A very

technologically will find that its products have been rendered obsolete by foreign competitors. Its markets will disappear. significant portion of the sales of many CBEMA members, as well as many other companies in the high technology electronics industry, lies in products that were not even in existence just a few years ago.

A firm's ability to develop and apply "breakthrough" products and technologies is critical to obtaining a competitive advantage. For example, a year's advantage in introducing a new product often can provide the company with as much as a 20-25 percent cost advantage over competing companies. Conversely, a year's lag in introducing a product places a company at a significant disadvantage vis-a-vis its competitors. Accordingly, U.S. high technology electronics companies are locked in a continuous, intensive race with foreign competitors most of which are highly subsidized by their governments to bring

new or improved products and manufacturing processes to the marketplace as soon as possible.

Given this fast pace at which the high technology electronics industry is evolving, each company must devote very substantial efforts to R&D. CBEMA members and other high technology companies may, on the average, invest as much as 8 to 10 percent of their revenues annually in R&D over 3 to 4 times the percentage invested by U.S. industry in general. For example, Tektronix in fiscal year 1982 invested almost $110 million in R&D activities out of sales totaling $1.2 billion. This R&D spending represented an $18 million increase in R&D investments over fiscal 1981, in which year Tektronix invested more than $91

million on a base of sales of approximately $1 billion. These 1981

R&D expenditures in turn were almost $14 million more than we spent on R&D in fiscal 1980.

II. PERMANENT TAX CREDIT

CBEMA supports S.738 in that it makes permanent the incremental tax credit enacted by the Economic Recovery Tax Act (ERTA) of 1981. By encouraging increased R&D, the bill helps strengthen U.S.

competitiveness and economic leadership.

Under current law, the R&D tax credit is due to expire at the end of December 1985. Eliminating this 1985 "sunset" of the R&D credit is the paramount tax legislative priority of CBEMA members for this

Congress.

The R&D tax credit was adopted by Congress in 1981 primarily for two reasons. First, the credit was intended to serve as an incentive for increases in R&D spending, thereby functioning as an incentive complementary to that embodied in ACRS, which was intended to increase investment in plant and equipment. Second, the R&D credit was deemed to be a relatively efficient way of providing some tax cut in ERTA for high technology companies, who pay relatively high effective tax rates and receive little if any benefit from ACRS.

In enacting the R&D credit, Congress pointed to the close and basic

relationship between this country's R&D activities and U.S. "economic growth, productivity gains, and our competitiveness in world markets" and the consequent need to promote continuous growth in R&D expenditures. (House Rept. No. 97-201, 97th Cong., 1st Sess. (1981) 111; Sen. Rept. No. 97-144, 97th Cong., 1st Sess. (1981) 77). By comparison, for example, our foreign competitors, led by Japan and West Germany, have devoted more resources, as a percentage of gross national product (GNP), to R&D over the past 20 years than has the United States, with West Germany now spending 2.15 percent of its GNP on civilian R&D in 1980, and Japan spending nearly 2 percent of GNP, as compared with only 1.66 percent of GNP spent by the United States on R&D activities. Japan and West Germany correspondingly have experienced much higher rates of growth in productivity

466 percent

by Japan, for example, as compared with 69 percent by the United States. As to the United States, it is well established that, prior to the enactment of the R&D credit, the decline in U.S. productivity growth over the last decade paralleled the declining pattern of U.S. R&D spending.

These considerations which led Congress to enact the R&D credit in 1981 continue to exist today. Indeed, with the rising cost of ever-more sophisticated high technology R&D projects and the intensified competition from foreign manufacturers, these considerations are of even greater importance in 1983 and will continue to grow in importance over the decade ahead. The process of R&D is fraught with risk and necessarily has a long-range focus. both the Senate Finance Committee and House Ways and Means Committee

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noted during adoption of the R&D credit, "the relationships between the investment in research and the subsequent earnings often are less directly identifiable and many businessmen are reluctant to allocate scarce investment funds for uncertain rewards." (House Rept. No. 97-201, at 111; Sen. Rept. 97-144, supra, at 77). Having enacted the R&D credit and thereby encouraged companies to incur R&D risks which they might otherwise have been unwilling to incur, Congress should not reverse this R&D incentive by allowing the credit to lapse.

Moreover, many major R&D projects have a cycle of 5 years or more with the greatest dollar amounts of cost coming toward the end of the cycle. Thus, for those R&D projects which would be undertaken now in response to the R&D credit, a substantial portion of the R&D costs will be incurred in years after 1985, the point at which the R&D credit currently is scheduled to lapse. Before undertaking a project and at each of the numerous "checkpoints" in the cycle of a project, a determination will be made whether to undertake or continue the

research effort. If the tax incentive embodied in the R&D credit disappears, the company's assessment of the financial risk of undertaking or continuing the research project likely will become more adverse and might well lead to termination of the project.

I predict that if the R&D tax credit is made permanent, strategic planners in corporations, who are required to look into the future, will take a harder look at speculative R&D work. The permanence of the tax credit will tip the scales in favor of going ahead, sometimes on sizable projects, and thereby seizing opportunities that otherwise

would be foregone. When a company such as my own is determining where to invest its resources, there always arises the question of balancing the short-term and the long-term. The short-term always seems to have a greater sense of urgency associated with it and therefore, there is a bias towards cutting into the long-term programs in favor of the short-term programs. The R&D tax incentive addresses this issue directly. It can, and does, encourage investment in the longer-term areas of a R&D strategy.

For example, at Tektronix, we have developed a leadership position in gallium arsenide technology, a technology that enables us to make very high-performance semiconductor chips. The position we currently enjoy in this technology is a direct result of Tektronix investing significant resources over the last few years in what was initially a very speculative program. Research and development tax incentives go a long way towards encouraging such activities.

In a similar example, Tektronix has recently announced a completely new way of making high-resolution color displays for such things as computer terminals and high-definition television. This is an area where the U.S. has had strong foreign competition. With this new technology, we expect to generate significant markets and job opportunities. Once again, this technology announcement comes at the end of a number of years of heavy R&D investment.

At this juncture, insufficient experience exists upon which to judge the full effectiveness of the R&D credit. The credit will only be