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Sources: Historical Statistics of the United States, Series F 1; md U.S. Department of Carmenerce, Burmu of Economic Analyus. www.bea.skie.gov/bum/dn/gdplev.htm.

FIGURE 2-3 In the 20th century, US per capita gross domestic product (GDP) rose almost sevenfold.

SOURCE: S. Moore, J. L. Simon and the CATO Institute. The greatest century that ever was: 25 miraculous trends of the past 100 years. Cato Policy Analysis, No. 364, Dec. 15, 1999, pp. 1-32.

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Of equal interest are studies of the rate of return on private investments in R&D." The return on investment to the nation is generally higher than is the return to individual investors (Table 2-2)." One reason that knowledge tends to spill over to other people and other businesses, so research results diffuse to the advantage of those who are prepared to apply them. Those "social rates of return">16 on investments in R&D are reported to range from 20% to 100%, with

throughout the world since the industrial revolution began has been driven by continual technological innovation through the pursuit of scientific understanding and application of engineering solutions" (p. 1).

14 Council of Economic Advisors. Supporting Research and Development to Promote Economic Growth: The Federal Government's Role. Washington, DC: White House, October 1995.

15 Center for Strategic and International Studies. Global Innovation /National Competitiveness. Washington, DC: CSIS, 1996.

16 "Social rate of return" is defined in C. I. Jones and J. C. Williams. Measuring the social return to R&D. Working Paper 97002. Stanford University Department of Economics. 1997. Available at http://www.econ.stanford.edu/faculty/workp/swp97002.pdf#search=R&D%20social%20rate%20of%20return. They state, "One can think of knowledge as an 'asset' purchased by society, held for a short period of time to reap a dividend, and then sold. The retum can then be thought of as a sum of a dividend and a capital gain (or loss)... The dividend associated with an additional idea consists of two components. First, the additional knowledge directly

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an average of nearly 50%. As a single example, in recent years, graduates from one US university have founded 4,000 companies, created 1.1 million jobs worldwide, and generated annual sales of $232 billion. 18

TABLE 2-1 Annual Rate of Return on Public R&D Investment

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Scott AH et al (2001) compiled following Salter and Martin (2001). [Sources. Griliches (1995), OTA (1986), and further additions by Scott et al. Salter and Martin point out that many of these authors caution about the reliability of the numerical results obtained]

SOURCE: A. Scott, G. Steyn, A. Geuna, S. Brusoni, and W.E. Steinmueller. The economic returns of basic research and the benefits of university-industry relationships. Report for the UK Government Office of Science and Techology. SPRU (Science and Technology Policy Research), University of Sussex: Brighton, 2001. Available at http://www.sussex.ac.uk/spru/documents/review for ost final.pdf.

raises the productivity of capital and labor in the economy. Second, the additional knowledge changes the productivity of future R&D investment because of either knowledge spillovers or because subsequent ideas are more difficult to discover" (pp. 6-8).+

17 M. I. Nadiri. Innovations and technological spillovers. Economic Research Reports, RR 93-31. New York: C. V. Starr Center for Applied Economics. New York University Department of Economics, August 1993. Nadiri adds, "The channels of diffusion of the spillovers vary considerably and their effects on productivity growth are sizeable. These results suggest a substantial under investment in R&D activity."

18 W. M. Ayers. MIT: The Impact of Innovation. Boston, MA: Bank Boston, 2002. Available at

http://web.mit.edu/newsoffice/founders/Founders2.pdf

TABLE 2-2 Annual Rate of Return on Private R&D Investment

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SOURCE: Center for Strategic and International Studies. Global Innovation/National Competitiveness. Washington, DC: CSIS, 1996.

Although return-on-investment data vary from study to study, most economists agree that federal investment in research pays substantial economic dividends. For example, Table 2-3 shows the large number of jobs and revenues created by information technology manufacturing and services-an industry that did not exist until the recent past. The value of public and private investment in research is so important that has been described as "fuel for industry".19 The economic contribution of science and technology can be understood by examining revenue and employment figures from technology- and service-based industries, but the largest economic influence is in the productivity gains that follow the adoption of new products and technologies."

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Council of Economic Advisers, 1995 Economic report of the President. United States Government Printing Office, Washington, DC.

20 D. J. Wilson. Is embodied technological change the result of upstream R&D? Industry-level evidence. Review of Economic Dynamics 5(2)(2002):342-362.

TABLE 2-3 Sales and Employment in the Information Technology (IT) Industry, 2000

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SOURCE: National Research Council. Impact of Basic Research on Industrial Performance. Washington, DC: National Academy Press, 2003.

CREATING NEW INDUSTRIES

The power of research is demonstrated not only by single innovations but by the ability to create entire new industries—some of them the nation's most powerful economic drivers.

Basic research on the molecular mechanisms of DNA has produced a new field, molecular biology, and recombinant-DNA technology, or gene splicing, which in turn has led to new health therapies and the enormous growth of the biotechnology industry. The potential of those developments for health and health care is only beginning to be realized.

Studies of the interaction of light with atoms led to the prediction of stimulated emission of coherent radiation. That, together with the quest for a device to produce high frequency microwaves, led to the development of the laser, a ubiquitous device with uses ranging from surgery, precise machining, and nuclear fusion to sewer alignment, laser pointers, and CD and DVD players.

Enormous economic gains can be traced to research in harnessing electricity, which grew out of basic research (such as that conducted by Michael Faraday and James Maxwell) and applied research (such as that by Thomas Edison and George Westinghouse). Furthermore, today's semiconductor integrated circuits can be traced to the development of transistors and integrated circuits, which began with basic research into the structure of the atom and the development of quantum mechanics by Paul Dirac, Wolfgang Pauli, Werner Heisenberg, and Erwin Schrodinger21 and was realized through the applied research of Robert Noyce and Jack Kilby.

In virtually all those examples, the original researchers did not-or could not-foresee the consequences of the work they were performing, let alone its economic implications. The fundamental research typically was driven by the desire to answer a specific question about nature or about an application of technology. The greatest influence of such work often is

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J. I. Friedman. Will innovation flourish in the future? Industrial Physicist, 8(6)(Dec. 2002/Jan. 2003): 22-25.

removed from its genesis,22 but the genius of the US research enterprise has been its ability to afford its best minds the opportunity to pursue fundamental questions (Figures 2-4, 2-5, 2-6).

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1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 1998

Sources: U.S. Patent and Trademark Office, U.S. Patent Activity, 1790-1998 (Washington: Government Printing Office, 1999); and
Louisiana State University, sportant Historical Inventions and Inventors, www.lib.su.edu/sci/chem/patent/ses 136.html.

FIGURE 2-4 Examples of critical technologies patented by US researchers.

SOURCE: S. Moore, J. L. Simon and the CATO Institute. The greatest century that ever was: 25 miraculous trends of the past 100 years. Cato Policy Analysis, No. 364, Dec. 15, 1999, pp. 1-32.

22 See, for example, National Research Council. Evolving the High Performance Computing and Communications Initiative to Support the Nation's Information Infrastructure. Washington, DC: National Academy Press, 1995.

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