[Senate Hearing 111-1018]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 111-1018
 
                        INNOVATION IN AMERICA: 
                      OPPORTUNITIES AND OBSTACLES

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

                                HEARING

                               before the

   SUBCOMMITTEE ON COMPETITIVENESS, INNOVATION, AND EXPORT PROMOTION

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 22, 2010

                               __________

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



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
                 Ann Begeman, Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel
                                 ------                                

   SUBCOMMITTEE ON COMPETITIVENESS, INNOVATION, AND EXPORT PROMOTION

AMY KLOBUCHAR, Minnesota, Chairman   GEORGE S. LeMIEUX, Florida, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri           JIM DeMINT, South Carolina
TOM UDALL, New Mexico                JOHN THUNE, South Dakota
MARK WARNER, Virginia                SAM BROWNBACK, Kansas
MARK BEGICH, Alaska                  MIKE JOHANNS, Nebraska


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 22, 2010....................................     1
Statement of Senator Klobuchar...................................     1
Statement of Senator LeMieux.....................................     4
Statement of Senator Warner......................................     5
Statement of Senator Udall.......................................    21
Statement of Senator Begich......................................    30

                               Witnesses

Hon. Aneesh Chopra, Chief Technology Officer and Associate 
  Director, Office of Science and Technology Policy, Executive 
  Office of the President of the United States...................     7
    Prepared statement...........................................     9
    Remarks, dated June 8, 2010, by Peter R. Orszag--Center for 
      American Progress..........................................    26
Dr. Robert D. Atkinson, President, Information Technology and 
  Innovation Foundation..........................................    33
    Prepared statement...........................................    36
Steven J. Ubl, President and CEO, Advanced Medical Technology 
  Association....................................................    50
    Prepared statement...........................................    52
Andrew M. Weiss, President and CEO, CoAxia, Inc..................    61
    Prepared statement...........................................    63
Rhys L. Williams, President, New World Angels, Inc...............    68
    Prepared statement...........................................    70


                        INNOVATION IN AMERICA: 
                      OPPORTUNITIES AND OBSTACLES

                              ----------                              


                         TUESDAY, JUNE 22, 2010

                               U.S. Senate,
  Subcommittee on Competitiveness, Innovation, and 
                                  Export Promotion,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m. in 
room SR-253, Russell Senate Office Building, Hon. Amy 
Klobuchar, Chairman of the Subcommittee, presiding.

           OPENING STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Good afternoon, everyone. Thank you so 
much for coming today. We're going to be talking today about a 
very key subject to our economy, to our economic recovery, and 
really to America's standing in the world, and that is 
innovation.
    I'd like to thank everyone that's here, especially The 
Honorable Aneesh Chopra, who is the Chief Technology Officer 
and Associate Director for Technology, Office in Science, 
Technology Policy. The President has named as his point person 
on these technology innovation issues. He is on our first 
panel.
    And then, after that, we have a second panel, and I will 
introduce the witnesses when they come up.
    But, I'd first like to thank Andy Weiss, who is the CEO of 
CoAxia. CoAxia is a small medical device company based in Maple 
Grove, Minnesota. And I think it's very important here that we 
could have had CEOs from big companies, but a lot of our 
entrepreneurship and innovation starts in America with our 
smaller companies. I know, personally, Medtronic started in a 
garage; 3M, in Minnesota, started as a sandpaper company in Two 
Harbors, Minnesota; and Target started in a dry goods store. 
That has been the story of America. It's a story of innovation.
    The world has always looked to our country as a center of 
innovation and entrepreneurship, a place where even the 
smallest startup from the humblest beginnings can grow into a 
household name.
    My state, the State of Minnesota, is a state that brought 
the world everything from the pacemaker to the Post-it Note; 
and despite being 21st in the country for population, we are 
now 7th for Fortune 500 companies. And, as I said, these all 
started as small businesses.
    I'm certain that the next Medtronic, 3M, or Mayo Clinic is 
being created right now in a lab or in a garage or in a 
manufacturing plant, and it is our job to support these 
innovators and entrepreneurs, and to allow them to bring these 
products to the market. The road from concept to 
commercialization is full of hurdles to jump and barriers to 
overcome, and we should focus our efforts to smoothing this 
road.
    I'm pleased to be here with my colleague, Senator LeMieux, 
the Ranking Member on this committee, from the State of 
Florida. And we have worked together on an export promotion 
bill to help small and medium-sized businesses. It actually got 
marked up through this committee 2 weeks ago.
    We know that, every day in every State, small companies are 
dreaming, doing, and driving the innovation agenda that we need 
to compete in this world economy. Whenever I think about this 
issue, I think about the beginning opening ceremony in the 
Beijing Summer Olympics, with the 2,000 perfectly synchronized 
drummers. Well, those drumbeats are only getting louder and 
louder. And while China is investing billions in its technology 
sector, we're still trying to get figure out some regulations. 
And while India encourages invention and entrepreneurship, we 
are still, sadly, playing ``Red Light, Green Light'' with stop-
and-go tax incentives. And while Brazil is training more 
engineers every day, we are doing our best, but we simply still 
haven't reached that point of graduating engineers and 
scientists to the degree to compete in this world economy.
    The world is moving ahead fast, and we can't let it pass us 
by. We need to be a country that exports, that thinks, and that 
invents, and that makes stuff again. In the words of Minnesota 
native and New York Times columnist Tom Friedman, ``We need to 
do some nation-building in our own Nation.''
    So, how do we do this? How do we encourage innovation? 
Well, first and foremost, we need policies that galvanize 
investors and encourage companies to grow. And that includes a 
strong and consistent R&D tax credit. We need greater 
investment in small business innovators through programs like 
the Small Business Innovation Research Program and the Small 
Business Technology Transfer Program. I saw Senator Warner just 
walked in; I know he has been working very hard--a group of us 
have been working hard on making sure that credit is getting 
out there to small businesses, as well.
    We need an education system that emphasizes STEM courses, 
like math and science and engineering, a system that trains our 
children for jobs in a 21st-century economy, to do the kind of 
innovative work that needs to be done.
    We need to allow people that study in this country from 
other countries, that come and work in our universities, that 
have graduate degrees, to stay in this country and start the 
next Google.
    America has many innovative industries and companies, high-
tech companies--IBM, Symantec--we've mentioned a number of them 
today--and we're going to hear from the biotech/high-tech 
industries today.
    But, I did want to focus on one issue which is very 
important in my State. And I know we're going to hear from some 
of the medical device industry people. I want you think about 
medical device in another way, besides saving my hip, and that 
is that the medical device industry is a poster child for 
American innovation. The U.S. is the world's number-one 
exporter of medical devices, and the medical device industry is 
one of the few industries that, even today, is adding jobs. 
From 2000 to 2007, from 2007 to 2008, employment in the overall 
economy went down by 0.7 percent, but jobs in the medical 
device industry increased by 1.5 percent. The industry is 
expanding for a number of reasons. One reason is that the 
science behind these devices is improving, and every day 
doctors and scientists come up with new materials, new ways of 
diagnosing diseases, and new ways of treating medical 
conditions.
    The industry is also expanding because advanced medical 
care is expanding throughout the world. Just think about the 
growing customer base in China and India. The middle class in 
these countries is increasing at an amazing rate. And with this 
expansion, the industry should also continue to grow.
    Not only is the medical device industry creating jobs in 
America, it is creating good high-paying jobs. Medical device 
jobs pay around 30 percent more than the average American job.
    Minnesota, in my State, has led medical innovation for more 
than 60 years and boasts more than 400 medical device companies 
that, together, employ more than 50,000 people. Plus, for each 
job created by the medical device industry, 4.5 additional jobs 
are created in the overall economy.
    So, this is truly an industry that we can look to as we 
look to how we expand this economy. When 95 percent of our 
potential customers, for any American business, are outside of 
the borders of the country, you should look to medical device.
    I did want to mention one roadblock that we're going to be 
discussing, and that is what's happening right now with changes 
to the FDA's 510(k) approval process. This is an expedited 
process by which the FDA approves medical devices when a 
substantial equivalent of that device is already on the market. 
Currently, 90 percent of devices on the market were approved 
using the 510(k) process.
    Changes to this process are always welcome. Safety should 
be the number-one focus. But, what's happening right now is 
that these changes are happening in the middle of individual 
companies' approval processes. For example, the FDA is asking 
for clinical data for devices that never before required 
clinical data, with no warning to device companies that such 
data would be needed. The device companies could not have 
predicted that the FDA was going to need this data, because 
these types of devices have not had any problems in the past. 
These requests obviously delay the approval process. And the 
longer the approval process, the longer it takes to get a 
lifesaving technology to market. The longer it takes to get a 
new device to market, the less certainty investors have and the 
more capital businesses need.
    Already, FDA's inconsistent approval process has dampened 
investment. In the last 2 years, venture capital funding alone 
has dropped by one-third. These declines have forced many small 
manufacturers to close their doors. Still others have picked up 
and relocated to Europe, taking jobs and revenue along with 
them.
    I'm aware of one American company that has had tremendous 
trouble with this process. The company and the FDA reached 
formal agreements regarding what kind of studies the company 
needed. The company completed those studies, with great 
results. However, the FDA, on multiple occasions, still goes 
back and asks for additional studies. The FDA kept changing the 
rules, even though the product had been approved in the market 
in Europe for 10 years. That's 10 years. The company is now 
going out of business. At its height, it had around 50 
employees.
    So, that's why I think it is very important, even for the 
best intentions, that we make sure that we mesh what's going on 
at our regulatory agencies with what we're doing to encourage 
innovation.
    I still believe that the industries we're going to hear 
from today--high tech and biotech, as well as medical device--
are really key to our economic fortunes in the country, and 
others should be brought along, as well, that can really create 
these jobs, can export to the world, create a world of 
opportunity, and bring our economy back to where it once was.
    So, I'm excited to hear from our witnesses today--and I 
want to thank you for coming.
    And I'll turn it over to my colleague Senator LeMieux.

               STATEMENT OF HON. GEORGE LeMIEUX, 
                   U.S. SENATOR FROM FLORIDA

    Senator LeMieux. Thank you, Madam Chair. I want to thank 
you, Senator Klobuchar, for calling this hearing, and 
continuing this discussion on the need to improve innovation 
and competitiveness. It follows, as you mentioned, on the 
hearings that we had on exports, specifically focusing on how 
we can help spur development and improvement in small and mid-
sized businesses.
    Advancements in science and technology and methods of 
providing products and services are the foundation of economic 
prosperity, and advance our security interests, as well. But, 
as the Information Technology and Innovation Foundation 
documented in a recent report, the Atlantic Century, the United 
States has slipped from number one in global innovation-based 
competitiveness to number six. The report identifies several 
reasons for this, including declines in domestic research and 
development delays for new U.S. patents, and a downturn in the 
number of candidates seeking science and engineering degrees.
    We have a responsibility in the Congress to work toward 
ensuring Americans have every opportunity to compete in the 
world marketplace. Congress has been focused, but a more laser-
like focus is required for the encouragement of candidates 
seeking math, science, and engineering degrees.
    We need modern and enforceable immigration policies that 
afford an opportunity for us to retain the best and brightest 
minds who come here seeking higher learning. We also need the 
kind of flexibility in our regulatory framework that recognizes 
that government should foster, rather than stifle, the 
entrepreneurial spirit.
    The recession has put enormous pressure on small and mid-
sized businesses, as well as investors, to find new and more 
economic ways to remain competitive.
    I look forward to our hearing today, and hearing from our 
witnesses about measures that would help advance our innovation 
and competitiveness in the world.
    I would like to specially recognize my friend, Mr. Rhys 
Williams, who is the President of New World Angels. He is a 
successful entrepreneur, and New World Angels is the largest 
angel investor group in Florida. He brings a unique perspective 
on the need of small firms and the bridging of what we call the 
Valley of Death, the--between innovation and the marketplace--I 
know Senator Warner and I have talked about that before--which 
is really a focus. You have this great support in our 
universities, especially for scientists and entrepreneurs and 
innovators who can develop things there in the lab. But, 
getting that funding in that middle area before it's marketable 
is very challenging, and it causes a lot of stifling of 
innovation.
    Madam Chair, this is a hearing that is very important to 
Florida. Florida is trying to diversify its economy. We are now 
under tremendous pressure, in this recession, with nearly 12 
percent unemployment, one of the Nation's worst foreclosure 
rates, one of the worst rates in folks being behind on their 
mortgages. And that is because we've been too reliant upon real 
estate and construction, and a couple of other industries, to 
make our economic engine run.
    Recently, in past years, we have attracted the life 
sciences business and other high-tech businesses to Florida, 
whether it's Scripps, whether it's Max Planck, whether it's the 
Medical Village in Orlando, or the great work that our 
universities are doing. This is a key focus for Florida, to 
help us diversify and advance our economy.
    So, I thank you very much and congratulate you on calling 
this hearing today.
    Senator Klobuchar. I'll now hand it over to Senator Warner, 
who knows a little bit about this, as he started his own 
business. I'm remembering, I know you two know each other well, 
when we had a hearing on cell phones, and there were three 
Senators up here chairing it. Senator Warner was brand new, had 
to go down to his seat down there, and I actually sent a note 
to him, as everyone was droning on, that said, ``What the hell 
do you think you know about this?''
    [Laughter.]
    Senator Klobuchar. So, I'm glad he has taken his rightful 
place, as he should, as a leader on these issues.
    Senator Warner.

                STATEMENT OF HON. MARK WARNER, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Warner. Thank you, Madam Chair. Thank you, Senator 
Klobuchar. And I guess I'm moving up the dais a little bit.
    Let me echo Senator LeMieux's comments and thank you for 
holding this hearing. It is long overdue. And I appreciate your 
interest in both competitiveness and innovation. I also 
particularly appreciate your focus on exports.
    As Senator Klobuchar has said, the markets of tomorrow are 
not just going to be domestic, they're going to be all over the 
world. And I really appreciate you bringing this hearing, and 
particularly having our chief technology officer for the 
country, a great Virginian, Aneesh Chopra, who I've had the 
pleasure of knowing for more than a decade. And I don't want to 
steal his thunder. Aneesh will give us a good presentation on 
what the administration is doing, and I look forward to asking 
him a couple of questions.
    I do want to make a couple of opening comments. I mean, and 
this is not very PC, but I don't think our country's had much 
of an innovation or growth strategy for the last decade-plus. 
And I think, if you look at most metrics, compared to late 
1980s and through most of the 1990s, innovation in America has 
been, at best, lackluster. I'm not trying to point political 
blame. I think there was a little bit of resting on our laurels 
as the rest of the world leaped ahead. And there are clear 
exceptions, companies in the last decade that have been 
extraordinary successes, but they pale in comparison to the 
numbers that took place during the 1990s.
    And I think there are three or four areas that, beyond this 
hearing, I'd love to work with my colleagues and others on. One 
is--and I think we'll get to this in a second panel--this is 
something I've been working with Dr. Atkinson on--America is 
one of the few major industrial countries in the world that 
doesn't even have a competitiveness strategy that's clearly 
outlined, that we can at least peg with metrics against how 
we're doing. If you look at some of the countries around the 
world--the Koreas of the world, who have grown enormously in 
innovation in the last decades-plus--they've got a strategy and 
a plan.
    Second, I do think there needs to be--and both Senator 
LeMieux and Senator Klobuchar have mentioned this--we're going 
to need a system that looks a little better at the regulatory 
system. Too often, our regulatory system has become an 
impediment to innovation. Senator Klobuchar mentioned the FDA. 
I think we've seen challenges around the energy sector, well-
intentioned environmental regulations sometimes precluding 
energy innovation. And this is tough, as a former telecom and 
IT guy, to say, but I think the greatest job and wealth creator 
in the next 25 years, worldwide, will be the energy sector, 
and, in many areas, we're not in the game. And while there are 
enormous challenges we've got to wrestle with, on IP protection 
that this committee's jurisdiction has got to take on the one 
area, regardless of where we fall on that issue is upgrading 
the caliber and length of stay of folks at the Patent and Trade 
Office, to make sure that those innovations can at least be 
reviewed in a timely manner. That is very important.
    Exports has been mentioned as an area that needs more 
attention.
    And then, my final comment--I know my time has run over--
and I'm very happy that Senator LeMieux has got--one of the 
second panel--a guy who was an angel investor coming up--but, 
one of the areas that we've had the most precipitous decline in 
the last decade is the slowing of early-stage capital formation 
in this country. Let's face it, over the last decade, why would 
anybody--I'm biased; I used to be a venture capitalist, I used 
to be somebody who started these companies--but, why would 
anybody go out and do the very hard work of investing with an 
entrepreneur, growing that company through that Valley of 
Death, when, over the last decade, a much surer bet was to go 
be a financial engineer on Wall Street and create a financial 
product that was supposed to be about lowering the price of 
risk, when, in reality, all we did was create an interconnected 
network of financial obligations that almost brought the 
country, and the world, to the brink of financial ruin?
    Now, some of those instruments are useful. Many of them are 
more about fee generation, I think, than lowering the price of 
risk. And it would be great to have a few less financial 
engineers and a few more real engineers that actually build 
something. And one of the challenges is that we've got--and I 
say this as we look at the migration toward hedge funds, 
private equity--and, candidly, even in the venture capital 
community--everybody's moved up the food chain to do larger and 
larger deals, so the absence of angel funding, the absence of 
early-stage venture funding, has made it extraordinarily 
difficult for those startup companies, whether they come out of 
the university lab or whether they come out of the garage, to 
get past that angel round, and friends-and-family round, to get 
that funding, to where the venture community now looks at deal 
size. Oftentimes, you know, many of the venture community looks 
at a minimum $10-million investment. You're going to be through 
the Valley of Death if you can rate a $10-million investment, 
with very few exceptions.
    So, I appreciate, again, the Chair bringing this hearing. I 
look forward to Aneesh's comments, and look forward to the 
questions.
    Thank you.
    Senator Klobuchar. Well, very, very good. Thank you, 
Senator Warner.
    Our first panelist, as I said, is Mr. Aneesh Chopra, who is 
the Chief Technology Officer and Associate Director for 
technology within the White House Office of Science and 
Technology Policy. He is our country's first-ever national 
Chief Technology Officer, a job he entered after serving as the 
Secretary of Technology for the Commonwealth of Virginia.
    A entrepreneur himself, he is a Co-Founder of Avatar 
Capital, a venture capital network that invested in 18 startups 
during the dot-com boom. Mr. Chopra is a strong advocate for 
the medical device industry, and is also a self-proclaimed 
``tech geek'' who likes technological devices. We like that, on 
this subcommittee. This is a welcome place for you.
    Mr. Chopra, thank you for being here.

 STATEMENT OF HON. ANEESH CHOPRA, CHIEF TECHNOLOGY OFFICER AND 
 ASSOCIATE DIRECTOR, OFFICE OF SCIENCE AND TECHNOLOGY POLICY, 
     EXECUTIVE OFFICE OF THE PRESIDENT OF THE UNITED STATES

    Mr. Chopra. Thank you so much.
    Chairwoman Klobuchar, Ranking Member LeMieux, and, of 
course, my dear friend and Senator, Mark Warner, it's a real 
pleasure to be with you today to discuss the President's 
strategy for American innovation.
    We do have more thoughtful and formal prepared remarks, 
which I'll leave for the record and just describe for you some 
of the key themes and case studies that I'd like to highlight.
    I'd like to begin by referencing the themes that were 
raised in your opening remarks, and highlight specifically the 
study Senator LeMieux referenced about ranking from first to 
sixth. The more telling statement was, for the decade that 
Senator Warner had just mentioned, the rate of change that we'd 
seen across the 16 metrics that Dr. Atkinson will describe 
later. We ranked 40th out of 40 countries in the degree to 
which we saw improvement across this index of 16 measures.
    So, yes, one to six is an important specific statistic, but 
that rate of change is the one that has us a little bit more 
concerned.
    In my capacity as Chief Technology Officer, it is my 
responsibility to execute on the President's strategy for 
American innovation, by highlighting the power of data, 
technology, and innovation, both to improve the Nation's 
economy and to improve the lives of everyday Americans.
    And with your permission, what I'd like to do briefly is 
summarize the key components of the President's strategy for 
our discussion today.
    The strategy rests on the notion that our country's at its 
best when we invest in the building blocks of innovation. We'll 
talk about R&D investments, the human capital aspect, and STEM 
education, as well as the information technology infrastructure 
necessary, whether it be broadband or other related 
capabilities.
    The second component of the strategy is that we look at 
open and competitive markets, with particular emphasis on 
entrepreneurship. I'm going to come back to this second pillar 
for my case studies.
    And then, last but not least, the President has identified 
a few areas that he has called for an ``all-hands-on-deck'' 
approach to catalyze breakthroughs. We speak directly--and 
address, Senator Warner, your comments--about the opportunities 
in clean energy and in healthcare information technology, a 
conversation that we will have later today.
    I'd like to highlight three examples, though, in this 
middle category, about focusing on entrepreneurship, and 
highlight for you examples on where our strategy is taking hold 
and where we're hoping to move forward.
    First is on the issue of technology transfer. The 
Administration is committed to strengthening the capacity of 
economic regions to commercialize research through 
entrepreneurship. In May, the Commerce Department released the 
I6 Challenge, in collaboration with the National Institutes of 
Health and the National Science Foundation, offering up to $12 
million in grant funding specifically to reward six teams 
around the country who have demonstrated the capacity to move 
ideas from the university setting to the marketplace. This 
particular program is active right now. Applications are due by 
July 15. It will focus on startups like a company called 
``iRhythm Technologies,'' which was born out of Stanford 
University's Office of Technology Licensing, back in 2006, with 
a powerful mission to both improve access to heart rhythm 
monitoring services, up to a full 14 days of monitoring, 
through a simple patch--and get this--that costs no more than 
today's more prevalent monitoring technologies that, frankly, 
dangle wires all over your body and often limit the monitoring 
time to a day, 2, or 3.
    Earlier this month, iRhythm formed a strategic partnership 
with St. Jude Medical that included a $10- million early-stage 
capital investment to deliver these innovative products to 
market, and that now supports, what had been a single-person 
faculty member's startup in 2006, a company that has over 80 
employees manufacturing domestically here in the United States 
and delivering those innovations throughout the country, and, 
as you all alluded to, the opportunities for export.
    The second component of entrepreneurship I'd like to 
highlight is the President's commitment to an open and 
transparent government. On the President's first full day in 
office, he directed us to instill a new culture of open 
government. And as part of that commitment, Secretary Sebelius, 
in early June, specifically highlighted the Community Health 
Data Initiative specifically to spur entrepreneurial activity 
born off of information that we've held within our databases at 
the Department of Health and Human Services. We met an 
entrepreneur, living in rural Wisconsin, by the name of David 
Van Sickle, who hailed from a community that had struggled with 
the issue of asthma reporting. He developed a platform that 
would help patients and public health professionals track the 
geography of asthma attacks by attaching a real-time GPS sensor 
to the inhaler so that it would record not only the location, 
but the time when it was activated. This has allowed for a much 
broader health surveillance system that would allow communities 
and individuals to avoid specific environmental conditions and 
be more preventive in their orientation with respect to asthma-
related concerns.
    I will end my remarks, given the time here, to highlight 
the importance of innovation clusters and the work that we're 
doing, and I'll end with this simple statement: We do believe 
that the United States is still the land of the future. We 
retain this honor because of America's scientists and 
entrepreneurs, and the public and private sectors, who are all 
coordinated and organized to understand the importance of 
applying the power of American curiosity and ingenuity to the 
biggest economic and social challenges of our time.
    With that, I'd look forward to your questions, comments, 
and concerns.
    [The prepared statement of Mr. Chopra follows:]

Prepared Statement of Hon. Aneesh Chopra, Chief Technology Officer and 
Associate Director, Office of Science and Technology Policy, Executive 
              Office of the President of the United States

    Chairman Klobuchar, Ranking Member LeMieux, 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 21, 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. Innovation begins from scientific research that creates new 
opportunities for technological change. That basic research lays the 
groundwork for the development of new products, services, or processes. 
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.
    For societies to prosper--both as producers of goods and services 
as well as consumers of them--innovations need to 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. For the Obama Administration, the arguments about too 
much or too little government involvement in innovation policy often 
lead to unproductive debates. The real question is how can government 
best create the conditions that will enable private sector 
entrepreneurs to innovate. Stated differently, the real issue is how to 
enable entrepreneurs to move our economy forward. As explained in the 
Innovation Strategy document, the best way forward is for the United 
States to invest in the building blocks that only the government can 
provide, protecting 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 work force, 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 (DOE) 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 3 
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 FY11 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. This past April, 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 job creation, and the Administration is 
stepping up its efforts to cultivate regional economic clusters across 
the country. For example, the Administration recently announced that 
seven Federal agencies would work together on a $130 million 
competition for an Energy Regional Innovation Cluster (E-RIC) around 
one of DOE's Energy Innovation Hubs. The Department of Commerce's 
Economic Development Administration is one of the partners, and will be 
contributing funds to link the Hub with local economic development 
strategies and to support economic adjustment efforts in the local 
community. 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. What we are learning is that 
whether the investment comes from the Federal or state government, or 
the private sector, or ideally, all of the above, those dollars will do 
a lot more good if they serve a well-developed regional strategy that 
leverages core regional strengths.
    The i6 Challenge launched by the Commerce Department's Economic 
Development Administration, the National Institutes of Health, and the 
National Science Foundation, is another example of these efforts. A 
total of $12 million is available to six teams around the country with 
the most innovative ideas to drive technology commercialization and 
entrepreneurship in their regions. The i6 Challenge is aimed at 
bringing together entrepreneurs, investors, universities, foundations 
and non-profits in communities throughout the United States, with 
applications due by July 15, 2010.
    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.
    An example of how prizes are being used to spur national priorities 
is USDA's Apps for Healthy Kids challenge that was launched by First 
Lady Michelle Obama in March as part of her Let's Move initiative. The 
competition is based upon a recently released set of data on nutrition 
by USDA and is aimed at encouraging entrepreneurs, software developers 
and students to create applications and games that encourage children 
and parents to make more nutritious food choices and to be more 
physically active. Eight game jams, bringing together developers to 
share tips and ideas, have been held across the country, and over 
twenty applications have been submitted so far in advance of the 
contest deadline on June 30.

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 promise improve the reliability, security, and 
efficiency of the electric grid. Smart grid technologies can also 
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.
    Last March, 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. 
Following the input received in that forum, I established another 
Subcommittee of the National Science and Technology Council's Committee 
on Technology to enable the Administration to develop a comprehensive 
policy framework for Smart Grid policy.

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.
    Last February, 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.
    The recently launched Community Health Data Initiative (CHDI) is 
another effort demonstrating how data and the innovative uses of 
technology are resulting in immediate improvements to health care. A 
public-private collaboration spearheaded by the Department of Health 
and Human Services, CHDI is aimed at using health care data to raise 
awareness and improve community health performance. Innovators from the 
worlds of business, technology, academia, and community organizations 
identified areas where exciting new applications to improve health 
could be developed. In less than 12 weeks these partners put together 
an amazing array of new or improved applications that utilize our data 
in creative and powerful ways to help advance health care. The results 
of these efforts, unveiled in early June, included the integration of 
patient satisfaction ratings from Medicare's Hospital Compare database 
into the web search results for hospitals, and a brilliant new 
combination of GPS device and app that allows asthmatics to have their 
inhalers automatically transmit the location and time of each use--
producing an anonymized, real-time map of asthma incidence that can 
provide crucial guidance regarding how to target interventions to 
reduce the burden of asthma.
    Existing technologies are also being used in innovative ways to 
improve health education, through the Text4Baby campaign that was 
launched in February. Text4Baby is a free mobile health education 
service to promote maternal and child health. Expecting mothers can 
text baby, or bebe in Spanish, to 511411, and they will receive free 
SMS text messages each week, timed to their due date or their baby's 
date of birth. Fifteen wireless carrier have agreed to deliver 
Text4Baby messages to subscribers at no charge for 2 years, and as a 
result, nearly 50,000 individuals have signed up for this services 
since February.

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 Obama Administration believes that the America COMPETES Act 
should be reauthorized this year so that the Nation can continue to 
build on the achievements of the original Act. I share the belief that 
the President and the Vice President hold, who supported the original 
COMPETES Act when they were Senators, that the COMPETES Act provides a 
valuable roadmap to guide Federal policies in innovation, 
competitiveness, and STEM education. We are supportive of this 
Committee's efforts to reauthorize this landmark act this year, and we 
very much look forward to working with the Committee to make the 
reauthorization a reality during this session of Congress.
    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.

    Senator Klobuchar. Thank you very much, Mr. Chopra. I 
really appreciate that, and thank you for that end, there. And 
I think we all share the same commitment. I just want to figure 
out how we're going to implement it, how we're going to get 
there, and----
    Mr. Chopra. Amen.
    Senator Klobuchar.--you ended there, because you had to end 
quickly, about the innovation centers and encouraging this on a 
governmental level. I know China has instituted what they call 
an innovation policy. The Indian government is building 
industrial parks to spur innovation. What is our government 
doing to ensure that we remain competitive along those lines? 
What more can we do? I believe we're still the number-one 
innovator, but people are really catching up fast. And what 
should we be doing?
    Mr. Chopra. Well, thank you very much. I believe the 
President's strategy sets the framework, Senator, on how we 
would attack this issue. But, if I were to highlight some key 
investment decisions that we're making, I would say, first and 
foremost, we're doing a significant job--you all, together with 
the administration--to make good on the America COMPETES 
commitment to double the core funding in our basic science and 
research activities: NSF funding, the National Institutes of 
Standards and Technology, and the work that's happening within 
the Office of Science at the Department of Energy. That 
investment decision, despite our tough economic climate, is 
going to sow the seeds for the next decade of economic growth. 
And I'm thankful that Congress has been supportive of that 
particular commitment.
    In terms of capacity, I would say the single biggest 
opportunity that doesn't necessarily require a tremendous 
amount of investment is to strengthen and improve our capacity 
to move ideas--what we call ``the lab gap,'' as my colleague 
Judy Estrin, one of the entrepreneurs in our society, has 
described to move ideas from universities to the private 
sector.
    In many cases, this is a cultural and institutional 
challenge; that is, organizations that do a better job of 
identifying the relevance of a given research idea, and then 
introducing that idea through some prototype activities that 
don't cost a lot of money, to get them ``cooked,'' if you will, 
in time for the private sector to pick them up, is actually an 
area where, if you get the culture right and you change some of 
the processes on technology transfer, you might actually see an 
increase in the return on very modest taxpayer investment.
    To this end, we have an active request for information 
underway from the Administration--we called for this about 2 
months ago--for the best ideas on how we can strengthen the 
cultural and institutional capacities at our Nation's Federal 
labs and universities. Secretary Locke and I are touring the 
country. We're holding four regional workshops identifying best 
practices, and we're hopeful that, by this fall, we'll put 
together a pretty aggressive package that will demonstrate, 
again, with limited to modest additional funds, in terms of 
university research activities, to actually shift some of these 
cultural norms.
    There are areas--and we can talk at much greater length 
about some of the other activities that we're doing 
specifically in clean tech--where you might have more of a 
direct relationship to how other nations have taken on a more, 
vertical approach in a given area. I'm happy to discuss this if 
you'd like to go deeper there.
    Senator Klobuchar. What about commonsense innovation 
promotion, in terms of our regulatory agencies, the issue I 
raised, in specifics, with medical device, but that Senator 
Warner raised more broadly, just in general? And how do you 
make sure the agencies are doing their jobs, but also have an 
understanding of how we must be able to compete internationally 
against countries that have more streamlined processes, like in 
Europe?
    Mr. Chopra. One of the reasons the President created the 
Office of the Chief Technology Officer was precisely to 
understand how these new capabilities actually influence a 
broader range of policy goals. And so, it is in that context, 
within a month of my confirmation that I had convened our first 
investor summit with the FDA, specifically on the topic, of 
biotechnology investments; and strategies that the FDA could 
embark upon, through a transparency initiative that is now 
seeing its way through on implementation, that would bring more 
visibility into the operations of the FDA, and has strengthened 
that relationship between the investor community, the 
entrepreneurial community, and the agency. I am convinced that 
there is more to be done in this area, and we are focused on 
continuing these industry collaborations, through both my 
office, and through Dr. Hamburg's office.
    We are very focused on making sure that we see emerging 
capabilities--now, it strikes, in a couple of ways. There are 
traditional medical devices that are now taking more advantage 
of wireless capability. So, the intersection of information 
technology and traditional medical devices opens up new 
opportunities, but also creates some challenges in the 
marketplace, in terms of, How does one manage this? On July 26 
and 27, we're having a public forum bringing the FDA and the 
FCC together specifically around this issue, a topic that had 
been raised by Chairman Genachowski in the National Broadband 
Plan. So, I intend to bring leadership on issues like, How do 
you bring regulatory perspectives at the intersection of these 
disciplines, in addition to strengthening the transparency and 
the collaboration between the public and private sectors, so 
that we achieve the President's call--and your comments were 
rightly on point--for economic growth through investments in 
innovation?
    Senator Klobuchar. I appreciate that.
    I'm going to turn it over to my colleagues, but I will 
emphasize, again, that image of those drummers at those Beijing 
Olympics, because it is getting louder and louder and louder. 
And I say this not only to you, but also to our own Congress, 
that we have got to unify and put some of the partisan politics 
aside and move on these innovation issues, to compete as a 
country.
    And I'll turn it over to Senator LeMieux.
    Senator LeMieux. Thank you, Madam Chair.
    Mr. Chopra, thank you for being here today.
    Mr. Chopra. My pleasure.
    Senator LeMieux. I appreciate the work that you're doing on 
this very important issue.
    I want to ask you a general question and then get in some 
specifics. This report, showing that we went from one to six, 
and then, you measured, it's really worse than that, because of 
the rate-of-change issues.
    Mr. Chopra. Yes, sir.
    Senator LeMieux. What do you think are the reasons that we 
had such a precipitous decline?
    Mr. Chopra. I would certainly welcome Dr. Atkinson to 
provide his scientific and technological perspective. My humble 
opinion is that this has to be a priority of the 
administration. And I don't want to render judgments on any 
particular priority sets that have been there in the past, but, 
structurally, our President--this administration--has made this 
a key priority. He has created this team of individuals, and 
myself as Chief Technology Officer, where this is my job. My 
focus, day and night, is ensuring that we have the right policy 
frameworks that will promote the right investment decisions, 
where we make them, but, more importantly, that we've got the 
right interfaces between the public and the private sector to 
spur activity.
    So, focus and leadership, I think, are a component of this.
    Senator LeMieux. So, were we more----
    Mr. Chopra. Dr. Atkinson might be more specific about 
investments in particular areas in education and----
    Senator LeMieux. Were we more focused on this in the 1990s, 
in your opinion?
    Mr. Chopra. I don't----
    Senator LeMieux. Or was it the private sector that came 
forward and did this?
    Mr. Chopra. I actually think that this is not an either/or. 
In fact, if anything, more research will suggest to you that, 
if you're an early adopter of a capability set, having trust 
that the environment in which you're operating, that the 
product or services you're actually using will actually work--
one of the benefits of having an FDA is that, if you're going 
to try a new drug, the American people have greater confidence 
that that drug should be consumed, because it's gone through a 
rigorous process. If you do it right, they actually can be 
synergistic; that is, the fact that we have an effective, 
functioning and working regulatory structure should open up 
markets of innovation, because you've created an environment 
where you have greater confidence--as the first mover, if you 
will--that when you take advantage of that new capability, that 
it's backed with some confidence.
    I understand, in today's environment, given the Gulf Coast 
oil spill and some of the concerns we've had with the financial 
markets, people's faith in our ability to execute on this may 
be at risk. However, I do not believe this is an either/or 
proposition. I think if we get both right, we would see that 
rising tide lift all boats.
    Senator LeMieux. Let me speak to you, if I can, 
specifically on some of the conditions that make innovation 
possible.
    Mr. Chopra. Yes, sir.
    Senator LeMieux. And one that I hear a lot about from 
businesses in Florida right now is a great concern, no matter 
what type of business they are, on certainty from their Federal 
Government, is the regulatory certainty or predictability. 
Because when things are unpredictable, businesses freeze up and 
tend not to act.
    Another thing that's important for entrepreneurs is a low 
tax environment, and a predictability of tax environment. We're 
about to have a debate, in the coming months, about capital 
gains tax.
    Mr. Chopra. Yes.
    Senator LeMieux. And it's set to increase from 15 percent 
to, potentially, 20 or more, all the way up to 39 and a half. 
Do you have an opinion, does the Administration have an 
opinion, on capital gains tax, where it should be in order to 
promote as much innovation as possible?
    Mr. Chopra. I don't have an opinion on the right capital 
gains tax rate, but I do believe this President has been 
explicitly clear. Making the R&E tax credit permanent has been 
a priority of this Administration. As part of the health reform 
bill, we included a billion dollars in the therapeutic tax 
credit, precisely to offer tax credits, and, in that case, 
grants, for those companies that don't yet have profitability--
a tax incentive, if you will--to promote innovations in new 
therapies. We've been supportive of those activities. The 
President has been very clear about areas like that R&E tax 
credit.
    So, you raise a very important topic, and I would certainly 
look forward to that conversation. My colleagues at the 
Treasury Department and the National Economic Council are 
clearly engaged on those issues more specifically.
    Senator LeMieux. Right.
    Mr. Chopra. My focus is ensuring that we have the right 
technological foundation for those discussions.
    Senator LeMieux. But, as a business person, a person who's 
the Chief Technology Officer----
    Mr. Chopra. Yes, sir.
    Senator LeMieux.--Capital gains tax is important. And 
obviously, it has to be something in order to generate revenues 
and to be a fair and equitable part of our tax system. But, a 
lower capital gains tax is going to provide for more incentives 
for innovation, is it not?
    Mr. Chopra. Frankly, my priority is promoting top-line 
growth. If you were to interview the top 20 CEOs, asking where 
the growth sectors are in the economy, I think they would say 
opening up overseas markets--because of the growth sectors that 
are there, would rank as a high priority. I think if you were 
to suggest domestic markets, the healthcare sector and the 
energy sector--if we get the healthcare sector and energy 
sector right--with respect to their willingness to embrace 
innovation, you might see a tremendous opportunity.
    Just as an example, as Madam Chairwoman described, venture 
capital has seen a bit of a decline, but if you looked at the 
2009 statistics compiled by the National Venture Capital 
Association, healthcare IT venture capital, up 37 percent, 
while overall venture capital saw a decline by roughly 31 
percent. Those are their numbers, not ours.
    I would argue that that's, in part, because of the focus on 
top-line opportunity. The President's commitment to the 
Recovery Act, on promoting the adoption of electronic health 
records, has had an impact, I believe, that has created the 
market conditions for more venture capital investment and more 
opportunity.
    If sectors of the economy that have not benefited from the 
Information Technology Revolution find opportunities to do so--
because we get the rules right on cybersecurity, because we 
think more thoughtfully about how to introduce health IT and 
the Smart Grid--we believe that we will unlock tremendous 
opportunities for economic growth, beyond any conversation that 
one might have on tax policy.
    That's my position and the thing that keeps me up at night 
as I serve our Administration.
    Senator LeMieux. My time is up, but we may have some time 
for some more.
    Senator Klobuchar. OK.
    Senator Warner.
    Thank you.
    Senator Warner. Thank you, Madam Chair.
    Let me start where my colleague Senator LeMieux mentioned. 
I believe tax policies ought to encourage long-term hold, 
early-stage capital formation. And I personally believe making 
sure that we've got as low as possible capital gains rates make 
sense, although I would argue that it's not always a direct 
correlation. I would argue that, during President Bush 41 and 
President Clinton, when capital gains rates were actually 
higher than they had been in the last decade, there was more 
innovation created.
    Now, we've still got to get tax policies right. And some of 
us up here have had some concerns with certain pay force 
recently that might have even tripled the rates on the venture 
community that is about early-stage capital formation, in terms 
of current legislation. I've been trying to work through some 
of that.
    But, we've got that double-headed whammy right now, as we 
want to make America business-tax competitive and business-tax 
friendly. I personally believe not only should the R&E tax 
credit be made permanent, but it should be raised from 14 
percent, hopefully up to 20 percent, to be competitive with 
other OECD countries. But, you can't do it in a revenue vacuum 
at the same time dealing with--the other looming challenge 
we've got out there, the deficit. A challenge I try to make 
when I see tech companies is, I'll lead that fight, but they 
should not carp when they raise personal taxes on people like 
me, and them, back up to the rates during President Bush 1 and 
President Clinton, because you've got to even it out somehow. 
You can't get this fixed on the deficit side, on only one side 
of the ledger.
    I appreciate your comments on the regulatory efforts. And 
it's tough, because we've seen, with the failure to regulate, 
at times--the Gulf, between Wall Street and main street--but, I 
hope we'd see from the Administration a little more clarity on 
how we can use transparency----
    Mr. Chopra. Yes, sir.
    Senator Warner.--as a way to streamline the regulatory 
process. If you look at the business functions, there's a lot 
quicker movement from idea to implementation in the business 
side than there has been on the government side. And I would 
love to--you don't have to answer today--but, I would like to 
see some real deliverables on what you've been working on----
    Mr. Chopra. Yes, sir.
    Senator Warner.--and specific examples, whether it's FDA, 
whether it's EPA--other areas, where--in this, I think, 
preeminent need to keep our innovation lead, we're going to 
make it easier to get ideas into the business mode and 
operational mode. Number one.
    Mr. Chopra. Yes.
    Senator Warner. Number two, I hope--and I appreciate the 
fact that you mentioned Stanford as one of your case studies--
you know, candidly, regardless of what's going to happen, 
Stanford, MIT, and a few other top-tier universities are going 
to do fine. I wish we could have cited an example at the 
University of Minnesota, University of Miami, University of 
Florida; VCU, in Richmond; and trying to make sure that we have 
a broader breadth of participation from our university sector, 
other than just the regular suspects. Because, candidly, the 
same idea we've had for years, has been the top ten 
universities say, ``Give us more money, and trust us.'' And 
it's had some mixed results, but not necessarily in a 
financially constrained area, as much as we need.
    I'd also like you to see--and perhaps you can answer this 
so I can actually get an answer to the question instead of me 
yakking on--in the stimulus, there was over $100 billion----
    Mr. Chopra. Yes, sir.
    Senator Warner.--that falls into different kind of 
innovation buckets, whether it is, in NIH, areas around 
education--or, around energy, Smart Grid, healthcare IT--I 
think it would be very helpful--as most of the American public 
still questions, I view, the stimulus was, while not pretty, 
necessary--it would be very helpful to us, as we start to see, 
What are the deliverables and what are the metrics that we can 
measure from that $100-billion investment? Do you want to take 
that one?
    Mr. Chopra. Let me take that one first, Senator Warner.
    We are absolutely committed to telling that story right. 
And I'm confident, in the not too distant future, we'll have a 
more thoughtful, complete inventory of----
    Senator Warner. It would help, since a third of that was 
tax cuts, and nobody in Virginia knew we gave them a tax cut, 
either, so it really----
    [Laughter.]
    Senator Warner.--you know, we're almost 2 years in--or, a 
year and a half into this--it would really help--the sooner the 
better on this, but----
    Mr. Chopra. Particularly on the impact on innovation, if I 
may be very specific, we have been very active in tracking the 
results of our recovery investments. We've actually even 
introduced some innovations. One of the pilot projects we 
initiated, called STAR METRICS, was an attempt to automate how 
our investments in universities actually translated into job 
creation more easily, more accurately, and more comprehensively 
than perhaps the traditional method of tracking some of these 
statistics in the past.
    So, my confidence is that we'll respond very shortly to 
you----
    Senator Warner. When?
    Mr. Chopra.--on it. I can't say exactly when. The----
    Senator Warner. Sixty days?
    Mr. Chopra. Oh, definitely within 60 days. That's an easy 
one. Yes. Done. In less than 60 days, you will have a better, 
more thoughtful report on the impact the Recovery Act has had 
on the innovation investment.
    Senator Warner. My time has run out, but I just would like 
to make one other point.
    Mr. Chopra. Yes, sir.
    Senator Warner. I've had conversations with your colleagues 
at Treasury on this, but I think it is a very big issue, this 
question of early-stage capital formation. And as we kind of 
sort through the Wall Street reform and try to get it right, 
that we think about policies, not just for that earliest-stage 
startup enterprise, which the President's been supportive of, 
but on a broader basis, how we encourage early-stage capital 
formation in this country. And my hope would be that there are 
voices like yours and others from the tech side and the 
innovation side who are kind of making this case inside the 
Administration.
    Mr. Chopra. Yes. If I may, just for a moment--I do want to 
be respectful of your time--but, one of the responsibilities I 
have as Chief Technology Officer is to lead interagency 
activities, to make sure that we have all the voices at the 
table. As one example--we've launched an Innovation and 
Entrepreneurship Working Group, with over a dozen or so Federal 
agencies, and we have a specific team dedicated to access-to-
capital issues.
    And part of the goal, Senator Warner, is that there are 
policy changes we can make within the current administrative 
processes that we have, that can be improved, that can deliver 
results sooner, and then there are broader questions about how 
we work with you all on formal changes to the law, where 
appropriate.
    We're looking at any and all of those options, and I look 
forward to coming back and sharing with you the results of that 
work.
    Senator Klobuchar. Very good.
    Senator Udall.

                 STATEMENT OF HON. TOM UDALL, 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Udall. Thank you, Chairman Klobuchar. And I 
appreciate you doing this hearing, and chairing it for us.
    Mr. Chopra, last year, Congress mandated that the FCC 
create a National Broadband Plan to address one of the most 
significant infrastructure challenges of our time: making 
broadband available to all Americans. And in a rural State like 
New Mexico, we really need that to happen.
    A witness on our second panel points out that other 
countries have created national innovation plans to identify 
ways that their policies can better promote innovation and 
entrepreneurship. For example, could OSTP help review current 
policies that block innovation, as well as recommended policy 
changes that promote innovation and entrepreneurship? And could 
OSTP work with the Department of Commerce and other Federal 
agencies to develop such a national innovation plan?
    Mr. Chopra. Thank you very much for your kind question. We 
are continuing to build upon the President's strategy for 
American innovation that was released last year in the fall, to 
continue with the improvement of that plan.
    Now, the word ``plan'' is one of those that requires a bit 
of clarity, in terms of, What do you mean by ``plan''? And 
Senator Warner had some comments about specific metrics 
deliverables and timelines. I think we will continue to iterate 
on what we believe to be a national plan that is within the 
constraints of our Nation's commitment to mostly private-sector 
entrepreneurship and innovation, more so than a top-down 
industrial model.
    Whatever the case may be, we're always open to listening 
and understanding strategies that you think would be more 
productive, and we are committed to making sure that we've got 
a harmonized approach across the Administration.
    I would suggest that there are three things that are top of 
mind in the question that you just asked. Are there policy 
barriers that we should be removing, administratively?
    Senator Udall. Right.
    Mr. Chopra. I think this gets to the question that the 
Chairwoman had asked earlier about, How are we creating more 
certainty in the market? We're certainly open to those, 
inventorying them, and we're hoping to take action. We've taken 
some action here and there. We'll take more as the months go.
    Second, when we do make investments, are we getting the 
right return on investment? I think the spirit of greater 
accountability and transparency for the dollars spent has been 
a commitment of this Administration. OMB Director Peter Orszag 
mentioned, earlier in June, that under my leadership and our 
CIO, Vivek Kundra, we'll be developing an R&D investment 
dashboard to bring greater transparency into the monies we're 
spending, so that funds can be allocated to the highest-return 
areas; and not just single-dimension definitions of ``return,'' 
but, more broadly, in terms of impact.
    And then, third, I would argue that there may be 
opportunities for new investments, more platform investments, 
that have the ability to achieve a much greater degree of 
innovation. A simple example there: We launched a website, 
data.gov, a year ago, that now has over a quarter of a million 
data assets that are available for the public, free of charge--
and entrepreneurs, in particular--to consume that data and 
launch new businesses.
    Secretary Sebelius, in March, said, ``In 90 days, I want to 
see how the entrepreneurial ecosystem responds. Here are 
thousands and thousands of pieces of health data. Go help 
people improve the quality of healthcare in their local 
communities.'' And a dozen entrepreneurs showed up, 90 days 
later, at the Institute of Medicine. They weren't paid, there 
was no law; there was just a call for action. And literally 
they demonstrated new and creative applications that would move 
the needle.
    So, in short, we are very focused on stopping policies that 
are inhibiting innovation, getting the investment portfolio 
right, and thinking about platform investments that have much 
greater return if they were done in a more thoughtful and 
collaborative way.
    Senator Udall. Thank you very much for that answer. And I 
think that's exactly the kind of thing we need to be doing with 
innovation with broadband. And then I think you also mentioned, 
in your testimony, about modernization of the Nation's electric 
grid as----
    Mr. Chopra. Yes, sir.
    Senator Udall.--a vital component of efforts to build a 
low-carbon economy. And so, we develop a comprehensive policy 
framework for a Smart Grid--we need the same thing there, the 
same kind of thinking. So, thank you.
    Mr. Chopra. A brief answer: I announced on June 8, at 
Brookings--that we're forming a National Science and Technology 
Council Committee focused on the Smart Grid, led by myself and 
Phil Weiser, who works in the National Economic Council. We're 
holding a forum, a public forum, at Brookings, in mid-July, and 
we're going to publish a strategy on this issue by the fall. We 
believe, very emphatically, that the Smart Grid has tremendous 
opportunities for both energy efficiency improvements as well 
as economic growth from new entrepreneurial companies. In fact, 
a Colorado-based company, Tendril, is actually our first 
deployment of the Smart Grid in the NSTAR implementation in 
Massachusetts. Three-thousand homes are going to get a little 
widget that would allow them to track their real-time energy 
consumption information and to build all these innovative 
applications so they can be told when they might want to 
consider reducing the temperature, and so forth, in their home.
    Anyway----
    Senator Udall. That's great.
    Mr. Chopra.--thank you so much for the question.
    Senator Udall. We look forward to seeing that strategy.
    Mr. Chopra. Yes, sir.
    Senator Udall. Thank you.
    Senator Klobuchar. Very good.
    I wanted to follow up. I know, in the President's State of 
the Union Address, he focused--which I was glad that he did 
this--on doubling the number of exports. Could you talk about 
where that is right now? Senator LeMieux and I have a bill, 
which I believe Secretary Locke supports, to help with the 
Foreign Commercial Service, to make sure that the Commerce 
Department and others are helping, in any way, our small and 
medium-sized businesses.
    We have some amazing success stories in my State--5 
employees up to 55; 10 employees up to 77--because they simply 
actually called the Federal Government--these are conservative 
businessmen, who never believed it would be true, but said, 
``We have this product.'' ``Can we sell it in Turkey? Can we 
sell it in Morocco?'' And they actually got help, and help get 
the customers vetted and their businesses ballooned, and in a 
very good way.
    What's being done right now with the export issue?
    Mr. Chopra. This is one of Secretary Locke's top priorities 
in his commitment to President Obama. We have a few key 
strategies in motion. There's the blocking and tackling, as 
you've said, getting the international trade team much more 
focused, not just on promoting exports from our large 
corporations, but to be very focused on the small business 
owner. There are so many small business owners today who export 
to one country. And, as Secretary Locke said to the President, 
``If we just get them to export to a second or third, precisely 
the kind of economics you're describing will take hold.'' So--
--
    Senator Klobuchar. Yes, I think----
    Mr. Chopra.--blocking and tackling----
    Senator Klobuchar.--60 percent actually only----
    Mr. Chopra. That's right.
    Senator Klobuchar.--export to Mexico----
    Mr. Chopra. To one.
    Senator Klobuchar.--or Canada.
    Mr. Chopra. You're absolutely right.
    So, number one, blocking and tackling, get the agency 
focused on providing those support services to all businesses.
    There's obviously a great deal of work in transparency and 
what we can do to bring more information to business owners.
    And, last but not least, we're very much focused on 
intellectual property enforcement, and a global strategy in 
that regard. In fact, I believe, 3 hours ago, the Vice 
President announced a strategy to promote intellectual property 
enforcement. And an important component of that is our 
commitment to promoting exports, precisely because of the fact 
that we do believe that there needs to be much more aggressive 
activity to support American business interests abroad, because 
so much of our economy's growth has been built on the 
foundation of intellectual property in this country.
    So, on all fronts, we are making progress, Senator. And if 
there are specific questions, I'd be happy, in the record, to 
make sure I get them answered for you.
    Senator Klobuchar. I had raised the issue of people coming 
from other countries to study at our universities, and a number 
of us have been working on at least this concept of allowing 
people to stay, instead of putting up a ``Do Not Apply'' sign 
after they graduate. Could you talk about the role that could 
play in our competitiveness? And to what extent should we 
examine our H-1B visa program for people? Again, I've just 
heard many stories, from my State, of companies who try to 
bring someone in. They can't. They don't meet the game of 
Russian roulette over who gets in and who doesn't, and then 
they end up contracting with them anyway. And then we don't get 
the tax revenue. So, could you talk about how we could improve 
that process?
    Mr. Chopra. Well, as you know, this is an area where the 
President has been pretty clear about his support to ensure 
that we have a thriving innovation economy. And a great number 
of our entrepreneurs and innovators, as research will show you, 
do have their origins in other countries. It's actually a 
personal issue for me, as well. My father holds three patents, 
and he came to this country from India, and we're grateful for 
the chance to have immigrated here.
    This President is committed, as you know, to a 
comprehensive approach on immigration reform. So, the strategy 
has been very clear from the get-go. This issue is absolutely 
important. And as he and the team work closely with you and 
Congress on finding a strategy forward, we are very supportive 
of ways in which this particular challenge can be addressed.
    Now, in ways small and modest, we are making administrative 
changes to make it easier. We've simplified scientists who are 
visiting this country from overseas, for the visa application 
process, so there's a collaboration, between our science team 
and the State Department. It's not a significant victory, in 
the sense that we haven't solved the immigration problem, but 
we've made that a little bit easier.
    Just this past month, the U.S. Citizenship and Immigration 
Service, under Ali Mayorkas's leadership, has convened a 
summit, had a public hearing, if you will, on the discussion of 
the investor visa; that is, the EB-5 visa. He opened it up for 
conversation, and a number of folks participated in that call, 
calling for strategies to strengthen and improve the investor 
visa to try to get to a place where more people might take 
advantage of it.
    So, your point is well taken. You may have seen, the 
President had an Economic Recovery Board meeting that was 
publicly aired via webcast, and you heard the President's key 
economic advisors specifically say to him, ``We should be 
stapling a green card to every graduate of our Nation's leading 
research universities.'' The President acknowledged that 
comment and, again, reiterated his support, as part of a 
comprehensive approach on immigration reform.
    Senator Klobuchar. Thank you.
    Senator LeMieux.
    Senator LeMieux. Thank you, Madam Chair.
    I want to speak for a moment about exports, and follow 
along the line of questioning that----
    Mr. Chopra. Yes, sir.
    Senator LeMieux.--Senator Klobuchar was on. And part of a 
successful export strategy is to get these free trade 
agreements passed. We have pending free trade agreements with 
Colombia, South Korea, and Panama. I believe the Colombian 
agreement was negotiated in 2006. And this is perhaps our 
greatest ally in the Western Hemisphere, certainly in Latin 
America. And our competitors--Canada and the European Union--
have already approved these agreements. So, where are we on 
submitting those agreements to Congress and getting their 
approval?
    Mr. Chopra. I don't have any particular information on the 
status of the free trade agreements, but for the President's 
commitment as he said as part of his pronouncements on our 
commitment to exports, that we will move forward on a number of 
agreements. And I will defer to Ambassador Kirk to provide 
specifics about where those agreements are, as I do not have 
that information with me.
    Senator LeMieux. I want to, if I may, Madam Chair, ask a 
follow up question, or a following question, which is a little 
bit off of our mission today. But, it occurs to me, as the 
chief technology officer of the United States----
    Mr. Chopra. Yes, sir.
    Senator LeMieux.--that this is something that you might be 
able to be helpful with. We talk a lot about measurement and 
metrics. And certainly, technology has given us the ability to 
that, internal to government. One----
    Mr. Chopra. Yes.
    Senator LeMieux.--thing that I have proposed--you were 
talking about Secretary Sebelius making the call to action on--
--
    Mr. Chopra. Health data.
    Senator LeMieux.--health data, healthcare records--one 
thing that I have proposed is using performance metrics to help 
catch Medicare fraud. And there's an industry that has a very 
low instance of fraud, which is about the same size as the 
healthcare industry, and that's the credit card industry. They 
use performance metrics, and they use predictive modeling.
    Mr. Chopra. Analytics.
    Senator LeMieux. So, when you use your credit card 
someplace, you're out of town, you get a phone call from----
    Mr. Chopra. Yes, sir.
    Senator LeMieux.--your credit card company, saying, ``Is 
that you? Did you really authorize that transaction?'' If you 
don't tell them, ``Yes,'' they don't pay. And that's how they 
stop fraud before it starts.
    We've got a proposal, Senate bill 2128, that I'm currently 
working on with some of my colleagues--Senator Baucus, Senator 
Whitehouse--to try to get accomplished. But, is--the reason I 
raise the question is, in your role, have you been asked to 
look inward on the government----
    Mr. Chopra. Absolutely.
    Senator LeMieux.--to see that we can use technology to 
create efficiencies and stop the waste, fraud, and abuse?
    Mr. Chopra. Yes, sir. I work closely with the President's 
Chief Performance Officer, who's the Deputy Director for 
management in the Office of Management and Budget, and, the 
Chief Information Officer, who's also in the Office of 
Management and Budget. Together, the three of us meet weekly on 
strategies to improve the performance of our Nation's agencies.
    In this particular example, I am very focused on ways we 
can bring emerging technologies and technologies from other 
industries into the government itself. While not my 
responsibility for monitoring the implementation of the 
Recovery Act, which the inspector-general community, took 
advantage of one of those emerging technologies that had been 
in use in our intelligence communities, advanced analytics, the 
predictive work that you're describing--to basically mash up as 
much data as possible to look for patterns that aren't obvious 
to an individual analyst. And I'm confident that the results 
we're seeing, which are, at least to date, low rates of fraud 
in the Recovery Act, in part are because we've got this very 
sophisticated tool.
    The President has been very clear that he wants the best 
tools going after Medicare waste, fraud, and abuse. We are 
going to--I don't know if we've announced it yet, or we soon 
will be announcing--a similar commitment to bringing those 
advanced tools, specifically going after Medicare waste, fraud, 
and abuse.
    There is no doubt that there are lessons to be learned from 
how the private sector has adopted information technology and 
how we can improve the government. One comment here. We held a 
forum on modernizing government. We had 50 or so CEOs from 
companies, big and small--Microsoft to startups--and the 
overwhelming message that we heard is that we have a technology 
gap between the way we live in our private lives and the way 
our government uses technology in its professional setting. And 
we are absolutely focused, like a hawk, on closing that 
information technology gap. In fact, we've been beginning to 
release strategies to that fact across this month. Peter Orszag 
gave a speech on this issue--I think it was June 8--where he 
announced this broader vision. And we'd be happy to make sure 
that you're provided a copy of that document.
    Senator LeMieux. I would appreciate that.
    Mr. Chopra. Yes, sir.
    [The information referred to follows:]

        Remarks by Peter R. Orszag--Center for American Progress

        June 8, 2010, Washington, D.C.--As Prepared for Delivery

    Thank you, Tom, for that kind introduction. And let me thank John 
Podesta and the Center for American Progress for inviting me to speak 
here today.
    Many of you may not know that my first experience working for the 
Federal Government occurred when I was a senior in high school, when I 
got an internship with a freshman Senator that I never heard of from a 
state I had never been to.
    I was fortunate that Spring because that office--Senator Daschle's 
office--was very much like the man who stands before you today: open to 
debate and good ideas, inclusive, and kind.
    My workspace has since been upgraded from Tom Daschle's mailroom to 
an office in the Eisenhower building. And when I moved into that 
office, I must admit that I took down a picture of President Eisenhower 
and replaced it with a portrait of Alexander Hamilton.
    It's interesting that in the first line of the very first of the 85 
Federalist Papers, Hamilton laid out why the United States needed a new 
form of government. It wasn't because the Founders had second thoughts 
about the basic idea of democracy. Instead, it was, as he put it, 
because of the ``unequivocal experience of the inefficiency of the 
subsisting Federal Government.''
    There it is in the first line of our founding narrative: a 
practical concern for the delivery and performance of the Federal 
Government.
    And it is that enduring struggle to create a Federal Government 
that is of, by, and for the people--and that accomplishes those goals 
in a way that is efficient and effective--that I want to discuss today.
    Too often in Washington, we spend more time developing, debating, 
and deciding which policies to pursue than we do actually figuring out 
how to implement them.
    But in reality, execution matters--and matters a lot.
    Take the Recovery Act as an example. One of the largest pieces of 
domestic legislation in recent memory, it was designed to jumpstart 
economic activity and prevent another Great Depression, and it is as 
complex as it is large in dollar amount.
    The evidence strongly suggests that the Recovery Act has been 
effective in reviving economic growth. We have seen, for example, a 
swing from an average GDP decline of 5.9 percent on an annualized basis 
at the end of 2008 and beginning of 2009 to an average growth rate of 
4.3 percent a year later, the largest one-year swing in GDP growth in 
three decades.
    And what has been most striking is that for an initiative this 
large, we have not seen any substantial incidences of fraud and abuse.
    This, I believe, is to the credit of ``Sheriff Joe''--our Vice 
President--who has made it his mission to make sure that the Recovery 
Act is implemented swiftly and effectively.
    Just as the dog that doesn't bark doesn't get any attention, 
effective implementation does not garner the headlines. But it is 
central to making government work better, reducing waste, and actually 
delivering the services people want and need.
    That is why from curbing the use of no-bid contracts to reducing 
improper payments--from changing how we hire Federal workers to how we 
purchase and use information technology, the President has undertaken a 
far-reaching effort to modernize and reform government.
    And we are lucky to have Jeff Zients serving as the Nation's first 
Chief Performance Officer to oversee this initiative.
    The effort is necessary for three reasons.
    First, we have massive national challenges that require national 
responses: laying the foundation for long-term economic growth, 
bringing about a clean energy economy, improving the quality of and 
reducing the costs of health care, reforming and improving our schools, 
protecting our homeland, and the list goes on and on.
    Second, just as the American people expect more to be done, they 
are skeptical that it can be done.
    According to the Pew Center, from 1987 to 2007--with one exception 
immediately after the 9/11 attacks--about two-thirds of Americans 
believe that ``when something is run by government it is usually 
inefficient and wasteful.''
    In effect, Americans have determined that their government cannot 
deliver what they want, an unsustainable fact for the life of our 
democracy.
    Third and perhaps most importantly, as stewards of the American 
public's tax dollars, we cannot afford to waste money on programs that 
do not work, that are out-dated, or that are duplicative of one 
another.
    Right now, there are over 110 funded programs in Science, 
Technology, Engineering and Mathematics education in 14 departments and 
agencies across the Federal Government; over 100 programs that support 
youth mentoring scattered across 13 agencies; and more than 40 programs 
located in 11 departments with responsibility for employment and 
training.
    This redundancy wastes resources and makes it harder to act on each 
of these worthy goals. That is one reason why the Administration 
proposed approximately $20 billion of terminations, reductions, and 
savings in both the FY 2010 and 2011 budgets.
    And while recent administrations have seen between 15 to 20 percent 
of their proposed discretionary cuts actually enacted, we worked with 
Congress to enact 60 percent of proposed discretionary cuts for FY 
2010.
    This type of redundancy and waste is also why the President 2 weeks 
ago asked Congress for expedited rescission authority so Congress can 
act quickly and cleanly to remove unnecessary and wasteful programs.
    To be sure, reducing this waste will not close the significant 
budget gap we face. But that fact does not absolve us from the 
obligation we have to use funds wisely.
    What is driving these trends and the skepticism so many of us have 
about government?
    One important reason is that over the years, Americans have seen 
huge advances in efficiency and technology both at work and in their 
daily lives.
    They have witnessed the movement from one-size-fits-all, mass 
production and secretarial pools to the age of just-in-time, customized 
manufacturing and instant communications. Organizations outside 
government have experienced impressive advances in productivity and 
have become more responsive to their customers.
    The government, however, has not kept pace. Let's look at the 
facts.
    Public-sector productivity growth matched the private sector's 
until about 1987. But something changed in the late 1980s. From 1987 
until 1995, private-sector productivity rose by an average of 1.5 
percent a year. Meanwhile, the public sector's productivity rose by 
only 0.4 percent per year--or about one-third as much--over roughly the 
same period.
    At that point, reliable data on public-sector productivity are not 
available because the Bureau of Labor Statistics--paradoxically, as 
part of a cost-cutting effort--stopped collecting the numbers.
    The best analysis we have, from the McKinsey Global Institute, 
suggest that since 1995 it appears that the public sector continued to 
fall behind the private sector which saw productivity surge during that 
period.
    Some of this increasing gap has to do with advances in management 
techniques in the private sector. Some, undoubtedly, has to do with the 
challenges the Federal Government has in attracting and hiring top 
talent. Keep in mind that the average time it takes to hire a new 
Federal employee is 140 days--and by that time, many of the best 
candidates, understandably, have gone elsewhere.
    But I believe that the biggest driver of this productivity divide 
is the information technology gap.
    At one time, a Federal worker went to the office and had access to 
the most cutting-edge computer power and programs. Now, he often has 
more of both in a device clipped to his belt.
    Closing the IT gap is perhaps the single most important step we can 
take in creating a more efficient and responsive government.
    Indeed, the IT gap is the key differentiator between our effort to 
modernize and reform government and those that have come before.
    While it would be better if we did not find ourselves in this 
position, note that because the gap is so big, the potential upside is 
substantial. Our historical shortcomings in IT may ironically give us a 
``late-mover advantage,'' by allowing us to leapfrog costly, less 
developed technologies and go directly to the less expensive, more 
powerful ones.
    How big is this IT gap?
    It is hard to quantify, but anecdotally the data are telling.
    Let's consider the divergence in data center usage. In the private 
sector, IBM has reduced the number of data centers it uses from 235 to 
12. Hewlett-Packard has consolidated 14 data centers into one, reducing 
energy usage by 40 percent.
    What about the Federal Government?
    Since 1998, we have gone from 432 data centers to more than 1,100.
    Or look at how the Federal Government has tried to introduce 
systemic technological improvements to its operations.
    In the conversations we had with CEOs at our modernizing government 
forum in January, most told us that they terminate a substantial number 
of bad IT projects soon after they start. High-performing companies 
kill roughly one out of every three IT projects in their first 6 
months. The Federal Government, by and large, terminates almost none.
    For example, the Census Bureau awarded in 2006, a $595 million 
contract to develop a handheld computer for census workers to use this 
year. Two years and $600 million later, the project was canceled with 
nothing to show for it.
    And census workers out there today still use pen and paper.
    Or as the President pointed out before, the Patent Office receives 
more than 80 percent of patent applications electronically. That's 
great.
    However, these applications are then manually printed out, re-
scanned, and entered into an outdated case management system. The 
average processing time for a patent is roughly 3 years.
    And this is the agency that interacts with the most creative and 
innovative individuals and companies in our country.
    Clearly, we have massive room for improvement. Pursuing that 
improvement and closing the IT gap will help us create a government 
that is more efficient and less wasteful, and that is more open and 
more responsive to the American people.
    So what are we doing?
    First, we're using IT to identify and cut waste.
    Take the dashboard concept--a graphically clear, data-rich web 
portal that enables a manager, and actually any member of the general 
public, to see how money is being spent.
    Our IT Dashboard now provides a transparent look into the 
approximately $80 billion a year the Federal Government spends on IT. 
By using the dashboard, the VA has been able to identify 45 IT projects 
that are at-risk, eventually terminating 12 of them.
    This same concept is being used by the Centers for Medicare and 
Medicaid Services with its dashboard to track inpatient hospital 
spending and how much Medicare is spending on other payments to 
providers for medical education, treating low-income patients, and 
operating in a high-cost region--to name just a few.
    We also are using IT to increase data-sharing among agencies to 
reduce the $100 billion in improper payments--payments that go to the 
wrong person, for the wrong amount, or at the wrong time--each year.
    And we're doing that by expanding recapture payment audits, 
bolstering internal control methods, and creating online dashboards of 
key indicators and statistics about improper payments--so the public 
can hold agencies accountable for how their money is being spent.
    Similarly, as part of the Administration's effort to save $40 
billion in contracting by 2011--a goal we are well on the way of 
reaching--we have launched the so-called FAPIIS system, which takes 
data from government contractors on things such as how they did their 
job and if they were suspended or debarred--and combines them into one 
database that contracting officers can access before making a decision.
    This will dramatically reduce the chance that an under-performing 
contractor with one agency will keep winning business from another.
    Second, we are using IT in our efforts to boost the efficiency of 
government operations.
    I mentioned earlier the growth in the number of Federal data 
centers, which runs counter to the movement in the private sector 
toward reducing the number of data centers and moving to cloud 
computing in which applications and data are centrally housed.
    Through our Cloud Computing Initiative, we are just beginning to 
take steps toward the cloud. And this holds substantial promise to save 
money on IT infrastructure, increase collaboration, and boost 
productivity.
    Third, in addition to identifying and rooting out waste, we can use 
information technology to make government more open and responsive--
delivering services in ways that are convenient and cost-effective.
    In almost every facet of one's daily life, you can use online and 
mobile devices--whether it's managing your money, paying a bill, buying 
a birthday gift, or arranging your own travel.
    We need to bring that kind of convenience to government services.
    That's why the Department of Homeland Security added an online 
tracking service for visa and citizenship applications--replacing the 
letters mailed back and forth when people wanted an update on their 
status.
    And it's why the Social Security Administration is implementing an 
idea that we got through our SAVE Award process from a front-line 
worker in Alabama to allow people to make appointments online to see a 
Social Security caseworker, freeing up this personnel to actually help 
people.
    Another way to deliver better services is to empower people 
directly with the information they need to serve themselves.
    As part of our Open Government Initiative, we have unlocked the 
valuable Federal data that the government has--and put it out on 
data.gov--so that it can be leveraged for wider and greater use.
    In just one year, data.gov has grown from 47 datasets to more than 
270,000. This information can be used by the American people directly 
to learn about things such as the safety ratings of children's car 
seats or the safety of different work places.
    And the data are increasingly being used by developers to build new 
tools to help Americans in their daily lives.
    Let's take FlyOnTime.us, for example.
    This application takes data from the Bureau of Transportation 
combines them with weather information and user-generated content about 
airline security lines--such as ``tweets'' from people waiting in those 
lines--to give travelers an accurate look at travel conditions.
    In the months ahead, we will be looking to unveil more of these 
technology-driven solutions that bring the public sector more in line 
with the private when it comes to customer service.
    That is the promise of closing the IT gap: increasing productivity 
and responsiveness; efficiency and customer service.
    And that brings me to a final point: these improvements will help 
agencies meet what are increasingly tight fiscal constraints.
    As many of you know, in this year's Budget, the President proposed 
a three-year freeze on non-security discretionary funding, saving $250 
billion over the next decade.
    This spending restraint complements other measures in the Budget 
that, together, produce more deficit reduction over the next 10 years 
than any Budget that has been proposed in over a decade.
    In his State of the Union address, the President was abundantly 
clear to Congress that he will use the veto pen to enforce this freeze.
    And in the Budget guidance for Fiscal Year 2012 issued to agencies 
this morning, that seriousness of purpose was underscored yet again.
    We are asking each agency to develop a list of their bottom 5 
percent performing discretionary programs, as measured by their impact 
in furthering the agency's mission.
    In addition, to ensure that we can meet the President's absolute 
insistence on a freeze for non-security agencies while funding priority 
areas, we are asking non-security agencies to specify how they would 
reduce their budgets by 5 percent which will give us the ability to 
achieve the overall non-security freeze even while meeting inevitable 
new needs and priorities.
    The reform efforts I outlined above should make it easier for 
agencies to identify their laggard programs and live within the three-
year freeze.
    Ultimately, our goal is not to cut for cutting's sake, but to 
modernize and reform government, to empower people with the information 
they require to make choices about what's best for them, to make their 
voices heard by government officials, and to give the American people 
the data they need to bring about change.
    The bottom line is that IT can help us achieve this in a government 
that is increasingly complex, serving a Nation of 300 million people.
    As a professor of political science at my alma mater noted: ``There 
is scarcely a single duty of government which was once simple which is 
not now complex; government once had but a few masters; it now has 
scores of masters.''
    Those words were written by Professor Woodrow Wilson--in 1887, 
before he was the President of Princeton, and well before he was 
President of the United States. And they are no less true today than 
they were more than a century ago.
    The lesson is: implementation matters. And it is our duty to 
continually strive to be prudent and productive stewards of tax 
dollars, creating a government that is efficient and effective in 
service of the American people.
    Thank you, and I'd be delighted to take your questions.

    Senator LeMieux. And I would commend you to look at this, 
Senate bill 2128, which seeks to accomplish this for Medicare. 
There's estimates that we could save $20 billion a year----
    Mr. Chopra. Yes, sir.
    Senator LeMieux.--by using predictive modeling.
    Mr. Chopra. Absolutely. We'll look at it. Thank you----
    Senator LeMieux. Thank you very much.
    Mr. Chopra.--sir.
    Senator LeMieux. Thank you, Madam Chair.
    Senator Klobuchar. Senator Begich has arrived.

                STATEMENT OF HON. MARK BEGICH, 
                    U.S. SENATOR FROM ALASKA

    Senator Begich. Thank you, Madam Chair. I'll just be brief.
    You may not be able to answer these--but this is kind of a 
broad question, which I think I know the answer to, but I 
really want to hear you say it.
    Mr. Chopra. Sure.
    Senator Begich. With regards to patent protection for folks 
that are creating and being innovative and so forth, we would 
rate ourselves, in this country, where in the scale of patent 
protection?
    Mr. Chopra. Well, Can I give two grades? I would say that 
the quality of our patent review process is pretty high. On a 
scale of 1 to 10, maybe it's an 8 or a 9, in terms of the 
competence of the agency to actually render judgment on high-
quality patents. But, the process and the performance of the 
agency, in terms of its throughput, is far lower. To be kind, 
maybe it's sub-5, maybe 4, maybe 3. The backlog today is well 
over 3 years. We have circumstances where information comes 
into the Patent Office; in some cases, it's in electronic 
format, in other cases, it has to be converted from electronic 
to be rekeyed in, because database A doesn't talk to database 
B. So, to the extent with which you would like to see an 
improvement--I believe Senator Warner made a comment earlier--
you guys are engaging on the discussion of patent reform, but I 
believe there's bipartisan--and I don't want to speak for you--
--
    Senator Begich. Right.
    Mr. Chopra.--but I believe there's bipartisan commitment to 
just cleaning up the operations themselves so that we can 
strengthen and improve the capacity of the office.
    Senator Begich. Let me ask----
    Mr. Chopra. Yes, sir.
    Senator Begich. That's part of the question, but the other 
part is, If I create something--where would you want to patent 
your product? What country?
    Mr. Chopra. Boy, that's an interesting question. I haven't 
given that much thought. I would still presume that patenting 
in the United States is still a very powerful asset to--I mean, 
so much of our economy is borne on patent-generating--patented 
products and services. There are some case examples. I believe 
the Chairwoman highlighted a few--where people are beginning to 
take their innovations overseas. But, I would argue that it 
still makes the most sense in the world to patent your 
invention here in the United States, and that--we have pretty 
good collaboration across the world's patenting regulatory 
bodies, if you will, to work together on a streamlined approach 
to making sure that that application actually can be filed 
around the world.
    Senator Begich. I appreciate that; I just wanted to get a 
little discussion; I know it may be partially in your field--
but, here's my question----
    Mr. Chopra. Please.
    Senator Begich.--in the broader sense, and maybe more of a 
comment. So, if you want to comment on it, that's great.
    Mr. Chopra. Sure.
    Senator Begich. Companies--and it goes to, I think, what 
the Chairwoman was getting to, in a different way, or augmented 
to what she was talking about; and that is, people patent here, 
but they manufacture elsewhere.
    Mr. Chopra. That's what she had made the----
    Senator Begich. OK?
    Mr. Chopra.--case for.
    Senator Begich. Do you, or does someone in the Federal 
Government, have some analysis that says, here, in the last--
pick a period of time--products that have been patented, that 
have been developed--produced overseas, but, at times, those 
same companies use our patent law to protect themselves for 
those products they manufacture overseas----
    Mr. Chopra. I haven't looked----
    Senator Begich.--or----
    Mr. Chopra.--at that particular metric.
    Senator Begich. Because, I mean, that's part of it. I mean, 
why people patent here--this is my assessment--is, we have some 
of the best patent laws. But, they don't manufacture, 
necessarily, always here, but they'll use the law to protect 
their patent when it's produced elsewhere.
    So, is there such a study that shows us--or some----
    Mr. Chopra. I will check.
    Senator Begich.--data?
    Mr. Chopra. I'm not familiar with the particular study. 
But, this cuts two ways, if I may, Senator. There are examples, 
in this increasingly global economy, where we want, and wish to 
encourage, U.S. innovation to solve global problems, often at 
price points that are dramatically lower than what the domestic 
U.S. market might otherwise seek.
    I highlight, for example, an article written, in the 
Harvard Business Review, by Jeff Immelt, the CEO of GE. And 
forgive me for attempting to paraphrase his article; I may not 
do it in--its justice. But, his highlighting of the strategy, 
at GE, of reverse innovation--that is to say, they had 
engineered, for example, an electrocardiogram machine in rural 
China that, in order to be profitable, had to be 85 percent 
cheaper than the products that they would sell domestically in 
the U.S. This innovative company in the U.S. looked at that as 
a growth opportunity. They were successful in building a 
profitable product for the rural Chinese market, and not only 
did they generate sales and profitability overseas, they 
created innovations that, in the term that they used in the 
article, ``reverse innovation'' brought those ideas back to 
strengthen their innovation capacity in the domestic U.S. 
economy.
    So, I'm not trying to suggest that your premise is a good 
one or a bad one; I'm just suggesting there's some nuance to 
the notion that an entrepreneurial company in the U.S. solving 
a global problem, at price points that are dramatically lower 
than what need here, could still see economic value bringing 
those innovations back and expanding.
    So, I am--I will look into your question of the study, and 
I will see if there's a way to think through the implications 
of it.
    Senator Begich. I'd appreciate it. And my time is up. But, 
the discussion I like to work off of is--show me the data that 
says--either way. Your description is a great example of a 
reverse. But, the other flip side is, What are we doing? And if 
people are developing here, in a sense of their idea--but then 
producing elsewhere, and then using our patent laws to protect 
what they produce elsewhere--we have to figure out the right 
balance here, because the reason is that we, the Federal 
Government, are allowing those opportunities of protection, but 
if we don't reap the benefit in some form--maybe it's the 
reverse, as you described, and/or the job creation--we have to 
figure out the right balance here.
    Mr. Chopra. I will certainly----
    Senator Begich. Now, that's the question.
    Mr. Chopra.--look into that and get back to you, Senator.
    Senator Begich. Great.
    Mr. Chopra. Thank you for that.
    Senator Begich. Thank you, Madam Chair.
    Senator Klobuchar. Well, thank you very much, Mr. Chopra. I 
hope you see that everyone is really raring to go here. We are 
impatient. We want to move forward. We know you get this. And 
we hope that we'll be working you a lot. I would really hope 
this would become a major focus of the administration policy in 
the next year; and not just yours, but the entire 
administration.
    So, thank you----
    Mr. Chopra. My honor.
    Senator Klobuchar.--very much.
    Mr. Chopra. Thank you for having me.
    Senator Klobuchar. All right, very good.
    And now we're turning to our second panel. And we're going 
to be joined--I'll let them get up here, and we'll get them 
some new name tags, here.
    We appreciate the interest in this hearing.
    [Pause.]
    Senator Klobuchar. I see Mr. Chopra's fan club is leaving, 
and now we have our second----
    [Laughter.]
    Senator Klobuchar.--panel.
    All right. First of all, we have Andy Weiss. Mr. Andy Weiss 
is President and CEO of CoAxia, which I mentioned before, a 
small medical device business based out of Maple Grove, 
Minnesota. CoAxia develops innovative new treatments for stroke 
patients. He came to the company with 20 years of experience in 
the medical device industry, having worked for GE Medical, 
Vital Images, and Medtronic. He serves as an advisor to a 
number of small medical device business and venture capital 
firms, and is also the Director of Steady State Imaging, which 
is a company that develops advanced MRI medical imaging 
technologies.
    We also have with us Dr. Robert Atkinson, who will be the 
first to testify here. He is the Founder and President of the 
Information Technology and Innovation Foundation, a nonpartisan 
think tank with the mission of promoting policies to advance 
technological innovation. He has an extensive background in 
technology policy, and has conducted groundbreaking research 
projects on technology and innovation.
    Steve Ubl is President and Chief Executive Officer of the 
Advanced Medical Technology Association, the world's largest 
medical technology association. He previously ran his own 
healthcare consulting firm, and has served in other leadership 
roles with AdvaMed and the Federation of American Hospitals.
    Rhys Williams, who Senator LeMieux already mentioned, is 
the President of New World Angels, Inc., an angel investment 
group in southeast Florida. He is also President of Tequesta 
BioVentures, and has co-founded several early-stage biotech 
companies. Prior to his current position, Mr. Williams worked 
as a venture capitalist, as an executive for a biotech company, 
and as an officer in the military, commanding an Army Special 
Forces combat diver detachment.
    So, our witnesses come from diverse backgrounds, but all 
are focused on the same driving force, and that is innovation 
in America.
    We will start with Dr. Atkinson.

  STATEMENT OF DR. ROBERT D. ATKINSON, PRESIDENT, INFORMATION 
              TECHNOLOGY AND INNOVATION FOUNDATION

    Dr. Atkinson. Great, thank you, Madam Chairwoman and 
Ranking Member LeMieux and Senator Begich. It's a pleasure to 
be here on this critical issue of U.S. innovation and 
technological commercialization and competitiveness.
    I think, as Senator LeMieux alluded to, the U.S. was in the 
lead for a long time, and, frankly, we're no longer in the lead 
in global innovation and competitiveness. There are other 
countries that have surpassed us, as we've documented in a 
report that was mentioned earlier.
    There are a lot of reasons why I think we've lost our lead, 
but one of the key reasons is that a number of other nations 
have developed national innovation and competitiveness 
strategies, and, as part of those strategies, put in place 
comprehensive policies, everything from cutting corporate tax 
rates, creating generous incentives--tax incentives for R&D, to 
expanding government support for R&D. In contrast, the U.S. has 
really done very little in these areas.
    In many ways--and, Senator LeMieux, you alluded to this--
we're like that old commercial. The other countries are Avis. 
They're number two, and they try harder. And we're Hertz. We 
think we're number one, and we don't try harder. The reality 
is, we're not number one anymore, as I alluded to.
    Ultimately, businesses are really going to have to drive 
this, but there are a lot of things the Federal Government can 
and should do to help play a more active role. And I allude to 
some of those in my testimony: certainly, skills and 
immigration policy; H-1B visas; increased funding for research, 
including Federal agencies, like the PTO and the FDA, both of 
which suffer from serious problems of review and backlog; a 
more generous R&E tax credit; and certainly more aggressive 
trade enforcement against what we would term ``technology 
mercantilism,'' where other countries and systemically 
targeting U.S. technology leadership through unfair and 
oftentimes WTO-violating practices.
    But, I want to just focus on two areas today, of how the 
Federal Government could play a better and more effective role. 
One is how we could reorganize some parts of the Federal 
Government to better spur innovation; and, second, how Federal 
policy could spur technology commercialization.
    A first step--and, Senator Udall and Senator Warner alluded 
to this--would be for Congress to charge the administration 
with the creation of a national competitiveness and innovation 
strategy. We did this in the Recovery Act; we charged the FCC 
to create a broadband strategy. The FCC didn't simply just 
draft a memo; they actually brought in some of the leading 
thinkers and analysts in the country, from the private sector, 
and they worked diligently to create a very comprehensive and 
in-depth strategy, which I would argue is probably the best 
document we've produced in a long time in this area. We need to 
do the same thing in the area of competitiveness.
    And I just mention, I really don't think this is about 
picking winners, or more government. When you look at what 
other countries have done with their strategies, they're really 
about smarter government, smarter regulation, smarter public 
investments, smarter tax policy. So, it's really looking at 
what the government's already doing, how we can do it better, 
what we can learn from our competitors.
    Second, I think we could--and, by the way, I should add, 
all of my recommendations in the report, I'm--recognizing the 
fiscal constraint that we're under today, I'm trying to suggest 
a lot of recommendations, frankly, that really don't cost any 
money, or very little money, but would get a big bang for the 
buck.
    I think one of those in that category would be for Congress 
to consider creating an Office of Innovation Review within OMB. 
In OMB, there's OIRA, and it's basically focused on cost 
benefit analysis. It really doesn't do anything about 
innovation. This goes to Senator Klobuchar's point. One of the 
things this group could do to essentially oversee what the FDA 
is doing, and make sure they're really doing the kind of job 
they need to do.
    Second, we really need to push, much more, our science 
agencies--and, in particular, NSF--to focus and encourage them 
and incent them to drive industry/university partnerships. It's 
striking that the last time we faced a big challenge in 
competitiveness was in the 1980s. And one of the things we did, 
with strong bipartisan support from the Democratic Congress and 
the Reagan administration, was to really change a lot of the 
programs. We passed Bayh-Dole, obviously a bipartisan act, and 
we put in place a number of programs in the National Science 
Foundation to encourage universities and industries to work 
together to commercialize technologies, including the 
Engineering Research Center Program, the IUCRC program, and 
others.
    I have to say, after two decades of looking at those 
programs, the evidence is unbelievably crystal clear. These 
programs are incredibly effective, they're largely underfunded. 
And NSF, basically, looks at them as second- tier programs that 
they ignore. The mission of NSF has basically morphed into one 
of supporting scientists at universities, with almost no 
attention to thinking about, how can we get those discoveries 
out to entrepreneurs to build businesses? And I think there's a 
lot the Federal Government could do. One of the things that we 
suggest is, in reauthorizing COMPETES or any other vehicles 
where there might be an increase at NSF or DOE Office of 
Science, is specifically allocate more money, to those programs 
that have been shown to work, that partner with industry.
    Second, we could require NSF to--some of the programs that 
they have, they'd give money directly to universities--for 
example, some of the big equipment awards where they do that--
to tie one of their criteria for getting an NSF award to how 
well the university actually works with industry. There is no 
accountability in the system right now. If you work with 
industry, you're graded the same as if you don't work with 
industry and entrepreneurs.
    Third, we need to do a better job of providing support to 
universities and Federal laboratories for their technology 
transfer efforts. They're largely underfunded. We've proposed a 
very small levy on Federal research kind of like the SBIR, only 
much, much smaller--and using some of those funds to support 
that.
    Finally, we should expand the regular R&E tax credit, but 
also, there's a provision in the R&E tax credit that was in the 
1996 energy bill, on collaborative research and development tax 
credit, that gave companies a more generous tax credit to work 
with universities and Federal labs. But, it only applies to 
energy research. We think that word, ``energy,'' should just be 
taken out.
    I know I'm over my time. The last point I didn't put this 
in my written testimony, but I thought about it here today. As 
I think, Senator Klobuchar, you had mentioned, How do we get 
more financing to small business? I think one of the things we 
should consider is, How can we reform the SBIC program that SBA 
runs? It really has morphed into a program to fund later- stage 
large deals. That's not what the Federal Government should be 
doing. The Federal Government, to the extent it's in that 
space, should be helping venture firms go into earlier-stage 
smaller deals, and I think SBIC could be reformed in that 
direction.
    Thank you very much.
    [The prepared statement of Dr. Atkinson follows:]

       Prepared Statement of Dr. Robert D. Atkinson, President, 
            Information Technology and Innovation Foundation

    Madam Chair, Senator LeMieux, and members of the Committee, I 
appreciate the opportunity to appear before you to discuss the critical 
question of U.S. innovation and technology commercialization and what 
the Federal Government can do improve it.
    I am the President of the Information Technology and Innovation 
Foundation. ITIF is a nonpartisan research and educational institute 
whose mission is to formulate and promote public policies to advance 
technological innovation and productivity. Recognizing the vital role 
of technology in ensuring American prosperity, ITIF focuses on 
innovation, productivity, and digital economy issues.
    For over 50 years after WWII, the United States was the global 
innovation leader. However, in the last decade we have lost that lead 
and our rank appears to be 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. 
There are two key kinds of activities the Federal Government can take 
to spur innovation.
    First, we need to better organize the Federal Government to support 
innovation. A key first step would be for Congress to charge the 
administration with the creation of a national competitiveness and 
innovation strategy. In addition, Congress should consider creating an 
Office of Innovation Review within OMB to review all proposed Federal 
regulations for their impact on innovation. Finally, Congress should 
consider creating a new National Innovation Foundation that would house 
innovation-based programs now housed at agencies like NSF and NIST.
    Second, it's time for Federal agencies, and particularly NSF, to 
focus much more on commercialization and industry partnerships. NSF is 
almost exclusively focused on providing funding for scientific research 
to universities and makes little effort to ensure that these results 
are commercialized and lead to jobs in the United States. Congress can 
play a key role in spurring more industry partnerships and 
commercialization at universities and Federal labs. First, as Congress 
increases science agency budgets, ITIF recommends that programs that 
focus specifically on industry partnerships and technology 
commercialization should receive a large share of the increases. 
Second, Congress should consider requiring NSF to tie funding to 
universities to the extent the latter work closely with industry and 
commercialize technology. Third, Congress should consider creating a 
new program to support university, state, and Federal laboratory 
technology commercialization initiatives, funded by a small ``tax'' 
levied on Federal research (the way SBIR and STTR are funded). Finally, 
we encourage Congress to expand R&D tax credit generally and also the 
scope of the current collaborative R&D credit.
    We believe these steps would significantly increase technology 
innovation and related jobs in the United States. Moreover, these steps 
could be taken with almost no net negative budgetary impact.
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 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 Klenow 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).
---------------------------------------------------------------------------
    \1\ Elhanan Helpman, The Mystery of Economic Growth (Cambridge, 
Massachusetts: Belknap Press, 2004).
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    Innovation is also essential if we are to create 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 higher wage jobs for workers in 
manufacturing and ``low-tech'' services. Innovation 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. Low-wage nations can now 
more easily perform labor-intensive, difficult-to-automate work. 
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.
    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.
The United States No Longer Leads the World 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 the world in innovation for the rest of the 
century after WWII. However, changes at home and abroad have meant that 
while the United States continues to have many strengths we no longer 
lead the world in innovation. We see signs of this relative decline in 
a wide array of indicators. The decline began at least in the 1980s, 
with the United States' shares of worldwide R&D investment, U.S. 
patents, scientific publications, researchers, and science and 
engineering degrees falling from the mid-1980s to the beginning of this 
century. But given our strong overall lead, the declines were not 
enough to dethrone us from our number one position.
    Yet, since then the U.S. has continued to lag on a number of key 
factors, including growth in corporate and government R&D, scientific 
and technical degrees and workers, venture capital, and creation of new 
firms. As ITIF documented in its report The Atlantic Century, from 2000 
to 2009, the United States slipped from number 1 to number 6 in global 
innovation-based competitiveness, falling behind nations such as 
Singapore, Denmark, Sweden, and South Korea on a per-GDP basis. The 
reason is that all of the other 39 nations or region examined made 
faster progress than we did on a collection of 16 innovation 
competitiveness indicators.
    We also see the evidence of our decline in our trade performance. 
The trade deficit represents perhaps the most visible manifestation of 
the global challenge. At 5 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.\2\ The traditional U.S. trade surplus in 
agricultural products is nearing zero and in high-technology products 
has turned negative. In fact, the United States has actually run a 
negative trade balance in high-technology goods since October 1995. 
Meanwhile, our surplus in services trade is small and only holding 
relatively steady.
---------------------------------------------------------------------------
    \2\ 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/transannual06_fax.pdf.
---------------------------------------------------------------------------
    We also see it in the decline in U.S. manufacturing output as a 
share of GDP. This has been 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.\3\ But drilling down to 
more detail causes a different, and more troubling picture to emerge. 
Over the last 25 years, the share of non-durable manufacturing output 
(e.g., sectors such as chemicals, paper, and food products) declined 
from around 7 percent of GDP in 1993 percent to 4.7 percent in 2008. 
The share of durables (e.g., sectors such as motor vehicles, wood 
products, and electronics), in contrast, increased to just over 9 
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. But taking out 
computers and electronic products (NA ICS code 334) shows a very 
different picture, with durable goods output share declining from 7 
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.
---------------------------------------------------------------------------
    \3\ U.S. Bureau of Economic Analysis, ``Real Value-Added by 
Industry.''
---------------------------------------------------------------------------
    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. It also appears to understate the value of imports in this 
sector, thus imputing more domestic output to the sector than is 
warranted. 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 
(and export) base, these statistics provide reassuring, if false, 
comfort. In 2011, the United States is poised to cede its title as the 
world's leading manufacturer--a position it has held for the last 110 
years--to China.\4\
---------------------------------------------------------------------------
    \4\ Peter Marsh, ``U.S. manufacturing crown slips,'' Financial 
Times, June 20, 2010, http://www.ft.com/cms/s/0/af2219cc-7c86-11df-
8b74-00144feabdc0.html.
---------------------------------------------------------------------------
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. With the emergence of globalization and 
relatively faster growth in income of many nations, one would expect to 
see the global share of U.S. output fall. And it is certainly true that 
as some advanced nations began to catch up (in part by emulating and 
going beyond our policies) 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 innovation competitiveness 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 in our decline. There are a number of 
non-policy factors that appear to be at work. One key factor is the 
pressure from U.S. financial markets to prioritize increasing short-
term returns to shareholders over growth or investments with longer-
term payoffs, such as research and development and workforce training. 
Financial pressures have forced many U.S. firms to not only cut back on 
the growth of their research budgets, but to reallocate their research 
portfolios more toward product development efforts and away from longer 
term and more speculative basic and applied research. As Figure 1 
shows, from 1991 to 2007, basic research as a share of 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 increased by 7.1 percentage 
points. Moreover, corporate R&D as a share of GDP fell in the United 
States by 5 percent from 1999 to 2006, while in Europe and Japan it 
grew by 2 percent and 12 percent respectively. This has contributed to 
the U.S. share of global R&D falling from 39 percent in 1999 to 33 
percent in 2007, while China's share increased fourfold.\5\
---------------------------------------------------------------------------
    \5\ Organization for Economic Co-operation and Development, 
``Ministerial Report on the OECD Innovation Strategy,'' May 2010, 
www.oecd.org/dataoecd/51/28/45326349.pdf.
---------------------------------------------------------------------------
Figure 1: Changes in the Shares of Corporate Basic and Applied Research 
        and Development Between 1991 and 2007 \6\
---------------------------------------------------------------------------
    \6\ Source: Authors' analysis of National Science Foundation data.

    
    
    It's not just corporations that are investing relatively less on 
riskier R&D. So too are venture capital firms. Venture capital has been 
a vital, and, at least initially, a distinctively American component of 
our national innovation system. In 2008, venture capital-funded 
companies accounted for 11 percent of private sector employment and 
represented the equivalent of 21 percent of U.S. GDP.\7\ But venture 
investments are moving downstream as VCs focus on the most attractive 
later stage deals. In fact, while total venture capital funding for 
zero and first stage deals increased from 1996-2008, the share of total 
venture capital going to zero and first stage deals actually declined 
from 35 to 24 percent in the same time period.\8\ This equals a market 
failure around risk, leading to underinvestment in early stage start-up 
deals, and also resulting in a gap between the completion of basic 
research and applied R&D. In addition, more recently, the level of 
venture capital activity has declined considerably in the current 
recession. In the first quarter of 2009, total U.S. venture capital 
investment plunged 60 percent as compared to the same period a year 
earlier.
---------------------------------------------------------------------------
    \7\ Global Insight, ``Venture Impact: The Economic Importance of 
Venture Capital-Backed Companies to the U.S. Economy,'' 2009, 2.
    \8\ While venture capital in the United States increased from $11.3 
billion in 1996 to $28 billion in 2008, the amount invested in 
startup--and seed-stage deals only increased from $1.3 billion to $1.6 
billion, or by one-third. The amount invested in early-stage deals rose 
from $2.8 billion to $5.3 billion between 1996 and 2008, but the early-
stage share of total venture funding fell from about 25 percent to 
about 18 percent. Similarly the share of startup- and seed-stage 
venture capital fell from 11.6 to 5.8. Authors' analysis of 2008 data 
from PricewaterhouseCoopers/.
---------------------------------------------------------------------------
    Another concern is that U.S. firms are moving R&D offshore. R&D 
expenditures from U.S.-based multinationals in emerging Asian markets 
increased from 5 percent to 14 percent between 1995 and 2006.\9\ And 
over 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 increased from 8 to 18 percent.\10\ Taken 
together, it is clear that the U.S. private sector engine of innovation 
is not working as well as it used to.
---------------------------------------------------------------------------
    \9\ ``Science and Engineering Indicators: 2010,'' National Science 
Foundation, 2010, http://www.nsf.gov/statistics/seind10/c0/c0s3.htm.
    \10\ Booz Allen Hamilton and INSEAD, ``Innovation: Is Global the 
Way Forward?'' (Booz Allen Hamilton, 2006), 3.
---------------------------------------------------------------------------
    One reason for these private sector challenges is that U.S. policy 
has not kept up to provide the support and incentives needed for 
private sector innovation. 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. Since the mid-1990s, total Federal R&D investment 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.\11\ 
To restore Federal R&D support as a share of GDP to its 1993 level, we 
would have to increase Federal R&D investment by 50 percent, or over 
$37 billion.
---------------------------------------------------------------------------
    \11\ Titus Galama and James Hosek, U.S. Competitiveness in Science 
and Technology (Santa Monica, California: RAND Corporation, 2008), 67.
---------------------------------------------------------------------------
    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.\12\ Among OECD 
countries, the United States now ranks seventh in total R&D intensity, 
behind a list of countries including Japan, South Korea, Finland, and 
Sweden.\13\ Moreover, the United States places only 22nd in the share 
of government GDP devoted to non-defense research.\14\
---------------------------------------------------------------------------
    \12\ Organization for Economic Co-operation and Development, OECD 
Science Technology and Industry Scoreboard 2005, 2005.
    \13\ Organization for Economic Co-operation and Development, OECD 
Science, Technology, and Industry Scoreboard 2007, 2007, http://
oecd.p4.siteinternet.com/publications/doifiles/9220070
81PIG2.xls.
    \14\ Norman Augustine, Is America Falling Off the Flat Earth? 
(Washington: National Academies Press, 2006), 53.
---------------------------------------------------------------------------
    Federal investment in most of the programs that focus most directly 
on innovation promotion have also declined or grown more slowly than 
GDP. Funding for NSF's Partnerships for Innovation program has grown 
more slowly than GDP since the program began operating in 2000. NIST's 
Manufacturing Extension Partnership (MEP) is scheduled to receive 
$131.8 million in FY10, only 3 percent more (not adjusted for 
inflation) than it did in 1999. The America COMPETES Act abolished ATP 
and created a new Technology Innovation Program (TIP) with a 
substantially broader scope than ATP. However, the legislation did not 
match the broader scope with increased funding. TIP is slated to 
receive $140.5 million in 2010, slightly more than ATP received in 2005 
but less than ATP received in any year between 1998 and 2004. Funding 
for NSF's Engineering Education Center programs, which includes NSF's 
Engineering Research Centers (ERCs) have declined by 11 percent since 
2004.\15\
---------------------------------------------------------------------------
    \15\ FY 2005 and 2009 Budget Request to Congress, National Science 
Foundation.
---------------------------------------------------------------------------
    The Defense Advanced Research Projects Agency (DARPA) has played a 
key role historically in driving innovation. The Internet grew out of a 
DARPA initiative. However, over the last decade, DARPA funding as a 
share of GDP has declined by over 20 percent. Moreover, in recent years 
DARPA has shifted toward more short term, mission-oriented 
development.\16\ Indeed, it is not an exaggeration to state that if 
DARPA were making the kinds of investments it makes today 30 years ago, 
the Internet never would have been developed.
---------------------------------------------------------------------------
    \16\ Erica Fuchs, ``The Role of DARPA in Seeding and Encouraging 
New Technology Trajectories: Pre- and Post-Tony Tether in the New 
Innovation Ecosystem,'' Industry Studies Working Paper, (2009), http://
isapapers.pitt.edu/73/.
---------------------------------------------------------------------------
    Lack of adequate funding has also severely impacted agencies like 
the Patent and Trademark Office (PTO) and the Food and Drug 
Administration that are critical to enabling inventions become 
innovations in the marketplace. Both the PTO and the FDA used to be the 
envy of other nations around the globe for their effectiveness and 
efficiency. But the backlog at the PTO means that most patent 
applicants will wait many years before finding out if their invention 
is granted a patent. Likewise, there have been increases in delays at 
the FDA for drug and device approval and difficulties in upgrading the 
scientific expertise the FDA needs in order to expeditiously and 
effectively evaluate new drugs and biological submissions.\17\ 
Likewise, the United States Office of the Trade Representative lacks 
the resources it needs to adequately go after rampant high-technology 
mercantilist practices other nations are engaged in to take market 
share away from U.S. technology companies.
---------------------------------------------------------------------------
    \17\ See Battelle Technology Partnership Practice, ``Gone Tomorrow? 
A Call to Promote Medical Innovation, Create Jobs, and Find Cures in 
America'' (Washington, D.C.: The Council for American Medical 
Innovation, June, 2010).
---------------------------------------------------------------------------
    Finally, 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.\18\ And while 
our research universities are still a key strength, their future is 
uncertain given the large cuts in state higher education budgets and 
slow growth in Federal support for university research.
---------------------------------------------------------------------------
    \18\ James Adams, ``Is The U.S. Losing Its Preeminence in Higher 
Education?'' NBER Working Paper 15233, (2009).
---------------------------------------------------------------------------
    The declines have not just been in direct spending. Relative to 
other nations our R&D tax credit has become significantly less 
generous. In the early 1990s, the United States had the most generous 
R&D tax credit among 30 OECD nations. Now, because other nations have 
expanded their R&D incentives, U.S. rank has fallen to 18th.\19\ And 
among 38 nations, it ranks 24th, now behind India, Brazil, and China 
(India's R&D tax credit is now four times that of the United States). 
The reason for this slippage is that the United States ranks just 21st 
out of 24 OECD countries assessed in rate of change in tax credit 
generosity between 1999 and 2008. Congress would need to increase the 
Alternative Simplified Credit (ASC) from 14 to 20 percent to reach 10th 
place and 47 percent to become the most generous of the OECD 
nations.\20\
---------------------------------------------------------------------------
    \19\ Organization for Economic Co-operation and Development , OECD 
Science, Technology, and Industry Scoreboard 2009, 79, http://
dx.doi.org/10.1787/744214584778.
    \20\ 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/files/WM-2009-03-
rd.pdf.
---------------------------------------------------------------------------
    Weaknesses in the U.S. innovation system don't simply stem from 
underfunding. The organization of efforts is often not optimal to 
driving innovation. Perhaps the most striking weakness is the fact that 
although there are a number of programs that help companies become more 
innovative or productive, there is no agency that has firm-level 
innovation as its sole mission. (In stark contrast to the litany of 
nations listed below who do have such an agency.) With a few important 
exceptions, U.S. innovation policy is at best a byproduct of Federal 
programs whose main purpose lies elsewhere.
    In addition, 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.\21\ 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.
---------------------------------------------------------------------------
    \21\ Issues of the State Science and Technology Institute's Weekly 
Digest provides examples (www.ssti.org).
---------------------------------------------------------------------------
What Can We Learn from Other Nations?
    Over the last 15 years, a large number of nations have woken up to 
the fact that they need to compete for internationally mobile 
innovation-based economic activities, and have put in place policies 
that reflect that determination, such as more generous R&D tax 
incentives 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. As a result, U.S. firms are now competing against firms in a 
growing number of national economies in which their governments 
actively help them compete.
    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 
productivity, and that losing the competition can result in a 
relatively lower standard of living as economic resources shift to 
lower-valueadded industries. These countries are implementing 
coordinated national innovation agendas that boost R&D funding, have 
introduced policy changes and government initiatives that more 
effectively transfer technologies from universities and government 
laboratories to the private sector for commercialization, and are 
ensuring 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.
    These innovation-support policies are crucial to national 
innovation competitiveness, as Professors Furman and Richard found in a 
study of the innovation capacity (an economy's potential for producing 
a stream of commercially relevant innovations) of twenty-three 
countries from 1978 to 1999.\22\ Starting with 1978, 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.
---------------------------------------------------------------------------
    \22\ 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.
---------------------------------------------------------------------------
    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, moving 
to the world's technological frontier and overtaking the innovative 
capacities of many mid- and third-tier countries, including France and 
Italy, whose economic conditions started off much more favorably in the 
early 1980s. Furman and Hayes conclude that the innovation leadership 
these countries achieved was based not only on 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.
1. National Innovation Strategies
    Part of the United States' leadership slippage is attributable to 
the fact that over the past decade many of our competitors--from Great 
Britain and Finland to Japan and South Korea--have created national 
innovation and competitiveness strategies designed specifically to link 
science, technology, and innovation with economic growth.\23\ As 
Annabelle Malins, British Consul General for the Southern U.S., 
commented recently, ``The United Kingdom has made a conscientious 
decision to place innovation at the center of our country's economic 
growth strategy.'' \24\ Where these countries have coherent, strategic 
game plans to compete and win in the highest value-added sectors of 
economic activity, the U.S. relies more on one-off policies that, while 
valuable and necessary, are all too often not tied to a coordinated 
strategy.
---------------------------------------------------------------------------
    \23\ Stephen Ezell, ``America and the World: We're Number 40!,'' 
Democracy Journal, Issue 14, Fall 2009, http://
www.democracyjournal.org/pdf/14/Ezell.pdf.
    \24\ Annabelle Malins, ``Address to National Foreign Trade 
Council,'' Raleigh, North Carolina, April 15, 2010.
---------------------------------------------------------------------------
    These nations are not content to let their government policies and 
actions influence innovation in a haphazard and uncoordinated way. They 
seek to develop strategies to assess their nation's weaknesses and 
strengths, examine the policies of other nations in order to learn from 
them, and assess and revise their own national policies in a broad 
array of areas that could influence innovation and competitiveness, 
including tax policy, regulation, direct science and technology 
programs and other areas (see Table 1).
    It should be noted that these strategies seldom seek to ``pick 
winners and losers'' in the sense of picking individual firms to favor. 
Indeed, these strategies are a far cry from the strongly directive 
Japanese efforts, for example, 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. And they seek to better align what government 
already does to ensure that it best supports innovation and 
competitiveness.

 Table 1.--Selected Countries with a National Innovation Strategy and/or
                               Foundation
------------------------------------------------------------------------
                           National Innovation      National Innovation
        Country                  Strategy                 Agency
------------------------------------------------------------------------
Australia                Yes                      Yes
Austria                  Yes                      Yes
Canada                   Yes                      No
China                    Yes                      No
Denmark                  Yes                      Yes
Finland                  Yes                      Yes
France                   Yes                      Yes
Germany                  Yes                      No (Yes at the
                                                   Bundeslander level)
India                    Yes                      Yes
Ireland                  Yes                      Yes
Japan                    Yes                      Yes
Malaysia                 Yes                      Yes
The Netherlands          Yes                      Yes
Portugal                 Yes                      Yes
Norway                   Yes                      Yes
Rwanda                   Yes                      No
Singapore                Yes                      Yes
South Korea              Yes                      Yes
Spain                    Yes                      Yes
Sweden                   Yes                      Yes
Thailand                 Yes                      Yes
United Kingdom           Yes                      Yes
United States            Yes                      No
Uruguay                  Yes                      Yes
------------------------------------------------------------------------

2. Civilian Technology and Innovation Promotion Agencies
    Many countries not only have innovation and competitiveness 
strategies, but also agencies specifically charged with spurring 
private sector 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 innovation 
promotion agencies (see Table 1). Many countries have launched such 
agencies only fairly recently. For example, India launched its National 
Innovation Foundation in 2000, Sweden introduced Vinnova in 2001, 
Thailand created a National Innovation Agency in 2003, the launched 
Senter November in 2004, and the United Kingdom launched its Department 
for Business, Innovation, and Skills in 2009.
    All these countries have science- and university-support agencies 
similar to America's National Science Foundation, which largely fund 
basic research. 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.
    These countries' innovation agencies perform roles such as 
channeling R&D into specific technology or industry research areas; 
surveying the world to identify nascent technologies; building 
technology ``roadmaps''; creating new knowledge pertaining to the 
methods, processes, and techniques of innovation; transferring 
knowledge from academia and government to the private sector; 
encouraging private-sector technology adoption; catalyzing industry-
university research partnerships; supporting regional industry 
``technology clusters''; developing national innovation metrics; and 
championing innovation in the public sector.
    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.
    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 3 years. Like Tekes, it is also responsible for more than 20 
industry- and technology-based knowledge transfer networks, with more 
being established.
    In virtually all cases 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.
    These nations also often invest considerable resources in these 
efforts. 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. In fact, it invests around $3 billion per year, 
or 0.02 percent of GDP. 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.\25\ 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.
---------------------------------------------------------------------------
    \25\ 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.
---------------------------------------------------------------------------
    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.'' \26\ It is funding Lithium-ion 
battery research over the five-year period from October 2007 to October 
2012 at $275 million (25 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 10 years to applied 
research on automotive electronics, lithium ion batteries, lightweight 
construction, and other automotive applications.\27\
---------------------------------------------------------------------------
    \26\ 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.
    \27\ Auto Industry U.K., ``Germany invests =420M in lithium-ion 
battery development,'' May 13, 2008, http://www.autoindustry.co.uk/
news/13-05-08_2.
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3. Tax Incentives for Research and Development
    As noted above, many other nations have much more generous tax 
incentives for the private sector to invest in R&D. They do this not 
only to encourage existing companies to expand R&D, but to attract 
globally mobile R&D activity. But not only have these nations put in 
place more generous research incentives they have been more innovative 
in using incentives to spur research and innovation. For example, 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. 
Other nations have more generous credits for companies investing in 
national laboratories or universities. For example, in France, 
companies funding research at national laboratories receive a 60 
percent credit on every dollar invested. Denmark, Hungary, Norway, 
Spain, and the U.K. provide firms more generous tax incentives for 
collaborative R&D with public research institutions. Japan's R&D 
incentive for research expenditures companies make with universities 
and other research institutes is almost twice as generous as its 
regular credit.
    Other nations are increasingly providing tax incentives to treat 
income received from patents more generously. For example, Belgium 
taxes income received from patents at a rate of 0 to 6.8 percent and 
Ireland at 0 percent. Switzerland has reduced corporate taxes on income 
from all intellectual property to between 1 and 3 percent. Just this 
year, the Netherlands expanded this incentive to include income derived 
from patents or R&D which are taxed at just 5 percent.\28\
---------------------------------------------------------------------------
    \28\ The Netherlands Ministry of Finance, ``Doing business in the 
Netherlands,'' http://www.minfin.nl/english/Subjects/Taxation/
Doing_business_in_the_Netherlands/Innovation_box.
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Steps Congress Can Take to Boost U.S. Innovation and Competitiveness
    The government's role in addressing the innovation economy is not 
to regulate business or to direct the path of technological 
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 simply ``leaving it up 
the market'' not only because the innovation economy is rife with 
market failures but also because U.S. firms are now in global 
competition with firms that have their government as an innovation 
partner. In this sense, government should be a facilitator that spurs 
firms to innovate in ways that serve the public interest. 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.
    As a core of this strategy, the Federal Government needs to invest 
significantly more in scientific research, commercialization, and 
innovation, including funding entities like the PTO and FDA that help 
support the innovation process. ITIF rejects the notion that in a time 
of fiscal constraint innovation investments should take their share of 
cuts, just like all other budget items. The reality is that investments 
in innovation are not like all other areas of the budget, most of which 
produce no or little additional economic activity and tax revenues. If 
structured properly Federal investments in innovation (either through 
direct spending or tax incentives), can more than pay for themselves, 
not only in terms of jobs and economic growth, but also tax revenues.
    However, given the current political climate that favors cutting 
the deficit over investing in America's future, I will focus my 
recommendations on activities that will have limited budgetary impact. 
If policies are crafted carefully, achieving greater levels of 
innovation and commercialization of R&D while recognizing budget 
limitations need not be mutually exclusive. Even in a time of budget 
constraints there are many pro-innovation policies Congress can pursue 
that will add little to the Federal deficit (under its current static 
and short-term budgetary scoring system).
    With this in mind, I offer the following set of innovation-
enhancing policy proposals, each designed to be of low or no cost to 
the Treasury, but whose impact on enhancing U.S. innovation and 
competitiveness could be significant. These are organized into two 
areas: (1) changes in the structure of the Federal Government to better 
support innovation and (2) enacting policies to spur university-
industry partnerships and technology commercialization.
    Before going into detail on these, let me make it clear that we 
believe that there are a wide range of policies that can spur 
innovation and should be the focus on national innovation policy. Three 
in particular are worth mentioning here. First, high-skill immigration 
reform to make it easier for the U.S. to attract and retain the best 
and the brightest from around the world is a key step Congress could 
take. As we recently noted, the old arguments that these highly-skilled 
immigrants take jobs away from Americans or lower their wages are 
simply not true.\29\ Second, Congress and the Administration need to do 
more to fight foreign ``high-tech'' mercantilism. As ITIF has shown, 
many nations are using an array of unfair trade practices, including 
standards; government procurement; anti-trust; intellectual property 
theft, including product counterfeiting; and other policies to 
systematically disadvantage U.S. technology companies in the global 
marketplace. U.S. trade policy needs to more aggressively go after 
these violations of the spirit and often the letter of the WTO.\30\ 
Third, we need to expand our tax incentives for R&D. ITIF recently 
calculated that expanding the Alternative Simplified Credit from 14 
percent to 20 percent would after several years created 162,000 jobs 
and actually lead to a net increase in Federal tax revenues of $9 
billion annually.
---------------------------------------------------------------------------
    \29\ New academic research has found that H1-B visa workers do not 
take jobs away from American workers, nor do they reduce their wages. 
Cited in Robert D. Atkinson, ``H-1B Visa Workers: Lower-Wage 
Substitute, or Higher-Wage Complement, (Washington, D.C.: ITIF, June, 
2010), http://www.itif.org/publications/h-1b-visa-workers-lowerwage-
substitute-or-higher-wage-complement.
    \30\ Julie Hedlund and Robert Atkinson, ``The Rise of the New 
Mercantilists: Unfair Trade Practices in the Innovation Economy, 
(Washington, D.C.: ITIF, June 2007), http://www.itif.org/issues/
15?page=2.
---------------------------------------------------------------------------
I. Restructure the Federal Government to Better Support Innovation
    The Federal Government plays a key role in innovation. To be most 
effective, Federal policy should be aligned wherever possible to 
proactively support innovation. President Obama took an important step 
in this direction with the creation of the position of a Chief 
Technology Officer in the White House. But more needs to be done. ITIF 
suggests three key changes:
    1. 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. As noted 
above, we are one of the few nations without one. The last time the 
United States did anything similar was President Carter's Domestic 
Policy Review on Industrial Innovation in 1978 and President Reagan's 
1984 Commission on Industrial Competitiveness. These efforts were 
extremely important in setting the stage for a number of important 
Congressional initiatives, including the R&D tax credit, the Bayh-Dole 
Act, the National Cooperative R&D Act, the Stevenson-Wydler Technology 
Innovation Act, and the Omnibus Trade and Competitiveness Act.
    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 Administration 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. competitiveness. Legislation 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 
competitiveness (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.
    2. Form an Office of Innovation Review in OMB (i.e., an Office of 
Information and Regulatory Affairs for Innovation). 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.
    To remedy these problems, we recommend that Congress create a White 
House Office of Innovation Review that would have the specific mission 
of being the ``innovation champion'' within these processes. OIR 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. OIR 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 OIR would 
not be designed to thwart Federal regulation; as a matter of fact, in 
some cases, the existence of OIR 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 OIR a fairly small change to the system? Certainly adding OIR 
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, OIR 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.
    3. Establish a National Innovation Foundation. If Congress wanted 
to more effectively organize Federal innovation implementation efforts, 
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.\31\ A National 
Innovation Foundation would:
---------------------------------------------------------------------------
    \31\ Robert Atkinson and Howard Wial, ``Boosting Productivity, 
Innovation, and Growth Through a National Innovation Foundation,'' 
(Washington, D.C.: Information Technology and Innovation Foundation and 
The Brookings Institution, April 2008), www.itif.org/publications/
boosting-productivity-innovation-and-growth-through-national-
innovation-foundation.

   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 Federal innovation policy. Creating NIF could 
be done in a budget neutral way by consolidating existing programs 
(with around $350 million in annual support). Because of its strong 
leveraging requirements from the private sector and state governments, 
NIF would lead to an expansion of overall national efforts devoted to 
innovation.
II. Spur University Industry Partnerships and Commercialization
    As companies have reduced their relative investment in basic and 
applied research, universities and Federal laboratories have become 
more important to the U.S. innovation system. As Fred Bloch and Matthew 
Keller documented in a recent ITIF report, Where Do Innovations Come 
From? Transformations in the U.S. National Innovation System, 1970-
2006, in 2006 76 of the 88 companies that produced award-winning 
innovations were beneficiaries of Federal funding.\32\ Today, the 
private sector increasingly relies upon partners in universities and 
Federal laboratories when developing innovations. Indeed, universities 
are becoming more important players in the innovation process.
---------------------------------------------------------------------------
    \32\ Fred Bloch and Matthew Keller, ``Where Do Innovations Come 
From? Transformations in the U.S. National Innovation System, 1970-
2006,'' Information Technology and Innovation Foundation, July 2008, 
http://www.itif.org/files/Where_do_innovations_come_from.pdf.
---------------------------------------------------------------------------
    However, 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.
    Not surprisingly, many universities and Federal labs underperform 
when it comes to working with industry and commercializing 
technologies. The major reason for this is that few universities and 
Federal labs see commercialization and industry partnerships as a 
central part of their mission. In this context, the Federal Government 
can and should take a number of steps to support and incent 
universities and labs to more effectively commercialize technology. 
They can do this in a variety of ways.
    4. Focus Increases in Science Agency Budgets on Programs That Focus 
on Commercialization. The National Science Foundation is fundamentally 
an agency which focuses on supporting university-based science, not on 
the transfer of these results to the marketplace. And this is reflected 
in part in the minimal levels of funding for NSF programs that seek to 
create partnerships with industry, such as the Engineering Research 
Center Program and other related programs. These partnership programs 
receive less than 2 percent of the overall NSF budget.\33\ Unless 
Congress specifically charges the NSF with focusing more on 
commercialization and significantly increases funds for the programs 
that have that as their mission, the NSF will continue to give these 
programs short shrift.
---------------------------------------------------------------------------
    \33\ FY 2009 Budget Request to Congress, National Science 
Foundation, http://www.nsf.gov/about/budget/fy2009/toc.jsp.
---------------------------------------------------------------------------
    As such, we recommend that Congress not just simply expand science 
agency funding across the board within NSF, NIST, and DOE Office of 
Science (as is contemplated in the reauthorization of the COMPETES 
Act), but that Congress target a significant share of increased funding 
to the programs more focused on commercialization activities. In 
particular, COMPETES reauthorization should look to increase by a 
factor of four (over a period of 3 years) funding for NSF's Engineering 
Research Center program, the Industry/University Cooperative Research 
Centers (I/UCRC), Partnerships for Innovation, Grant Opportunities for 
Academic Liaison with Industry, and Advanced Technical Education (ATE) 
Program. These programs not only effectively leverage non-Federal 
dollars (for example, I/UCRCs leverage 10 to 15 times the NSF 
investment), they effectively link universities and colleges to 
industry.
    Some will object to such targeting, arguing that the funds should 
go to ``basic'' university research. But there is no reason why some 
share of university 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).\34\ One 
way to improve the link between economic goals and scientific research 
is to fund more strategic research in partnership with industry and 
universities.
---------------------------------------------------------------------------
    \34\ Donald Stokes, ``Pasteur's Quadrant,'' Brookings Institution, 
1997.
---------------------------------------------------------------------------
    5. Tie Federal Research Awards to University Commercialization 
Results. Currently, NSF awards grants to universities solely on 
technical merit, not on whether the university is effective on 
transferring the results of that research into society and the economy. 
ITIF recommends that America COMPETES legislation include incentives 
for accountability. The legislation contemplates more dollars and more 
grants for private investigator scientific research; but we need 
greater accountability for results--a challenge we've had for more than 
20 years. Many countries are experimenting with measures that would 
bring greater accountability to show results from government-funded 
scientific research. For example, in Sweden, 10 percent of regular 
research funds allocated by the national government to universities are 
distributed using performance indicators. Five percent of these funds 
are allocated based on the amount of external funding the institutions 
have been able to attract, with the other 5 percent based on the 
quality of scientific articles published by each institution (as 
determined through bibliometric measures such as the number of 
citations).\35\ Finland has also started to base its university budgets 
on performance--25 percent of Finnish universities' research and 
research training budgets are based on ``quality and efficacy'' 
including the quality of scientific and international publications and 
the universities' ability to attract research investment from 
industry.\36\
---------------------------------------------------------------------------
    \35\ Swedish Ministry of Education and Research, ``Government Bill: 
A Boost to Research and Innovation,'' November 17, 2008, http://
www.sweden.gov.se/sb/d/6949/a/115809.
    \36\ Jukka Haapamaki and Ulla Makelainen, ``University Steering,'' 
Finnish Ministry of Education, June 17, 2009.
---------------------------------------------------------------------------
    One way to begin this process would be for Congress to charge NSF 
with using the criteria of the share of the university's research 
budget that is provided by industry when it makes awards to 
institutions (as opposed to individual scientists). Programs using this 
criteria might include the NSF Major Research Equipment and Facilities 
Construction Funding program, the Major Research Instrumentation 
program, and the Technology and Tools Funding program. If universities 
understand that their likelihood of receiving NSF grants is increased 
if they work more closely with industry, they will likely do so.
    6. Create an SCNR (Spurring Commercialization of Our Nation's 
Research) Program to Support University, State, and Federal Laboratory 
Technology Commercialization Initiatives. In addition to using Federal 
research funding as an incentive for universities to work more with 
industry, ITIF believes that the Federal Government should also provide 
funding to directly support commercialization activities. However, in 
an era of fiscal constraint adequate new funding may be difficult to 
obtain. As a result, Congress should consider establishing 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. If Congress allocated 0.15 
percent of agency research budgets it would raise around $110 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.\37\ We would recommend that 
half the funds would go to universities and Federal laboratories that 
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 50 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, a fraction of what they spend on industrial 
recruitment to convince firms to move from one state to another. States 
are a key partner in the U.S. innovation system, and the Federal 
Government needs to better support their technology commercialization 
efforts.
---------------------------------------------------------------------------
    \37\ U.S. Small Business Administration, ``Description of the Small 
Business Technology Transfer Program,'' 15. http://www.sba.gov/
aboutsba/sbaprograms/sbir/sbirstir/SBIR_STTR_
DESCRIPTION.html.
---------------------------------------------------------------------------
    7. Expand the Scope of the Collaborative R&D Tax Credit. 
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. Moreover, participation in research consortia has a 
positive impact on firms' own R&D expenditures and research 
productivity.\38\ And OECD analysis shows that firms that collaborate 
on innovation spend more on innovation than those that do not, an 
indication that collaboration is more a means to extend the scope of a 
project or complement firms' competencies than simply a means to save 
on costs.\39\
---------------------------------------------------------------------------
    \38\ L. Branstetter and M. Sakakibara, ``Japanese Research 
Consortia: A Microeconometric Analysis of Industrial Policy,'' 21, 
Journal of Industrial Economics, 46 (1998): 207-233.
    \39\ OECD, ``Science, Technology and Industry Scoreboard 2009,'' 6.
---------------------------------------------------------------------------
    Yet, 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 socially optimal levels.\40\ 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 declined over a 6-year period, from 
2000 to 2006 (before experiencing a modest increase in 2007).\41\ 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.\42\
---------------------------------------------------------------------------
    \40\ 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.
    \41\ Raymond Wolfe, ``U.S. Business Report 2008 Worldwide R&D 
Expense of $330 Billion: Findings from New NSF Survey,'' National 
Science Foundation, 2008.
    \42\ Barry Bozeman and Albert N. Link, ``Tax Incentives for R&D: A 
Critical Evaluation,'' 24. Research Policy, 13, no. 1 (1984): 21-31.
---------------------------------------------------------------------------
    ITIF urges Congress to 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. To spur more collaborative 
research, Congress could allow firms to take a flat credit of 20 
percent for all collaborative research conducted at universities, 
Federal laboratories, and research consortia, not just that related to 
energy.
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.

    Senator Klobuchar. Those were great ideas. Thank you, Dr. 
Atkinson.
    Mr. Ubl.

   STATEMENT OF STEPHEN J. UBL, PRESIDENT AND CEO, ADVANCED 
                 MEDICAL TECHNOLOGY ASSOCIATION

    Mr. Ubl. Thank you, Madam Chair, Ranking Member LeMieux, 
Senator Begich, for the opportunity to testify today.
    Senator Klobuchar failed to mention I'm also from 
Minnesota, which is----
    Senator Klobuchar. Well, I was trying to hide it, because--
--
    Mr. Ubl. Yes.
    Senator Klobuchar.--it meant we had two----
    Mr. Ubl. Two proxies----
    Senator Klobuchar.--Minnesotans on the panel. And so, I 
was----
    Mr. Ubl. All right.
    Senator Klobuchar.--trying to--I was deep-sixing it. No, 
it's fine; I'm kidding.
    Mr. Ubl. We appreciate your strong leadership and support 
of our industry, and look forward to continuing to work with 
you.
    This hearing is particularly timely. The Financial Times 
reported, this weekend, that, after 110 years of world 
manufacturing leadership, the United States is about to lose 
first place to China. While manufacturing, generally, is 
faltering, the U.S. medical technology industry still leads, 
but our continued leadership cannot be taken for granted.
    I'd like to make three points today, which are discussed in 
greater detail in my written testimony.
    First, the medical technology industry is an American 
success story, both for patients and for our economy. And the 
potential for this industry, going forward, is enormous. For 
patients, medical progress has been remarkable. Between the 
period of 1980 and 2000, life expectancy has increased by more 
than 3 years. Deaths from heart disease have been cut in half. 
Stroke has been reduced by 30 percent, and breast cancer 
reduced by 20 percent.
    For the economy, we are a true high point in the landscape 
of American manufacturing. We create high-paying jobs; 38 
percent higher pay, on average, than jobs in the economy as a 
whole. As you mentioned, employment in our industry is growing, 
up 20 percent between 2005 and 2007. And we are one of the few 
manufacturing sectors that has consistently been a net 
exporter. And the future opportunities are enormous. Advances 
in the understanding of human biology open the door for 
dramatic progress in new treatments and cures.
    The aging of the world population will create steadily 
increasing demand for medical progress, and the projected large 
growth of middle-class populations demanding modern healthcare 
in countries like China and India offer incredible 
opportunities for growth and export expansion.
    Second, while America is the world leader in medical 
technology today, this leadership is by no means assured, and 
the trends are not positive. Since 1998, the surplus of exports 
over imports has been cut in half. Our member companies are 
increasingly introducing breakthrough products abroad before 
they're available to patients here at home. The proportion of 
clinical research trials conducted abroad has also grown 
dramatically.
    Both FDA approval and Europe's CE Mark provide a gateway to 
developing markets, such as China and India. Our concern is 
that, over time, a more efficient European regulatory system 
could make it more attractive to locate R&D and manufacturing 
outside of the U.S. Venture capital investment in medical 
technology, as has been referenced is increasing faster in 
Europe today than it is in America.
    At the same time these negative trends are occurring, 
foreign governments are putting in place aggressive policies to 
support their domestic industries and lure foreign investments, 
including favorable tax treatment, direct subsidies, failure to 
enforce IP protection for American firms, and manipulation of 
regulatory and payment policies to favor domestic research and 
production.
    Finally, my third point is that we need to recognize that 
government policies have a tremendous impact on whether or not 
the United States retains its leadership in medical technology. 
These include regulatory, reimbursement, tax, trade, research 
and innovation policy. All are key factors in determining the 
future success of our industry.
    I would especially like to highlight the central role of 
the FDA regulatory policies. FDA policies must protect the 
public health, but they must also encourage the medical 
innovation that is critical to patients and American industry.
    One policy issue deserves special mention: FDA's 
reexamination and potential reform of the 510(k) process. This 
process fosters rapid incremental innovation for products with 
a low to moderate level of risk. It has an excellent track 
record in protecting public health. It would be a serious 
mistake, in our view, to make radical changes in the process 
that would undermine these strengths. Reform should be targeted 
on product types where there are documented problems, and 
should be reasonable and clearly designed to fix these problems 
within the structure of the 510(k) process.
    At the same time, there are changes that could be made that 
would be clear improvements. FDA needs to provide greater 
clarity and transparency in evidence requirements through more 
guidance documents. This will help both manufacturers and 
reviewers, and will increase public confidence in FDA 
decisionmaking.
    FDA also needs to work internally on increasing the 
consistency of decisionmaking and training of its reviewers. I 
know that the new team at FDA is committed to making the 
process work better, and I am hopeful that they will listen to, 
and respond to, industry concerns.
    Madam Chair and all members of the Committee, thank you 
again for the opportunity to testify this afternoon. For 
America to lead in the 21st century, we must recognize that 
success will not just happen; it requires the creation of a 
positive ``innovation ecosystem'' that will capitalize on our 
industry's strengths and create a level playing field with 
foreign competitors. We believe the opportunity is great. The 
time to act is now.
    And thank you very much for your time and attention.
    [The prepared statement of Mr. Ubl follows:]

        Prepared Statement of Steven J. Ubl, President and CEO, 
                Advanced Medical Technology Association

    Thank you, Chairwoman Klobuchar, for the opportunity to testify on 
this important topic. My name is Steve Ubl, and I am the President and 
CEO of the Advanced Medical Technology Association (AdvaMed). AdvaMed 
is the world's leading trade association representing manufacturers of 
medical devices and diagnostics. AdvaMed member companies produce the 
medical devices, diagnostic products and health information systems 
that are transforming health care through earlier disease detection, 
less invasive procedures and more effective treatments. AdvaMed members 
range from the largest to the smallest medical technology innovators 
and companies.
    We are very appreciative of this subcommittee's interest in the 
issue of the competitiveness of the life sciences industries. While 
today the U.S. is the recognized world leader in medical technology and 
the other life sciences industries, its continued leadership is by no 
means assured. A number of factors, including policies of foreign 
governments designed to support medical technology, threaten to 
undermine U.S. leadership and competitiveness. If America fails to lead 
in medical technology in this century of the life sciences, America's 
long-term future as the world's most powerful economy will be 
jeopardized.
    Several characteristics of our industry are especially relevant as 
policies are considered to support the continued preeminence of the 
American medical technology industry. It is important to recognize that 
small firms are a key part of our industry. A 2007 study by the U.S. 
International Trade Commission (USITC) found a total of 7,000 medical 
technology firms in the U.S.\1\ The U.S. Department of Commerce 
estimated that 62 percent of these firms had fewer than 20 employees 
and only 2 percent had more than 500.\2\ Even large companies in the 
medical technology space tend to be smaller than large companies in 
many other sectors. There are only four pure device and diagnostic 
companies in the Fortune 500 and none in the Fortune 100.
---------------------------------------------------------------------------
    \1\ United States International Trade Commission, ``Medical Devices 
and Equipment: Competitive Conditions Affecting U.S. Trade in Japan and 
Other Principal Foreign Markets,'' March, 2007.
    \2\ U.S. Department of Commerce, unpublished data, 2002.
---------------------------------------------------------------------------
    Small, venture capital funded firms are particularly critical to 
the future of U.S. scientific and technology leadership, because they 
are the source of most of the breakthrough technologies that drive 
medical practice and industry growth. The National Venture Capital 
Association has developed an impressive list of breakthrough medical 
devices and diagnostics that were initially developed by venture 
capital funded start-ups, ranging from Doppler ultrasound to 
implantable defibrillators to pulse oximeters.\3\
---------------------------------------------------------------------------
    \3\ Michaela Platzer, Patient Capital: How Venture Capital 
Investment Drives Revolutionary Medical Innovation, 2007.
---------------------------------------------------------------------------
    Whether created by large or small firms, medical technologies are 
characterized by a very rapid innovation cycle. The typical medical 
device is replaced by an improved version every 18-24 months.
    High levels of research and development (R&D) expenditures are 
necessary to continue this virtuous cycle of innovation and maintain 
U.S. competitiveness. As reported by the USITC, research and 
development is one of the main reasons for the US's competitive 
advantage. U.S. medical technology firms spent over twice the U.S. 
average on R&D. The USITC found that high technology medical device 
companies devote upwards of 20 percent of revenue on R&D.\4\ The 
European Commission reported that U.S. medical technology firms' R&D 
expenditures as a percentage of sales were, on average, roughly twice 
as high as such expenditures in the EU and Japan as of 2005.\5\ There 
are indications, however, that this differential is eroding.
---------------------------------------------------------------------------
    \4\ USITC, ``Medical Devices and Equipment: Competitive Conditions 
Affecting U.S. Trade in Japan and Other Principal Foreign Markets,'' 
March, 2007.
    \5\ Ibid.
---------------------------------------------------------------------------
    The device industry is highly competitive, and this helps moderate 
U.S. healthcare costs. A study of medical device prices from 1989 to 
2006 found that they increased, on average, only one-quarter as fast as 
the MCPI and one-half as fast as the regular CPI. Because the highly 
competitive market kept prices low, medical devices and diagnostics 
accounted for a relatively constant 6 percent of national health 
expenditures throughout the eighteen year period despite a flood of new 
products that profoundly changed medical practice.\6\
---------------------------------------------------------------------------
    \6\ Donahoe, Gerald and King, Guy. ``Estimates of Medical Device 
Spending in the U.S.'' May, 2009. Available from: http://
www.advamed.org/NR/rdonlyres/6ADAAA5B-BA37-469E-817B-3D61DEC4E7C8/0/
King2009FINALREPORT52909.pdf.
---------------------------------------------------------------------------
    A key feature distinguishing medical technology from many other 
manufacturing sectors is the extraordinary impact of Federal policies. 
All medical technology products sold domestically are regulated by the 
Food and Drug Administration (FDA). Most must receive clearance or 
approval before they can be marketed and all are subject to quality 
systems and good manufacturing practices regulations. Further, products 
are monitored for adverse events once marketed to the public and are 
subject to recall authority. Accordingly, FDA policies are critical to 
the health and growth of the industry.
    Beneficiaries of government programs are important consumers of 
medical technology. In 2008, Medicare and Medicaid together paid for 
medical care that accounted for 48 percent of total domestic sales of 
medical technology products. Patients in the VA and DOD care systems 
are also major users of medical technology. Meeting the coverage rules 
of these programs is critical for medical technology companies, given 
the size of this market, and their reimbursement policies ultimately 
affect a major share of company revenues. In addition, Medicare 
coverage decisions and payment methodologies often spillover to the 
private insurance market, expanding the impact of government decisions 
significantly beyond the boundaries of the government programs.
    The manufacture of medical technology is an American success story. 
Our industry employs more than 400,000 workers, and, if indirect 
employment is included, the employment impact is substantially 
higher.\7\ Industry pay levels are 38 percent higher than average pay 
for all U.S. employment and 22 percent higher than other manufacturing 
employment.\8\ While the number of manufacturing jobs was plummeting 
across the larger economy, even before the current recession, 
employment in our industry was expanding. Between 2005 and 2007, 
medical technology employment grew 20.4 percent, adding 73,000 jobs.\9\ 
During the recession, between 2007 and 2008, MedTech employment dropped 
1.1 percent, compared to 4.4 percent for manufacturing as a whole.\10\
---------------------------------------------------------------------------
    \7\ The Lewin Group, ``State Economic Impact of the Medical 
Technology Industry,'' June 7, 2010.
    \8\ Ibid.
    \9\ Ibid.
    \10\ Ibid.
---------------------------------------------------------------------------
    With $33 billion in total exports in 2008, medical technology ranks 
eleventh among all manufacturing industries in gross exports.\11\ 
Notably, unlike virtually every other sector of U.S. manufacturing, 
medical technology has consistently enjoyed a favorable balance of 
trade. With the aging of both U.S. and foreign populations, the 
projected explosive growth of large middle class populations demanding 
modern health care in developing countries like China and India, and 
the accelerating pace of biomedical discovery, the potential for growth 
of our industry is great.
---------------------------------------------------------------------------
    \11\ The Manufacturing Institute, ``The Facts about Modern 
Manufacturing,'' 2009, p. 18; ITC data web.
---------------------------------------------------------------------------
    The contribution of the life sciences to our economy goes beyond 
conventional measures of employment, wages, and exports. By improving 
the health of the population, progress in the life sciences is an 
engine driving productivity and labor force participation, both 
significant contributors to economic growth and GDP. Between 1980 and 
2000, medical progress added more than 3 years to life expectancy. The 
death rate from heart disease was cut in half; the death rate from 
stroke was cut by one-third, and the death rate from breast cancer was 
cut 20 percent.\12\
---------------------------------------------------------------------------
    \12\ MEDTAP International, Inc.. The Value of Investment in Health 
Care: Better care, better lives, 2004, Bethesda, MD: MEDTAP.
---------------------------------------------------------------------------
    The Milken Institute has compared two alternative futures regarding 
the growth in chronic disease. Under one path, the current trends in 
growth in the incidence of chronic disease continue unchecked. Under 
the other path, the growth is reduced significantly by a combination of 
better prevention, better management, and continued technological 
progress in treatment. The difference between the current trend path 
and the more favorable path was estimated to be $1.1 trillion in GDP 
annually by 2023.\13\ Similarly, the United BioSource Corporation 
examined the literature on the economic burden of lost productivity due 
to eleven chronic and two acute conditions. They concluded that the 
total drain on the Nation's GDP in 2008 from lost productivity and 
labor force participation due to these conditions was as much as $1.4 
trillion annually in 2008.\14\
---------------------------------------------------------------------------
    \13\ Ross DeVol and Armen Bedroussian, with Anita Charuworn, 
Anusuya Chatterjee, In Kyu Kim, Soojung Kim and Kevin Klowden. An 
Unhealthy America: The Economic Burden of Chronic Disease, the Milken 
Institute, October, 2007.
    \14\ United BioSource Corporation, The Economic Burden of Chronic 
and Acute Conditions in the U.S., 2009. Available at http://
www.advamed.org/NR/rdonlyres/92EABCBA-4A06-4712-BFF0-1EE90C119876/0/
A28690BurdenofDiseaseReport_Final_81409_CLEAN_Rev1.pdf.
---------------------------------------------------------------------------
    While the medical technology industry is a genuine American success 
story, our world leadership is not guaranteed to continue. Without 
sound public policy, it is increasingly likely that the U.S. will fall 
behind not only in medical devices and diagnostics but in other 
industries based on the life sciences.
    To quote Dr. Laurence Summers, Chairman of the National Economic 
Council, ``The 20th century was an American century in no small part 
because of American leadership in the application of the physical 
sciences. While the foundational ideas of relativity and quantum 
mechanics were developed in Europe, the practical application of these 
ideas occurred in the US. If the 20th century was defined by 
developments in the physical sciences, the 21st century will be defined 
by developments in the life sciences. It is natural to ask whether the 
U.S. will lead in the life sciences in this century as it did in the 
physical sciences in the last. It is a profoundly important economic 
question, but one whose implications go far beyond to embrace issues of 
national security and moral leadership.'' \15\
---------------------------------------------------------------------------
    \15\ Lawrence Summers, ``America Must Not Surrender Its Lead in 
Life Sciences,'' Financial Times, January 28, 2007.
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    There are a number of indicators that show that the gap between 
America and foreign competitors in the medical technology industry is 
narrowing. While the U.S. has maintained a favorable balance of trade, 
the surplus of exports over imports has been narrowing both in absolute 
terms and relative to the size of the export-import sector. In 1998, 
imports and exports together totaled $24.6 billion and the trade 
surplus was $6.6 billion--more than one-quarter of total trade. By 
2009, total trade had almost tripled--to $63.5 billion, but the trade 
surplus had shrunk by more than half--to $3 billion, and the surplus 
was only 4.7 percent of total trade.
    A troubling trend is the rapid movement of clinical research 
abroad. In 2004, 78.7 percent of all clinical trials listed in 
ClinicalTrials.gov were carried out in the U.S. By 2009, that 
proportion had sunk to 45 percent. U.S. clinical trials that were 
specifically for medical technology products started even higher and 
finished even lower, dropping from 86.9 percent of the worldwide total 
to 44.8 percent during this period. The cumulative annual growth rate 
of U.S. clinical trials 2004-2009 was lower that of Brazil, China, 
France, Germany, India, the U.K., Israel, and Japan.\16\
---------------------------------------------------------------------------
    \16\ Clinicaltrials.gov. PwC analysis.
---------------------------------------------------------------------------
    Given the importance of startup firms in creating breakthrough 
technologies and fueling the growth of the industry, America's strong 
network of venture capital firms with an interest in investing in the 
life science has been a key strength. Here, too, although the U.S. 
maintains a strong lead in absolute terms, the lead is shrinking 
relatively. Comparing 2000 and 2009, venture capital investment in 
medical technology grew almost 60 percent in Europe and Israel and less 
than 40 percent in the U.S.\17\
---------------------------------------------------------------------------
    \17\ Data from Ernst & Young.
---------------------------------------------------------------------------
    Not only is venture capital growth in the U.S. slower than abroad, 
we are increasingly hearing that growing regulatory and payment 
uncertainties in the U.S. are causing VC firms to rethink whether they 
want to invest in the sector. Moreover, as they see longer time--and 
thus greater cost--in getting products to market as the result of these 
uncertainties, they are planning to invest the same amount of dollars 
in fewer companies and shifting investments more to companies that are 
further along in the development process.\18\ If these trends prove 
durable, they would be very troubling for the future of medical 
innovation and for the industry. Moreover, there are far more start-ups 
seeking VC funds than there are funds available, suggesting that 
significant innovation opportunities are being lost.
---------------------------------------------------------------------------
    \18\ Ernst and Young, Pulse of the Industry: Medical Technology 
Report 2009; Batelle Technology Partnership Practice, ``Gone Tomorrow? 
A Call to Promote Medical Innovation, Create Jobs, and Find Cures in 
America,'' report prepared for the Council for American Medical 
Innovation, June 10, 2010.
---------------------------------------------------------------------------
    Another troubling trend is that many AdvaMed members are 
increasingly looking to Europe to launch their products, given the 
longer regulatory process in the US. As the USITC reported ``*an 
efficient regulatory approval system is an important factor favoring 
the medical device industry in the EU.'' \19\ This observation applies 
not just to medical technology designed to be used in the EU but 
increasingly to third countries as well. For example, China now 
requires approval in the country of origin. So, to the extent the EU 
process is more efficient, medical technology approved in Europe has an 
edge over the U.S. in China. Likewise, many other countries in Asia and 
Latin America use approval in the EU or U.S. as the basis for market 
access to their market, favoring the more efficient EU system. 
Australia is another case in point, as its regulatory system is based 
on the European system, thereby expediting approvals.
---------------------------------------------------------------------------
    \19\ United States International Trade Commission, ``Medical 
Devices and Equipment: Competitive Conditions Affecting U.S. Trade in 
Japan and Other Principal Foreign Markets,'' March, 2007.
---------------------------------------------------------------------------
    The fact that products are launched first abroad has several 
negative consequences. From a human point of view, it means that 
American patients may be denied timely access to the newest and best 
treatments. From a commercial point of view, as more and more products 
are launched first abroad, there is a real danger that R and D 
establishments will follow, so that product development will be close 
to the first users of the product.
    Foreign countries are working to undercut America's leadership in a 
number of ways that transcend the regulatory system. Many European 
countries offer a wide range of incentives to attract job-creating 
industries. For example, France dedicates funding equal to 2.2 percent 
of its GDP to programs designed to foster innovation and R&D--such as 
research tax credits, incentives for start-ups, Federal subsidies, as 
well as an additional $50 billion grant program about 10 percent of 
which is specifically dedicated to health and biotech research. Germany 
has committed about $1.5 billion to life science research, as well as 
special cash payments--some covering as much as 50 percent of costs--
and grants to attract investment. The U.K. offers a variety of R&D tax 
credits, special schemes to support job-creating capital investment, 
and a new Office of Life Sciences specifically designed to involve the 
highest levels of government in cutting red tape, attracting clinical 
research and expediting the use of innovative medical technology. 
Ireland's multiple incentives have attracted over 90 separate medical 
device companies (including 15 of the world's top medical device 
firms), according to the USITC. Moreover, the European Commission 
offers its member states additional incentives to help attract job-
creating industries as part of its ``Framework Programmes,'' in which 
healthcare related industries are specifically identified.
    Of course, Europe is not our only competitor, and other governments 
are eyeing the medical technology industry to bring jobs to their 
people. They are adopting policies to achieve this. For example, China 
has implemented an Indigenous Innovation policy in its government 
procurement--which could well include the vast public hospital sector--
that is intended to require purchases of products with ``domestic'' 
intellectual property and to force the transfer of technology to 
domestic companies. Brazil's health minister has publicly proclaimed 
that he will use Brazil's product approval regulatory agency to favor 
domestic medical technology firms. India is building a series of 
industrial parks expressing to attract medical technology investment 
and the jobs that foreign companies will bring.
    In the face of the negative trends noted above and the aggressive 
policies undertaken by foreign governments to build domestic industries 
and attract investment from multinationals, what should be the American 
response? In my view, we need a proactive program to assure that the 
U.S. retains its commanding lead in medical technology and all the life 
sciences. We need a program that will allow America to take full 
advantage of the enormous growth opportunities for medical technology 
in the 21st century. We need a program that will maximize the 
industry's contribution to the President's goal of doubling exports 
within 5 years.
    The comprehensive approach I believe is necessary will include 
regulatory policy, reimbursement policy, trade policy, tax policy, and 
policies to support research and development. AdvaMed will continue to 
develop policy recommendations for the Committee. Today, I can share 
with the Committee a few ideas for your consideration. I hope we can 
work together over the coming months to positively shape the direction 
of U.S. policy and assure America's continued leadership.
Regulatory Policy
    The predictability and speed of FDA decision-making, as well as 
reasonable, risk-based standards of evidence to show the safety and 
effectiveness of medical technology products is essential to maintain 
innovation and the long-term success of the medical device industry. 
The FDA clears products for marketing by one of two routes--the 510(k) 
process or the Pre-market Approval (PMA) process. The 510(k) process 
clears products based on their similarity to products that are already 
on the market and is not available to the highest risk products. To be 
cleared under the 510(k) process, a product must be ``substantially 
equivalent'' to a product already on the market, and manufacturers must 
demonstrate that the product is as safe and effective as the marketed 
product. If it has different technological characteristics or a 
different intended use than the product already on the market, the 
device manufacturer must present data to show that the product does not 
``raise new questions of safety and effectiveness.'' The FDA has broad 
discretion to require any data that it thinks necessary to assure the 
safety and effectiveness of the device, including clinical data.
    The 510(k) process is critical to a vibrant and successful device 
industry and to the process of medical innovation that provides better 
products for patients to address unmet clinical needs. In a typical 
year, 3,600 new products will be cleared for marketing through the 
510(k) process. This compares to 30-40 products annually approved 
through the PMA process.
    The FDA is currently conducting a thorough review of the 510(k) 
process with a view to instituting internal reforms by early September. 
The IOM has also been asked to review the process and will be making 
recommendations next year as to any changes it thinks are necessary. 
The device industry welcomes this review, because we believe the 
process can be improved and that public confidence in it can be 
increased. In this regard, we have contributed a number of ideas to the 
FDA and are pleased that they are being given careful consideration by 
the Agency leadership.
    We also believe, however, that the 510(k) process has an excellent 
record of protecting the public against unsafe or ineffective products 
while providing a relatively speedy path to development and approval of 
innovative products. It is very important to the future of the industry 
and to continued medical progress that the 510(k) not be altered 
radically in a way that would unnecessarily increase the time and cost 
of developing new products.
    The PMA process is reserved for products that are most innovative 
and of highest risk. PMA products are typically required to provide 
clinical data and often required to conduct a controlled trial of a new 
product. Development and testing of a PMA product is inherently costly, 
but the time it takes FDA to complete the review of a product is 
troubling. According to FDA data, in 2007--the most recent data 
available--the average time between a product's submission and a final 
decision by the FDA was 446 days. The device industry entered into a 
user fee agreement with FDA in 2002 in part to reduce the long time it 
took to complete a PMA review. Between that time and 2007, however, the 
average time in review actually increased by 2 months.
    The figures cited above reflect total time between submission of a 
product to FDA and an FDA final decision. This is the most important 
metric for industry. As part of the user fee agreement, however, FDA 
has committed to achieving review time goals based on time on the FDA 
clock--that is time in which the FDA is actively reviewing a product. 
This time clock stops whenever the FDA asks the company for more data 
or clarifying information and restarts when it is supplied by the 
company. We have relatively current data for time on the FDA clock, and 
it shows that the FDA is not meeting its own review goals. We are 
pleased that the FDA leadership has made correcting this problem a 
priority and hope that the newest data will show an improvement.
    Finally, the FDA recently put out draft recommendations to increase 
transparency of its operations. Transparency is clearly a laudable 
objective. FDA's recommendations are well-intentioned and, in some 
cases, meritorious. We are very concerned, however, that some of the 
recommendations dealing with release of information on products that 
are in the review process and cannot be legally marketed will undermine 
intellectual property and discourage investment in breakthrough 
products while providing no significant public health benefits. We hope 
that the final recommendations will address these concerns.
    As I noted earlier, it is not a good omen for the future of the 
U.S. device industry--or for American patients--that an increasing 
proportion of complex products appear to be undergoing clinical trials 
and entering the market abroad before they are introduced in the U.S. 
The FDA leadership understands that promoting medical innovation is 
part of its mission to protect and improve the public health, and I am 
hopeful that FDA will find ways to speed up PMA reviews, maintain an 
effective 510(k) process and increase the predictability and 
consistency of reviews while maintaining its exemplary record of 
protecting patients against unsafe or ineffective products.
Payment Policy/Health Reform
    A reliable expectation of adequate payment for products offering 
clinical benefit is a prerequisite for a healthy medical technology 
industry and for stimulating investment in technological innovation. 
The new health reform bill makes a number of changes in the way health 
care is paid for under Medicare that will, over time, create a profound 
shift in incentives throughout the health system. These changes are 
generally positive. Most policy analysts agree that the key to reducing 
growth in health costs and improving quality is to shift incentives in 
the health care system toward rewarding value and away from simply 
paying on the basis of volume and cost.
    While these new payment paradigms offer the promise of a more 
efficient and effective health care system, there are also some 
potential pitfalls that could negatively affect innovation and medical 
progress if the new systems are not carefully designed to encourage 
innovation.
    The widespread adoption of an improved treatment or cure generally 
follows a typical path. The treatment is developed by a company or a 
physician. Following FDA approval (in the case of a drug or device) the 
new treatment is adopted by cutting-edge physicians and is recognized 
by insurance companies and other payers. If the treatment proves 
successful in practice, it gradually diffuses until it becomes the 
standard of care.
    Without special protections for innovation, the new changes in 
health care delivery models and the application of quality standards to 
reimbursement risks freezing medical practice in place. New delivery 
models must ensure patient access to appropriate devices, diagnostics, 
and other medical technologies and must not penalize early adopters of 
new technology. The current quality standards are generally ``process'' 
standards--for example, for a given specific disease state, a certain 
course of action should be followed. For example, patients presenting 
with a heart attack are supposed to be treated with percutaneous 
coronary intervention (PCI) within 90 minutes. The new payment 
modalities embed these quality standards in the level of payment 
physicians and other providers will receive. Without special provisions 
in the reporting and payment system, providers who are early adopters 
of a new, alternative treatment--a new drug or procedure to replace 
PCI--will be penalized.
    The same concern applies to adoption of new treatments that appear 
to be more expensive than the existing standard of care. Not only does 
the early adopter face a potential penalty on the quality side, but 
they also could be treated as inefficient because they are generating 
higher costs--even if the new treatment represents a significant 
clinical advance.
    Providers could be penalized even if the new treatment actually 
lowers costs, if the savings appear outside the measurement window. For 
example, under bundled payments--where all providers treating a patient 
during an episode of care receive a single, lump sum payment--costs are 
measured across the episode of care. A drug-eluting stent that reduces 
costs over the long-term by reducing the need for repeat procedures 
would appear more expensive than a bare metal stent. So would a heart 
valve or a knee replacement that lasts for 20 years instead of 10 years 
or other treatments that have better outcomes over a more extended 
period than the immediate episode of care.\20\
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    \20\ None of the payment schemes address economic benefits from 
effective treatment that arise outside the health system, from reduced 
disability, expanded productivity, and reduced dependency.
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    These problems can be addressed without undercutting the central 
goals of payment reform. Possible solutions could include:

   Develop explicit design features to ensure Medicare health 
        care delivery demonstrations and pilots protect patient access 
        to appropriate devices, diagnostics, and other medical 
        technologies and must not penalize early adopters of new 
        technology.

   Improving the existing new technology add-on payment that is 
        part of the current system by which hospitals are reimbursed 
        for treatment of each Medicare patient and applying a revised 
        version to the new payment modalities. Under the new technology 
        add-on payment provision, hospital reimbursement for patients 
        treated with a new technology that offers the promise of a 
        significant improvement in care and is more costly than current 
        treatments is increased to partially reflect the increased cost 
        of the new treatment. The increase is time-limited.

   Allowing a grace period during which new treatments that are 
        alternatives to existing quality standards are pulled out of 
        both the numerator and denominator in judging providers' 
        performance.

   Applying a modified version of the outlier policy in the 
        current hospital payment system to the new payment modalities, 
        so that providers are not penalized for providing appropriate 
        care to patients who need more expensive treatments than the 
        norm. Under the outlier policy, hospitals receive an increase 
        in payment for treatment of patients whose care is 
        substantially more costly than the average patient with that 
        diagnosis.

Building Innovation Into Government Policy
    The discussion of the importance of considering the impact of 
payment and regulatory policy on innovation suggests another approach 
to stimulating the competitiveness of the life sciences sector. As 
agencies carry out their individual missions, most do not consider the 
impact of policies on medical innovation as part of their mission. As 
discussed earlier, the new payment paradigms created by health reform 
could have a profound and negative impact on medical innovation. These 
negative impacts can be avoided without doing violence to the goals of 
health reform. But to make sure the changes support rather than inhibit 
innovation, someone has to be thinking about the issue and build 
appropriate measures into implementation.
    One option for assuring that innovation is considered as policies 
are implemented across the government would be to create a dedicated, 
adequately staffed office within the White House with the specific 
mission of making sure that government policies are sensitive to 
medical innovation and support the President's goals of assuring that 
America leads the world in science and technology. The office's 
activities would be complementary to the current work of OSTP and 
PCAST. This office would act as an advocate for innovation, provide 
review and input into policies of individual agencies, and serve as a 
point of contact for industries, institutions and individuals with an 
interest in medical, scientific and technological innovation. Such an 
office could be located within PCAST, OSTP or the National Economic 
Council, or could be a stand-alone office. This proposal has recently 
been endorsed by the Council for American Medical Innovation, a 
coalition of leaders and organizations from research, medicine, 
academia, industry, and labor.
    A related policy that could be considered is to require that each 
major policy decision or regulation include an analysis of the impact 
of the policy on medical, scientific and technological innovation. This 
would be analogous to an environmental impact statement. Requiring that 
a statement of this kind be included would assure that the issue of 
innovation is at least considered as policies are developed.
Trade Policy
    The opportunities for export growth by our industry and 
corresponding job creation in the United States are very great. Rapid 
economic growth in emerging markets is 2-3 times faster than in the 
U.S., EU and Japan. China's middle class is projected to exceed the 
entire U.S. population by 2015, and India's middle class could reach 
600 million by 2025. These are just two of the largest expanding 
markets, with smaller but also rapidly growing economies in Southeast 
Asia, Latin America, and the Middle East. In each of these countries, 
the emerging middle class is demanding first class medical care and 
creating a very large potential market for advanced medical technology. 
Even in Europe, the market for many advanced technologies is 
historically under-penetrated.
    The question is whether the U.S. medical technology industry will 
retain its leadership position to take advantage of this growth 
overseas and expand exports and create jobs for Americans. The future 
seems far less secure in view of the increasing competition by foreign 
companies and, perhaps more significantly, by foreign governments. 
Overseas, we see government policies that are designed to encourage 
domestic growth in, and attract foreign investment to, the medical 
technology industry. In the U.S., we need a comparable response.
    As I have mentioned, there are significant efforts by a number of 
foreign governments to support a home-grown medical technology industry 
or to encourage location of research or manufacturing facilities or 
purchase of locally manufactured components by multinationals. Some of 
these efforts are legitimate, but others represent abuse of government 
power. Opening markets and ensuring a level playing field are essential 
to the future growth of the U.S. medical technology industry. 
Protection of American intellectual property is particularly vital. We 
are pleased with the support our industry has received from U.S. 
agencies involved in trade--the USTR, Commerce and State. The officials 
in these agencies have worked hard to use the tools they currently have 
to attack discriminatory practices in other countries.
    But they need more firepower to match the efforts of other 
countries. U.S. trade barriers are very low--virtually non-existent for 
medical technology. Other countries, especially the fast growing 
emerging markets, have much higher access hurdles. Unless the U.S. 
becomes engaged in actively negotiating and implementing free trade 
agreements (FTAs) that lower those barriers, U.S. exports will suffer. 
The EU has many more FTAs around the world than the U.S. China is 
pursuing FTAs with its Asian neighbors. The barriers that U.S.-made 
medical technology must overcome drives up the cost of our products in 
foreign markets compared to domestically made products and even medical 
technology from their FTA partners.
    The proposed Trans-Pacific Partnership (TPP) should be viewed as 
one important component of the Administration's export promotion for 
the medical device industry. Implementing the U.S.-Korea FTA should be 
another, followed by launching many more FTA negotiations. In addition 
to the direct benefits from the specific provisions of the agreements, 
each FTA provides a valuable forum for governments to discuss and 
resolve trade issues. In a highly competitive global market, the United 
States cannot afford to disengage, as other nations conclude 
preferential agreements that benefit their industries. U.S. leadership 
in international trade is always necessary to maintain open markets; at 
no time has this leadership been more critical than in today's 
challenging economic environment.
    In pursuing free trade agreements, it is important that the U.S. 
demonstrate a commitment to the strongest possible FTA provisions. In 
addition to advancing public health and patient access, these 
agreements should: (1) address non-tariff barriers (NTBs) affecting our 
industry, especially non-transparent or discriminatory regulatory 
procedures; (2) include provisions that foster access of foreign 
consumers to innovative products; (3) encourage harmonization among the 
signatories of regulations that are necessary for determination of 
safety and efficacy, consistent with international norms; (4) ensure 
the strong protection of intellectual property (IP) rights; (5) secure 
the most expeditious elimination of tariffs possible; (6) grant 
efficient regulatory approvals, while ensuring product safety; and (7) 
provide expeditious customs clearance. In addition, new FTAs, like the 
TPP, should include specific provisions for sectors, like the medical 
technology industry, to address our unique concerns regarding 
regulatory approvals and government reimbursement.
    We recognize that negotiating new free trade agreements is a long-
term process and can only focus on a limited set of countries. In the 
meantime, the United States is facing ever-greater challenges to its 
economic position in the world, and U.S. industry is experiencing 
fiercer competition in the global market place. Companies can deal with 
the challenges that come from the private sector and that are unaided 
by foreign government support. However, as I have noted, foreign 
governments are increasingly assisting their industries, sometimes 
directly but more often indirectly--for example by championing certain 
industries and adopting standards and regulations that favor domestic 
firms--and that are not consistent with international norms. Such 
actions that are used to protect the domestic market can have a 
damaging effect on U.S. exports to those markets, diminishing the U.S. 
manufacturing base. Therefore, we encourage the U.S. trade agencies to 
address the goals described above through all means at their disposal.
    In that regard, we have two additional suggestions. First, in 
negotiations with foreign governments to preserve and expand export 
opportunities for U.S. manufacturers, USTR must have sufficient 
authority to lead negotiations involving these issues. U.S. agencies 
with regulatory authority should not have the option of opting out or 
adopting a posture of only protecting their authority within the U.S. 
There should be creative ways to maintain and strengthen regulations 
that protect the health and safety of Americans while improving the 
U.S. economy.
    Second, we believe that one of the goals of regulatory agencies 
should be to improve U.S. international competitiveness. For example, 
the primary role of FDA is, and should certainly remain, to protect the 
health and safety of the American people. At the same time, consistent 
with that role, FDA should also assist U.S. international commerce. As 
it now stands, FDA's international mission is almost exclusively 
focused on assisting other countries to meet U.S. regulatory 
requirements--including by establishing offices in many of those 
countries. This legitimate outreach has the effect of facilitating 
access to the U.S. market in competition with U.S.-based firms. To 
maintain balance and help assure reciprocity, those same FDA offices 
should be staffed and have a mandate to work, in cooperation with the 
U.S. embassy, with foreign governments to assist entry of safe and 
effective American products into foreign markets.

Tax Policy
    As is well recognized by authorities in the field, a number of 
aspects of American tax policy are not conducive to maintaining 
America's lead in science and technology or in encouraging medical 
technology and other industries to locate manufacturing and research 
and development in the United States. Issues that have been identified 
include the relatively high American corporate tax rate; the failure to 
make the R& D tax credit permanent and its lack of generosity relative 
to competitor nations; and tax policy that makes it expensive to bring 
profits earned abroad home for investment in America. All of these 
policies deserve reconsideration.
    The R&D tax credit deserves special mention. The U.S. was the first 
country to establish such a credit, but today it ranks 17th out of 21 
OECD companies in its generosity. It has been estimated that raising 
the credit from 14 percent to 20 percent would increase economic output 
by $90 billion and increase Federal tax revenues by $90 billion, more 
than offsetting the $6 billion of additional Federal costs.\21\ The 
failure to make the credit permanent undermines its ability to 
stimulate research and development, as opposed to subsidizing research 
and development that would occur anyway. For the start-up companies 
creating the breakthrough products of tomorrow, the R&D tax credit has 
limited utility, as described below, and could be much more effective 
in encouraging innovation.
---------------------------------------------------------------------------
    \21\ Robert D. Atkinson, ``Create Jobs by Expanding the R&D tax 
credit,'' ITIF, January, 26, 2010, cited in Gone Tomorrow.
---------------------------------------------------------------------------
    The newly enacted $20 billion excise tax on medical technology 
products will inhibit investment and put U.S. domiciled companies and 
especially small companies at an additional disadvantage relative to 
foreign competitors. Of course, we want to express our deep 
appreciation of your successful efforts, Senator Klobuchar, to reduce 
the level of that tax.

Encouragement Of Small and Start-Up Companies
    As discussed earlier, small and start-up companies are critical 
engines of innovation for the medical technology industry. These 
companies are extremely dependent on venture capital and angel 
investors and sufficient venture capital is often not available to fund 
many promising ideas, to provide support in the earliest stages of 
product development, and to sustain development of innovative products 
over an extended timeframe. There are several ideas that could be 
considered to address this problem that could potentially have a 
significant effect in driving scientific and technological innovation:

   For companies with no profits, allow the R&D tax credit to 
        be taken against payroll taxes or received as a refundable tax 
        credit rather than held and used against future profits. This 
        could help provide critical capital during the time when the 
        company most needs a positive flow of funds, and could have a 
        major impact in encouraging private investment and bringing 
        more innovative therapies to fruition.

   Expand the Small Business Innovation Research program at the 
        NIH and liberalize eligibility requirements. This program is 
        potentially extremely valuable in funding early-stage research 
        and development by start-up companies, but the maximum award 
        size and the requirement that applicants can not have majority 
        venture capital ownership are limiting. Since the program 
        precluded awards to majority venture capital owned firms, 
        applications for SBIR grants at the NIH have declined by almost 
        50 percent.\22\
---------------------------------------------------------------------------
    \22\ Gone Tomorrow.

   Expand support for regional or local innovation clusters and 
        incubators. Such clusters have been shown to spur development 
        of new technologies and products and additional support for 
        local efforts to establish them could be helpful.

Invest in America's Science Base
    America's science base, including basic research, the supply of 
scientists and engineers, and vitality of America's universities as 
centers of basic and applied research, is critical to the medical 
device industry, as it is to America's leadership in science and 
technology more generally. A number of studies have documented the 
relative decline of America's science base by such measures as R&D 
investment as a share of GDP, new patents as a share of the global 
total, global share of scientific researchers, and new doctorates in 
science and engineering.\23\ The Administration's proposals, as 
outlined in the President's address to the National Academy of Sciences 
on April 27, 2009, will go a long way to rebuilding America's 
scientific and technical strength and these policies should be 
maintained.
---------------------------------------------------------------------------
    \23\ Robert D. Atkinson, ``Role the U.S. Government can Play in 
Restoring U.S. Innovation Leadership,'' testimony before the Committee 
on Science and Technology, Subcommittee on Technology and Innovation, 
U.S. House of Representatives, March 2.
---------------------------------------------------------------------------
Conclusion
    Thank you again for your interest in this important issue. If I 
could leave you with one message it is this: to maintain America's 
world leadership in the life sciences generally and medical technology 
specifically, we need good policy to support our strengths in this 
increasingly competitive world.

    Senator Klobuchar. Thank you very much.
    Mr. Weiss.

 STATEMENT OF ANDREW M. WEISS, PRESIDENT AND CEO, CoAxia, INC.

    Mr. Weiss. Thank you very much, Senator Klobuchar, for 
inviting me to be a witness at this hearing. Senator Begich, 
Senator LeMieux, thanks very much for letting me come here and 
testify and represent our industry.
    As you heard, my name is Andrew Weiss. I'm the President 
and CEO of a startup company named CoAxia. CoAxia is pioneering 
an innovative therapy to treat ischemic strokes. Ischemic 
strokes affect over half a million patients a year.
    By way of background, I am an engineer. I did go to MIT. I 
did get a business degree. And I've spent most of my 
professional career working in, or guiding, medical device 
companies.
    Today, in addition to my role at CoAxia, I'm on the boards 
of a couple of startup companies, and I advise others, and 
medical venture device firms. So, I live, sleep, eat, and 
breathe this every day.
    I'm here to discuss my direct experience with what it takes 
to develop and commercialize medical therapies. And, as we've 
heard, you know, this industry, I think, is a shining star. I 
like to say to my community, ``We're the good guys.'' We've 
helped with a positive trade surplus. We help improve, extend, 
and help people's lives. But, this industry's now at risk.
    So, our community has developed pacemakers, implants, 
neurostimulators, minimally invasive surgery techniques, et 
cetera. All of these devices help people's lives. And many of 
the jobs in our industry are highly paid and very, very highly 
skilled. And, as you heard, in our hometown of Minneapolis 
there are hundreds of medical device companies, thousands of 
employees. We have a precious natural--national resource, where 
we can develop, test, and manufacture medical therapies for 
almost any disease state right here in Minnesota--or, right 
there in Minnesota.
    So, let me tell you a little bit about the CoAxia story. 
CoAxia was started 10 years ago, by a brilliant neurologist at 
Cornell Medical Center, named Denise Barbet. Denise had an idea 
for increasing the blood flow into patients' brains after they 
got an ischemic stroke. She had a concept for treating these 
patients. She came to Minnesota, and she found guidance and 
venture capital money.
    Since that time, I've raised $60 million for the company. 
We've conducted five clinical trials in over 10 countries, at 
80 medical universities and research centers. We've employed 
dozens of people. We've recruited the efforts of hundreds of 
clinical researchers in these different institutions.
    And we're not done. Although we finished enrollment in our 
pivotal trial, after 5 years of work, we're calculating, we're 
collecting lost data. We hope, if we're positive, to submit a 
PMA to the FDA sometime later this year.
    After this 10 years of work, if we're positive with our 
PMA, we hope to then apply for coverage, coding, and 
reimbursement from CMS and the insurance agencies, and conduct 
a likewise process overseas, as well. So, you can see, from the 
startup of an idea, to actually getting a device into clinical 
use with reimbursement can take 10 to 12 years, $50- to $100 
million.
    As you can see, as a CEO of a startup, I'm at the 
intersection of many of the members of this ecosystem, and 
these members, in many cases, don't know that they act, 
frankly, in partnership. So, my job is to coordinate them all.
    And who are they? They're the patients, the physicians, 
inventors, universities, hospitals, regulators, engineers, 
clinical trialists, suppliers, and our investors, and lawyers. 
If these members aren't aligned, then the innovation process 
stops. So, fundamentally, our role is to make sure that the 
entire innovation process works as efficiently as possible.
    This ecosystem's in great risk right now. Despite the fact 
that there's an unparalleled amount of new technology to apply 
to medical therapies, this whole community is threatened. The 
FDA regulatory environment is in flux. And this risk of 
increasing uncertainty, time to market, et cetera, is reducing 
venture investing in the community. Reimbursement paths are 
complex and opaque. Physician consulting relationships and 
access to university technologies are being restrained.
    All of these factors, combined with the global financial 
downturn, has led--have led to significant declines in venture 
investing. The declines in venture investing are choking off 
the formation of new medical device companies. If these factors 
continue to trend negatively, our ability to innovate in this 
field will cease.
    Let me highlight a few areas of great concern.
    First of all, as we discussed, the regulatory environment. 
The FDA's mission is to establish reasonable safety and 
efficacy of medical devices, and to promote innovation. Demands 
for additional information, delays in reviews, questionable 
experience of reviewers, inconsistency in the application of 
FDA guidelines, and, as we've heard, the announcement of 
upcoming changes in the 510(k) process, causing concern in the 
medical innovation community. Dr. Shuren, the CDRH director, 
deserves a lot of credit for being public about the need, and 
for driving changes.
    But, what's happened in the meantime is, venture investing 
in this field has frozen, in anticipation of the possibility of 
more restricted FDA guidelines, and they're causing U.S. 
companies, many of my colleagues, to shift to an outside-of-
the-United-States strategy for both development, trialing, and 
commercializing. This is real, and it's happening today.
    A clear, efficient, predictable regulatory path, which 
focuses on reasonable standards of safety and efficacy, will 
promote innovation in the United States. The medical community 
needs a champion to help with this effort, to make sure that 
the FDA is serving the balance of public good, here.
    With regard to the financial community--this is the other 
major risk right now--in addition to the perceived regulatory 
risk, the global financial decline has led to a reduction in 
venture investing. And, as I mentioned earlier, this reduction 
in venture investing is negatively impacting startups.
    Intellectual property reform is the third area. As it 
takes, often, more than 10 years to get a new invention out 
into clinical use, patent protection is critical. If we can't 
offer that to our investors, they won't invest in our 
companies.
    And physician availability. It is critical that we have 
easy access to physicians to act as consultants to our 
companies, and, in some case, in early stages, that we can use 
stock to remunerate them. We need access to physicians.
    So, our medical innovation model is based on a public/
private partnership. We look forward to your help. Thanks very, 
very much for inviting me here.
    [The prepared statement of Mr. Weiss follows:]

 Prepared Statement of Andrew M. Weiss, President and CEO, CoAxia, Inc.

Introduction
    My name is Andrew Weiss, and I am the President and CEO of CoAxia, 
a medical device start-up company based in Minneapolis, MN. CoAxia is 
pioneering an innovative medical therapy for ischemic stroke, a 
condition that afflicts more that 500,000 Americans every year. By way 
of background, I am a mechanical engineering graduate of MIT with an 
MBA from Columbia University. I have spent the majority of my 
professional life leading large and small medical device companies, or 
participating on their Boards of Directors. I have run startups with no 
revenue and a $600M division of Medtronic. I have worked with medical 
capital equipment, diagnostic imaging, patient informatics, implantable 
device therapies, and single use catheter systems, with companies and 
investors in the U.S., Europe and Israel. Today, in addition to my role 
at CoAxia, I am a Director of two early-stage medical companies and am 
an informal advisor to others and to medical venture funds.
    The U.S. medical device innovation engine--the medical device 
startup community--is at great risk. Despite an unparalleled level of 
new technology which is available to apply to medical therapy 
innovation, there is great concern in the medical community that our 
ability to pioneer new therapies is threatened. The regulatory 
environment is in flux. The financial system of venture capital is in a 
period of decline. Physician consulting relationships and our ability 
to collaborate with university hospitals are being restrained. 
Intellectual property laws are in review--possibly making it easier and 
cheaper for patent infringers. If these factors trend negatively, then 
our ability to fund, develop, evaluate and produce new medical 
therapies will decline. We need visibility to the issues, and in a 
number of areas, support from our legislatures.

Medical Device Industry Benefit
    Let us remember for a moment the medical devices which save, 
improve or extend lives today--which are the result of medical 
innovation. Pacemakers. Hip implants. Stents. Angioplasty catheters. 
Neurostimulators for pain management and movement disorders. Of course 
the list goes on and on. They benefit patients. They are good for our 
society.
    In addition, as you all know, the companies which make these 
devices employ hundreds of thousands of Americans. Many of these jobs 
are highly skilled and highly paid. They are the sources of income, 
taxes and community wealth across the U.S.. In my hometown of 
Minneapolis, there are hundreds of medical innovation companies and the 
entire business and clinical infrastructure to support them: suppliers, 
lawyers, consultants, clinical experts, physicians. It is an intensely 
valuable community of experts who can collaborate to develop new 
medical therapies. This is, in my view, a precious national resource.
    In addition, U.S. medical devices are heavily exported and generate 
a $5B+ positive trade balance. Our technology and devices generate 
income for American companies and positive good will around the world.
    Some say that medical device innovation raises healthcare costs. 
More tests, more scans, more procedures, yields more costs . . . 
However, innovation in medical therapies also improves patient 
outcomes, speeds their return to productive, healthy lives, reduces 
hospital stays, increases physician productivity and can reduce 
healthcare administrative expenses.
    Lastly, some people have intimated that we have enough medical 
devices--and that there is no more need for medical therapy innovation. 
This is an absurd and dangerous point of view. There are many, many 
untapped fields of innovation in medical treatment, and we should in 
fact view this decade as having the possibility of a renaissance in 
medical innovation: genomics, nanotechnologies, higher levels of 
computing power, miniaturization, biotechnology, device combinations 
and more. To even consider our work ``done'' is a terrible injustice to 
citizens with illnesses and an unwise, cynical approach to innovation 
and progress.

Trends and Pressures--Medical Device Innovation at Risk
    Positive trends--There are many positive factors in medical device 
innovation today--primarily due to technology: the explosion of new 
materials, electronic, biotechnology, genomic and communications 
technologies. As I mentioned earlier, the underlying development of new 
technologies is creating major new opportunities to manage care, 
provide treatment, and reduce costs. From simple technologies which 
allow the elderly to be remotely monitored for their heart conditions, 
to complex image-guided remote robotic surgery, to closed-loop methods 
to control insulin for diabetes patients, there are thousands of new 
devices and new therapies in development and ideas yet to come based on 
new technology development. Other positive trends have been the 
increasing use of information and computing technologies to speed and 
reduce the cost of development.
    Negative trends/Increasing Risks--On the negative side there are a 
number of critical factors which deserve your attention. As one of my 
medical community colleagues Dr. Josh Makower has put it, the medical 
device community is facing ``the perfect storm'' of negative factors, 
which indeed threaten medical device innovation. The key negative 
trends are:
    Regulatory environment--Within the FDA's mission are the 
requirements to establish the ``reasonable safety and efficacy'' of 
medical devices, and the ``promotion of innovation.'' The division 
which regulates medical devices, the Center for Devices and 
Radiological Health (CDRH), has the responsibility to clear or approve 
all medical devices--an enormous task. Over the past 5 years thousands 
of devices have been cleared to market by the 510(k) process and a few 
hundred by the PMA process. A number of trends are causing concern 
among medical device innovators, including demands for additional 
information, delays in reviews, a perception of inconsistency, and 
announcements of upcoming changes to the 510(k) process. Dr. Jeffrey 
Shuren, CDRH Director, deserves credit for being very public in his 
efforts to upgrade and reform FDA practices, but in the device 
community, the anecdotes of delayed reviews, inconsistency, changing 
requirements and upcoming changes have caused deliberate shifts of 
venture funding away from medical devices. In my experience, this shift 
is due to fear among the venture investors that the regulatory 
requirements are unknown and increasing.
    Financial community stability--At the same time, global financial 
instability, starting with the derivative and mortgage-backed security 
crises has forced significant reductions in funds going into the 
medical device venture funds. The impact is that venture investing is 
down \1/3\, and a much higher proportion of the remaining funds is 
supporting existing companies, and moving away from early stage 
startups. As you can imagine--no funding--no innovation.
    Uncertainty and complexity in healthcare structure, coverage and 
reimbursement--For years, the complexity of our healthcare insurance 
environment has challenged device innovators. Whereas we can relatively 
easily identify patient and clinical needs, determining insurance 
coverage, physician, hospital and clinic reimbursement paths is a 
constant challenge.
    In summary, the medical device innovation community is threatened 
by a combination of longer and more expensive development and clinical 
requirements, increased regulatory burden and risk, uncertainty in the 
health coverage and insurance fields and more restrictive policies 
regarding hospital and physician collaboration. If we want a healthy 
medical innovation community, we must address these issues.

What Support is Needed Now
    I believe, and many of my colleagues in the startup medical device 
industry believe, that we are in very challenging times for new medical 
device innovation. The combined challenges of regulatory uncertainty 
with threat of increasing data requirements, setbacks and uncertainty 
in the venture community, a long, complex and uncertain environment for 
medical device insurance coverage and payment and restrictions to 
access University settings and physician advisors are crippling our 
ability to fund, invent, develop, evaluate and bring innovations into 
clinical practice.
    Medical Device Regulations--The U.S. regulatory device approval 
process is by definition complex and requires deep study for any true 
assessment of recommendations. The medical community needs a champion 
to assure that the FDA regulatory process becomes a clear, efficient 
partner in the medical innovation process--ensuring reasonable safety 
and efficacy and promoting innovation. The fundamentals are: a clear, 
efficient, predictable regulatory path, focusing reasonable standards 
for safety and efficacy, which align with the risk/benefit of medical 
devices, will promote innovation. Speed, predictability, least-
burdensome principles and a partnering attitude with the ultimate goals 
of safety and efficacy are needed to ensure that U.S. medical 
innovations flourish here in the U.S.
    A few basic principles are important:

   Innovation in medical devices needs a competent, clear, 
        efficient and collaborative CDRH which partners with device 
        developers to reach consensus on a strategy for technical and 
        clinical data, which assures reasonable safety and efficacy of 
        treatments and promotes innovation.

   The medical community needs the FDA, as its regulations and 
        policies create a baseline for device and treatment safety, 
        efficacy claims, reliability, and comparable clinical and 
        technical evidence. This allows physicians, payers and patients 
        to be able to compare, select, and have confidence in their 
        treatment selections.

   Congress needs to provide guidance to the FDA on its 
        fundamental role: is it chartered to select treatments for 
        physicians, or to regulate approval of devices and treatments 
        for physicians to select. It is my view that the FDA should 
        clear/approve treatments, and then let the medical community 
        select treatments based on their assessments of relative 
        effectiveness and their patients' needs.

   CDRH must have the skills, expertise, structure, and 
        guidelines, along with partnerships with the medical community 
        to help judge the safety/risk/benefit balance of any new 
        therapies.

   CDRH should ensure that any requests for additional 
        information conform to the basic principle of being ``least 
        burdensome.'' CDRH's device evaluation information requirements 
        scale based on device risk. This is appropriate and should be a 
        basic principle for future assessments. Requests for additional 
        data, tests and studies should only be those which are required 
        to ``assure reasonable safety and efficacy.''

   There are times when studies come close to meeting but do 
        not fully meet their trial objectives. The FDA should have the 
        flexibility, and the encouragement, to allow treatments and 
        devices to be approved for narrower claims based on these 
        trials, with requests for appropriate follow-on studies, so 
        that these devices can be put into clinical use without the 
        need for completely new studies.

   CDRH needs to maintain, upgrade and streamline the 510(k) 
        clearance process so that incremental improvements in devices 
        can be moved quickly through the clearance process.

    Financial community stability--The medical device industry needs 
stability in the financial community, healthy employment and healthy 
state and Federal Government budgets in order to have the private funds 
needed to support medical innovations. The current financial 
environment, combined with uncertainty about the FDA regulations has 
choked off investments into medical venture funds, which is further 
reducing medical device startups.
    Coverage and Reimbursement--Medical devices innovators need a clear 
path to insurance coverage for its devices and procedures. The U.S. 
presents a complex patchwork of largely independent systems which 
review new devices and treatments for insurance coverage, coding and 
hospital, clinic and physician payment. The lack of efficiency, 
consistency and clarity in coverage and reimbursement prevents new 
therapies from clinical adoption.
    Hospital/University partnerships--Medical innovators need access to 
university labs, people and resources. Many universities are facing 
conflicting pressures of intellectual property commercialization, 
restrictions on innovators or physicians from owning their inventions, 
or from being compensated as consultants to startups, and from academic 
conflict of interest guidelines to ensure that their professors' 
publications are deemed unbiased.
    Physician availability--All medical innovators--and especially the 
smaller companies--need inventions, advice, feedback from, and research 
conducted by leading physicians in their fields. Without physician 
invention, we will lose most new medical therapy ideas. Without 
physician feedback, we will develop products which do not fit their 
needs. Small companies often do not have cash to pay physicians, and 
rely instead on stock or option grants as compensation. Physicians need 
to be able to invent--and own stakes in their own companies--and to 
consult--and be compensated for their work, without recrimination.

Summary
    Medical device innovation is a positive, valuable resource for the 
United States. It is threatened by the combined forces of financial 
markets instability, lack of clarity and administrative burden from 
existing regulations and uncertainty about regulatory reform, patent 
reform, access to physicians and university resources and clarity and 
speed in insurance coverage and reimbursement. The industry welcomes 
congressional review and visibility into these diverse issues in order 
to continue to prosper and to provide innovative medical therapies, 
jobs and positive export trade balances for America.
Additional Background Information
Medical Device Innovation--Collaboration Requirements
    Medical Device Innovation requires many collaborating partners. In 
order for our system for medical device innovation to take place, key 
partners must collaborate productively. The key partners are:

        I. Inventors--There are thousands of inventors in the U.S. and 
        overseas. This vibrant community exists in companies, 
        universities, hospitals and garages. They are motivated to 
        invent, but require financial incentives and rewards to fund 
        their livelihoods and work.

        II. Physicians--Physicians are fundamental to the medical 
        innovation process. They invent, guide, judge and adopt new 
        therapies. It is in the public's best interest to have 
        physicians intimately involved with, and incentivized to 
        participate in development of new therapies. If physicians are 
        restricted from participating in therapy innovation, then the 
        innovation process will stop.

        III. Scientists and Engineers--It goes without saying that our 
        national competence in engineering and science is a basic 
        requirement for medical innovation. We need strong 
        universities, science and biomedical engineering scholarships 
        and internships, and immigration for key talents.

        IV. Patients--Everything we do is patient-focused, however, we 
        also critically need patients to participate in clinical 
        studies. Without them, we cannot determine safety or efficacy 
        of new therapies.

        V. Universities--Universities are key sites for labs and 
        research facilities, generators of new technologies, education 
        centers for future physicians and scientists, and magnets for 
        inventors. University relationships with their research and 
        teaching staffs should facilitate business formation and 
        collaboration with the startup community.

        VI. Hospitals, Clinics, Physician Practices--Hospitals and the 
        related care providers offer the underlying resource to 
        evaluate and then adopt new therapies. Overly restrictive risk 
        profiles and intellectual property rules, or inadequate patient 
        data management stifles new therapy evaluation.

        VII. The Financial Community--The vast majority of medical 
        device innovation is funded by private investors who take long 
        term risks on the development and commercialization of new 
        medical therapies. Whether they are private investors in large 
        public companies, ``angel'' investors who seed startups, or 
        venture funds who provide the core capital to prove out new 
        therapies, each of these investors plays a fundamental role in 
        medical innovation: they provide the capital which funds all 
        the work. And, without the promise of a reasonable return for 
        the risk taken and capital employed, then the financial 
        resources will cease, and the new technology will stay just 
        that: as new technology. It is important for the public good 
        for there to be sufficient stability in the financial markets, 
        clarity and transparency in medical venture investing, and a 
        reasonable regulatory and reimbursement environment, if we are 
        to continue to rely upon--and benefit from--private funding of 
        medical device development.

        VIII. Regulatory Agencies--All medical device innovators have 
        the same underlying objective: to develop devices and therapies 
        which are safe and serve a medical need. Only when a device 
        meets these simple objectives is there any hope of medical 
        adoption, insurance coverage and use--resulting in sales and 
        profits. In the U.S., the FDA is responsible to regulating 
        medical devices and therapies, for setting the standards for 
        safety and efficacy, and for ensuring that medical devices meet 
        their stated and proven claims, so that physicians and patients 
        can make informed decisions about adoption. Medical device 
        manufacturers need a clear, predictable, efficient, and 
        appropriate regulatory path to clear and approve medical 
        devices in order to both create realistic and timely plans to 
        evaluate new devices, but also to minimize the time and cost to 
        develop, evaluate and place devices into clinical use.

        Note that the FDA has been in the news often these recent 
        months, and the medical device community is very concerned 
        about the recent trends. The fundamental issue is that all 
        medical devices have some level of risk associated with them--
        and this risk must be balanced against the potential benefit of 
        the therapy. If the risk-benefit balance is too lax, patients 
        may suffer--but with good disclosure physicians will stop using 
        the therapy. If the balance is too tight, no new therapies will 
        be approved and then all patients who could possibly benefit 
        will be denied their opportunity for treatment. This balance is 
        a ultimately a decision based on data and medical judgment, 
        which is guided by two key FDA guiding principles: ``reasonable 
        safety and efficacy,'' and ``least burdensome'' paths to 
        market. The concern in the innovation community is that 
        current--and possibly the new--FDA policies are too 
        restrictive, uncertain and unpredictable. In this case, we 
        cannot plan, investors cannot invest, and our innovation cycle 
        breaks down.

        IX. Insurers and Payers--Without insurance coverage, coding, 
        and appropriate reimbursement for devices, institutions and 
        physicians, there will be no adoption of new medical therapies. 
        Clear benchmarks for reimbursement and coverage processes 
        provide innovators guidance for timing, pricing and costs.
How the Medical Innovation Collaboration Works
    The medical innovation process is long, risky, and involves the 
diverse community mentioned above. To understand how to facilitate the 
process--to reduce risk, remove choke points, reduce time, and increase 
output, while maintaining the underlying goals of safety and efficacy--
a quick review is valuable.

        a. Invention--A new idea for a medical device or therapy is 
        invented and the inventor often seeks advice from physicians. 
        Some times the inventors are University employees. Often, the 
        inventors offer physicians stock in their new company for their 
        advice. The inventor will submit patent applications for their 
        invention.

        b. Initial Funding/Prototyping/Animal Experiments--The inventor 
        and physician may raise some funds from local investor 
        ``angels''--perhaps as much as a few hundred thousand dollars--
        to develop prototypes and proof of principle of their therapy.

        c. Feasibility Testing--After initial testing and prototyping--
        often 1-2 years from invention--the inventor may seek venture 
        capital funding to build a team, conduct initial human 
        experiments. $3M-$10M is raised, 20-30 employees are employed, 
        more physician advisors are needed, University research 
        hospitals are involved and 1-2 years passes. FDA approval of 
        the studies--or work overseas--is required. Following the 
        initial feasibility work, the team will often conduct a second 
        set of feasibility trials, also under FDA approval, to refine 
        their therapy, and demonstrate some level of patient benefit 
        and safety. This second trial may also take 2-4 years and 
        require $10M-$20M. The team may grow to support the development 
        and manufacturing of devices and to conduct the trials--at 
        perhaps as many as 10-20 hospitals.

        d. Pivotal Study--The team must then conduct a pivotal study, 
        which is also regulated with the FDA and establishes the 
        specific claim language and statistically valid outcomes for 
        the therapy. This pivotal study may involve hundreds of 
        patients, take 3-5 years and cost $50M-$100M. Dozens of 
        hospitals, hundreds of patients, and 50+ people are now engaged 
        in the development, manufacturing and clinical work for the new 
        therapy.

        e. Regulatory Submissions--After the trial is completed, the 
        team then submits trial results to the U.S. FDA and overseas 
        regulatory/insurance groups. The FDA process involves FDA 
        reviews, often review by an FDA-selected panel of physicians 
        and then a final decision by the FDA. The entire time and cost 
        of data collection, review, FDA submission and FDA review may 
        take 2 years and $10M-$20M.

        f. Coding, Coverage and Reimbursement--After FDA review and 
        approval, the Company may now initiate sales and marketing, but 
        must still secure insurance/CMMS coverage and reimbursement--
        and include hospital payments, physician payments and device 
        payments--a 2-year process.

    In the end, 10 years are likely to pass, 50-100 employees hired, 
$50-$100M dollars raised, 50+ hospitals, 100+ physicians, often 200-
500-1,000 patients are studied, insurers and at numerous state and at 
least 2 Federal agencies have been involved. The time, commitment, 
development and investment in these new devices is extraordinary.
    The process for new medical devices and therapies to be developed, 
tested and approved is a complex, long and risky path. Medical 
innovators--and the medical startup community have mastered this 
process and the new medical therapies in use every day are the result. 
This is good for America. And we can do better.

    Senator Klobuchar. Thank you.
    Mr. Williams.

           STATEMENT OF RHYS L. WILLIAMS, PRESIDENT, 
                     NEW WORLD ANGELS, INC.

    Mr. Williams. Senator Klobuchar, thank you very much for 
convening this subcommittee hearing. And I want to thank 
Senator LeMieux, as well, for the invitation to speak as a 
witness, and thank Mr. Begich for his consideration.
    Senator Klobuchar. He's returning in a minute.
    Mr. Williams. I believe you.
    Senator Klobuchar. I'll fill him in on what you say.
    Mr. Williams. He knows where I live. I know where he lives.
    Members of the Committee are likely very aware of the 
critical role that entrepreneurial management plays for one of 
our--for our Nation's competitiveness, and quality and quantity 
of innovative technologies, and the companies that our economy 
produces.
    You may be somewhat less aware of the role of so-called 
``angel investors,'' who, in most years, either match or exceed 
the total level of early venture finance funding provided by 
institutional investors to early-stage ventures. These are the 
same companies that create new jobs in entirely new 
industries--high-wage jobs--for our economy, and assist our 
competitiveness.
    Angels invest as much money as VC firms do, but in smaller 
amounts and spread over a greater number of companies, with--
and also with a greater geographic dispersion of those 
companies. So, in that case, a very important source of 
financing, nationwide.
    Angels may invest individually, in small groups of two or 
three fellow investors, or as part of structured angel groups, 
whose numbers may range from 20 to 25, giving them real 
critical mass, in terms of combining individual checks into 
meaningful financing rounds.
    The prototypical angel investor--angel group investor--has 
been an angel for 9 years, has made an average of 10 angel 
investments during that time. They, themselves, have founded 
an--on average, 2.7 ventures over 14.5-year tenure as an 
entrepreneur; is 57 years of age, and has earned a master's 
degree; and commits fully 10 percent of their total net worth 
to investments within this asset class of early-stage 
investing. So, they're very familiar with the challenges and 
the opportunities within this asset class of early-stage 
capital.
    Early-stage investment is critical to commercializing the 
technological innovations and promoting our Nation's 
competitiveness. And that should be obvious by now.
    From both of these perspectives, that of entrepreneur and 
that of other--of angels that back them, there are several 
areas where the Federal Government can take positive action to 
increase and accelerate the quality and rate of our innovation.
    I'd like to hit a couple of them. And I've been fortunate, 
most of the panelists have covered several of them, so I can, 
kind of, be very specific in certain comments.
    With regard to the FDA, I'd like to make a very--a somewhat 
controversial suggestion that we might--the agency might shift 
away from a zero-defect mentality. And there's probably not 
enough time to fully go into that, but there are medications 
that provide significant benefits to a very broad number of 
patients, and yet there are certain profiles where they do 
present a hazard. This can be diagnosed ahead of time. And with 
patient--with careful decision and oversight with physicians, 
there may be cases where we should look beyond just a zero-
defect mentality within that agency.
    With regard to the U.S. Patent and Trademark Office, we 
really need--there are very little incentives for our 
entrepreneurs to file in foreign--certain strategic foreign 
jurisdictions, because of the lack of enforcement and--or 
quality of enforcement. And it's unfortunate, because we 
thereby abandon any, really, economic value of the innovations 
that we come up with here in our country. So, we really would 
like the Federal Government to significantly push for 
protection, and particularly in strategic jurisdictions--China, 
India.
    Federal tax policy is the one area I think where I can 
speak best to and is, I think, critical. The incidence of low 
capital gains rates over the past several years has definitely 
led to an upsurge over the past 6 years in early-stage 
investment. And so, low capital gains rates are very necessary 
to support an investment class which is characterized by 5- to 
15-year holding periods, illiquidity up--all the up to the time 
of exit, categories of risk that are just not present in other 
asset classes, such as regulatory risk: Will you actually be 
able to sell the product that you have, and when? Technology 
risk: Will the product ultimately work, once we get the 
prototype developed and the product perfected? And financing 
risk: Will there actually be another investor to pick up the 
baton once we've done our part and handed it off? It's a very 
unique asset class, and it requires special protections. And 
among those protections, or promotions, is capital gains--a low 
capital gains rate. With the absolute number of angel investors 
able and willing to invest, and with--contracting on an 
absolute and relative basis, it's critically important that 
capital gains rates remain very low to extend investment in 
this asset class.
    Same is true with the number of--number and extent of 
venture capital investments. The industry, as it normally does, 
is going through a significant contraction. The boom-and-bust 
cycle usually sees the ranks thin by two-thirds over the period 
of a cycle. And so, that industry, as well, is very dependent 
upon low capital gains for maximum returns.
    I see my time is up. If I can take just one more minute?
    Senator Klobuchar. Sure.
    Mr. Williams. Thank you very much.
    Serious consideration needs to be given to the--removing 
the threat of taxation of carried interest. This is also--I 
think, will thin the ranks of venture capitalists. People--it 
will steer managerial talent out of the sector. Potential 
venture capitalists will seek employment in other areas, where 
compensation is much more lucrative. And current fund managers 
will retire. They, essentially, won't want to raise another 
fund. I have seen this firsthand. I've lived it through the--
during the dot-com era. And so, our venture industry is the 
envy of the entire world. It is the goose that lays the golden 
egg, and we would be ill-served by threatening one of its key 
incentives, which is the carried interest, the taxation of 
carried interest. So, we need to, I think, leave well enough 
alone when it comes to taxation of that very important feature.
    I went to thank you again for this opportunity. 
Unfortunately, I didn't get a chance to talk with other--on my 
other points, but they are in my remarks--my written remarks.
    Thank you very much for this opportunity.
    [The prepared statement of Mr. Williams follows:]

 Prepared Statement of Rhys L. Williams, President, New World Angels, 
                                  Inc.

    My name is Rhys Williams, and I would like to thank Sen. George 
LeMieux (R.--Florida) and the other Honorable Members of the U.S. 
Senate Subcommittee on Competitiveness, Innovation, and Export 
Promotion for this opportunity to share ideas from the frontlines of 
both entrepreneurship and early stage venture finance. I am a 
businessman from southeast Florida, and I wear two closely-related 
hats. My primary occupation is that of biotechnology entrepreneur; I am 
President of an early stage R&D firm (iTherapeutics) developing 
pharmaceutical drug candidates in partnership with academic researchers 
from the region's leading academic institutions. Additionally, my all-
consuming avocation is serving as President of Florida's largest and 
only state-wide angel investor group (New World Angels), whose 
individual members invest collaboratively in what they hope will be the 
region's next entrepreneurial business success stories.
    Members of the Subcommittee are very aware of the critical role 
that entrepreneurial management plays for our Nation's competitiveness 
and the quantity and quality of innovative technologies and companies 
our economy produces. They may be somewhat less aware of the role of 
so-called ``angel investors,'' who, in most years, either match or 
exceed the total level of early stage venture funding provided by 
institutional investors such as venture capital funds. The Center for 
Venture Research estimates that U.S. angel investors invested $19 
billion in 55,000 deals (in about 35,000 small businesses) in 2008. 
Figures for 2009 (same source) comparing the activity of angel 
investors with that of institutional venture capital funds is highly 
instructive. In that year, 259,500 individual angel investors invested 
$17.6 billion as part of 57,000 deals, 47 percent of which were in 
early stage ventures. By contrast in that same year, 794 institutional 
venture capital funds invested the same amount ($17.69 billion) as part 
of only 2,800 deals, only 9 percent of which were considered as 
investments in early stage companies.
    Angel investors may invest individually, in small groups of two or 
three fellow investors, or as part of structured angel investor groups, 
whose number may range from 25 to 100. The metrics furnished by the 
Angel Capital Association regarding the profile of structured angel 
groups are instructive (see www.angelcapital
association.org). The prototypical angel group investor has been an 
angel investor for 9 years, has made an average of 10 angel investments 
during that time, have themselves founded 2.7 new ventures during a 
14.5 year tenure as an entrepreneur, is 57 years of age, has earned a 
masters degree, and directs fully 10 percent of his/her net worth to 
angel investments as an asset class. Such members are themselves either 
current or former successful entrepreneurs, and they also place 
investment bets on early stage companies run by other entrepreneurs, 
since they are more familiar with the challenges and the opportunities 
within the early stage ventures which comprise this asset class.
    Early stage investment in high-growth, technology-based ventures is 
critical to commercializing technological innovations, to promoting our 
Nation's competitiveness, and to robust job creation. For the 25 year 
period from 1980 to 2005, firms less than 5 years old accounted for all 
net job growth in the U.S. (Business Dynamics Statistics Briefing: 
``Jobs Created from Business Start-ups in the United States,'' Jan. 
2009). A representative list of firms initially funded by angel 
investors include Google, PayPal, Starbucks, BestBuy, Amazon, 
Myspace.com, facebook, Costco.com, Yahoo!, Alcoa, and Cisco Systems.
    From both perspectives (those of early-stage entrepreneurs, and the 
angel investors who back them), there are several areas where the 
Federal government can take positive action to increase and accelerate 
both new business creation and private funding thereof. Equally 
important, there are areas where the Federal Government's best policy 
would be to take no action at all and let private matters remain 
private.

I. Regulatory Arena (Food and Drug Administration)
    In recent years, the Food and Drug Administration has gone through 
extended periods without formal, resolute leadership. Political 
considerations in the wake of high-profile drug safety incidents have 
left regulators at all levels hamstrung, afraid to make any decision 
whatsoever during the long drawn-out process of regulatory review of 
new drug candidates, medical devices, and ``combination'' technologies. 
In such an environment, entrepreneurs lose years in their product 
development timelines and must spend additional capital in order to 
pursue preliminary, and ultimately final, approvals of the technologies 
they seek to bring to market. As a result, early stage investors 
increasingly altogether avoid making investments in areas with greatest 
technological promise, for the following reasons:

   With extended (and some would say indeterminate) development 
        timelines, is it not possible to predict what the risk-adjusted 
        return on investment (ROI) might be for a given technology.

   Investors believe that given the internal culture of the 
        FDA, regulators are incented not to make approvals in any case 
        (for fear they may get it wrong).

   With the ``regulatory risk'' so great, angel investors are 
        incented to make investments in other equally promising sectors 
        and technologies which are not required to pass through 
        regulatory scrutiny at all (e.g., wireless, social media, 
        entertainment software, business process services, etc.). The 
        chilling effect of regulatory delay and/or indecision is 
        palpable from an investor standpoint.

    Recommendations:

   Fill critical vacancies at the FDA as quickly as possible.

   Charge the FDA leadership to send clear, consistent policy 
        signals as part of its regulatory pronouncements, so that both 
        entrepreneurs and early stage investors will understand the 
        FDA's expectations, requirements, preferences, timelines, etc., 
        within specific biotechnological/medical sub-sectors; enhance 
        the agency's communication function.

   Speed up regulatory review at all stages of the FDA 
        application and regulatory process.

   Perform a cost-benefit analysis to compare societal benefits 
        resulting from a ``calculated risk'' policy, vs. a ``zero-
        defect'' policy as pertains to new drug reviews and approvals. 
        Common wisdom within the biotechnology and pharmaceutical 
        industries is that there is no such thing as a ``safe drug''; 
        there are drugs whose safety profiles offer substantial 
        benefits to the overwhelming majority of patients who 
        understand and personally accept the risks of a particular 
        drug, undertaken with the guidance of their physicians.

II. U.S. Patent and Trademark Office (USPTO)
    Similar to characteristic delays resulting from FDA regulatory 
review, the U.S. Patent and Trademark Office (USPTO) is significantly 
backlogged in its patent application review and patent issuance 
processes. It is a common thread of discussion within the 
entrepreneurial community that the USPTO is facing up to a 3.5 year 
backlog in processing applications. This delay not only adds to a 
company's developmental timeline requirement, but increases the legal 
costs that must be born by early stage ventures. Entrepreneurs and the 
angel investors who back them require more timely information regarding 
whether a particular venture's technologies will receive patent 
protection; patents are often one of the few assets an early stage 
venture can acquire. Relatedly, an early stage venture is required to 
know whether it has ``freedom to operate'' within a particular 
intellectual property landscape (i.e., a general analysis that it is 
not likely violating other patent-holders' rights). Entrepreneurs are 
often told by investors to ``call me when you have received your patent 
allowance'' from the USPTO; however, the entrepreneur is not able to 
keep the doors open until that time. Given the significant gating 
factor that the patent application process represents, entrepreneurial 
managers must make decisions regarding allocation of time, capital, 
technology, and skilled labor, often under total uncertainty. To the 
extent the time-frame of this uncertainty can be minimized, from a 
patent perspective, the more efficient and efficacious the venture 
creation economy will be.
    Finally, U.S. ventures often perceive little value in filing 
patents in strategic foreign jurisdictions, since there is little 
guaranty that local enforcement mechanisms are available or effective. 
Consequently, entrepreneurs often forego pursuing patent filings in 
foreign jurisdictions with poor or questionable enforcement mechanisms. 
Intellectual property is thereby abandoned for purposes of 
commercialization within that foreign territory.
    Recommendations:

   Consider implementing a USPTO policy of ``expedited review'' 
        for those technologies in strategic sectors of the U.S. and 
        international economies (e.g., biotechnologies, wireless 
        technologies, clean technologies, renewable energy, etc.).

   Significantly expedite the review process and approval of 
        patent issuances, whether this might require re-allocating 
        existing resources or increasing staff levels to handle 
        workload, or outsourcing backlogged workflows to private 
        vendors at key thresholds.

   Continue to push for reciprocity for and enforcement of 
        intellectual property rights within foreign jurisdictions.

   Study potential changes to the U.S. patent regime, whereby 
        U.S. patent rights might begin from the time of award, not from 
        the time of filing or disclosure. This would ``toll'' the 
        patent application period and allow companies to exploit the 
        full potential 20 year life of a patent. It would also increase 
        the economic value of the patent for the firm and from the 
        perspective of early stage investors.

III. Federal Tax Policy
    The 15 percent capital gains rate has been cited as one of the most 
important reasons for the increase in angel investment levels in the 
last six years. Any significant increase in capital gains rates will 
significantly curtail the number of investments made in this high-risk 
asset class. At a time when all other economic indicators point to less 
available capital for small business at the same time that the sheer 
number of potential investors has plummeted with the economic downturn, 
it would be counterproductive to increase capital gains taxes for 
individual investors who embrace great financial risk to directly 
support innovative, start-up companies.
    Additionally, Federal ordinary income tax credits for angel 
investments in small business start-ups would also improve the flow of 
angel capital to small businesses in communities throughout the 
country. Twenty-plus states and several foreign countries have 
instituted income tax credits over the last decade. These credits are 
generally offsets against other investor tax liabilities and enhance 
the attractiveness of early stage, high-risk investments in early stage 
enterprises. A Federal tax credit could ensure that innovative small 
businesses would benefit from such investor credits, irrespective of 
state of domicile. A nationwide credit would enhance the benefits 
offered by states that already have such programs as offsets to state 
taxes (federal ordinary income tax obligations are greater than state 
tax liabilities). In addition, a tax credit with a nationwide footprint 
could help encourage more syndication among and between angel groups in 
different states, which is increasingly the manner by which 
entrepreneurs are able to raise larger rounds of financing. Several 
state-level precedents are instructive. A 2008 study of Wisconsin's 
angel tax credit program and related initiatives found that overall 
investment in Wisconsin small businesses increased by 43 percent from 
2006 to 2007. Wisconsin-based angel groups increased their investments 
by 57 percent and more than doubled the number of small businesses that 
benefited from Wisconsin's policy initiatives during the same period.
    Beyond the realm of angel investors, recently proposed legislation 
to tax ``carried interest'' earned by venture capital fund managers at 
ordinary income tax rates rather than at capital gains rates will 
significantly reduce the number of institutional venture capital funds 
being raised and consequently the amount of capital deployed to the 
most deserving entrepreneurs. In normal cyclical fashion, the venture 
capital industry expands by two-thirds during ``boom'' times, and then 
contracts by two-thirds during ``bust'' cycles. During bust cycles, 
venture capitalists ``retreat upstream'' and pursue later-stage 
companies whose risk/reward profile is lower than that of early stage 
companies. Thus, there is already a strong cyclical contraction 
underway; to reduce the compensation earned by venture capital fund 
managers will substantially exacerbate this already challenging trend. 
Venture capitalists will forego or abandon their involvement in the 
discrete asset class of venture capital, and instead pursue other areas 
within the investment professions, such as traditional mutual fund 
management, asset management, commodities and/or currency trading & 
arbitrage, where the risk/reward profile will appear more attractive. 
The ``drying up'' of early stage venture capital sends an extremely 
discouraging signal to early stage entrepreneurs (particularly within 
the biotechnology arena), and it has the very tangible effect of 
channeling both capital and managerial talent into other industries and 
technology sectors which require less total capital, over fewer years, 
and which do not include ``regulatory risk'' as part of their 
investment profile. Unfortunately, such industries are of less 
strategic importance to the Nation's competitive standing (e.g., niche 
consumer products now receive investor capital vs. pharmaceutical 
development; entertainment media deals are funded vs. clean energy 
technologies).
    Recommendations:

   Encourage Congress to keep capital gains tax rates for angel 
        investments in truly early-stage businesses at 15 percent or 
        less when it renews tax legislation for long-term capital gains 
        this year.

   Given current economic conditions, Congress should consider 
        complementing a lower capital gains rate for successful early-
        stage investments with a tax credit for investments in 
        innovative small businesses. Federal ordinary income tax 
        credits for individual angel investors in small business start-
        ups would also improve the flow of angel capital to small 
        businesses in communities throughout the country. The Angel 
        Capital Association could serve as a resource to advise 
        legislators and policy makers on best practices gleaned from 
        the twenty-plus states who have implemented state-level 
        individual tax credit programs to promote growth of small 
        businesses that create high-paying jobs.

   Resist calls for changing the taxation of carried interest 
        for venture capital fund managers from capital gains to 
        ordinary income. Such a policy would greatly reduce the already 
        shrinking pool of available venture capital and result in a 
        significant drop-off in new venture funds being raised.

   Beyond ordinary income tax credits for individuals, 
        corporate tax credits for small firms could be linked to levels 
        of outside capital investment attracted, employment gains made 
        by small firms, capital equipment purchased, or some 
        combination of these measures. There has been experimentation 
        in this area at the state level as well. The effectiveness of 
        this proposed policy however is admittedly lessened for those 
        early stage technology-based firms which operate for several 
        years without meaningful revenues (which is not uncommon).

IV. Federal and State Securities Regulations
    Federal rules require individual investors who seek to invest in an 
early stage company to meet certain threshold requirements of either 
wealth or income level. As the economic downturn has decreased the 
number of individuals able to meet these thresholds, consideration 
should be given to lowering one or both the standards.
    Additionally, the Federal Government should continue its beneficial 
policy of permitting the exemption of early stage company stock from 
the usual securities and exchange listing requirements under Regulation 
D of the 1934 Act. This exemption saves early stage companies and their 
investors significant time and money, which are at a premium for such 
enterprises.
    Recommendations:

   Preserve, and potentially lower, the traditional definition 
        of ``accredited investor(s)'' for securities and tax law 
        purposes. Conversely, raising the threshold definitions will 
        vastly reduce the number of angel investors eligible to make 
        investments in early stage companies.

   Continue to protect the ``Reg. D'' exemption under the `34 
        Act for the offering of stock in early stage ventures.

   Study the potential benefits of simplifying the complex 
        patchwork of all Federal regulations within the area of 
        securities issuance exemptions.

   Pursue harmonization of Federal laws with the patchwork 
        landscape of the states' own ``Blue Sky'' securities 
        regulations. This would provide regulatory and financial relief 
        to early stage firms, which often must incur onerous legal cost 
        to ensure compliance in numerous state jurisdictions.

V. Programs Promoting the Development and Integration of Local/Regional 
        Infrastructure and Critical Resources for the ``Entrepreneurial 

        Ecosystem''
    Two programs showing early promise and worthy of promotion at the 
Federal level are as follows:

A. The Florida Institute for the Commercialization of Public Research 
        (FICPR)
    The Florida Institute for the Commercialization of Public Research 
(FICPR) matches commercially-viable technologies originating from the 
states' public and select private research institutions with: (i) 
experienced start-up managers (entrepreneurs) and (ii) private investor 
capital (angel investors, venture capitalists, and corporate 
development partners). FICPR is an unprecedented collaborative effort 
of the technology licensing and commercialization offices of Florida's 
eleven state universities as well as those private research 
institutions within the state that receive public funding. These 
partners are the gatekeepers charged with licensing technologies to 
startups for commercial product development leading to company growth 
and job creation. A nonprofit organization formed by the Florida 
Legislature in 2007, FICPR's mission is to create new, innovation-based 
companies and jobs by supporting entrepreneurship and commercialization 
of publicly-funded research in the life sciences, aviation/aerospace, 
clean energy, homeland security, and information technology sectors.
    In addition to the aforementioned ``matchmaking function,'' FICPR 
expands access to early stage capital by administering Florida's newly 
authorized Commercialization Matching Grant Program, which provides 
matching state funds to qualified Phase I and Phase II SBIR Federal 
grant and STTR Federal grant awardees. The multiplier effect of this 
program significantly expands the initial award of Federal grant monies 
with new sources of both state funding and private investor capital.
    Finally, FICPR expands and strengthens the connectivity among the 
state's technology business incubators, local innovation networks, 
prototyping facilities, strategic workforce training agencies, angel 
investor groups, and other entities through which additional training, 
communication, financing, and relevant support services are provided to 
early stage ventures. In this role, FICPR leverages existing assets and 
infrastructure, connecting the dots in a state often characterized by 
regional and institutional insularity.
    In the near future, FICPR aspires to foster even greater 
connectivity among the many separate elements of the entrepreneurial 
ecosystem by leveraging requested Federal funding with other state and 
locally-funded initiatives and programs. The collaborative model 
implemented by FICPR represents a successful precedent that is worthy 
of study and replication, both regionally and nationally.

B. Promote the Establishment and Growth of Private Angel Investor 
        Groups and 
        Networks
    Since angel investors have most recently accounted for roughly half 
of all early-stage funding last year (also consistent with the long-
term trend), entrepreneurs and the early stage businesses they start 
would benefit from an expansion of organized angel investor activity. 
One challenge facing policymakers is that angel investing is, by its 
very nature, an inherently private sector matter. Providing private 
investors with exposure to best practices and a roadmap for how they 
may organize collaborative angel investment activity at local and 
regional levels is perhaps the best manner of promoting private 
investment activity in early stage companies. The Angel Capital 
Education Foundation (ACEF), a national source of education and 
research on angel investing, serves as a resource and repository 
available to assist private investors, entrepreneurs, support 
organizations, legislators, and policymakers who seek to understand, 
pursue, access, and/or promote angel investment activity 
(www.angelcapitaleducation.org).
    Recommendations:

   Federal agency heads and Federal legislators should become 
        familiar with the programmatic successes of both the Florida 
        Institute for the Commercialization of Public Research (FICPR) 
        and the Angel Capital Educational Foundation (ACEF). Where 
        possible, the programs and initiatives developed by both 
        entities should be supported, replicated, extended, and also 
        integrated into existing Federal programs (as relevant).

   Specific consideration should be given to funding the 
        FICPR's upcoming grant application to the i6 Challenge Grant 
        program (sponsored by the U.S. Department of Commerce's 
        Economic Development Administration, in partnership with the 
        National Institutes of Health (NIH) and the National Science 
        Foundation (NSF).

VI. SBIR and STTR Programs.
    The Federal Small Business Innovation Research (SBIR) and Small 
Business Technology Transfer (STTR) Programs have been a staple of 
early stage company formation and advancement for many years. While the 
time and scope of this testimony do not permit a sufficient overview of 
each program, the core takeaways are as follows:

   SBIR and STTR grants provide key financing for early stage 
        companies seeking to bridge the ``Valley of Death'' between 
        initial seed capital (most often provided by entrepreneurs 
        themselves, their ``friends and family,'' and/or angel 
        investors), and later, larger financing rounds from 
        institutional investors (e.g., venture capital funds and large 
        pharmaceutical firms).

   SBIR/STTR grants serve an important ``validating'' function 
        for later investors, signaling that the science supporting the 
        technology under development by an early stage firm has gone 
        through peer-review during the grant award selection process.

   SBIR/STTR grants are often the sole source of funding for 
        ``highest risk/highest reward'' projects which seek to 
        demonstrate the first ``proof of concept'' for a given 
        technology.

    In recent years, funding for the SBIR and STTR programs has been 
threatened by larger corporate and institutional investor interests, 
who would prefer to see Federal funding steered toward later-stage, 
larger enterprises. However, SBIR and STTR grants, primarily intended 
for small and mid-size enterprises, are literally the ``seed corn'' for 
much of this Nation's most innovative private research and development 
efforts.
    Recommendations:

   Preserve Federal funding support for both the SBIR and STTR 
        programs.

   Protect SBIR and STTR programs from encroachment by larger 
        firms which seek to displace earlier stage firms from grant 
        award funding, potentially by imposing ceilings on the size of 
        enterprise that may be eligible for grant funding.

VII. Conclusion
    Again, I would like to thank Senator George LeMieux (R.--Florida) 
for the opportunity to share these observations and recommendations 
with the Honorable Members of this Senate Subcommittee. Federal 
policies supporting: (i) entrepreneurs, (ii) the early stage ventures 
they launch and grow, and (iii) the early stage investors who back 
them, all contribute to an ecosystem that is part of a virtuous cycle 
of high-wage job creation, increased tax revenue (over the long-term), 
dynamic innovation, and robust competitiveness on the global stage. By 
the same token, as suggested earlier, restraint at the Federal level is 
often the best available policy option.

    Senator Klobuchar. Well, I'm sure Senator LeMieux won't let 
you go without some questions.
    I, first, turn to you, Dr. Atkinson. Both Senator LeMieux 
and I were interested--and I know Senator Warner and Begich 
have raised this, as well--this idea of a competitiveness 
policy. And I thought Mr. Chopra's analogy, with the broadband 
policy, which actually had some meat on the bones when it was 
put out there--how would you like this to look? Like, what 
would it really be, this competitive policy?
    Dr. Atkinson. Well, I think--it's interesting, in my 
written testimony, I allude to how many other countries have 
done this. Ghana just recently established a process to do 
this. So, many countries are doing this. And it involves more 
than just simply several people getting together in an 
interagency process every few weeks and drafting up, you know, 
a little white paper, as helpful as that may be.
    I think what it requires is a very serious analytical 
effort. And one of the things the broadband team did is, they 
brought in people from groups like McKinsey and Boston 
Consulting Group--real experts, real--people who do this for a 
living--brought them in on detail, and spent 9 months going 
deep into what the real challenges are. So, I think we need to 
do that. We need to, for example, look at the medical device 
industry, look at the IT industry, look at aeronautics, a whole 
set of things: Where are we strong, where are we weak? What are 
the challenges they face? Then look at a whole set of things 
around what you call ``support factors.'' How is our regulatory 
system working? How is our tax system, compared to other 
countries? How are we doing on public investment and policies 
to spur technology transfer and commercialization? What can we 
learn from other countries? And then develop a whole list of 
recommendations that both the Administration and Congress could 
follow up on.
    Senator Klobuchar. Has anything been done like this before?
    Dr. Atkinson. We've done two things like this before in 
this space. One was President Carter's 1978--I believe it was 
1978--Domestic Policy Review on Innovation. And this was a very 
serious, long-term, you know, 8 to months kind of effort, 
looked across the board. And this actually stimulated a lot of 
the follow-on activities in the 1980s--the Bayh-Dole Act, the 
Collaborative Research and Development Act, a whole set of 
other things.
    And then again, in 1983 or 1984, President Reagan 
established the Industrial Competitiveness Commission, and that 
also did a lot of analysis and led to a whole set of other 
acts, including helping shape the Omnibus Trade and 
Competitiveness Act of 1989.
    So, we have done these things before. And we did them, I 
think, pointedly, when we thought we faced real challenges with 
the Japanese and Europe, challenges in the 1970s and 1980s. And 
then we sort of decided we didn't need to do this anymore, and 
put it aside.
    Senator Klobuchar. And I can look into this more, myself, 
but do people point to it, then, sometimes? I feel, sometimes, 
that people are just responding to various groups that are 
coming in all the time--auto industry, this industry. And it 
does seem to me that it would be incredibly helpful to--even 
hearing Fred Hochberg, the head of the Export-Import Bank, list 
some of our top export potential, and look at what those are, 
and look at, How are we helping them? How are we hurting them? 
And then, also, as you point out, bigger policies that would 
help everyone so we could----
    Dr. Atkinson. Could I make a----
    Senator Klobuchar.--use it as a guidepost?
    Dr. Atkinson. Could I just make----
    Senator Klobuchar. Go ahead.
    Dr. Atkinson.--one other point?
    I think an interesting point--I--when I was Chief Advisor 
to the Governor of Rhode Island, back in the 1990s, for the 
Economic Policy Council there, we actually put in place a very 
detailed strategy. We looked at nine key industries in the 
state. We understood their competitive position. We then looked 
at all these crosscutting things. We put in place a policy that 
led to a whole--a plan and a strategy that led to a whole set 
of policies. But, we weren't the only state that has done this. 
I believe Minnesota has done this. Many states have put in 
place competitiveness strategies. And it's just striking that 
somehow states can do this, but we don't think the Federal 
Government should.
    Senator Klobuchar. Well, especially when we're competing in 
a global economy.
    You also mentioned OIRA, this whole idea--did I say that 
right? It's Cass Sunstein's position.
    Dr. Atkinson. Right.
    Senator Klobuchar. And he was my law professor, and my law 
review comment advisor, so I know him well and have a lot of 
respect for him, including the work he's doing with the book, 
``Nudge,'' and all of the other things he's done. Do you think 
that--you mentioned it--could they play a bigger role in this, 
as we look at how we deal, in a positive way, with the FDA, to 
move them and work with them to see, not just one side, but 
also understand this innovation side, that there are ways you 
can ensure safety, but do this in a way that doesn't discourage 
good investment?
    Dr. Atkinson. Yes. This was a proposal that we actually 
made from work that two of our colleagues did--Arti Rai and 
Stuart Benjamin, who were both law professors at Duke 
University, and proposed this idea and had it as a law review 
journal and then an ITIF report. Both of them are in the 
administration now. Stuart is at FCC, and Arti Rai is at the 
Patent Office. And obviously they're big proponents of this 
idea. And the point that they make in their report in--is that 
OIRA, right now, is basically a cost-benefit agency, so it 
looks at what agencies are doing from a very narrow 
perspective--what economists would call ``static analysis.'' 
How is this going to affect just what's going on today? There's 
very little capability or focus on how this might affect 
things, 5 years down the line or 10 years down the line. How do 
what agencies do and how do--what they perform--how do they----
    Senator Klobuchar. When you listened to Mr. Weiss, it's 10 
years for one product. But, go on, yes.
    Dr. Atkinson. Well, you're--it's just this--there's nobody 
in--at OMB standing over the shoulder of agencies, looking not 
just at the rules that they propose, but their operations, and 
saying, ``You know what, you're not structured to support 
innovation as well as you could.''
    So, our view is, a very small effort in OMB--it doesn't 
need to be a lot of money, but just someplace in the Federal 
Government where that's what they're doing every day, and 
really urging agencies to take innovation more seriously.
    Senator Klobuchar. Very good.
    Mr. Ubl, you mentioned something--and maybe it was in your 
written testimony, but maybe we just talked about it before--
that China is looking at this country-of-origin policy, in 
terms of when they allow products in, that you have to have an 
OK in your own country of origin. Well, it's pretty easy to put 
the dots together. But, if it's taking us years longer than it 
is, say, France or England, or just Europe as a whole, to OK a 
product, if you're a businessman or -woman, and you want to get 
something in China, what motivation is there to stay here, if 
our policies take too long?
    Mr. Ubl?
    Mr. Ubl. I think that's a terrific point. I mean, if you 
picture two gateways, the FDA review process, which is, at best 
right now, unclear, and could potentially get more arduous for 
companies, and you look at the European CE Marking process, 
under which many medical technologies are on the market for 
several years before they're available to U.S. patients, the 
choice is pretty clear, that you're going to continue to pursue 
the more efficient path.
    And, as I mentioned, our concern is that that is going to 
be the beachhead under which, if China and India are the target 
markets, the whole industry is going over time to migrate 
abroad not only manufacturing, but clinical trials, R&D, the 
whole value chain.
    Senator Klobuchar. Does China actually have that policy in 
place right now?
    Mr. Ubl. They do.
    Senator Klobuchar. OK.
    We all know that there are advantages of the U.S. I mean, I 
don't think we have to go into it. You know that. You represent 
the companies, with our long history here, and the people who 
are trained, and the well-thought- of products. But, as Dr. 
Atkinson said, looking 5 years down the line here, if we don't 
respond to this quickly--because we live in a global world, and 
it's going to make a difference.
    Could I--just one more question--I know there's an 
Institute of Medicine study coming out, on this 510(k) process. 
Do you have any information about the study? Have they included 
all interested parties in working on this study?
    Mr. Ubl. The IOM has just recently begun its inquiry into 
the 510(k) process, and they will report, Spring or Summer of 
next year.
    We do have some concerns that the IOM Review Committee does 
not include a great number of people who have actually 
developed products, and brought them through the 
commercialization process, although they are opening their 
process to outside comment.
    I think, to understand the value of the 510(k) process, you 
really have to appreciate the innovation model in medical 
technology. I sort of liken the drug discovery model to the Big 
Bang theory, where you test a compound for a number of years, 
you find one that works, the compound doesn't change, going 
forward. Medical technology, by contrast, is like the software 
industry; it's rapid, incremental improvement, where you have 
new products coming out every 18 to 24 months. And the way 
those incremental improvements are brought through the 
regulatory process is through the 510(k) process, which allows 
you to make these modest incremental improvements that, when 
you add them up, make a powerful impact on public health.
    So, it's the main superhighway, if you will, where most 
medical technologies are brought through the process.
    Senator Klobuchar. And the concerns that I've heard is 
that, you know, suddenly there has been--it's not that you 
couldn't perfect the process and make it better and make some 
changes, but there's--it's sort of sporadically happening right 
now, without a lot of lead time, so that companies and 
investors can adjust to that, so that you--instead of saying, 
``This is how we're going to change it in 3 years,'' suddenly, 
on the 89th day of a 90-day process, someone's suddenly asking 
for a $40-million new study, is what I'm hearing. Could you 
comment on that?
    Mr. Ubl. I'm hearing a lot of that, as well. On the one 
hand, there's a great fear of the unknown, where the agency is 
looking at the process, and the IOM is looking at the process, 
investors and companies don't know what's going to come out of 
the other end. But, yes, an analogy I would use is, today it's 
built like the ``Peanuts Cartoon,'' where you've got Charlie 
Brown trying to kick the field goal, and Lucy, at the very last 
minute, pulls it away. Many companies are very frustrated that 
they'll go and make an agreement with the agency over the data 
that's required, only to have a new reviewer put in place, or 
new data requirements being requested. And that just throws the 
entire process up in the air.
    Senator Klobuchar. Mr. Weiss, do you want to comment a bit 
more on this, in terms of the questions I was asking Mr. Ubl? 
And how could we change this? While still understanding that 
you can always make a better regulatory process, and there are 
probably some changes that safety experts, consumer advocates, 
patients groups, as well as medical device industry would 
support--how do we do it in a way that makes it work, so you 
don't unnecessarily limit investment and send it all over to 
Europe?
    Mr. Weiss. Well, I think Mr. Ubl put his finger right on 
the issue. The fear of the unknown makes it very, very 
difficult for companies like ours to plan. When we can't put a 
plan together, then, fundamentally, we can't attract 
investment. So, investors are looking at medical devices with 
more uncertainty that they had before.
    So, the first thing to do is to take uncertainty out of the 
process. There's a number of ways to do that. One is to assure 
that companies that are in the process today are grandfathered 
to whatever the current system is. The second one is to involve 
industry in the development of the new processes.
    And what seems to have happened in the last few months--and 
now, with the review process, led by Dr. Shuren--is that there 
seems to be signaling by the FDA that they're going to change 
something. And, whereas we have the right to provide comment, 
the--there are a lot of questions as to whether or not that's 
real input, and whether we can help shape the process.
    That's why we--you know, we're so grateful for the 
opportunity to speak here today, to see what kind of support 
congressional support and visibility can provide.
    Last, I think that the basic principle of harmonization 
with the European system would be advantageous to everyone. 
These same issues are dealt with in Europe with stratified 
risk, risk-reward benefits, the different levels of risk that 
devices have. And I think harmonization with the European 
system is a positive idea.
    Senator Klobuchar. Very good, thank you.
    Mr. LeMieux has returned.
    Senator LeMieux. Thank you, Madam Chair.
    I wanted to, if I may, ask a question to you, Mr. Williams. 
Something that you and I have talked about--in fact, we talked 
about today, and it was mentioned earlier, and Senator Warner 
and I were discussing it--is this Valley of Death challenge. 
And maybe other folks on the panel will also speak to it.
    Where we do a pretty good job in helping folks, in getting 
investment to people when they're working in their garage, or 
they're at a university and they're working in the lab, we do 
very well once a product has been developed, sort of the end of 
the spectrum, getting investment to folks. But, that middle 
time seems to be a very challenging time for these folks to get 
the money so they can continue developing their product and 
getting it toward commercialization.
    What can the government do, and what models might there be 
out there that other States have tried successfully, that can 
help bridge that gap so that we can bring more of these good 
ideas to marketplace?
    Mr. Williams. One idea comes to mind. And I've heard that 
there may be three different proposals floating out there now 
for a Federal angel investor tax credit. Fully 20 States and 
some--three foreign jurisdictions--have already tried 
experiments in this area. I know the State of Wisconsin is a 
standout success in this area. In a 2-year period, where they 
used a State angel investor tax credit, combined with their 
other policies, they--there was a 57-percent increase in the 
amount of funding given to small businesses. And I think an 
increase in the absolute number of businesses receiving funding 
jumped by 47 percent. An Angel Capital Association report, 
dated April 16 of this year, indicated that there were three 
proposals somewhere out there. And--I think, in the House. But, 
that's something--I think, it's definitely--I believe the 
Federal Government could look at those examples and maybe call 
for best practices, and see which policies might make the most 
sense.
    Additionally, right now, the ecosystem is significantly 
disrupted with the contraction of the venture capital industry. 
Angels used to be able to take big, broad bets on the big 
ideas, the big technologies--clean tech, pharmaceutical 
therapeutics--and then trust that the better ones would 
survive, perhaps then with Federal grant funding, and then be 
picked up by the venture capital industry. That's no longer the 
case. The venture capital industry has contracted. They're 
feeding their own young. Their existing portfolio companies. 
They're not making new bets.
    And so, there's a Valley of Death within the Valley of 
Death. And so, I think we really need to--as I said during my 
primary comments, we really need to support the venture capital 
industry, and look at specific comments, in tax policy and 
other realms, to help establish it. It really is our--the pride 
of our country. It's the envy of the world. And we need to do 
what we can, I think, to foment additional, you know, robust 
recovery of that industry.
    And I'm kind of surprised to hear an angel wax so 
positively about VCs, because frequently we are somewhat 
competitive across the negotiating table. But, there is a very 
important ecosystem there. So, I think that's very important.
    Senator LeMieux. Mr. Weiss, do you want to tackle that?
    Mr. Weiss. Yes, I appreciate the opportunity.
    And I--and let me just reinforce what was just said. I 
advise a number of very early-stage companies, and I also work 
with a number of venture capitalists. There are a number 
venture capital firms that have simply withdrawn from medical 
device investing. They view that the uncertainty in the 
regulatory environment, the complexity and challenges of 
getting insurance coverage and reimbursement, and the--just 
simply the time to get a trial done, as untenable. So, they 
can't attract investment into their funds.
    And the--exactly the issues with angels are compound by 
this sort of, you could say, the second Valley of Death. I know 
half a dozen venture funds that have either moved to much 
later-stage or just completely withdrawn from startup venture 
investing. And the impact of that, unfortunately, is--I've 
spoken to a number of companies that I've advised, ``It's very, 
very difficult for you to get any funding at all, so don't even 
start.'' And it's really become a bigger and bigger problem.
    And in the Twin Cities, a number of venture-backed 
companies have simply shut down, because as venture funds have 
contracted, they have had to pick and choose which of their 
companies they continue to fund. And there are two or three, 
just in our building, that have left recently.
    Senator LeMieux. Mr. Ubl?
    Mr. Ubl. Just briefly. I was in Israel last week, and I was 
struck by two things. One is, they do have a comprehensive 
innovation policy, of which medical technology is a key pillar. 
The second thing I was struck by is that the government has 
some fairly novel approaches to trying to cross the Valley of 
Death. For example, if small companies are able to secure 
private funding, the government will match that funding through 
the life cycle of the technology.
    So, I think that, if we can look at some novel ways of 
strengthening the seed-funding aspect of this, and creating 
incentives throughout the development process, that would be 
one suggestion I would make.
    Senator LeMieux. Dr. Atkinson?
    Dr. Atkinson. My colleagues talked more on the venture side 
or the angel side; let me talk about even prior to that. The 
first step to even get into the Valley of Death is to get 
something to take research and put it into a prototype or a 
business plan. And we do that well in some places, but in a lot 
of places, we don't. I would look, for example, to MIT, where 
MIT has a whole ecosystem, where, if you're a faculty, or even 
a student, with a good idea, you can get what are called these 
$50,000 ignition grants. It's not a lot of money, but enough 
money for a faculty member or a student to develop a plan, to 
go out and start to talk to venture capitalists or angel 
investors. We need to have all our universities doing things 
like that.
    The second thing related to that is, there are States now 
that have very good public/private partnerships that work to 
get technologies out of universities and to provide, sort of, 
early-stage management help, sometimes with incubators, so they 
can--and States, including Florida, Minnesota--a lot of States 
have programs like that. Frankly, they're significantly 
underfunded.
    So, I think we need to think about--was that proposal that 
I made in my written testimony, of what we call the SCNR, sort 
of like an SBIR, but--again, taking a small amount of money, 
and really spurring these kinds of efforts.
    Related to this is what other countries are beginning to do 
is actually tie university funding to their ability to 
commercialize technology. In Finland, for example, 25 percent 
of their higher-ed budget now is tied to performance. In 
Sweden--they just started this last year--10 percent of their 
higher-ed budget is tied to performance, with about half of 
that performance metric being, Are you commercializing 
technologies? Are you working with entrepreneurs? Are you, sort 
of, getting out of your comfort zone?
    We don't do anything like that here. We could start to take 
very small steps in that direction, to begin to provide 
incentives for real performance.
    Senator LeMieux. Mr. Weiss, did you have another comment?
    Mr. Weiss. No, thank you.
    Senator LeMieux. OK.
    Senator?
    Senator Klobuchar. OK.
    Well, I wanted to thank all of you. This has really been a 
very good hearing.
    Maybe Senator LeMieux has a few closing remarks, as well.
    What I'll take away from this is, first of all, this--
several of Dr. Atkinson's ideas, and that were, I'd say, echoed 
by Mr. Chopra, in terms of a competitiveness strategy for our 
country. I think all of us share some frustration with the 
regulatory system. We've certainly heard that from our very 
successful medical device industry, and one that we want to 
keep successful, as well as across the board with other 
innovative businesses. And that's something we need to work on. 
And I am very committed to doing that.
    The patent issues that we talked about, and then, overall, 
the need to focus on exports. I think you saw common ground 
here, across party lines.
    And if I left you with anything, it's what I'd leave with 
Mr. Chopra, is that we have to act, here. We are competing in a 
world against some incredibly vigorous competitors that aren't 
going on listening tours. We need to do something, and get it 
done now, in terms of making a better environment for 
innovation in this country. And I know those of us up here on 
this subcommittee are committed to doing that.
    Thank you very much.
    You want to add anything----
    Senator LeMieux. I do.
    Senator Klobuchar.--Senator LeMieux?
    Senator LeMieux. I want to, first of all, thank Senator 
Klobuchar for her leadership on this, as well as the leadership 
on exports. These are such important issues for medium and 
small businesses across the country.
    And I want to thank you all for the work that you've done 
and the testimony that you've given today. This is not a 
partisan issue; this is about the competitiveness of this 
country. And I think we identified, today, the components of 
what this innovation plan needs to be focused on. It needs to 
be focused on making sure that regulation is efficient and 
effective in getting rid of the lag time, whether it's at the 
FDA or the Patent Office. We need to make sure that the tax 
environment is of the sort that's going to promote innovation. 
We've got a focus on increasing exports, as well as a focus on 
providing funding, where appropriate, to allow these companies 
to be able to develop their ideas and bring them to the 
marketplace.
    So, you've given us a lot of great information, and we will 
be back in touch with you, because I think this is something 
that Senator Klobuchar and I are going to work on together.
    Senator Klobuchar. Very good.
    And, Senator LeMieux, I'm off to talk to some of our people 
in Tourism--I think that's sort of important to Florida, isn't 
it?
    Senator LeMieux. Slightly, yes.
    Senator Klobuchar. Yes. Which is another part of our 
subcommittee.
    So, thank you very much, everyone. And we look forward to 
working with you in the future.
    Thank you.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]

                                  
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