Rather than "targeting" specific technologies or

industries, the proper role for government is to target

the process by which they are developed of innovation.

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the process

That is, our government should focus on creating an environment in this country in which high technology, innovation, new ideas, and new companies are likely to flourish. Ensuring that such an environment exists is the best way to help America maintain its techological leadership.

In order to know exactly how to maintain an environment for innovation, it is necessary first to understand the process by which technological advances occur. It is not a well-defined, step-by-step process such as in an algorithm or computer program. However, studying examples of innovation, new technologies, and emerging companies helps to identify certain fundamentals that are necessary for the process of innovation to flourish.

The Process of Technological Innovation

In my congressional district near San Jose, California, this process of technological innovation has flourished over the past three decades in a fashion that has brought fame and fortune to the area. Companies in the area have contributed enormously to the development of

telecommunications, integrated circuits, lasers, computer

equipment, pharmaceuticals, and genetic engineering.

A

study of the many examples of entrepreneurship and

innovation that have occurred there highlights the factors

so important to the expansion of our technological and industrial base.

An environment that promotes technological innovation includes:

• A strong commitment to basic research, deepening and broadening our understanding of the fundamental processes that will form the basis for industries and products in the future;

o Incentives for investors, entrepreneurs, innovators and corporations to provide the capital and take the personal risks associated with the development of new companies and new products;

o A strong educational capability, particularly in the sciences, that assures an ample quantity of trained technical and management personnel and a broad base of technically literate citizens who can deal with the challenges of a high technology world;

o Expanding market opportunities, domestic and foreign, which require a healthy economic environment and aggressive trade policies.

It

A proper high technology industrial policy is one that focuses on all of these prerequisites for innovation. should consist of specific legislative and regulatory initiatives that foster these conditions. In addition, it would mandate examining all existing or proposed legislation and regulations to make sure they would not have negative effects on the environment for innovation.

Today, this subcommittee is gathering information about three bills which directly affect two of these prerequisites:

S.738,

to make the R&D tax credit permanent, and strengthens and incentive for corporate risk-taking, and S.1194 and S.1195, which would increase the supply of trained technical personnel in this country.

I strongly support the objectives and approaches of these measures.

IMPROVING THE R&D TAX CREDIT

AND MAKING IT PERMANENT

The Economic Recovery Tax Act of 1981 contained a new

incentive for corporate risk-taking to advance technology and innovation. It provided for a 25 percent tax credit on increases in research and development expenditures.

This tax credit was an

excellent idea, and it appears already to have had a positive effect on R&D expenditures.

Although the R&D credit was only

partially phased in in 1981 and 1982, the McGraw-Hill annual research and development survey shows that despite the severe recession there was a significant increase in research and development expenditures during these years, making this the first post-war recession in which the pace of research spending increased.

Although the tax credit can't be called the sole cause of the R&D increase, I believe it played an important role.

Although the R&D tax credit can be an important incentive, the restrictions that were placed on it in the ERTA of 1981 have, in my opinion, prevented it from being as effective as it should

be.

It

Most importantly, the tax credit is only temporary. expires in 1986. However, since most R&D projects are long term in nature, a temporary R&D tax credit cannot provide the kind of incentive needed for long range projects.

By making the R&D tax credit permanent now, S.738 would enable companies planning their research and development programs today to assess the risk and returns from such activities knowing that the tax credit will be available throughout the life of the project. This should stimulate greater R&D for the long run. Happily, removing the sunset provision now will have no effect on tax revenues for the next two fiscal years, but it would have an immediate effect on R&D plans.

In addition to making the R&D tax credit permanent, there are some other improvements that should be made to make it more effective. For example, the R&D tax credit is applicable only to increases in the R&D expenditures of less than

100 percent per year.

Increases in R&D above that growth rate

are not eligible for the tax credit. Clearly, such a restriction does not affect most companies, particularly the largest companies. However, it's not unusual for a small company to increase its R&D spending at a rate much faster than 100 percent, at least

for the first few years of its existence.

These small companies

have generally been the innovators in our economy, yet it is these very companies that under the current law are not able to take full advantage of the tax credit incentive. I'm hopeful that at some time in the near future the entire R&D tax credit will be reviewed and improvements will be made to make it more effective.

PROVIDING AN ADEQUATE SUPPLY OF TRAINED TECHNICAL PERSONNEL

We must insure that there is an adequate supply of trained technical people. This is a critical problem that has only recently been recognized. The future demand for engineers and technicians is predicted to far outstrip the supply. For example, a 1983 American Electronics Association survey has forecast an annual shortfall of 16,000 electrical engineers and computer scientists through 1987.

The scarcity of trained technical people will put us at a severe competitive disadvantage in world markets. Japan, for example, is training on a per capita basis twice as many engineers per year as we are.

The problem is a financial one. The cost of educating technical people, particularly engineers, is very high, and it's difficult to attract enough qualified professors because industrial salaries are so attractive. Currently, there are more than 2,000 unfilled faculty positions in the engineering departments of colleges and universities in America.

I believe private industry has an important role to play in