.\3\
---------------------------------------------------------------------------
    \3\ Steve Roach. More Jobs, Worse Work. New York Times. July 22, 
2004.

   The United States is one of the few countries in which 
        industry plays a major role in providing healthcare for its 
        employees and their families. Starbucks spends more on 
        healthcare than on coffee. General Motors spends more on 
        healthcare than on steel.\4\
---------------------------------------------------------------------------
    \4\ Chris Noon. 2005. ``Starbuck's Schultz Bemoans Health Care 
Costs.'' Forbes.com, September 19. Available at: http://www.forbes.com/
facesinthenews/2005/09/15/starbuckshealthcare
benefitscx_cn_0915autofacescan01.html?partner=yahooti; Ron Scherer. 
2005. ``Rising Benefits Burden.'' Christian Science Monitor, June 9. 
Available at: http://www.csmonitor.com/2005/0609/p01s01-usec.html.

   Chemical companies closed 70 facilities in the United States 
        in 2004 , and tagged 40 more for shutdown. Of 120 chemical 
        plants being built around the world with price tags of $1 
        billion or more, one is in the United States and 50 are in 
        China. No new refineries have been built in the United States 
        since 1976.\5\
---------------------------------------------------------------------------
    \5\ Michael Arndt. 2005. ``No Longer the Lab of the World: U.S. 
Chemical Plants are Closing in Droves as Production Heads Abroad.'' 
BusinessWeek, May 2. Available at: http://www.businessweek.com/
magazine/content/05_18/b3931106.htm and http://www.usnews.com/usnews/
biztech/articles/051010/10energy.htm.

   The share of leading-edge semiconductor manufacturing 
        capacity owned or partly owned by U.S. companies today is half 
        what it was as recently as 2001.\6\
---------------------------------------------------------------------------
    \6\ Semiconductor Industry Association. 2005. ``Choosing to 
Compete.'' December 12. Available at: http://www.sia-online.org/
downloads/FAD%20'05%20-%20'scalise%20Presentation.pdf.

   During 2004, China overtook the United States to become the 
        leading exporter of information technology products, according 
        to the OECD.\7\
---------------------------------------------------------------------------
    \7\ OECD. 2005. ``China Overtakes U.S. As World's Leading Exporter 
of Information Technology Goods.'' December 12. Available at: http://
www.oecd.org/document/60/0,2340,en_
2649_201185_35834236_1_1_1_1,00.html. The main categories included in 
OECD's definition of ICT (information and communications technology) 
goods are electronic components, computers and related equipment, audio 
and video equipment and telecommunication equipment.

   The United States ranks only 12th among OECD countries in 
        the number of broadband connections per 100 inhabitants.\8\
---------------------------------------------------------------------------
    \8\ OECD. 2005. ``OECD Broadband Statistics, June 2005.'' October 
20. Available at: http://www.oecd.org/document/16/
0,2340,en_2649_201185_35526608_1_1_1_
1,00.html#data2004.

   In 2001 (the most recent year for which data are available), 
        U.S. industry spent more on tort litigation than on research 
        and development.\9\
---------------------------------------------------------------------------
    \9\ U.S. research and development spending in 2001 was $273.6 
billion, of which industry performed $194 billion and funded about $184 
billion. National Science Board. 2004. Science and Engineering 
Indicators 2004 (NSB 04-01). Arlington, VA: National Science 
Foundation. One estimate of tort litigation costs in the United States 
was $205 billion in 2001.
    Jeremey A. Leonard. 2003. ``How Structural Costs Imposed on U.S. 
Manufacturers Harm Workers and Threaten Competitiveness.'' Prepared for 
the Manufacturing Institute of the National Association of 
Manufacturers. Available at: http://www.nam.org/s_nam/bin.asp?
CID=216&DID=227525&DOC=FILE.PDF.

   In 2005, only four American companies ranked among the top 
        10 corporate recipients of patents granted by the United States 
        Patent and Trademark Office.\10\
---------------------------------------------------------------------------
    \10\ U.S. Patent and Trademark Office 2006. USPTO Annual List of 
Top 10 Organizations Receiving Most U.S. Patents. January 10, 2006. 
http://www.uspto.gov/web/offices/com/speeches/06-03.htm.

   Beginning in 2007, the most capable high-energy particle 
        accelerator on Earth will, for the first time, reside outside 
        the United States.\11\
---------------------------------------------------------------------------
    \11\ CERN. Internet Homepage. http://public.web.cern.ch/Public/
Welcome.html.

   Federal funding of research in the physical sciences, as a 
        percentage of GDP, was 45 percent less in FY 2004 than in FY 
        1976.\12\ The amount invested annually by the U.S. Federal 
        Government in research in the physical sciences, mathematics, 
        and engineering combined equals the annual increase in U.S. 
        health care costs incurred every 20 days.\13\
---------------------------------------------------------------------------
    \12\ AAAS. 2004. ``Trends in Federal Research by Discipline, FY 
1976-2004.'' October. Available at: http://www.aaas.org/spp/rd/
disc04tb.pdf and http://www.aaas.org/spp/rd/discip04c.pdf.
    \13\ Centers for Medicare and Medicaid Services. 2005. National 
Heath Expenditures. Available at: http://www.cms.hhs.gov/
NationalHealthExpendData/downloads/tables.pdf.

   Eight different studies by various economists of the 
        societal benefits from expenditures on research and development 
        reveal returns on investments ranging from 11 percent to 147 
---------------------------------------------------------------------------
        percent.

   When asked in spring 2005 what is the most attractive place 
        in the world in which to ``lead a good life'', respondents in 
        only one (India) of the 16 countries polled indicated the 
        United States.\14\
---------------------------------------------------------------------------
    \14\ Pew Research Center. 2005 ``U.S. Image Up Slightly, But Still 
Negative, American Character Gets Mixed Reviews'' Pew Global Attitudes 
Project. Washington, D.C. Available at: http://pewglobal.org/reports/
display.php?ReportID=247.
    The interview asked nearly 17,000 people the question: ``Supposed a 
young person who wanted to leave this country asked you to recommend 
where to go to lead a good life--what country would you recommend?'' 
Except for respondents in India, Poland, and Canada, no more than one-
tenth of the people in the other nations said they would recommend the 
United States. Canada and Australia won the popularity contest.

    As important as jobs are, the impact of these circumstances on our 
Nation's security could be even more profound. In the view of the 
bipartisan Hart-Rudman Commission on National Security, ``. . . the 
inadequacies of our system of research and education pose a greater 
threat to U.S. national security over the next quarter century than any 
potential conventional war that we might imagine.'' Indeed, the 
consequences of current trends are particularly acute for the defense 
sector, which must rely upon U.S. citizens for much of its engineering 
force and cannot shift sensitive work to overseas firms. Further, a 
service economy (which accounts for 75 percent of today's jobs) is, in 
general, not the foundation of military equipment and power.
    The good news is that there are things we can do to assure that 
America does in fact share in the prosperity that science and 
technology are bringing the world. In this regard, our committee has 
made four broad recommendations as the basis of a prosperity 
initiative--and offers 20 specific actions to make these 
recommendations a reality. They should be viewed as an integrated 
package and include:

   ``Ten Thousand Teachers, Ten Million Minds''--which 
        addresses America's K-12 education system. We recommend that 
        America's talent pool in science, math and technology be 
        increased by vastly improving K-12 education. Among the 
        specific steps we propose are:

        -- Recruitment of 10,000 new science and math teachers each 
        year through the award of competitive scholarships in math, 
        science and engineering that lead to a bachelor's degree 
        accompanied by a teaching certificate--and a 5-year commitment 
        to teach in a public school.

        -- Strengthening the skills of 250,000 current teachers through 
        funded training and education in part-time master's programs, 
        summer institutes and Advanced Placement training programs.

        -- Increasing the number of students who take Advanced 
        Placement science and mathematics courses and pass exams.

   ``Sowing the Seeds''--which addresses America's research 
        base. We recommend strengthening the Nation's traditional 
        commitment to long-term basic research through:

        -- Increasing Federal investment in research by 10 percent per 
        year over the next 7 years, with primary attention devoted to 
        the physical sciences, engineering, mathematics, and 
        information sciences--without disinvesting in the health and 
        biological sciences.

        -- Providing research grants to early career researchers.

        -- Instituting a National Coordination Office for Research 
        Infrastructure to oversee the investment of an additional $500M 
        per year for 5 years for advanced research facilities and 
        equipment.

        -- Allocating at least 8 percent of the existing budgets of 
        Federal research agencies to discretionary funding under the 
        control of local laboratory directors.

        -- Creation of an Advanced Research Projects Agency--Energy 
        (ARPA-E), modeled after DARPA in the Department of Defense, 
        reporting to the Department of Energy Undersecretary for 
        Science. The purpose is to support the conduct of out-of-the-
        box, transformational, generic, energy research by 
        universities, industry and government laboratories.

        -- Establish a Presidential Innovation Award to recognize and 
        stimulate scientific and engineering advances in the national 
        interest.

   ``Best and Brightest''--which addresses higher education. In 
        this area we recommend:

        -- Establishing 25,000 competitive science, mathematics, 
        engineering, and technology undergraduate scholarships and 
        5,000 graduate fellowships in areas of national need for U.S. 
        citizens pursuing study at U.S. universities.

        -- Providing a Federal tax credit to employers to encourage 
        their support of continuing education.

        -- Providing a one-year automatic visa extension to 
        international students who receive a science or engineering 
        doctorate at a U.S. university, and providing automatic work 
        permits and expedited residence status if these students are 
        offered employment in the U.S.

        -- Instituting a skill-based, preferential immigration option.

        -- Reforming the current system of ``deemed exports'' so that 
        international students and researchers have access to necessary 
        non-classified information or research equipment while studying 
        and working in the U.S.

   ``Incentives for Innovation''--in which we address the 
        innovation environment itself. We recommend:

        -- Enhancements to intellectual property protection, such as 
        the adoption of a first-to-file system.

        -- Increasing the R&D tax credit from the current 20 percent to 
        40 percent, and making the credit permanent.

        -- Providing permanent tax incentives for U.S.-based innovation 
        so that the United States is one of the most attractive places 
        in the world for long-term innovation-related investments.

        -- Ensuring ubiquitous broadband Internet access to enable U.S. 
        firms and researchers to operate at the state-of-the-art in 
        this important technology.

    The committee notes that, just as when America was faced with the 
science and technology challenge posed by Sputnik and President Kennedy 
announced the program to land Americans on the Moon, the proposals made 
herein will best be served by having a ``centerpiece goal''--
particularly with regard to the proposals affecting research. It is not 
intended that all the suggested efforts be directed at one particular 
national goal, but rather that a goal be established to provide a focus 
under which a central core of research can be pursued. The goal 
selected by the Committee is that of providing the Nation with 
sustainable, safe, clean, secure and affordable energy. This particular 
choice was made, first, because it represents a highly critical 
national problem and, second, because the challenge it offers relates 
closely to those particular aspects of science and technology of 
greatest concern herein; namely, physics, chemistry, mathematics, 
computer science and engineering.
    Since the Academies' draft report was released in October 2005, the 
response has been quite remarkable. We are particularly pleased that 
the President has embraced the challenge we are facing and proposed 
important actions in his American Competitiveness Initiative (ACI). As 
you also know, the House and Senate have been very active on this issue 
both before and after the National Academies report was released. Among 
the bills proposed is that of Senators Ensign and Lieberman--the 
National Innovation Act (NIA). This bill, along with the Protecting 
America's Competitive Edge Act (PACE) proposed by Senators Domenici, 
Bingaman, Alexander, and Mikulski, are generally harmonious with our 
recommendations. All three activities recognize the importance of 
increasing the Nation's investment in research--particularly at the 
National Science Foundation.
    The National Academies does not endorse legislation, but we would 
like to note that PACE and much of the NIA closely match the actions 
proposed in the Gathering Storm report. For example, the NIA would:

   Establish an Innovation Acceleration Grants Program which 
        would encourage Federal agencies funding research in science 
        and technology to allocate a fraction of their research and 
        development (R&D) budgets to grants directed toward high-risk 
        frontier research.

   Increase the national commitment to basic research by nearly 
        doubling research funding for the National Science Foundation 
        (NSF) by FY 2011.

   Make permanent the Research and Experimentation (R&E) tax 
        credit with modifications expanding eligibility for incentives 
        to a greater number of firms.

   Expand existing educational programs in the physical 
        sciences and engineering by increasing funding for NSF graduate 
        research fellowship programs as well as Department of Defense 
        science and engineering scholarship programs.

    Today we are not confronting a so-called ``typical'' crisis, in the 
sense that there is no 9/11, Sputnik or Pearl Harbor to alert us as a 
Nation. Our situation is more akin to that of the proverbial frog being 
slowly boiled. Nonetheless, while our committee believes the problem we 
confront is both real and serious, the good news is that we may well 
have time to do something about it--if we start now.
    Americans, with only 5 percent of the world's population but with 
nearly 30 percent of the world's wealth, tend to believe that 
scientific and technological leadership and the high standard-of-living 
it makes possible is somehow the natural state-of-affairs for our 
people. But such good fortune is not a birthright. If we wish our 
children and grandchildren to enjoy the standard-of-living most 
Americans have come to expect, there is only one answer: We must get 
out and compete.
    I would like to close my remarks with a perceptive and very 
relevant poem. It was written by Richard Hodgetts, and eloquently 
summarizes the essence of innovation in the highly competitive, global 
environment. The poem goes as follows:

        Every morning in Africa a gazelle wakes up. It knows it must 
        outrun the fastest lion or it will be killed.

        Every morning in Africa a lion wakes up. It knows it must 
        outrun the slowest gazelle or it will starve.

        It doesn't matter whether you're a lion or a gazelle--when the 
        sun comes up, you'd better be running.

    And indeed we should.
    Thank you for providing me with this opportunity to testify on 
behalf of my colleagues before the Committee. I would be pleased to 
answer any questions you may have about our report.

    Senator Ensign. Thank you. Our next witness will be Dr. 
Craig Barrett. Craig, welcome. Dr. Barrett is Chairman of the 
Board of Intel Corporation. We have worked together many times. 
Welcome to our committee. It is good to have you here. We look 
forward to hearing from you.

              STATEMENT OF DR. CRAIG R. BARRETT, 
            CHAIRMAN OF THE BOARD, INTEL CORPORATION

    Dr. Barrett. Thank you Mr. Chairman, and Senator Allen, and 
other members of the Committee. It's a pleasure to be here to 
testify in front of you today. As you may have ascertained from 
the previous two speakers, I'm deeply involved with the Council 
on Competitiveness, I was deeply involved with the National 
Academies and their report. And when we get to Dr. Kelly on my 
left I'm deeply involved with John, and the Semi-Conductor 
Industry Association and other associations, and frankly, all 
of these associations say exactly the same thing. They say the 
same sort or thing that was included in the National Innovation 
Act that you and Senator Lieberman have put forward; they're 
exactly what is said in the PACE legislation put forward by 
Senators Domenici, Alexander, Bingaman, and Mikulski. Both--
those pieces of legislation talk exactly about what Norm and 
Deborah have spoken about earlier, which is the U.S. is in a 
position of having to choose to compete in the future and 
choose to compete for a standard-of-living and competitiveness 
around the world.
    And if I could just capsulize what was said earlier. I 
think we need to choose to compete, in three specific areas 
which I'll just enumerate briefly. One is with smart people, 
second is with smart ideas, and the third is in an environment 
that lets smart people work with smart ideas to be successful. 
And the legislation and the reports all say the same thing 
about K-12 education, and young Americans majoring in 
mathematics and science, and their poor performance relative to 
their international peers. That needs to be corrected. The 
legislation in many instances suggest that the issue of smart 
ideas is really basic research and development. Research and 
development done in our universities and national labs, 
supported by National Science Foundation, NIST, DOE, and DOD. 
The reports call for an increase in that Federal expenditure, 
after about 20 years of flatness, in an environment when the 
rest of the world is catching us. As Norm Augustine mentioned, 
the last area is the environment to allow smart people to go 
forward with smart ideas and that is really the policy put 
forward by regulating agencies and the Federal Government and 
state governments, in some instances.
    If I could only make one suggestion in that space it's that 
the regulators and the legislators about the Hippocratic Oath 
of Competitiveness, which is ``Do No Harm.'' And if I just 
might point out a few quick examples where Do No Harm could be 
implemented it's in the issue of telecom policy, which in the 
last 10 years has really promoted the U.S. to fall from number 
1, in many instances to number 15 in broadband per capita 
implementation. And I think number 45 in mobile telephony 
implementation, so we've fallen dramatically behind as we focus 
more on fostering competition than we have focused on bringing 
capability to the consumer. And I would think that we could 
make great improvements there. Issues of fostering an 
environment for innovation and an investment in innovation, 
permanent R&D tax credits are I think important, I think, in 
that space. And if we look at the area of immigration and 
immigration reform, and Senator Allen and I spoke about this 
yesterday. The real issue of immigration ought to be protecting 
our borders on the one hand, but also looking at the best and 
brightest minds around the world and making the United States 
the most attractive place for them to come pursue their 
graduate education and stay and work. So something that I 
started to speak on about 5 years ago which is stapling a green 
card or an H1B Visa to every advanced degree granted to a 
foreign national from an U.S. university, which by the way, 
U.S. taxpayers pay for in great part, I think would be wise 
policy going forward.
    Let me just conclude by saying I'm very heartened by the 
Senate action, both the National Innovation Act and the PACE 
legislation. I'm very heartened by President's State of Union 
message on the American Competitiveness Initiative. And I look 
forward to working with the Senate and the House and the 
Administration to make sure that these pieces of legislation 
get enacted and help us improve our overall competitiveness. As 
Mr. Gretzky said many times, ``it's not where the puck is, it's 
where the puck is going.'' The puck is in a pretty good place 
right now from a competitiveness position, but we really need 
to see where the puck is going in five or 10 years and make 
sure we're there at that time.
    Thank you for this opportunity.
    [The prepared statement of Dr. Barrett follows:]

              Prepared Statement of Dr. Craig R. Barrett, 
                Chairman of the Board, Intel Corporation

    Mr. Chairman, members of the Committee:
    A once-in-a-lifetime event has taken place over the last 15 years. 
Half of the world's population has joined the free economic system. 
Approximately 3 billion people from China, India, Russia and the 
Eastern European countries have entered the world marketplace. They 
represent a tremendous opportunity for U.S. companies. They are the 
consumers of today and tomorrow--who are ready, willing and often 
increasingly able to purchase products ``Made in the U.S.A.'' Three-
quarters of Intel's sales, for example, are now outside the United 
States, and the Asia-Pacific region accounted for 40 percent of our 
revenue in 2003. But these nations also present an enormous challenge 
to U.S. economic and technological leadership.
    Aside from the growing competency and success of the foreign 
companies U.S. corporations must compete against, governments around 
the world are fighting to make their nations the best place to do 
business. They are developing their infrastructures, offering 
incentives to attract investment, and in many cases, providing a highly 
educated and motivated workforce. They are investing in research and 
creating their own domestic industries. As a result, we no longer have 
a lock on the ideas and innovations of the future.
    This was the challenge posed to the panel, upon which I served, 
convened by the National Academy of Sciences/National Academy of 
Engineering: What do we, as a country, need to do to prepare for this 
changing global dynamic? The report we issued, ``Rising Above The 
Gathering Storm,'' tackles these questions.

The Policy Prescription
    To retain or create jobs here in the U.S., we (as a society) first 
have to choose to compete. We won't win the race by asking others to 
slow down or by throwing barriers in their paths. Rather, we will win 
by being better than the competition. That means we must have higher 
productivity, greater innovation, superior education, and cooperative 
government policy. Here are four key points to remember:
    First, the competitiveness of the U.S. workforce depends on a 
strong educational foundation, particularly in the math and science 
skills required to succeed in the information technology industry. Yet, 
U.S. secondary school students continue to score significantly below 
the international average in both general and advanced math and 
science. In fact, out of developed countries, the U.S. ranked 19th in 
math achievement and 18th in science achievement. And this trend 
continues into the U.S. university environment where we see declining 
interest and number of graduates in engineering and the physical 
sciences. The fact that approximately one-half of advanced engineering 
degrees granted in the U.S. go to foreign nationals further exacerbates 
this issue.
    Fixing this problem requires a long-term commitment to some basic 
principles. We need to assure that teachers are well-prepared, 
academically, to instruct in math and science. We need to give them 
ongoing training opportunities to improve their skills. We need to pay 
market-competitive salaries to attract and retain good math and science 
teachers. We need our school administrators to open the doors to people 
who want to serve in teaching as a ``second career'' and who are 
qualified to do so--with a minimum of bureaucratic hassle. Most 
importantly, we need to raise our sights and not tolerate the 
mediocrity we currently have.
    Second, we must invest in the technologies and industries of the 
21st century. This means our government should prioritize where it puts 
its limited resources--will we subsidize the industries of the past, or 
invest in those of the future? Innovation is the backbone of new 
technologies, new industries and new jobs. It drives business process 
improvements, increases productivity, boosts economic development, and 
improves our standard-of-living. Yet, the Federal commitment to basic 
R&D is at its lowest level in percentage terms since the National 
Science Foundation began compiling data in 1953.
    In 2000, the Federal Government sponsored 26 percent of all R&D, 
compared to 47 percent in 1981 and 50 percent of basic research, down 
from 71 percent in 1981. Some would say, ``what's the problem? The 
private sector should pick up the difference.'' But the numbers don't 
tell the whole story: most of the Federal share of this research today 
is in the life sciences, while funding for the physical sciences has 
been flat for over two decades in real dollar terms. And most research 
done by the private sector is not basic, but developmental and applied 
research. Private sector companies with obligations to shareholders 
cannot afford to devote a great percentage of resources to basic 
research, which ``stretches the frontiers of knowledge.'' Only the 
Federal Government can support such research on the scale needed to 
support the graduate programs in areas such as engineering, physics, 
chemistry, materials science, computing technology and mathematics. A 
goal for the U.S. over the next few years should be to grow the budgets 
of key public research agencies like NSF by 10-12 percent a year. This 
funding goes primarily to America's universities, which are the best in 
the world, and we need to maintain their preeminence.
    Third, the U.S. must develop the infrastructure to support the 
industries and advancements upon which much of our economic growth will 
rely. In a recent survey by the International Telecommunications Union, 
the U.S. ranked 16th of 20 countries in broadband Internet penetration. 
Similarly, cellular mobile subscribers made up 54 percent of the U.S. 
population in 2003, compared with 106 percent in Hong Kong, 84 percent 
in the United Kingdom and 69 percent in South Korea.
    Our government should adopt telecom policies that encourage 
broadband deployment and facilities-based competition and, at the same 
time, assure consumers full access to Internet content and use of 
related applications and devices. Also, the radio spectrum needs 
substantial reform. Recently, the Technology CEO Council--the 
information technology industry's public-policy advocacy organization 
comprising CEOs from Applied Materials, Dell, EMC, Hewlett-Packard, 
IBM, Intel, Motorola, NCR and Unisys--made 10 specific recommendations 
that would maximize our Nation's spectrum efficiency and wireless 
potential. Simply put, we need to give licensees more flexibility and 
allow more unlicensed use where appropriate.
    Fourth, apply the Hippocratic Oath: ``Do No Harm''. We are hurting 
ourselves in three key areas: tax policy, immigration policy, and the 
intellectual property system.JLW
    Tax: Our tax policies today discourage investment in research, and 
investment in new manufacturing, in the U.S. Two examples:

   The erratic nature of how Congress has handled the Research 
        and Development Tax Credit (one-year extensions, allowing it to 
        expire)--which does not give any secure basis upon which 
        companies can know what the tax treatment of such expenditures 
        will be over time.

   The relatively high degree of taxation of U.S. corporate 
        revenues in the U.S., compared to the tax concessions that 
        foreign governments--eager to secure foreign investment 
        dollars--are willing to give to bring those investments to 
        their shores. Businesses have to make rational economic 
        judgments. We can pursue our existing tax policies, but we must 
        face up to the fact that the rest of the world is out to win 
        investment in new facilities. Our global competitors have no 
        compunctions about taking investment away from the U.S.

    Intel continues to invest substantially in new and upgraded 
manufacturing facilities in the U.S. But building a fabricating plant 
in the U.S. vs. overseas means starting out with a billion dollar 
deficit in return on that investment in the U.S.--and most of that 
delta is due to our domestic tax policies.
    Immigration: Our policies are a shambles. While illegal immigration 
rightly concerns all Americans, and the threat of terrorists crossing 
our borders must be dealt with, we also have to remember that our 
graduate schools of engineering are heavily dependent upon foreign 
talent. We must continue to attract the most talented students from 
other countries--and keep them here after they graduate, to work and 
build new companies and industries in the U.S. Yet our visa policies 
today work against these goals: H1B Visas are limited in number 
compared to our needs, and the backlog for those seeking permanent 
resident alien status is becoming a huge obstacle to keeping foreign 
graduates in the U.S.--particularly when there are superb opportunities 
for those graduates in their home countries as well. These problems 
must be fixed or our graduate engineering programs in the U.S. will be 
in jeopardy, as well as industry's ability to find enough talent in the 
U.S. to support expansion of research, engineering, and manufacturing 
capabilities.
    Intellectual Property: The patent system is in disrepair. We need a 
21st century system: more and better paid examiners; better search 
tools including expanded databases in computing technologies, 
semiconductors, and software; and we need to ``get back to basics'' 
with regard to how the courts handle patent infringement lawsuits.
    The point of the patent system is to encourage innovation and the 
use, for the benefit of society, of those innovations. Today, the 
system is beset by ``patent speculators,'' parties who buy up patent 
claims in the secondary market for the purpose of pursuing often 
specious claims of infringement. The hope is to use existing judicial 
rules on remedies and damages to extract large settlements. We need to 
rebalance the laws to return to the fundamental premise: the patent 
system exists for the benefit of society at large, and should not 
simply become a tool for the game of ``legal jeopardy.''
    ``Gathering Storm'' addresses these concerns with specific 
recommendations.

New Directions: American Competitiveness Initiative, PACE, and the 
        National Innovation Act
    In our industry we have a belief that you cannot save your way out 
of a recession . . . you can only invest your way to prosperity. I 
believe this holds true for the U.S. as a whole. We have to decide 
whether we are willing to make that investment.
    In his State of the Union speech this past January, and in the FY07 
budget transmitted to Congress in February, President Bush set forth a 
program--the American Competitiveness Initiative--which is designed to 
begin attacking these problems. The President's program embraces a 
wide-ranging plan to strengthen our workforce, our math and science 
education programs, research funding, and investment incentives.
    Congress has also embraced this challenge with legislation such as 
the National Innovation Act and the three PACE bills introduced last 
month. Those of us in industry who have been working on these issues 
for several years now are encouraged by this new national focus on 
competitiveness. The President's Initiative, and the bills that have 
been introduced, represent the directions that we must move in as a 
society if we expect to retain our place as the global leader in 
innovation, the creation of new technologies, and new industries which 
provide high-value jobs. The business community is united in supporting 
rapid action on these initiatives.
    Our challenge over time will be to ensure that the focus is not 
lost as the process goes forward, and this year's budget and 
appropriations are history. Reversing the path of stagnation and 
decline will require a dedicated commitment in Congress to continuous 
improvement in programs and funding levels over the next several years. 
We in industry stand ready to work with you to make long-term success a 
reality; to educate and help lead a rebuilding of the foundations of 
innovation that have served us so well over the past 50 years.
    Thank you for your attention.

    Senator Ensign. Thank you. Our next witness will be Dr. 
John Kelly III, Senior Vice President of Technology and 
Intellectual Property for IBM Corporation. Welcome, Dr. Kelly. 
We look forward to hearing from you.

        STATEMENT OF DR. JOHN E. KELLY III, SENIOR VICE

        PRESIDENT, TECHNOLOGY AND INTELLECTUAL PROPERTY,

                        IBM CORPORATION

    Dr. Kelly. Good afternoon, Mr. Chairman and Senator Allen. 
I want to thank you both for the bipartisan support of the 
National Innovation Act. Together you have produced both 
practical steps and an intellectual framework for the United 
States to drive our competitiveness.
    As a company, IBM is committed to innovation as being a 
central driver for a sustained competitive advantage; we're 
encouraged by the momentum that is ongoing here in the Senate. 
Now, IBM believes the drivers of growth are very different 
today than they were just a few years ago and that the rewards 
of this growth will not be equally shared. They will flow to 
those enterprises and nations that can innovate and turn these 
global shifts to their advantage.
    As an example, IBM and several companies from around the 
world are collaborating in semiconductors or in nanoelectronics 
in the State of New York, in the Hudson Valley. Companies from 
the U.S. such AMD, Sony and Toshiba from Japan, Samsung from 
Korea, Chartered Semiconductor from Singapore and Infineon from 
Germany all are in the U.S. in New York, collaborating in a 
partnership with state government with the university systems 
and with this industry collaboration. I assure you that the 
U.S. and New York would not have been chosen had we not had 
this open collaborative innovative model in the U.S.
    So how do we as a Nation enable innovation in its many 
forms? How do we capitalize on the changes in technology, 
business, and innovation itself and translate this into 
differentiators for American prosperity?
    Achieving innovation success requires more than just the 
traditional pillars that we have spoken about here today, such 
as education, research and development, and technology transfer 
policy. There are other factors that govern whether and where 
new ideas will make it to the market, including the 
availability of risk capital, the ability to leverage 
intellectual capital, infrastructure and as was previously 
mentioned health, legal and regulatory costs.
    The point is that America needs a strategic, integrated and 
sustainable focus on strengthening our national innovation 
ecosystem. And this ecosystem includes both policies and 
physical infrastructure.
    The National Innovation Act recognizes this and raises 
important issues through this committee. The National 
Innovation Act would almost double, as you know, the funding 
authorized for NSF over 5 years; it would set goals for 
committing 3 percent of its annual R&D for Innovation 
Acceleration Grants and support novel approaches to address 
fundamental technology challenges. I urge the Committee to 
approve these measures.
    IBM, working with hundreds of people through the National 
Innovation Initiative, learned that many of the richest 
opportunities for growth reside at the intersections of 
technology, insight and traditional disciplines. Research 
funding and academic curricula, however, often remains stove-
piped and make this type of collaboration very difficult.
    The National Innovation Act directs that a percentage of 
the research funding be devoted to these multidisciplinary 
research projects. The bill also supports multidisciplinary 
education, in fact the bill takes the next strategic step and 
helps integrate scientific and business knowledge that underpin 
our rapidly growing services economy. Some of the fastest 
growing well-paid professions in fact require both technology 
and business expertise that are integrated.
    Our Nation's transition to a globally-integrated high-value 
service economy requires these skills not only for services, 
but for areas like manufacturing and I sense that we perhaps 
are ignoring innovation in services and that could be a 
tremendous competitive mistake for us. I understand the service 
economy employs 75 percent of the civilian U.S. workforce, and 
generates two-thirds of our gross national product and produces 
$56 billion of trade surplus. We simply can't afford to leave 
this portion behind in the innovation agenda.
    Now IBM is working with some of our top institutions, 
academic institutions in the U.S., such as Georgia Tech, North 
Carolina State, Rensselaer Polytechnic Institute to develop 
services science curricula that will help produce the needed 
skills in these high innovation fields. The National Innovation 
Act would require the NSF in consultation with industry and 
academia to examine how the Federal Government should best 
support services science through research education and 
training. We also need a mechanism to sustain our focus and our 
policy on innovation.
    These issues include boosting services innovation, 
reforming the patent system and making risk capital more 
available in America. The National Innovation Act establishes 
such a mechanism, the President's Council on Innovation chaired 
by the Secretary of Commerce. IBM believes that we can draw on 
the expertise of the Economic Development Administration to 
help more communities join the type of collaborative work I 
talked about in New York State.
    So in summary, Mr. Chairman, Senator Allen, your 
legislation sets the Committee on the right path; it sends the 
right message, and we understand that the changes taking place 
around the world can work to our advantage. And I assure you 
that the IBM Corporation stands ready to help in any way. Thank 
you again for the opportunity to be with you today.
    [The prepared statement of Dr. Kelly follows:]

  Prepared Statement of Dr. John E. Kelly III, Senior Vice President, 
         Technology and Intellectual Property, IBM Corporation

    Good afternoon, Senator Ensign, Mr. Chairman, and members of the 
Committee. Thank you for inviting me to join you today. My name is John 
Kelly and I am Senior Vice President of Technology and Intellectual 
Property for the IBM Corporation. I appreciate the opportunity to offer 
IBM's views on innovation and U.S. competitiveness and the actions that 
this committee can take to strengthen our standing in the world. 
Innovation rightly has taken center stage in discussions across the 
country about our economic future and I thank you for your leadership.
    I also wish to thank Senator Ensign's co-author, Senator Lieberman, 
for working in a bipartisan fashion to craft S. 2109, the National 
Innovation Act. Together you have produced both practical steps and an 
intellectual framework for a competitiveness strategy for the United 
States based on innovation. IBM co-chaired the National Innovation 
Initiative that helped inspire this important legislation and we 
commend it highly.
    As a company committed to innovation as the central driver of 
sustainable competitive advantage, we're encouraged by the momentum 
building in the Senate. IBM supports the President's American 
Competitiveness Initiative and the Protecting America's Competitive 
Edge (PACE) legislation introduced by Senators Alexander, Bingaman, 
Domenici and Mikulski. We support efforts in the Judiciary, Energy, and 
HELP Committees to reform the patent system, invest in basic research 
and strengthen math and science education as well as the Finance 
Committee's proposal to reform and make permanent the R&D credit. We 
also look to the Appropriations Committee to prioritize key innovation 
investments.
    Our task today is to understand more clearly the changing nature of 
innovation and its importance to U.S. competitiveness--and to identify 
how the Committee on Commerce, Science, and Transportation should lead 
this effort. The National Innovation Act points the way. I understand 
that Senator Ensign has reintroduced Title I of the National Innovation 
Act as a stand-alone bill, S. 2390, under this committee's 
jurisdiction.
    At IBM, we no longer focus exclusively on developing, manufacturing 
and delivering information technology. Our clients around the world 
need more. They want an innovation partner who can help them apply and 
integrate technology in ways that deliver new and lasting value for 
their customers. We are proud that IBM is more than an innovative 
company; we are an innovation company.
    IBM is at the forefront of innovation and it is far more than 
creating new products and services. IBM's view of innovation includes 
business processes, new business models, management and corporate 
culture and, of course, innovation as a source of societal change. Our 
Chairman, Sam Palmisano, says that innovation is both an IBM value and 
our value proposition.
    Innovation has been a driving force behind the remarkable 
productivity growth that has buoyed the U.S. economy through the 
turbulent waters of the tech bubble, the war on terror, energy price 
increases and natural disasters. It is both generating growth and 
creating new U.S. jobs in the face of all these obstacles and the 
increasing strength of our global competitors.
    Americans know, however, that we cannot be complacent and hope to 
remain competitive. We have to recognize the genuine challenges on the 
horizon--including all the pressures of a flattening world--address our 
shortcomings, and embark on a thoughtful, sustained commitment to put 
in place the policies, incentives and investments that support U.S. 
innovation, spanning from knowledge creation to commercial application.
    IBM knows innovation literally inside and out. We are not only 
innovation partners with our clients; we are transforming our own 
business, driven by major new global marketplace realities and 
opportunities. As a company with $91 billion in revenue that does 
business in more than 170 countries, IBM has unique insight into global 
trends and a very broad platform from which to make national 
recommendations.

Trends
    We believe that the drivers of growth are very different today than 
they were just a few years ago and that the rewards of that growth will 
not be shared equally. They will, as in the past, flow to those 
enterprises and nations that can innovate and turn disruptive shifts to 
their advantage.
    Let me give you three examples of what I mean by disruptive shifts:
    Network Ubiquity: In less than a decade, the Internet--the most 
visible evidence of an increasingly networked world--has reached some 
800 million people, and is projected by some analysts to reach more 
than a billion people by 2007. The Internet not only has connected 
people and opened access to the world's information; it is rapidly 
becoming the planet's operational infrastructure. It is linking people, 
cultures, businesses and institutions, as well as billions--ultimately 
trillions--of devices. It is facilitating and transforming transactions 
of all kinds--from commerce, government services, education and 
healthcare, to entertainment, conversation and public discourse.
    Open Standards: Technical and transaction specifications underpin 
all industries. When they become standards--that is, when they are 
widely adopted--they enable growth by spurring the creation of many new 
kinds of products and services. Standards made possible electrical, 
telephone and TV networks, CDs, DVDs, credit and debit cards and global 
financial markets--and by extension, all the other business and public 
services those systems enabled.
    Today, standards are taking hold in information technology. They 
determine how computers operate and software applications are 
developed, how digital content is produced, processed, distributed and 
stored, and how transactions of all types are managed. These standards 
are ``open''--that is, not owned or controlled by any one company or 
entity. (The Internet itself is--and should remain--the ultimate open 
standard.) No one can deny that the Internet has generated tremendous 
innovation.
    Open standards promote innovation in several ways. They form a 
common base upon which others can build. The best open standards are 
almost invisible. Home builders, for examples, design most homes to use 
standard size windows. Window manufacturers then compete on the quality 
of the glass and on innovations such as locking mechanisms. Standard 
sizes lower the price of windows for consumers and they lower the 
barriers of entry for competitors with new technologies to enter the 
marketplace.
    Collaborative Innovation: The final shift I'll mention--
collaborative innovation--is an outgrowth of the previous two. In the 
Industrial Age, innovation primarily was the result of work by 
individuals or small groups within an enterprise.
    Today, the ubiquity of networks and the adoption of open standards 
have created an environment that allows groups of people to innovate 
together across enterprises and national boundaries.
    Collaborative innovation is real. It is the basis for open source 
software, such as Linux. If America is going to remain the innovation 
leaders, we must embrace and incent collaborative innovation.
    For example, in New York's Hudson Valley there is an unique 
collaboration in advanced semiconductors that started with 
international companies including IBM and AMD from the United States, 
Sony and Toshiba from Japan, Samsung from Korea, Chartered 
Semiconductor from Singapore, and Infineon from Germany. It has begun 
to spread and now includes ASML from the Netherlands; Sematech, a 
consortium of semiconductor companies; and Albany Nanotech at The 
University of Albany.
    There is only one reason why all these companies have chosen to 
base this collaboration in New York. There was a partnership between 
New York State government, which had the vision to provide incentives 
for this collaboration; the university system, which is pumping out the 
skilled graduates to fill jobs that have been created and companies 
that have chosen to invest billions of dollars in the region. I can 
assure you that if New York had not adopted this collaborative model, 
all the investment, all the students and all the jobs that have been 
created would now be located in Asia.
    Earlier this month, IBM released the findings of a global survey on 
the subject of innovation. It was a unique piece of work--765 personal 
interviews with CEOs and other business leaders. One of the more 
striking findings is the correlation between collaborative innovation 
and financial performance. Those that do it best, outperform their 
competitors.
    The fundamental shifts I have described are creating significant 
competitive advantages for institutions around the world. Companies are 
innovating in new areas, such as supply chain management, engineering 
design services, human resource management, after-sales services and 
customer care. Governments are reorganizing around missions rather than 
departments. Academic institutions are redefining their curriculums and 
delivering courseware through the Internet in addition to classrooms.
    In healthcare, we see personalized medicine on the horizon as the 
integration of patient histories and genomic data is changing the 
nature of diagnosis and patient care.
    This new organizational structure and marketplace are growing 
dramatically, and American industry is at the forefront. We see global 
opportunity in excess of $500 billion as enterprises around the world 
transform themselves recognizing that new and integrated processes 
result in genuine competitive advantage.
    So, how do we, as a Nation, enable innovation in its many forms? 
How do we capitalize on the most important developments in technology, 
infrastructure and business organization and translate them into 
differentiators for American prosperity? In short, how do we optimize 
for innovation?

Innovation Ecosystem: a Key Concept
    Achieving national innovation success requires, to be sure, the 
traditional pillars of education, research and development, and 
technology transfer policy. But today it requires more. The challenge 
is not only to generate fresh ideas and intellectual property, but to 
transform them into new value. The private sector is the primary agent 
for innovation, marshalling insight, technology, management and capital 
on a global scale to meet market and societal demands.
    The Federal Government, however, has enormous influence over the 
physical and policy environment in which the private sector innovates. 
Federal basic research sets the pace of fundamental knowledge advances, 
tax policies encourage private enterprises to invest in innovation, and 
education policy at all levels of government impacts our most crucial 
asset--skilled citizens.
    And this is only a small sampling. There are many other factors 
that govern whether (or where) a new idea makes it to market--including 
the availability and cost of risk capital, the ability to leverage 
intellectual capital, adequate infrastructure, and health, legal and 
regulatory costs. Bankruptcy law plays a role in whether an 
entrepreneur can fail before succeeding. Trade policy can determine who 
provides new services to a networked global marketplace.
    The point is that America needs a strategic, integrated and 
sustained focus on strengthening the national innovation ecosystem. 
This ecosystem includes the policies (e.g., research, education, tax, 
immigration, intellectual property) and physical infrastructure (e.g., 
national and university labs, high-speed networks, transportation) that 
accelerate or hinder innovation. As important as it is this year to 
boost basic research and improve math and science education, we will 
have failed if we only accomplish those pieces of the puzzle.

Priorities for the Commerce, Science, and Transportation Committee
    The National Innovation Act places many thoughtful measures before 
this committee that would accelerate innovation-based prosperity for 
the United States. The Act would:

        1. Reinvigorate basic research and math & science education at 
        the National Science Foundation (NSF) and National Institute of 
        Standards and Technology (NIST).

        2. Encourage multidisciplinary learning and research.

        3. Launch a strategic effort to grow America's high-value 
        service economy.

        4. Establish a mechanism to frame, assess and coordinate 
        strategically the future direction of the Nation's innovation 
        policies.

        5. Coordinate Federal economic development programs on regional 
        innovation hotspots and create more dynamic innovative industry 
        clusters.

    NSF and NIST: Senator Ensign stated, when introducing the National 
Innovation Act, that current Federal budget restraints require a 
prioritization of spending--and that increased support for basic 
research should be a national priority. Senator Ensign is absolutely 
correct.
    The Federal Government is the primary source of funds for 
university-based fundamental research. This research is the base from 
which new technologies are derived. This is not research, however, that 
will get done in the private sector. Industry has a major R&D 
responsibility to build on fundamental research and it is investing 
heavily. For example, the semiconductor industry invests on average 13 
percent of sales in research and development. However, industrial R&D 
cannot replace government investment in long-term fundamental research.
    The National Innovation Act would almost double the funding 
authorized for NSF over 5 years and set a goal of committing at least 3 
percent of its annual R&D budget for ``Innovation Acceleration Grants'' 
that support novel approaches to address fundamental technological 
challenges. It also requires NSF to focus on the physical sciences and 
engineering. This is a critical emphasis area. Much of our country's 
success is built on this type of smart, purposeful investment. I urge 
the Committee to approve these measures.
    The bill also would authorize $300 million for NIST to support 
advanced manufacturing. This investment would support research on 
state-of-the-art production processes and facilitate a NIST competition 
for three ``Test Beds of Excellence.'' The test beds would be places 
where entrepreneurs could develop and test prototypes for new 
technologies, helping them bridge one of the most difficult stages 
between a good idea and a job-generating enterprise. NIST would fund 
one-third of the test-bed facilities, requiring the remaining two-
thirds to come from industry and state or local government.
    Speaking as both an engineer and a scientist, I am encouraged that 
S. 2109 would create additional NSF graduate level fellowships and 
traineeships for study in science, technology, engineering and 
mathematics (STEM). Coupled with similar investment in Department of 
Defense education programs, this legislation would train 5,000 more 
scientists over 5 years. The bill also makes smart investments in: (1) 
the NSF Tech Talent program to increase the pool of undergraduate STEM 
students; and (2) in innovation-based experiential learning in 1,000 
schools at the K-12 level.
    IBM strongly supports these provisions and I'd like to highlight 
the importance IBM places particularly on experiential learning. We 
believe this type of hands-on, problem-solving and analytical skill set 
is crucial to educating the next generation of innovators--especially 
in the engineering and technical professions. Experiential learning 
focuses on ill-structured problem-solving and provides deeper meaning, 
applicability and relevancy to classroom materials. A curriculum 
focused exclusively on acquiring discreet skills and memorizing 
information will not produce the leaders and innovators America needs.
    Senator Ensign, we look forward to working with you to ensure that 
these provisions are considered by the Health, Education, Labor, and 
Pensions Committee.
    Multidisciplinary learning and research: Competitive advantage 
today comes from expertise--and expertise is not static. The United 
States needs the world's deepest, most diverse collection of business 
and technology innovators, supported by advanced collaboration systems 
and a culture that enables continuous learning. In the Agricultural 
Age, land and farm production defined competitive advantage. In the 
Industrial Age, it was raw materials and manufacturing capability. 
Today, it is the ability to create and apply intellectual capital based 
on multidisciplinary expertise.
    Many of the richest opportunities for growth reside at the 
intersection of technology, insight and traditional disciplines. 
Advances in medical technologies, for example, integrate biology with 
physics, math, materials sciences, computing power and software 
engineering. Research funding and academic curriculums, however, often 
remain stove-piped and make this type of collaboration difficult.
    S. 2109 responds to this reality, directing that Innovation 
Acceleration Grants and a percentage of Defense research be devoted to 
multidisciplinary research projects. The bill also supports 
multidisciplinary education, enabling students to better integrate 
insights from multiple scientific fields. In fact, the National 
Innovation Act takes the next strategic step--it helps integrate 
scientific and business knowledge that underpins contemporary 
innovation and our rapidly growing service economy.
    Growing the high-value service economy: Workforce skills must 
include both technology and business expertise. An understanding of 
technology--its current capabilities as well as its future potential--
is now integral to business decisionmaking. Business leaders need 
innovation partners who are at the frontiers of research and deeply 
steeped in the issues and dynamics of specific industries.
    Our Nation's structural transition to a services economy (see 
chart) needs to be supported by a deepened understanding of how 
services support and interact with manufacturing and other more 
traditional activities. In fact, in today's global economy, the 
services sector provides the bulk of employment in high-wage economies, 
including America's. The service economy employs 75 percent of the 
civilian U.S. workforce; generates two-thirds of our gross domestic 
product; and produces a $56 billion trade surplus. We simply cannot 
ignore innovation in services.



    A wide community is beginning to discuss new developments in global 
connectivity, automation, technology integration and web services, 
opening a new scientific discipline. Leading universities are working 
with IBM to better understand the social and technical issues involved 
in collaborating across global enterprises. Much in the way the first 
computer science department was established at Columbia University in 
collaboration with IBM, we are working with institutions like Cal 
Berkeley, Georgia Tech, North Carolina State, and Rensselaer 
Polytechnic Institute to develop Service Science, Management and 
Engineering (SSME) curriculums. Federal research investment and 
collaboration could significantly accelerate learning in this area.
    In my industry, the need for individuals with these skills is 
particularly acute. The information technology sector needs people able 
to fuse industry-specific knowledge, information technology and 
business process expertise. New information technology jobs are 
mushrooming in areas like business analysis, security analysis, vendor 
management, service management, system integration, and others.
    Two sections of S. 2109 tackle this issue. The bill would require 
NSF, in consultation with industry and academia, to examine how the 
Federal Government should best support service science through 
research, education and training. The bill also would fund university 
Professional Science Masters Degree programs that include education in 
these multidisciplinary skill sets.
    Mechanism to sustain national innovation focus: As I stated 
earlier, innovation relies on many factors. I am hopeful that we will 
address some of our most pressing problems this year, but we need a 
leadership mechanism to sustain our focus and policymaking for 
contemporary innovation challenges. These issues beyond research and 
education, like boosting services innovation, reforming the patent 
system, and making risk capital more available will differentiate 
America from our competitors--keeping this country the most fertile and 
attractive place in the world to innovate.
    The National Innovation Act would establish such a mechanism, a 
President's Council on Innovation, chaired by the Secretary of 
Commerce. The Council would recommend policies annually across agencies 
to boost innovation. Our hope is that such a Council will sustain and 
lend political support to ideas that few others now have on their radar 
screens--things like S. 2109's proposal to examine how markets could 
better value intangible assets. In a knowledge economy, intangible 
assets like intellectual capital can be a company's most valuable 
asset; yet financial markets lack measurement tools to account for 
these assets.
    Coordinate Federal economic development: I've already spoken about 
IBM's collaborative ``innovation hot spot'' in New York and we're 
familiar with other regional hotspots--places like Silicon Valley and 
Research Triangle. These communities have developed a culture of 
innovation and entrepreneurship that arises from collaboration between 
industry, academia, financial firms and government. IBM believes this 
committee can draw on the experience of the Economic Development 
Administration (EDA) to help more communities join in this prosperity.
    The National Innovation Act prescribes simple but important steps, 
asking EDA to produce a Guide to Developing Successful Regional 
Innovation HotspotsTM and to develop metrics that measure 
successful development strategies. This will enable states and the 
Federal Government to prioritize funding on those projects most likely 
to generate jobs and growth in return for taxpayer investment.

Summary
    America has a long history of recognizing when change is required 
and rising to the challenge. We are at such an inflection point today. 
Although we retain many advantages, we must renew our commitment to 
basic research, improve dramatically our math and science abilities, 
and embark on a sustained effort to hone the supporting network of 
policies that enable contemporary innovation.
    S. 2390 sets this committee on the right path. It sends a message 
to constituents back home that the Senate understands the changes 
taking place around the world and we're ready to turn them to our 
advantage. I also ask Members to revisit S. 2109, the broader National 
Innovation Act that includes provisions outside the scope of this 
committee and to help bring those important ideas into practice as 
well. The IBM Corporation stands ready to help.
    Thank you for the opportunity to be with you today.

    Senator Ensign. Thank you all for excellent testimony. I 
would like to go much further than even some of this 
legislation goes to address a lot of your recommendations. You 
know some of the costs in implementing health IT--and we've 
held hearings on that, and working on that within the Health, 
Education, Labor, and Pensions Committee we are exploring the 
implications of healthcare costs. I believe that the whole 
issue of medical liability reform is critically important. This 
topic gets into the whole area of legal reform and some of the 
comments that you all have made about more money being spent on 
legal costs by corporations today, than on R&D and that's--your 
report actually--the numbers that I saw in Rising Above the 
Gathering Storm on, graduations of engineers in 2004: 500,000 
engineers in China, and 200,000 in India. Those were much 
higher numbers than I've seen before. The numbers I saw before 
were disturbing, and these are even higher numbers.
    Last time I checked though, I think we might have one or 
two more lawyers than either one of those countries. So that 
might be something we need to take a look at as well. Taxes. 
You know, we passed the Invest in the USA Act last year, which 
has brought over $350 billion back into the United States. And 
it is just an example that indicates that, we need to consider 
further tax reform to support competitiveness. Tax reform is an 
area beyond the jurisdiction of this committee, but tax policy 
is certainly an area we need to examine when considering 
comprehensive innovation and competitiveness legislation. Dr. 
Barrett, you mentioned Telecom, and you know I have a bill on 
Telecom Reform, and I totally agree it's an area where we need 
to act because of what positive action can do to drive 
broadband deployment in the United States. Competitiveness in 
the telecommunication sector not only benefits the consumers, 
it can also benefit our country when examined from the 
standpoint of global competitiveness. Now having said that, I 
want to get to a couple of questions. I want to start with Ms. 
Wince-Smith, and the idea of metrics. You know how we study 
things. How we measure whether some programs are working, we 
have been talking a lot with the Administration; we have a lot 
of different programs out there. Can you elaborate on the 
Competitiveness Index that you have talked about. As you know, 
the dollars that we have up here are limited? How do we measure 
what is working and what is not, so that we can put money 
toward programs that are working and take money away from 
things that are not working?
    Ms. Wince-Smith. Well first the Competitiveness Index that 
we've been doing at the Council since 1986--and we do this in 
collaboration with Michael Porter--is really a set of 
quantitative measures on U.S. economic performance across a 
whole range of dimensions; and then benchmarking our 
performance against global competitors. Now we do look at 
obvious inputs like savings levels, numbers of patents, 
scientists, engineers, education levels, and also we put a 
qualitative story around that, and much of that we've heard 
today. But what really has not been done--and there have been 
attempts by the Federal Government and OMB--is to really look 
at the outcome and the performance of these inputs.
    We talk about the numbers of scientists and engineers and 
we compare ourselves to China and India, but let's not forget 
the Soviet Union had the largest number of scientists, and 
engineers in the world and they certainly didn't have a 
competitive, dynamic innovative economy. So what are the things 
that are going on that we can begin to elucidate and try to 
measure to produce outcomes of productivity growth, and 
standards of living? Its really green field research. It hasn't 
been done before and I think it's going to take some of the 
really best economists, not just in the United States, but with 
some of our international partners to begin to try to 
understand this. Federal agencies, once a program is going, 
they do not like to stop it. And they don't want to take 
something off the plate. And so there's priority setting, as 
the President has mentioned, two areas--it was interesting in 
his State of the Union, he mentioned supercomputing and 
nanotechnology out of all the potential areas, and of course 
they're interdisciplinary. But are we going to take some things 
off the plate in order to invest in that. Agencies are very 
reluctant to do that, and I think that's where those--the 
leadership in Congress is needed to help make that happen.
    Senator Ensign. Mr. Augustine, I know that your group did 
not get into a lot of the details; it would be my 
recommendation for the further work, that you help us. Because 
you have seen what an impact some of these reports have had on 
the Congress. They have helped us move forward. When we do our 
own studies, even GAO, talked about the 207 different STEM 
programs that are out there, we--if we have outside groups like 
your's telling us that these programs over here are not 
working, and we should shift the money to these programs over 
there. It gives great credibility to us, who are trying to do 
those things if we have outside groups to support these 
actions. So I would encourage you to do that in some of your 
future work. This can be a great partnership, because the 
people that you have lined yourselves up with have so much 
credibility that it can really help to move all of this 
forward.
    In the Rising Above the Gathering Storm report, the focus 
is on the need to improve K-12 mathematics. Did you look at the 
idea of how we motivate our kids? Senator Allen talked about 
it, in India, science, technology, engineering and mathematics 
are tickets out for young students. A lot of our children, 
especially minorities, look at becoming someone in the music 
industry or someone in the sports industry as their ticket out. 
How do we motivate more kids to go into science and math? How 
should we encourage more students to become engineers? Teaching 
science and math is one thing, but we also have to motivate our 
children outside of the classroom.
    Mr. Augustine. It's a terrific question and something we 
thought about a lot and frankly we didn't deal with it in great 
depth; because it's not something you could legislate 
obviously. But there are things you could do, and first of all, 
the notion that science and engineering is boring, which 
frankly is held by many young people. I'm an engineer; I've had 
a minor part in helping put 12 of my friends on the moon during 
my career. I mean what more could you ask in a life than to 
just to have done that. So it's exciting. The problem is we 
don't convey that: we particularly don't convey that to young 
women.
    It's our committee's belief that the most powerful single 
thing we could do, would be to have qualified in the field 
teachers in K-12 who really have a degree in science, or a 
degree in engineering, or a degree in mathematics that can 
inspire our young people. Today if you're in eighth grade in a 
public school in America, there's a 58 percent chance, excuse 
me , a 68 percent chance that your math teacher won't have a 
degree or certificate in math. If you're in eighth grade 
there's a 93 percent chance that your science teacher, physical 
science teacher won't have a degree in the field. It's very 
likely to be the phys ed teacher who is told, go teach math, 
and they don't like it, they don't understand it, they don't 
enjoy it and they convey that.
    Then you have the father of the girl in eighth grade, who 
says Algebra isn't for girls, don't study Algebra. Well if you 
make the decision in 8th grade not to study Algebra you're 
never going to be an engineer or a scientist. You could be a 
lawyer, and decide to do that in your senior year of college, 
but if you want to preserve the option to be a scientist or 
engineer, that's an 8th grade decision.
    So I think there are many things that we could do but 
foremost would be to have teachers who are qualified in the 
field, who are excited about it. And who can go beyond just 
what was in the text book, and tell the additional stories and 
what's related to what they just have to teach.
    Senator Ensign. Dr. Barrett, you would like to make a 
comment.
    Dr. Barrett. If I could sir, we sponsor something called a 
science talent search. It's the Old Westinghouse Science Search 
for the last 8 years. We had the final gala awards ceremony 
last night here in Washington, D.C. The 40 top high school kids 
who have done research projects, kind of the junior Nobel 
Prize. Talking to most of those young people, I asked them 
specifically, what turned you onto math or science. Invariably 
it's a teacher they had some place that got them turned onto 
chemistry, mathematics, physics, and biology, something of that 
sort.
    I just want to second Mr. Augustine's comment. The way you 
get young children interested in this, is you have teachers who 
are excited and love the topic and love conveying the topic to 
young people. If you have people who are teaching as a job, 
rather than something that they love doing in the K-12 
education system you'll turn them off.
    So teachers, and qualified teachers, and teachers who are 
excited are the first, second, and third priority in the 
system.
    Senator Ensign. It is interesting that you say that, and my 
time has expired. But just to conclude, I want to compliment 
Senator Alexander for holding Subcommittee hearings on these 
issues in the HELP Committee. One really exciting program 
discussed in those hearings is the University of Texas at 
Austin's UTeach program. Instead of just having people who are 
education majors take a few science classes in the UTeach 
program, they are teaching science and math majors how to teach 
science and math. Citing early results, they have had 80 
percent retention rates after 3 years. And if anybody knows 
anything about teachers today, retention rates are one of the 
biggest problems we have in American schools today. Good 
teachers often just get frustrated and they leave. But we are 
seeing some good, positive early results with the UTeach 
program and we want to build on those.
    I promised Senator Lieberman that when he arrived he could 
make an opening statement, because I had to move the hearing 
start-time up because of a meeting that was supposed to be at 
the White House but then got postponed.
    So, if you don't mind, we will turn it over to Senator 
Lieberman and allow him to make an opening statement. Senator 
Lieberman, I want to thank you by the way, it has been awesome 
working with you this year in a partnership to develop our 
legislation. We took a long time before we introduced the 
National Innovation Act. In creating the bill, we worked with 
members of the private sector in business and academia. Through 
it all, working with Senator Lieberman has been great. I am 
really looking forward to continuing our work on the National 
Innovation Act, as it moves through.

            STATEMENT OF HON. JOSEPH I. LIEBERMAN, 
                 U.S. SENATOR FROM CONNECTICUT

    Senator Lieberman. Thanks very much Mr. Chairman, thanks 
for your courtesy, thanks members of the panel for all the 
leadership that you have given us. I'm going to enter my 
statement in the record and just say very briefly a couple of 
things, which I would guess have been stated already. We're--
just to step back a little bit, about 5 years--let's talk about 
pre-9/11. Most of us were looking forward to this next period 
in our history as a time of relative tranquility in the world. 
Relative. When the major national concern we would have is how 
to compete economically with particularly the rising super 
powers--economic super powers of China and India.
    9/11 intervened; we're facing the challenge posed by 
militant Islam, by Islamic terrorism, terrorists, but the other 
challenge remains. And it goes to the heart of not only what we 
fight to secure, which is the American way of life, and the 
freedom and opportunity, and upward mobility that's been there 
for the previous generations; and we want it to be there in the 
future, and coincidentally this same fight is exactly the best 
alternative within the Islamic world to the hatred and suicidal 
death that al Qaeda offers as a path to the future.
    So you know there are all sorts of indicators of that other 
challenge that we have to do these two simultaneously: protect 
our security and sustain America as an opportunity society. A 
little bit earlier this year the OECD had some numbers that 
were put out, yet another wake-up call I hope, which is that 
China has overtaken U.S. as the world's largest exporter of 
high-tech products. Shipping $180 billion worth of high-tech 
goods worldwide last year, versus $149 billion for the U.S.
    Well you know it's not just a race this goes to the 
quality-of-life for people who live in this country and the 
promise of upward mobility that brought my grandparents here, 
and continue to bring people here. I always say to people, if 
you're looking for a market test on nations in the world, we 
come out very well. This is a country in which more people are 
trying to get in and fewer people are trying to get out, than 
any country in the world. I understand some are coming 
illegally, but they are coming for the same reason my 
grandparents came, which is for a better life for their 
families. And we're just not going to be able to sustain this 
remarkable American experience, focused on innovation from you 
know, the Franklin stove, to the personal computer and beyond 
unless we do something about it together. That's why I 
appreciate the leadership that all four of you--and 
particularly the work done by the National Council on 
Competitiveness. And Mr. Augustine and your group that has led 
to the legislation that Senator Ensign and I and more than 20 
others co-sponsors, bipartisan, and Senator Alexander and 
Senator Bingaman have put in. And we've cross-endorsed each 
other's bills.
    So we've got to find common ground here. We've separated 
parts out that come to this committee, as you know the focus of 
our bill Senator Ensign and I, and other co-sponsors developing 
talent, targeting investment, and creating infrastructure. And 
this is urgent stuff. Now there are a lot of important hearings 
that happen around the Capitol everyday, I don't know of one 
that's more important than this one happening right here. And 
the question is, whether we can generate enough of a response 
to put our money where our hopes our; and to invest in the 
improvement and the quality of education, sustain the spirit of 
entrepreneurship and innovation that has created millions and 
millions of jobs and better lives for people in this country. 
And again, it's only going to happen with the kind of 
partnerships that are reflected in the work that you all have 
done and that we have tried to do between the public and the 
private sectors. I think all of us up here, I know these two 
guys, we're optimists about this. That's the nature--that's the 
spirit of America. But this is a very different kind of 
challenge we're facing, I remain optimistic, but it's really 
time to get going on it, and Mr. Chairman I thank you for your 
leadership. It has been a great pleasure to work with you, and 
you and I are persistent and stubborn, right? And Senator 
George Allen is just, you know, outrageously persistent. He's 
more tenacious and stubborn--at least that's what his wife 
tells me. So we're not going to stop until we get this done, 
but we can't do it without the help from the folks on the other 
side of the table, so I thank them and you very much.
    [The prepared statement of Senator Lieberman follows:]

            Prepared Statement of Hon. Joseph I. Lieberman, 
                     U.S. Senator from Connecticut

    Thank you, Senator Ensign, and Committee Chairman Stevens, for 
holding this hearing to discuss building a new century of American 
prosperity by spurring a new wave of American innovation.
    From the Franklin stove to the personal computer, Americans have a 
strong history of innovation. But we face new challenges. We live in a 
global age where competition can come as easily from across an ocean as 
across the street.
    We got a wake up call earlier this year about how tough today's 
challenges are when the Organization for Economic Cooperation and 
Development (OECD) announced that China had overtaken the United States 
as the world's largest exporter of high-tech products--shipping $180 
billion worth of high-tech goods worldwide last year, versus $149 
billion for the U.S.
    If this continues, the global high-tech centers could shift from 
America to China, and with them the high-skill, high-paying jobs that 
are key to the innovation economy will be lost as well.
    America must prepare itself to compete in this new world.
    Earlier this year, the Council on Competitiveness circulated a 
report in response to these challenges with detailed recommendations on 
how to reinvigorate our innovation economy.
    In December, Senator Ensign and I--along with 22 bipartisan co-
sponsors--introduced the National Innovation Act, which is based on the 
Council's recommendations in three key areas: developing talent; 
targeting investment, and creating infrastructure.
    Last week, Senator Ensign and I reintroduced Title I of the bill, 
now called the National Innovation Act--Commerce Provisions, which 
contains key provisions of the original bill and has been referred to 
this Committee.
    One of the key provisions of this bill is the creation of a 
President's Council on Innovation whose goal will be to develop a 
comprehensive national innovation agenda and coordinate all Federal 
efforts. The Secretary of Commerce will chair the Council which will 
have oversight over legislative proposals as well as Executive Branch 
initiatives.
    But new ideas need research money if they are to move from 
imagination to market.
    This bill strengthens the National Science Foundation by more than 
doubling its research budget from $4.8 billion in 2004 to nearly $10 
billion by 2011.
    Our bill also creates an ``Innovation Acceleration Grants'' program 
to stimulate high-risk research by urging Federal research agencies to 
allocate at least 3 percent of their current R&D budget to breakthrough 
research--the kind of research that gave us the Internet.
    Now, having moved a product idea from imagination to the point 
where it's ready to market, we must be able to manufacture it as well. 
It's the manufacturing component of the innovation economy that creates 
and sustains high-paying, high-skilled jobs.
    This bill directs Commerce Department's National Institute of 
Standards and Technology to hold a competition to develop three new 
pilot test beds where innovators could evaluate and refine new 
manufacturing ideas. The competition to create these test sites would 
be open to state and local governments and the business community.
    As I said, the ideas contained in this bill were pulled from our 
larger bill, which, among other things, would also:

   Encourage students to train for technical professions by 
        increasing Federal support for graduate fellowships and trainee 
        programs in science, math, and engineering.

   Create a Professional Science Master's degree program that 
        couples business or legal training with a traditional science 
        or engineering discipline to create a cadre of new 
        professionals with broad skills in both business and science.

   Direct the Defense Department to work with the private 
        sector to identify and develop innovative manufacturing 
        techniques and that could help create a 21st century 
        manufacturing base.

   Make permanent the current Research and Experimentation tax 
        credit and extend it to a greater number of enterprises--a 
        provision that also appears in the Invest in America Act of 
        2005, sponsored by Senators Hatch and Baucus with 44 bipartisan 
        co-sponsors.

    I realize our bill is not the only one before the Senate. Several 
important pieces of legislation that have been introduced, including 
the PACE package introduced by Senators Alexander and Bingaman, of 
which I am also a cosponsor.
    All of these different bills strive toward the same end--the 
renewal and reinvigoration of America's historic role as a global 
leader in innovation that has made our economy the envy of the world. 
It is my hope that the Commerce committee, the HELP committee, and 
other committees of jurisdiction will take action soon in this session 
to report legislation incorporating important ideas from all of these 
proposals. And it's my hope that the bipartisan leadership will work 
together to advance these bills.
    Finally, I also want to commend the private sector, the academic 
sector, and the many outside organizations for their contributions to 
and support for this effort as was evidenced so eloquently by the 
testimony today.
    Thank you, Mr. Chairman.

    Senator Ensign. Thank you for your testimony. Senator 
Allen?
    Senator Allen. Thank you Mr. Chairman, thank you Senator 
Lieberman as well, it's a pleasure to work with you all and 
I've taken notes through the witnesses' testimony. All four of 
you all were outstanding and, I like the analogies as well, 
frog slowly boiling and so forth. Generally speaking, I use the 
term, ``you either make dust, or you eat dust.'' I want America 
to be in the lead. And once you get behind it's hard to catch 
back up especially with countries that have a focus, and also 
have the populations to stay in the lead. And that's why I 
think nanotechnology which is a multifaceted field; it's not 
any one field. It has at least six to seven different aspects 
and the President has made that a priority which is good, 
within that priority if you look at this present proposal, 
energy is one of the--the Department of Energy is actually 
getting more of that funding, which fits into one of those key 
missions that energy security aspect for our country. Senator 
Ensign mentioned metrics, I was speaking with Steve Appleton of 
Micron, who you partner with Dr. Barrett from time to time and 
I suspect Dr. Kelly as well with hers; and there is some 
focused research that the government funds but it's also 
matched by the private sector.
    And any government program will have a built-in 
constituency instantly and if you ever try to change it, three 
or four, or five, or 10 years down the road, it's just very 
difficult. But in any event, in this sponsored or focused 
research the private sector matched--the private sector, you 
care about your shareholders, and you're not going to be 
putting funds into research that doesn't make economic sense 
insofar as whatever that research will develop into ultimately. 
The one aspect of this, and let me ask you Dr. Barrett about 
it. On this Rising Above the Gathering Storm, action item D4, 
ensure ubiquitous broadband Internet access.
    The United States is lagging behind the rest of the world, 
not all of the world, but from other countries in Europe and 
Asia in particular. In this committee I have sponsored with 
Senator Kerry in a bipartisan way, and we have Senators Sununu, 
and Dorgan and Boxer, as we transition from analog to digital 
to make sure these white spaces in the analog spectrum, which 
would otherwise be unused. We call it the WIN ACT, the Wireless 
Innovation Act, I believe this is--can be a very efficient use 
of this otherwise unused space. To get broadband out there, 
especially to rural areas where it just doesn't make a great 
deal of economic sense to get wires and digging, and digging, 
and digging. It's the same reason they don't have cable out 
there. It's just there's not the return on the investment. 
Could you share with our committee what you would think of this 
Wireless Innovation Act, insofar as making sure that broadband 
is more available to all people.
    Dr. Barrett. I'm going to have to say I love it. No, 
broadband comes in a variety of flavors, it can be either over 
glass fiber, twisted copper, or wireless. And if you look at 
the opportunities in the current TV spectrum, and as analog TV 
moves to digital and there's the movement to in fact free-up 
that spectrum, and make it available for high-quality broadband 
wireless, that's great. There's a time table now set for that 
transformation. But in the meantime there's also unused 
spectrum in that TV, kind of the channels 3 to 52 or whatever 
it is, target which could be used without interference with 
current TV broadcast. And we are great fans of using that, and 
using the technology that's available and that's come available 
recently for low interference, or noninterference light space 
use for broadband wireless technology, to provide a greater 
approach, or greater availability of broadband capability, 
especially in rural areas, where the wireless technology is 
wonderful. So we heartily endorse that approach, and think it's 
a great use of a scarce national resource, which is our 
wireless spectrum.
    Senator Allen. Ms. Wince-Smith, I'm really glad you're hear 
because you heard my opening statement and concern and in fact, 
Mr. Augustine mentioned also how few women and Latinos, and 
African-Americans are interested for whatever reason in science 
and engineering and technology. We've actually had hearings in 
another aspect of this committee and this is again partnering 
with Senator Wyden on this issue. And we actually--when you 
look at the Minority Serving Institutions in this country, 
historically black colleges and universities, a little over 100 
of them. And there are about 200 Hispanic-serving institutions, 
a couple dozen tribal colleges, you find their infrastructure 
is way behind. And so therefore they don't attract the faculty. 
Therefore the students who go through these minority serving 
institutions do not get the training and education that they 
need to then be able to even apply for the 60 percent of the 
jobs out there in the real world which require technological 
proficiency.
    This committee over the years and the Senate has passed a 
motion that I've had introduced to establish a grant program 
with the National Science Foundation to upgrade the technology 
infrastructure, to bridge this economic digital divide that we 
find in this country. The Administration hasn't necessarily 
been onboard with this. I'll be diplomatic with it. Do you have 
any suggestions for increasing and seeing as how you are a 
woman--and I'm glad you're the Chairperson, because that is a 
role model--any suggestions that you have for increasing the 
number of women and minorities, particularly African-Americans 
and Latinos, to get more interested, incented or involved in 
these key areas for the future, and there are great paying jobs 
also on top of it all.
    Ms. Wince-Smith. Well, I certainly think teachers are 
critical role models. But one of the things we've learned, and 
a lot of this is anecdotal, is that young women, who are doing 
very well in math-science have a time once they get into 
undergraduate where they lose interest. And a lot of work has 
been done on that actually, at some of our research 
universities to kind of understand those dynamics. They don't 
have mentors; there are a lot of social-cultural things going 
on.
    Senator Allen. Such as?
    Ms. Wince-Smith. Pardon?
    Senator Allen. Such as? Because in China and India you 
don't see this.
    Ms. Wince-Smith. I know and that's the great irony, that in 
a country such as ours, where women have risen up in so many 
fields, in this there are still some challenges on the 
mentoring and role modeling. One idea that we were floating 
with Dr. Rita Caldwell, who was Director of NSF, was in 
graduate NSF fellowships, where we would have doctoral students 
teaching undergraduates to ensure that there was a very strong 
mentoring program for women that are freshman and sophomores. 
Of course, if they don't have the K-12 background, that is a 
challenge before they even get there.
    The other thing that is really fantastic, and this is an 
outcome to look at, are professional science masters degrees. 
These are the degrees that schools such as Georgia Tech, and 
others are giving that are multidisciplinary degrees, and they 
involve accounting, business, and other skills. Not setting 
someone up to be a research scientist, but women and minorities 
who are taking these professional science masters are having 
tremendous success being gobbled up in regional economies in 
entrepreneurial activities. There's something very good going 
on in these professional science masters programs that are 
attracting women and minorities, and of course that's where the 
growth of the economy is going to come from, small and medium-
sized businesses.
    Senator Allen. Thank you, do any of the other witnesses 
have any--I think Mr. Augustine brought it up, do you all have 
any specific suggestions on how we can encourage more 
Americans, particularly in the minorities and women to be more 
interested in these areas. Mr. Augustine?
    Mr. Augustine. I would just add a footnote, and Deborah's 
comments I think are right on target. Because of the 
hierarchical nature of engineering or science education you've 
got to start very young to influence people. And that means 
it's basically parents and teachers. And teachers we've talked 
about and how you can do more to have the teachers really 
excite young people. I think this is an issue, not only 
particularly a problem with women and minorities. Engineering 
has always been the opening education for both young people who 
come from families without a lot of higher education: the first 
generation doesn't usually go into law, or into medicine. They 
become engineers very often, and so we doubly suffer when we 
discourage those people from going into those fields. I was the 
first of my family to go to college. It never occurred to me to 
be a lawyer, or a banker, an engineer is what you did. And I 
think that's still largely true today.
    The challenge George Hollmeyer, who used to run the 
Advanced Research Projects Agency, told me the other day that 
when he was in Russia, he likes to go to the movies there, 
because the engineer always gets the girl.
    [Laughter.]
    I suspect the reciprocal may be true; the engineer gets the 
guy hopefully. And we need some help from all of you folks, 
from the media, from Hollywood. I once proposed we needed a TV 
program called LA Engineer, and I got laughed out of the House. 
But those things count, but I think it comes back that our 
greatest hope has got to be the teachers in K-12 particularly 
K-8.
    Senator Allen. Thank you, both Dr. Barrett, and Dr. Kelly.
    Dr. Kelly. I would just agree with our other members, it is 
about role models and it is about teaching. I think that one of 
the challenges is that the pipeline takes so long to fix. So 
one of the ideas and one of the things we've implemented very 
recently in IBM is something we call, Transition to Teaching. 
We have many engineers and scientists and mathematicians who 
see this problem, are very excited about trying to help and 
want to Transition to Teaching, and so we've created a program 
that helps them do that. From a time standpoint, we 
economically help them get the education they need to do the 
teaching part. They know the math and the science. But we think 
we can kick-start this, and very quickly create some role 
models, and work the diversity issue, Senator, that you raised.
    Senator Allen. Now you're to be congratulated and commended 
on this Transition to Teaching. More and more companies need to 
try to do it. There are others I've heard, called Math is Cool. 
Philip Morris or Altria is doing that. It has got to be made 
relevant and exciting to kids. Mr. Augustine just went into it. 
He just could see--you could see he was a serious young man, 
but others of you do have to make it interesting and that is 
great that IBM is doing it. Dr. Barrett, I saw you raise your 
hand.
    Dr. Barrett. Just two vignettes to support the previous 
comments that talents--Science Talent Search Finals we had last 
night. The ultimate winner of the competition was a young lady 
from Utah, and the third place finisher was also a young lady, 
so two out of three isn't bad. But interestingly with both of 
those it was a teacher that turned them onto math and science. 
The other vignette is you may have read it in Wired Magazine in 
the last year, the story of Carl Hayden High School in South 
Phoenix, where four illegal alien, undocumented Hispanics, 
because of a robotics teacher in an after-school robotics club 
entered an open underwater robotics competition, competing at 
the university level. So this is four undocumented Hispanic 
boys competing against the likes of MIT, won the competition. 
Driven by the teacher who had a genuine interest in the kids 
and in the technology on basically a teacher, on their own 
nickel, doing it after school.
    By the way the interesting thing, is as they were 
undocumented aliens they were not even eligible for in-state 
tuition grants at Arizona State University. A year later they 
were both, or all four of them were in manual labor-type 
positions until Wired wrote the story on them. Since then they 
all four got scholarships. And I think Warner Brothers bought 
the movie rights.
    So the situation may turn around for them in the future. 
But they're all four studying to be engineers.
    Senator Allen. Are they now legally in this country?
    Dr. Barrett. That I don't know.
    Senator Allen. Thank you all. Let's not get into another 
issue, thank you.
    Senator Ensign. Actually I do want to quickly address a 
related issue. Maybe Dr. Kelly you could start with this, the 
issue of the H1B Visas. The only reason I am asking about this 
today, is because when we come back from break, we will have 2 
weeks of immigration on the floor and I met with someone from 
your association today and we talked about some of the H1B 
Visas, and there is always politics involved with immigration, 
and you have to be sensitive to that. So for those who are 
concerned about taking American jobs, what I hear from industry 
is that the jobs filled by H1B Visa holders are jobs that they 
cannot fill. They do not have enough people to fill these jobs.
    Any comments about how we should structure the H1B Visas to 
make sure such Visas help admit immigrants for jobs that we 
cannot fill with Americans. Dr. Barrett, you talked about the 
green card for any kind of post doctoral work or advanced 
degrees, attach green cards. Well do you want them all or do 
you want the brightest. In other words the top 10 percent of 
the class, the top half of the class, or do you want them all? 
Anybody who's got an advanced degree, do you have any comments 
on that?
    Dr. Kelly. There are certain fields where I would say that 
it's basically a no-brainer. Electrical engineers, a huge 
shortage of electrical engineers particularly in the IT 
industry. Certain areas of programming. Huge shortages of 
programmers. So, there ought to be some sort of grade standard 
obviously. But some of these fields are dramatic shortages and 
declining numbers; and that is causing us to have to reach 
deeper and deeper into the lower grades, and causing us to 
become less competitive and so I agree with Dr. Barrett, we 
ought to be stapling these Visas to people in these fields, 
with high-performance grades.
    Dr. Barrett. I totally concur, and in fact if you look at 
the number of advanced technical graduates in the field the 
number is not that large compared to the total budget of H1B 
Visas. And in fact the last legislation set aside 20,000 Visas, 
particularly for that category, I think that's absolutely the 
right thing to do. But I think you could even simplify it so we 
wouldn't argue numbers here. And that's where the ``staple the 
green card to the diploma'' idea came from.
    The companies that are represented here, IBM and Intel, are 
internationally competitive, we do about 75-80 percent of our 
business outside the U.S., IBM does two-thirds of their 
business outside the U.S. We have to be competitive in the 
international marketplace, we have to hire the best and 
brightest wherever they are. So this is really a market-driven 
system. And we're just suggesting that you make it a market-
driven system in the United States, and give these people the 
availability to work in the United States. You really want the 
United States to be the work place of choice for the best and 
brightest in the world. You don't do that by putting 
immigration barriers in front of them.
    Senator Ensign. Well I have a tendency to agree with all of 
you on that. And especially because of these statistics that 
Mr. Augustine, I think you were the one that said it earlier, 
that 4 percent of the workforce produces the other 96 percent 
of the jobs. And the really, really bright ones are the ones 
who really produce those jobs. So whether we look at ourselves, 
post-World War II and all the scientists that came over here 
after World War II, and the unbelievable impact that such 
immigrants had on our country. I think that we have to continue 
to look at that, and continue to draw the best and brightest. 
Especially in the short-term, because as you all mentioned, 
some of these initiatives that we put forward are really long-
term measures and that is important. We have to get the long-
term structures put in place with some of the recommendations 
you all have made. But some of the short-term measures involve 
making sure that we also have the people that we need here 
today so that we don't end up with an innovation or 
competitiveness gap. Because once you start trailing behind 
when it comes to innovation, technology, and competitiveness it 
is very, very hard to catch up and I think that meaningful H1B 
Visa reform is one of those stop-gap measures that can help 
keep us on that competitive edge as we move forward in a global 
economy.
    We just started voting and we have a series of nine votes 
on the floor, relating to budgets. So once again, thank you all 
for being here today. In addition, thank you for all of the 
work that has been done by you on innovation and 
competitiveness. It will be very exciting to go forward. And I 
just encourage you to continue to work hard in support of 
innovation because I know none of you are getting paid, they're 
very few anyway who are getting paid for a lot of the work you 
are doing. This is work you are doing that is good for the 
country. So I applaud you, and I look forward to continuing to 
work with you and to seeing some of the products you are going 
to put out in the future. So thank you all very much.
    [Whereupon, at 3:10 p.m., the hearing was adjourned].

                            A P P E N D I X

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii

    By the broadest definition, our committee is responsible for the 
economic and commercial health of the country. We have expertise that 
touches on fields of industry from telecommunications to 
transportation; from the safety of the home to the security of the 
homeland; and from marine containers to marine mammals.
    But at the end of the day, ``science'' is our middle name. This 
hearing rightfully places our committee at the center of the debate on 
how this Nation will use technology and innovation to improve our 
national, economic competitiveness.
    Our committee has particular expertise in science, technology, and 
economic development. We have a unique opportunity and responsibility 
to ensure that the United States remains strong and competitive in the 
face of emerging challenges from the rest of the world.
    At today's hearing, we will discuss many of the ideas embodied in 
several bills that have been introduced. This committee should view 
those bills as a starting point.
    Further, I believe this committee should begin a bipartisan, 
committee-wide effort to develop a Commerce Committee title that will 
be an integral part of any Senate competitiveness legislation. Each 
subcommittee can and should make significant contributions to this 
bill. Our members' ideas and involvement will be essential as we 
develop and advance what I believe will be a forward-looking, 
comprehensive proposal.
    Interestingly, ocean sciences have been absent from the 
competitiveness discussion thus far. Oceans are 70 percent of the 
Earth's surface, yet they remain largely unexplored and under-
researched. Our oceans present an astounding frontier for science and, 
I believe, an incredible source of inspiration for math and science 
students, or better yet, America's future scientists.
    Economic competitiveness is the essence of our committee's work, so 
I look forward to working with Chairman Stevens and the rest of my 
colleagues in what could be a remarkable endeavor for this committee. 
Today's discussion on innovation and competitiveness with this 
distinguished panel of witnesses is an appropriate starting point.
                                 ______
                                 
  Prepared Statement of Hon. Gordon H. Smith, U.S. Senator from Oregon

    Thank you Mr. Chairman.
    The United States is a world leader in innovation and 
competitiveness; however, in recent years, as other countries have 
placed a higher priority on the importance of math and the sciences, 
our leadership position in this area has come into question.
    In order to maintain and strengthen our leadership role in the 
years ahead, we all realize that more must be done to increase our 
competitiveness on the global stage.
    We must make investment in math and science a priority to ensure 
that we as nation are the preeminent leader in the sciences and 
emerging technologies such as nanotechnology.
    I am proud to cosponsor both the National Innovation Act and the 
PACE-Energy Act that emphasize the importance of these issues, and 
others that will lead to increased innovation and competitiveness.
    Mr. Chairman, in addition to supporting these legislative 
initiatives, I have introduced two bills and announced another to 
advance technology and improve our Nation's competitiveness.
    My bill, the Manufacturing Technology Competitiveness Act, will 
increase innovation and the competitiveness of small and medium-sized 
manufacturers in the global marketplace. Through a number of measures, 
this Act is aimed at improving productivity, advancing technology and 
promoting growth in the industry.
    A version of this bill has already passed the House with broad 
bipartisan support.
    I urge all my colleagues to support quick passage of this bill.
    As we discussed at a recent committee hearing, nanotechnology is 
being incorporated in more and more products everyday. While promising 
advancements in nanotechnology can be seen throughout research 
laboratories in the United States, other countries in Europe and Asia 
are making significant investments and advances in this area as well.
    My bill, the Nanoscience to Commercialization Institutes Act, will 
promote the commercialization of this emerging technology throughout 
many industries and increase U.S. innovation and global 
competitiveness.
    I announced recently my intention to introduce legislation that 
will increase the availability of broadband Internet services 
throughout the country. These networks are absolutely critical to the 
long-term competitiveness of the United States. Unfortunately, an oft-
cited 2005 International Telecommunications Union study revealed that 
the United States has fallen to 16th in global broadband deployment. 
Congress must act swiftly to correct this disturbing trend.
    My legislation will address four areas of reform essential to 
boosting broadband deployment: (1) broadband universal service, (2) 
video competition, (3) wireless broadband, and (4) community broadband. 
Faster broadband networks will benefit America's consumers and 
America's workers, and lead to enhanced economic growth and job-
creation.
    I urge my colleagues to support my bills that will bolster U.S. 
innovation and global competitiveness.
    Mr. Chairman, thank you for holding today's hearing on this 
important topic.
                                 ______
                                 

                   The Washington Times, May 10, 2006

          Scientific R&D--Congress Should Rethink Its ``Fix''

                         By Hon. John E. Sununu

    Less than a year ago, I wrote an op-ed observing that ``hydrogen-
car'' mania, having reached a fever pitch on Capitol Hill, had Members 
of Congress firmly under its spell. That was then; and despite the $1.1 
billion already spent on hydrogen-related programs, lawmakers have 
finally come to the realization that an affordable hydrogen car remains 
at least 20 years away.
    Today, the tune is eerily similar, but the chant has become 
``competitiveness, competitiveness, competitiveness.'' President Bush 
identified competitiveness as a priority in his State of the Union 
address, declaring this initiative essential to future economic growth. 
Its key goals are to increase Federal spending on critical research and 
to refocus the attention of today's public education system on 
mathematics and science--worthy goals indeed. But before Congress 
rushes forward with an expensive legislative package, this agenda 
deserves thorough review.
    For the benefit of current and future generations, the primary 
focus of government-sponsored research should be to answer questions in 
the most fundamental of areas: science and mathematics. Perhaps the 
best model for this approach can be found within the National Science 
Foundation (NSF), which dedicates its funding to high-quality, peer-
reviewed, merit-based projects. As mathematician and philosopher Rene 
Descartes declared, ``Each problem that I solved became a rule which 
served afterwards to solve other problems.'' Investing in basic 
science--that which is driven by curiosity to expand knowledge and has 
no immediate marketable value--will lead to solutions to fundamental 
puzzles that today stifle general scientific progress.
    The role of the Federal Government on the education side of the 
competitiveness agenda is somewhat limited. With few exceptions, 
engaging young students' minds in the study of mathematics and science 
occurs very early in the education process. To know whether students in 
a particular school district will be interested in science and 
mathematics, we need only look at the commitment of the local school 
board or school district and its willingness to challenge students in a 
range of disciplines. Challenging students through a strong curriculum 
and with dedicated teachers, rather than new programs, is a better path 
to educational success.
    As this debate moves forward, any legislation designed to promote 
American competitiveness and innovation should adhere to the following 
rules to ensure that American taxpayer dollars are not wasted or 
misused:

   Focus on the basics. Federal funding for research and 
        development should be applied toward basic science and 
        technology, (such as chemistry, physics, material science and 
        computational mathematics) rather than applied research, 
        technology transfer or commercialization efforts. The private 
        sector--not the Federal Government--has the obligation to 
        advance the findings of basic research into marketable products 
        and technologies. Equally troubling, legislators await the 
        movement of a competitiveness bill in hopes they may attach pet 
        research projects or fund a favored industry. Politicizing the 
        process only undermines the integrity of peer review and 
        dilutes the effectiveness of these resources.

   Don't over-promise. To date, Senate competitiveness bills 
        are littered with increased authorization levels for various 
        purposes. Billions of dollars would be needed to actually fund 
        programs at such inflated levels. Given this scenario, 
        reasonable authorization levels must be utilized to ensure that 
        funding can actually be secured through the appropriations 
        process. It would not be beneficial to repeat an example from 
        2002, when Congress reauthorized the NSF with the goal of 
        doubling its annual funding. Ultimately, NSF appropriations 
        never approached such levels.

   Limit new programs. Like so many other sound-bite driven 
        ``debates'' in Congress, competitiveness proposals often boil 
        down to the usual simplistic solution: Create more government 
        programs. How many times do we have to go down this same costly 
        road? And when was the last time we dealt effectively with a 
        complex problem by creating new Federal programs? One Senate 
        bill would create more than 20 new programs without eliminating 
        a single one. Dozens already exist, including the Advanced 
        Technology Program, the Manufacturing Extension Partnership, 
        and other questionable expenditures of funds. Congress should 
        not create new programs without a thorough review of the value 
        and efficacy of existing programs. Otherwise, we are merely 
        diverting funding to new programs and layers of bureaucracy 
        when such money could be used on basic research.

   Make hard decisions. Once realistic authorization levels are 
        established, Congress needs to make the necessary adjustments 
        to ensure funding increases actually occur. Spending billions 
        on a competitiveness agenda through deficit spending restricts 
        future economic growth, and stunts future innovation and 
        competitiveness. If we are to increase funding for a 
        competitiveness agenda, legislation needs to include necessary 
        rescissions and program repeals to remain budget neutral.

   Don't play favorites. Given the popularity of a 
        competitiveness initiative, it is disappointing that agencies 
        integrally involved in basic research are being ignored. For 
        instance, NASA's basic science mission, referred to by many as 
        its crown jewel, results in significant scientific findings. 
        Ironically, the Administration recently proposed that planned 
        spending for these accounts be cut by more than $3 billion over 
        the next few years, a decision NASA Administrator Michael 
        Griffin admitted was made solely for budgetary reasons. How is 
        this internally consistent for the Administration?

    If done for the right reasons, a successful plan to invest new 
resources in scientific research can have a positive impact. Without 
discipline and focus, however, Congress is doomed to repeat the same 
mistakes, fund more failed programs and expand Federal bureaucracy.
    America's technology-driven economy grows despite, not because of, 
government intervention. That is a lesson we all need to learn before 
trying to ``fix'' what ails us.
                                 ______
                                 
   Prepared Statement of The Institute of Electrical and Electronics 
             Engineers--United States of America (IEEE-USA)

    IEEE-USA appreciates this opportunity to share our views on 
innovation and competitiveness challenges facing the United States and 
on legislative action that can be taken by Congress to address these 
challenges.
    If the United States is to continue flourishing in the increasingly 
competitive global marketplace, the Federal Government needs to focus 
on ways to improve the science and technology research and development 
infrastructure and to broaden the technical expertise of its citizens. 
IEEE-USA believes that effective competitiveness and innovation 
policies will sustain U.S. technological leadership and encourage the 
development of a skilled, creative and competitive workforce critical 
for U.S. prosperity. To accomplish this goal, the United States needs 
sustained commitment for supporting fundamental research in the 
physical sciences and for improving education, training and lifelong 
learning.
    We appreciate the emphasis being put on this issue by Congress and 
by President Bush with his American Competitiveness Initiative, and 
have indicated our support for legislation currently under review in 
the Senate, in particular the National Innovation Act of 2005 (S. 2109) 
and the Protecting America's Competitive Advantage (PACE) Energy and 
Education Acts (S. 2197 and S. 2198). We strongly encourage Congress to 
work together and with the Administration for the good of country to 
pass consensus legislation during this legislative session to preserve 
America's competitive edge in the global arena.
    To that end, IEEE-USA has identified workforce policies and 
federally-funded research policies as two broad areas where Federal 
Government policy can enhance the Nation's intellectual capital and 
technical skills. Each area will be a decisive contributor to U.S. 
innovation in the coming years.

Education Policy Objectives
    IEEE-USA believes that legislators and Administration leaders 
should work to strengthen our current and future engineering workforce 
by improving the United States' education system and enhancing life-
long employment opportunities for scientists and engineers. We support 
the recommendations of the National Academy of Engineering in its 
report ``Rising Above the Gathering Storm: Energizing and Employing 
America for a Brighter, Economic Future,'' with specific emphasis on 
those recommendations targeted at:

   Improving the Nation's education system from preschool 
        through graduate school and beyond, with special emphasis on 
        improving math, science and communications skills in grades K-
        12.

   Early recognition and support for students with aptitude and 
        passion in Science, Technology, Engineering, and Math (STEM) 
        fields.

   Strengthening the skills and recruitment of science and 
        mathematics teachers.

   Increasing incentives for individuals to pursue an education 
        and career in STEM fields, and promote more effective 
        utilization of STEM personnel by public and private sector 
        employers.

   Making continuing education available to practicing 
        scientists and engineers.

R&D Policy Objectives
    IEEE-USA believes that Federal research and development policies 
and investments should be redirected, as recommended by the Council on 
Competitiveness in its Innovate America report and in the National 
Academy's Rising Above the Gathering Storm report, to:

   Intensify support for research in the physical sciences and 
        engineering to achieve a more robust national R&D portfolio.

   Enact a permanent, restructured research and experimentation 
        tax credit, and extend the credit to research conducted in 
        university-industry research consortia.

   Address the looming energy concerns of the Nation by 
        supporting appropriate innovative energy technologies.

   Promote innovative research through new approaches such as 
        the establishment of innovation ``hot spots'' to capitalize on 
        regional assets and leverage public and private sector 
        investments and/or by reallocating at least 3 percent of agency 
        R&D budgets to ``Innovation Acceleration'' grants.

    IEEE-USA also recommends the timely enactment of legislation to:

   Increase National Science Foundation (NSF) funding to nearly 
        double by 2011.

   Increase the funding for the Department of Energy basic 
        research, development, demonstration, and commercial 
        application to nearly double by 2011.

   Increase R&D funding for the National Institute of Standards 
        and Technology (NIST) to double over 10 years.

   Maintain the long-term basic research focus in other science 
        and technology programs, including those administered by the 
        Department of Defense and its Defense Advanced Research 
        Projects Agency, as well as the Department of Homeland Security 
        and its Homeland Security Advanced Research Projects Agency.

   Increase high-performance computing research and expanded 
        access to supercomputing resources, including enactment of the 
        High Performance Computing Research and Development Act (H.R. 
        28).

   Support funding for the National Nanotechnology Initiative 
        at levels recommended in the 21st Century Nanotechnology Act 
        (Pub. L. 108-153).

   Strengthen R&D designed to revitalize the manufacturing and 
        the technical services sectors, including enactment of the 
        Manufacturing Technology Competitiveness Act (H.R. 250).

   Revitalize U.S. leadership in aerospace and aviation 
        research and development.

   Support technologies that promote public health and safety, 
        including deployment of advanced information technologies and 
        bioinformatics infrastructure into the healthcare sector.

   Accelerate broadband deployment in the United States as a 
        national priority.

   Protect intellectual property.

    Collectively, these reforms channel Federal resources toward long-
term research goals that will foster innovation. This investment helps 
foster innovation in two ways. First, it will generate scientific 
discoveries and technological breakthroughs that drive innovation, 
indirectly creating entire new industries. Second, the research itself 
provides valuable educational opportunities for the next generation of 
engineers and scientists, opportunities that cannot be reproduced any 
other way.

About the IEEE-USA
    This statement was developed by the Technology Policy Council of 
the IEEE--United States of America (IEEE-USA) and represents the 
considered judgment of a group of U.S. IEEE members with expertise in 
the subject field. IEEE-USA is an organizational unit of the Institute 
of Electrical and Electronics Engineers, Inc., created in 1973 to 
advance the public good and promote the careers and public policy 
interests of the more than 220,000 electrical, electronics, computer 
and software engineers who are U.S. members of the IEEE. The positions 
taken by IEEE-USA do not necessarily reflect the views of IEEE or its 
other organizational units.
                                 ______
                                 
             Prepared Statement of The R&D Credit Coalition

Introduction
    Chairman Stevens, Co-Chairman Inouye, Senator Ensign, and members 
of the Committee. The R&D Credit Coalition (the ``Coalition''), which 
represents more than 1,000 small, medium and large U.S. companies and 
85 professional and trade associations, respectfully submits this 
statement for the record of the Commerce Committee's March 15, 2006 
hearing on innovation and competitiveness legislation.
    First, we want to express our appreciation to Senator Ensign and to 
Senator Lieberman for their leadership in introducing the National 
Innovation Act (S. 2109). This comprehensive legislative agenda focused 
on the need to enhance research and innovation in the United States 
contains a proposal for a strong, permanent Federal tax incentive for 
R&D that the Coalition strongly endorses. Specifically, the National 
Innovation Act includes among its key provisions a permanent research 
tax credit, an increase in the Alternative Incremental Research Credit 
rates and a new alternative simplified research credit. By proposing 
this strong and permanent R&D credit, the bill sponsors recognize that 
an effective Federal incentive to businesses will result in more U.S. 
investment, jobs, innovation and economic growth.
    Unfortunately, the credit expired on December 31, 2005. Despite the 
broad bipartisan support for extending and strengthening this vital tax 
incentive, businesses currently cannot anticipate a future credit 
extension when estimating future R&D costs. As we approach the end of 
the first quarter of 2006, we are beginning to see the adverse 
financial impact this is having. Companies are required to calculate 
their financial statement effective tax rates for periods after 
December 31, 2005, without any benefit from the credit, thus increasing 
their effective tax rates, which translates into lower reported 
earnings.
    Moreover, longer-term research funding and hiring decisions also 
are being affected by the uncertainty that exists. In the pending Tax 
Relief Extension Reconciliation Act (H.R. 4297) both the House and 
Senate demonstrated strong support for extending the credit and for 
making changes in the law that will help make the credit a more 
powerful incentive. We urge you to act soon on the longest possible 
extension of the R&D tax credit with the modifications that are 
included in the tax bills as a first step toward the ultimate goal of a 
strong, permanent R&D credit.

Importance of Innovation
    Before turning specifically to the R&D tax credit proposal, we want 
to talk briefly about the broader importance of innovation to job 
growth, economic vitality, and increased standards of living.
    Economists agree that, in the long-run, productivity growth is the 
principal source of improvements in living standards. There is 
consensus that the productivity growth in recent years has been driven 
by the combination of accelerated technical progress and the resulting 
investments in capital assets, research and development, human capital, 
and public infrastructure. In order to continue this pattern of growth 
the focus of public policy must be on providing continued incentives to 
companies that invest, innovate, and create the new capital and 
knowledge that drive the U.S. economy.
    In 2001, Federal Reserve Board Chairman Alan Greenspan told the 
Senate Budget Committee, ``Had the innovations of recent decades, 
especially in information technologies, not come to fruition, 
productivity growth during the past five to 7 years, arguably, would 
have continued to languish at the rate of the preceding twenty years.''
    U.S. businesses and Federal policymakers should continue to work 
together to promote policies that will foster those same high levels of 
growth for decades to come.
    Without a growing economy Americans' standard-of-living, and our 
ability to support the needs of our aging population, will be in 
jeopardy. Faced with a static or decreasing workforce as U.S. 
demographics shift, U.S. lawmakers must focus on encouraging 
technological developments to increase productivity, enabling a smaller 
workforce to support a growing population of retirees.
    It will take the continued support of both public and private 
investment in research and development to foster the level of 
innovation needed to keep the United States economically competitive. 
Research confirms, however, that private-sector R&D funding generally 
falls below the optimal level of spending necessary to provide maximum 
benefits to the overall economy. Corporate research is high-risk, long-
term and limited by the ``free rider'' problem in economics. The 
benefits of R&D will not fully accrue to those businesses conducting 
the research, so there must be an additional incentive for businesses 
to undertake the costly and risky investment in additional research 
that benefits the public good. Thus, it makes public policy sense for 
the U.S. Government to do all it can to encourage companies to further 
increase R&D spending in the United States.
    Foreign jurisdictions also have recognized the value and importance 
of R&D investments and the high-quality jobs that flow from that 
investment. Governments around the world are competing for corporate 
R&D investment to help create a better economic future for their 
citizens.

Research Incentives
    According to the OECD,\1\ ``Support to business R&D remains a 
central feature of innovation policies across the OECD, especially as 
governments aim to boost business R&D spending. With the exception of 
several Eastern European countries, direct government support to 
business R&D has declined, both in absolute terms and as a share of 
business R&D, and greater emphasis is being placed on indirect 
measures, such as tax incentives for R&D.''
---------------------------------------------------------------------------
    \1\ OECD Science, Technology and Industry (STI) Outlook 2004.
---------------------------------------------------------------------------
    Between 2002 and 2004, Belgium, Ireland, and Norway established new 
R&D tax incentive regimes, bringing to 18 the number of OECD countries 
employing tax incentives for R&D. Canada, which offers a 20-percent 
flat tax credit for R&D spending, continues on its mission of inducing 
U.S. companies to locate R&D operations in that country. The United 
Kingdom also developed an R&D tax incentive for large firms, 
complementing the incentives currently provided for small firms. 
Countries are also making efforts to stimulate entrepreneurship and 
boost R&D activities in small and medium-sized enterprises (SMEs) by, 
for instance, supporting venture capital and providing preferential 
support to SMEs.
    In 2004, the European Commission requested the International Bureau 
of Fiscal Documentation to carry out an information survey on the 
current tax treatment of research and development expenditures in the 
25 EU Member States and the United States and Japan. A stated purpose 
for this study was to provide information that would enable the 
European Commission to find an incentive to increase the R&D spending 
within the Member States that would be competitive with other countries 
such as the United States and Japan.\2\
---------------------------------------------------------------------------
    \2\ International Bureau of Fiscal Documentation, Tax Treatment Of 
Research & Development Expenses, December 2004, 230 pages. http://
europa.eu.int/comm/taxation_customs/resources/documents/
eu_rd_final_rep_dec_2004.pdf. 
---------------------------------------------------------------------------
    The Federal R&D tax credit, according to many government and 
private sector experts, has been a proven, effective means of 
encouraging increased research and development activity in the United 
States. Other countries are looking at our system and actively trying 
to compete for U.S. business' R&D investment.
    There is a significant body of evidence produced by the General 
Accounting Office, Bureau of Labor Statistics, National Bureau of 
Economic Research, and others that concludes that the R&D credit 
represents a very sound investment in U.S. economic growth.\3\
---------------------------------------------------------------------------
    \3\ See, e.g., Hall, Bronwyn H. and John Van Reenen. ``How 
Effective Are Fiscal Incentives for R&D: A Review of the Evidence.'' 
Working Paper 7098. Cambridge, MA, National Bureau for Economic 
Research, April 1999; U.S. General Accounting Office (GAO), Tax Policy 
and Administration: Review of Studies of the Effectiveness of the 
Research Tax Credit, May 1996, 26 pages.; Office of Technology 
Assessment, Congress of the United States, The Effectiveness of 
Research and Experimentation Tax Credits, OTA-BP-ITC-174, September 
1995, Washington, D.C., 65 pages.
---------------------------------------------------------------------------
    In 1998, Coopers & Lybrand (now PricewaterhouseCoopers) completed a 
study, Economic Benefits of the R&D Tax Credit, which dramatically 
illustrates the significant economic benefits provided by the credit. 
According to the study, making the R&D credit permanent would stimulate 
substantial amounts of additional R&D in the United States, increase 
national productivity and economic growth almost immediately, and 
provide U.S. workers with higher wages and after-tax income.
    It is clear that the current R&D tax credit reduces the cost of 
investing in additional U.S.-based research for companies that qualify 
under the current formulation. For these companies that undertake that 
research, that assistance can often mean the difference between a 
project getting the green light or being put back on the shelf. The 
fate of that additional research project not only matters to the 
researchers, and technical personnel who would be hired to do the 
research, but it also matters to the unrelated small or medium-size 
company that might be hired to help take a product to market. Often, 
the discussion of the R&D tax credit centers on large companies that 
claim the credit. What has been overlooked, unfortunately, are those 
companies that don't claim the R&D credit, but whose livelihoods are 
linked to the products and services developed as a result of this 
additional research. Technology-based productivity increases benefit 
all businesses--even businesses that do no R&D.
    As an example, consider Ace Clearwater Enterprises, Inc., a 
Torrance, California company, that makes many of the component parts 
that are used by large aerospace companies. When the large companies do 
more R&D in new and improved products and need to build and test more 
prototypes, Ace Clearwater does more business and hires more people. As 
R&D increases, so too does the need for suppliers, manufacturers, and 
ultimately a host of others when products are finally taken to market. 
Those firms and their employees are spread out in every community and 
every state and their contribution to economic prosperity is vital. 
These firms may not be the first thing that comes to mind when you hear 
about the R&D tax credit, but they certainly are among the first 
beneficiaries of increased investments in research and could be the 
first casualties if those levels of investment decline or move 
offshore.
    Currently, companies of all sizes, across a wide range of 
industries and in every state claim the R&D tax credit. A 2004 study 
\4\ by Washington Council Ernst & Young, showed that the credit is 
highly beneficial to small firms. According to this study, in 2000:
---------------------------------------------------------------------------
    \4\ Koch, Cathy. Supporting Innovation and Economic Growth: The 
Broad Impact of the R&D Tax Credit, Washington Council Ernst & Young, 
April 2004, 15 pages. http://www.nam.org/s_nam/
bin.asp?CID=155&DID=230921&DOC=FILE.PDF.

---------------------------------------------------------------------------
   Nearly 16,000 companies claimed the R&D credit.

   More than 4,500 firms with assets of less than $1 million 
        (25 percent of all firms) claimed the credit. For the smallest 
        firms in the study, those with assets between $1,000 and 
        $99,000, on average the value of the credit claimed equaled 9.4 
        percent of their assets.

   Employees of companies in the manufacturing, services, 
        retail and wholesale trade, construction, and real estate 
        sectors were among the greatest beneficiaries of that 
        investment.

    If we want to maintain and improve that track record, it is 
important for Congress to adopt the changes proposed in the National 
Innovation Act that would--on a permanent basis--maintain the 
traditional credit, increase the Alternative Incremental Credit (AIRC) 
rates and provide for an Alternative Simplified Credit (ASC) in order 
to induce even more research-intensive businesses to undertake 
additional U.S.-based research spending.

History of the R&D Tax Credit
    Congress first enacted the R&D credit in 1981 to provide an 
incentive for companies to increase their U.S. R&D activities. The 
Federal R&D tax credit is available only for research done in the 
United States. The bulk of the qualified expenditures are the salaries 
of workers directly involved in R&D.
    The initial credit rate was equal to 25 percent of a company's 
incremental ``qualified R&D expenditures'' (QREs) in excess of a 
rolling base amount equal to average QREs for the prior 3 years. 
Currently, the credit rate is 20 percent of a company's QREs and the 
base amount calculation is linked to the taxpayer's gross receipts.
    The original credit was scheduled to expire at the end of 1985. 
Recognizing the importance and effectiveness of the R&D credit, 
Congress decided to extend it and has extended it on ten subsequent 
occasions. In addition, the credit's focus has been narrowed by further 
limiting both qualifying activities and eligible expenditures--
increasing the credit's incentive leverage. With each extension, the 
Congress indicated its strong bipartisan support for the R&D credit.
    In 1996, Congress added the elective Alternative Incremental 
Research Credit (AIRC) to the statute, making the credit available to 
R&D-intensive industries that could not qualify for the credit under 
the regular formula. The AIRC adds flexibility to the credit to address 
changes in business models and R&D spending patterns that are a normal 
part of a company's life cycle.
    In 1999, the credit was extended until June 30, 2004, and a modest 
increase in the AIRC rates was adopted to bring the AIRC's incentive 
effect more into line with the incentive provided by the regular 
credit.
    Most recently, in 2004, as part of the Working Families Tax Relief 
Act of 2004 (Pub. L. 108-311), the credit was seamlessly extended for 
the period beginning July 1, 2004 through December 31, 2005. This 
seamless extension was particularly important, as it ensured there was 
no disruption in ongoing research projects.

The Current Credit Needs To Be Strengthened and Made Permanent
    In order to maximize its incentive effect, the R&D credit should be 
permanent. Research projects cannot be turned off and on like a light 
switch and generally represent multi-year commitments; if corporate 
managers are going to take the benefits of the R&D credit into account 
in planning future research projects and future hiring needs, they need 
to know that the credit will be available to their companies for the 
years in which the research is to be performed. Research projects have 
long horizons and extended gestation periods. Furthermore, firms 
generally face longer lags in adjusting their R&D investments compared, 
for example, to adjusting their investments in physical capital. The 
12-month gap in the credit from July 1995 to June 1996 reduced the 
business community's willingness to plan based on assumed future 
extensions of the temporary credit.
    In the normal course of business operations, R&D investments take 
time and planning. Businesses must search for, hire, and train 
scientists, engineers and support staff, and in many cases invest in 
new physical plants and equipment. There is little doubt that some of 
the incentive effect of the credit has been lost over the past twenty-
four years as a result of the constant uncertainty over the continued 
availability of the credit. This must be corrected so that the full 
potential of its incentive effect can be felt across all sectors of our 
economy.
    In order to provide for the maximum potential for increased R&D 
activity, and for the government to maximize its return on tax dollars 
invested in the credit, the practice of periodically extending the 
credit for short periods, and then allowing it to lapse, must be 
changed by making the R&D credit permanent.
    Although the current statutory incentive is effective for many 
companies, many others that spend significant amounts on R&D in the 
U.S. get little or no benefit. Consequently, a simple extension of 
present law will provide insufficient incentive to maintain or increase 
their R&D spending in the United States. Moreover, the R&D inducements 
outside the U.S. will look relatively more favorable to these 
taxpayers.
    For example, many taxpayers are no longer able to qualify for the 
traditional credit because their sales increased significantly in the 
intervening years, or they entered into an additional line of business 
that generated additional gross receipts but performed little R&D, or 
they became more efficient in their R&D processes and were able to 
spend less to perform the same R&D activity.
    In 1996, the addition of the AIRC at significantly reduced rates 
partially addressed this issue for many companies. It is time to take 
the next step by both increasing the AIRC rates and providing for an 
Alternative Simplified Credit (ASC) calculation that will improve the 
credit's incentive value for increased research activity and job 
creation in the United States.
    The U.S. business community needs a stable, consistent, and 
improved R&D credit that will strengthen its incentive value, stimulate 
the Nation's economic growth and sustain the basis for ongoing global 
technology. We urge the Congress to enact the Hatch-Baucus proposal in 
2006.

Proposed Changes to Current Law
    In addition to the need for permanency for the R&D credit, changes 
to the statute need to be made in order to maximize the credit's 
incentive value. In order to extend an incentive for U.S.-based R&D to 
more companies, Congress should adopt the Alternative Simplified Credit 
(ASC). The ASC is an elective credit that equals 12 percent of the 
excess of current-year qualified research expenses (QREs), over 50 
percent of the taxpayer's average QREs for the prior 3 years. These 
credit and base amounts are designed to provide an effective credit 
rate comparable to that provided on average by the traditional credit. 
Importantly, the ASC is calculated without reference to gross receipts, 
a feature of the traditional credit that, as discussed above, has left 
many research-intensive companies unable to qualify for the credit.
    While the new ASC may provide a greater incentive for many AIRC 
companies over time, AIRC firms should be given a more meaningful 
incentive to continue and increase their research activities in the 
United States as they assess the value of the new regime. In order to 
move closer to the incentive value provided by the traditional credit, 
Congress should increase the AIRC rates to 3 percent, 4 percent and 5 
percent, respectively, which will bring those rates in line with the 
levels envisioned when the AIRC was originally proposed in 1996.
    While the ASC increases the incentive value of the credit for 
certain businesses, it is equally important to avoid disrupting the 
current incentive for companies that benefit under the traditional 
credit and AIRC. The traditional credit, in its current form, provides 
a strong incentive for many companies that continue to increase R&D 
activities in the United States at an equal or higher rate than 
revenue. For companies whose R&D investments continue to increase, the 
traditional credit calculation may yield a higher credit amount for 
that company than under the new ASC.
    Overall, the introduction of an elective new credit calculation is 
intended to provide a comparable incentive to other companies engaged 
in research that have been unable to qualify for the traditional 
credit--while avoiding penalizing those companies that have responded 
to the incentives provided by the traditional credit by significantly 
increasing their U.S.-based R&D spending.

Conclusion
    Private sector R&D in the United States stimulates investment in 
innovative products and processes that greatly contribute to overall 
economic growth, increased productivity, new and better U.S. jobs, and 
higher standards of living in the United States. By creating an 
environment favorable to private sector R&D investment in the United 
States, Congress can encourage companies to site new research projects 
here and maintain and attract the high-skill, high-wage jobs associated 
with those projects in the United States. Investment in R&D is an 
investment in U.S. jobs. A strong, vibrant, and permanent R&D credit is 
essential for the competitiveness of U.S. companies, as many foreign 
countries have chosen to offer direct financial subsidies and reduced 
capital cost incentives to ``key'' industries.
    The R&D Credit Coalition applauds the Senate Commerce Committee, 
and all the co-sponsors of the National Innovation Act, for your 
commitment to fostering American innovation. The Coalition will 
continue to work with you on effective Federal policy, like a strong, 
permanent R&D tax credit, that fosters economic growth through support 
of private sector investments in innovation.
    Thank you for the opportunity to present these views.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                               the Panel

    Question 1. My Manufacturing Technology Competitiveness Act 
authorizes funding for the National Institute on Standards and 
Technology. Can you explain how technology advancements and services 
performed by the National Institute of Standards and Technology benefit 
your industry?

    Question 1a. In your view, how would industry be impacted without 
these programs and services performed by the National Institute of 
Standards and Technology?
    Answer from Deborah L. Wince-Smith. The Council on Competitiveness 
disagrees with the assertion that manufacturing is a lost cause in the 
United States. Advances in manufacturing technology and processes will 
be critical to our ability to glean value and wealth creation from new 
ideas. The research that the National Institute on Standards and 
Technology performs in these areas is vitally important, as 
breakthroughs in nanotechnology and biotechnology, to name two emerging 
areas, are ready to be commercialized.
    Just as the Federal Government must lead in the area of support for 
long-term basic research, so can it lead in the research into 
manufacturing processes. Industry would be negatively affected by the 
elimination of NIST programs in this area.

    Answer from Dr. Craig R. Barrett. NIST research and development has 
played, and continues to play, an important role in major scientific 
and technological advances. NIST research has enabled major 
breakthroughs in materials, testing, and scanning tunneling microscopy. 
The NIST labs are relied upon by industry for accuracy, reliability, 
and cooperative international scientific research. This research has 
extended to assisting our industry with nano-scale manufacturing of 
semiconductor devices, and various technologies that will be critical 
to next-generation extreme ultraviolet photo-lithography (EUV), which 
will be critical to our ability to continue shrinking the size of 
circuits upon chips.
    It is not an overstatement to say that industry would be crippled 
in its ability to compete without the programs and services provided by 
NIST labs. In many areas, there are simply no private sector 
substitutes for the work done by NIST and if it did not exist, industry 
would be forced to find other venues for the accomplishment of some 
major research goals, which would in many cases (of necessity) be 
located outside the U.S. Although our industry participates in research 
in non-U.S. geographies, the proximity of U.S. laboratories to domestic 
manufacturing centers, and the opportunities for U.S. employees to 
interact with American research specialists in U.S. laboratories, is a 
key element of maintaining our competitive posture. This is why we at 
Intel have been fighting so hard to preserve these critical programs.

    Answer from Dr. John E. Kelly. The National Institute on Standards 
and Technology (NIST) has historically been a key part of Federal 
programs that seek to advance competitiveness of U.S. industry. IBM has 
benefited particularly from NIST's work in the creation of voluntary 
open industry standards that enable innovation across many sectors. 
NIST recently convened an industry meeting on the important issue of 
creating interoperable solutions for healthcare and manufacturing.
    We also have encouraged NIST and other relevant Federal agencies to 
undertake programs that will reorient Federal research and development 
investment to include the emerging field of services science, 
management and engineering (SSME) where individuals apply technology to 
solve complex problems in the industrial sector.

    Question 2. My bill also includes authorizations for the 
Manufacturing Extension Partnership Program (MEP). Can you explain how 
assistance from MEP has supported your industry?

    Question 2a. In your view, how would industry be impacted without 
support from MEP?
    Answer from Deborah L. Wince-Smith. A key recommendation in the 
Council's report Innovate America, is for the Manufacturing Extension 
Partnership Program (MEP) to focus on innovation and advanced 
technologies--in other words retool for the technologies of the future. 
If done successfully, and indications are that NIST is headed in this 
direction, MEP can be a valuable tool for America's manufacturing 
capability.
    An MEP program focused on innovation and forward-looking 
technologies could be a valuable tool for industry.

    Answer from Dr. Craig R. Barrett. MEP centers have not had a major 
direct impact upon Intel, as we are of a size and financial strength 
that the ``start-up business guidance'' nature of the services that MEP 
centers provide are not directly needed by Intel. However, many of our 
industry partners--particularly the smaller supplier firms and channel 
vendors--have benefited from the services of MEP centers. Overall, 
American business has been strengthened by the contribution of MEP 
centers.

    Question 3. My bill includes a provision to authorize funding for 
the Advanced Technological Program that supports high-risk, cutting-
edge technologies. Can you explain how this program has benefited your 
industry?

    Question 3a. In your view, how would industry be impacted without 
the type of support provided by this program?
    Answer from Deborah L. Wince-Smith. The Council is a membership 
organization with over 120 members representing companies, universities 
and labor organizations. Many of our members have participated in and 
support the Advanced Technology Program (ATP). The ATP program seeks to 
bridge the gap--known as the Valley of Death--between basic research 
and product commercialization. Our report, Innovate America, contained 
several proposals to try and address this problem including greater 
university-industry collaboration and communication; expansion of angel 
investor networks; and the creation of state or local seed-investment 
funds.
    Speaking generally, it is increasingly critical to America's 
economic growth that we have mechanisms in place--financial and 
logistical--to move ideas from the lab to the marketplace.

    Answer from Dr. Craig R. Barrett. The ATP program has gone through 
a number of structural and mission changes over the past 5 years which 
have strengthened its focus on breakthrough technologies and research 
that might falter in the absence of the financial partnering that the 
ATP program is intended to provide. Many in our industry (such as IBM) 
strongly support the ATP program and have found it to be very 
beneficial to the supporting technologies and companies that contribute 
to semiconductor technology development. Intel per se has not been a 
major participant in the ATP program.

    Question 4. I am told that companies in all types of industries 
needs more workforce education and training in order to be successful 
and competitive. Do you support the Advanced Technological Education 
program?

    Question 4a. Do you find these authorization levels to be 
appropriate?

    Question 4b. Do you think more needs to be done to support 
workforce training and education?
    Answer from Deborah L. Wince-Smith. The intent of the Advanced 
Technological Education program to support education and training for 
the high-tech workforce is certainly an important goal and critical to 
successfully developing a highly-skilled workforce.
    I am not familiar enough with the program to comment on the 
authorization levels.
    Certainly workforce training and education needs to be a high 
priority in an innovation-based economy. Close collaboration between 
academia and industry to ensure we are training people with the skills 
they will need for the jobs of the future is an important first step.
    Answer from Dr. Craig R. Barrett. I believe that workforce training 
and education is vital to our competitive future. Intel has devoted 
substantial resources to assisting in the strengthening of teachers' 
skills in the use of computing technology in the classroom through its 
``Teach to the Future'' program. Over 300,000 teachers in the U.S. have 
benefited from participation in this program.
    I have strongly supported steps to ensure that teachers who provide 
math and science instruction in our public schools truly have the 
background and training to be effective instructors in those areas. In 
that context, we strongly support the educational testing and teacher 
improvement initiatives that are contained in the President's American 
Competitiveness Initiative.
    With regard to the Advanced Technological Education program, this 
NSF program has proved to be of great value in strengthening the 
ability of our community colleges to prepare students to work in the 
high-technology industries. I support the extension of this program to 
all institutions of higher education. The appropriate authorization 
levels for such programs are in the discretion of Congress and I have 
no opinion on that.

    Question 5. The potential impact of nanotechnology on the economy 
and our quality-of-life is truly revolutionary. In addition to the 
U.S., countries in Europe and Asia are also making tremendous advances 
in this emerging technology. I have introduced a bill with the goal of 
bringing advances in nanotechnology to commercialization. Do you think 
this type of effort will help enhance U.S. innovation and 
competitiveness?

    Question 5a. From your perspective, what should we do to further 
advance nanotechnology and its application in commercial products?
    Answer from Deborah L. Wince-Smith. Similar to my answer on the ATP 
program, I would only say that the process of commercialization of new 
technologies and ideas is of critical importance to America's long-term 
competitiveness. The Council on Competitiveness has convened an 
advisory group of experts from the public and private sectors on the 
future of manufacturing to try and tackle these and related issues and 
I welcome the chance to continue this discussion with you and the other 
members of the Committee.
    Answer from Dr. Craig R. Barrett. I believe that all efforts should 
be made to foster nanotechnologies, particularly advanced 
nanoelectronics manufacturing techniques, which are essential to the 
future viability of ``Moore's Law.'' Congress has directed a major 
investment in these technologies through the National Nanotechnology 
Initiative.
    With regard to commercialization, two points: first, one very 
important thing that can be done to enhance commercialization is to 
preserve the advances in the ability of federally-owned and/or operated 
laboratories (such as DOE labs and NIST labs) to license research 
breakthroughs through the mechanics of the Bayh-Dole Act, which 
dramatically expanded the ability of the Federal labs to foster 
commercialization of advances brought forth from those labs. Second, a 
major challenge to our ability to effectively commercialize these 
technologies are current IP licensing strategies being pursued by a 
number of major universities, which have the effect of restricting the 
ability of the private sector to obtain exclusive use rights to 
technological breakthroughs which result from jointly sponsored 
research. If these barriers are removed, I believe that there would be 
no substantial impediments to commercialization of nanotechnology 
developments. Hearings on this topic would be helpful to focus 
attention on remedial steps.

Question to Dr. Craig Barrett
    Question. Dr. Barrett, in your testimony, you recommended that 
Congress adopt policies that will ``develop an infrastructure that will 
support real economic growth,'' including what you called ``full metal 
jacket broadband.'' I've announced my intention to introduce a bill 
that would promote broadband deployment. One element of my bill will 
authorize the use of Universal Service Funds to build broadband 
networks. Do you support this approach?
    Answer. I definitely agree with your goal of ensuring that high-
quality, affordable, and universal broadband service is essential to 
our Nation's global competitiveness. With respect to the question 
regarding Universal Service Funds, we believe that if broadband pays 
into USF, then broadband should be eligible to be a recipient of USF.
    Our position is that Universal Service Funds should be raised from 
a comprehensive, fixed charge on end-users in a competitively-neutral 
manner based on numbers or connections (two of the funding mechanisms 
referenced in the ``Broadband for America Act of 2006''). Intel does 
not support collection methodologies based on total telecommunications 
revenues (another funding mechanism referenced in the ``Broadband for 
America Act of 2006'').
    The funding and distribution methodologies for universal 
communications service programs should be efficient and fair. We 
believe that this can only be achieved by reforming the explicit and 
implicit Universal Service Funds now in existence, including the 
intercarrier compensation regime. An efficient funding and payment 
system would be sustainable, competitively and technologically-neutral 
and minimize the suppression of demand.
    Therefore, while Intel has supported investment tax credit and 
Rural Utility Service funding for rural broadband, we prefer that rural 
and other high-cost programs be designed to be competitively and 
technologically-neutral.
    I commend you, Senator Smith, for your efforts on the USF issue--a 
topic that is incredibly complex and involves many trade-offs. We would 
welcome the opportunity to discuss this multifaceted and complicated 
issue in more detail or answer any additional questions that the 
Senator might have.
    On a related issue, I want to thank you for including the provision 
on TV ``white spaces'' in your bill. Intel believes that opening this 
unused spectrum to unlicensed devices would enable the deployment of 
valuable new wireless broadband services such as WiMAX in rural and 
other under-served areas, as well as innovative wireless networking 
solutions in the home and office. These new wireless broadband devices 
would benefit consumers across the country and help the Nation meet its 
broadband goals--thus helping to ensure continued U.S. technological 
leadership and economic development.

Question to John E. Kelly III
    Question 1. Dr. Kelly, you noted in your testimony that the 
Internet ``is rapidly becoming the planet's operational infrastructure 
. . . linking people, cultures, businesses and institutions, as well as 
billions--ultimately trillions--of devices.''
    I believe that our communications policies must match the 
marketplace reality you have described. My proposed broadband 
legislation will update our laws to promote video competition, 
broadband universal service, wireless broadband and municipal 
broadband. Has Congress done enough to promote broadband deployment?

    Question 1a. Would you support legislation of the type I have 
outlined?
    Answer. We support efforts by Congress to encourage greater 
broadband penetration. IBM, however, has not taken a position on 
specific legislation.
                                     The National Academies
                                       Washington, DC, May 31, 2006
Hon. Gordon H. Smith,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

    Dear Senator Smith:

    Thank you for your questions following the Senate Commerce hearing 
held on March 15. Although important questions, I'm afraid they fall 
beyond the boundaries of the testimony I was offering on behalf of the 
National Academies on its report Rising Above the Gathering Storm. Many 
of the questions are about the National Institute of Standards and 
Technology (NIST) and we did not focus on this agency in our report. As 
a consequence, the questions you ask are beyond my knowledge of the 
agency. In addition, because of their tax-exempt status, the National 
Academies are not permitted to endorse legislation.
    I can tell you that the National Academies did release its annual 
report assessing NIST in 2005. The Board that assessed NIST indicated 
the following:

        ``The Board is very impressed with the technical quality of 
        NIST's intramural work. NIST carries out in a superb fashion an 
        absolutely vita role in supporting as well as facilitating the 
        further development of the technological base of the U.S. 
        economy. Its personnel and scientific programs are, by 
        scientific measures, among the best in the world and its 
        explicit and continuing attention to the needs of its customers 
        keeps it alert to the changing technological environment to 
        which it must be responsive.''

    You might wish to have your staff pursue your questions further 
with this board. A good point of contact would be Jim McGee, Director, 
National Academies Board on NIST Assessment. Should you wish to include 
in the hearing transcript that I provided the above quotation from 
prior National Academies' work, which would be fine.
    Thank you for your interest and my apologies that I could not be 
more responsive to your questions.
        Sincerely,
                                       Norman R. Augustine,
                                                     Chair,
                                        Committee on Prospering in the 
                                    Global Economy of the 21st Century.

                                  
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