[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]






                        SUPPORTING INNOVATION IN
                        THE 21ST CENTURY ECONOMY

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

                                HEARING

                               BEFORE THE

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                  COMMITTEE ON SCIENCE AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 24, 2010

                               __________

                           Serial No. 111-90

                               __________

     Printed for the use of the Committee on Science and Technology










     Available via the World Wide Web: http://www.science.house.gov

                                 ______


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                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                   HON. BART GORDON, Tennessee, Chair
JERRY F. COSTELLO, Illinois          RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas         F. JAMES SENSENBRENNER JR., 
LYNN C. WOOLSEY, California              Wisconsin
DAVID WU, Oregon                     LAMAR S. SMITH, Texas
BRIAN BAIRD, Washington              DANA ROHRABACHER, California
BRAD MILLER, North Carolina          ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois            VERNON J. EHLERS, Michigan
GABRIELLE GIFFORDS, Arizona          FRANK D. LUCAS, Oklahoma
DONNA F. EDWARDS, Maryland           JUDY BIGGERT, Illinois
MARCIA L. FUDGE, Ohio                W. TODD AKIN, Missouri
BEN R. LUJAN, New Mexico             RANDY NEUGEBAUER, Texas
PAUL D. TONKO, New York              BOB INGLIS, South Carolina
JOHN GARAMENDI, California           MICHAEL T. MCCAUL, Texas
STEVEN R. ROTHMAN, New Jersey        MARIO DIAZ-BALART, Florida
JIM MATHESON, Utah                   BRIAN P. BILBRAY, California
LINCOLN DAVIS, Tennessee             ADRIAN SMITH, Nebraska
BEN CHANDLER, Kentucky               PAUL C. BROUN, Georgia
RUSS CARNAHAN, Missouri              PETE OLSON, Texas
BARON P. HILL, Indiana
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
KATHLEEN DAHLKEMPER, Pennsylvania
ALAN GRAYSON, Florida
SUZANNE M. KOSMAS, Florida
GARY C. PETERS, Michigan
VACANCY
                                 ------                                

               Subcommittee on Technology and Innovation

                      HON. DAVID WU, Oregon, Chair
DONNA F. EDWARDS, Maryland           ADRIAN SMITH, Nebraska
BEN R. LUJAN, New Mexico             JUDY BIGGERT, Illinois
PAUL D. TONKO, New York              W. TODD AKIN, Missouri
DANIEL LIPINSKI, Illinois            PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona               
GARY C. PETERS, Michigan                 
BART GORDON, Tennessee               RALPH M. HALL, Texas
                 MIKE QUEAR Subcommittee Staff Director
         MEGHAN HOUSEWRIGHT Democratic Professional Staff Member
            TRAVIS HITE Democratic Professional Staff Member
            HOLLY LOGUE Democratic Professional Staff Member
             DAN BYERS Republican Professional Staff Member
                  VICTORIA JOHNSTON Research Assistant










                            C O N T E N T S

                             March 24, 2010

                                                                   Page
Hearing Charter..................................................     2

                           Opening Statements

Statement by Representative David Wu, Chairman, Subcommittee on 
  Technology and Innovation, Committee on Science and Technology, 
  U.S. House of Representatives..................................     6
    Written Statement............................................     6

Statement by Representative Judy Biggert, Member, Subcommittee on 
  Technology and Innovation, Committee on Science and Technology, 
  U.S. House of Representatives..................................     7
    Written Statement............................................     7

                               Witnesses:

Hon. Aneesh Chopra, Chief Technology Officer of the United 
  States, White House Office of Science and Technology Policy 
  (OSTP)
    Oral Statement...............................................     8
    Written Statement............................................    10
    Biography....................................................    14

Dr. Mark Kamlet, Provost, Carnegie Mellon University
    Oral Statement...............................................    15
    Written Statement............................................    17
    Biography....................................................    21

Dr. Robert D. Atkinson, President, the Information Technology and 
  Innovation Foundation (ITIF)
    Oral Statement...............................................    21
    Written Statement............................................    23
    Biography....................................................    54

Dr. Dan Breznitz, Associate Professor, the Sam Nunn School of 
  International Affairs, Georgia Institute of Technology
    Oral Statement...............................................    55
    Written Statement............................................    57
    Biography....................................................    63

Mr. Paul Holland, General Partner, Foundation Capital
    Oral Statement...............................................    64
    Written Statement............................................    66
    Biography....................................................    72

 
           SUPPORTING INNOVATION IN THE 21ST CENTURY ECONOMY

                              ----------                              


                       WEDNESDAY, MARCH 24, 2010

                  House of Representatives,
          Subcommittee on Technology and Innovation
                        Committee on Science and Technology
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:39 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. David Wu 
[Chairman of the Subcommittee] presiding.
                            hearing charter

                     U.S. HOUSE OF REPRESENTATIVES

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                      Supporting Innovation in the

                          21st Century Economy

                       wednesday, march 24, 2010
                         10:30 a.m.-12:30 p.m.
                   2318 rayburn house office building

1. Purpose

    Innovation, ``the development of new products, services, and 
process,'' \1\ has had an indelible impact on the lives of Americans 
and is increasingly important for ensuring the well-being of the 
Nation's economy. While new technology like the Internet dramatically 
changed society in a short period of time, such profound innovation has 
remained elusive in sectors like energy, where fossil fuels have 
dominated for over a century. This hearing will examine factors that 
drive innovation, as well as those that impeded it. In addition, this 
hearing will discuss the role of the Federal Government in promoting 
the innovation that is crucial for American prosperity.
---------------------------------------------------------------------------
    \1\ A Strategy for American Innovation: Driving Towards Sustainable 
Growth and Quality Jobs, Executive Office of the President, National 
Economic Council, and the Office of Science and Technology Policy. 
September, 2009.

---------------------------------------------------------------------------
2.  Witnesses

          The Honorable Aneesh Chopra is the Chief Technology Officer 
        of the United States at the White House Office of Science and 
        Technology Policy.

          Dr. Mark Kamlet is the Provost at Carnegie Mellon 
        University.

          Dr. Rob Atkinson is the President of the Information 
        Technology and Innovation Foundation.

          Dr. Dan Breznitz is an Associate Professor at the Sam Nunn 
        School of International Affairs at Georgia Institute of 
        Technology.

          Mr. Paul Holland is a General Partner at Foundation Capital.

3. Background

    First developed in the late nineteenth century, the telephone 
became one of the most important inventions in the twentieth century. 
The technology, made possible by previous research in sound and 
electricity, created a new industry and new infrastructure, and greatly 
enhanced productivity across the entire economy. However, it is 
notoriously difficult to predict the impact of technological advances 
on society and the U.S. economy. For instance, in 1983 prominent 
experts forecasted that the demand for mobile phones in the U.S. would 
total only one million by 1999. Instead, by that time, 70 million 
Americans had cell phones. Rapid improvements in technology and 
reductions in costs made the original predictions obsolete.\2\ In 
contrast, a Massachusetts company started in 1998 with promising 
technology to revolutionize skin grafts suffered bankruptcy and near-
collapse before solving the manufacturing and logistical problems that 
allowed it to finally succeed a decade later.\3\
---------------------------------------------------------------------------
    \2\ Innovation and Economic Growth, Nathan Rosenberg, Organization 
of Economic Cooperation and Development, 2004.
    \3\ Innovation Interrupted, BUSINESSWEEK, June 15, 2009.
---------------------------------------------------------------------------
    Regardless of the difficulty of predicting or creating it, 
economists have long studied the impact of innovation on the U.S. 
economy. Nobel Prize winner Robert Solow found that approximately 85 
percent of the growth in the U.S. economy from the late nineteenth 
century to the mid-twentieth century was the result of forces beyond 
the traditional economic inputs of labor and capital. These 
``intangible'' inputs--namely R&D and a more educated workforce--grew 
in importance in the twentieth century as innovations moved away from 
physical-capital intensive technology advancements, like railroads, to 
more research-intensive advancements, like DNA sequencing.\4\
---------------------------------------------------------------------------
    \4\ The Search for the Sources of Growth: Areas of Ignorance, Old 
and New, Moses Abramovitz, The Journal of Economic History, June 1993.
---------------------------------------------------------------------------
    The increasingly competitive nature of the global economy has 
raised concerns among U.S. policy-makers and others that the U.S. has 
not sufficiently invested in maintaining leadership for the intangible 
inputs that drive innovation. The influential 2007 National Academies 
Rising Above the Gathering Storm report took note of factors such as 
declining Federal investment in R&D, poor performance in math and 
science among American schoolchildren, and declining support for 
corporate R&D within the U.S. The authors recommended increasing 
support for science and engineering research and targeted action to 
improve American students' capacity and interest in science, math, and 
related fields. Congress acted upon the recommendations with the 
America COMPETES Act, which put the budgets of the National Science 
Foundation (NSF), the National Institute of Standards and Technology 
(NIST), and the Department of Energy Office (DOE) of Science on the 
path to doubling, and also provided for improvement in science and math 
education through teacher development.
    President Obama's FY 2011 budget request includes $147.7 billion 
for R&D across the Federal Government, and reflects the commitments 
made in COMPETES by increasing the budgets of NSF (by eight percent), 
NIST (by 7.7 percent, core scientific and technical research services), 
and the DOE Office of Science (by 4.6 percent).\5\ In addition to 
increasing R&D expenditures (with the goal of reaching a total R&D 
investment of three percent of GDP as a nation), the Administration has 
identified a number of other priorities which are key to supporting 
innovation for economic growth and job creation, such as broadband 
coverage, strong protection for intellectual property, better support 
of entrepreneurs, and increased effort to open-up foreign markets to 
U.S. exports.\6\
---------------------------------------------------------------------------
    \5\ Federal Research and Development Funding: FY 2011, 
Congressional Research Service, March 2010.
    \6\ Executive Office of the President, National Economic Council, 
and the Office of Science and Technology Policy. September, 2009.
---------------------------------------------------------------------------
    A number of Federal R&D programs use the word ``innovation'' within 
their titles or mission statements. For example, NSF spent nearly $50 
million in FY 2009 on Industrial Innovation and Partnership funding and 
the Emerging Frontiers in Research and Innovation program (with an 
additional $19 million for ARRA (P.L. 111-5) funding). These programs 
fund a wide range of activities from research to making more efficient 
use of radio frequencies to developing measurements for sustainable 
construction practices and the development of applied mathematical 
models for complex engineered systems. The Department of Energy also 
makes a number of awards for innovation, such as the Energy Innovation 
Hubs to fund research to bridge the gap between basic scientific 
breakthrough and industrial commercialization. However, the authors of 
Boosting Productivity, Innovation, and Growth Through a National 
Innovation Foundation \7\ note that while the Federal Government 
invests billions in R&D, there is very little funding directed toward 
``firm-level'' innovation. They identified only two programs that 
focused directly on stimulating commercial innovation, NIST's 
Manufacturing Extension Partnership Program and its Technology 
Innovation Program. Other Federal programs, like the Defense Advanced 
Research Project Agency (DARPA) and the Small Business Innovation 
Research (SBIR) program focus on spurring technological development, 
but generally to accomplish a mission-related goal.
---------------------------------------------------------------------------
    \7\ Boosting Productivity, Innovation, and Growth Through a 
National Innovation Foundation, ITIF & Brookings, April 2008.
---------------------------------------------------------------------------
    The authors of the Boosting Productivity report recommend that the 
Federal Government take a more active role in supporting innovation to 
help overcome some of the barriers faced by the private sector. These 
barriers, or market failures that disadvantage innovation, include the 
pressure to shift corporate R&D away from long-term breakthroughs, 
towards short-term development projects and the difficulties faced in 
aligning the needs of universities and the private sector to enable 
effective collaboration. The authors propose creating a National 
Innovation Foundation to remedy the shortcomings in Federal innovation 
policy, which they view as ad-hoc, too focused at the Federal-level, 
and too narrow (e.g., very little Federal science and technology 
support directly for the service-sector). This Foundation, an 
independent Federal agency, would fund industry-university research 
partnerships, make state-level grants to help promote regional industry 
clusters and technology commercialization, assist small firms in 
adopting new technologies, and support innovation throughout the 
Federal Government.
    Investment in innovation is not confined to the Federal level. Many 
states, recognizing that they now must compete globally, as well as 
with each other, are making investments to improve the innovation 
capacity of their economies. Collectively, states spend approximately 
$1.9 billion per year on technology-based economic development 
activity.\8\
---------------------------------------------------------------------------
    \8\ Boosting Productivity, Innovation, and Growth Through a 
National Innovation Foundation, ITIF & Brookings, April 2008.
---------------------------------------------------------------------------
    These types of initiatives, like the Oregon Nanoscience and 
Microtechnologies Institute, provide funds, facilities, and other 
services to high-tech start-up companies. Some states are also 
investing directly in R&D and in recruiting top science and engineering 
talent, such as Maryland's $23 million per year investment in stem cell 
research and Kentucky's decade long $350 million investment in 
recruiting top faculty to its universities.\9\ States make many of 
these investments not only to improve their economies over a range of 
sectors, but also in an effort to spur the development of specific-
industry clusters. The rise of Silicon Valley demonstrates the powerful 
force of cluster development both to regional economic growth and to 
spurring innovation. The Council on Competitiveness has identified 
clusters as a critical element to advancing regional competitiveness 
and innovation capacity. The presence of related industries, though, is 
only one piece of a strong innovative economy. A multitude of factors, 
such as workforce, R&D capacity, demand conditions, availability of 
capital, and local governance all affect the innovation capacity of 
regional economies.\10\
---------------------------------------------------------------------------
    \9\ Innovation America: Investing in Innovation, National Governors 
Association, The Pew Center on the States, 2007.
    \10\ Clusters of Innovation Initiative: Atlanta-Columbus, U.S. 
Council on Competitiveness
---------------------------------------------------------------------------
    A study of Rochester, New York, by the Council on Competitiveness, 
illustrates the need for all of these factors to enable innovation. The 
study found that Rochester had the fundamental building blocks for an 
innovation economy, but lacked both the capital and culture to take the 
necessary risks to innovate. The area, dominated by Eastman Kodak and 
Xerox, has two well-regarded universities, a strong K-12 educational 
system, a skilled workforce, and a good transportation and 
communications infrastructure. However, despite the fact that workers 
there produce six-times the average number of patents as workers 
elsewhere in the country, the area ranked very low in terms of 
licensing technology and launching start-ups or spin-out companies. The 
authors attributed the low rate of entrepreneurship to the fact that 
the area had long relied on a few strong corporate entities, 
contributing to a risk-averse culture. In fact, between 1995 and 2003, 
the area attracted only 0.6 percent of the total venture capital 
market. The venture capital in the region tends to focus on the least 
risky opportunities. The report did note that the region is attempting 
to create coalitions around strengths like optics, and promote more 
collaboration between business and the universities.\11\
---------------------------------------------------------------------------
    \11\ Fanning the Flames of Economic Progress: Igniting Greater 
Rochester's Entrepreneurial Economy, U.S. Council on Competitiveness, 
September 2004.
---------------------------------------------------------------------------
    Funding to bring new discoveries from the lab into 
commercialization is critical for innovation. Experts have noted the 
declining level of funding available for early stage 
commercialization--the money needed for proof of concept or prototype 
development. Angel investors, independent investors working with their 
own funds, have traditionally focused funding at this early stage, but 
their contributions have dropped dramatically, particularly with the 
recent economic downturn ($19 billion in 2008, down from a five-year 
high of $26 billion in 2007). At the same time, venture capital 
investment is increasingly trending toward later stage investment. The 
NSF Science and Engineering Indicators reported that venture 
capitalists have largely abandoned seed and start-up stage funding from 
a high of nine percent in 1996 through 1998, to a low of two percent 
from 2002 to 2004. Currently, such funding stands at five percent, but 
this lack of early stage funding contributes significantly to the 
``valley of death phenomena'' which makes commercialization of new 
technology notoriously difficult.\12\
---------------------------------------------------------------------------
    \12\ National Science Foundation Science and Engineering 
Indicators, 2010
---------------------------------------------------------------------------
    Despite the increasingly competitive global environment, the U.S. 
is still a leader in knowledge and high-tech industries. According to 
the most recent National Science Foundation Science and Engineering 
Indicators, the U.S. provided 34 percent of knowledge intensive service 
industries (business, financial, and communications) in 2007 and 30 
percent of the global value added for high technology manufacturing was 
accounted for by the U.S. However, the U.S. trade deficit in high-tech 
goods in 2008 was $80 billion.\13\
---------------------------------------------------------------------------
    \13\ National Science Foundation Science and Engineering 
Indicators, 2010

---------------------------------------------------------------------------
4. Overarching Questions

          What factors have enabled innovation in the past?

          What is the role of the Federal Government in spurring 
        innovation?

          How can government best support entrepreneurs?

          What factors enable regional innovation-based economic 
        growth? How can these be encouraged and sustained?

          How should efforts to create innovation be measured or 
        assessed?
    Chairman Wu. The hearing will come to order.
    Good morning, everyone. I would like to thank you all for 
being here, and also for helping us think about a very 
challenging topic and one that frequently doesn't get addressed 
as well as in our Nation's capital as sometimes it gets 
addressed elsewhere in the country. We tend to get tied up in 
the issues of the day and the issues of the moment rather than 
looking a long ways down the road and also looking carefully at 
our own history, and it is very instructive that economists 
like Solow and others attribute at least 50 percent of our 
economic growth, and in some instances up to 90 percent of our 
economic growth, in the last century or especially in the 
postwar era is attributable to innovation, to things other than 
immediate changes in labor inputs and other factors. It is 
absolutely crucial that we understand the past in order to set 
our policies properly today to have the future that we want for 
our country and the world.
    I view this as the beginning of a very important 
conversation that we are going to have here in the science and 
technology community. I know that this is a discussion which 
many of you have been initiating elsewhere but I think that 
bringing this to the Congress and supporting the 
Administration's efforts in this arena is absolutely crucial.
    So today we have a beginning of the conversation, and I 
look forward to holding probably several hearings on this topic 
and looking at what pieces of legislation we can initiate from 
this Subcommittee and from the Full Committee to better 
encourage the innovative forces which have always been quite 
strong in our society and our economy but which sometimes 
suffer from some impediments and it is our task both to remove 
those impediments and also to engage in those activities which 
truly promote innovation and all the things that we want from 
innovation.
    Chairman Wu. With that, I would like to recognize Ms. 
Biggert, the gentlelady from Illinois, for her opening 
statement.
    [The prepared statement of Chairman Wu follows:]
                Prepared Statement of Chairman David Wu
    Good morning. I would like to thank everybody for being at today's 
hearing, particularly our witnesses.
    Near the end of every year, Time Magazine publishes a list of that 
year's best inventions. Some on the 2009 list include rubber from 
dandelions, a 3-D camera, and highly maneuverable underwater robots. At 
one point, no doubt Time's list would have included the telephone, the 
transistor, or the polio vaccine. It is a challenging exercise in 
imagination to look at lists like these and try to predict which 
discovery will have the same level of impact as the Internet or the 
combustion engine, which discovery will go nowhere, and which will be 
tomorrow's airship--useful for a time, but made obsolete by superior 
technology.
    It is not an exercise in imagination to contemplate the impact 
innovation has had on our economy and our lives. Economists estimate 
that innovation has been responsible for 50 to 85 percent of the 
economic growth in this country. The importance of innovation--creating 
new ideas, products, and services--cannot be overstated. And in this 
global, highly competitive economy, it is increasingly the intangible 
inputs of R&D, education, and entrepreneurial risk-taking that drive 
that growth. Innovation is key to creating new industries, and 
therefore key to the creation of American jobs.
    As I'm sure the witnesses will tell us today, the government's 
commitment to funding research and education has had a major impact on 
fueling innovation. Innovation, though, is not just about expanding 
knowledge and making discoveries. Innovation brings new products and 
services into the marketplace that can then drive economic growth and 
future prosperity.
    I hope the panel today can give us greater insight into the factors 
that have promoted innovation in the past and a picture of the health 
of our current innovation environment. I look forward to learning how 
the government can best support innovation. This is an important 
discussion to have as we look forward to reauthorizing America 
COMPETES.

    Ms. Biggert. Thank you, Mr. Chairman, and thank you so much 
for calling this hearing on supporting innovation in the 21st 
century economy. As we move forward reauthorizing the America 
COMPETES Act, we can always learn from new ideas, from 
listening to a broad range of viewpoints, so I welcome that 
opportunity today.
    And likewise, the President should be applauded for taking 
a committed interest in innovation as he has demonstrated with 
his strategy for American innovation, and we welcome you, Mr. 
Chopra, to this side of the Capitol.
    But Chairman Wu, I think you will agree with me that 
innovation and competitiveness have long been at the forefront 
of this Committee agenda for as long as we have been members. I 
think we struggle to get some of our other members to be as 
engaged as we are, and I think you are right that in the 
hinterland there is probably a lot more emphasis on this. But 
we do understand its importance and we will continue to work 
towards ensuring that the United States remains the world's 
leader in innovation, and it is not only imperative to maintain 
our competitive edge but also to strengthen our economy.
    And we took some major steps to reinforce our innovative 
future with the 2007 America COMPETES Act, which was a result 
of recommendations from the Rising Above the Gathering Storm 
Report, and I think that is where we really took that on, the 
previous Administration's American Competitiveness Initiative 
and the bipartisan leadership of this Committee, so as the 
chairman and I have both already mentioned, this hearing is a 
part of that reauthorizing process.
    We are still waiting to see the benefits of some of the 
initiatives put into place in COMPETES as well as the return on 
investment from the more than $10 billion dollars in stimulus 
funding for R&D within this Committee's jurisdiction, so I hope 
that given our current economic climate, we proceed very 
cautiously with any new initiatives to spur innovation until we 
know our current investments are worthwhile.
    So I want to thank our witnesses for being here today and I 
look forward to your testimony, and I yield back the balance of 
my time.
    [The prepared statement of Ms. Biggert follows:]
           Prepared Statement of Representative Judy Biggert
    Thank you, Mr. Chairman, for calling this hearing on supporting 
innovation in the 21st century economy. As we move forward on 
reauthorizing the America COMPETES Act, we can always learn new ideas 
from listening to a broad range of viewpoints, so I welcome that 
opportunity today.
    Likewise, the President should be applauded for taking a committed 
interest in innovation as he has demonstrated with his Strategy for 
American Innovation, and we welcome you, Mr. Chopra, to this side of 
the Capitol. However, I am sure you will agree with me, Chairman Wu, 
that innovation and competitiveness have been at the forefront of this 
Committee's agenda for as long as we have been Members. We understand 
its importance and will continue to work towards ensuring that the 
United States remains the world leader in innovation. It is not only 
imperative to maintaining our competitive edge, but also to 
strengthening our economy.
    We took some major steps to reinforce up our innovative future with 
the 2007 America COMPETES Act, which was a result of recommendations 
from the Rising Above the Gathering Storm Report, the previous 
Administration's American Competitiveness Initiative, and the 
bipartisan leadership of this Committee. As the Chairman and I have 
both already mentioned, this hearing is part of that reauthorization 
process.
    We are still waiting to see the benefits of some of the initiatives 
put into place in COMPETES, as well as the return on investment from 
the more than $10 billion in stimulus funding for R&D within this 
Committee's jurisdiction. I hope that, given our current economic 
climate, we proceed very cautiously with any new initiatives to spur 
innovation until we know our current investments are worthwhile.
    I would like to thank our witnesses for being here today, and I 
look forward to your testimony. I yield back the balance of my time.

    Chairman Wu. Thank you very much, Mrs. Biggert.
    If there are Members who wish to submit additional opening 
statements, your statements will be added to the record at this 
point.
    Now it is my distinct pleasure to introduce our witnesses. 
Mr. Aneesh Chopra is the Chief Technology Officer of the United 
States at the White House Office of Science and Technology 
Policy. Welcome. It is absolutely wonderful to have an 
Administration which seems to really get it in terms of 
technology and innovation. Dr. Mark Kamlet, who is the Provost 
at Carnegie Mellon University. Dr. Rob Atkinson is the 
President of the Information Technology and Innovation 
Foundation. Dr. Dan Breznitz is Associate Professor at the Sam 
Nunn School of International Affairs at the Georgia Institute 
of Technology, and our final witness is Mr. Paul Holland, who 
is General Partner at Foundation Capital.
    Welcome, one and all. You will each have five minutes for 
your spoken testimony. Your written testimony will be included 
in the record for the hearing, and I commend this to all of us 
as audience and witnesses, the body of work in the written 
testimony is truly impressive for its completeness and hitting 
on so many of the issues important to innovation. Each Member 
will have five minutes to question the panel after the spoken 
testimony, and Mr. Chopra, please begin.

 STATEMENT OF HON. ANEESH CHOPRA, CHIEF TECHNOLOGY OFFICER OF 
THE UNITED STATES, WHITE HOUSE OFFICE OF SCIENCE AND TECHNOLOGY 
                         POLICY (OSTP)

    Hon. Chopra. Well, thank you very much, Chairman Wu and 
Congresswoman Biggert. It is a pleasure to be with you and 
others here on the Subcommittee.
    It is my honor and privilege to discuss the President's 
strategy for American innovation, an issue he addressed 
directly on September 21, 2009, when he released his approach 
for sustainable growth and quality jobs. As Chief Technology 
Officer, I work to execute on that strategy by harnessing 
technology, data and innovation to transform the Nation's 
economy and to improve the lives of everyday Americans. As you 
noted, I will briefly summarize the key highlights of my 
testimony for us this morning, beginning with what we define as 
the nature of the problem, which we call the problems of 
bubble-driven growth of the past. So despite America's economic 
strength historically, our economic growth has rested too long 
on what we believe to be an unstable foundation. Time and 
again, explosive growth in one sector of our economy provided a 
short-term boost while masking what we consider to be some 
long-term weaknesses. A short-term approach to the economy 
masks the underinvestments in essential drivers of sustainable, 
broadly shared growth. It promotes temporary fixes over lasting 
solutions. That said, the American economy remains the most 
dynamic, innovative and resilient in the world. America's 
strengths are clear: world-class research universities, 
flexible labor markets, deep capital markets, and an energetic 
entrepreneurial culture. The United States must redouble its 
efforts to give our world-leading innovators every single 
chance to succeed. America cannot rest on our laurels while 
other countries are clearly catching up.
    So the need for innovation is clear. It is the foundation 
for durable, sustainable expansion in both employment and 
economic growth. From our perspective, it begins with the 
development of a new product, service, or process. It then 
proceeds with widespread diffusion throughout our economy and 
at an appropriate scale, resulting in jobs and economic value.
    So what is the proper role for government? The Obama 
Administration proposes to strike a balance by investing in the 
building blocks that only the government can provide, setting 
an open and competitive environment for business and 
individuals to experiment and grow, and by providing extra 
catalysts to jump-start innovation in sectors of national 
importance. I'd like to highlight just a few of those 
components, the building blocks of innovation. We are committed 
to making investments that will foster long-term economic 
growth and productivity including R&D, a skilled workforce, a 
leading physical infrastructure and widely available broadband 
networks. Given last week's Federal Communication Commission's 
release of the National Broadband Plan, I thought I would 
simply note we have established a broadband subcommittee within 
the National Science and Technology Council to advise this 
Administration on the actions it should take to promote 
broadband as a platform to improve the lives of everyday 
Americans and drive innovation in the economy.
    On the topic of promoting competitive markets that spur 
productive entrepreneurship, here too we believe that this is a 
key imperative to create a national environment that is ripe 
for entrepreneurship. Part of this strategy is to change the 
way Washington works by promoting a more open and innovative 
government. Yesterday I was pleased to announce that the 
Defense Advanced Research Projects Agency, DARPA, will begin 
providing data on awardees in the Small Business Innovation 
Research Program that utilize a streamlined process for 
contracting and will extend this streamlined process to future 
SBIR solicitations starting with their one coming out on April 
21st. Initially, DARPA will display data on the number of 
awardees that are eligible for this streamlined program, how 
many awardees have opted for it and the average number of days 
it took to complete.
    Now, what does this mean? Typically, contracting can take 
up to five or six months to complete after you have been given 
an award. But we believe this streamlined approach will take on 
average less than 60 days. That represents a 60 to 70 percent 
reduction in both time and cost, saving small businesses tens 
of thousands of dollars and letting them get to work months 
faster.
    Finally, on the topic of catalyzing breakthroughs for 
national priorities, we are absolutely committed to harnessing 
the power of science, technology and innovation to address our 
challenges in clean energy, health care and, broadly speaking, 
the grand challenges of the 21st century. Increasingly, our 
efforts to spur innovation on these matters rely on an 
effective, open and strategic collaboration between the Federal 
agencies and the private sector to ensure that the 
technological innovation needed to tackle these national 
problems is an opportunity for economic growth and job 
creation.
    To that end, I am pleased to announce today that I am 
joining our Federal CIO [Chief Information Officer], Vivek 
Kundra, and OIRA [Office of Information and Regulatory Affairs] 
Administrator, Cass Sunstein, in establishing a new 
subcommittee on standards under the National Science and 
Technology Council's Committee on Technology, which will be co-
chaired by Patrick Gallagher at NIST [National Institute of 
Standards and Technology] as well as Phil Wiser from the 
Department of Justice. This interagency group will provide 
high-level leadership so that Federal agencies are 
strategically focused and actively engaged in critical 
standards-related issues. The improved coordination will in 
turn ensure that agencies can work in a responsive and timely 
fashion with the private sector so that effective standards are 
developed or practiced to meet their needs. This subcommittee 
will work closely with the existing Interagency Committee on 
Standards Policy [ICSP], which also happens to be chaired by 
NIST. The subcommittee we announce today will provide direction 
and guidance to the ICSP and rely on them to fulfill their 
traditional duties and coordinating assessing progress and so 
forth.
    In conclusion, Mr. Chairman, the United States is still the 
land of the future. We retain this honor because America's 
scientists, entrepreneurs and public officials have understood 
the importance of applying the power of American curiosity and 
ingenuity to the biggest economic and societal challenges. 
Clearly, we welcome any questions you may have.
    [The prepared statement of Hon. Chopra follows:]
                  Prepared Statement of Aneesh Chopra
    Chairman Wu, Ranking Member Smith, and Members of the Subcommittee, 
it is my distinct privilege to be here with you today to discuss the 
Obama Administration's Strategy for American Innovation.
    President Obama understands the importance of innovation for 
sustainable growth and quality jobs. On September 21st, 2009, he 
released his Strategy for American Innovation that identified three 
critical roles for the Federal Government: to invest in the building 
blocks of innovation; to create the right environment for private 
sector investment and competitive markets by, for example, promoting 
high-growth entrepreneurship, protecting U.S. intellectual property 
rights, and fostering an open government; and to serve as a catalyst 
for breakthroughs related to national priorities such as clean energy, 
health care, and other ``grand challenges'' of the 21st century.
    In my capacity as Assistant to the President, Chief Technology 
Officer, and Associate Director for Technology in the Office of Science 
and Technology Policy, my mission is to harness the power and potential 
of technology, data, and innovation to transform the Nation's economy 
and to improve the lives of everyday Americans. The Administration 
envisions an economy in which jobs are more plentiful, American firms 
are more competitive, Americans are safer and more secure, and energy 
use is cleaner and more economical.

Problems with the Bubble-Driven Growth of the Past

    Despite the American economy's historic strength, our economic 
growth has rested for too long on an unstable foundation. Time and 
again, explosive growth in one sector of our economy provided a short-
term boost while masking long-term weaknesses. In the 1990s, the 
technology sector climbed to unprecedented heights of valuation. The 
tech-heavy NASDAQ composite index rose over 650 percent between 1995 
and 2000, but then lost two-thirds of its value in a single year.
    After the tech bubble burst, a new one emerged in the housing and 
financial sectors. This type of growth isn't just problematic when the 
bubble bursts, it is not entirely healthy even while it lasts. Between 
2000 and 2007 the typical working-age American household saw its annual 
income decline by nearly $2,000.
    A short-term approach to the economy masks under-investments in 
essential drivers of sustainable, broadly-shared growth. It promotes 
temporary fixes over lasting solutions. This is patently clear when 
looking at how American education, infrastructure, healthcare, energy, 
and research--all pillars of lasting prosperity--were ignored during 
the last bubble.
    Despite this underinvestment in key drivers of growth, the American 
economy remains the most dynamic, innovative, and resilient in the 
world. America's strengths are clear: world-class research 
universities, flexible labor markets, deep capital markets, and an 
energetic entrepreneurial culture. The United States must redouble its 
efforts to give our world-leading innovators every chance to succeed. 
America cannot rest on our laurels while other countries are catching 
up.

The Need for Innovation

    Innovation is at the core of a new foundation for durable, 
sustainable expansion in both employment and economic growth. Robert 
Solow won the Nobel Prize in economics by showing that factors other 
than capital intensity, most notably advances in human knowledge and 
technology, accounted for almost 90 percent of the growth in America's 
output per hour in the first half of the last century. Growth 
accounting has been refined since Solow's first attempts, yet 
contemporary research still shows that human skill and innovation 
remain far and away the most powerful force for improving prosperity 
over the long-run, which is exactly what we need.
    Given its importance, the process of innovation cannot be taken for 
granted. It begins with the development of a new product, service or 
process. But it does not end there. To create value, a new idea must be 
implemented. Thus successful innovations will diffuse throughout an 
economy and across the world, impacting various sectors and sometimes 
even creating new ones. A diffused innovation must then scale 
appropriately, reaching an efficient size at which it can have a 
maximal effect.
    The full process--from development to diffusion to scaling--has 
many variables and many inputs. Ideas often fail before they make it 
through the full chain. But those that do succeed can create value and 
jobs while improving people's lives.
    It is essential for the long-run prosperity of our society that 
innovations flourish and progress along this chain. And here, 
government has a fundamental role to play.

The Appropriate Role for Government

    While it is clear that a new foundation for innovation and growth 
is needed, the appropriate framework for government involvement is 
still debated. Some claim that the laissez-faire policies of the last 
decade capture the right strategy, and that the recent crisis was the 
result of too much rather than too little government support. Another 
view is that the government must dominate certain sectors, protecting 
and insulating those areas thought to be drivers of future growth. The 
Obama Administration rejects both sides of this unproductive and 
anachronistic debate.
    The United States proposes to strike a balance by investing in the 
building blocks that only the government can provide, setting an open 
and competitive environment for businesses and individuals to 
experiment and grow, and by providing extra catalysts to jumpstart 
innovation in sectors of national importance.

A Strategy for American Innovation

    President Obama has already taken historic steps to lay the 
foundation for the innovation economy of the future. In the Recovery 
Act alone the President committed over $100 billion to support 
groundbreaking innovation with investments in energy, basic research, 
education and training, advanced vehicle technology, health IT and 
health research, high speed rail, smart grid, and information 
technology.
    The Obama Innovation Strategy has three parts: investing in the 
building blocks of innovation, promoting competitive markets that spur 
productive entrepreneurship, and catalyzing breakthroughs for national 
priorities.

Investing in the building blocks of American innovation

    President Obama is committed to making investments that will foster 
long-term economic growth and productivity. These investments are in 
areas that include research and development, a skilled workforce, a 
leading physical infrastructure, and widely available broadband 
networks.
    Recognizing the need for long-term and sustained investments in 
R&D, President Obama has pledged to complete the doubling of funding 
for three key science agencies, the National Science Foundation, the 
laboratories of the National Institute of Standards and Technology, and 
the Department of Energy's Office of Science. In his landmark address 
before the National Academy of Sciences, President Obama set a goal of 
lifting the sum of public and private investment in R&D to three 
percent of GDP, which would exceed the level achieved at the height of 
the space race. As the President noted, ``science is more essential for 
our prosperity, our security, our health, our environment and our 
quality of life than it has ever been before.'' To encourage private 
sector investment in R&D, the President has proposed making the 
Research and Experimentation Tax Credit permanent. The Obama 
Administration is working to increase the impact of this investment by 
providing greater support for university commercialization efforts, for 
high-risk, high-return research, for multidisciplinary research, and 
for scientists and engineers at the beginning of their careers. For 
example, the National Science Foundation's FY 2011 budget proposes to 
double support for the Partnerships for Innovation program, which will 
help universities move ideas from the lab to the marketplace.
    The Obama Administration is committed to expanding access to 
broadband. Last week, the Federal Communications Commission (FCC) 
released the National Broadband Plan, called for in the American 
Recovery and Reinvestment Act, to identify ways to expand access to 
broadband and promote economic growth and job creation.
    In his statement on the plan's release, the President committed to 
``build upon our efforts over the past year to make America's 
nationwide broadband infrastructure the world's most powerful platform 
for economic growth and prosperity.'' To that end, I've established a 
Broadband Subcommittee of the National Science and Technology Council's 
Committee on Technology, to focus closely on the plan that the FCC--an 
independent agency--produced, and to advise the Administration on the 
actions it should take to promote broadband as a platform to improve 
the lives of everyday Americans and drive innovation in the economy.

Promoting competitive markets that spur productive entrepreneurship

    The Obama Administration believes that it is imperative to create a 
national environment that is ripe for entrepreneurship and risk taking, 
and allows U.S. firms to compete and win in the global marketplace. The 
Administration is pursuing policies that will promote U.S. exports, 
support open capital markets, encourage high-growth entrepreneurship, 
invest in regional innovation clusters, and improve our patent system. 
The Administration also strongly supports public sector and social 
innovation.
    Competitive, high-performing regional economies are the building 
blocks for national growth, and the Administration is stepping up its 
efforts to cultivate regional economic clusters across the country. For 
example, the Administration has just announced a $130 million 
competition for an Energy Regional Innovation Cluster. This pilot 
project is designed to spur regional economic growth while developing 
energy efficient building technologies, designs, and systems. This will 
allow a region to develop a strategy that includes support for R&D, 
infrastructure, small and medium-sized enterprises, and workforce 
development.
    Innovation must occur within all levels of society, including the 
government and civil society. The Obama Administration is committed to 
increasing the ability of government to promote and harness innovation. 
The Administration is encouraging departments and agencies to 
experiment with new technologies that have the potential to increase 
efficiency and reduce expenditures, such as cloud computing. The 
Federal Government should take advantage of the expertise and insight 
of people both inside and outside the Federal Government; use high-
risk, high-reward policy tools such as prizes and challenges to solve 
tough problems; support the broad adoption of community solutions that 
work; and form high-impact collaborations with researchers, the private 
sector, and civil society.
    The Administration launched the White House Open Government 
Initiative to coordinate Open Government policy, support specific 
projects, and design technology platforms that foster transparency, 
participation and collaboration across the Executive Branch. The 
principles of open government help to advance a set of key national 
priorities with emphasis on demonstrating tangible benefits for the 
American people.
    As an example, I am pleased to announce that the Defense Advanced 
Research Projects Agency (DARPA) will begin providing data on awardees 
in the Small Business Innovation Research (SBIR) program that utilize a 
streamlined process for contracting, and will extend this streamlined 
process to future SBIR solicitations. The SBIR program is one of the 
major Federal Government programs used to support innovative 
technologies in America--yet the paperwork is cumbersome, lengthy and 
time consuming. These new steps represent a significant improvement--
think of this as the 1040 EZ for Federal Government innovation grants. 
Initially, DARPA will display data on the number of awardees that are 
eligible for this streamlined process, how many awardees opted to 
utilize this process, and the average number of days it took to 
complete the streamlined agreement. In addition, the next round of 
DARPA's SBIR solicitations, scheduled for April 21st, will for the 
first time announce the wide availability of this streamlined option.
    Typically contracting would take from five to six months to 
complete, but we believe that the streamlined approach will take on 
average less than 60 days. This represents a 60 to 70% reduction in the 
time and cost, saving small businesses tens of thousands of dollars and 
letting them get to work months faster.
    By taking these steps, the Federal Government is matching young, 
innovative companies responsible for creating new technologies, new 
jobs and America's future economic growth with Federal funding that 
meets their needs.

Catalyzing breakthroughs for national priorities

    President Obama is committed to harnessing science, technology and 
innovation to unleash a clean energy revolution, improve America's 
health care system, and address the ``grand challenges'' of the 21st 
century.

            Smart Grid Technologies

    Modernization of the Nation's electric grid is a vital component of 
efforts to build a low-carbon economy. The ``smart grid'' will help 
provide consumers with the information, automation, and tools they need 
to control and optimize energy use. The tools and services enabled by 
the smart grid will improve the reliability, security, and efficiency 
of the electric grid. Smart grid technologies can facilitate energy 
generation from clean energy supplies and enable more effective 
integration with the electricity delivery system of renewable energy 
sources, demand response resources, and plug-in electric vehicles. The 
National Institute of Standards and Technology (NIST) has coordinated 
an unprecedented, open, and transparent public/private collaboration 
involving over 550 companies, organizations and government agencies to 
create the interoperability standards needed to foster innovation in 
the electric grid.
    One month ago, in conjunction with NIST, we broadened participation 
by launching the Smart Grid Forum, an on-line forum focused on the 
Nation's energy consumers with an emphasis on spurring innovation in 
smart grid products and services. We received comments from over 130 
individuals and organizations contributing their solutions to some of 
the most challenging smart grid goals that we have--from deployment of 
smart grid solutions, to development of standards needed for 
information exchange, to ensuring cybersecurity in the smart grid.

            Healthcare IT

    Another important Presidential priority is improving our health 
care system. Broad use of health information technology has the 
potential to improve health care quality, prevent medical errors, 
increase the efficiency of care provision and reduce unnecessary health 
care costs, reduce paperwork, increase administrative efficiencies, 
expand access to affordable care, and improve population health. The 
Recovery Act provides support for the deployment of health information 
technology, such as electronic health records. The Office of the 
National Coordinator for Health IT and the Centers for Medicare & 
Medicaid Services are working to ensure that health information 
technology products and systems are secure, can maintain data 
confidentially, can work with other systems to share information, and 
can perform a set of well-defined functions. NIST, in coordination with 
the Office of the National Coordinator and others, is accelerating the 
adoption of health IT standards by providing the critical testing 
infrastructure needed to achieve these goals.
    One month ago, the Office of the National Coordinator for Health IT 
announced a new collaborative, NHIN Direct, which will organize a set 
of standards, services and policies that enable secure health 
information exchange over the Internet (www.nhindirect.org). Several 
Federal agencies and healthcare organizations are already using the 
Nationwide Health Information Network (NHIN) technology to exchange 
information amongst themselves and their partners. This new effort will 
provide an easy ``on-ramp'' for a wide set of providers and 
organizations looking to adopt the exchange of health information--and 
provide a framework to spur innovation in support of direct 
communication amongst providers, and between providers and patients--in 
a secure and simple manner.

            Grand Challenges
    Finally, the Obama Administration believes that grand challenges 
should be an important organizing principle for science, technology and 
innovation policy. They can address key national priorities, catalyze 
innovations that foster economic growth and quality jobs, spur the 
formation of multidisciplinary teams of researcher and multi-sector 
collaborators, bring new expertise to bear on important problems, 
strengthen the ``social contract'' between science and society, and 
inspire students to pursue careers in science, technology, engineering, 
and mathematics. The President's innovation strategy sets forth a 
number of grand challenges, such as solar cells as cheap as paint, 
educational software that is as compelling as the best video game and 
effective as a personal tutor, and early detection of diseases from a 
saliva sample. The National Economic Council and the Office of Science 
and Technology Policy are encouraging multi-sector collaborations to 
achieve these grand challenges that might involve companies, research 
universities, foundations, social enterprises, non-profits, and other 
stakeholders.

            The Way Forward

    Thanks to President Obama's leadership, the Administration has 
taken large strides in developing and implementing an ambitious 
innovation agenda. The Recovery Act alone provides over $100 billion to 
support research and development and the deployment of advanced 
technologies such as clean energy, health IT, the smart grid, and high-
speed rail. This commitment to investing in America's future continues 
in the President's most recent budget, with sustained support for 
research, entrepreneurial small businesses, education reform, college 
completion, and a 21st century infrastructure.
    The Administration is working with a wide range of stakeholders to 
identify the most promising ideas for implementing and further refining 
the Administration's innovation strategy. There are active inter-agency 
working groups on issues such as prizes and challenges, regional 
innovation clusters, research commercialization, spectrum reform, 
broadband, open government, and standards. The National Science and 
Technology Council is leading multi-agency research initiatives in 
dozens of critical areas such as aeronautics, genomics, green 
buildings, nanotechnology, quantum information science, robotics, and 
information technology. Through the President's Council of Advisors on 
Science and Technology, the Administration is able to receive high 
quality advice from the Nation's leading scientists, engineers and 
innovators on issues such as health information technology, advanced 
manufacturing, clean energy, and STEM education.
    America has always been a Nation built on hope--hope that we can 
build a prosperous, healthy world for ourselves and for our children. 
These long-standing American aspirations depend critically on our far-
sighted investments in science, technology and innovation that are the 
ultimate act of hope and will create the most important legacies we can 
leave.
    The United States is still the land of the future. We have held 
that honor since this continent was discovered by a daring act of 
exploration more than 500 years ago. We have earned it anew with each 
passing generation because America's scientists, entrepreneurs and 
public officials have understood the importance of applying the power 
of American curiosity and ingenuity to the biggest economic and 
societal challenges.
    I welcome any questions that the Committee may have.

                      Biography for Aneesh Chopra
    Aneesh Chopra is the Chief Technology Officer and in this role 
serves as an Assistant to the President and Associate Director for 
Technology within the Office of Science & Technology Policy. He works 
to advance the President's technology agenda by fostering new ideas and 
encouraging government-wide coordination to help the country meet its 
goals from job creation, to reducing health care costs, to protecting 
the homeland. He was sworn in on May 22nd, 2009. Prior to his 
appointment, he served as Secretary of Technology for the Commonwealth 
of Virginia from January 2006 until April 2009. He previously served as 
Managing Director with the Advisory Board Company, a publicly-traded 
healthcare think tank. Chopra was named to Government Technology 
magazine's Top 25 in their Doers, Dreamers, and Drivers issue in 2008. 
Aneesh Chopra received his B.A. from The Johns Hopkins University and 
his M.P.P. from Harvard's Kennedy School. He and his wife Rohini have 
two young children.

    Chairman Wu. Thank you very much, Mr. Chopra.
    Dr. Kamlet, please proceed.

    STATEMENT OF DR. MARK KAMLET, PROVOST, CARNEGIE MELLON 
                           UNIVERSITY

    Dr. Kamlet. Chairman Wu, thank you very much, and it is an 
honor to be able to participate in this hearing.
    As Provost and Executive Vice President of Carnegie Mellon, 
I am here today to offer perspectives on supporting innovation 
from the trenches, so to speak. I will cover two main areas in 
my brief remarks. First, I would like to offer a quick overview 
of Carnegie Mellon's experience in helping to shape a pathway 
from research to innovation, and second, based upon these 
experiences, I will offer a few thoughts for your consideration 
on Federal policies that can help ensure continued U.S. 
leadership in technology-based innovation in the future.
    I should say that as with our peer institutions, we have 
benefited immeasurably from the strong historic partnership 
with the Federal Government that has made the American research 
university truly unique in the world as an engine for new 
business creation, and of course, this partnership was 
dramatically energized by the Bayh-Dole Act, which over the 
last 30 years has made technology transfer a critically 
important university mission. But Carnegie Mellon's experience 
highlights the importance, as well, of supporting the Federal 
investment in research with deliberative strategies that create 
a culture of innovation and speed research to the marketplace. 
At Carnegie Mellon, we have implemented two strategic thrusts 
to directly accelerate commercialization.
    First, we overhauled our tech transfer process in 2004 to 
create a streamlined, transparent approach for faculty seeking 
to create new companies known as our ``5% go in peace'' policy, 
named such because of the fact that we cap university equity at 
five percent, up to $2 million dilution event, and that this 
strategy has largely removed the conflicts that often accompany 
negotiations over faculty startups. Combined with a series of 
supporting initiatives that range from widespread 
entrepreneurial education for faculty and students, to the 
placement of embedded entrepreneurs right in the heart of 
research labs, the 5% go in peace approach has more than 
doubled our rate of new business creation. We now have 10 to 20 
new companies that we launch each year, and we rank 
consistently among the top three universities in the Nation in 
surveys by AUTM [Association of University Technology Managers] 
of university startups and first among universities without a 
medical school.
    Our second major strategic thrust has been a campus-wide 
commitment to regional economic development born from a sense 
of our need to contribute to our region's recovery from the 
collapse of the steel industry. That focus has included 
aggressive efforts to directly link faculty research to the 
attraction of companies to Pittsburgh. As a result of this 
focus on economic development, we have succeeded in helping 
bring companies such as Apple, Intel, Google, Disney and 
Caterpillar to Pittsburgh.
    More critically, this economic development commitment has 
fostered a vibrant environment for the industry-university 
research collaboration as with the burst of new startups 
created by our 5% go in peace policy. The collaborations 
stemming from this focus on economic development have created 
new channels for commercializing university research.
    Let me offer three key suggestions on what lessons the 
Carnegie Mellon experience may hold for policies that can 
support innovation. First, I believe that we can significantly 
improve the climate for innovation by focusing small but 
targeted Federal investments to fill the gap between the end of 
basic research and the point where private investments or even 
SBIR funding can support startup development or licensing. This 
gap often involves the development of pre-commercial prototypes 
and other early market tests. The Obama Administration has 
proposed $12 million in the innovation ecosystem funding in the 
NSF budget. This and ideas such as the notion of regional 
prototype centers offered by Secretary Locke will be valuable 
steps towards filling this gap. This funding should come with 
strings that hold universities accountable for creating the 
policies and environment necessary for commercialization to 
thrive.
    Second, I believe there is great promise in seeking to 
identify niche areas for Federal science funding where greater 
synergy can be created between basic research and technology 
development to accelerate commercialization. For example, over 
the last two years, faculty from Carnegie Mellon have joined 
with colleagues at ten other universities and a range of 
industry leaders to create a roadmap for commercial robotics. 
This roadmap outlines a shared vision for advances in both 
fundamental research and shorter-term barriers to commercial 
application that must be addressed to dramatically expand the 
U.S. robotics industry.
    Finally, we need to create the equivalent of a Bayh-Dole 
Act for university-industry collaboration, a broad framework 
that can reinvigorate partnership development. Two pillars to 
build this framework would include a lessening of restrictions 
that impede the ability of universities to conduct exclusive 
research for companies in buildings funded with tax-exempt 
bonds and more focused provisions for the industry-university 
collaboration in the R&D tax credit.
    In closing, I want to thank the Members of this Committee 
for their commitment to preserving U.S. leadership in science 
and technology. I have witnessed the fruit of it directly in 
the research labs at Carnegie Mellon and we are grateful for 
your leadership. Thank you very much.
    [The prepared statement of Dr. Kamlet follows:]
                   Prepared Statement of Mark Kamlet

Introduction

    Thank you Chairman Wu, Ranking Member Smith, and Members of the 
Committee for the opportunity to speak to you today and to share 
perspectives on strategies to maintain and reinvigorate the leadership 
of the United States in innovation-led job and business growth. My name 
is Mark Kamlet. I am the Provost and Executive Vice President of 
Carnegie Mellon University. I serve as the chief academic officer of 
CMU but I have also been very engaged in our tech transfer policies and 
directly involved in a number of university spin-out companies. I also 
serve on the National Academy of Sciences panel on intellectual 
property--though my remarks today reflect only my views and not those 
of the panel.
    My comments will focus on two key areas. First, I will share 
briefly with you Carnegie Mellon's experience in seeking to create a 
culture that accelerates the path from basic research to 
commercialization. Second, my remarks will seek to discern lessons from 
these experiences that may be of value as you assess policy options to 
ensure that the U.S. remains the world leader in innovation and, 
particularly, the capacity for innovation to stimulate broad-based 
economic opportunity.
    However, it is important that I first begin by thanking you and the 
members of this Committee for your tireless support of the advancement 
of science and technology. This Committee has been a steadfast 
proponent of policies to maintain U.S. science excellence and an 
``incubator'' of the kinds of creative ideas needed to refresh and 
rejuvenate our leadership for a changing world. I have witnessed the 
impact of this leadership directly in labs within Carnegie Mellon and I 
am grateful for your efforts.

Recognizing Our Strengths: The Vitality of the American Research 
                    University Partnership

    An effort to assess future directions for U.S. innovation policy 
must begin with recognition of the core vision and values that have 
been at the heart of our success to date. The fundamental partnership 
between the Federal Government and American higher education in the 
post-war period to create the modern research university has been the 
greatest catalyst to economic growth in the last half century. While 
the U.S. faces intense competition in the global economy it is worth 
noting that we possess one asset that no other nation has yet 
duplicated--the capacity of university based research to launch high 
growth companies. There is virtually no equivalent of ``Google'' 
emerging from dorm rooms in universities in Europe or Asia. This is an 
asset we must seek to nurture for the future.
    The power of this partnership in creating the modern research 
university was in my view greatly enhanced by the passage of the Bayh-
Dole Act. Bayh-Dole extended this partnership by fully engaging 
universities in technology transfer and spin-out development. At its 
essence, the Bayh-Dole Act created a vehicle for leveraging U.S. 
investment in basic research into a stronger engine for 
commercialization.
    Bayh-Dole was enacted at a time when the U.S. economy faced 
economic challenges nearly as severe as those we currently confront. In 
1980 the U.S. economy was beset by double digit unemployment and double 
digit inflation. The rise of international competition had brought the 
phrase ``rust belt'' into the popular lexicon for the first time. In 
Pittsburgh, America's epicenter of economic dislocation in the early 
1980s, over 100,000 jobs were lost in the steel industry in less than 
three years.
    The Bayh-Dole Act created the foundation for the innovation-led 
recovery of the 1980s and the growth of the 1990s. Since the enactment 
of Bayh-Dole the university community's commitment to technology 
transfer has skyrocketed. The number of university tech transfer 
programs increased from 30 to over 300. Over 5,000 new companies have 
been created and university-based patents and product introductions 
have also risen dramatically.
    Without question I believe that the U.S. investment in science and 
basic research would never have produced the commercial and job 
dividends so vital over the last two decades without the Bayh-Dole Act 
and its impact on energizing universities to become partners and 
advocates for commercialization.
    But while a recognition of those historic strengths is vital to 
charting a course forward, past achievements are no guarantee for a 
future where we face fundamental new challenges from increasing 
international competition, a critical need to overcome a period of 
stagnation in Federal support for basic research, some evidence of a 
plateauing in university-based patenting trends and unmistakable 
indications that the vital link between basic research and innovation-
led job growth has weakened if not broken completely. I will seek to 
identify lessons from Carnegie Mellon's experiences that may hold 
promise for writing a new chapter in the innovation compact between the 
Federal Government and American universities.

Searching for Strategies to Rejuvenate Innovation: Lessons from 
                    Carnegie Mellon's Experiences

    Carnegie Mellon University brings perspectives on these challenges 
from a relatively unique history among leading American research 
universities. Created in 1900 to be a technical trade school for the 
sons and daughters of steelworkers, the University is the youngest Top 
25 research institution in the U.S. Our roots have instilled a focus on 
practical problem solving and a culture of interdisciplinary research 
that have been critical to our capacity to stimulate innovation.
    Nevertheless, we have faced the challenge of having to forge 
policies and a cultural environment capable of generating significant 
results. Upon becoming provost in 2000, I confronted the strong 
findings of a University committee convened to guide the search for my 
position that concluded that Carnegie Mellon's tech transfer process 
was broken. The Committee found that the policies and processes in 
place at that time instilled conflict between the University and our 
faculty and choked off both commercialization and start-up creation.
    Our response was an overhaul of Carnegie Mellon's tech transfer 
process and the creation of what we call the ``5% go in peace'' 
approach. This approach creates a streamlined, common template for 
faculty based start-ups that limits university equity to 5% capped at a 
$2 million dilution event, establishes clear royalty guidelines with a 
three year delay in payments and ensures virtually no University 
interference in start-up operations. This streamlined template has been 
augmented by supportive policies that allow faculty to incubate 
companies in University labs for short periods and that also allow 
faculty to hold C-level positions in the companies they create.
    The 5% go in peace program has also been bolstered by the 
establishment of a supportive innovation ecosystem across the 
University. This ecosystem consists of aggressive entrepreneurial 
training and outreach that engages over 10% of the student population 
each year. It also includes the strategic placement of entrepreneurs in 
residence in key areas to jump start the development of ideas for new 
companies. In addition, a new initiative in computer science, known as 
Project Olympus, is bringing focused assistance on entrepreneurship to 
researchers in the earliest phases of research. One Project Olympus 
supported start-up was recently acquired by Google. Finally, we augment 
our streamlined processes for start-up creation with intense 
collaboration with regional economic development organizations to 
ensure that our companies have fertile ground for growth after leaving 
the University.
    The 5% go in peace approach has been a catalyst to innovation. The 
rate of university spin-outs has doubled since the implementation of 
this policy in 2004. Since 2007, Carnegie Mellon has ranked number #1 
among all U.S. universities without a medical school in the number of 
start companies created per research dollar spent and ranked number two 
in the Nation among all universities in 2008 (source: AUTM, the 
Association of University Technology Managers).
    On average the University creates 10 to 20 new companies each year. 
These start-ups range from robotics firms launching new applications 
for manufacturing and services, to video game companies, to a new 
battery storage company and a recent start-up that has developed a 
technology to utilize a person's blood to engineer plastics for plates 
to be used in medical procedures in order to reduce rejection rates. 
While most of these start-ups focus on leading edge technologies, 
nearly one-third involve the manufacturing of products. University-
based innovation is capable of far reaching impacts.
    This focus on creating an ecosystem to support start-ups has been 
mirrored by a University-wide commitment to economic development by 
Carnegie Mellon's President, Jared Cohon. This commitment has resulted 
in the creation of an on campus facility to ease the ability of 
companies to launch operations in Pittsburgh. The facility is currently 
home to Apple, Intel and Google. Carnegie Mellon has also helped to 
attract Caterpillar, Disney Research and Rand to Pittsburgh. Other 
major tech leaders such as Network Appliance, Foster Miller and Cadence 
Design Systems have entered the Pittsburgh market by purchasing CMU-
related companies.
    This focus on economic development has done more than simply 
contribute to the nearly 9,000 jobs created by Carnegie Mellon related 
companies in the Pittsburgh region that are central to the area's 
recovery from the collapse of the 1980s. A University wide commitment 
to economic development has helped to establish entirely new models for 
industry/university research collaboration--the second core component 
of the innovation equation. While each company tends to pursue its own 
unique model of collaboration ranging on a spectrum from open source 
research to highly proprietary engagements, our experience demonstrates 
that a commitment to economic development is a vital catalyst to 
building the strong faculty/company relationships that are essential to 
stimulating innovation.

Challenges and Potential Strategies for the Road Ahead

    The Carnegie Mellon experience demonstrates that a focus on 
accelerating start-ups and a commitment to regional economic 
development as a core university mission can help establish a culture 
of innovation that produces tangible commercialization outcomes. At the 
same time we confront clear challenges that illustrate the difficulties 
the Nation faces in accelerating innovation-led job growth.
    These challenges fall into two major areas. First, at a time when 
universities and the Federal Government face enormous fiscal 
challenges, the resources needed to advance basic research outcomes to 
the point where a determination can be made as to whether they provide 
the basis for licensing or start-up creation are virtually non-
existent.
    The scale of resources required is not large. An investment of 
$100,000 in a promising area, for example, can often enable a 
researcher to make the leap from concept to commercial potential. But 
currently, universities must rely on either internal sources or 
foundations for these funds and the net result is a lower return on 
U.S. investment in basic research.
    The Federal effort most applicable to meeting this gap is the SBIR 
program. However, the need for pre-commercial prototyping is often-
greatest before a researcher would be ready to start a firm and be SBIR 
eligible.
    The second challenge is the need to fundamentally reevaluate 
strategies to encourage stronger partnerships between universities and 
new industry. While Carnegie Mellon's focus on economic development has 
fostered important collaborations, the overall climate created by key 
tax policies is having a chilling effect on the capacity to stimulate a 
stronger research partnership with companies. I believe that this 
climate is hindering our capacity to link university research to 
capturing manufacturing opportunities in the U.S.
    Recognizing these two main challenges I would offer the following 
three recommendations for consideration.

        (1)  Create funding sources to close the gap between basic 
        research and commercialization

                 I would strongly encourage Committee consideration of 
                experimental approaches to enhance investment in moving 
                basic research outcomes closer to commercialization. 
                The President has proposed one approach to fill this 
                gap by including $12 million in the proposed FY 2011 
                NSF budget for Innovation Ecosystem grants. The goal of 
                this proposal is to provide support for programs that 
                link researchers to resources that can evaluate the 
                potential for new business creation or commercial 
                licensing earlier in the research process.

                 Secretary Locke has also discussed the potential 
                creation of regional ``prototype development centers'' 
                that would also facilitate pre-commercialization 
                refinement of research activities. A national pilot 
                program in efforts such as these could both test their 
                effectiveness and foster the creative development of 
                strategies.

                 This funding should come with clear requirements 
                however to ensure a Federal return. I would propose for 
                example that to be eligible, universities must 
                demonstrate that they have in place policies conducive 
                to start-ups and commercialization and have created the 
                economic development partnerships vital to foster 
                innovation. Where applicable these programs should also 
                enhance collaboration among universities in the 
                commercialization process.

        (2)  Invest in Targeted Research Initiatives that have the 
        Potential to Dynamically Link Fundamental Research and 
        Commercialization

                 The ability to stimulate innovation would also be 
                enhanced by exploring opportunities to target 
                investments towards areas where a strong synergy exists 
                between advancements in basic research and near term 
                commercial growth.

                 For example, over the last two years researchers at 
                Carnegie Mellon have joined their colleagues at ten 
                other universities and a number of major companies to 
                develop a roadmap for the future of U.S. commercial 
                robotics. Funded by the Computing Community Consortium, 
                the roadmapping process focused on identifying near 
                term, medium range and long term application and 
                research needs.

                 The outcome of this work is an integrated vision for 
                linking continued progress in fundamental research 
                areas vital to breakthrough advances with near term 
                technology gaps that can accelerate new product 
                innovations in manufacturing, health care, education 
                and service applications. This approach harnesses the 
                best strengths of U.S. research universities but 
                creates a framework for collaborations on near term 
                innovations that can stimulate new companies and 
                technology transfer. I believe similar initiatives in 
                areas such as the science of learning or the brain 
                sciences where major breakthroughs in fundamental 
                research have recently been made could also be fertile 
                ground for this type of approach.

        (3)  Establish a National Focus on Rejuvenating Industry-
        University Collaboration

                 Just as the Bayh-Dole Act ushered in a boom in 
                university based start-ups, the U.S. is in need of an 
                overall strategy or policy framework for increasing 
                collaboration among companies and universities. Such a 
                framework should assess both current barriers and 
                opportunities for new incentives.

                 One starting point for developing this framework would 
                be an examination of the U.S. Tax code and Revenue 
                Procedure 97-14 which places restrictions on the 
                ability of universities to effectively engage 
                companies. This procedure precludes companies 
                sponsoring research projects from receiving 
                preferential treatment in licensing. In effect, it 
                requires universities to essentially stipulate that 
                companies cannot own the IP coming from research they 
                fund. It is a barrier unique to the U.S. and a major 
                competitive disadvantage.

                 Efforts were made in Revenue Procedure 2007-47 to 
                mitigate the impact of these provisions. But these 
                changes still largely preclude the ability of companies 
                to readily obtain exclusive licenses for research that 
                they fund in buildings financed with tax exempt bonds.

                 Arguments can be made that altering these provisions 
                would foster unfair competition with private sector 
                research or undermine the basic mission of 
                universities. I believe these issues can be addressed 
                and that the competitive challenges facing the U.S. 
                demand that we try.

                 A second starting point for this initiative would be 
                to continue to explore modifications to the R & D tax 
                credit that would incentivize university collaboration. 
                At a time when companies are increasingly off-shoring 
                research operations, tax incentives for university 
                collaborations could be a valuable tool for retaining 
                innovation capacity in the U.S.

                 Finally, an initiative to rejuvenate university/
                industry collaborations should focus specifically on 
                opportunities to more closely link basic research to 
                manufacturing. Carnegie Mellon is launching a campus-
                wide initiative called the Manufacturing Accelerator to 
                create more direct pathways between leading edge basic 
                engineering and computer science research and 
                manufacturing.

                 The Accelerator will leverage a network of over 200 
                small and medium sized Pennsylvania firms to focus 
                basic research on industry defined product and process 
                opportunities. Any effort to stimulate stronger 
                university/industry collaboration must include 
                strategies for extending that partnership to 
                production.

Conclusion

    Thank you again for your commitment to American leadership in 
science and the opportunity to share Carnegie Mellon's experiences in 
seeking to ensure that the Federal investment in basic research 
stimulates innovation. The U.S. confronts the challenges from a unique 
position of strength. The American research university is an asset not 
yet matched anywhere in the world.
    But the times demand that we evaluate strategies that can insure 
that this asset fosters broad-based economic opportunities in the 
future. Carnegie Mellon has worked to foster a culture of innovation 
that has accelerated new business creation and commercialization 
research partnerships with companies. Our experiences suggest that 
strategic policy initiatives could serve to reinvigorate the overall 
climate for university-based innovation.
    These strategic initiatives should include new funding sources that 
bridge the gap between basic research and commercialization anchored in 
strict requirements for universities to put in place and maintain 
start-up supportive policies. Second, focusing some segment of basic 
research funding on targeted areas where close collaboration to foster 
synergy between fundamental science breakthroughs and barriers to 
commercial applications, such as robotics, would be a critical step to 
accelerate research-based innovation. Finally, a broad-based effort to 
explore means of enhancing the environment for industry/university 
collaboration is clearly needed. A focus on tax code and tax credit 
actions as well as an assessment of opportunities that create closer 
linkages between university research and manufacturing activities could 
provide a starting point for establishing a policy framework as bold as 
the Bayh-Dole Act proved to be in launching an era of start-up 
creation.
    In closing, let me pass on the observation that one cannot spend 
time on the campus of an American university without coming away with a 
renewed belief that our best times are ahead of us. Carnegie Mellon and 
the entire university community stand ready to join you in advancing 
ideas and policies that will match the vigor and creativity of our 
students.

                       Biography for Mark Kamlet
    Mark S. Kamlet is provost and senior vice president of Carnegie 
Mellon University and professor of economics and public policy. He 
received a B.S. in Mathematics from Stanford, and an M.S. in 
Statistics, M.S. in Economics and Ph.D. in Economics from the 
University of California at Berkeley. He has taught at Carnegie Mellon 
since 1976. He has served as head of the Department of Social and 
Decision Sciences, associate dean of the College of Humanities and 
Social Sciences, and for eight years served as dean of the H. John 
Heinz III School of Public Policy and Management.
    Kamlet's research areas are in the economics of health care, 
quantitative methodology, and public finance. He has over 75 published 
papers, and has received the outstanding publication award from the 
Association of Public Policy and Management for his work on the Federal 
budgetary process.
    He has served on a U.S. Public Health Service panel to produce 
national guidelines on applying cost-effectiveness analysis in health 
care; and on three National Institute of Health consensus panels to 
make recommendations on national policies relating to prenatal genetic 
testing; neonatal screening; and end-of-life care. He has served on the 
Institute of Medicine's Board on Population Health and Public Health 
Practice, National Institute of Health's Public Access Working Group, 
and various consensus panels for the Centers for Disease Control.
    Kamlet is chairman of the board of directors of Carnegie Learning, 
Inc., past chairman of the board of Carnegie Technology Education, Inc. 
He has served on numerous boards of regional not-for-profits, including 
currently Pittsburgh Parks Conservancy, the Institute for Transfusion 
Medicine, The Western Pennsylvania Hospital and Highmark Inc. He served 
on the committee that drafted the rules and procedures for the new 
Allegheny County Executive and County Council, chaired the transition 
team for Allegheny County in the area of information technology, and 
chaired the first advisory board for the County Chief Executive on 
economic development.

    Chairman Wu. Thank you very much, Dr. Kamlet.
    Dr. Atkinson, please proceed.

STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, THE INFORMATION 
          TECHNOLOGY AND INNOVATION FOUNDATION (ITIF)

    Dr. Atkinson. Thank you, Chairman Wu, Mr. Smith and other 
Members. It is a pleasure to be here.
    I want to start by making, I think, a simple but very 
important point. In a report that we issued last year called 
The Atlantic Century, we benchmarked the United States against 
39 other nations or multi-nation regions on 16 different 
indicators of competitiveness and innovation; factors like 
corporate R&D, government R&D, venture capital, new business 
startups, number of scientists and engineers and the like. What 
we found was that in 2000, the United States was by far the 
world leader. Our closest competitor was significantly below us 
in overall ranking and score, and that was Sweden. 
Unfortunately, by 2009, when we released the report, we had 
fallen from number one to number six behind counties like 
Denmark, Sweden, South Korea and some others.
    The reason we fell so much and so fast is because we ranked 
40th out of 40 nations or regions in change. In other words, we 
were dead last in progress on these factors. Other nations 
expanded their corporate and government R&D faster. Other 
nations expanded their number of scientists and engineers 
faster. They expanded their venture capital faster. So while a 
lot of that is due principally to the fact that in the last 
decade or so a wide array of other countries have woken up to 
the fact that they need to be competitive in innovation. Just a 
simple factoid on that. In the early 1990s the United States 
had the most generous research and development tax credit in 
the world. According to the most recent OECD data, we are 17th 
out of 30 OECD [Organization for Economic Co-operation and 
Development] nations in R&D tax credit generosity, and that is 
just one example of many kinds of policies.
    Why do we care about this? Why is it important? I would 
actually argue that we can trace at least a portion of the 
cause of the recent financial crisis to this trend we have seen 
in innovation. We had an enormous amount of money in the United 
States looking for a home, money coming in from overseas 
including China, and it was looking for a place to be invested 
and there just weren't enough good investment opportunities of 
things we would consider good, i.e., innovation, and so the 
money ended up going into essentially bad consumption 
opportunities of subprime mortgages and other kinds of housing 
investments, which did nothing to promote U.S. long-term 
productivity or innovation and essentially, as we learned, was 
unsustainable. So I think there is a connection between the 
financial crisis and the lack of innovation or the suboptimal 
amount of innovation.
    I think the second key point here, though, is that 
innovation can play a key role in driving jobs in the future. 
One of the reasons is not just because you can get high-tech 
jobs and innovation-based jobs that export and pay more, but 
more importantly for what Keynes once talked about is the key 
to capitalist economies working is the ``animal spirits of 
capitalism.'' People have to have faith and optimism that there 
is going to be a better tomorrow, and innovation is a key 
enabler of that optimism to occur.
    So what do we need to do? Let me just say, money is 
important but I don't think money is enough. I think one of the 
most important changes we need to make in our national 
innovation policy system is, we need to increasingly put 
partnerships and collaboration at the center of it. It is not 
just enough to give money to NSF or other agencies and do 
individual projects. We need to think about systemic 
partnerships, and we lay out and propose several 
recommendations in the testimony on some of those. A few 
examples--science and technology STEM [Science, Technology, 
Engineering and Mathematics] high schools. There are a number 
of these STEM high schools around the country. They partner 
with high-tech companies. They do a great job of educating kids 
in science. One locally here is Thomas Jefferson High School in 
Northern Virginia--there are a number of these. But there 
aren't enough of them, and what we would propose is that there 
is a role for NSF funding to help expand the number of these 
specialty math and science high schools.
    I think one of the key areas that we lack right now, and 
Dr. Kamlet had alluded to this, is we do an OK job of funding 
basic research. Where we fall down, though, is sometimes 
translating that research into commercial opportunities, and 
you have some leading institutions including Carnegie Mellon, 
MIT, Stanford, and Georgia Tech who do a very good job of that 
but they are the outliers. We need a national system that 
really helps all universities and Federal laboratories do a 
better job there. One of the proposals we have made is for a 
new kind of SBIR. We call it an SCNR, ``Spurring 
Commercialization of Our Nation's Research,'' which would take 
a small portion of Federal R&D funds, about 0.15 percent, 
allocate that to universities and Federal labs and states to do 
this kind of bridging and commercialization.
    Another component, I think Dr. Kamlet alluded to this, we 
have proposed a collaborative R&D tax credit. Many countries in 
the last five years have created special, more generous credits 
if you are funding research at universities or Federal 
laboratories because that research spills over.
    And two final things. One, we think it is important that 
Federal research do a better job of supporting sector-based 
collaborations. We have got a very good one now in a program 
called the Focus Center program that the semiconductor industry 
and DARPA fund. It is a very, very good program, but it is only 
one program. So we need to be working more on sector-based 
efforts where industry comes to the table with ideas and money 
and the Federal Government helps match that, and we need to do 
a better job of supporting the state and local efforts that are 
trying to revive the U.S. economy through innovation-based 
economic development. They are very good efforts in many cases 
but they are underfunded. One way to do that, but certainly not 
the only way, would be to create as we have proposed with the 
Brookings Institution, a National Innovation Foundation to 
support that.
    The final proposal or suggestion would be, one of the 
things many countries have done in the last few years is create 
a national innovation strategy to look more in a detailed way 
where they are strong, where they are weak, what other 
countries are doing. I think it would behoove us to also do 
something like that akin to the national broadband strategy but 
for innovation. Thank you.
    [The prepared statement of Dr. Atkinson follows:]
                Prepared Statement of Robert D. Atkinson
    Mr. Chairman, Mr. Smith, and Members of the Committee, I appreciate 
the opportunity to appear before you to discuss the critical question 
of U.S. innovation leadership and what the Federal Government can do 
about it.
    The United States is no longer the global innovation leader and our 
rank is rapidly slipping. The effects are seen in increased trade 
deficits, relatively lower increases in standards of living, higher 
unemployment and even the severity of the current economic crisis. 
While ultimately businesses and other organizations (e.g., 
universities) will have to take the lead in driving innovation, the 
Federal Government can and should take a much more proactive role. As I 
describe below, Congress can take a number of important steps, 
including: ensuring that USTR takes a more aggressive role in trade 
enforcement, expanding the R&D credit, promoting science, technology, 
engineering and math (STEM) skills and increasing support for research 
and most importantly research commercialization. In addition, we 
encourage the Committee to particularly consider two ideas discussed in 
more detail below: the creation of a national innovation and 
competitiveness strategy and the establishment of a National Innovation 
Foundation, akin to the National Science Foundation (NSF), but for 
innovation.

What is at Stake: Why is Innovation Important?

    In recent years, a growing number of economists have come to see 
that it is not so much the accumulation of more savings or capital that 
is the key to improving standards of living; rather it is innovation-
the creation and adoption of new products, services, processes, and 
business models.\1\ When economists Kienow and Rodriguez-Clare 
decomposed the cross-country differences in income per-worker into 
shares that could be attributed to physical capital, human capital and 
total factor productivity, they found that more than 90 percent of the 
variation in the growth of income per worker was a result of how 
effectively capital is used (e.g. innovation), with differences in the 
actual amount of human and financial capital accounting for just 9 
percent.
    Innovation is also essential if we are to create a future of better 
jobs for all Americans. Properly conceived, innovation is not just 
about creating more jobs for engineers and managers in high technology 
industries. It is also about providing more and better training for 
incumbent workers in manufacturing and ``low-tech'' services and 
reorganizing work processes so that their companies can perform better. 
Boosting innovation leads to higher real wages for American workers, 
and in the moderate- to the long-term, (and often in the short-term as 
well) leads to more jobs. Innovation, properly conceived, also benefits 
not just the notable high-tech regions of the nation, but all regions.
    The growth of international trade also makes it increasingly 
important for the United States to innovate to maintain its standard of 
living. Low-wage nations can now more easily perform labor-intensive, 
difficult-to-automate work in manufacturing and in a growing share of 
services. Indeed, it has become difficult for the United States to 
compete in such industries as textiles and commodity metals. 
Notwithstanding the efforts of countries like China and India to 
compete in advanced technology industries, for the foreseeable future 
their competitive advantage should remain in more labor-intensive, less 
complex portions of the production process.\2\
    By contrast, the United States' primary source of competitive 
advantage should be in innovation-based activities that are less cost-
sensitive. To illustrate, a software company can easily move routine 
programming jobs to India where wages are a fraction of U.S. levels. 
There is less economic incentive for moving advanced programming and 
computer science jobs there because innovation and quality are more 
important than cost in influencing the location of these jobs. 
Likewise, an auto company can easily move production of commodity car 
parts to China. But the case for moving advanced research and 
development or production of complex, technology-driven parts (such as 
drive trains) there is weaker.
    Nor does this mean that the United States must inevitably cede 
entire industries to low-wage countries. Even in industries such as 
apparel and textiles, which are dominated by labor-intensive 
production, some firms have carved out innovation-based product niches 
(e.g., high-fashion articles whose designs change rapidly or textiles 
made of advanced materials) that make it possible for them to produce 
in the United States. Moreover, with sufficient productivity growth, 
companies can offset the cost of high U.S. wages, enabling them to 
produce in the United States at costs equal to or below those of low-
wage countries.

The United States Led in Innovation from WWII to the End of the 20th 
                    Century

    Prior to World War II, it could be argued that Europe, and in 
particular Germany and Great Britain, led in innovation. However, since 
World War II until the early part of the last decade, the United States 
led the world in innovation. A range of statistics consistently showed 
this. We were leading on patents, corporate R&D, Nobel Prize winners, 
high tech exports, etc. Indeed, as the Information Technology and 
Innovation Foundation (ITIF) documented in a report, The Atlantic 
Century, released last year, the United States was ranked first among 
40 leading nations in 2000 according to an amalgam of 16 innovation-
based competitiveness factors (such as funding of corporate and 
government R&D, venture capital as a share of GDP, new businesses 
created, number of scientists and engineers as a share of the 
workforce, etc.). And our lead was not slight; we were far ahead of our 
closest two rivals (Sweden and Singapore).

What Factors Helped the United States Lead in Innovation-based 
                    Competitiveness?

    There are a number of policy and non-policy factors which 
contributed to the United States lead in innovation from the 1940s 
through to the 2000s.
    On the non-policy side, a key factor was our large and growing 
market which enabled U.S. corporations to have large enough markets to 
invest in R&D at the scale needed to drive innovation. The large market 
(both in number of consumers but also in their higher incomes) also 
meant that U.S. firms could gain economies of scale and economies of 
learning that enabled costs to be driven down and new generations of 
products and services to become profitable faster. For example, in 
1960, the number of automobiles sold in Los Angeles County alone 
exceeded all those sold in Asia or South America.\3\
    Indeed, the U.S. led the world in the application of mass 
production manufacturing to virtually all sectors. Numerous production 
innovations, including automated assembly lines, numerically controlled 
machine tools, automated process control systems and mechanical 
handling systems drove down prices in American manufacturing and led to 
production of a cornucopia of inexpensively manufactured consumer 
goods.
    The United States was also the first nation to transform its 
innovation system into a science-based one where innovation was derived 
from a more fundamental understanding of underlying processes than from 
one of mere tinkering and mechanical trial and error. As economist 
Joseph Schumpeter argued in the 1940s, reflecting on the U.S. economy, 
``Technological progress is increasingly becoming the business of teams 
of trained specialists who turn out what is required and make it work 
in predictable ways.'' \4\ As a result, U.S. R&D expenditures 
skyrocketed by 400 percent between 1953 and 1964. For example, DuPont's 
R&D expenditures increased from around $1 million per year in 1921 to 
over $60 million by the mid-1950s.\5\ The number of research and 
development laboratories increased from around 1,000 in 1927--with few 
doing basic research--to almost 5,000 in 1956, with many, like Bell 
Labs, conducting extensive basic research. As the innovation process 
became systematized and corporatized, engineers became more important. 
In 1900, engineers made up only 0.05 of the population, but by 1940, 2 
out of 1,000 people were engineers, and by 1970, 6 out of 1,000 
were.\6\ As a result, the locus of innovation also switched from 
individual inventors like Edison and Bell tinkering in their garages to 
scientists working in corporate R&D laboratories.\7\ One reflection of 
this is the fact that in 1901 there were 20,896 patents issued to 
individuals, with only 4,650 going to corporations. This evened out by 
the 1930s, but by the mid-1950s the corporate rate took off. By 1980, 
corporations obtained about five times more patents than individuals.
    But our lead in scientific discovery alone was not enough to propel 
the United States to the lead. That required firms willing and able to 
make the investments needed to transform from invention to innovation 
and commercialization. And a key factor was the new science of 
management and the organization of firms able to handle large complex 
production systems. After WWII, new forms of corporate organization 
emerged, in which a top managerial cadre became empowered with the 
information necessary to centrally manage massive, sprawling 
enterprises. When the large, multidivisional company became commonplace 
after World War II, CEOs put in place elaborate paper-based managerial 
systems to coordinate these sprawling companies. Millions of new white-
collar middle managers were needed to make these behemoths work. This 
rise of a new managerial class was one of the most profound changes 
resulting from the rise of the corporate economy. Indeed, after World 
War II, the formal discipline of management emerged. James Burnham's 
1941 book, The Managerial Revolution, argued that the world was 
witnessing the emergence of a new ruling class, the managers,' who 
would soon replace the rule of capitalists and communists alike. 
Combine this with the emergence of world class business schools that 
educated managers who could manage innovation, and the United States 
had another lead over its competitors who did not embrace the `new 
managerialism' until decades later.
    Other factors played a role. The American inventor and 
entrepreneurial ethos also helped drive our innovation lead. More so 
than any other nation at the time, America was a place where ``anyone 
could make it,'' provided they worked hard and took risks. America was 
able to draw on the talents of a larger share of the population to 
drive innovation. And related to this, in contrast to many nations, 
failure was not seen as a stigma from which recovery was difficult. 
Rather, it was a mark that someone had the fortitude to take a risk, 
and perhaps the second (or third, or fourth) time would be the charm. 
Moreover, in those days, if one wanted to remake oneself, one simply 
moved south or west. Indeed, the very size of our nation and the 
relative underdevelopment of much of the West and South until the 1970s 
meant that entrepreneurs could locate in places unconstrained by the 
dead weight of tradition and inertia. No wonder that in the 1960s 
Silicon Valley instead of Pittsburgh (where the largest electronics 
firm in the world at the time, GE, was headquartered) became the 
world's innovation leader. Pittsburgh was a place where if it hadn't 
been tried before, it was probably because it was a bad idea. Silicon 
Valley was a place where if it hadn't been tried before, it probably 
meant it was a good idea that no one had yet before come up with. In 
addition, in comparison to other nations that exhibited greater 
institutional rigidities and hierarchies, the more flexible and 
collaborative U.S. innovation system provided an advantage. Compared to 
other nations, the U.S. innovation system has long been characterized 
by collaboration and cooperation, with universities working more 
closely with industry, small firms working with large ones, etc.
    Finally, our financial system provided real advantages. Compared to 
other nations it was easier for entrepreneurs to get financing for new 
and risky ventures, and for those firms to pay back initial investors, 
either by issuing stocks or getting large firms to finance their 
acquisitions as the way to maintain a pipeline of new products.\8\
    It would be a mistake to argue, though, that it was only, or even 
largely, non-policy factors that led to America becoming the world's 
innovation leader. Clearly some of our policy choices to regulate less 
and to be more accepting of change propelled the United States to lead.
    Our relatively open borders (itself a policy factor) made the 
United States a mecca for talent. Welcoming the world's most skilled 
foreign-born scientists and engineers into the land of economic 
opportunity that America affords has long been one of the strengths of 
the U.S. national innovation system. Both the U.S. economy and the 
standard of living of American citizens have benefited enormously from 
this influx of foreign talent. AnnaLee Saxenian, a professor at the 
University of California-Berkeley, has shown that Indian and Chinese 
entrepreneurs founded or co-founded roughly 30 percent of all Silicon 
Valley startups in the late 1990s.\9\ During this period, many of the 
leading scientists, managers and entrepreneurs came from other nations 
where opportunities were more limited and in some cases where the 
opportunities didn't even exist, as was the case in communist nations.
    Likewise, our embrace of a light regulatory touch in the face of 
new technologies allowed innovators to be confident that their 
innovations would be able to enter the market. In contrast, regulatory 
regimes such as the European ``precautionary principle,'' which sought 
to limit innovation until all possible effects were known, slowed 
innovation. And in fast-moving industries where competitive advantage 
is related to how quickly players get in the market and establish a 
position, the slower and more restrictive regulatory regimes in many 
other nations benefited the United States.
    The overall business climate and rule of law that the United States 
has enjoyed has provided entrepreneurs and firms with the certainty 
that if they invested they could make a market-based rate of return. 
Likewise, the United States' leadership in promoting open markets and 
globalization helped the United States, at least through the 1980s, for 
it expanded the size of markets, allowing more dominant U.S. 
technology-based firms to gain even more scale and profits (allowing 
them respectively in turn to drive prices down even more and to invest 
more into research and new technology).
    In addition, while the United States brought a number of anti-trust 
cases during this period, the emergence of a large number of large, 
profitable companies meant that innovations were a way that firms could 
charge premium prices or even gain market share from their competitors. 
With constrained competition and consequent market control, these 
companies could apply lower discount rates to new research 
opportunities; in essence, they were willing to take on the higher 
levels of risk required to pursue more radical but higher payoff 
technologies. As a result, many of these dominant firms used the steady 
flow of profits to invest heavily in their own research laboratories. 
They created factories for inventions that brought large numbers of 
scientists and engineers directly under the corporate umbrella. In the 
1950s and 1960s, the central research laboratories of firms such as 
AT&T, GE, IBM, RCA and Xerox were corporate jewels that attracted 
highly productive researchers.
    But proactive policies also played a key role. Perhaps the most 
important one was the role of government as a buyer of technology and 
funder of research and education. During the three decades immediately 
following World War II, the Federal Government's role in supporting new 
technologies centered on military and space imperatives. Such familiar 
spin-offs as mainframe computers and jet airplanes had been largely 
unintended consequence of government spending for the military and the 
space program, both in support for research in these areas and 
procurement of products using these technologies. Clearly the United 
States' lead in many technology areas, including information 
technology, would not have occurred without government procurement and 
government support for R&D. Indeed, as late as 1992, Santa Clara County 
(Silicon Valley) received more defense contracts than any other county 
(in dollar value as a share of county economic output).
    But support for research and research universities was also central 
in driving U.S. innovation leadership. Federal and state support meant 
that a large number of research universities were not only doing 
cutting-edge research, much of it transferred to the private sector, 
but also educating a regular crop of top notch scientists and 
engineers. Our global lead in pharmaceutical and biotech industries, 
for example, would not have been as strong without the significant 
funding provided to NIH, much of which in turn supported leading 
research universities.
    As the United States excelled, its lead over other nations 
expanded, leaving the Europeans fearful of being left behind. In the 
1960s, French author Jean-Jacques Setvan-Schreiber wrote the best 
seller, The American Challenge, which described an all powerful 
American economic system widening its technological lead and utilizing 
superior management ability and economies of scale to take over the 
European economy.
    But our unparallel leadership lasted only approximately 25 years. 
For by the mid-1970s, evidence was emerging that the United States 
faced new innovation competitors. But U.S. policy didn't stand still in 
response to the challenges of globalization 1.0 in the 1980s (the 
emergence of Japan and Europe as key competitors). Indeed, significant 
changes occurred in Federal policies in the 1980s in direct response to 
the heightened international competitive pressures experienced by U.S.-
based corporations. In that decade, both Congress and the Executive 
Branch launched a series of initiatives that were intended to mobilize 
public resources to accelerate the development and commercial 
exploitation of new technologies. These programs extended well beyond 
the defense and space sectors that had previously been the main areas 
of Federal technology policy.
    These initiatives can be usefully grouped into four separate areas. 
First, there were a series of efforts to increase the commercial impact 
of research already being funded by the Federal Government, 
particularly in universities and government laboratories. Incentives 
were created for scientists and institutions to push their research 
discoveries into the commercial sphere either by creating new start-
ups, licensing technologies to private firms or engaging in 
collaborative projects with business firms. The Bayh-Dole Act 
encouraged universities to see their research enterprise as a potential 
revenue source and concerted efforts were made over twenty years to 
shift resources in the Federal Laboratories away from weapons 
production and towards commercial applications.
    Second, new programs were created to help finance pre-competitive 
research and development costs for individual firms, both startup and 
established firms.\10\ Most prominent among these programs was the 
Small Business Innovation Research (SBIR) program through which 
government agencies set aside a small percentage of their R&D budgets 
for projects proposed by small firms, many of which are newly created 
spinoffs from university or Federal laboratories. The Advanced 
Technology Program (ATP) at the National Institute of Standards and 
Technology (NIST) and a series of initiatives at the Department of 
Energy provided matching funds to support particularly promising new 
technologies among both new and more established firms. In addition, 
the United States was the first nation to create a Research and 
Development (R&D) Tax credit in 1981.
    Third, the Federal Government expanded its ``in-kind'' technical 
support to business firms trying to surmount technological barriers. 
The Manufacturing Extension Partnership (MEP) has helped thousands of 
small firms adapt to computerization and the more demanding schedules 
of just-in-time production. The National Nanotechnology Initiative has 
made a series of federally funded, university-based laboratories 
available to business firms that want to avoid the costs of developing 
their own laboratory infrastructure. Similarly, efforts by Federal 
laboratories to form partnerships with firms provide them with 
important technical support, including through the formation of 
Cooperative Research and Development Agreements (CRADAs).
    Fourth, the Federal Government played an active role in 
facilitating and supporting research consortia that bring together 
multiple firms in the same industry to solve technological problems. 
The passage of the 1984 Cooperative Research and Development Act made 
it easier for companies to collaborate. Federal investment in SEMATECH 
in the 1980s and the Semiconductor Focus Center Program in the 1990s 
helped the semiconductor industry maintain a leadership position.\11\ 
Congress created programs at NSF to spur more collaborative research, 
including NSF's Engineering Research Centers, a group of 17 
interdisciplinary centers located at universities and operated in close 
partnership with industry.

The United States Has Lost its Lead in Innovation

    The combination of its policy and non-policy strengths, combined 
with policy and non-policy weaknesses in other nations, enabled the 
United States to lead in innovation for over half a century. However, 
changes both in the United States and abroad have meant that while the 
United States continues to have many strengths, there is disturbing 
evidence that our overall innovation lead has not only been lost, but 
that we are continuing to rapidly lose ground. As ITIF documented in 
The Atlantic Century, from the year 2000 to 2009, the United States 
slipped from number 1 to number 6 in global innovation-based 
competitiveness, behind nations such as Singapore, Denmark, Sweden and 
South Korea. The primary reason for this is that every other nation or 
region made faster progress than we did on a collection of 16 
innovation competitiveness indicators. Overall, we ranked 40th out of 
37 countries and three regions in making progress on innovation and 
competitiveness.
    We see signs of this relative decline in innovation capacity in a 
wide array of indicators. The decline began at least in the 1990s with 
the United States' shares of worldwide total domestic R&D spending, new 
U.S. patents, scientific publications and researchers and bachelor's 
and new doctoral degrees in science and engineering all falling from 
the mid-1980s to the beginning of this century (figure 1), when we were 
still number 1. But given our strong overall lead, the declines were 
not enough to move us down from number 1 until this last decade.



    There has been a declining share of American college graduates with 
science and technology degrees. The United States now lags behind much 
of the world in the share of its college graduates majoring in science 
and technology. As a result, the United States ranks just 29th out of 
109 countries in the percentage of 24-year-olds with a math or science 
degree. Although Americans (citizens and permanent residents) are 
getting graduate degrees at an all-time high rate, the increase in 
graduate degrees in natural science, technology, engineering and math 
fields has been minimal during the last two decades. The number of non-
science and engineering degrees increased by 64 percent between 1985 
and 2002, while the number of science, technology, engineering and 
mathematics degrees grew by only 14 percent during that period.\12\
    The United States ranks only 14th among countries for which the 
National Science Foundation tracks the number of science and 
engineering articles per million inhabitants. Sweden and Switzerland 
produce more than 60 percent as many science and engineering articles 
in relation to the size of their populations than does the United 
States.\13\
    The United States ranks only seventh among OECD countries in the 
percentage of its GDP that is devoted to R&D expenditures (2.6 
percent), behind Sweden (3.9 percent), Finland (3.5 percent), Japan 
(3.3 percent), South Korea (3.0 percent), Switzerland (2.9 percent), 
and Iceland (2.8 percent), and barely ahead of Germany and Denmark (2.5 
percent each).\14\ One reason explaining this is that the United States 
is one of the few nations where total investments in R&D as a share of 
GDP fell from 1992 to 2005 (largely because of a decline in public R&D 
support).\15\ Moreover, corporate-funded R&D as a share of GDP fell in 
the United States by five percent from 1999 to 2006, while in Europe it 
grew by two percent and in Japan it grew by 12 percent.\16\
    We also see the evidence of our decline in innovation-based 
competiveness in other areas including our trade performance. The trade 
deficit represents perhaps the most visible manifestation of the global 
challenge. At five percent of GDP in 2008, the current account deficit 
is at extremely high levels both in absolute terms and relative to the 
size of our economy.\17\ The traditional U.S. trade surplus in 
agricultural products is nearing zero and in high-technology products 
has already turned negative. Meanwhile, our surplus in services trade 
is small and only holding relatively steady. Moreover, the U.S. trade 
surplus in services is only 17 percent of the overall trade deficit in 
goods.
    Moreover, companies are increasingly shifting R&D overseas. For 
example, R&D expenditures from U.S.-based MNCs in emerging Asian 
markets increased from five percent to 14 percent between 1995 and 
2006.\18\ In the last decade, the share of U.S. corporate R&D sites in 
the United States has declined from 59 percent to 52 percent, while the 
share in China and India, specifically, increased from 8 to 18 
percent.\19\
    We also see it in the decline in U.S. manufacturing output. The 
United States has experienced a hollowing out of many advanced 
production supply chains, as more advanced manufacturing has moved 
offshore than has expanded in the United States. I recently spoke with 
the CEO of a major U.S. high technology company about a new product 
line they were introducing. I asked him where he was sourcing the very 
advanced display that was being incorporated in the device. His 
response was ``we looked long and hard around the United States to see 
if we could source it here. We couldn't find any company with the 
capability of producing here, so we ended up sourcing it in Taiwan.''
    This hollowing out of supply chains is overlooked by many 
economists because the national economic accounts that track 
manufacturing output provide a misleading picture of the health of U.S. 
manufacturing by overstating output, particularly in the computer and 
semiconductors industry. According to the Department of Commerce's 
Bureau of Economic Analysis, manufacturing output as a share of GDP has 
stayed somewhat constant between 1994 and 2008, at around 13.7 
percent.\20\ But drilling down to more detail causes a different 
picture to emerge. Over the last 25 years, the share of non-durable 
manufacturing output peaked around 1993 and has declined from around 
seven percent to 4.7 percent of GDP in 2008. The share of durables, in 
contrast, increased to just over nine percent in 2007, with a very 
slight decline in 2008, leading many to the rosy conclusion that while 
manufacturing employment may have declined, manufacturing output is 
still strong and therefore that employment declines were due only to 
the higher levels of productivity in manufacturing relative to the rest 
of the economy. But taking out computers and electronic products (NAICS 
code 334) shows a very different picture, with durable goods output 
share declining from seven percent in 1998 to 5.3 percent in 2008. 
Overall manufacturing output minus computers and electronic products 
declined from 13 percent of GDP in 1998 to just 9.7 percent in 2008. 
Defenders of the status quo will respond that the proper measure is 
overall manufacturing, not manufacturing minus computers. But does 
anyone really think that the real inflation-adjusted value added of 
computers and electronic products really doubled between 2003 and 2007, 
which is what the BEA numbers suggest? The problem is that BEA counts 
output of computers based on improvements in Moore's law and when 
processing power doubles every 18 months or so it counts that in the 
value-added. But this clearly overstates output and provides an 
extremely misleading picture of the real health of the U.S. 
manufacturing sector. For those who want to play down the threat to the 
U.S. manufacturing base, these statistics provide reassuring, if false, 
comfort.

Factors Contributing to our Relative Decline in Innovation-based 
                    Competitiveness

    There are a number of factors which have contributed to the United 
States' relative decline in innovation-based competitiveness. Many 
point to globalization. At one level there is no doubt that with the 
emergence of globalization and the relatively faster growth in income 
of many nations to ``catch up'' to the United States, one would expect 
to see the global share of U.S. economic output fall. And it is 
certainly true that as some advanced nations began to catch up to the 
United States (in part by emulating our policies, as described below) 
the U.S. share of global innovation output (e.g., R&D and patents) 
would also fall, although by less than overall economic output since 
the United States should actually be increasingly specializing in 
innovation-based activities as more routine-based production shifts 
offshore. But there was nothing preordained about the United States 
falling from number 1 in 2000 to number 6 in 2009. The United States 
can and should remain the global innovation leader.
    So what happened? As in explaining our success, non-policy and 
policy factors have played a role. There are a number of non-policy 
factors that appear to be at work. First, the evolution of U.S. 
financial markets has placed mounting pressure on large corporations to 
prioritize increasing short-term returns to shareholders over growth or 
investments with longer-term payoffs. And related to this, the market 
environment has become much more competitive.
    On the one hand, this has disciplined firms into being more 
efficient. But at the same time it has led many firms to seek short-
term cost reductions (often through moving to lower cost locations) 
even if similar or even greater cost reductions through innovation 
could be achieved but over a slightly longer period of time. Likewise, 
these new financial pressures have forced many firms to reallocate 
their research portfolios more toward product development efforts and 
away from longer term and more speculative basic and applied research. 
From 1991 to 2007, basic research as a share of total corporate R&D 
conducted in the United States fell by 3.6 percentage points, while 
applied research fell by roughly the same amount, by 3.5 percentage 
points. In contrast, development's share of corporate R&D increased by 
7.1 percentage points, as figure 2 shows.




    We see this focus on the shorter term in the venture capital 
industry. As the venture capital market has matured, firms have found 
it more profitable to invest in larger deals and less risky later-stage 
deals. Even though the overall amount of venture capital has grown 
since the mid-1990s, the actual amount invested in startup-and seed-
stage venture deals is smaller today than a decade ago, and a smaller 
percentage of venture funding now goes to early-stage deals (the stage 
just after seed-stage).\21\ The result is a gap between the completion 
of basic research and applied R&D.
    When it comes to policy, it is important to focus both on the 
change in policy in the United States and externally. Externally, as we 
discuss below, nations put in place aggressive technology and 
competitiveness policies to lure internationally mobile technology 
investment. U.S. firms are now competing against firms in a growing 
number of national economies in which their governments actively help 
them compete.
    Over the last 15 years in particular, a large number of other 
nations have woken up to the fact that they need to compete for 
internationally mobile high technology manufacturing, and they have put 
in place policies that reflect that determination, such as more 
generous research and development tax treatments and stronger 
government support for all stages of research. In contrast, the United 
States has lagged behind, believing that it needed to do little since 
it had long been the global innovation leader. In the early 1990s, for 
example, the United States had the most generous research and 
development tax credit among the 30 OECD nations. Now, because other 
nations have expanded their R&D tax incentives, the U.S. rank has 
fallen to 17th.
    In response to increased global competition for internationally 
mobile economic activities, most nations have established 
competitiveness policies, including more competitive corporate tax 
codes. In the early 1980s, the average statutory tax rate amongst OECD 
nations was nearly 50 percent; by 2001 the rate had fallen to under 35 
percent. Some formerly high tax nations have reduced their taxes 
dramatically. For example, the statutory corporate tax rate in Sweden 
in 1982 was 60 percent; by 1999 it had been reduced to 28 percent. 
Overall, average corporate tax rates have declined by at least 15 
percentage points in leading industrialized nations over the last 30 
years. Not only have corporate tax rates declined, but a growing number 
of nations, particularly Asian nations, use targeted tax incentives 
(such as tax holidays on new plants) to attract internationally mobile 
investment. The U.S. statutory rate has not changed since 1986, and the 
Federal Government does not provide tax incentives to attract or retain 
international investment.
    We see the same trend in other areas. Among 36 nations, the United 
States ranked just 21st in the growth of government investment in R&D 
from 1999 to 2006, with a growth rate of just 20 percent the average of 
the other nations. The major reason for this slippage has been a 
slowdown in Federal R&D investment. Since the mid-1990s total Federal 
R&D spending grew at a sluggish 2.5 percent per year from 1994 to 
2004--much lower than its long-term average of 3.5 percent growth per 
year from 1953 to 2004.\22\ Indeed, the United States is one of only a 
few nations where total investment in R&D as a share of GDP actually 
fell from 1992-2005, largely because of that decline in public R&D 
support.\23\ When U.S. R&D intensity is compared to other OECD 
countries, we find that at 2.6 percent of GDP devoted to R&D 
investment, the United States ranks only seventh in R&D intensity, 
behind a list of countries including Japan, South Korea, Finland and 
Sweden.\24\ In more recent rankings (2006) from the OECD, the United 
States placed only 22nd in the fraction of GDP devoted to nondefense 
research.\25\
    Finally, while many nations have practiced ``good'' innovation 
policy, many have also put in place ``bad'' innovation policy: high-
tech mercantilism. Indeed, a key factor in the loss of U.S. innovation 
leadership has been the dramatic increase in technology-oriented trade 
protectionism engaged in by many U.S. competitors. While U.S. markets 
are generally open, the same cannot be said for many other nations. 
Many nations, and not just China, manipulate their currency as a way to 
subsidize exports and raise the price of imports. On top of that they 
use an array of tariff barriers to keep out U.S. exports. But these 
nations go further, engaging in a kind of protectionism 2.0. This 
involves aggressive anti-trust enforcement, particularly against U.S. 
high tech companies (witness foreign actions taken against U.S. tech 
companies like Microsoft, Intel and Qualcomm); technology standards 
manipulation (the Chinese alone have developed over 15 proprietary 
technology standards designed to keep out U.S. IT products); turning a 
blind eye to and even engaging in rampant intellectual property theft 
(over 85 percent of software in China is pirated, while many nations 
attempt to force U.S. pharmaceutical companies to transfer intellectual 
property in return for market access); and huge government subsidies to 
prop up high-tech exporters (without EU government subsidies, Airbus 
would have nowhere near the global market share it does).
    But even absent what other nations have done, the U.S. relative 
position would have declined because of policies at home. One policy 
area that has been cited by many is K-12 education. While there is no 
doubt that improving the quality of K-12 education will have some 
positive benefit on our innovation-based competitive position, it would 
be a mistake to believe that fixing K-12 will be the silver bullet for 
innovation. K-12 quality has not been the major reason for the 
precipitous and troubling decline in U.S. innovation leadership. In 
fact, while the U.S. competitiveness position has declined relative to 
other nations, at least by one measure, our educational performance has 
not. For 20 nations for which there are comparable data, between 1999 
and 2007 the United States ranked fourth in improvement in 8th grade 
math scores an sixth out of 25 nations in 81' grade science scores 
according to TIMMS (Trends in International Mathematics and Science 
Study). The United States has also made greater improvement in 8th 
grade science scores than several international leaders such as Japan, 
Sweden, Norway and Singapore between 1999 and 2007.
    The United States does less well on the OECD's PISA (Programme for 
International Student Assessment) test, which focuses more on measures 
of application of learning to real world situations than does TIMMS. 
Still, the U.S. performance on PISA has not been so bad as to indicate 
our economic decline. In reading, math and science, U.S. 15-year-olds 
in 2000 (who would now be 25-years-old and entering the workforce) 
performed about as well on average as 15-year-olds in the 27 
participating OECD countries and ahead of the 4 non-OECD nations. 
Compare the United States and Denmark. Denmark outperformed the United 
States in innovation-based competitiveness, ranking fifth in progress, 
compared to our last place rank. Yet, in 2000, U.S. 15-year-olds 
outperformed Danish 15-year-olds on reading, math and science. 
Likewise, U.S. 15-year-olds did better than 15-year-olds in Germany, 
Spain, Russia and Brazil, all of which made faster progress on 
competitiveness. Let us also remember that U.S. college education 
levels are at historic highs. In 2007, 46 percent of high school 
graduates between the ages of 18 and 24 were actively enrolled in 
higher education. This is hardly the stuff of catastrophic failure.
    An area of more concern is the reduced investment in innovation 
infrastructure, including research. Total Federal funding for R&D 
declined as a share of GDP from 1985 to 2004. To restore Federal R&D 
support as a share of GDP to its 1993 level, we would have to increase 
Federal R&D spending by 50 percent, or over $37 billion. Federal 
investment in most of the programs that focus most directly on 
innovation promotion have declined or grown more slowly than the 
economy overall. Between 1998 and 2006, the budgets for the Advanced 
Technology Program, the Manufacturing Extension Partnership, the Office 
of Science and Technology Policy, and the Industrial Technologies 
Program declined in nominal terms, while that of NSF's Engineering 
Research Center program grew at less than one-fifth the rate of GDP 
growth. Funding for NSF's Partnerships for Innovation also grew more 
slowly than GDP since the program began operating in 2000. And while 
our public and private research universities used to be the envy of the 
world, 20 years of underfunding by state governments have meant that 
many public research universities have fallen in capabilities relative 
to private research universities.
    Adequately investing in and developing innovation-enhancing 
policies is crucial to national innovation competitiveness, as 
Professors Jeffrey Furman and Richard Hayes found in a study of the 
national innovation capacity (an economy's potential for producing a 
stream of commercially relevant innovations) of twenty-three countries 
from 1978 to 1999.\26\ Starting with the year 1979, they classify 
countries as either world-leading innovators (the United States, 
Germany, Japan), middle-tier (Great Britain, France, Australia), third-
tier (Spain, Italy), or ``emerging'' innovators (Ireland, Taiwan) based 
on countries' patenting activity per capita, a proxy for commercialized 
innovations.
    A number of these ``emerging innovators''--among them Ireland, 
Finland, Singapore, South Korea, Denmark and Taiwan, in particular--
achieved remarkable increases in innovative output per capita from 1978 
to 1999, moving to the world's technological frontier and overtaking 
the innovative capacities of many mid- and third-tier countries, 
including Great Britain, France and Italy, whose economic conditions 
started off much more favorably in the early 1980s. Furman and Hayes 
conclude that innovation leadership among countries requires not only 
the development of innovation-enhancing policies and infrastructure, 
such as strong IP protections, openness to trade, highly competitive 
markets, and strong industry clusters, but also a commitment to 
maintaining substantial financial and human capital investments in 
innovation.
    Additionally, Federal agencies have not responded as nimbly as they 
should too many of the changes in the innovation environment. For 
example, the U.S. Patent and Trademark Office (PTO) used to be the envy 
of other nations around the globe for its effectiveness and efficiency. 
But today backlogs at the PTO mean that most patent applicants will 
wait years before finding out if their invention is granted a patent.
    Moreover, even as services innovation has become much more 
important, U.S. innovation policy has not responded. U.S. innovation 
policy is largely focused on innovation in goods-producing industries, 
e.g., developing a new energy source or coming up with new materials. 
In the past, when goods production was a much larger share of the 
economy than it is today, such a focus made more sense. But in an 
economy where more than 80 percent of civilian jobs lie in service-
providing industries, the lack of focus on services innovation makes 
little sense. The emerging discipline of service science brings 
together ongoing work in computer science, operations research, 
industrial engineering, business strategy, management sciences, social 
and cognitive sciences, and legal sciences to develop the skills 
required in a services-led economy.\27\
    Finally, as the U.S. innovation system has spread out to all states 
and corners of the nation, the Federal system has remained national in 
scope. Washington is often far removed from the firms and other 
institutions that drive innovation. This is particularly true for small 
and mid-sized firms. In contrast, state and local governments and 
metropolitan-level economic developers have a long track record of 
creating organizations that work more closely with firms. 
Unfortunately, most existing Federal programs do not work through or in 
collaboration with state or local governments or regional 
organizations, which are often more flexible and less remote from 
production processes. Indeed, there is very little appreciation in 
Washington for the fact that virtually every state has in place 
technology-based economic development programs.\28\ Federal program 
managers and policymakers all too often seem to assume that there is 
one uniform national economy in which regional agglomerations are at 
best a sideshow.

What Can We Learn From Other Nations?

    Many forward-thinking countries have made innovation-led economic 
development a centerpiece of their national economic strategies during 
the past decade. These nations know that moving up the value chain to 
more innovation-based economic activity is a key to boosting future 
productivity, and that losing the competition can result in a 
relatively lower standard of living as economic resources shift to 
lower-value-added industries. These countries are implementing 
coordinated national innovation agendas that boost R&D funding, 
introduce policy changes and government initiatives that more 
effectively transfer technologies from universities and government 
laboratories to the private sector for commercialization, and ensure 
that immigration policies support innovation.
    While many nations have taken the innovation challenge to heart and 
put in place a host of policies to spur innovation, the United States 
has done little, consequently falling behind in innovation policies and 
in innovation performance as well. We see this gap in at least four 
main areas: programs to establish civilian technology and innovation 
promotion agencies, services innovation initiatives, tax incentives for 
research and development, and policies regarding high-skill 
immigration.\29\

1. Civilian Technology and Innovation Promotion Agencies

    A number of advanced countries are well ahead of the United States 
in creating national agencies that support innovation. In recent years, 
Finland, France, Iceland, Ireland, Australia, Japan, the Netherlands, 
New Zealand, Norway, South Korea, Canada, Germany, Taiwan, Switzerland 
and Great Britain have all either established or significantly expanded 
separate technology-and innovation-promotion agencies. Other nations, 
such as Denmark, Sweden and Spain, have longstanding agencies of this 
type.\30\ All these countries have science- and university-support 
agencies similar to America's National Science Foundation, which 
largely fund basic research, universities and national laboratories. 
But these countries realized that if they were to prosper in the highly 
competitive, technology-driven global economy, they needed specifically 
to promote technological innovation, particularly in small and mid-
sized companies and in partnership with universities.
    Perhaps the most ambitious of these efforts is Tekes, Finland's 
National Agency for Technology and Innovation. In the last two decades, 
Finland has transformed itself from a largely natural resource-
dependent economy to a world leader in technology, with Tekes a key 
player in the country's transformation. Affiliated with the Ministry of 
Employment and the Economy, Tekes funds many research projects in 
companies, multi-company partnerships, and business-university 
partnerships. With a budget of $560 million (in a country of only 5.2 
million people), Tekes works in partnership with business and academia 
to identify key technology and application areas--including nano-
sensors, ICT and broadband, health care, energy and the environment, 
services innovation, and manufacturing and minerals--that can drive the 
Finnish economy. Tekes also operates a number of overseas technology 
liaison offices that conduct ``technology scanning,'' seeking out 
emerging technologies bearing on the competitiveness of Finnish 
industries, and sponsors foreign outreach efforts to help its domestic 
companies partner with foreign businesses and researchers.
    Similarly, Japan's New Energy and Industrial Technology Development 
Organization (NEDO) is a quasi-public agency that receives its $2 
billion budget from the Ministry of International Trade and Industry. 
Great Britain's new Technology Strategy Board is a non-departmental 
public body (similar to an independent government agency in the United 
States) whose mission is to drive forward the government's national 
technology strategy. In South Korea, the Korea Industrial Technology 
Foundation, established in 2001, engages in a wide range of technology 
activities, including providing training to develop industry 
technicians and cooperating with international entities to promote 
industrial technology development. A host of other nations have similar 
bodies dedicated specifically to promoting innovation and 
competitiveness.\31\
    Most foreign innovation-promotion agencies provide grants to 
companies for research, either alone or in consortia, including in 
partnership with universities. All support university-industry 
partnership grant programs, whereby companies or business consortia can 
receive grants (usually requiring matching funds) to partner with 
universities on research projects. Vinnova, Sweden's innovation-
promotion agency, gives most of its grants to research consortia 
involving companies and universities.
    Most agencies focus their resources on specific areas of 
technology. For example, by working with business and academia, Tekes 
has identified 22 key technology areas to fund. Many foreign programs 
have expanded their focus to include service sector innovation. One of 
Tekes' focus areas is innovation in services, including insurance and 
finance, retail and wholesale trade, logistics, and knowledge-intensive 
business services. The United Kingdom's Technology Strategy Board is 
working with knowledge-intensive industries such as creative and 
financial services in addition to the high-tech and engineering 
sectors. Most programs insulate their grant making from political 
pressure by using panels of outside experts to review grant 
application, just as our National Science Foundation and the Technology 
Improvement Program (TIP) do.
    Most agencies also support national sector-based activities that 
bring together researchers in the private, non-profit and public 
sectors. For example, the UK's Technology Strategy Board established 
its Innovation Platforms program to bring together government 
stakeholders and funders, engage with the business and research 
communities to identify appropriate action, and align regulation, 
government procurement and other public policies to support innovative 
solutions. To date, this program has identified two priority areas, 
intelligent transport systems and network security.\32\
    One of the benefits of these programs is that they not only fund 
research projects but also facilitate networking and collaboration. For 
example, Tekes brings together in forums many of the key stakeholders 
in the research community. For each of its 22 technology areas there 
are networking groups of researchers. In addition, Tekes publishes a 
description of each project it funds. Through these processes, 
researchers learn more about research areas and gain opportunities to 
collaborate. Many agencies also work with industry on ``roadmapping'' 
exercises, whereby key participants (industry and academic researchers 
and government experts) identify technology challenges and key areas of 
need over the next decade. They then base their selection of research 
topic funding on the results of the roadmap exercise. The UK's 
Technology Strategy Board is funding over 600 collaborative business-
university research projects which have been launched over the past two 
to three years. Like Tekes, it is also responsible for more than 20 
industry-and technology-based knowledge transfer networks, with more 
being established.
    Foreign innovation-promotion agencies do not limit their activities 
to R&D support. The Danish Technological Institute and Iceland 
Technology Institute, for example, help small and mid-sized firms 
upgrade their technologies and business processes. Enterprise Ireland 
offers workforce training grants to small and mid-sized businesses.
    Many innovation-promotion agencies also have foreign outreach 
efforts to help domestic companies partner with foreign companies or 
researchers. For example, Tekes has a number of overseas offices that 
act as technology liaisons including in Washington, DC, Singapore and 
South Korea. Indeed, 40 percent of Tekes-funded projects involve 
international collaboration. Spain's innovation-promotion agency, CDTI, 
also helps Spanish businesses find partners in other nations and 
provides up to 60 percent funding to the participating Spanish firm.
    Most of these organizations are affiliated with, but separate from, 
national cabinet-level agencies similar to our Commerce Department. 
However, some are independent government agencies or government-
sponsored corporations. The Danish Technological Institute is a 
private, nonprofit organization. In virtually all cases, though, these 
nations have made an explicit decision not to place their innovation-
promotion initiatives under the direct control of large government 
departments. Although most innovation-promotion agencies are affiliated 
with those departments, they usually have a substantial degree of 
independence. It is common for these agencies to have their own 
executive director and a governing board of representatives from 
industry, government, university, or other constituency groups. For 
example, Japan's government recently made a conscious choice to 
establish NEDO as an autonomous agency because it realized that MITI, 
as a large government bureaucracy, did not have the flexibility needed 
to manage such a program. NEDO is governed by a board of directors, 
with the Chair appointed by MITI and members from industry, 
universities and other government agencies. Similarly, Tekes is 
affiliated with the Ministry of Trade and Industry but has its own 
governing board that includes national and regional government, 
businesses and union representatives.33 The Technology Strategy Board, 
begun in 2004 as a unit of the Department of Trade and Industry, was 
established in 2007 as an executive non-departmental public body. While 
it is now affiliated with the Department for Innovation, Universities 
and Skills, it is governed by a board made up mostly of technical 
experts from industry.\34\
    One reason for structuring innovation-promotion agencies this way 
is that they have more flexibility, including the ability to pay 
salaries high enough to attract staff from the business world and the 
ability to employ some staffers who are on leave from positions in 
private business. For example, about one-third of the NEDO staff is 
from industry and one-third is from universities, while the remaining 
third is full time NEDO staff. Rotating in outside staff helps keep the 
agency in touch with current business practices and cutting-edge 
technology. (For similar reasons, NSF employs some people who are on 
leave from academic and research positions outside the Federal 
Government.) The Technology Strategy Board has been able to source a 
fairly large share of its staff from industry, enabling it to have the 
kind of expertise that would be difficult without this ability. In 
addition, independent government bodies can adapt more quickly than 
those that are subject to the tight control of larger agencies. It is 
easier for them to start new initiatives and abolish less effective 
ones. Likewise, many national technology agency programs are able to 
pay employees more than the standard government salaries, enabling them 
to attract higher quality individuals, often with industry experience. 
Nevertheless, most of these agencies are fairly lean. For example, 
Tekes, with a budget equivalent to $560 million, has a staff of just 
300.
    To be effective, these agencies need to be flexible and able to 
work closely with industry. For this reason they are less bureaucratic 
than traditional ministries or departments. As the UK government notes, 
``As separate legal entities, non-departmental public bodies can 
operate more flexibly than executive agencies, entering into 
partnerships and taking commercial and entrepreneurial decisions.'' 
Moreover, ``their distance from government means that the day-to-day 
decisions they make are independent as they are removed from ministers 
and civil servants.'' \35\ Foreign innovation-promotion agencies today 
are a far cry from the strongly directive Japanese MITI of the 1980s. 
They do not try to decide the path of business innovation and then 
induce firms to follow that path. Instead, they exemplify the 
cooperative, facilitative government role that is needed to address the 
market failures that hamper the innovation process.
    If the United States wanted to match Finland's outlays per dollar 
of GDP in innovation-promotion efforts, it would have to invest $34 
billion per year. While other nations invest less in their innovation-
promotion agencies than Finland, they still invest considerably more 
than the United States. As a percent of their countries' GDPs, Sweden 
spends 0.07 percent, Japan 0.04 percent and South Korea 0.03 percent on 
their innovation promotion agencies. To match these nations on a per-
capita basis, the United Sates would have to invest $9 billion to match 
Sweden, $5.4 billion to match Japan, and $3.6 billion to match South 
Korea.\35\ It is astounding that economies a fraction the size of the 
United States spend more on innovation-promotion in actual dollars, let 
alone as a percentage of their economy.
    But compared with other industrialized democracies, the U.S. 
government invests relatively little in innovation-promotion efforts. 
In fiscal year 2006, the Federal Government spent a total of $2.7 
billion, or 0.02 percent of gross domestic product, on its principal 
innovation programs and agencies: the National Institute of Standards 
and Technology's Advanced Technology Program and Manufacturing 
Extension Partnership, the White House's Office of Science and 
Technology Policy, three NSF-administered innovation programs (Small 
Business Innovation Research, Small Business Technology Transfer and 
Industrial Technologies Program), and the Department of Labor's 
Workforce Innovation Regional Economic Development (WIRED) program.
    This places U.S. industries and corporations operating alone at a 
disadvantage against foreign corporations that benefit from coordinated 
and enlightened national strategies among universities, governments and 
industry collaborations to foster competitiveness. For example, the 
Japanese government has recognized advanced battery technology as a key 
driving force behind its competitiveness, and views battery technology 
as an issue of ``national survival.'' \37\ It is funding Lithium-ion 
battery research over the five-year period from October 2007 to October 
2012 at $275 million (y25 billion), and longer term has committed to a 
20-year Li-ion battery research program. Germany's government will 
provide a total of =1.1 billion ($1.4 billion) over ten years to 
applied research on automotive electronics, lithium ion batteries, 
lightweight construction, and other automotive applications.\38\

2. Services Innovation Initiatives

    As services increasingly drive employment, productivity, and 
economic growth, a number of countries have developed explicit national 
services innovation policies focused on spurring innovation in the 
services sectors of their economies. Policymakers in these countries 
have recognized that knowledge of services innovation has largely been 
informed by studies of the manufacturing sector, and acknowledged the 
need to tailor unique measures to the needs of services firms and 
industries.\39\
    The focus on service innovation began in the mid-2000s with a 
coterie of small Northern European countries--Finland, Denmark, Norway, 
The Netherlands and Sweden--and has since grown to include additional 
small countries in Europe and Asia (Taiwan, Ireland and Singapore) and 
large nations (Great Britain, Canada and Germany). Finland was the 
first to implement a national services innovation policy, with a five-
year, =100 million \40\ program launched in 2006 called ``SERVE--
Innovative Services Technology Programme.'' \41\ Finland's neighbors 
soon followed suit, recognizing the increasing importance of services 
as their domestic manufacturing industries departed for cheaper 
production centers abroad, particularly in the form of ``near-shoring'' 
to Baltic and Eastern European countries. The same phenomenon affected 
developed Pacific Rim countries, as manufacturing moved first from 
Japan and Taiwan to cheaper production centers in China, and now out of 
China and on to the poorer nations of Southeast Asia. This process has 
forced almost all industrialized countries to seek to migrate their 
economies up the value chain towards knowledge-based, high-value-added 
services activities such as R&D, design, finance, consulting/training, 
and post-installation service and support.
    Policy approaches quickly evolved into two main strands. First, 
these countries strove to develop framework conditions that support 
competitive services industries. As they began to scrutinize their 
services industries, these countries found they first needed 
considerable work in setting favorable framework conditions, such as 
removing barriers to labor market mobility in services industries, 
further opening and integrating cross-border services markets, 
developing better accounting practices for intangible assets, updating 
intellectual property and trade laws to accommodate the unique 
characteristics of services, developing core information technology 
infrastructure, and providing structures and incentives to encourage 
services exports.
    Second, with this supportive policy framework in place, these 
countries implemented specific programs to support innovation in 
services businesses. Specific efforts (and at least one sample country 
implementing them) include: \42\

          Boosting academic research in the area of services 
        innovation and services business, especially research on 
        creating innovative services-based business models, quantifying 
        improvements in services productivity, and enhancing the 
        quality of services delivery. (Finland, The Netherlands, 
        Denmark)

          Funding Services Science research; that is, cross-
        disciplinary research that draws on fields such as computer 
        science, management, operations, marketing and organizational 
        behavior. (Singapore, Taiwan)

          Extending research and experimentation tax credits to 
        services industries; especially, defining where the 
        ``innovative step'' occurs for services firms. (Norway and The 
        Netherlands)

          Developing innovation metrics that measure innovation 
        in services, not just advanced manufacturing, and looking for 
        ``hidden innovation'' in services industries. (Great Britain, 
        the United States, Ireland)

          Supporting the development of creative industries 
        through establishing regional design centers. (South Korea, the 
        Netherlands, Great Britain)

          Providing online self-assessment tools that allow 
        companies to benchmark their innovation infrastructures (R&D 
        budgets, number of employees, intellectual property strategies) 
        against in-nation and in-industry peer companies. (Great 
        Britain and European Union)

          Benchmarking services innovation policies across 
        European countries. (European Union)

3. Tax Incentives for Research and Development

    The tax incentives the U.S. government provides corporations for 
R&D activities have fallen from the most generous in the world in the 
late 1980s to 17th among 30 OECD countries in 2004.\43\ Many nations 
now provide significantly more generous tax incentives for research 
than does the United States. From leading the world in the late 
1980s,\44\ the United States by 1996 fell to seventh most generous 
among OECD nations, behind Spain, Australia, Canada, Denmark, the 
Netherlands and France.\45\ By 2004, we had fallen to 17th in 
generosity for general R&D 16th for machinery and equipment used for 
research; and 22nd for buildings used for research.\46\
    Among nations with a tax incentive for R&D, the United States now 
provides one of the weakest incentives, below our neighbors Canada and 
Mexico, and behind many Asian and European nations. Japan's credit is 
almost three times as generous as the United States', and for small 
companies it's four times as generous. In 2004, France adopted a credit 
essentially equivalent to a 40 percent incremental R&D tax credit. In 
an explicit effort to attract U.S. corporate R&D, our neighbor to the 
north is even more generous. In Canada, large companies are eligible 
for a flat 20 percent credit while small companies can receive a 35 
percent credit; in many provinces, equally generous credits can be 
taken on top of the Federal credit. Indeed, over the past decade, all 
other nations with R&D tax incentives have boosted the generosity of 
their R&D tax incentives, particularly since 2000.\47\
    At a time of increased concern about America's growing 
competitiveness challenge, our tax credit has been getting weaker, both 
in absolute terms and relative to other nations, in part because of 
changes made by Congress over the years that have diminished its 
generosity.\48\ In fact, until the passage in 2006 of the Alternative 
Simplified Credit, the credit was about half as generous as it was in 
the early 1980s.\49\ Even with the recent increases in R&D tax 
incentives (the passage of the Alternative Simplified Credit in 2006 
and its expansion in the Emergency Economic Stabilization Act of 2008), 
the United States moved up only to 14th place. Out of the 21 OECD 
nations that offered R&D tax credits in 2008, the United States ranked 
17th. The United States would need to increase the ACS to 20 percent to 
move up to 10th place, 31 percent to move to 5th place, and 47 percent 
to become the most generous of the OECD nations.\50\ However, this 
doesn't include non-OECD nations such as India, China and Brazil, all 
of which have significantly more generous tax incentives to attract 
multinational R&D. India's R&D tax credit is now four times that of the 
United States. On top of salaries for R&D personnel that are as low as 
one-sixth of the costs in the United States, China provides a 150 
percent deduction on R&D expenses (provided that R&D spending increased 
ten percent over the prior year). Some countries, including Denmark and 
the Netherlands, have begun to extend R&D tax credits to cover process 
R&D activities, effectively extending the R&D tax credit from their 
goods to services industries as well.

4. High-Skill Immigration

    Over the last decade, many nations have liberalized their policies 
regarding high-skill immigration, while the United States, in stark 
contrast, has restricted its policies. In a study benchmarking high-
skill immigration policies in eight nations (the United States, Canada, 
New Zealand, Australia, Japan, Great Britain, Germany and France), 
``Global Flows of Talent: Benchmarking the United States,'' ITIF found 
that the United States trails other peer countries in developing a 
proactive approach to attract high-skill foreign workers.\51\
    Using data from 2001 to 2006, the United States received an average 
of about 67,000 highly skilled permanent immigrants per year, with 
Canada receiving 56,000 per year, Australia 20,000 and New Zealand 
about 10,000.\52\ As a share of their populations, these rates are all 
several times larger than those in the United States--more than 11 
times larger in the case of New Zealand.
    ITIF's study of the immigration policies of those eight countries 
found three broad approaches. The first group--Australia, Canada and 
New Zealand-conceive of immigrants as a source of economic growth and 
consider highly skilled immigrants especially valuable contributors. 
The second group-the United States and Great Britain--are more amenable 
towards immigration but do not place high priority on tilting the mix 
of immigrants toward the talented. The third group--France, Germany and 
Japan--tend to view highly skilled immigrants (and immigrants in 
general) more as threats to native workers than as positive additions 
to national well-being.
    While the United States may not be as reflexively anti-immigration 
as some other industrialized countries, in recent years it has severely 
limited the flow of foreign talent entering the country at a time when 
the science and engineering workforce in the United States has become 
increasingly reliant on foreign talent. In 1995, non-U.S. citizens 
accounted for only six percent of the U.S. science and engineering 
workforce; by 2006, that percentage had doubled to 12 percent, and for 
the youngest cohort of scientists and engineers (ages 21 to 35), the 
percentage rose to 20 percent.
    With the United States restricting the number of H-1B visas issued 
annually to 85,000 from 2006 to 2008 (and 65,000 as of today),\53\ 
almost 50 percent of highly talented foreign professionals who applied 
for temporary work in the United States in the years 2006 to 2008 were 
turned away. Limiting the influx of talented foreign-born science and 
engineering professionals not only hurts U.S. competitiveness, it may 
also contribute to the decision of companies to source R&D operations 
abroad to be closer to local pools of S&E talent.

Why Does the United States Need a Robust Innovation Policy?

    The global competitive landscape continues to stiffen as a number 
of countries get serious about creating favorable climates that attract 
foreign direct investment and R&D activities and that support the 
innovation efforts of their domestic corporations and workforce. It is 
time for the United States to articulate and implement an innovation-
led economic growth strategy to respond to global economic 
competitiveness challenges.
    But before detailing some of the key elements of such a strategy, 
it is first worth briefly discussing why there is a need to develop 
such a strategy. Unfortunately in the United States too many 
conventional ``neoclassicalist'' economists hold on to the antiquated 
view that economic welfare is maximized by individual firms acting as 
independent utility maximizers, doing what is best for them 
individually. In fact, according to this view, many policy efforts to 
help firms become more innovative will only make things worse. Indeed, 
the worst possible sin in the eyes of neoclassical economists is to 
``pick winners and losers'' (an absurd characterization since nations 
only pick winners, not losers). Substituting for the wisdom of the 
market can only lead to a worse, not better, allocation of resources, 
they opine.
    Because of that, many conventional neoclassical economists argue 
that policy makers should be indifferent to the occupational and 
industrial mix of the U.S. economy. For most neoclassical economists, 
the right industrial structure is the one that ``the market'' provides, 
because by definition market exchanges engaged in by two parties are 
what is known as ``Pareto optimal.'' Why else would the parties engage 
in them? Any attempt by policy makers to try to alter this invisible 
hand by increasing innovation output can only reduce, not increase, 
economic welfare. This view, it should be noted, is almost unique in 
the world. In no other nation, perhaps with the exception of British 
Commonwealth nations, does the economics profession consist of such a 
large cohort of neoclassicalists counseling such blind faith in market 
processes.
    This helps explain a key reason why so many neoclassical economists 
advising Washington have been so blase about the decline in U.S. high-
tech manufacturing. To the extent that they are even willing to admit 
that high-tech manufacturing has declined, they simply assert as a 
matter of faith that domestic resources left idle by offshoring will 
automatically shift to new higher-productivity industries. The magic of 
the market will optimally reallocate resources. But only if one 
believes that economies are largely made up of ``Coasian'' factors of 
production that assemble and reassemble on the basis of prices could 
one take this view seriously. As innovation economist Greg Tassey 
argues, ``The central failure of current economic growth models is the 
assumption that shifts in relative prices will automatically elicit a 
Schumpeterian-type efficient reaction from domestic private markets--
namely an adjustment involving development and assimilations of new 
technologies to replace offshored ones.'' \54\
    According to this view, if a high-wage, high-tech firm like Boeing, 
for example, were to go out of business because of unfair European 
Commission subsidies to Airbus, as long as America maintains flexible 
labor and capital markets, these resources will flow into other 
industries, including into expanding or new firms and sectors. In such 
a market environment, policies are needed only to facilitate the 
transition of resources from losing to winning companies, including 
making sure that losing companies are not protected from this tough but 
necessary discipline, and helping workers get reemployed quickly. As a 
result, proponents of this view believe that as long as we have a good 
education system and don't restrain creative destruction, then all 
should be well.
    This conventional view may have accurately described a country's 
economy before the emergence of the globalization era over the last two 
decades. During the old economy era, if firms could not compete and 
went out of business, the only issue was making sure that their assets, 
including employees, were quickly redeployed to other companies that 
could compete successfully. If Boeing failed, Northrop Grumman or 
Lockheed Martin would add capacity.
    But in the new global economy, in which knowledge is increasingly 
the major factor of production, this framework no longer sufficiently 
explains industrial and economic change. As such, in the 21st century 
global economy, nations can no longer be indifferent to the industrial 
and value-added mix of their economy. In contrast to the neoclassical 
view, knowledge is not a free-flowing commodity held solely by 
individuals. It is embedded in organizations and if organizations die 
so too does a significant amount of knowledge. Moreover, there are 
significant spillover effects from firm activities and significant 
first-mover advantages, including learning effects that enable firms' 
early leads to translate into dominant positions. There are also 
significant network effects that mean that advancement in one industry 
(e.g., broadband telecommunications) can lead to advancement in a host 
of others (e.g., Internet video). As a result, for many parts of the 
U.S. economy exposed to international competition, if you lose it, you 
can't easily reuse it. In these cases, foreign high-value imports may 
end up substituting for the defunct U.S. product.
    To bring this back to a company like Boeing, if America were to 
lose Boeing, in all likelihood it could not rely on market forces, even 
a dramatic drop in the dollar, to later recreate a domestic civilian 
aviation industry. For to do so would require recreating not just the 
firm, but it's complex web of suppliers, professional associations, 
university programs in aviation engineering and other knowledge-sharing 
organizations.
    Clearly if Boeing were to go out of business, the economy would 
quickly regain ``equilibrium'' as factors of production were 
reabsorbed. But neoclassical economics assume that there is only one 
equilibrium and it is the role of government to make sure that that the 
market attains it. But new research suggests that there may be multiple 
equilibria in an economy, some better than others. Indeed, while 
economies can attain equilibrium, absent a robust innovation policy 
that equilibrium may not be a high-wage, high-skill equilibrium. 
Research by economist Elvio Accinelli has shown that there is strategic 
complementarily between the percentage of high-skill workers and high-
value added, innovative firms in an economy. He finds that economies 
can be in perfect neoclassical equilibrium at either a high level of 
innovation or in a ``poverty trap'' of low skills and underinvestment 
in innovation. Since the poverty trap can be avoided if the number of 
innovative firms in an economy exceeds a threshold level leading to an 
increased number of skilled workers, there is a role for public policy 
to move economies to a high-level equilibrium on innovation.\55\
    But there is a second reason for an innovation policy and that is 
because economies are subject to a host of ``market failures'' with the 
implication that markets acting alone will not always lead to optimal 
performance. Following are five market failures that cause markets to 
perform suboptimally:
    1. Because individual firms cannot capture all the benefits of 
their own innovative activity, firms will produce less innovation 
activity than society needs. The first market failure has to do with 
who benefits from private companies' investments in innovation. The 
knowledge needed to create new products, processes and organizational 
forms is not something that can be completely contained within an 
individual firm. It inevitably spills over to other firms, which can 
use it without paying the costs of creating it. For example, an 
entrepreneur develops a new business model that others copy. A 
university transfers discoveries from the lab to the marketplace. A 
company makes a breakthrough that forms the basis of innovations that 
other companies can use. This is why studies have found that the rates 
of return to society from corporate R&D and investments in IT are at 
least twice the estimated returns that the company itself receives.\56\ 
Firms' inability to capture all the benefits of their own innovative 
activity means that firms, left on their own, will produce less 
innovation than society needs.
    2. R&D increasingly depends on collaboration between firms and 
universities but the interests of the collaborators are not well-
aligned. Problems with the important interactions of firms and 
universities represent another area of possible market failure. As 
short-term competitive pressures make it difficult for even the largest 
firms to support basic research and even much applied research, firms 
are relying more on university-based research and industry-university 
collaborations. Yet, the divergent needs of firms and universities can 
hinder the coordination of R&D between these two types of institutions. 
University researchers are not necessarily motivated to work on 
problems that are relevant to commercial needs. University technology 
transfer offices do not always promote the licensing of university 
intellectual property to firms. Conversely, individual businesses 
sometimes want to ``rent'' universities' research capabilities and 
appropriate the resulting research discoveries for themselves. This can 
impede the free flow of knowledge that can contribute to innovation 
elsewhere in the economy.\57\
    3. Many industries and firms lag in adopting proven technologies. 
Market failures also plague the diffusion of innovation. Outside of 
relatively new, science-based industries such as information technology 
and biotechnology, many industries lag in adopting more productive 
technologies. For example, the health care industry has lagged in 
adoption of available technologies that could boost productivity and 
health care quality.\58\ The residential real estate industry has 
resisted moving toward more Internet-enabled sales.\59\ The 
construction industry is plagued by inefficiencies and failure to adopt 
best-practice technologies and techniques.\60\ A host of market 
failures, including chicken-or-egg issues related to standards and 
technology adoption and principal-agent problems where innovation may 
hurt the implementers of it (e.g., real estate agents embracing e-
realty systems) impede faster productivity growth in these sectors of 
the economy.
    4. The innovation producing benefits of industry clusters are 
under-realized. A fourth market failure involves the under-recognition 
of industry clusters' role in innovation. Both the creation and the 
diffusion of innovation often occur in geographic clusters. Geographic 
industry clustering enables firms to take advantage of common resources 
(e.g., a workforce trained in particular skills, technical institutes 
or a common supplier base), to facilitate better labor market matching 
and to facilitate the sharing of knowledge. This process may be 
particularly relevant in industries that rely more on the creation or 
use of new knowledge, as clustering appears to spur knowledge 
transfers. Such industries are especially likely to cluster in large 
metropolitan areas.\61\ Perhaps the best known cluster is Northern 
California's Silicon Valley, where a large agglomeration of high-tech 
firms, research universities such as Stanford, technical colleges to 
train high-tech workers, venture capitalists, and other supporting 
institutions make it the world's most vibrant technology region. But 
Silicon Valley is not the only region in the United States with 
industry clusters: From the furniture cluster in Tupelo, Mississippi; 
to the jewelry cluster in Rhode Island and southern Massachusetts; to 
the recreational vehicle cluster in Elkhart, Indiana; to the 
biotechnology clusters in the Boston, Washington, DC, and San Diego 
metropolitan areas, regional industry clusters abound. And as these 
examples show, clusters are not only made up of ``high-tech'' firms. 
Moreover, clusters are not confined to manufacturing, but also exist in 
a host of service industries, including financial services in New York, 
movies and music in Hollywood, software in Seattle and gaming in Las 
Vegas. Evidence suggests that industry clustering may have become more 
important for productivity growth during the last three decades; the 
extent to which an industry was geographically concentrated (at the 
metropolitan or county level) was increasingly associated with 
subsequent productivity growth during the last three business 
cycles.\62\
    Yet because the benefits of geographic clustering spill over beyond 
the boundaries of the firm, market forces produce less geographic 
clustering than society needs. Each firm in a cluster confers benefits 
on other firms in the cluster, but no individual firm takes these 
``external'' benefits it produces into account when making its own 
location decisions. In addition, the firms in a cluster have common 
needs (e.g., for worker training or infrastructure) that they cannot 
meet on their own. Clustered firms usually require external 
coordination (e.g., from governments or industry associations) to meet 
these needs because no one firm can capture all the benefits. Failure 
to meet these common needs makes clusters smaller and less productive 
than they would otherwise be. If the benefits of clustering to all 
firms in the United States were considered and the common needs of all 
firms in each cluster met, there would be more clustering, and thus 
more innovation and higher productivity.
    5. The interests of geographically mobile firms in locating 
innovative activity may diverge from those of U.S. residents. There is 
one other failure that has emerged in the last decade or so and that, 
while not a market failure per se, results in too little innovation in 
the United States. That failure is the potential divergence between the 
interests of geographically mobile firms and those of the residents of 
the United States.\63\ Firms' decisions about where to locate 
innovative activity are based on their own interests, which may or may 
not coincide with the interests of a place's residents. Since World War 
II and the emergence of a truly national market, most U.S. states have 
put in place policies to tilt the choice of corporations to invest in 
their states. To be sure, even the most liberal governors recognize and 
respect the power and primacy of markets as the key driver of 
prosperity. But even the most conservative governors recognize that 
this market-produced bounty does not always automatically end up in 
their own jurisdiction. For this reason, both Republican and Democratic 
governors ``intervene'' in their economies with robust economic 
development policies. They are not content to let the ``market'' 
determine what kind and how many jobs are created: they work to ensure 
that they gain more high-paying, high-productivity jobs. With the rise 
of the globally integrated enterprise, the United States faces the same 
reality states faced after World War II: without robust economic and 
innovation policies, it risks losing out in global competition.
    These failures in the process of innovation and its diffusion 
suggest that, left to itself, the market will produce less innovation 
and lower productivity in the United States than our society needs. In 
a globally competitive world, this is a limitation that we can no 
longer afford. What is more, these market failures in turn suggest that 
there are several ways in which government can improve the process.

What Steps Should Congress Take to Boost U.S. Innovation and 
                    Competitiveness?

    The government's role in addressing these market failures is not to 
regulate business or to direct the path of technological or economic 
development. We do not advocate a heavy-handed, government-driven 
industrial policy. Indeed, such a policy cannot be nimble enough to 
respond to the kinds of market failures that afflict the innovation 
process. At the same time, though, we do not advocate giving away 
public funds to companies without any public benefit. Government should 
be a facilitator that spurs firms to innovate in ways that serve the 
public interest. Economist Dani Rodrik captures this view of the 
appropriate relationship between government and business with respect 
to innovation policy when he describes ``an interactive process of 
strategic cooperation between the public and private sectors which, on 
the one hand, serves to elicit information on business opportunities 
and constraints and, on. the other hand, generates policy initiatives 
in response.'' \64\ Political scientist Dan Breznitz similarly writes 
that a government innovation-promotion agency should not pick strategic 
products or technologies but should motivate firms, individually and in 
cooperation with other firms and government, to make the investments 
needed to innovate.\65\ In short, while we believe that the private 
sector should lead in innovation, we also believe that in an era of 
globalized innovation and intensely competitive markets the Federal 
Government can and should play an important enabling role in supporting 
private sector innovation efforts. Indeed, many nations have already 
come to this realization. In recent years, they have come to understand 
that markets relying on price signals alone will not always be as 
effective as smart public-private partnerships in spurring higher 
productivity and greater innovation. It is time for the United States 
to do the same. There are two major areas where the United States needs 
to act, one domestic and one international.

More Robust Trade Enforcement

    It will be difficult for the United States to regain global 
innovation leadership if we continue to largely turn a blind eye to 
rampant foreign policies that distort the spirit, if not often the 
letter, of the WTO, with the goal of limiting U.S. imports of high tech 
products and services and promoting their exports. These countries want 
it both ways. They desperately want access to the U.S. market (and as 
reflected by the fact that the United States has run massive annual 
trade deficits, for instance, of almost $800 billion in 2006 alone,\66\ 
they are getting it) but they don't want to buy U.S.-produced goods and 
services. They want U.S. foreign direct investment, particularly high-
tech investment, through outsourcing, joint ventures and other types of 
investment, but they also want to systematically weaken the competitive 
advantage of U.S. technology companies in favor of their domestic 
technology companies. They want our wonderful technology and 
intellectual property, but they don't want to pay for it. ``Take'' is 
not ``trade.''
    These aggressive technology mercantilist policies have resulted in 
fewer high paying technology jobs in the United States and have eroded 
the United States' global innovation leadership position. As such if we 
want to stop the continued erosion of America's technology leadership, 
the Federal Government will have to be much more vigilant and make 
fighting these unfair trade practices a top priority. Both Congress and 
the Obama Administration need to let countries know that they can't 
expect to get the WTO's benefits when they aren't meeting its 
obligations. Countries are willfully violating these agreements and we 
need to make them live up to their commitments.
    While many of the tools for more aggressive enforcement of global 
trade policies are in the hands of the administration, Congress can 
play an important supporting role. To start with, we urge Congress to 
pass S.1466: The Trade Enforcement Act of 2009, which strengthens 
USTR's trade enforcement powers and restructures the agency to more 
greatly focus on eliminating foreign barriers to exports.\67\ In short, 
Congress should hold USTR's feet to the fire and expect them to wake up 
every morning figuring out how they are going to enforce trade 
agreements, and defend American technology jobs from the assault of 
unfair trade practices.

Develop and Implement a More Robust National Innovation Policy

    Even with the orientation of many neoclassical economists there is 
a somewhat broad consensus that the role of the Federal Government 
should include support for basic research, education, and provision of 
a good regulatory climate. But while these are necessary ingredients, 
they are woefully inadequate in enabling the United States to increase 
its global rank in innovation-based competitiveness. Indeed the 
neoclassical model which not only posits an overly simplistic 
innovation process (the linear model) but also assumes that it is only 
basic research which requires a government role is a poor guide to 
policy. Generic platform technologies, infra-technologies and risk 
reduction all also require a public-private approach. What are 
essentially ideological statements put forth by neoclassical 
economists, such as that the role of government is not to support 
applied research, are supported by little logic and even less data and 
only serve to stop, not advance, needed reasoned analysis and 
discussion. With this in mind, I list a number of specific proposals 
that if enacted would help the U.S. regain its innovation lead.

1. Spur Science, Technology, Engineering and Math (STEM) Education and 
                    Skills

    Ensuring an adequate supply of talented scientists and engineers is 
one key step in the U.S. innovation agenda. Following are three 
proposals to address the STEM challenge:

1a) Fund Specialty Math and Science High Schools

    A wide array of proposals before Congress seek to intervene 
upstream in the STEM pipeline at the K-12 level. These include 
expanding professional development programs for science teachers; 
enhancing science enrichment programs; using No Child Left Behind to 
judge scientific educational outcomes; and boosting science teacher 
quality, either through stricter requirements, providing incentives to 
attract higher quality teachers to science, and/or making it easier for 
scientists and engineers to become teachers.
    While these proposals have received the lion's share of attention 
in the policy debates over STEM education, we believe that the focus is 
too broad. If funding were unlimited, such a broad-based strategy might 
make sense. But since funding is limited and since less than ten 
percent of the U.S. workforce is engaged in STEM-related careers, it 
makes more sense to focus limited funds more narrowly. In particular, 
we believe that the most effective strategy to address the STEM 
challenge at the high school level is to significantly expand the 
number of specialty math and science high schools (MSHS).
    There are only about 100 math and science high schools across the 
nation, ranging from pull-out programs with 125 students, to full day 
programs and dedicated high schools of over 4,000 students, to state 
sponsored residential schools, enrolling over 47,000 students in 
total.\68\ By creating an environment focused more intensely on science 
and technology, these schools have been able to successfully enable 
students to study science and math, often at levels far beyond what 
students in conventional high schools are at; they can then go on to 
degrees in math and science at relatively high levels. It's time to 
build upon this successful model and significantly expand the number 
and scope of our nation's math and science specialty high schools.
    Mathematics, science, and technology high schools differ from the 
general education found in comprehensive high schools in key ways. 
First, as the name implies, MSHSs focus much more extensively on STEM 
curricula. For example, in addition to the three years of lab science 
and three years of mathematics required by the state for high school 
graduation, Florida's Center for Advanced Technologies offers students 
an opportunity to declare a mathematics and science major by taking 
four additional courses in mathematics and science, often Advanced 
Placement Courses.\69\
    Second, students don't just take more STEM courses; they take more 
advanced courses and do more advanced work. Indeed, the coursework and 
integrated curricula of MSHSs go over and above the normal graduation 
requirements for general education students. For example, students at 
the Arkansas School for Mathematics, Sciences, and the Arts can take 
courses in Biomedical Physics, Immunology, Microbiology, Multivariable 
Calculus, Number Theory, Differential Equations, Math Modeling, 
Computer Programming III, and Web Application Development.
    A third distinguishing feature of these schools is their level of 
partnership with other organizations. Collegiate, corporate, and alumni 
organizations have formed significant partnerships with these schools. 
While some partnerships have been in support of specific events, others 
have been long-term partnerships supporting research and innovation 
among students and faculty. Collegiate partners, for example, often 
provide classroom, dormitory, research and financial support to these 
schools. For example, at the Governor's School of South Carolina, every 
rising senior is placed for six weeks in the summer at an off-campus 
program. Many of the students work with a research professor at an in-
state university.
    While the educational environments are exemplary, the key question 
is whether they produce results. While formal studies are few, there is 
some evidence that these schools are highly effective at producing 
graduates not only with high levels of aptitude in STEM, but who go on 
to further study and careers in STEM. For example, one study of 1,032 
graduates finds, 99 percent of graduates enroll in college within one 
year of high school (compared to 66 percent nationally) while 79 
percent complete college in four years (compared to 65 percent in 
private universities and 38 percent in public universities).\70\ 
Moreover, graduates earn undergraduate and graduate degrees in 
mathematics, science, and technology fields in significantly higher 
numbers than the general population. Approximately 56 percent of MSHS 
graduates earn undergraduate degrees in mathematics or science-related 
fields, compared to just over 20 percent of students who earn an 
undergraduate degree. Over 40 percent of females earn such degrees, 
nearly double the national average.
    A key part of any solution to the STEM challenge needs to be the 
significant expansion of specialty math and science high schools. But 
because more so than other high schools, math and science high schools 
produce benefits that local communities, and even states, will not 
capture, local school districts will under-invest in them. Rather than 
be seen as solely the responsibility of local school districts, or even 
states, they should be seen for what they are: a critical part of the 
scientific and technological infrastructure of the nation. Thus, we 
believe that the National Science Foundation should play a key role in 
supporting and expanding such schools. As a result, Congress should set 
a goal of approximately quintupling enrollment at such high schools to 
around 250,000 students. This will require both the creation of a 
significant number of new high schools, but also expansion of others 
with room to grow. To do this, Congress should allocate $100 million a 
year for the next five years to the National Science Foundation to be 
matched with funding from states and local school districts and 
industry to invest in both the creation of new MSHSs and the expansion 
of existing ones.\71\ Moreover, a share of these funds should go toward 
establishing MSHSs focused on under-represented populations. States 
and/or local school districts would be required to match every dollar 
of Federal support with two dollars of state and local funding. 
Industry funding would count toward the state and/or local school 
district match.

1b) Fund Joint Government-Industry STEM Ph.D. Fellowships

    One key factor in producing more Ph.D. degrees in STEM, especially 
by U.S. residents, is the ability to support doctoral fellowships. But 
as Richard Freeman notes, the number of NSF graduate research 
fellowships awarded per thousand of college students graduating with 
degrees in science and engineering went from over seven in the early 
1960s to just over two in 2005. Today the same number of NSF graduate 
research fellowships are offered per year as in the early 1960s, 
despite the fact that the number of college students graduating with 
degrees in science and engineering has tripled.\72\ But rather than 
simply expand funding for the NSF Graduate Research Fellowship program 
(funded at $102 million) to do this, Congress should instead create a 
new NSF-industry Ph.D. fellows program. Currently the program provides 
up to three years of support over a five year period and supports 
approximately 3,400 students per year at $40,500 per year.\73\ The new 
NSF-industry program would work by enabling industry to fund individual 
fellowships of $20,250 with NSF to match industry funds dollar-for-
dollar. Congress should allocate an additional $21 million to a joint 
industry-NSF STEM Ph.D. fellowship program. This would allow NSF to 
support an additional 1,000 graduate fellows.
    Individual companies could commit to supporting American residents 
in whatever fields that the companies are interested in. Students would 
of course be under the supervision of their university faculty, and 
ultimately dissertation advisor, but industry would be able to build a 
relationship with the student. For example, a company might offer the 
student a summer internship at one of the company's laboratories, 
helping the student to get a better sense of actual research challenges 
the company faces.
    To be sure, this program would be slightly more complicated to 
administer. First, companies would have to be informed of the program 
and propose graduate fellow areas of study. Prospective fellowship 
applicants would have to identify which awards they are most interested 
in applying for. However, with the Internet, such matching would be 
relatively straightforward, with students indicating their intended 
areas of study and the online program identifying relevant fellowship 
opportunities. If after three years, it turns out that industry does 
not support the program in great enough numbers or students and 
universities are not interested in the program, then it could and 
should be terminated and the funding redirected into the regular 
fellows program.
    However, this program would have two advantages over the regular 
NSF fellows program. First, by leveraging industry funds, Federal 
dollars would go twice as far. Instead of having to appropriate $42 
million to fund 1,000 additional fellowships, they could appropriate 
$22 million instead. Second, and more important, engaging industry as a 
partner would help selected graduate students better understand how 
research is conducted in industry and better understand the 
interdisciplinary nature of today's innovation process. Both of these 
challenges have been the subject of increasing focus by scholars 
writing about STEM graduate education. There have been several studies 
about the growing disconnect between the training that graduate 
students receive and their future job responsibilities.\74\ Most 
doctoral programs still train students as if they were going to be 
going into academic teaching and research careers. But increasingly 
this is not the case.\75\ For example, one survey of doctoral chemistry 
students found that only 36 percent intended to go into academia 
(compared to 76 percent of English students).\76\ As Campbell, Fuller 
and Patrick have argued, ``graduate education needs to be broadened 
from its research focus to include a wider range of training for the 
careers students are pursuing and to reflect the versatility needed to 
work in an increasingly global job market, where collaboration between 
industry, universities, and government agencies is the norm rather than 
the exception.'' \77\ Finally, for those who worry that industry 
funding will somehow taint the scientific learning process, it is 
important to remember that students would be guaranteed the funds as 
long as the university agreed that the student was performing up to 
standards.\78\

1c) Allow Foreign Students Receiving STEM Ph.D.s from U.S. Universities 
                    to Automatically Qualify for Green Cards

    While ideally the supply of American STEM workers will expand to 
fill the gap, the likelihood of that happening in the near- to 
moderate-term is unlikely, even if Federal efforts to support STEM 
education expand significantly. Yet welcoming the world's most skilled 
foreign-born scientists and engineers into the land of economic 
opportunity that America affords has long been one of the strengths of 
the U.S. national innovation system. The U.S. economy and the standard 
of living for American citizens have benefited enormously from this 
influx of foreign talent. AnnaLee Saxenian, a professor at the 
University of California-Berkeley, has shown that Indian and Chinese 
entrepreneurs founded or co-founded roughly 30 percent of all Silicon 
Valley startups in the late 1990s.\79\
    Recognizing this, over the last decade many nations have 
liberalized their policies regarding high-skill immigration, while the 
United States, in stark contrast, has restricted its policies. In a 
study benchmarking high-skill immigration policies in eight nations 
(the United States, Canada, New Zealand, Australia, Japan, Great 
Britain, Germany and France), ITIF found that the United States trails 
other peer countries in developing a proactive approach to attracting 
high-skilled foreign workers.\80\
    Moreover, the current system of employer sponsorship signals only 
that potential immigrants are desirable employees. A system that 
allowed additional criteria to be considered, like those used in the 
point systems of Australia, Canada and New Zealand, would meet policy 
objectives better. (Applicants for immigration in these countries 
receive points for such characteristics as education, work experience 
and language skills. Those surpassing an adjustable point threshold are 
admitted. Having a job offer in hand and meeting a designated 
occupational shortage may add points to an individual's application, 
but it is usually possible to meet the pass mark without either of 
these attributes.) Toward that end, foreign graduate students in STEM 
fields should be given special preference within such a system, even if 
they have not received job offers. To do this, Congress should 
automatically make recipients of advanced science and engineering 
degrees eligible for permanent residency. Providing additional 
opportunities for green cards not tied to employment could allow highly 
skilled foreign graduates to make more creative contributions to the 
economy more quickly by working in smaller and riskier businesses.

2. Create a National Innovation and Competitiveness Strategy Modeled on 
                    the National Broadband Strategy

    The United States needs to create millions of new good-paying jobs 
over the next decade. If the United States wants to do this and be 
successful in the global economy, it is critical that the Federal 
Government develop a serious, in-depth, and analytically-based national 
competitiveness strategy. We are in fact one of the few nations without 
one. Denmark, the United Kingdom, South Korea, The Netherlands and 
Ireland are just a few of the nations that in recent years spent the 
time and effort to craft a national competitiveness strategy. The last 
time the United States did anything similar was President Carter's 
Domestic Policy Review on Industrial Innovation in 1978. This review 
was in fact extremely important in setting the stage for a number of 
important Congressional initiatives in the following decade, including 
the R&D tax credit, the Bayh-Dole Act, the National Cooperative R&D 
Act, and the Stevenson-Wydler Technology Innovation Act.
    It should be noted that ITIF is not advocating industrial policy or 
top-down direction of innovation. Thus we have deliberately chosen the 
term ``agenda'' to describe the outcome of a process that we believe 
must engage private and civil society constituencies and reflect the 
bottom up as well as top down nature of innovation. This would allow 
the development of a robust national innovation agenda. Its value would 
be apparent in allowing our country to more effectively address complex 
challenges with ``whole of government'' solutions, galvanize the public 
by advancing a useful narrative around innovation, enable us to engage 
more effectively with global innovation constituencies, and most 
importantly allow us to reinvent the traditional sources of our 
economic and societal success.
    The American Recovery and Reinvestment Act charged the FCC with the 
development of a national broadband plan. The next America COMPETES Act 
should charge the White House Office of Science and Technology Policy 
with the development of a national competitiveness strategy. Adequate 
funding should be provided to bring in an outside director with deep 
technical and policy knowledge and hire individuals with technical and 
business experience.
    A national innovation strategy would provide an opportunity to 
engage in a comprehensive analysis of the key factors contributing to 
future U.S. competiveness. Legislation to create this could require 
that the strategy focus on a number of broad issues, going more in 
depth on each. These should include assessing: 1) current U.S. 
competitiveness, including at the major industry level; 2) current 
business climate for competiveness (including tax and regulatory); 3) 
trade and trade policy issues; 4) education and training; 5) science 
and technology policy; 6) regional issues in competitiveness (including 
the role of state and local government and impacts on rural, urban and 
other regions); 7) measurement and data issues; and 8) proper 
organization of government to support a comprehensive innovation and 
competitiveness agenda.

3. Spur Technology Commercialization

    While the United States remains a leader at nurturing innovation 
and commercializing new inventions, the process can and should be 
improved. The United States will forfeit technology leadership unless 
it finds ways to accelerate entry of new growth sectors. The U.S. 
innovation system separates fundamental research from incremental 
development, with the former increasingly performed at research 
universities and labs with Federal support, and the latter performed by 
industry. Connections between these sectors need significant 
strengthening, so there is a smoother and more active hand-off process. 
Recommendations include:

3a) Create an SCNR (Spurring Commercialization of Our Nation's 
                    Research) Program to Support University, State and 
                    Federal Laboratory Technology Commercialization 
                    Initiatives

    The current Federal system for funding research pays too little 
attention to the commercialization of technology, and is still based on 
the linear model of research that assumes that basic research gets 
easily translated into commercial activity. In fact, the process is 
ripe with barriers, including institutional inertia, coordination and 
communication challenges, and lack of funding for proof of concept 
research and other ``valley of death'' activities. It is time for 
Federal policy to explicitly address this challenge and allocate more 
funding to commercialization activities.
    However, in an era of fiscal constraint adequate new funding may be 
difficult to obtain. As a result, one idea would be to establish an 
automatic set-aside program taking a modest percentage of Federal 
research budgets and allocating them to a technology commercialization 
fund. Currently the SBIR program allocates 2.5 percent of agency 
research budgets to small business research projects; the STTR program 
allocates 0.3 percent to universities or nonprofit research 
institutions that work in partnership with small businesses.
    3b) Thus, Congress should allocate 0.15 percent of agency research 
budgets (around 5110 million per year) to fund university, Federal 
laboratory, and state government technology commercialization and 
innovation efforts. The 0.15 percent share could either be added on top 
of the existing 2.8 percent allocation currently going to SBIR and 
STTR, or it could be taken from the SBIR share.
    This program would be different than the STTR program which funds 
small businesses working with universities.\81\ Half the funds would go 
to universities, and Federal laboratories could use the funds to create 
a variety of different initiatives, including mentoring programs for 
researcher entrepreneurs, student entrepreneurship clubs and 
entrepreneurship curriculum, industry outreach programs, seed grants 
for researchers to develop commercialization plans, etc.
    The other half of funds would go to match state technology-based 
economic development (TBED) programs. Since the 1980s, when the United 
States first began to face global competitiveness challenges, all 
states have established TBED programs. Republican and Democratic 
governors and legislators support these programs because they recognize 
that businesses will not always create enough high-productivity jobs in 
their states without government support. State and local governments 
now invest about $1.9 billion per year in TBED activities.\82\ This is 
about 70 percent of the amount that the Federal Government spends on 
its principal innovation programs and agencies.
    States and regions engage in a variety of different TBED 
activities. They spur the development of cutting-edge, science-based 
industries by boosting research funding. For example, Oregon's 
NanoScience and Microtechnologies Institute serves as a forum for R&D 
synergy among Oregon's three public research universities, the Pacific 
Northwest National Laboratory, the state, and the ``Silicon Forest'' 
high technology industry cluster. States also try to ensure that 
research is commercialized and good jobs created in both cutting-edge, 
science-based industries and industries engaging in related 
diversification. For example, the Georgia Advanced Technology 
Development Center at Georgia Tech is a technology incubator that 
offers services including consulting, connections to university 
researchers and networking with other entrepreneurs and service 
providers. States have also established programs to help small and mid-
sized firms support collaborative research at universities. For 
example, Maryland's Industrial Partnerships program provides funding, 
matched by participating companies, for university-based research 
projects that help companies develop new products or solve technical 
challenges.\83\ Finally, states have established initiatives to help 
firms commercialize research into new business opportunities. For 
example, Oklahoma's non-profit i2E organization helps Oklahoma 
companies with strategic planning assistance, networking opportunities, 
and access to capital. i2E's Oklahoma Technology Commercialization 
Center assists researchers, inventors, entrepreneurs and companies in 
turning advanced technologies and high-tech startups into growing 
companies.\84\ But without assistance from the Federal Government, 
states will invest less in TBED activities than is in the national 
interest. A formula-based allocation to help fund state TBED efforts 
would help correct this limitation.
    We propose that NIST be responsible for administering this program. 
Universities and Federal labs would submit proposals explaining their 
proposed activities. States would submit proposals to NIST laying out 
their TBED strategy and explaining how NIST support would enable them 
to do more and better. Qualifying activities would include a host of 
TBED activities, such as technology commercialization centers, 
industry-university research centers, regional cluster development 
programs, regional skills alliances, and entrepreneurial support 
programs. In addition, where relevant, states would need to spell out 
in detail how they intended to create innovation alliances among local 
governments, businesses, educational institutions, and other 
institutions (such as economic development organizations or labor 
unions) in metropolitan areas. States would have to explain how their 
activities would meet the needs of firms following innovation 
trajectories that currently exist or that can reasonably be developed 
within the state. The precise mix of TBED activities would be left up 
to each state because the mix of innovation trajectories and the 
specific needs of firms in each trajectory vary among and within 
states. However, proposals would have to be economically realistic. For 
example, a state proposal to develop a new biotechnology cluster in a 
metropolitan area that had no existing institutions to support such a 
cluster and no realistic strategy to develop those institutions would 
be unlikely to be funded. Proposals that built appropriately on TBED 
activities in neighboring states or that included plans for interstate 
collaboration in TBED would receive extra points in the review process. 
To be eligible for NIST funding, states would need to provide at least 
two dollars in actual funding for every NIST dollar they receive.
    Rotating panels of TBED experts would review proposals. In most 
cases these would be experts in the field (e.g., consultants, 
academics, venture capitalists and economic development professionals). 
For states there would be a two-stage proposal review process. States 
would submit initial proposals describing activities and use of funds. 
Based on review from the TEED panel and NIST staff, the program would 
provide feedback to states on how to modify and improve their 
proposals. States would then submit final proposals that would be 
reviewed and scored by the outside panel of experts. Proposals that 
were judged acceptable would be funded to the extent that funds were 
available, with priority going to those with the highest scores. States 
with proposals judged not fundable would be eligible to receive modest 
planning grants and technical assistance from NIST staff to develop a 
proposal for the subsequent year's competition.\85\

4. Expand the R&D Tax Credit

    As ITIF has demonstrated, the U.S. R&D tax credit is no longer 
generous when compared to other nations. It is not enough to make the 
credit permanent, it also needs to be expanded. There are several 
reforms that are needed. One is to provide greater incentives for 
collaborative R&D. Increasingly, firms are collaborating with other 
firms or institutions in order to lower the cost of research and 
increase its effectiveness by maximizing idea flow and creativity. 
Indeed, a growing share of research is now conducted not only on the 
basis of strategic alliances and partnerships but also through ongoing 
networks of learning and innovation.\86\ Moreover, participation in 
research consortia has a positive impact on firms' own R&D expenditures 
and research productivity.\87\
    Most collaborative research, whether in partnership with a 
university, national laboratory, or industry consortium, is more basic 
and exploratory than research typically conducted by a single company. 
Moreover, the research results are usually shared, often through 
scientific publications. As a result, firms are less able to capture 
the benefits of collaborative research, leading them to under-invest in 
such research relative to societally optimal levels.\88\ This risk of 
underinvestment is particularly true as the economy has become more 
competitive, and a reflection of this is the fact that for the first 
time since the data were collected in 1953, the percentage of U.S. 
academic R&D supported by industry has declined in each of the last 
five years.\89\ This may stem from the fact that university contracts 
are often undertaken as discretionary activities and are the first to 
be cut when revenues are down.\90\
    Other countries, including France, Norway, Spain and the United 
Kingdom, provide firths more generous tax incentives for collaborative 
R&D. Denmark and Hungary provide more generous tax deductions for 
collaborative R&D with public research institutions.\91\ Japan's R&D 
incentive is almost twice as generous for research expenditures 
companies make with universities and other research institutes.\92\ 
France provides a 60 percent flat tax credit for business-funded 
research conducted at national laboratories.
    The U.S. tax code allows firms a basic research credit of 20 
percent of expenses above a base period amount.\93\ But the credit is 
not significantly more generous than the regular credit. Moreover, its 
applicability is limited because rules require that such research not 
have any ``specific commercial objective.'' At a minimum, Congress 
should delete this restrictive language from current law and allow any 
research expenditures at universities to qualify for the basic research 
credit.
    But Congress should go further and provide a more generous 
incentive for collaborative research. As part of the Energy Policy Act 
of 2005, Congress created an energy research credit that allowed 
companies to claim a credit equal to 20 percent of the payments to 
qualified research consortia (consisting of five or more firms, 
universities, and Federal laboratories) for energy research. In 2006, 
several bills were proposed allowing all research consortia, not just 
energy-related ones, to become eligible for a 20 percent flat 
credit.\94\ Congress should go further and allow firms to take a flat 
credit of 30 percent for collaborative research conducted at 
universities, Federal laboratories, and research consortia.
    In addition, Congress needs to expand the Alternative Simplified 
Credit. Currently the ASC provides a credit of 14 percent of qualified 
R&D expenditures in excess of 50 percent of base period expenditures. 
Congress should increase the Alternative Simplified Credit rate from 14 
percent to between 20 and 40 percent, depending on the level of 
increase in research investment. Congress should also broaden the 
definition of qualified R&D from beyond that involved in inventing a 
new product, to that involved in developing a new production process. 
Under current law only product R&D is eligible for the credit. But a 
key source of U.S. manufacturing renewal will come from more advanced 
production processes. Allowing companies to take a credit against 
process R&D investments would spur more of this kind of research. 
Taking these steps would put the U.S. R&D tax credit back among the top 
5 most generous in the world.

5. Fund Industry-University-Government Manufacturing Research and 
                    Deployment Centers

    The debate over science and technology policy has tended to 
oscillate between those who argue that the Federal Government should 
fund industry to conduct generic pre-competitive R&D and those who 
maintain that money should be spent on curiosity-directed basic 
research at universities. This is a false dichotomy. There is no reason 
why some share of university basic research cannot be oriented toward 
problems and technical areas that are more likely to have economic or 
social payoffs to the nation. Science analyst Donald Stokes has 
described three kinds of research: purely basic research (work inspired 
by the quest for understanding, not by potential use), purely applied 
(work motivated only by potential use), and strategic research 
(research that is inspired both by potential use and fundamental 
understanding).\95\ Moreover, there is widespread recognition in the 
research community that drawing a bright line between basic and applied 
research no longer makes sense. One way to improve the link between 
economic goals and scientific research is to encourage the formation of 
industry research alliances that fund collaborative research, often at 
universities.
    While the government supports a few sector-based research programs, 
they are the exception rather than the rule.\96\ Moreover, existing 
ones are largely underfunded. As a result, Congress should fund a 
competitive Industry Research Alliance Challenge Grant program to match 
funding from consortia of businesses, businesses and universities, or 
businesses and national labs. This program would resemble the current 
Technology Improvement Program (TIP) operated by NIST but would have an 
even greater focus on broad sectoral consortia and would allow large 
firms as well as small and mid-sized ones to participate. It could be 
housed in either NSF or NIST.
    To be eligible for matching funding, firms would have to: form an 
industry-led research consortium of at least five firms, agree to 
develop a mid-term (three-to-ten year) technology roadmap that charts 
out generic science and technology needs that the firms share, and 
provide at least a dollar-for-dollar match of Federal funds. This 
initiative would increase the share of federally funded university and 
laboratory research that is commercially relevant. In so doing it would 
better adjust the balance between curiosity-directed research and 
research more directly related to societal needs.

6. Establish a National Innovation Foundation

    If Congress wanted to go further, it could establish a National 
Innovation Foundation (NIF)--a new, nimble, lean, and collaborative 
entity devoted to supporting firms and other organizations in their 
innovative activities.\97\ The goal of NIF would be straightforward: to 
help firms in the nonfarm American economy become more innovative and 
competitive. It would achieve this goal by assisting firms with such 
activities as joint industry-university research partnerships, 
technology transfer from laboratories to businesses, technology-based 
entrepreneurship, industrial modernization through adoption of best 
practice technologies and business practices, and incumbent worker 
training. By making innovation its mission, funding it adequately, and 
focusing on the full range of firms' innovation needs, NIF would be a 
natural next step in advancing the innovation agenda that Congress put 
in place when it passed the America COMPETES Act. A National Innovation 
Foundation would:

          Catalyze industry-university research partnerships 
        through national sector research grants.

          Expand regional innovation-promotion through state-
        level grants to fund activities like technology 
        commercialization and entrepreneurial support.

          Encourage technology adoption by assisting small and 
        mid-sized firms in taking on existing processes and 
        organizational forms that they do not currently use.

          Support regional industry clusters with grants for 
        cluster development.

          Emphasize performance and accountability by measuring 
        and researching innovation, productivity, and the value-added 
        to firms from NIF assistance.

          Champion innovation to promote innovation policy 
        within the Federal Government and serve as an expert resource 
        on innovation to other agencies.

    By doing these things, NIF would address quite robustly each of the 
major flaws that weaken current Federal U.S. innovation policy. We 
recognize that in the current fiscal climate it will be difficult for 
the Federal Government to launch major new investment initiatives, 
especially since strong political forces on either side of the aisle 
oppose raising taxes or cutting spending. Nevertheless, the compelling 
need to boost innovation and productivity merits a substantial 
investment in NIF. We propose that the Federal Government fund NIF at 
an initial level of $1 billion per year (with around $350 million 
coming from several programs that would be consolidated into NIF), 
ramping up to $2 billion after several years. At $2 billion, NIF's 
budget would be approximately one-third the size of NSF's. In addition, 
because of its strong leveraging requirements from the private sector 
and state governments, NIF would indirectly be responsible for ensuring 
that states and firms spend at least one dollar on innovation for every 
dollar NIF spent.

7. Federal Institutional Reforms to Spur Innovation

    Innovation policy is not just about tax incentives or funding for 
government programs. It is about a wide array of government actions 
that can have an impact on innovation. But currently, the institutional 
ability of the Federal Government to strategically and comprehensively 
spur innovation is more limited than it needs to be. To remedy that we 
propose two recommendations:

7a) Form an Office of Innovation Policy in OMB (i.e., an Office of 
                    Information and Regulatory Affairs for Innovation) 
                    \98\

    The relative absence of innovation from the agenda of many relevant 
Federal agencies--as well as interagency processes such as the 
centralized cost-benefit review performed by the Office of Information 
and Regulatory Affairs (OIRA) within the Office of Management and 
Budget (OMB)--manifests the confluence of two regulatory challenges: 
first, the tendency of political actors to focus on short-term goals 
and consequences; and second, political actors' reluctance to threaten 
powerful incumbent actors. Courts, meanwhile, lack sufficient expertise 
and the ability to conduct the type of forward-looking policy planning 
that should be a hallmark of innovation policy.
    7b) To remedy these problems, Congress should create a White House 
Office of Innovation Policy that would have the specific mission of 
being the ``innovation champion'' within these processes. OIP would be 
an entity that would be independent of existing Federal agencies and 
that would have more than mere hortatory influence. It would have some 
authority to push agencies to act in a manner that either affirmatively 
promoted innovation or achieved a particular regulatory objective in a 
manner least damaging to innovation. OIP would operate efficiently by 
drawing upon, and feeding into, existing interagency processes within 
OIRA and other relevant White House offices (e.g., the Office of 
Science and Technology Policy). It is important to note that OIP would 
not be designed to thwart Federal regulation; as a matter of fact, in 
some cases, the existence of OIP might lead to increased Federal 
regulation (e.g., more Environmental Protection Agency regulations 
might pass muster under cost-benefit analysis if innovation-related 
effects were calculated).
    Some might question the significance of this proposal. Isn't 
creating an OIP a fairly small change to the system? Certainly adding 
OIP to the existing mix is a smaller change than jettisoning the 
existing substantive agencies in favor of a new agency with authority 
to regulate, and promote, innovation across all government agencies. 
But implementing this proposal will significantly change the regulatory 
environment. First, an entity focused on innovation would add an 
important new voice to the regulatory conversation. There would now be 
an entity speaking clearly and forthrightly on the centrality of 
innovation. Second, and more important, OIP would not merely have a 
voice: it would be able to remand agency actions that harm innovation. 
It would also have as part of its mission proposing regulation that 
benefits innovation. This is no small matter. Indeed, it would change 
the regulatory playing field overnight.
    To those who might oppose an OIP on the grounds that making 
predictions about the future is very difficult and that experts are 
often wrong when they make such predictions, our response is 
straightforward: Agencies are already making predictions about the 
future (whether consciously or not) when they make laws that affect 
innovation. They are simply doing so in a manner that is unsystematic, 
haphazard, and subject to undue influence by well-funded incumbents. We 
can do better.

Conclusion

    For over half a century, the United States led the world in 
innovation on a per-GDP and per-capita basis. This leadership role not 
only enabled America to be the leading military power, it enabled us to 
be the leading economic power, with the resultant economic and social 
benefits that came with that. But now more than ever, the American 
standard of living depends on innovation: To be sure, companies are the 
engines of innovation and the United States has an outstanding market 
environment to fuel those engines. Yet firms and markets do not operate 
in a vacuum. By themselves they do not produce the level of innovation 
and productivity that a perfectly functioning market would. Even 
indirect public support of innovation in the form of basic research 
funding, R&D tax credits, and a strong patenting system, important as 
they are, are not enough to remedy the market failures from which the 
American innovation process suffers.
    At a time when America's historic lead in innovation has evaporated 
and its relative innovation competitiveness continues to shrink, when 
more and more high-productivity industries are in play globally, and 
when other nations are using explicit public policies to foster 
innovation, the United States cannot afford to remain complacent. 
Relying solely on firms acting on their own will increasingly cause the 
United States to lose out in the global competition for high-value 
added technology and knowledge-intensive production. Congress has an 
opportunity to take steps now to stop and reverse this slide, but only 
if it adopts the kinds of policies and makes the kinds of investments 
needed to help firms in the--United States do a better job of driving 
innovation here at home.

Endnotes:

    \1\ Elhanan Helpman, The Mystery of Economic Growth (Cambridge, 
Massachusetts: Belknap Press, 2004).
    \2\ This is not to say that these nations have not developed some 
technology-based jobs. It is to say that relative to the rest of their 
economies, technology jobs will be a much smaller share than is the 
case in the United States. For an analysis of how, because of very low 
wages, China is specializing in manual assembly production, see Thomas 
Hout and Jean Lebreton, ``The Real Contest Between America and China,'' 
Asian Wall Street Journal, September 16, 2003.
    \3\ Ronald J. Oakley, God's Country: America in the Flies, (New 
York: Red Dembner Enterprises, 1986), 239.
    \4\ Joseph Schumpeter, Capitalism, Socialism and Democracy (New 
York: George Allen & Unwin Ltd.,1975), 132.
    \5\ Total private industrial research and development expenditures 
as a share of GDP grew 28 times from 1920 to 1960 (0.07 percent to 2.0 
percent). By the mid-1950s, over 3,000 companies had R&D facilities. 
Public and private R&D expenditures grew from $3.6 billion in 1940 to 
$23 billion in 1967 (in constant dollars). See http://www.nsf.gov/sbe/
srs/seind00/c1/tt01-03.htm.
    \6\ The process was the same with scientists. The 1900 census had 
only two scientific occupations: chemical assayers and metallurgists.
    \7\ Under the census categories, `inventor' was a separate 
occupation since 1900, but was downgraded to a title within 
professional workers not elsewhere classified in 1940.
    \8\ Robert D. Atkinson, ``The Globalization of R&D and Innovation: 
How Do Companies Choose Where to Build R&D Facilities?'' October 4, 
2007, Testimony to the House Science Committee, http://www.itif.org/
index.php?id=102; Richard Rosenbloom and William J. Spencer. Eds. 
Engines of Innovation: U.S. Industrial Research at the End of an Era 
(Boston, Massachusetts: Harvard Business School Press, 1996).
    \9\ Richard Florida, ``The World is Spiky,'' Atlantic Monthly, 
October 2005, 48-51, http://www.isites.harvard.edu/fs/docs/
icb.topic30774.files/2-2-Florida.pdf.
    \10\ Pre-competitive research is defined as everything before the 
development of a saleable prototype.
    \11\ Raymond E. Corey, Technology Fountainheads: The Management 
Challenge of R&D Consortia (Boston: Harvard Business School Press, 
1997); Andrew P. Cortell, Mediating Globalization: Domestic 
Institutions and Industrial Policies in the United States and Britain 
(Albany, New York: SUNY Press, 1997).
    \12\ Robert D. Atkinson et. al, ``Addressing the STEM Challenge by 
Expanding Specialty Math and Science High Schools,'' Information 
Technology and Innovation Foundation, March 2007, http://www.itif.org/
publications/addressing-stem-challenge-expanding-specialty-math-and-
science-high-schools.
    \13\ Authors' analysis of data on scientific articles from National 
Science Foundation, ``Science and Engineering Indicators 2008,'' 
National Science Foundation, 2008, Appendix Table 5-34; population data 
from the World Bank World Development Indicators database.
    \14\ Organization for Economic Co-operation and Development, OECD 
Science, Technology and Industry Scoreboard 2007, http://
ocde.p4.siteinternet.com/publications/doifiles/922007081
P1G2.xls.
    \15\ Organization for Economic Co-operation and Development, OCED 
S&T and Industry Outlook, 2004.
    \16\ Organization for Economic Co-operation and Development, OECD 
Science, Technology and Industry Scoreboard 2005, 2005.
    \17\ U.S. Bureau of Economic Analysis, ``U.S. Current-Account 
Deficit Increases in 2006,'' News Release, March 14, 2007, www.bea.gov/
newsreleases/international/transactions/2007/pdf/
transannua106-fax.pdf.
    \18\ ``Science and Engineering Indicators: 2010,'' National Science 
Foundation, 2010, http://www.nsf.gov/statistics/seindl0/cO/cOs3.htm.
    \19\ Booz Allen Hamilton and INSEAD, ``Innovation: Is Global the 
Way Forward?'' (n.p.: Booz Allen Hamilton, 2006), 3.
    \20\ U.S. Bureau of Economic Analysis, ``Real Value-Added by 
Industry.''
    \21\ While venture capital in the United States more than doubled 
from $113 billion in 1996 to $26.4 billion in 2006, the amount invested 
in startup- and seed- stage deals fell from $1.3 billion to $1.1 
billion. The amount invested in early-stage deals rose from $2.8 
billion to $4.0 billion between 1996 and 2006, but the early-stage 
share of total venture funding fell from about 25 percent to about 15 
percent. Similarly the number of startup- and seed-stage deals fell 
from 504 to 342; the number of early-stage deals rose from 762 to 918, 
but this represented a relative decline from about 30 percent to about 
25 percent of all deals. Authors' analysis of 2006 data from 
PricewaterhouseCoopers/National Venture Capital Association MoneyTree 
Report, available at  https://www.pwcmoneytree.com/MTPublic/ns/nav/
jsp?page=historical.
    \22\ Titus Galama and James Hosek, U.S. Competitiveness in Science 
and Technology (Santa Monica, California: RAND Corporation, 2008), 67.
    \23\ Organization for Economic Co-operation and Development, OECD 
Science Technology and Industry Scoreboard 2005.
    \24\ Organization for Economic Co-operation and Development, OECD 
Science, Technology, and Industry Scoreboard 2007, 2007, http://
oecd.p4.siteinternet.com/publications/doifiles/922007081PIG2.xls.
    \25\ Norman Augustine, Is America Falling Off the Flat Earth? 
(Washington: National Academies Press, 2006), 53.
    \26\ Jeffrey L. Furman and Richard Hayes, ``Catching up or standing 
still? National innovative productivity among `follower' countries, 
1978-1999,'' Research Policy 33 (2004): 1329-1354.
    \27\ See Abe Tadahiko, ``What is Service Science?'' Research Report 
246, Fujitsu Research Center, Tokyo, Japan, December 2005. The America 
COMPETES Act calls for a National Academy of Sciences study of service 
science (a useful first step) but does not create any means for the 
Federal Government to advance this discipline or diffuse its findings 
to foster innovation in services. See America COMPETES Act, section 
1005, P.L. 110-69, 121 Stat. 593 (2007).
    \28\ Issues of the State Science and Technology Institute's Weekly 
Digest provides examples (www.ssti.org).
    \29\ In this context, ``civilian'' means non-defense-focused 
technology and innovation promotion agencies focusing on private sector 
and non-defense public sector technology and innovation funding and 
support.
    \30\ Information about foreign technology and innovation-promotion 
agencies is from the following sources: Denmark-Danish Technological 
Institute Web site, www.danishtechnology.dk; Finland--Tekes Web site, 
www.tekes.fi/eng, and personal communication with Peter Westerstrahle 
of Tekes; France--OECD Reviews of Innovation Policy: France (Paris: 
Organization for Economic Cooperation and Development, 2006); Iceland--
Technological Institute of Iceland Web site, www.iti.is/english; 
Ireland--Enterprise Ireland Web site, www.enterprise-ireland.com; 
Japan--NEDO Web site, www.nedo.go.jp/english, and personal 
communication with Hideo Shindo of NEDO; Netherlands--TNO Web site, 
www.tno.nl/index.cfm?Taal=2; New Zealand--New Zealand Trade and 
Enterprise Web site, www.nzte.govt.nz; Norway--Innovation Norway Web 
site, www.innovasjonnorge.no; South Korea--Korea Industrial Technology 
Foundation Web site, http://lenglish.kotef.or.kr; Spain--CDTI Web site 
www.cdti.es/index.asp?idioma=es&r-1024*768; Sweden-Vinnova Web site, 
www.vnnova.se/misc/menyer-och-funktioner/Global-meny/In-English; 
Switzerland-CTI Web site, www.bbt.admin.ch/kti/index.html?lang=en; 
United Kingdom Technology Strategy Board Web site, www.dti.gov.uk/
innovation/technologystrategyboard.
    \31\ It is difficult to obtain information on actual results. 
However, discussions with government officials suggest that overall, 
the programs have been successful. Moreover, agencies work to improve 
performance. For instance, Tekes conducts regular evaluations of 
specific programs. An example of such an evaluation may be found at 
http://www.tekes.fi/julkaisut/FENIX-arviointi.pdf (in 
Finnish, with English summary).
    \32\ Technology Strategy Board Web site, www.dti.gov.uk/innovation/
technologystrategyboard/page40223.html.
    \33\ Tekes Web site, http://tekes.fi/eng/contact/personnel/
hallitus.htm.
    \34\ Technology Strategy Board Web site, www.dti.gov.uk/innovation/
technologystrategyboard/page40218.html.
    \35\ United Kingdom Cabinet Office, ``Public Bodies: A Guide for 
Departments,'' (June 2006).
    \36\ Expenditures for Finland, Sweden, Japan and South Korea are 
based on personal correspondence between the authors and 
representatives of the respective nations' innovation-promotion 
agencies. Inference for the United States is from the authors' 
analysis.
    \37\ Testimony of Don Hillebrand, Ph.D., Director, Center of 
National Transportation Research at Argonne National Laboratory, to 
House Appropriations Subcommittee on Energy and Water Development, 
February 14, 2008.
    \38\ Auto Industry UK, ``Germany invests =420M in lithium-ion 
battery development,'' May 13, 2008, http://www.autoindustry.co.uk/
news/13-05-08-2.
    \39\ Forfas, Service Innovation in Ireland--Options for Innovation 
Policy, (Dublin, Ireland: Forfas, September 2006), 10, http://
www.forfas.ie/media/forfas060928-services-
innovation-full-report.pdf.
    \40\ =100 million converted into $120 million according to exchange 
rates at the time. (=100 million converts to $135 million in today's 
dollars.)
    \41\ Tekes, the Finnish Funding Agency for Technology and 
Innovation, = (Helsinki, Finland: Tekes, 2006).
    \42\ While this is a small sampling, a comprehensive inventory of 
European services innovation policies is available via the European 
Innovation Policy Project in Services available at http://www.europe-
innova.org/serv/et/Doc?cid=9268≶=EN.
    \43\ Robert D. Atkinson, ``Expanding the R&D Tax Credit to Drive 
Innovation, Competitiveness and Prosperity,'' Information Technology 
and Innovation Foundation, April 2007, http://www.itif.org/node/1280.
    \44\ Bronwyn Hall and John van Reenen, ``How Effective Are Fiscal 
Incentives for R&D? A Review of the Evidence,'' Research Policy 29 
(2000): 449-469.
    \45\ Dominique Guellec and Bruno van Pottelsberghe de la Potterie, 
``Does Government Support Stimulate Private R&D?'' OECD Economic 
Studies 29 (1997).
    \46\ In fact, government support declined significantly over this 
period and as a result, the United States was one of the few nations 
where the share of R&D-to-GDP ratio fell between 1991 and 2002.
    \47\ Martin Falk, ``What Drives Business R&D Intensity Across OECD 
Countries?'' Paper Presented at the DRUID 10th Anniversary Summer 
Conference, Copenhagen, Denmark (June 27-29, 2005).
    \48\ In 1985, the rate was reduced from 25 to 20 percent, and other 
restrictions (such as the 50 percent rule and the recapture of benefits 
through reductions in expensing) were put in place in the late 1980s.
    \49\ K.C. Whang, A Guide to the Research Tax Credit: Why We Have 
It, How It Works, and How It Can Be Improved (Washington, DC: U.S. 
Congress, Working Paper Series, Offered to the Joint Economic Committee 
Minority, Dec. 1998).
    \50\ Robert Atkinson and Scott Andes, ``U.S. Continues to Tread 
Water in Global R&D Tax Incentives,'' Information Technology and 
Innovation Foundation, 2009, http://www.itif.org/filesJWM-2009-03-
rd.pdf.
    \51\ David M. Hart, ``Global Flows of Talent: Benchmarking the 
United States,'' Information Technology and Innovation Foundation, 
November 2006, 12, http://www.itif.org/files/Hart-
GlobalFlowsofTalent.pdf.
    \52\ Australian data are drawn from the Australian Department of 
Immigration and Multicultural Affairs (DIMA) annual Immigration Update, 
http://www.immi.gov.au/media/publications/statistics/. New Zealand data 
are drawn from OECD, SOPEMI 2006, 303-304. Canadian data are drawn from 
Citizenship and Immigration Canada annual Facts and Figures, accessible 
at http://www.cic.gc.ca/english/research/menu-fact.html. All figures 
are for principal applicants only.
    \53\ However, the 65,000 cap doesn't apply to all countries. For 
example the United States-South Korea Free Trade Agreement allows for a 
higher number of H-1B visa applicants from South Korea.
    \54\ Gregory Tassey, ``Rationales and Mechanisms for Revitalizing 
U.S. Manufacturing R&D Strategies,'' December 2009, forthcoming in 
Journal of Technology Transfer, June 2010.
    \55\ Elvio Accinelli, Silvia London, and Edgar J. Sanchez Carrera, 
``Complimentarity and Imitative Behavior in the Populations of Firms 
and Workers,'' 2008, http://www.ssrn.com/abstract=1136323, (accessed on 
February 28, 2008).
    \56\ See Charles I. Jones and John Williams, ``Measuring the Social 
Return to R&D,'' Quarterly Journal of Economics 113 (1998): 1119-1135; 
Edwin Mansfield, ``Social Returns from R&D: Findings, Methods, and 
Limitations,'' Research Technology Management 34 (1991): 24-27; Eric 
Brynjolfsson, Lauren Hitt, and Shinkyu Yang, ``Intangible Assets: How 
the Interaction of Information Technology and Organizational Structure 
Affects Stock Market Valuations,'' Brookings Papers on Economic 
Activity 1, (2000): 137-199.
    \57\ On the conflict between firms' desires to appropriate 
university research capacity and universities' broader social and 
economic role in promoting the free flow of knowledge, see Richard K. 
Lester and Michael J. Piore, Innovation: The Missing Dimension 
(Cambridge: Harvard University Press, 2004).
    \58\ Daniel Castro, ``Improving Health Care: Why a Dose of IT May 
Be Just What the Doctor Ordered,'' Information Technology and 
Innovation Foundation, 2007, http://www.itif.org/node/1238.
    \59\ Shane Ham and Robert Atkinson, ``Modernizing Home Buying: How 
IT Can Empower Individuals, Slash Costs, and Transform the Real Estate 
Industry,'' Progressive Policy Institute, 2003.
    \60\ Barry LePatner, Broken Buildings, Busted Budgets: How to Fix 
America's Trillion-Dollar Construction Industry (Chicago: University of 
Chicago Press, 2007).
    \61\ For a comprehensive overview of the causes and consequences of 
geographic industry clustering, see Joseph Cortright, Making Sense of 
Clusters: Regional Competitiveness and Economic Development 
(Washington: Brookings Institution, 2006). On the geographic clustering 
of innovation and the special importance of large metropolitan areas 
for innovation, see Andrew Reamer with Larry Icerman and Jan Youtie, 
Technology Transfer and Commercialization: Their Role in Economic 
Development (Washington: U.S. Department of Commerce, Economic 
Development Administration, 2003), 57-110.
    \62\ The authors' analysis of Bureau of Economic Analysis data on 
value added and employment at the national level and Economy.com data 
on the geographic distribution of industry employment shows that, for 
the 17 nongovernmental industry supersectors other than real estate 
(accommodation and food services; administrative and waste management 
services; arts, entertainment, and recreation; construction; 
educational services; finance and insurance; health care and social 
assistance; information; management of companies and enterprises; 
manufacturing; mining; other services; professional, scientific, and 
technical services; retail trade; transportation and warehousing; 
utilities; and wholesale trade), the cross-industry correlation between 
an industry's Herfindahl index of employment concentration at the 
county or metropolitan level (a measure of the extent to which an 
industry is geographically concentrated rather than spread out evenly 
across the nation) at the beginning of the business cycle and the 
growth of inflation-adjusted value added per job in the industry over 
the course of the business cycle increased over the course of the 1979-
89, 1989 2000, and 2000-05 periods. (Business cycles here are 
approximated by periods that begin and end in the last pre-recession 
year. The most recent period ends in 2005 because of data limitations.) 
At the county level, the correlation coefficient rose from ^0.18 in 
1979-89 to ^0.07 on 1989-2000 to 0.36 in 2000-05. At the metropolitan 
level, it rose from ^0.12 in 1979-89 to 0.00 in 1989-2000 to 0.15 in 
2000-05.
    \63\ For a detailed treatment of this issue in the context of 
international trade, see Ralph Gornory and William J. Baumol, ^ 
(Cambridge, Massachusetts: MIT Press, 2000).
    \64\ Dani Rodrik, ``Industrial Policy for the Twenty-First 
Century,'' Kennedy School of Government Working Paper, Harvard 
University, 2004, 38.
    \65\ Dan Breznitz, Innovation and the State (New Haven, 
Connecticut: Yale University Press, 2007), 29.
    \66\ Annual U.S. trade deficits have subsequently shrunk somewhat, 
to $731.2 billion in 2007 and to $673.3 billion in 2008; however, these 
annual trade deficits are still extremely high.
    \67\ ``S.1466: Trade Enforcement Act of 2009,'' Govtrack.us, 13, 
http://www.govtrack.us/congress/bill.xpd?bill=s111-1466. See also 
Robert Atkinson, ``Combating Unfair Trade Practices in the Innovation 
Economy,'' Testimony before the Committee on Finance, United States 
Senate, May 22, 2008, http://www.itif.org/files/
atkinsonfinancecommitteetestimony.pdf.
    \68\ Robert D. Atkinson et. al, ``Addressing the STEM Challenge by 
Expanding Specialty Math and Science High Schools.''
    \69\ Many MSHS students are able to take these extra courses by 
taking regular education graduation requirements such as Economics, 
American Government, Physical Fitness, and Health online at the Florida 
Virtual High School.
    \70\ Source for national figures are: U.S. Department of Education, 
National Center for Education Statistics, ``Digest of Education 
Statistics,'' Table 18, http://nces.ed.gov/programs/digest/d05/tables/
dtO5-181.asp, and U.S. Department of Education, National 
Center for Education Statistics, ``2000101 Baccalaureate and Beyond 
Longitudinal Study,'' http://nces.ed.gov/das/library/
tables-listings/show-nedre.asp?rt=p&tableID=1378.
    \71\ Some of the expansion would come from construction and 
creation of new MSHSs. Costs for building such a high school can range 
from around $11 million (for rehabilitating an existing building) to 
over $50 million for constructing a new MSHS in an area where land 
prices are more expensive. Some expansion of enrollment would come from 
expanding existing high schools, where the price would presumably be 
less. However, even at these schools the costs can be higher, 
particularly for more extensive laboratory equipment. Overall these 
funds will be used as an incentive to spur states and local school 
districts to create more specialty math and science high schools.
    \72\ Richard Freeman, ``Investing in the Best and the Brightest: 
Increased Fellowship Support for American Scientists and Engineers,'' 
The Brookings Institute, 2006, http://www.brookings.edu/views/papers/
200612freeman.pdf.
    \73\ Established in the early years of NSF, the program provides 
the nation's most promising graduate students with great flexibility in 
selecting the university of their choice and gives them the 
intellectual independence to follow their research ideas unfettered by 
the exigencies of mode of support.
    \74\ Donald Wulff, Ann Nquiest, and Jo Sprague, ``The Development 
of Graduate Students as Teaching Scholars: A four-year longitudinal 
study,'' in Paths to the professoriate: Strategies for enriching the 
preparation of future faculty, ed. Donald Wulff and Ann Austin (San 
Francisco: University of Chicago Press, 2006); Chris Golde and Timothy 
Dore, ``At Cross Purposes: What the experiences of today's doctoral 
students reveal about doctoral education,'' Pew Charitable Trusts, 
2001, http://www.phd-survey.org/report%20final.pdf.
    \75\ Jody Nyquist , BJ Woodford , and Dale Rogers, ``Re-envisioning 
the Ph.D.: A challenge for the twenty-first century,'' in Paths to the 
professoriate: Strategies for enriching the preparation of future 
faculty, ed. Donald Wulff and Ann Austin (San Francisco: University of 
Chicago Press, 2006).
    \76\ Chris Golde and Timothy Dore, ``At Cross Purposes: What the 
experiences of today's doctoral students reveal about doctoral 
education.''
    \77\ Steven Campbell, Angela Fuller and David Patrick, ``Looking 
beyond research in doctoral education,'' Frontiers in Ecology and the 
Environment, 3, no. 3, (2005), http://www.biology.duke.edu/jackson/
ecophys/153-160-ESA-April05.pdf
    \78\ Moreover, research suggests that there is little difference in 
ethical behavior by faculty whether they are funded by industry or 
government; see Brian Martison, Lauren Crain, Melissa Anderson, and 
Raymond De Vries, ``Institutions' Expectations for Researchers' Self 
Funding, Federal Grant Holding, and Private Industry Involvement: 
Manifold Drivers of Self-Interest and Research Behavior,'' Academic 
Medicine, 84, no. 11 (2009).
    \79\ Government Accountability Office, ``Streamlined Visas Mantis 
Program Has Lowered Burden,'' GAO 05-198, February 2005, http://
www.gao.gov/new.items/d05198.pdf
    \80\ David Hart, ``Global Flows of Talent: Benchmarking the United 
States.''
    \81\ U.S. Small Business Administration, ``Description of the Small 
Business Technology Transfer Program,'' STIR, http://www.sba.gov/
aboutsba/sbaprograms/sbir/sbirstir/
SBIR-STTR-DESCRIPTION.html.
    \82\ Dan Berglund, State Science and Technology Institute, in-
person interview with Rob Atkinson, January, 2010.
    \83\ Connecticut's Yankee Ingenuity program and Pennsylvania's Ben 
Franklin Technology Partners program work in a similar manner. See 
Yankee Ingenuity Competition, http://www.ctinnovations.corn/funding/
ccef/yankee.php and Ben Franklin Technology Partners, http://
www.benfranklin.org/about/index.asp.
    \84\ The Great Lakes Entrepreneur's Quest, a program in Michigan, 
is similar. Its organizers represent Michigan's entrepreneurial 
community: academics, investors, lawyers, CPAs, corporate executives 
and other entrepreneurs. Program gives competitors a chance to win seed 
capital and valuable services (e.g., legal, accounting, and consulting) 
and provides other opportunities to help entrepreneurs launch or grow a 
business.
    \85\ This kind of assistance to states with unsuccessful proposals 
is based on similar assistance that JumpStart, a nonprofit pre-venture 
capital fund in the Cleveland area, and Adena Ventures, an Athens, OH-
based venture capital firm, provide to applicants whose proposals are 
not yet fundable. See www.jumpstartinc.org/Process/Assist.aspx and 
www.adenaventures.com/serviceprograrns/opsassist.aspx.
    \86\ Jane E. Fountain and Robert D. Atkinson, Innovation, Social 
Capital, and the New Economy: New Federal Policies to Support 
Collaborative Research, Progressive Policy Institute, July 1998, http:/
/www.ppionline.org/ppi-ci.cfxn?knlgAreaID=140&subseclD=293 
&contentID=1371.
    \87\ L. Branstetter and M. Sakakibara, ``Japanese Research 
Consortia: A Microeconometric Analysis of Industrial Policy,'' Journal 
of Industrial Economics, 46 (1998): 207-233.
    \88\ For example, spillovers from company-funded basic research are 
very high--over 150 percent according to one study: Albert Link, 
``Basic Research and Productivity Increase in Manufacturing: Additional 
Evidence,'' The American Economic Review, 71, no. 5 (Dec. 1981): 1111-
1112.
    \89\ According to NSF, industrial R&D support to U.S. universities 
and colleges in current dollars reached its peak in 2001 and has 
declined every year since then (to 2004). The share of academic R&D 
provided by industry peaked in 1999 and has declined every year since. 
See Alan I. Rapoport, ``Where Has the Money Gone? Declining Industrial 
Support of Academic R&D,'' National Science Foundation, Division of 
Science Resources Statistics, September 2006, http://www.nsf.gov/
statistics/infbrief/nsf06328/.
    \90\ Barry Bozeman and Albert N. Link, ``Tax Incentives for R&D: A 
Critical Evaluation,'' Research Policy 13, no. 1 (1984): 21-31.
    \91\ Denmark looks to promote public and private co-operation in 
R&D by having a 150 percent deduction of investments co-financed by a 
public university or research institute and the industry.
    \92\ Jacek Warda, ``Tax Treatment of Investment in Intellectual 
Assets: An International Comparison,'' OECD Science, Technology and 
Industry Working Papers, 4, 2006, Appendix 1.1.
    \93\ Expenditures firms make to outside organizations are treated 
two ways. Qualified expenses cover just 65 percent of payments for 
contract research, unless the payments are to a qualified non-profit 
research consortium at which point the company can count 75 percent of 
the payments as qualified expenses. However, firms contracting with 
certain nonprofit organizations (e.g. universities) to perform basic 
research may claim a credit of 20 percent.
    \94\ The 109th Senate considered versions of HR.4297 (Thomas, (R-
CA)), S.14 (Stabenow (D-MI)), S.2199 (Domenici (R-NM)), and S.2357 
(Kennedy (D-MA)). S.2357 would institute a flat credit for payments to 
qualified research consortia.
    \95\ Donald Stokes, ``Pasteur's Quadrant,'' Brookings Institution, 
1997.
    \96\ See the Focus Center Program, http://fcrp.src.org/member/
about/about-centers.asp.
    \97\ Robert Atkinson and Howard Wial, ``Boosting Productivity, 
Innovation, and Growth Through a National Innovation Foundation,'' 
Information Technology and Innovation Foundation and The Brookings 
Institution, April 2008, http://www.itiF.org/publications/boosting-
productivity-innovation-and-growth-through-national-innovation-
foundation.
    \98\ This is based on a report by Stuart Benjamin and Arti Rae, 
``Structuring U.S. Innovation Policy: Creating a White House Office of 
Innovation Policy,'' Information Technology and Innovation Foundation, 
June 2009, http://www.itif.org/files/
WhiteHouse-Innovation.pdf.

                    Biography for Robert D. Atkinson



    Robert Atkinson is the founder and president of the Information 
Technology and Innovation Foundation, a Washington, DC-based technology 
policy think tank. He is also author of the State New Economy Index 
series and the book, The Past And Future Of America's Economy: Long 
Waves Of Innovation That Power Cycles Of Growth (Edward Elgar, 2005). 
He has an extensive background in technology policy, he has conducted 
ground-breaking research projects on technology and innovation, is a 
valued adviser to state and national policy makers, and a popular 
speaker on innovation policy nationally and internationally.
    Before coming to ITIF, Dr. Atkinson was Vice President of the 
Progressive Policy Institute and Director of PPI's Technology & New 
Economy Project. While at PPI he wrote numerous research reports on 
technology and innovation policy, including on issues such as broadband 
telecommunications, Internet telephony, universal service, e-commerce, 
e-government, middleman opposition to e-commerce, privacy, copyright, 
RFID and smart cards, the role of IT in homeland security, the R&D tax 
credit, offshoring, and growth economics.
    Previously Dr. Atkinson served as the first Executive Director of 
the Rhode Island Economic Policy Council, a public-private partnership 
including as members the Governor, legislative leaders, and corporate 
and labor leaders. As head of RIEPC, he was responsible for drafting a 
comprehensive economic strategic development plan for the state, 
developing a ten-point economic development plan, and working to 
successfully implement all ten proposals through the legislative and 
administrative branches. Prior to that he was Project Director at the 
former Congressional Office of Technology Assessment. While at OTA, he 
directed The Technological Reshaping of Metropolitan America, a seminal 
report examining the impact of the information technology revolution on 
America's urban areas.
    He is a board member or advisory council member of the Alliance for 
Public Technology, Internet Education Foundation, NetChoice Coalition, 
the Pacific Institute for Workforce Innovation, and the University of 
Oregon Institute for Policy Research and Innovation. He is also chair 
of the Congressionally-created National Surface Transportation 
Infrastructure Financing Commission. He also serves on the advisory 
panel to Americans for Computer Privacy, is an affiliated expert for 
the New Millennium Research Council, a member of the editorial board of 
the Journal of Electronic Government and the Journal of Internet 
Policy, a member of the Reason Foundation's Mobility Project Advisory 
Board, a member of the Global Innovation Forum Brain Trust and a 
Nonresident Senior Fellow at the Brookings Institution. Dr. Atkinson 
was appointed by President Clinton to the Commission on Workers, 
Communities, and Economic Change in the New Economy. He is also a 
member of the Task Force on National Security in the Information Age, 
co-chaired by Markle Foundation president Zoe Baird and former Netscape 
Communications chairman James Barksdale. In 1999, he was featured in 
``Who's Who in America: Finance and Industry.'' In 2002, he was awarded 
the Wharton Infosys Business Transformation Award Silver Medal. In 
addition, Government Technology Magazine and the Center for Digital 
Government named him one of the 25 top Doers, Dreamers and Drivers of 
Information Technology. In 2006, Inc. Magazine listed Atkinson as one 
of 19 Friends of Small Business in Washington. Ars Technica listed 
Atkinson as one of 2009's tech policy People to Watch. Dr. Atkinson has 
testified before a number of committees in Congress and has appeared in 
various media outlets including CNN, Fox News, MSNBC, NPR, and NBC 
Nightly News. He received his Ph.D. in City and Regional Planning from 
the University of North Carolina at Chapel Hill in 1989.

    Chairman Wu. Thank you very much, Dr. Atkinson.
    Dr. Breznitz, please proceed.

  STATEMENT OF DR. DAN BREZNITZ, ASSOCIATE PROFESSOR, THE SAM 
  NUNN SCHOOL OF INTERNATIONAL AFFAIRS, GEORGIA INSTITUTE OF 
                           TECHNOLOGY

    Dr. Breznitz. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to take part in this hearing. In 
this testimony, I hope to do three things: clarify some 
baseline points with regards to innovation policy, give an 
example of successful foreign innovation policy, its negative 
and positive consequences, conclude by sketching the need for 
the United States to concentrate on all three roles government 
can play in stimulating more innovation, and urge for new 
Federal-state partnerships.
    There are some baseline points to be made when discussing 
innovation policy. Stimulating and promoting innovation is a 
critical role of government and is a very different strategic 
exercise from promoting specific industries, sectors, or even 
skills. Good innovation policies need to allow experimentation 
and change. In order to promote innovation, there is a need to 
balance with different interests of the public represented by 
the elected government and the private actors who are going to 
be the major agents of innovation in our country.
    Two key strategic constraints: When you talk about 
innovation-based growth, it calls for a different logic of 
policies. You have undefined markets and undefined products. 
You basically aim to come up with new technologies and new 
products which you don't know what they are. It is a very 
different exercise when trying to restructure the car industry 
where we know what cars are, we know what the troubles are, we 
know what the markets are, and we have a pretty good idea of 
how to make better cars and what skills we need. When we think 
about the ideal kind of innovation policy, we aim to equip the 
economy with agents of change that are stimulated for action in 
ways we cannot yet foresee.
    Second, production is now globally fragmented. Activities, 
not whole industries, are clustered in specific nations and we 
have to take that into account if we want to understand how our 
innovation activities are going to impact job growth in this 
country. Government needs to make innovation less risky and 
more rewarding for entrepreneurs in order to maximize 
innovating activities. It also needs to ensure positive global-
local interconnection in order to maximize our national 
spillovers. The ways in which different countries have 
successfully done this have led to very diverse national 
industries with different outcomes in terms of economic 
distribution as well as the current and future challenges each 
of those models have.
    To optimize the impact of a public funding of innovation, 
governments need to meet three challenges: trust--the need to 
establish trust between government and those private actors and 
we need the private actors themselves; coordination--the need 
to coordinate R&D across different institutional actors; and 
motivation--the need to motivate private actors to innovate in 
a way that contributes to the domestic economy, which is the 
main reason for public funding in the first place.
    Broadly speaking, there are three roles by which government 
successfully supports this: public finance of private 
innovation where, if a government supplies capital to private 
agents who use it to engage in R&D, public production of 
innovation and a facilitator role. Here the main emphasis is on 
the government role in anchoring professional 
interinstitutional networks and more generally on the 
government's role in fostering relations with and between 
private actors. The importance of these facilitating policies 
cannot be overemphasized as government-sponsored networks have 
been shown to be one of the most important factors for creation 
of a favorable environment for radical innovation, and Dr. 
Atkinson just mentioned the semiconductor industry.
    Let me give you the example of Israel. Facing crisis 
starting in 1968 with 886 R&D workers with academic education 
in the whole industrial sector, probably less than what we have 
in this building right now, the government opted to focus on 
what they called science-based industry and concentrated on 
financial and facilitator roles, implementing horizontal R&D 
policy, meaning trying to sponsor R&D activities to novel 
products in all industries, all sectors, and emphasizing the 
conduction of the local and the global, especially with the 
United States, the BIRD [Binational Industrial Research and 
Development] Foundation, which is cosponsored by the U.S. 
government and the Israeli government, and anchoring 
cooperation around innovation. Outcomes have been the great 
success of Israel as the supplier of new technologies and 
products, the largest number of high-tech companies after the 
United States--more than the EU in total--and the challenges, 
however, with industry migrates to the United States, exactly 
the opposite of what we think about in globalization, building 
of sustainable success and major economic inequality, mainly 
because you have a high-tech sector but you have measurable 
positive spillover to the rest of the economy.
    To conclude, innovation policy can significantly enhance 
economic growth and national competitiveness. Innovation 
policies are contact specific and need to evolve in tandem with 
industry. To be successful at implementing innovation policies, 
government needs to be able to engage in all three roles: 
financier, producer and facilitator. In the U.S., much 
attention has been given to the financier role. I argue that 
much more attention needs to be given to the facilitator role, 
and in order to be successful in this, we have to devise new, 
and build upon old, Federal-state partnerships as well as 
public-private partnerships. I think it is time that we apply 
innovation to our own innovation policies.
    Thank you for the hearing.
    [The prepared statement of Dr. Breznitz follows:]
                   Prepared Statement of Dan Breznitz
    Chairman Wu, Ranking Member Smith, and members of the Subcommittee, 
thank you for the opportunity to take part in this hearing. I was 
invited here to talk about innovation for economic growth, and what we 
can learn from the extensive efforts of other nations to excel in this 
domain so we can secure the long-term economic welfare of the American 
people.
    There are some baseline points to be made when discussing 
innovation policy:

        1.  Spurring and promoting innovation is a critical role of 
        government, and is a very different strategic exercise from 
        promoting specific industries, sectors, or even skills.

        2.  Good innovation policy needs to allow experimentation and 
        change as it, and the industries it helps to develop, evolve.

        3.  In order to promote innovation there is a need to balance 
        the different interests of the public, represented by the 
        elected government, and private companies and individuals that 
        will be the major agents of innovation in our country.

    Current U.S. policy debates have been clouded by significant 
misunderstandings in relation to these principles. A careful analysis 
of other nations' efforts to use the tremendous forces of competition 
and entrepreneurship to spur innovation, can help us sort out these 
misunderstandings and improve our innovation policies.
    In this testimony I will:

        1.  Lay out the challenges associated with government efforts 
        to enable innovation.

        2.  Describe three roles a government can take on to support 
        rapid innovation-based growth and illustrate how some other 
        countries have implemented policies to fill these roles.

        3.  Discuss the lessons the U.S. might take from international 
        experiences in innovation policy.

Innovation, growth and the U.S.

    Innovation has been a tremendous force for good. Innovations in 
industry, health, and agriculture have advanced the quality of life of 
the American people to such a degree that today the average American 
child has a much better, more comfortable, luxurious, and healthy life 
than the Emperor of China had in the beginning of the 20th century. 
Thanks to innovation, the world no longer faces imminent hunger, 
diseases that were once both common and fatal are vanquished, and the 
sum set of appliances in an average American home gives its owner the 
ability to do things that were impossible with a regiment of workers 
and scholars just a few generations ago. We might forget, but what we 
now consider as low-tech traditional industries, were, only a few 
decades ago, the cutting edge of high-technology. Indeed, in the 1967 
movie, The Graduate, Mr. McGuire famously said to Benjamin one word 
that embodied the future of industrial innovation: ``Plastics.'' For 
this country to stay a world leader, our children will need to be able 
to react in the same bemused way we do to the idea of plastics as the 
future, when someone in circa 2050 would say: ``Nano-technology.''
    The U.S. has grown to prominence as the place where people with 
vision and drive can become educated, generate novel ideas, and secure 
specialized financing to transform their ideas into superior products 
and services. Furthermore, it was in the U.S. where one could pursue 
that course without its being squashed in infancy by stronger 
corporations, the legal system, or the growing costs of doing business 
and staying independently employed. With each new innovation-based 
revolution--agriculture, steel, electricity, internal combustion 
engine, aviation, space, information technology, and biotechnology--the 
U.S. has led the world, becoming richer and stronger as a result. This 
has been true not only with regard to novel technologies brought to the 
market for the first time, but with regard to new ideas all along the 
production chain. To accomplish this, the United States has developed 
the world's best centers of higher education and research and the 
world's most efficient system for transforming ideas into marketable 
realities. Today, however, in each and every part of this system we 
face increased international competition.

Choices matter

    Contrary to commonly held belief, the current processes of 
intensified globalization give countries a larger number of rapid-
innovation-based economic growth alternatives than they had in the 
past. A general truism today is that both the onslaught of 
international economic forces and the fragmentation of production limit 
the power of governments to set unique courses of successful economic 
growth. And yet, these same conditions have given countries more 
choices of action than ever before, for the increasing complexity and 
openness of the world allow nations that wish to engage with the 
international economic system a far larger number of entry points than 
in any other period. This does not mean that stimulating development 
has become an easier task for government, nor that success, if it is 
achieved, is without cost.

Rapid-Innovation-Based growth--the misunderstood strategic policy 
        implication

    The case of rapid-innovation-based growth presents a variety of 
problems for those who try to understand the role of government. Since 
the main aim is to bring to fruition novel ideas--ideas that cannot be 
known in advance--for products and services that are as yet unimagined, 
we cannot develop policies assuming that we know the markets, the 
products, the industries, the specific skills needed, or how they will 
be combined (Breznitz 2007b). This is not the case of developing or 
restructuring an existing industry, such as the car industry, where the 
products are well understood, and where we have a clear idea of how to 
make them, and a pretty good guess about the capabilities we would need 
to make better vehicles.
    In the case of innovation, the aim of the government is to spur 
agents, some of whom are currently unknown or do not yet exist, to come 
up with novel ideas and transform them into products and services, 
which, as of now, cannot be defined. Accordingly, in its idealized form 
innovation policy aims to equip the economy with agents of change that 
are stimulated for actions in ways we cannot foresee. Furthermore, with 
globalization--that is, the growing fragmentation of production where 
products are produced in discreet stages across many locales--we at 
best have only a limited ability to predict the exact division of labor 
between the local agents and the international economy that would allow 
for the making and sale of these products and services for maximum 
profits. Hence, we need to develop agents (both individuals and 
organizations) that have the capacity to understand science and 
technology as well as the market, and the capability to generate novel 
ideas. In addition, we need to ensure that they work within a system 
that enables them, as smoothly as possible, to transform these ideas 
into products and services to be sold worldwide.
    What we do know, however, is that the inherent characteristics of 
industrial research and development (R&D) would lead, under free 
competitive market conditions, to under-investment in innovation from a 
social optimum point of view (Arrow 1962; Nelson 1959). For this reason 
almost every nation on earth now engages in public funding of 
innovation in an attempt to lower the risk and stimulate more activity. 
Similarly, many nations now try to increase the rewards for innovation 
in the hope of making them more attractive. This is part of the logic 
behind systems, such as the patent system, that grant monopoly rights 
to inventors who come up with ideas that are deemed original. 
Consequently, in our era of globalization governments now need to 
actively engage in two critical domains: i) solutions to the industrial 
R&D market failure; ii) local-global relationships. My research has 
found that different countries successfully solve these issues in very 
different ways, leading to significantly varied outcomes both in the 
scope of activities and in the distribution of the economic fruits of 
success within their societies.
    None of these issues are considered to be outside the mainstream of 
policy and theory. Most scholars and policy makers would fully agree 
that there is a need for public funding of industrial R&D. However, the 
common policy prescription urges government to go no further than 
minimal `market-enhancing' intervention. It is here where the most 
common misunderstandings about innovation policy occur.

Three Challenges

    Once governments commit to funding of industrial R&D, a host of 
issues that are not fully acknowledged in policy debates and theory 
comes into play. Specifically, nations that subsidize industrial R&D 
face three overlapping challenges (Breznitz and Zehavi 2010):

        1.  Trust: the need to establish trust both between public and 
        private actors and among private actors.

        2.  Coordination: the need to coordinate R&D across 
        institutional actors. Both the trust and coordination 
        challenges are closely associated with the overarching goal of 
        establishing cooperation among private and quasi-private 
        actors.

        3.  Motivation: the need to motivate private actors to innovate 
        in ways that contribute to the domestic economy--the prima 
        facie reason for public funding in the first place.

    Trust: The importance of trust for industrial R&D is manifested in 
two different types of relationships: trust between the government and 
private actors and trust among the private actors themselves. The 
`trust' deficit with regard to `government-private' relations is 
associated with the problem of information asymmetries. One of the 
government's main objectives in financing R&D is the creation of new 
industries and the introduction of new activities into the local 
economy. As a consequence, by definition, markets are either 
underdeveloped or not yet in existence. Under these circumstances, the 
government cannot rely on market signals to ensure that: a) its 
investments are used properly; and b) that its policies lead to the 
stated goal of creating new industries and capabilities within the 
national economy. Because governments cannot fully rely on the market 
for information, adherence to a pure financier/provider division might 
create significant information asymmetry problems between the 
government and private firms. Even in the private market it is assumed 
that these problems can never be optimally resolved, and hence, that 
financing of new R&D-based companies is, supposedly, best handled by 
specialized financiers, such as venture capitalists, who use a variety 
of instruments to negate, but can never fully eliminate, these 
information asymmetries.
    Second, as we have learned from the multidisciplinary study of 
innovation in the last few decades, innovation is a collective endeavor 
that necessitates close cooperation among agents if it is to flourish 
and result in long-term economic growth (Antonelli 2000; Carlsson et 
al. 2002; Edquist 1997; Hagedoorn 2002; Kenney 2000; Lester and Piore 
2004; Lundvall 1992; Nelson 1993; Powell et al. 1996). Therefore, for 
public investments in private R&D to deliver sustained economic growth 
there is a need to accommodate close cooperation among firms. However, 
against the backdrop of fully competitive free markets it is to be 
expected that inter-firm collaborations would be laced with suspicion 
and distrust. Balancing cooperation and competition is no simple matter 
even when firms possess complementary knowledge and capabilities. 
Moreover, even in situations in which private firms do choose to 
cooperate, insufficient trust is likely to push partners to restrict 
the scope of cooperation (Li, Eden et al. 2008). Government-facilitated 
cooperation has, over time, successfully engendered trust among 
cooperating private actors. Closely related to this problem, countries 
that rely solely on public funding to stimulate R&D growth might well 
discover, to their dismay, that firms are underutilizing public funding 
because of capacity problems in the private sector (Sustman and Teubal 
1995). This problem is compounded by inter-firm competition that 
engenders distrust and discourages professional cooperation across 
firms. This is a major problem because R&D is a collaborative venture 
in which the interplay of different skills and ideas allows 
professionals to achieve together what would have been well nigh 
impossible on their own. Isolated professionals might well fail to make 
substantial breakthroughs, where the same professionals working in 
cooperation would have had a far better chance.
    Coordination: Meaningful and sustained interaction among diverse 
actors that are separated organizationally, geographically, or both, is 
not a given regardless of concerns regarding trust. The system of 
innovation literature shows that private firms that engage in R&D 
activities cannot operate in an optimal manner without the support of 
an array of other institutions (Carlsson et al. 2002; Edquist 1997; 
Lundvall 1992; Nelson 1993). The development of a high technology 
industry does not happen in an institutional vacuum. Many locales must 
undergo a fair amount of industrial restructuring before the conditions 
are right for high technology growth. For example, dynamic R&D-led 
industries lead to the need to have ever greater flexibility in the 
labor force. This flexibility must be achieved while preventing severe 
political backlash against innovation when it leads to deep crises in 
specific locales. Such a feat, however, can be accomplished only with 
close coordination between private market actors and public actors that 
work together to legitimize and facilitate flexibility-enhancing 
restructuring (McDermott 2007; Ornston and Rehn 2006; Traxler and Unger 
1994).
    Domestically-oriented Motivation: Governments would like private 
actors not only to be motivated to innovate, but to do so in ways that 
would benefit the local economy. Yet there is little assurance that 
this would be the case because private actors' prime need and interest 
is to maximize their personal utility regardless of effect on other 
domestic firms or the geographical locale in which their value-added 
activities take place. These different goals create two distinct 
conflicts of interests between the government, on the one hand, and 
private companies, on the other.
    First, one of the main justifications for public support of 
industrial R&D is the expectation that private R&D would generate 
positive spillovers for the rest of the economy. The government 
therefore aims to maximize local spillovers from its industrial R&D 
investment. However, in their search for profits, companies prefer to 
maximize the appropriability of their R&D outcomes. Private firms do 
their best to create the most competitive R&D possible--certainly a 
public interest--but would also do their utmost to fully appropriate 
its benefits and limit the spillover effects--something that 
governments would like to prevent.
    Second, governments prefer that individuals and firms contribute 
first and foremost locally. But what could motivate private domestic 
actors to stay, or for that matter, return, home? While the government 
hopes to keep as much high value-added business at home, commercial 
firms would relocate abroad if they deem such a move advantageous. The 
traditional economic viewpoint is that, even if commercial firms indeed 
choose to pick up and leave, it is all for the best because the 
reallocation of resources would be more efficient and benefit domestic 
consumers (Krugman and Obstfeld 1991). Nonetheless, the rationale for 
public investment in R&D is specifically to create positive spillover 
at home, and this will not occur if both the R&D and the diffusion of 
its results are conducted abroad as it is more and more the case in our 
globalizing world (Gomory and Baumol 2000).
    The three related problems of trust, coordination and motivation 
are by no means unique to innovation. In the R&D field, however, these 
concerns are accentuated for at least three reasons. First, distrust--
especially among private actors--is likely to be prevalent because of 
the nature of the product and also that of the firms involved. Where 
innovation is at the epicenter, then a firm's advantage is to be found 
primarily in its ability to create new know-how. Transfer of 
information and technology to other firms, and with it a firm's 
competitive advantage, is relatively easy (Lundvall 1999). Hence, firms 
have a strong incentive to limit the lines of communication with other 
firms so as not to suffer from unwelcome knowledge transfer. As a 
result, establishing trust between private firms is a challenging 
venture. Second, the R&D field is relatively internationalized compared 
to most other production domains. This means that coordination is 
likely to involve not only domestic but also international actors. 
Obviously, this implies an additional challenge for coordination. 
Finally, in R&D-intensive high-technology sectors, such as information- 
or bio-technology, both firms and professionals are comparatively far 
more footloose than in traditional industries or services (e.g., steel 
manufacture or healthcare). Therefore, the question of how to motivate 
private actors to contribute locally is more pertinent than in most 
other fields.

Three Government Roles, Many Games: What do other countries do?

    There are three broad roles by which governments, using very 
different modes which are tailored to their specific conditions, 
support rapid-innovation-based growth:

          i)  public-financing of private-innovation, where the 
        government supplies capital to private agents who use it to 
        engage in R&D and innovation;

         ii)  public production of innovation, where public production 
        is commonly understood to imply industrial R&D conducted in 
        government research institutes, universities, and non-profit 
        research institutes such as hospitals; and,

        iii)  the government acting as a facilitator, where the main 
        emphasis here is on the government role in anchoring 
        professional, inter-institutional networks, and more generally, 
        on the government's role in fostering relations with--and 
        among--private actors.

    The importance of the third role, facilitating policies, cannot be 
over-emphasized, as government-sponsored networks have been shown to be 
one of the most important factors for the creation of a favorable 
environment for radical innovation (Godoe 2000; Kushida 2008; Kushida 
and Zysman 2008; O'Riain 2004). Actor interaction within these networks 
helps shape a common vision of the future, and R&D efforts, which are 
then channeled towards realizing this vision (Lester and Piore 2004). 
Indeed, some argue that DARPA's excellence in conducting this role in 
the American context is the base for its greatest successes (Fuchs, 
forthcoming).
    Since public financing of private innovation activities is the best 
known and most discussed role of the three, let me briefly describe 
some international examples of successful usage of the two others. 
Taiwan has received much attention for its extremely successful 
application of the public production strategy. The government had 
mitigated the market failure and information asymmetries problems by 
undertaking the core R&D itself. This created a unique division of 
labor between government and industry in the case of the IT industry. 
The specificity of this division of labor stems from the state's high 
level of participation in the development of the technological 
capabilities of the industry. In this division of labor, public 
research institutions do most of the R&D up to the level of a working 
prototype, and then disseminate the results to industry, which 
concentrates on final development and integrated design. It is this 
division of labor that is considered responsible for Taiwan's leading 
role in the global information technology industry, most famously in 
semiconductors. This strategy also allowed Taiwan to create a large 
number of jobs--not just jobs for the very high-skilled and educated, 
but jobs at many levels, thereby spreading the fruits of its innovation 
success more widely across the society (Amsden and Chu 2003; Berger and 
Lester 2005; Breznitz 2007b; Fuller et al. 2003; Hong 1997; Mathews and 
Cho 2000; Meany 1994; Park 2000).
    This public production-anchored model also addresses the capacity 
problem. The government concentrates scarce capacities, and by so 
doing, overcomes the private non-cooperation obstacle. Arundel and 
Geuna contend that in Europe public research is an especially important 
resource for firms that lack the financial resources, or capabilities, 
to obtain knowledge abroad (Arundel and Geuna 2004). Therefore, a case 
can be made for more direct public intervention in R&D. However, for 
such interventions to work the incentives for public R&D production 
should be carefully aligned with the growth and creation of a local 
privately-owned industry and the government should set a premium on 
bureaucratic flexibility in its research institutions. Otherwise, the 
negative outcomes will outweigh the positive ones.
    Israel is an example of a highly successful use of the facilitator 
strategy. A measure of the success of its innovation policies is the 
fact that in 1968, when the first government committee on R&D policy 
was convened, there were only 886 academy-trained R&D workers in the 
entire industrial sector. Within three decades of implementing its new 
innovation policies, Israel boasted the highest number of high-tech 
companies listed on NASDAQ after the United States. As part of these 
efforts, as early as 1975, the Israeli Office of the Chief Scientist of 
the Ministry of Trade, Industry and Employment (OCS), Israel's main 
industrial innovation agency, launched a joint program with the 
American Government that matched local companies with American 
multinational corporations (MNCs). This program, known as the Bi-
national Industrial R&D foundation (BIRD), concentrated on fostering 
and financing cooperation between Israeli and U.S. companies (BIRD 
2000; Breznitz 2007a; Teubal 1997; Trajtenberg 2001; Yahalomi 1991). 
Its mode of operation has been to fund projects co-designed by American 
and Israeli companies, in which the R&D was done in Israel, and the 
marketing and product definition handled in the U.S. As a consequence, 
the Israeli government stimulated international cooperation that 
ensured R&D would commence in Israel, and mitigated the information 
asymmetries between itself and the private firms it sponsored by 
receiving high-quality ``external'' evaluation from world-leading 
American MNCs. In 1992 Israel went further in its network facilitating 
policies with the MAGNET program. MAGNET, which stands for Generic Non-
Competitive R&D, addresses two problems related to the development and 
maintenance of the long-term innovative advantage of companies. The 
first problem is a large number of companies in the same technological 
space, all of them too small to compete on the basis of, or to advance, 
cutting-edge infrastructural research activities that are crucial to 
their survival. The second problem is the underutilization of academic 
research. MAGNET solves some of these issues by creating a consortium 
to develop generic technologies. MAGNET consortiums are created for a 
period of up to three years. All IP outputs are shared among the 
consortium members, at least one of which must be a university. The 
consortium members also must agree to license this IP to local 
companies at a cost that does not reflect monopoly status. MAGNET has 
been critical in allowing Israeli firms to tap into otherwise 
inaccessible knowledge domains, and to develop new technologies and 
products for markets and niches whose needs they did not understand, 
using technologies they could not afford to develop alone. However, 
while Israel's sole focus on novel-product R&D and intimate ties with 
the American industry led it to great success, the economic gains of 
this success have been very narrowly distributed, and the success of 
the high-tech industry has resulted in only negligible spillovers to 
the rest of the business sector (Breznitz 2007a; Breznitz 2007b; 
Trajtenberg 2001).
    Finland is a classic example for the government role as a 
facilitator using a very different strategy. In Finland, after the fall 
of the USSR, national employer and labor associations created long ago 
for collective bargaining and resolution of labor-capital conflicts 
were infused with a new mission as they morphed into institutions to 
regulate the transition from a traditional to a high-technology ``new'' 
economy (Ornston 2006; Ornston and Rehn 2006). Consensus among the old 
actors created a platform on which new dense inter-firm networks were 
built. A panoply of government actions established new public 
commissions, and agencies pushed the old partners towards agreement on 
new objectives for the economy and new channels for public expenditure, 
for example, the Science and Technology Policy Council, which 
subsequently gave rise to Tekes. These broad agreements legitimized the 
deep structural transformations involved and formed the bedrock of 
multi-polar networks on the local level. In the most successful cases 
of development of new technology industries in Finland, for example in 
the city of Tampere, new networks were constructed by combinations of 
previously-developed skilled labor, university strengths, industrial 
commitment, and municipal leadership. However, Finland's inability to 
create new companies and its growing reliance on one--Nokia--is 
apparent even in the case of Tempere, where Nokia is by far the biggest 
employer (Juba and Sotarauta 2002).

Back to the home court--Lessons Learned

    Successful innovation policies throughout the world have taught us 
a few valuable lessons:

          i)  innovation policy can significantly enhance economic 
        growth and national competitiveness;

         ii)  innovation policy are context-specific and need to evolve 
        in tandem with private industry;

        iii)  there are many different modes of devising and 
        implementing innovation polices, each of which leads to 
        different social and economic outcomes;

         iv)  to be successful in innovation policy implementation 
        governments need to be able to engage in all three roles: 
        financer, producer, and facilitator.

    While far from ensuring success, these points lead to a few 
principles, which if applied, can increase the chances of success and 
induce a better policy learning curve. First, the Federal Government 
should sustain and enhance its important role as financier. While that 
by itself will not yield a qualitative change, it is necessary as the 
minimal first step. Second, the government needs to carefully evaluate 
its R&D production activities to decide which serve useful purposes and 
which should be restructured or cancelled, and to determine in which 
domains timely, and perhaps finite (that is limited in time-scope), 
public production could stimulate large-scale undertaking by private 
actors, which should always be the ultimate goal of innovation policy. 
Thirdly, and perhaps most importantly, the Federal Government needs to 
think more constructively and comprehensively on the role that the 
government can play as a facilitator of innovation activities. Here 
scope for experimentation is needed, and while the ARPA/DARPA model has 
worked in the past it is far from being the only approach that should 
be pursued.
    It is critical to note that in order to conduct the three roles, 
specifically the facilitating role, a nation must have deep knowledge 
of the technological domains, as well as a nuanced understanding of the 
current, and always changing, needs of private actors. This includes 
knowing and having access to individuals (such as leading researchers 
in specific labs) as well as organizations, and understanding business 
dynamics in multiple sectors.
    In the case of a the U.S., a big Federal democracy aiming to 
stimulate growth throughout its economy in all locales, a dual 
approach, local and Federal, might be the key to success. Creating new 
Federal-state partnerships could also have the benefit of stimulating 
states to compete in the development of different, experimental, and 
creative policies.
    From many levels of analysis, American states, in terms of size, 
economic history and capacity, and unique contextual situation, are 
similar to many of the European and Asian countries that are widely 
viewed as the paragons of successful innovation policy experimentation 
and implementation. Many of these policies necessitate close 
collaboration among actors within a particular spatial unit, and hence, 
lend themselves much more easily to state rather than Federal 
engagement. Furthermore, since many successful innovation policies need 
to be tailored to specific conditions, both the intimate knowledge 
essential for the development, and the capacities critical for their 
implementation, exist on the local and not Federal level.
    One way, certainly not the only one, of tapping this potential, 
creating a dynamic of innovative thinking among policymakers, and 
devising a working public-private partnership, is to allow for Federal 
funding to be allocated on competitive basis for states and local 
governments that develop unique and comprehensive ten to fifteen-year 
programs that take into account local needs and capabilities as well as 
the national innovation agenda. Winning proposals should get 
substantial Federal funding (50-60%), and should be evaluated around 
the seventh year of the program, by which time the first signs of 
change should be evident. If successful, these programs should be 
funded for another finite period of time. In addition the Federal 
agency responsible for these programs should arrange workshops that 
allow collaboration and learning among participating states, as well as 
replication of the more successful models across the country.
    We need to recruit the tremendous forces of competition and 
ingenuity to help us seriously apply innovation to our innovation 
policies. We must think outside of conventional constraints as we seek 
to develop policies to enhance the innovativeness of the American 
business sector and secure our future economic growth.

                       Biography for Dan Breznitz
    Professor Dan (Danny) Breznitz (Georgia Institute of Technology, 
Sam Nunn School of International Affairs & The School of Public Policy, 
Ph.D. MIT) has extensive experience in conducting comparative in-depth 
research of Rapid-Innovation-Based Industries and their globalization. 
Dr. Breznitz's first book, Innovation and the State: Political Choice 
and Strategies for Growth in Israel, Taiwan, and Ireland (Yale 
University Press), won the 2008 Don K. Price for best book on Science 
and Technology given by APSA and was a finalist for the 2007 best book 
of the year award in political science by Fore Word Magazine. His 
second book (co-authored with Michael Murphree) The Run of the Red 
Queen: Government, Innovation, Globalization, and Economic Growth in 
China is forthcoming with Yale University Press in 2010. In addition, 
his work was published in various journals, as well as chapters in 
edited volumes. Breznitz is one of five young North American scholars 
to be selected as a 2008 Industry Study Fellow of the Sloan Foundation. 
Breznitz has also been an advisor for local and national governments on 
Science Technology and Innovation Policies in the U.S., Asia, and 
Europe.
    During 2006 Breznitz was a visiting scholar at Stanford 
University's Project on Regions of Innovation and Entrepreneurship, and 
during 2007 he was a Visiting Fellow at the Bruegel Institute for 
International Economics, Brussels. His work is sponsored by the Sloan 
Foundation, the Kauffman Foundation, and the Samuel Neaman Institute 
for Advance Studies, the Bi-National Science Foundation (U.S. Israel), 
the NSF, Georgia Research Alliance, and the Enterprise Innovation 
Institute. In addition, Breznitz is the co-director with John Zysman of 
UC Berkeley of a collaborative study titled ``Can Wealthy Nations Stay 
Rich in a Rapidly Changing Global Economy?'' A former founder and CEO 
of a small software company, Breznitz is also a research affiliate of 
MIT's Industrial Performance Center. In addition he is a senior 
researcher of the Science, Technology, and Innovation Policy Program 
(STIP) and the Academic Director of the Initiative for Sustainable High 
Tech Cluster at The Enterprise Innovation Institute (EI2), and the 
director of the Globalization, Innovation, and Development program at 
the Center for International Strategy, Technology and Policy (CISTP) in 
the Sam Nunn School of the Georgia Institute of Technology.

    Chairman Wu. Thank you very much, Dr. Breznitz.
    Mr. Holland, please proceed.

  STATEMENT OF MR. PAUL HOLLAND, GENERAL PARTNER, FOUNDATION 
                            CAPITAL

    Mr. Holland. Chairman Wu, Ranking Member Smith and Members 
of the Committee, my name is Paul Holland. I am a general 
partner at Foundation Capital, a venture firm in Menlo Park, 
California, commonly known as the Silicon Valley. We invest in 
early-stage companies driving innovation in software, clean 
tech, the Internet, telecommunications and semiconductors. 
Since our first fund in 1995, we have invested $1.5 billion in 
well over 100 innovative startups.
    In addition to my responsibilities as a venture investor, I 
am also a member of the National Venture Capital Association 
located here in Arlington. The NVCA represents more than 400 
venture capital firms and more than 90 percent of the venture 
industry in the United States by dollar volume.
    So let us talk a little bit about innovation. Historically, 
our government has helped pave the path with policies that 
encourage innovation at many levels, yet the environment has 
changed significantly in the last decade and the United States 
is no longer guaranteed a monopoly on entrepreneurship and 
innovation.
    So I will spend a moment talking about how venture capital 
works, and I think most of you are probably familiar with this. 
We take in large pools of capital from endowment funds, 
universities, foundations, charitable organizations, employee 
pensions and so forth, and we take our own capital, combine 
that, and we invest it in hundreds and hundreds of innovative 
companies over the course of any given year. We do not employ 
leverage or issue debt as part of our investments, so we are 
not like a hedge fund or other forms of private equity you 
might have heard of. We also generally take a seat on the 
company's board and we work for five to ten years, often 
reinvesting several times in that company over the course of 
that time period until we achieve an exit, either an IPO or a 
mergers and acquisition exit.
    The venture class has been recognized for building a 
significant number of high-tech industries including 
biotechnology, semiconductors, online retailing and software. 
Within the last several years, we have invested billions of 
dollars in clean technology including smart grid, renewable 
power, power management, recycling, water purification and 
conservation. In fact, I coordinate the clean tech practice at 
my firm, Foundation Capital, and I had the honor of giving a 
nationally televised speech last year with President Obama on 
clean tech investing, and it was truly a highlight.
    My partners and I are extremely proud of the work we do 
each day and we are working very hard to create a positive 
future for this country. So what are the results of all this 
hard work on behalf of venture capitalists and entrepreneurs? 
Since 1970, companies that were started with venture capital 
have accounted for $12.1 million jobs, or 11 percent of private 
sector employment, and also $3 trillion in revenue by 2008. 
Such companies include historic innovators such as Genentech, 
Intel, Federal Express, Microsoft, Google, Amgen and Apple. 
These companies have brought to market thousands of innovations 
that have improved, and in the case of life sciences, actually 
saved millions of lives.
    So I often get asked why is so much of this happening in 
the Silicon Valley, and many of you are regular visitors to our 
region. Forty percent of venture capital in this country is 
deployed between the cities of San Francisco and San Jose. 
There are a number of reasons for that, too long to get into in 
the time that we have today. We have two outstanding 
universities there in Stanford and U.C. Berkeley. We leverage 
those as much as we can. But I think maybe the biggest factor 
is that we have a very strong risk-taking culture and our 
society supports it in all the different dimensions including 
Federal, state and local government. But it is not just Silicon 
Valley where this is occurring. It is in Boston with MIT, it is 
in Philadelphia with Penn, Pittsburgh with CMU, Atlanta with 
Georgia Tech, Duke and University of North Carolina, the 
research triangle. This is happening across the country and it 
has been a very, very successful model, particularly over the 
last 40 years or so.
    So that is a look at what is happening on the regional 
level in our world. Let us take a look at the national level, 
and the big issue there is competition. Competition is looking 
internationally like we have never seen before. At the same 
time we are seeing all sorts of benefits of globalization, and 
we are big fans of it, we want to see, you know, open standards 
and open trade provisions from our government. At the same 
time, there is a significant rise of venture capital and 
entrepreneurial activity in Asia, Eastern Europe and South 
America, and foreign governments are being very aggressive in 
promoting favorable tax policies and improving their 
infrastructure. So for the first time we have got very, very 
viable competitors outside of the United States. They are 
giving us a run for our money.
    That is one of the reasons why we support the America 
COMPETES Act of 2007. Some of the major components of that Act 
are things like support for basic research, so we leverage NIH, 
DOD, DARPA and ARPA-E, and if we have time later, I will give 
you some really fun examples of companies that have been 
started as a result of this that are now employing thousands 
and thousands of Americans.
    Another component of this is support for a highly skilled 
workforce. This is very critical for us. The venture capital 
community wholeheartedly supports improving math and science 
education for U.S. students, particularly in K-12 students, 
things like STEM curriculum and other fundamentals of 21st 
century education, some of which I am fortunate enough to see 
practiced in my children's schools in California at Ormondale 
and Cormadera and Castalella.
    But other critical elements for us are things like 
immigration reform. Twenty-five percent of venture-backed 
public companies were founded by immigrant entrepreneurs. We 
have immigrant entrepreneurs represented at this table. In 
fact, I would daresay that if you go back a couple of 
generations, we are all represented in one form or another by 
immigrants. These companies include stars such as Intel, eBay, 
Google, Yahoo and Sun, and yet in recent years U.S. immigration 
policy has become relatively restricted when it comes to 
bringing in the best and brightest from overseas. We have to 
stop that and we have to reverse these policies. India and 
China are welcoming these bright minds. We have to be first in 
that regard. For that reason, we are supportive of the Start Up 
Visa initiatives that are in the House and the Senate. Passage 
of these types of bills will signal the entrepreneurial 
community around the world that the United States is indeed 
open for business.
    Another major category for us is access to capital. A 
significant part for us and a very, very serious near-term 
threat to our entire industry is what is being contemplated by 
Congress now in changing the capital gains rate associated with 
venture capital and innovation. Going back to 1968, Congress 
passed a watershed law that had risk capital rewarded with a 
lower capital gains rate, not ordinary income rates. There is a 
discussion underway right now within Congress to reverse that 
and to in fact install ordinary income rates on capital gains. 
If that happens, make no mistake, you are tripling the rates of 
taxation on our industry and you will absolutely kill the goose 
that is laying the golden eggs. I can't make that any clearer 
for you. It is just that simple.
    The need for capital, however, does not end with venture 
investment. We need a lively and a vibration IPO market. Go 
back to 1996. Sixty percent of the IPOs in the world in 1996 
were done in the United States. By 2006, 22 percent were done. 
Last year, two-thirds of the clean tech exits in clean tech, 
the field in which I work, were in China, not in the United 
States. There are a number of things that we have to improve 
and we have to get stronger around this. The implementation of 
Sarbanes-Oxley, some of the restrictive provisions around 
financial regulation are starving our young companies of the 
ability to have early exits. That is very, very difficult for 
us. I realize you are not the Finance Committee but we could 
use your help on that wherever we can.
    Finally, on intellectual property protection, we have some 
of the strongest intellectual property protection in the world 
but it needs to be even stronger and we need to continue to 
reform and augment the work of the U.S. Patent Office.
    So in conclusion, let us make no mistake about it, the race 
is ours to lose but to maintain our innovation advantage we 
must rededicate ourselves to what has made us successful: 
increasing support for basic R&D, improving math and science 
education, supporting immigration and patent reform, and 
improving access to capital through smart tax policies. Without 
action on these fronts, the United States may find itself in 
the unfamiliar role of an also-ran in the innovation race. The 
venture capital community looks forward to working with you, 
the Federal Government, on this, and I will be happy to take 
any questions. Thank you.
    [The prepared statement of Mr. Holland follows:]
                   Prepared Statement of Paul Holland

Introduction

    Chairman Wu, Ranking Member Smith, and members of the Committee, my 
name is Paul Holland and I am a general partner at Foundation Capital, 
a venture capital firm based in Menlo Park, California. Foundation 
invests in early stage companies that are driving innovation in the 
areas of software, clean technology, the Internet, telecommunications 
and semiconductors. We look for new and innovative ideas that don't 
simply improve the status quo incrementally, but rather disrupt it in 
positive ways. Specifically, we fund companies that promise to change 
the way businesses, consumers and even entire industries behave. Since 
our first fund in 1995, Foundation has invested more than $1.5 billion 
dollars into innovative start-up companies located primarily in 
California but across the United States as well.
    In addition to my responsibilities as a venture investor, I am also 
a member of the National Venture Capital Association (the NVCA) based 
in Arlington, Virginia. The NVCA represents the interests of more than 
400 venture capital firms in the United States. These firms comprise 
more than 90 percent of the venture industry's capital under 
management.
    It is my privilege to be here today to share with you, on behalf of 
the venture industry, our perspective on the critical factors that 
foster innovation on a regional and national basis in the United 
States. Our country is home to many of the brightest minds on the 
planet. And that intellectual prowess has benefited our economy in 
countless ways. Yet we all know that the process of bringing innovation 
to life is not simple. There is a critical path along which many 
stakeholders--including entrepreneurs, venture capitalists and policy 
makers--play important roles. Historically, our government has helped 
pave that path with policies that encourage innovation on many levels. 
Yet the environment has changed significantly in the last decade and 
the United States is no longer guaranteed a monopoly on 
entrepreneurship and innovation. We have a tremendous opportunity to 
shape our future and I look forward to discussing today how we can 
ensure our technological and economic leadership going forward.

The Role of Venture Capital in the Innovation Life Cycle

    I would like to share a brief overview of the role of venture 
capital in the innovation life cycle. For decades, the venture capital 
industry has dedicated itself to finding the most innovative ideas and 
bringing those ideas to market. We raise money from institutional 
investors and our firm partners for the express purpose of identifying 
and investing in the most promising ideas, entrepreneurs and companies. 
We only choose those with the potential to grow exponentially with the 
application of our expertise and venture capital investment. Often 
these companies are formed from ideas and entrepreneurs doing work in 
university and government laboratories--or even someone's garage. Many 
of these ideas would never see the light of day were it not for venture 
investment.
    Once we have identified a promising opportunity, we conduct a 
thorough due diligence process on the entrepreneur or scientist, the 
technology on which the opportunity is based, and the potential market. 
For a venture capitalist to invest in a company, the discovery process 
must be well underway. Oftentimes, we will delay an investment until 
further research is successfully completed. Put another way, venture 
capitalists invest in applied research--not basic research. For those 
companies that have moved through the basic research process and have a 
functioning product that passes muster with our firm, we make an 
investment in exchange for equity ownership in the business. Venture 
capitalists do not employ leverage or issue debt as a part of our 
investment. We also generally take a seat on the company's board of 
directors and work very closely with management to build the company 
and bring the innovation to market.
    The innovation process is long and characterized by significant 
technological and entrepreneurial risk. We typically hold a venture 
capital investment in an individual company for at least eight to ten 
years, often longer and rarely much less. During that time we continue 
to invest follow-on capital in those companies that are performing 
well; we cease follow-on investments in companies that do not reach 
their agreed-upon milestones. Our ultimate goal is what we refer to as 
an exit--which is when the company is strong enough to either go public 
on a stock exchange or become acquired by a strategic buyer at a price 
that ideally exceeds our investment. At that juncture, the venture 
capitalist ``exits'' the investment, though the business continues to 
grow and innovation continues to take place.
    The nature of our industry is that many companies do not survive, 
yet those that succeed do so in major ways. Our asset class has been 
recognized for building a significant number of high-tech industries, 
including the biotechnology, semiconductor, online retailing and 
software sectors. Within the last several years, the venture industry 
has also committed itself to funding companies in the clean technology 
arena. This includes renewable energy, power management, recycling, 
water purification and conservation. Many of the young companies that 
we fund serve as the de facto R&D pipeline for larger corporations as, 
in many cases, our start-up technology is far superior than what can be 
generated in a corporate R&D environment. This phenomenon is especially 
true in the life sciences and software sectors, where our companies are 
regularly acquired for their technology and intellectual property. We 
believe this dynamic will ultimately become the reality in the energy 
and clean tech sectors as well. My partners and I are extremely proud 
of the work that we do each day because we are indeed creating the 
future.
    Historically, venture capital has differentiated the U.S. economy 
from all others across the globe in terms of job creation and 
innovation. According to a 2009 study conducted by the econometrics 
firm IHS Global Insight, companies that were started with venture 
capital since 1970 accounted for 12.1 million jobs (or 11 percent of 
private sector employment) and $2.9 trillion in revenues in the United 
States in 2008. Such companies include historic innovators such as 
Genentech, Intel, FedEx, Microsoft, Google, Amgen and Apple. These 
companies have brought to market thousands of innovations that have 
improved and, in the case of the life sciences sector, actually saved 
millions of lives.
    Venture-backed companies are responsible for the introduction of 
Internet navigation and search, microprocessors and wireless 
applications. On the medical side, our companies brought to market 
drugs to treat cancer, diabetes, heart disease and spinal chord 
injuries. And on the clean technology side, we are actively working on 
innovations to reduce our dependence on foreign oil and create a more 
sustainable environment for the next generation. It is almost 
inconceivable that these monumental advances were once small ideas 
tucked away in a lab or a living room. But we assert that the next 
great innovation is today a small idea waiting somewhere. We are 
committed--along with the government--to finding and funding it. Our 
country's future depends on it.

The Silicon Valley Phenomenon

    No other region in the country can attest to the positive impact of 
innovation on the economy than California. In fact, most people who are 
familiar with venture capital--even remotely--tend to associate it with 
Silicon Valley. It is indeed the industry's Fertile Crescent, with 
approximately 40 percent of all venture capital dollars invested in 
companies from San Jose to San Francisco. For this reason, VCs are 
often asked what factors drive Silicon Valley's ongoing growth and keep 
the region successful in fostering innovation and growing new 
companies. It is a relevant question because the answer offers a 
blueprint for other regions that wish to emulate the Valley's success. 
This blueprint is also consistent with what our country must do as a 
whole to keep innovation alive.
    Like Silicon Valley, most successful venture capital hubs begin as 
communities of extremely bright, best-in-class innovators. These 
innovators are usually drawn together by a top-flight research 
university, government laboratory or a highly innovative, often 
venture-backed company. Stanford University has been the source of 
countless innovations around which venture capitalists have formed 
Silicon Valley-based companies. The same can be said for MIT in Boston, 
University of Pennsylvania in Philadelphia and Duke and North Carolina 
in the Research Triangle region. Silicon Valley is also home to 
important anchor companies: Intel, Genentech, Cisco and Google are just 
a few. These companies regularly spin-out new entrepreneurs who pursue 
their own ideas and start-ups from existing operations. They also 
foster a pool of technical talent available to the region. We have seen 
similar types of spin-out companies in places such as Austin, Texas 
with Dell, in Minneapolis with MedTronic, and in Seattle with 
Microsoft.
    Often, these communities coalesce around a certain industry or 
technological niche. Silicon Valley has a long and successful history 
of embracing these niches early on, beginning with semiconductors and 
following up with biotechnology, enterprise software, consumer Internet 
and now, clean technology. Other examples of regions that have 
successfully built an ecosystem around a specific technology include 
New York with new media, Tennessee with healthcare IT, and Northern 
Virginia with telecommunications. Concentrating on these niches creates 
a virtuous circle that spurs research and innovation, draws more talent 
and attracts more capital to the region. And while regions such as 
Silicon Valley and Boston account for a majority of the investment in 
certain sectors, there is room for more than one region to claim space. 
To wit, Florida, in its quest to become a life sciences center, 
recruited the new Scripps Institute to locate there and has benefited 
from that institution's presence in Palm Beach County. Many regions are 
now vying for a stake in the clean technology sector. Rocky Mountain 
states like New Mexico, Colorado and Arizona making strides in this 
area.
    Innovators become entrepreneurs only when they have the supporting 
environment to do so. Venture capital alone is not enough. There must 
be a sound mechanism for transferring technological innovations from 
the research institutions and scientists that spurred them to the 
company that will guide them to market. To support that process, a 
robust network of lawyers, accountants and other business professionals 
to help with business planning, networking, intellectual property 
protection, IPO registration compliance and hiring issues is also 
important. In addition, though as simple as it sounds, the region must 
have an infrastructure that can support growing companies. That means 
efficient local and regional transportation systems, convenient 
airports, affordable housing, quality schools and vibrant cultural and 
social scenes.
    Government and civic support is also essential. This starts with 
favorable tax policies, common-sense regulatory structures and 
encouragement of basic research. State and local initiatives that 
reward emerging growth companies also make a significant difference. 
Please understand that is different than giving massive tax abatements 
to large local corporations. Instead, a program like Ben Franklin 
Technology Partners in Pennsylvania, that supports start-up companies 
in their earliest stages, helps create a pipeline from which venture 
capitalists can draw. Also, state pension funds that invest in local 
venture capital firms also drive success. States such as California, 
Pennsylvania, and Wisconsin have strongly supported local venture firms 
in recent years, resulting in increased investment by indigenous firms 
in their states' start ups.
    It is important to note that venture capitalists do not create 
these conditions favorable to investment. We seek them out. For those 
looking to replicate Silicon Valley's success, it starts with these 
factors and builds from there. States should understand that growing 
such an environment is an expensive, long-term endeavor. However, I'm 
sure that Californians will tell you that the economic pay-off is worth 
it.

Looking Forward on a National Level

    The ingredients that make for successful venture capital hubs like 
Silicon Valley are not unlike the ingredients for a thriving innovation 
ecosystem in the U.S. as a whole. Access to strong basic research, the 
best and brightest minds, public policy that promotes access to 
capital, and an infrastructure that supports the entrepreneur are in 
fact the precise components that have historically allowed the U.S. to 
thrive on the innovation spectrum. And these same drivers will 
determine our fate going forward.
    Yet, it is important to recognize that the global environment for 
innovation has changed dramatically in the last decade--creating both 
opportunities and threats to U.S. innovation. Technology has indeed 
made the world flat and our companies today all employ global 
strategies when it comes to markets, product development and 
operations. The global markets offer our companies tremendous growth 
opportunities--provided the U.S. maintains open trade provisions. Yet, 
at the same time, there has been a significant rise of venture capital 
and entrepreneurial activity in regions outside the United States such 
as Asia, Eastern Europe and South America. As entrepreneurialism grows 
on a global scale, we face a new competitive environment in which 
innovation can be developed anywhere. Foreign governments are being 
extremely aggressive in promoting favorable tax policies, improving 
their legal, accounting and intellectual property structures, and 
boosting their R&D spending to foster more innovation in their 
countries. The U.S. needs not only to maintain our current commitment 
to an innovation agenda but rise up to meet the challenge set by our 
foreign competitors or risk losing our technological edge.
    For these reasons, the venture capital industry supported the 
America Competes Act and continues to support the spirit in which it 
was passed in 2007. In order for the U.S. to maintain its competitive 
advantage and economic leadership, we must continue to aggressively 
promote a public policy agenda that rewards risk takers and embraces 
innovation at a national level. Components that are particularly 
relevant to the venture capital industry and our role as purveyors of 
innovation are as follows:

Support for Basic Research

    The government has a critical role to play in the area of basic 
research. It is from this pipeline of scientific advances in fields 
such as information technology, life sciences and now, clean 
technology, that the venture capital industry has traditionally drawn 
many of our innovations. Often, early stage research into new 
discoveries is first funded with Federal dollars in a university or 
government lab and then commercialized by a venture investor.
    Such was the case with Atheros Communications, founded by leading 
experts in radio and signal processing at Stanford University. Atheros 
benefited early on from access to DARPA research on semiconductors and 
communications. My firm helped to shepherd the researchers out of 
Stanford and invested the first $100,000 into the company in 1997. 
Since that time, the company has become the leading provider of WiFi 
communications, providing the technology that powers innovations such 
as wireless local area networks (WLAN), mobile WLAN, global positioning 
systems (GPS), Bluetooth, Ethernet and powerline communications. 
Atheros went public in 2004 and today employs more than 1,300 people 
and has a market capitalization of $2.5 billion.
    Sources of these basic research funds have historically included 
the NIH, DOD, DARPA and, most recently ARPA-E. Continuing to support 
federally funded research through these agencies will allow the 
symbiotic relationship between the government and venture capital to 
continue. Essentially we pick up where government funding leaves off. 
We believe this relationship will be especially important in the area 
of clean tech innovation. We have been very encouraged by the funding 
of ARPA-E at the $400 million level. We hope to see a continued 
commitment at that level or above going forward, so that the exciting 
work taking place in those labs has the opportunity to be brought to 
the American public. We also ask that policy makers continue to exhibit 
the same patience they have shown in the past for the high-risk and 
long-term nature of the innovation process. This support is critical to 
our ability to see our projects through to success.

Support for a Highly Skilled Work Force

    In addition to supporting the research, government must also 
support the entrepreneurial and technological talent that brings this 
research to life. The venture capital community wholeheartedly supports 
improving math and science education for U.S. students, particularly in 
grades K through 12. Other countries have been committed to the 
Science, Technology, Engineering and Math (STEM) components of 
education for some time. Our understanding is that we are making 
strides in these areas; but we can not ease up on our commitment to 
engage our students more fully.
    In addition to better educating our own students, it is also 
critical that we ensure that the best and the brightest scientists and 
entrepreneurs from all over the world want to come to the United States 
to innovate and grow their businesses. The venture industry has long 
supported highly skilled immigration reform that would make it easier 
for foreign born nationals to build companies in the United States. The 
NVCA-commissioned study, American Made: The Impact of Immigrant 
Entrepreneurs and Professionals on U.S. Competitiveness found that 25 
percent of venture-backed public companies were founded by immigrant 
entrepreneurs. These companies include innovation stars such as Intel, 
eBay, Google, Yahoo and Sun.
    Yet in recent years, U.S. immigration policy has become restrictive 
relative to the policies of foreign countries--and just when they are 
proactively growing their own entrepreneurial and innovation 
ecosystems. As the United States is making it more difficult for 
foreign scientists and entrepreneurs to enter our country, other 
countries such as India and China are welcoming these bright minds to 
their shores. Unless we see a significant change in immigration policy 
for highly skilled workers, we risk losing the brightest talent to our 
global competitors.
    For this reason, we are very supportive of the Start Up Visa 
initiatives that have been introduced in both the House and the Senate. 
Under these bills, immigrant entrepreneurs can obtain a special visa to 
build their companies in the United States if they have secured venture 
capital financing from a qualified investor. The passage of such a bill 
would send a much needed signal to entrepreneurs around the world that 
United States wants them innovating here. Companies that are formed 
here drive innovation here. There is no other way to say it.

Access to Capital

    Support for innovation also hinges upon the government's 
understanding of the importance of capital formation and support for 
incentives for long-term investment and risk taking. While we know that 
this committee does not have jurisdiction on developing tax policies, 
it is an area that remains of critical concern to the venture industry 
and has the potential to impact our ability to fund innovation. 
Entrepreneurs and venture capitalists must continue to be rewarded for 
the risks they take. Today there is a meaningful differential between 
ordinary income and capital gains tax rates, which offers an incentive 
for the long-term investment in innovative companies as opposed to 
short-term speculation. Without this differential, the reward for 
building and growing a company from scratch is significantly lower and 
less likely to promote this type of activity.
    We also continue to support the current tax policy that allows both 
entrepreneurs and the venture capitalists who invest their time and 
capital alongside management to receive capital gains tax treatment 
when they have successfully built and grown companies. This policy--
which grants capital gains tax status to venture capitalists who 
successfully invest in and help companies to grow--has been under fire 
as certain lawmakers have sought to change the tax status of carried 
interest to ordinary income. The result will likely be a long-term 
reduction of venture capitalists, a lower risk threshold for existing 
venture capitalists, and fewer innovations funded overall. By enacting 
this policy, Congress will put innovation and job creation at 
tremendous risk. Our position on this issue is publicly available from 
previous hearings and we continue to welcome the opportunity to work 
with lawmakers to better understand the implications of this troubling 
proposal.
    The need for capital does not end with venture investment. The goal 
of many venture-backed companies is to one day thrive as a publicly 
traded entity. However, the last decade, and the last three years in 
particular, have been especially hard for venture-backed IPOs. A 
healthy venture-backed IPO market would see close to 100 new issues 
each year. In 2008, we saw just 6 venture-backed IPOs; 2009 had 12; in 
the first three months of 2010, there have been just 5.
    While much of this lackluster environment can be attributed to the 
financial crisis and skittish investors, we believe that there are 
fundamental structural issues that need to be more closely examined. 
The implementation of Sarbanes Oxley, the separation of research and 
investment banking, and decimalization--among other factors--have all 
contributed to a market that is not receptive to small cap IPOs. This 
situation is critical to the future of innovation because without an 
IPO market recovery, venture capitalists are not in a position to make 
new investments at the pace we have kept in previous years. We will 
spend more time with existing companies, wait longer to take them 
public, and complete fewer new deals. We do not want these good 
companies to wither on the vine if we can jump start the IPO market 
once again.
    We believe there is a role for policy makers and regulators to 
better support emerging growth companies and commit formal resources to 
understanding the dynamics and challenges of today's IPO market. 
Dedicating senior SEC officials to address the collective interest of 
these rising stars will send a message to the market that the 
government is there to help, not hinder, their growth and innovation. 
We believe the formation of such a group would be extremely well 
received and we as an industry would commit to supporting its 
endeavors.

Intellectual Property Protection

    The U.S. must also enact some essential reforms to its patent 
system. Few systems have protected and rewarded innovation better, but 
the system has gone 50 years without so much as a tune up. Patents are 
particularly important to the start-up community because they are 
sometimes the only asset of value that an emerging company holds. Often 
venture capitalists evaluate the quality of a company's patent or 
patents when deciding whether or not to invest. Thus, patents protect 
the value of both the innovation and the investment.
    For this reason, the U.S. must focus on improving the quality of 
the patents it grants and the predictability of its protection process. 
Stronger patents will help reduce the amount of needless litigation 
generated by specious or spurious challenges and infringement claims. 
Greater predictability in how the U.S. Patent and Trademark Office, or 
PTO, awards and protects patents will also reduce risk for emerging 
companies and their investors. Current patent reform legislation moving 
through the Senate addresses many of these challenges and we are 
hopeful that the final outcome will institute reform that adequately 
funds the PTO and protects small innovative companies.

Conclusion

    As we've seen, the United States has harnessed innovation to power 
economic growth, raise standards of living and improve our lives. The 
Federal Government has played a vital role in this success through 
innovation-friendly policies and incentives. We applaud policy makers 
who seek to foster an ecosystem where risk taking and entrepreneurship 
are rewarded. Yet the bar continues to rise as many foreign governments 
have begun to emulate our success and seek to surpass it. Their 
successes mean that we no longer hold a monopoly on innovation and its 
benefits.
    Make no mistake: The race is still ours to lose. But to maintain 
our innovation advantage, we must rededicate ourselves to what made us 
successful: increasing support for basic R&D, improving math and 
science education, supporting immigration and patent reform, and 
improving access to capital through smart tax policies. Without action 
on these fronts, the United States may find itself in the unfamiliar 
role of also-ran in the innovation race. The venture capital community 
remains committed to doing our part to ensure this is not the case. We 
look forward to working with Members of this Committee, Congress and 
the Administration to support the best and brightest ideas and continue 
to fill a robust pipeline of innovation for our country. I want to 
personally thank you for the opportunity to discuss these important 
issues with you today and I am happy to answer any questions.

                       Biography for Paul Holland
    In addition to coordinating the CleanTech practice at Foundation 
Capital, Paul's primary focus is on helping early-stage start-ups go 
from zero to $100M in revenue. He helped take public two venture-funded 
software start-ups, Kana Communications (KANA), and Pure Software 
(RATL). Paul currently serves on the board of directors for Bella 
Pictures, CalStar Products, Chegg, Coverity, Ketera, Serious Materials, 
and TuVox; and previously for Talking Blocks (acquired by Hewlett-
Packard) and RouteScience (acquired by Avaya).
    Prior to joining Foundation Capital, was senior vice president of 
worldwide sales at Kana Communications, a leading supplier of 
Enterprise Relationship Management solutions to strategic e-businesses. 
Paul went on to build a team of over 350 people that secured more than 
900 customers worldwide, helping Kana become one of the top ten IPOs of 
1999. Before Kana, Paul was a vice president and general manager for 
another highly successful start-up, Pure Software, helping raise their 
market value from $2 million to over $1 billion in his five-year tenure 
there. He began his professional career at SRI International (formerly 
the Stanford Research Institute).
    Paul enjoys spending time with his wife Linda Yates, and their 
three daughters, Kylie, Devon, and Piper. In his spare time he enjoys 
golf, volleyball, poker, traveling (he has visited over 50 countries to 
date), and is building a LEED Platinum home in Portola Valley. Paul has 
been guest lecturer on entrepreneurship at Dartmouth's Amos Tuck School 
of Business, Harvard Business School, James Madison University, and the 
Stanford Graduate School of Engineering. He is an active advisor and 
supporter of Project BUILD in East Palo Alto, the Bing School at 
Stanford and Sustainable Silicon Valley. Paul received an MBA from the 
University of California at Berkeley; an MA in Foreign Affairs from the 
University of Virginia; and a BS from James Madison University.

    Chairman Wu. Thank you very much, Mr. Holland. At this 
point we will open for our first round of questions, and the 
Chair recognizes himself for 5 minutes.
    I just want to point out that we have a number of 
opportunities right before us. It is not just the 
Administration's deployment of broadband but the Administration 
already has statutory approval and funding for health IT 
initiatives, for its energy initiatives. We have a couple of 
very important legislative opportunities in front of this 
Congress. One is the reauthorization of SBIR and of course the 
big one is the reauthorization of America COMPETES, which 
affects so much of what you all have addressed.
    I am going to begin by throwing you a puffball for you all, 
and I think I will just go from my left to right and ask that 
you, from your view, don't repeat anything that is cited to 
your right but list additional factors, and the question is, 
what are the biggest barriers, what are the biggest barriers to 
entrepreneurship and what are your top one, two or three 
priorities, priority recommendations to help address those 
particular barriers. Mr. Chopra, why don't we start with you?
    Hon. Chopra. We are squarely focused on strengthening the 
commercialization success rate out of research and development 
investments as a Nation, and you heard a terrific body of 
testimony from Dr. Kamlet. But Secretary Locke is leading a 
dialog with the university community throughout the country 
specifically on how we address this issue. I will simply 
highlight one basic phenomenon. As my mentor describes, we have 
a terrific portfolio of ideas throughout our university system 
and we have a challenge to bring market relevance to those 
ideas. In combination we can achieve a much higher rate of 
entrepreneurship, and so a great deal of the reason you saw the 
$12 million investment in the partnership for innovation fund 
in the National Science Foundation in the President's budget--
was to bring more of the market relevance capabilities to the 
ideas that are coming out of our universities. You see that our 
innovation clusters work, and we are going to continue to focus 
on that as an important lever to see, we think, an improvement 
in the rate of entrepreneurship in the country. Obviously the 
factors I had cited earlier-about ensuring the conditions for 
an open and competitive marketplace, the capital markets 
success, an open and efficient government--are all factors as 
well but we are first and foremost going to look at the 
commercialization aspect.
    Chairman Wu. Terrific. Thank you.
    Dr. Kamlet.
    Dr. Kamlet. Thank you. I will focus on one that is specific 
to universities and in particular to university-industry 
partnerships. Right now a company may come to the university 
and to a faculty member and say I would like to give you $1 
million to do research in this particular area, and the faculty 
member will say that is fabulous, that is exactly what I want 
to do and this is going to be critically important research, 
and then we tell the company but you do know that you will not 
own the intellectual property, that we can't guarantee that we 
will license it to you and we cannot guarantee we won't license 
it to your competitors instead. And then the company says I am 
sorry, you must have misunderstood, I said we were going to 
give you $1 million. And we say yes, we heard you correctly but 
those are the conditions, and then the company says here we go 
to Singapore. And this is a reflection of an unintended aspect 
of the tax laws pertaining to doing research that is funded by 
industry in buildings that were originally once upon a time 
financed by tax-exempt bonds. It seems like it is a small thing 
but when you are trying to find good ways to interface with 
industry, it is a huge impediment and we would be happy to 
provide more details about that. It is something that is not 
recognized very broadly but affects us quite a bit.
    Chairman Wu. You know, a staffer brought that to my 
attention about five years ago, and I had a hard time 
understanding it until just this moment. Thank you.
    Dr. Atkinson.
    Dr. Atkinson. Let me list two, one that isn't this 
Committee's jurisdiction but I do think it is a central one, 
and that is what you could term foreign technology 
protectionism or mercantilism. I think it is much harder for 
entrepreneurs to succeed in this country now when you have 
intellectual property theft on a rampant basis, when you have 
standards manipulation, when you have a whole set of other 
practices that countries, not just China, but other countries 
are engaged in that that violate the spirit and oftentimes the 
law of WTO. I think that is a key factor that we are going to 
have get right.
    But the second thing I think is, we don't do anywhere near 
as good a job of creating support systems for entrepreneurs at 
the ground level, and you compare that to a country like 
Finland which has a wonderful support system linked to their 
universities where if you are an entrepreneur with an idea, you 
can get help, you can get technical assistance, you can find 
maybe an incubator to be in. You can get easy technology 
transfer from universities. So I commend what the 
Administration has done and I hope we can continue to improve 
on that because I think that is the right direction to go as we 
have got to beef up these regional innovation clusters. I think 
that would be an important step.
    Chairman Wu. Thank you. Dr. Breznitz.
    Dr. Breznitz. I would like to follow Dr. Atkinson and the 
Honorable Chopra and also to talk about people, and in this 
case with great opportunity we have with this financial crisis 
that we just had. If you look at other countries, Finland, 
Israel and Ireland, one of the most important things for the 
high-tech industry was a crisis after which there were released 
a resource of a great genius who are in their middle ages with 
families and kids that need to go to college that couldn't even 
think about becoming entrepreneurs before and now they had to, 
and what those countries did is help those kinds of people who 
know the industry, know how to make products but never wanted 
to do this job, now had to do this job, helped them to get the 
education to be entrepreneurs and the environment to be 
entrepreneurs and I think that is part of what we should do.
    Chairman Wu. Thank you.
    Mr. Holland.
    Mr. Holland. I will try not to be duplicative. I got the 
bad seat for that. It is pretty straightforward from our 
perspective.
    Chairman Wu. Well, I knew that you were up to the 
challenge.
    Mr. Holland. Thank you so much, Chairman. I appreciate your 
confidence.
    So straightforward for us. Please don't triple the tax rate 
on the industry that has created 11 percent of the high-quality 
jobs and about 20 percent of the GDP in this country over the 
last 40 years. It is pretty straightforward from our 
perspective. Second, pass the Start Up Visa Act and take any 
steps necessary to ensure that the best and brightest from 
around the world continue to come to this country and don't 
choose instead to go to China and India and other places that 
welcome them in a more receptive way than it looks as if we are 
about to as a society.
    And finally, continue to drive for improvements in math and 
science education and a 21st century curriculum in our K-12 
system. If any of you saw the recent Friedman article on the 
Intel Prize, which the top science students in the country 
compete for, 80 percent of the kids that were there were either 
first- or second-generation immigrants and many of whom's 
parents had had training elsewhere. We have got to upgrade our 
basic infrastructure in K-12 and get back on the forefront of 
producing the best scientists in the world.
    Chairman Wu. Thank you very much.
    Mr. Adrian Smith of Nebraska, five minutes.
    Mr. Smith. Thank you, Mr. Chairman, and thank you to the 
panel for sharing your expertise. I am grateful for the many 
perspectives that you bring and certainly I hope that we can 
focus on innovation more so every day. I can't help but think 
that the best driver for more innovation is available capital, 
and so I want--and I think we need to be mindful of that. I 
understand the government needs to provide a nudge here and 
there but I struggle to think where the government should be 
the most important driver of innovation because I think that 
the private sector is underestimated with that. This has been 
interesting hearing the various perspectives and so again I 
just want to reiterate how much I appreciate your willingness 
to come here today.
    Dr. Chopra--I hope I am pronouncing that right--how 
involved should the Federal Government be in terms of the 
growth of innovation and what are the building blocks that you 
mentioned only the Federal Government can provide?
    Hon. Chopra. Well, thank you for the question. We actually 
strongly agree with the view that our private sector has been 
at the heart of job creation and the success of our 
entrepreneurial economy. But we, as I referenced in testimony, 
believe that there is a balance to be struck around building 
blocks, and the building blocks in particular are very 
straightforward, basic research and development, the work this 
Committee had done on putting us on track to doubling the basic 
research investments at NIST, the National Science Foundation 
and the basic science office within the Department of Energy. 
We very much believe in the importance of basic research 
investments and that is why the President has done as much as 
he can both in the stimulus act and in the proposed budget-to 
get us on track for the investment.
    On the workforce piece: I think, to underscore Mr. Holland, 
we are absolutely committed to making sure that our educational 
system focuses on science, technology, engineering and 
mathematics. That is why in the Race to the Top Fund, the only 
competitive differentiator a state could get extra points for 
when they applied for the Race to the Top funding was the 
degree to which they incorporated STEM into their application. 
It is the only differentiator. That is why the President, with 
basically no government money, collaborated with dozens of 
companies to create the Educate to Innovate Initiative which 
has already tallied over $500 million in private sector and 
philanthropic commitments to focus on STEM education. His 
priority goal is having America achieve the highest proportion 
of college graduates in the world by 2020, all of that is an 
essential building block. But we also believe in advanced IT 
infrastructure and the degree to which we have effective and 
efficient broadband, affordable and universal broadband 
throughout the country is a key priority for this 
Administration. If you are in a rural part of the country and 
you have a terrific idea and you want to build that application 
to generate wealth in your neighborhood, with the access to 
high-speed affordable broadband, we think you deserve every 
right to have the ability to compete. So those are the key 
building blocks as we see them, and I would be happy to go into 
more detail if you would like.
    Mr. Smith. So I hear you saying that perhaps research 
wasn't exactly ignored during the tech bubble, 1995 to 2000 or 
2000 to 2007. I think you mentioned previously that it was 
ignored. Really? I mean, do you really mean that?
    Hon. Chopra. Maybe I misunderstood your characterization. I 
never said that research and development investments per se had 
been ignored, but I think if you looked at the overall 
performance, the statistics that Rob Atkinson cited very 
clearly were that there is a distinction between flat year 
after year, or I should say consistent with historical 
purposes, and how others around the world are competing. I 
think Rob's statement that we had been at the top on a range of 
these measures and that if you look at the rate at which we 
have improved on those numbers from 2000 to 2009 that the rate 
of change in our investments in these areas hadn't kept up the 
pace. I think that is the heart of the COMPETES Act, about 
putting us on track to doubling R&D. It is not that per se the 
numbers had fallen and we have ignored them. We have been 
funding universities forever. But it is the notion that we 
hadn't put more of the research emphasis in that area, and I 
think that was where I was referring to, the notion of the 
historical perspective.
    Mr. Smith. Okay. Thank you. I appreciate that. I do want to 
also add, you know, as I am across not only my district but I 
do get out of Washington and my district now and then, there is 
an immense concern that some of the goings-on in Washington 
will indeed stifle innovation, whether it is tax policy as has 
been mentioned a little bit here, and I don't want to elaborate 
in the interest of time on exactly what these things are, but I 
want to give emphasis and pass along the concern of many 
Americans that many of these policies, tax policy among them 
but just one of them, would constrain innovation, would have a 
lockdown among our economy that is especially damaging, 
especially to innovation, especially to technology, ultimately 
to prosperity, and as we know, our budget relies heavily on 
those who have prospered and the fewer prosperous folks and 
entities we have, the more our budget hurts.
    And so I know that my time is up and so I want to close 
with that, at least for now, but again, let me say thank you 
for your expertise.
    Chairman Wu. Thank you very much, Mr. Smith.
    Ms. Edwards.
    Ms. Edwards. Thank you, Mr. Chairman, and thank you to all 
of our witnesses. As is always the case whenever we are in this 
Subcommittee, we hear much more interesting and creative things 
than in some other places here in Congress, so thank you.
    I want to ask about this notion of innovation and 
entrepreneurship because I do think that there is a distinction 
and I think sometimes we get confused that merely investing in 
entrepreneurship is investing in innovation, and I wonder if 
some of our witnesses could actually discuss that, and along 
those lines, also this notion of investing in risk taking and 
the role of government, particularly in early stages in risk 
taking which might be distinct from the kind of risk taking, 
Mr. Holland, that you spoke about, where you are making 
decisions about where to place venture capital. And perhaps 
starting with Mr. Chopra, Mr. Holland, I wonder if you could 
weigh in on that.
    Hon. Chopra. Very thoughtful questions. Thank you. Let me 
begin by saying the distinction between innovation and 
entrepreneurship may be slightly less broad if you focus on 
high-growth entrepreneurship, and a great deal of our policy 
framework is focused on high growth, and of course, neither are 
sufficient. Simply investing in high growth, one has to make 
some leaps of faith as to what is in fact a high-growth 
business, and there is a whole body of work around how one does 
that. Experts like Paul at the end are focused there.
    On the topic of risk capital, we see that the President has 
made investment decisions to reflect this, that high-risk, 
high-reward basic research should remain a priority within the 
government. So while we have asked for the rate of growth to 
continue to rise in investments in National Science Foundation 
and so forth, we are also innovating within how that money is 
deployed so that we are pushing as much as we can to ensure 
that those programs that they fund allow for creativity and 
innovation. That is what I would call the productivity with 
which our R&D investments flourish, and I think high-risk, 
high-reward opportunities that we are focused on-for a specific 
example, ARPA-E in the energy domain--allow us to take a chance 
in areas that may not be as viable for traditional private 
investment but might make sense given the construct of where we 
are from a basic research perspective.
    When it comes to risk capital in the commercial setting, as 
we said earlier, creating the right market conditions that spur 
productive entrepreneurship is where we have focused our policy 
priorities. So making sure that we are doing what we can to be 
supportive of our private sector participants and ensuring that 
we are doing what we can to make government work, where we 
engage, that we have created a capital markets environment that 
is supportive and encouraging of the kind of investments that--
--
    Ms. Edwards. Well, can you tell me how that relates to the 
new rules around--the new policies around SBIR? Because we have 
heard testimony in our larger subcommittee and this Committee 
about the tensions between the sort of private smaller business 
entrepreneurs and the institutional-based educational research 
institutions.
    Hon. Chopra. Well, actually I think there is a great deal 
of creativity and innovation taking place. I wouldn't call it 
matchmaking--that may not be the right word--but just last week 
the National Science Foundation announced a $4 million 
solicitation, kind of a matchmaking service, to find the most 
innovative SBIR firms coupled with the most successful 
engineering research centers to see if they could collaborate 
together in spurring new economic activity. So we are focused. 
I think the comment that I was making about SBIR was, DARPA as 
just one agency has tried to streamline it. You know, one of 
the things that is frustrating, if you are a small business and 
you are successful in winning an award but you have to wait six 
months to get a contract, you can't carry your cash flow for 
that long. It is almost not worth the effort. So by getting 
them to streamline the operations and say well, in 60 days we 
are going to get you paid to get you to work, we think that is 
more in line with the notion of a small business. So there are 
some operational aspects to this that we are trying to get 
right.
    Ms. Edwards. Before I run out, Mr. Holland.
    Mr. Holland. Yes. Thank you. It is an honor to take a 
question from you, Representative Edwards. I was born in 
Baltimore a long time ago, so I am very proud of my birth State 
of Maryland.
    I think, simply put, when Steve Jobs and Steve Wozniak were 
forming Apple, when Gordon Moore and Bob Norris were forming 
Intel, when Serge and Larry were forming Google, to put it 
bluntly, they didn't give a frog's fat behind about what was 
going on back here in Washington. It just doesn't work that way 
in entrepreneurial circles. We just do what we do. It is almost 
as if the entrepreneurs are almost genetically programmed to 
start companies and to raise capital and to hire people. It is 
just the way they exist. It is like artists who create art. It 
is like writers who write. It is a form of existence that 
people do.
    Where government can help is in the areas that Dr. Chopra 
is referring to. Interfering in the way that capital is formed 
and capital is deployed and making it less efficient for that 
capital to be deployed is an incredible hindrance. That is the 
hallmark of Second World countries. That is not a hallmark of 
this country. And so that is one of the things that we are 
very, very concerned about as we look at what happens. So we 
have plenty of private capital available to help start these 
companies and get things to happen. Just putting us in a 
position where we can go and operate and do what we do and 
enable entrepreneurs is all we ask of the Federal Government at 
that level. All the work that we are hearing about here with 
the universities, the national labs and so forth is very, very 
important but we deal with things at the end of the line. We 
are where the rubber meets the road in trying to make these 
into businesses that will hire millions and millions of people. 
We know how to do that. The industry knows how to do it. But we 
are at risk right now.
    And just as a footnote, just to give you an idea, there 
were 1,200 firms practicing venture capital by the year 2000. 
There are probably close to something like 600 or 700 firms 
now. Only 95 of those, according to some sources, did more than 
four investments last year. That is a very scary statistic for 
anybody that thinks about job growth over the next five or ten 
years. And if you add on to that some of the things that are 
being contemplated, that is only going to get worse.
    Ms. Edwards. Mr. Chairman, I have greatly exceeded my time.
    Chairman Wu. Mr. Smith, five minutes.
    Mr. Smith. I would yield if the Member from Maryland wishes 
for any more time. If she is on a roll, I don't want to stand 
in the way. Okay. Thank you.
    Now, we have heard here this morning that America is one of 
the only countries in the world that does not have a national 
competitiveness strategy yet the Committee is continually 
examining our innovation and competitiveness needs through 
various hearings, culminating in the passage of the 2007 
America COMPETES Act and continuing with its legislation 
reauthorization this year. To all the witnesses, what do you 
see as the failures in the current America COMPETES that would 
lead to perhaps such a conclusion?
    Dr. Atkinson. Let me start. I can't resist the last 
question so let me do 30 seconds on that, because I think one 
of the problems with our innovation policy is, we are torn 
between, is this something the private sector does or is it 
something the government does. And with all due to respect to 
Mr. Holland's last comment, when you look at many of the 
Silicon Valley companies, they can trace their roots very 
clearly back to government funding in one way, shape or form. 
Google had an NSF grant and others had NSF grants around 
library technology, searching technology. Intel, one of its 
first customers was the Defense Department. In fact, in 1992, 
the county in the United States that had the most defense 
contracts--this was a study I did for OTA [Office of Technology 
Assessment] when OTA still existed--was actually Santa Clara 
County. So it is sort of I think a false choice to say it is 
all entrepreneurs who are creative and it is all the 
government--the government didn't create Apple nor could it, 
but certainly it helped, and I think we have got to think about 
our policies in that regard.
    So to your point about COMPETES, we are big supporters of 
COMPETES. I think it was a very important first step. But 
COMPETES is a little different than a strategy. COMPETES is a 
set of policies and programs, and I think what we would argue 
needs to be framed on that is a very in-depth strategy to 
really look at exactly where our weaknesses are, where our 
strengths are. And the last point on COMPETES, and I would echo 
Dr. Breznitz's point, I think we need innovation in our 
innovation policy. I think COMPETES was principally about what 
economists would call supporting factor conditions, in other 
words, more basic research and more STEM personnel. Those are 
very important, and we have not done enough of that in this 
country. But there is a whole set of other things around tax 
policy, around institutional frameworks, what Mr. Chopra was 
talking about, public-private partnerships, research consortia, 
better university relations with entrepreneurs and companies, 
and I think that is where the next COMPETES could do a little 
more with.
    Dr. Breznitz. If I can add, I can also tell something about 
what other nations are doing since I have done this for both 
Finland and Israel and other nations do every seven years in 
the case of Finland, which I think is the Nation that does it, 
convey a group of experts, both local and foreign so they know 
they have somebody to evaluate them, and try to really look at 
how the country works, what are the policies and do they make 
sense together, not just as one act but all the tax laws, all 
the education facilities, all the entrepreneurship policies, do 
they make sense together? How they can be fixed? What are good 
ideas to fix them? And that I think is what put both Israel and 
Finland from peripheral economies--let us call them that--to 
being on the forefront, and I think that this is what we should 
do. So I do think that we need to, as Dr. Atkinson said, think 
strategically about those issues.
    Mr. Holland. And if I could just tag onto Dr. Atkinson's 
comments, I certainly don't mean to give the impression that we 
don't appreciate some of the groundbreaking work that has been 
done over the years from the Federal Government in the Silicon 
Valley. In fact, I will give you an example out of portfolio. 
There is a company. I will mention the name of the company. It 
is Atheros Communications. I am going to guess that perhaps 
some of the people on this panel would know but most of the 
people in the public won't know Atheros. When I tell you what 
they do, you will all know. This is a company that was funded, 
we funded it with $100,000 in 1997. There was a professor named 
Theresa Mung, first-generation Chinese, Ph.D. at Stanford 
University, and she had come up with an innovation in 
communications and we brought her into our group. We brought 
her whole lab over into our building. I will fast forward this. 
Eighty million dollars of private investment later including 
some really interesting work early on with DARPA, and this 
company is now the inventor of what is now known as WiFi, so 
most of us now in our personal computers, when we fire up our 
personal computer, there is a wireless chip in it and it is 
almost guaranteed it is by this company called Atheros. The 
company is worth several billion dollars and employs close to 
10,000 people. It integrates all the different things that we 
are talking about here today. I think that point that Dr. 
Breznitz is making about, I will describe that as a holistic 
and an integrated strategy. I think that is often really hard 
to do in this country but it is worth it in this case if we can 
find a way to do that.
    Mr. Smith. Anyone else? If not, thank you.
    Chairman Wu. Thank you very much.
    The gentleman from New Mexico, Mr. Lujan, for five minutes.
    Mr. Lujan. Mr. Chairman, thank you very much. I appreciate 
very much the conversation today and the emphasis on R&D, the 
emphasis with commercialization, but I am very concerned of the 
lack of mention of our national laboratories when we talk about 
commercialization, tech transfer, trying to understand what is 
not working there with legislation that has been brought forth 
in the past to create an environment such that tech can 
transfer and we can commercialize it, but we do know that we 
don't see much of it. Back in the 1990s, we saw an acceleration 
that created the cooperative research and development 
agreements with lack of utilization going into 2000 and 2001, 
and we need to figure out how to integrate them more into this 
and see how we can involve them.
    Dr. Atkinson, I very much appreciate that you did mention 
the national laboratories with your bullets that you 
highlighted. The one thing that I would ask is your perspective 
on how we can use our national laboratories as part of the 
nucleus for the regional innovation clusters. As we all know, 
the national labs currently engage in a range of tech transfer 
activities but we still don't see that strength, and you 
highlight with your first bullet to see what we can do to 
remove the restrictions on universities from having specific 
commercialization objective. I wonder what your thoughts are 
around that, and also, Mr. Chopra, around what we could do with 
creating incentives so that we can see more commercialization 
and this kind of activity and even incentives for 
entrepreneurial lead so that way we can create certainty for 
companies that Mr. Holland would bring in, the scientists, the 
engineers, the physicists that help develop these ideas is able 
to partner with those entrepreneurs that have the ability to 
manufacture, and your thoughts on that.
    Dr. Atkinson. Excellent question and comment. We did a 
report last year with a colleague of ours at University of 
California Davis, Fred Bloch, and Fred did a report called 
``Where Do U.S. Innovations Come From,'' and he did an analysis 
over 40 years with the top hundred innovations every year. What 
Fred and his team found was that Federal labs actually play a 
more important role than you think, that about two-thirds of 
award-winning innovations today, actually more than that, about 
75 percent, come from collaborative partnerships. That is very 
different than 30 years ago when most innovations came from one 
company having it in their lab, figuring out how to do it and 
commercializing it. Today it is much more about collaboration--
SBIR award winners, Federal laboratories, universities, small 
businesses, big businesses. So in that new ecosystem, Federal 
labs can play an important role. And we see that in New Mexico, 
for example, the Sandia Science Park, very effective. There is 
an innovative approach to try to get some of those technologies 
out of there.
    I think we could do two things. One, in the 2005 energy 
bill, there was a provision put in there by Senator Bingaman, I 
believe Senator Domenici at the time, on a collaborative energy 
R&D tax credit so if you worked with a Federal laboratory, you 
are a company and you worked with a Federal laboratory on 
energy R&D, you could get a more generous credit because the 
logic is, a lot of that benefit is going to spill over. A 
scientist at the lab will publish those results. I think we 
could just change that provision and say that any R&D done at a 
Federal laboratory by a company could get a more generous R&D 
tax credit. That would be one thing. I think the second part of 
this would be to make sure that any provisions or proposals 
that the Administration has or other proposals that try to 
engage universities in better efforts on technology transfer 
that we also apply that to Federal laboratories because there 
are certainly some Federal laboratories that have a lot of 
potential and could do a lot more.
    Mr. Lujan. I appreciate it.
    Mr. Chopra and Mr. Holland.
    Hon. Chopra. Let me begin by saying I hope I didn't convey 
the impression that it was only a university focus. I think the 
Federal labs have a great deal to offer. In fact, I was with 
the Chief Technology Officer at Procter and Gamble who has 
created a multimillion-dollar benefit out of a collaboration 
with Sandia itself. So we are seeing the same principles apply. 
Now, there are some peculiarities in how we promote bringing of 
industry relevance into research activities and so there are 
some processes that are different, but no, we are very much 
committed to servicing best practices and understanding what we 
can do to make it work. We are doing a deep dive on the 
experiment that had been done in the labs to bring in 
entrepreneurs and residents. It may not have achieved the 
results we had anticipated. The venture capital community 
participated in that program. Trying to gather lessons learned 
and see how we can think anew. I was with Christina Johnson at 
the Department of Energy, very focused on this issue within the 
portfolio in collaboration with Koonan. So we are very much 
open and interested to finding ways in which we can collaborate 
on best practices with the universities and Federal labs and 
see that as a strong engine of new ideas for the commercial 
sector.
    Mr. Lujan. And I apologize, Mr. Holland. My time has run 
short. Just quickly.
    Mr. Holland. So Representative Lujan, I think it is a good 
news/bad news thing. The bad news aligns with the frustration 
that I heard in your question. The good news is, I think the 
venture industry is waking up to the potential in the national 
labs so that the NVCA does clean tech road trips where we take 
40 VCs out to Sandia, Enrel, Oak Ridge and Argonne, and a 
number of us, including me, have actually funded projects out 
of the labs. On the bad news side, we were one of the 
participants in the EIR [Entrepreneur in Residence] program. We 
took a brilliant Ph.D. physicist, we embedded him in a national 
lab, not in your state, for a year. He looked at a thousand 
projects and at the end of that time period we concluded there 
were none that we could put venture money behind, that we had 
confidence would succeed, and so I think the issue there is, it 
goes back to your original question. There is a fundamental 
disconnect, I think, between some of the activities in the work 
and their ability to apply those in a commercial realm, so 
there is sort of a bridge too far in some ways that we have to 
figure out.
    Mr. Lujan. And Mr. Chairman, I know my time is up, but if 
you give me the flexibility to--we mentioned this to Secretary 
Chu as far as how can we put these incentives in to create a 
stronger environment, and I will give you just a quick example. 
There was a brain imaging scientific exploration going on at 
Los Alamos National Laboratories. The spin-off was that we were 
as a result of what happened on the failed attempt on 
Christmas, we were able to take that brain imaging technology 
and use that magnetic resonance technology to now be able to 
put a molecular footprint on chemicals, liquids, materials that 
we could identify that could be harmful in a plane. Now, there 
may not be an obvious technology but the spin-offs are endless, 
and I certainly think that as we talk about the competitiveness 
of the United States, Mr. Chairman, that we need to look to see 
how we can include our national labs in this process and see 
how we can get this technology off the shelf and into the 
market. Thank you, Mr. Chairman.
    Chairman Wu. Mr. Lujan, always happy to give you a couple 
of additional minutes. You are a great representative for the 
country and especially those two national labs, absolutely 
wonderful.
    I was just stunned. I was in a conversation with some of 
the folks at Los Alamos recently and just as an aside asked how 
many Ph.D.s do you have there, and the fellow said 2,700. 
Absolutely stunning, and we need to build a different culture 
perhaps and do a better job of mining what is there.
    Dr. Kamlet, a couple of quick questions for you. I used to 
represent folks doing spinouts. Most of the time I represented 
the institution, and we engaged in protracted discussions about 
how to do the spinout, and at the risk of starving some future 
attorney families, you all have found an interesting way of 
doing business with this five percent go-in-peace policy. Have 
other universities adopted it? It apparently has worked well 
for you all. What is you evidence that it is causality rather 
than correlation in the step up in your spinouts, and just a 
couple of other questions, is it the decrease in transactions 
cost or an important signal to your PIs or some of each of 
that?
    Dr. Kamlet. Well, first I should say, I mean, most of our 
technologies are in the IT and engineering space and it is 
possible that other approaches in biotech would have to take 
other forms, but for us it has been transformational. When I 
came in as Provost ten years ago, the committee that had 
searched for the provost had identified tech transfer as the 
single most broken thing at Carnegie Mellon, and it is almost 
impossible to overstate the ill will that occurs when you start 
negotiating hard with your own faculty and the transaction 
costs are stupendous. We have found that the simple template, 
five percent go in peace, has made things very transparent. It 
has made things very quick. It has made things very mutually 
friendly on both sides between us and our faculty, and we know 
from advisory groups that come to evaluate different parts of 
campus that we are now seeing by the faculty, by the 
researchers as this being a competitive strength for Carnegie 
Mellon. It is something that attracts both students and faculty 
to us because we have these kinds of policies, and I think 
other universities have not adopted this very widely but we are 
on their radar screen and hopefully they will in the future.
    Chairman Wu. Terrific. Thank you.
    Mr. Holland, do you care to comment if you have had 
experience in negotiating with universities or research 
institutions and whether that has been hard or easy?
    Mr. Holland. I guess I would say I think it is getting 
better in part because of the kind of innovation we are seeing 
from Dr. Kamlet and others. I think that we went through a 
period of time where nobody really knew how to do the dance and 
now we have kind of figured it out. We figured out the rules 
that make the most sense. We have been extraordinarily 
fortunate in terms of rolling projects directly out of 
university and having them be incredibly successful, and I 
won't bore you with all the examples. I could give you six 
right off the top of the bat, and we are one of hundreds of 
venture firms. One that is notable is a company called 
Financial Engines. We funded that directly out of Nobel prize-
winning work out of Stanford University. We took the professor 
and his top graduate student out and started this company back 
in 1996. Financial Engines creates these algorithms that are 
very interesting. They automatically help invest your 
retirement money. It is a lot more complicated than that but 
there are 58 patents associated with the work there. This is a 
company that took 13 years for us to get to the point where it 
could reach the public market. It went public two weeks ago on 
Monday and is now trading at about a $800 million market cap on 
NASDAQ so it is employing hundreds and hundreds of people, very 
high-quality jobs, and it was a research project directly out 
of a university, but as I can tell you, I can give you many, 
many more of those and I think, you know, quite frankly there 
are just some places that do it better than others. The schools 
that are represented on this panel do it very, very well.
    We were at Carnegie Mellon two weeks ago. We commissioned 
some work there, a study on some things that we can't handle 
within our own firm on some algorithms we want to develop and 
so we spent a day at Carnegie Mellon, had a competition, had a 
bunch of students and faculty come forward with some great 
ideas. It was very cost-effective for us, so we love that type 
of collaboration.
    Chairman Wu. Great. Thank you very much.
    Dr. Kamlet, just very quickly, this project at Olympus and 
the entrepreneur in residence program, I am fascinated by that. 
How do you set that up and how do you select the people to 
participate?
    Dr. Kamlet. Well, the people who participate are self-
selected but it is amazing how many of them respond incredibly 
well to a little bit of assistance. They didn't see themselves 
necessarily as knowing how the dance works, so to speak, in 
terms of commercialization and we have found both students and 
faculty to be enormously receptive. We have tried to create 
what you might call an entrepreneurial ecosystem trying to 
provide assistance across all the points in which faculty and 
students interface with us, and in terms of entrepreneurs in 
residence, it is a process that has worked amazingly smoothly. 
We have to find the funding for it, but we have a very good 
culture for welcoming some entrepreneurs.
    Chairman Wu. Thank you very much, Dr. Kamlet.
    I recognize the gentlelady from Maryland.
    Ms. Edwards. Thank you, Mr. Chairman.
    I want to go back to Dr. Atkinson. In your testimony you 
talked particularly about tax policy, and this isn't the 
committee to do tax policy but it is actually important to our 
consideration about how we structure investments in innovation, 
and you talked about other countries and their tax policies 
that have elevated them to spur investment, and one of our 
recommendations goes to a 30 percent credit around the idea of 
collaboration, which you have spoken to a great deal. I believe 
in investing in collaboration and I don't think you necessarily 
get the kind of collaboration you want unless you do invest in 
it. But I wonder if there is a point in time or process or 
research at which it is important to scale up those investments 
and collaboration as opposed to some other times because you 
could make those investments really early or allow for a 30 
percent credit early but it still doesn't necessarily at the 
end product result in the kind of collaboration that you want 
to spur something toward one form of innovation into the 
commercial sector. So I wonder if you can give us some ideas 
about that or what the limitations or hazards might be in 
putting in and enabling that kind of credit at the outset at 
such a substantial amount.
    Dr. Atkinson. Sure. I guess we do see that this notion of 
collaborative innovation systems is critical to driving high 
rates of innovation that are commercialized within the United 
States, and we need a multitude of different policies, and we 
have heard a lot of them today, different policies around how 
intellectual property is licensed and different incentive 
policies and all. I do think the tax policy is one component of 
that. I don't think in and of itself a collaborative R&D tax 
credit is going to solve all the problems but I think it will 
help. Right now if a company wants to invest at Carnegie 
Mellon, and you have many, and there are at Georgia Tech as 
well, a lot of that research is going to be a benefit to 
everybody. So even though Google has a lablet there and Intel 
has a lablet there, the faculty aren't prohibited from 
publishing articles. In fact, they do publish articles. So 
economists would call that knowledge has spilled over and other 
sort of free riders, if you will, can just take it and 
innovate. And so there is an underinvestment of industries in 
university collaborative research, and to Mr. Lujan's point, in 
Federal labs as well. So that is why we think that a tax credit 
could play an important role there.
    One of the nice things about that too, by the way, this 
wouldn't involve the government picking a winner or a loser. If 
an industry and a university or a lab come together and they 
think there is something valuable in that partnership, they 
would be able to do that under the system. So I don't really 
see a lot of risks with that other than the risk of if we only 
did that, I think we wouldn't do enough because you have to 
have a whole ecosystem.
    Ms. Edwards. And are there standards--and maybe, Mr. 
Chopra, you can answer this. Are there standards or principles 
that could be set so that when government makes grant-type 
investments that you don't just encourage collaboration but you 
actually buy it?
    Hon. Chopra. Well, in fact, we make those judgments within 
the program areas, so let me answer your question in two parts. 
One example is health IT as a new research and development 
endeavor that was called for because of the Recovery Act, and 
because for health IT there is a closer gap between what is 
done in the research environment there and what could actually 
be seen in the hands of the software companies who produce the 
goods for doctors and hospitals. Collaboration was a 
requirement as part of the grant request and so there was an 
explicit notion there that you had to collaborate not only 
across research institutions but also with the private sector. 
So that is one. And two, and this is an important point and I 
think the term ``innovation cluster'' can be described in lots 
of ways. From a policy standpoint, there are program mission 
restrictions about what they should or shouldn't fund, but what 
we tried to do to promote collaboration was to say if we could 
bring multiple agencies that have mission alignment around a 
particular policy objective--but come to it with their own 
perspectives--that we could actually achieve the kind of 
collaboration we are looking for without bearing all that 
burden on a single funded program area.
    So the reference we made earlier, maybe a month ago in 
February, the Department of Energy initiated an energy 
innovation hub on building efficiency, and we are scoped to 
make an investment that looked like as defined in the program, 
but we wrapped around it the engineering research centers in 
the National Science Foundation. We wrapped around it Small 
Business Administration grant opportunities. We wrapped around 
it NIST opportunities to the Manufacturing Extension Program. 
So we stitched together seven Federal agencies who offered if 
an applicant could describe their approach to the innovation 
cluster, the collaboration that would help bring about the 
economic growth we would like to see out of the investment, 
they could apply for multiple buckets, in a sense, in a 
coordinated fashion. This is our first pilot of this regard.
    It seems that the demand out in the field is pretty high. 
We had a couple of public hearings about people's interest in 
this. Normally you get 100 people to show up at these things. 
Four hundred-plus people showed up at the first of these to 
talk about how they could take advantage of this new 
initiative. As we see the results of this program, we might 
factor that into future activities. So some programs will have 
more specific language about collaboration and the 
solicitations themselves. Others will take this collaborative 
approach where they bring multiple agencies to the table to 
achieve the same goal. I am sure there is a better and cleaner 
and more efficient way of doing this but we are doing it within 
the constraints of the current environment, and you all will, I 
am sure, engage on these issues during the course of your 
deliberations.
    Ms. Edwards. Thank you, Mr. Chairman.
    Chairman Wu. Thank you, and thank you very much, Mr. 
Chopra. I saw that group of 400 individuals and it was an 
interesting gathering, and I just want to let you know that the 
folks that we brought together for our little regional 
application for that project, the red-team analysts commented 
that this is the most complex offering, shall we say, that they 
had ever seen, and I am not sure which way to take that, but--
--
    Hon. Chopra. We are learning as we go, Mr. Chairman.
    Chairman Wu. Mr. Lujan for five minutes.
    Mr. Lujan. Mr. Chairman, thank you very much, and I just 
want to say, what a useful and very valuable discussion that 
this has been today to get some insight and especially the 
level of detail that you went to in the testimony that you 
submitted to us as well prior to this hearing. Very insightful.
    A very simple question directed to Mr. Chopra. It seems 
that a lot of the R&D directorates that we see with the 
Department of Defense and DOE are top down that we push what we 
want to see but there are a lot of ideas that are percolating 
from the bottom up. What can we do or how can we work to create 
an environment that can support a lot of that as well to have 
some flexibility with those programs as well, which is those 
centers were originally created for but other programs that do 
exist for some of these collaborations to allow for that to 
happen?
    Hon. Chopra. Well, thank you very much. That happens to be 
an area that I have a great deal of passion for, which is 
balancing the top down from the bottom up, and here I would 
like to invoke the President's open government initiative where 
we are trying to change the way Washington works by being much 
more transparent and collaborative and participatory so we can 
find great ideas from the bottom up and see that they have a 
chance to take hold, and this applies beyond R&D. This is a 
philosophy we are taking to every Federal agency. I will mark 
the date April 7th when each of the Federal agencies, the 
Cabinet agencies in particular, will be publishing open 
government plans as directed by the directive that had been 
issued back in December. You will see a great deal of strategy 
in each of those plans outlining how agencies will service 
bottom up new ideas that can be implemented. Specifically, I 
will point to a line in that directive referencing prizes, 
competitions and challenges.
    When the President issued the open government directive, 
one of the key deliverables coming out of it was produced on 
March 8th, guidance from OMB [Office of Management and Budget] 
to all Federal agencies on how we can thoughtfully utilize 
prizes, competitions and challenges to do the kind of thing you 
are describing, bring ideas up that hadn't been conceived and 
detailed requirements that go over 500 pages of material where 
you know exactly what you are looking for. That is a culture 
change in Washington. I am not going to suggest it is going to 
happen immediately but we are starting to see the fruits of 
that activity. More and more of our agencies are thinking about 
ways that they can capture both frontline worker innovations, 
perhaps the Federal labs might be another example, as well as 
innovations out in the private sector.
    I will give you just one agency in particular, the Veterans 
Administration. They have been trying to get the claims backlog 
down forever, and as many of us know, it is a top priority for 
nearly every presidency is to serve our veterans at the highest 
standards yet the claims backlog continues. President Obama in 
August said ``I want the 19,000 frontline workers to give us 
your best ideas.'' We ran a business plan competition, picked 
the 10 best. Those are being implemented as we speak, but a 
gentleman from Togus, Maine had a simple idea that didn't cost 
us a nickel to restructure our performance measures so that we 
could create a culture of accountability for results. He 
wouldn't know that his idea would go anywhere. Togus, Maine put 
it in their business plan, came down to Washington, made the 
pitch. Secretary Shinseki said yes, this is it. They are now 
executing, and by July that will be implemented at zero 
additional cost. So we are going to do this, I hope, in every 
one of our agencies.
    Mr. Lujan. I appreciate that.
    And Mr. Holland, and this goes for the entire panel, I am 
very interested in getting whatever analysis was conducted with 
that pilot project that you engaged with, with working with the 
national laboratories to see what failed, and for that matter, 
hearing from any companies that you have worked with or that 
are out there that have positive stories and negative stories 
so that we can see what we can do to learn from that and see 
how we can integrate that to make a much more friendly 
environment to allow for this to move forward.
    Mr. Holland. Given the nature of the time constraints, we 
have other more positive stories to share and I am happy to 
take those offline with you. One is around some of the work at 
Oak Ridge around their energy efficiency smart homes, and our 
clean tech practice at the foundation happens to specialize in 
energy efficiency, smart grids, smart materials. So one of our 
companies has their windows installed in this smart home. The 
windows are actually manufactured in Pittsburgh, just outside 
of Pittsburgh. But we have got great stories around that type 
of thing. But the bottoms-up nature of what you are talking 
about is a huge issue for us. It is what we call deal flow, and 
it is actually probably the most important thing in our 
industry.
    One of the things that we are working on now, and you all, 
thank you for so many things about this meeting but one is, you 
saved me a couple plane flights because we are going to be 
hitting up our friends at Carnegie Mellon and Georgia Tech to 
participate in a program that we are going to start, having us 
basically hire students to be campus reps, and we want those 
campus reps to be the equivalent of kind of little miniature 
AWACS [Airborne Warning and Control System] planes. We want 
them sort of buzzing around the area and notifying us when they 
see something that looks interesting, looks like it could be a 
good project. A project can come from anywhere. It could come 
from the university, come from the local area. We are looking 
very closely at a company in Pittsburgh called Mod Cloth right 
now that was funded out of two students that happened to be 
married who were undergraduates at Carnegie Mellon. That is the 
kind of stuff that we live and breathe for, so we are very 
interested in this whole notion of bottom up and we are 
spending a lot of time on it.
    Mr. Lujan. Thank you.
    Thank you, Mr. Chairman.
    Chairman Wu. Thank you very much.
    Mr. Holland, we read your materials about facilitating 
collaboration and we acted on it promptly.
    Three very, very quick questions. I hope to get this in in 
my last five minutes. Dr. Kamlet, you suggest, and I think a 
couple other people also suggested, that there are some funding 
issues. The Technology Innovation Program and SBIR don't cover 
the spectrum of taking a product from the lab to 
commercialization and that we need to address earlier as well 
as later funding, if we could quickly tap on that and then move 
on.
    Dr. Kamlet. Yes. The government's main role of course is in 
the domain of basic research but it is also the case that 
before Mr. Holland and his organizations can take a product, it 
has to reach a certain potential in terms of commercial 
capability and have progressed to the point in which there is a 
clear functionality and intellectual property and so forth, and 
it is really before something is ready for an SBIR or for 
venture funding because that requires a company to already have 
been formed. That chasm exists, and in order to get the most 
mileage from the basic research to translate into 
commercialization, spending some attention on trying to find 
funding mechanisms to take not large amounts, $50,000, 
$100,000. There should be a lot of accountability attached to 
it but that is a current gap in which unless we find funding 
from foundations or conceivably do it ourselves, there is no 
basis in the ecosystem and the American structure and the 
universities to fund those kinds of things.
    Chairman Wu. Well, shoot, you know, maybe the feds can just 
match what Carnegie Mellon is willing to put on the table in 
terms of indirect cost recovery funds.
    Dr. Kamlet. Well, we can talk.
    Chairman Wu. If no one else wants to comment on that, Dr. 
Atkinson, you and Dr. Breznitz mentioned that some of our 
innovation is perhaps better done at the state level or that 
coordination is better done at the state level, and I wanted 
you to address that a little bit further because quite frankly, 
that is something that I have not focused on despite all the 
activity that has been going on in my neck of the woods with 
Onami and others.
    Dr. Atkinson. Sure. Within the last perhaps 15 years, I 
think one of the biggest changes in the U.S. innovation system 
is that virtually every state has developed some programs and 
policies to spur technology-based economic development, and it 
is completely divorced from party lines so Republican governors 
do this just as actively as Democratic governors. The big 
problem with that, though, is that the incentive for them is 
limited because sometimes it takes innovation policies five to 
ten years to pay off. I don't think a lot of governors are 
thinking five to ten years down the line. Oftentimes they have 
to worry about their reelection. And secondly, a lot of these 
policies sometimes will spill over into other states. So our 
view is that the United States is so big--Dr. Breznitz 
mentioned Finland, great, interesting programs there. They are 
sort of like a state. The United States is so big that we can't 
really have a national innovation system that is completely run 
from Washington. The people who are running the technology 
group in Pittsburgh that the state helps fund, they know about 
these projects in Pittsburgh pretty well but I don't think 
Washington knows about them. Same thing in Portland. That is 
why Oregon has a program like that. So the problem though, is 
that these programs are underfunded, and if the Federal 
Government could support them in a more systemic way and tie 
them also to the development of long-term strategies around 
innovation, as you, Dr. Breznitz, have alluded to in your 
testimony, I think that would really go a long way. I think we 
have an undervalued resource here as partners with the states 
and it is, I think, time for a Federal-state innovation 
partnership.
    Dr. Breznitz. Thank you for this question since, as you 
know, I am very much interested in this. I can give an example 
from Georgia, so for example, we conducted a study at Georgia 
Tech about what happens to a cluster of high-tech industries in 
Atlanta and we found out it is stagnant, so it grew and then it 
is stagnant for about ten years, and we tried to figure out 
what it is. Money? No. Good people? No. We found out it is 
basically a secret sauce of Silicon Valley, collaboration. 
Companies do not collaborate. And in order to make the Atlanta 
cluster better, therefore you had to have a program that 
understands how to connect the actors within the Atlanta 
region. This is something that the Federal Government can't 
even know and therefore we need to go to the state levels if we 
talked about bottom-up ideas and understand what some of the 
limits, constraints, ideas that they have and we can probably 
do that as the Honorable Chopra said by giving competitions. If 
you want to have a really innovative idea to look for your 
region and your city, you have to submit a proposal for a 
competition and the Federal Government can give you a certain 
amount of money or tax credits and make it happen. An 
experiment that works can be replicated and the Federal 
Government can make sure that if you want to do semiconductors, 
which is all around the Nation, and have three or four of those 
competitions, you can coordinate with them and that way we can 
bring the forces and the knowledge from the bottom up and from 
the Federal Government and have a national strategy at the same 
time.
    Chairman Wu. Terrific. Thank you. My understanding is that 
there are no more questions form the panel except for this last 
one from me. Lessons from DARPA, ARPA-E and NASA. Many people 
have talked about the good model that DARPA has provided. DARPA 
and NASA were started at about the same time, and we might have 
some lessons about how each has or has not spurred private 
sector innovation, and finally, our experience to date with 
ARPA-E. I don't know if we have had enough run time to draw any 
conclusions but if the panel would like to comment on at least 
these three organizations and their effect on innovation in 
America.
    Hon. Chopra. You know, I would not want to speak for the 
directors of the programs that you have referenced to describe 
their success, but I will tell you from my vantage point, a key 
to their success is understanding a problem that they wanted to 
solve. When you have a problem, an itch you are trying to 
scratch, a problem you are trying to solve, you can be much 
more effective in bringing together an ecosystem to help you 
address the particular problem that you are looking to solve. 
That is, in a sense, that equation of ideas and relevance 
equals innovation. So I think a key in DARPA in particular and 
NASA as well, it is really early in ARPA-E but it is part of 
the DNA there, is a really thoughtful understanding of the 
problem. That allows there to be a creative approach to 
tackling that problem and that I think has been much more 
effective to produce relevant ideas that hopefully have the 
ability to translate in the commercial sector.
    Dr. Atkinson. I will just make one comment, there was a 
report that we had an event on with a Carnegie Mellon 
professor, Erica Fuchs, who is an engineering and also public 
policy professor, and she has done a very in-depth study of 
DARPA over the long history of DARPA and when it was more 
successful and less successful at spurring innovation sort of 
beyond just the Defense Department. And what she found was that 
DARPA was most successful when it didn't just focus on their 
narrow mission and it had a more broader and expansive role, 
also going to Mr. Chopra's point about still had focus but it 
wasn't just we are trying to do this very narrow thing. So I 
think that is important for an agency like DARPA or ARPA-E to 
maintain that somewhat broader focus on spurring innovation, 
and DARPA has been able to do that sometimes quite successfully 
and other times less successfully.
    The last point I will make is, one of the things that I do 
think, though, it is important to recognize that there are 
innovation challenges in the United States that aren't related 
only to mission needs, and I think that is a big gap that we 
have and other countries--talk about a leader is Taiwan. I 
mean, they really are focused on some technologies that are 
driving their economy and have been quite successful but aren't 
really related to national government mission needs.
    Dr. Breznitz. On that point, two remarks. I think DARPA--
and I know Erica very well. We have been officemates at MIT 
when we were both slightly less young. DARPA was very, very 
successful when it managed to become a facilitator for private 
actors and universities to work together and come up with great 
ideas and fund them to do research that otherwise would not 
have been funded. When it saw its main role in creating those 
networks, making them happen and letting them run, it was 
amazingly successful. And the same goes for Taiwan. When Taiwan 
was amazingly successful as a research foundation, very similar 
to a national lab, in creating the private industry--the most 
famous one is semiconductors--is when it understood what its 
main role and its main metrics and benchmarks would be the 
creation of new companies that brings on billions and come up 
from new ideas and new collaboration with itself, universities 
and private entrepreneurs, and I think that is part of a 
facilitating role of the Federal Government that I would like 
to see more of.
    Chairman Wu. Terrific. Thank you all very much. This has 
been such an important discussion. I just wish that it had the 
draw of, say, doing a hearing on steroids in baseball. But 
putting the economy on steroids just doesn't have the same 
draw.
    I very much share with you all the view that America's best 
days are ahead. The balance with that sort of quintessentially 
American optimism about the future, I think it also behooves us 
to look over our shoulder. A few years ago when I was visiting 
China, and I visited a number of research institution and 
universities, but I also took the time to visit a high school, 
and we had a vigorous discussion there. It was absolutely 
terrific. It was very similar to the discussions that I have 
with high school students at home in Oregon. But the question 
that came up that I want to recall now is this Chinese high 
school student asked me what do you think is America's greatest 
strength, and I thought about it for a second and I said well, 
actually paranoia, paranoia about whether we are staying ahead, 
whether someone is catching up, and I think that sometimes we 
can overplay that concern and that can infect our optimism in 
negative ways and we should not have either a blind optimism or 
blind paranoia, and striking that balance is a very important 
role for anyone who leads the public, and I think that we all 
have an important role to play in that.
    Again, I want to thank you all for appearing before this 
Subcommittee. I view this as part of a continuing dialog and 
look forward to looking for both legislative opportunities and 
convening opportunities and other opportunities to push our 
agenda forward in stimulating innovation in America.
    The record will remain open for two weeks for additional 
statements from the Members and for questions to the witnesses.
    The witnesses are excused. Thank you very much. The hearing 
is now adjourned.
    [Whereupon, at 12:24 p.m., the Subcommittee was adjourned.]



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