R&D RELATES TO JOB CREATION AND PRODUCTIVITY

R&D expenditures directly relate to job creation.

Between 1972

and 1978 new products developed and marketed, for example, accounted for three-quarters of the job growth in high growth industries--at double the rate for other U.S. manufacturing

segments.

And the correlation between R&D and productivity is graphically demonstrated by a sliding downhill trend: from a fairly

consistent 3 percent productivity growth between 1948 to 1973, years when U.S. R&D spending was high, to a low of .8 to 1 percent after 1973, reflecting several years of decreased R&D expenditures. From 1964 to 1978 R&D as a share of U.S. GNP plunged from almost 3 percent to 2.24 percent in 1978. In 1981-before passage of the ERTA R&D tax credit--it stood at 2.39 percent of the GNP--a 20 percent decrease over the pattern of the 1960s.

NEED FOR PERMANENT R&D TAX CREDIT

Permanence of the ERTA R&D tax credit is essential if high technology is to remain competitive in both U.S. and world markets. Designed to stimulate investment, the R&D credit constitutes what AEA companies regard as a major breakthrough in U.S. tax policy. It signaled the Federal Government's interest in encouraging increased private research (including university

research).

Premature assessments cause some to maintain that industry is not using the credit or that results, when the credit is used, do not warrant taxpayer costs. It is true that some cautious companies have not acted yet. Enacted for only 4 1/2 years, the start-up of the credit has occurred in the middle of an economic recession, a time when budget constraints and careful management limited may companies' R&D expansion. In addition, the existence of the five year sunset provision has also been a disincentive to those who know that R&D is not as beneficial in the short-term but reaps success only after sustained long-term financial commitments.

And finally, some companies have not acted simply because of the slowness of the regulations to be written and adopted.

Evidence shows, however, that others are aggressively investing. A new McGraw-Hill report, "Annual Summary of R&D Expenditures for 1982," shows that high tech electronics firms increased R&D expenditures in 1982 between 16.1 and 23.2 percent over 1981. The survey report also indicates that these same companies intend to increase their R&D expenses in 1985 between 29.6 and 46.3 percent over those for 1982.2 A typical AEA company spends

between 8 percent and 14 percent of its total revenues annually on research and development.

The R&D credit is a prime stimulus to increased investment. Spokesmen for Digital Equipment Corporation maintain that their company's R&D expenditures have risen 38 percent in absolute

dollars, or from 8 percent of revenues in 1981 to 11 percent in 1982. These increases have been motivated not only by strategic positioning but by the availability of the tax credit. Both Burroughs and 3M increased their R&D expenditures substantially and maintain that the tax credit was a primary incentive. Burroughs Vice-President of Finance, James Unruh, suggests that the phaseout of the R&D tax credit might cause his company to "3 "rethink a project's merits."

I would also like to call your attention to the key paragraphs of

a statement before this Committee today from a witness the schedule was not able to accommodate in person.

John R. Colbert,

Treasurer of M/A-Com Inc. of Burlington, Massachusetts.

Here is

an excellent illustration of how the R&D credit fits into and expands the R&D planning of a technology company:

Mr. Chairman, we appreciate that the question before the
committee is: "Does the R&D tax credit work? Does it
encourage companies to undertake research and development
efforts which it would not otherwise undertake?" The
answer from M/A-Com is a resounding "Yes!!"

The credit has been in effect for only two years; yet in
that time it has become embedded in the thinking of our
company's senior management, and has had the effect of
heightening the corporate priority for research. Of
course, M/A-Com will perform research and development
activities regardless of the presence or absence of the
credit, but that is not the question. What has happened
is that a "tilt" has been created in favor of expanding
our effort at a more rapid rate, just as you intended
when you enacted the credit. It is too soon yet, and in
fact may never be possible to draw a direct correlation
between the dollars we recovered through the credit and
the additional dollars we spent on R&D. I can, however,
offer some specific observations on particular M/A-Com
R&D efforts which were affected by the credit.

Since the credit was enacted, M/A-Com has made the
decision to intensify its research in gallium arsenide
(GaAs), a material which could be used with or in place
of silicon in semiconductor components. Within the last
year, we have made the commitment to acquire a $20
million facility to house this research and the
manufacturing that results, and we will, of course, equip
and populate it to the tune of many millions more. The
presence of the credit made it much easier for us to
commit to this level of effort, even though it represents
an outlay far in excess of any we could expect to recover
from the credit for years to come.

This program illustrates the effect of the credit on our corporate thinking; it also represents the difficulty of making a direct correlation between the credit and a given effort. Our GaAs effort is a long-term program. Decisions we make today will influence our company for decades to come. With that in mind, it is obvious that no such decision is made solely on the basis of the credit. On the other hand, this investment represents a major risk of assets for us. The willingness of the government to recognize that risk through the credit is no small factor in our willingness to undertake it.

It

There is one thing I should mention about GaAs.
represents one of the technological areas in which the
United States does not enjoy clear technological
superiority over our trading partners, including Japan.
Perhaps the safe play for us would be to stay in an area
where we already have the head start. By participating
vigorously in an area of international technological
competition in which the outcome is not assured, we
multiply our risk. We believe that this is precisely
what you wanted us to do when you enacted the credit, and
we are doing it.

To allow the R&D tax credit to work most effectively, and to enable corporate planners to look to the longer term, the sunset provision needs to be eliminated now. We hope this committee will so concur. For the revenue costs incurred, the return on investment in the form of substantial improvement in productivity and competitiveness of U.S. companies in increasingly demanding international markets is clearly justified.

R&D AS A WAY TO STRENGTHEN EDUCATION AND RESEARCH

High technology's ability to fulfill its promise as a creator of new markets and as a partner with traditional industries is predicated on the availability of highly skilled human resources specifically electrical and electronic engineers (EE's) and computer engineers (CE's) and technicians.

AEA's report "Technical Employment Projections:

1983-1987"

indicates a need by 1987 for 63.1 percent more electronic technicians, 65.5 percent more electrical/electronic engineers, 115 percent more computer (software) engineers, 102.5 percent more computer analyst/programmers, and 107 percent additional electronic engineering technologists. And in spite of what one reads about mechanization, there continues to be a healthy projected need for 63.7 percent more assemblers. Attachments A and B).4

(See

Extrapolating the projected needs for EE and computer engineers to the entire U.S. electronics industry and juxtaposing them against the projected supply from U.S. colleges and universities, we get a trend-shortfall of some 20,000 a year. Sixteen percent of the industry projections are based on successful receiving of defense contracts. However, even assuming no defense contracts, annual EE/CS engineer shortfall is projected to be over 16,000.