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Mr. Chairman and Members of the Committee:
My name is Dr. Peter F. McCrea and I am Vice President and Director of
Research for the Foxboro Company, which is headquartered in Foxboro,
In 1982, my company had a total sales volume of $603 million.
Of this amount, approximately 50% represented products sold outside the United
I am appearing before you today on behalf of the Scientific Apparatus
Makers Association (SAMA). SAMA is a national trade association representing
this country's manufacturers and distributors of a wide range of scientific,
industrial and medical instruments and equipment. The 180 companies who are
SAMA members, many of small or moderate size, constitute the bulk of
American industry producing research, laboratory, analytical, electronic test and
measurement, and process measurement and control instruments, as well as
clinical laboratory apparatus and equipment.
In 1981, the industries represented by SAMA produced and shipped products
valued at over $12 billion. Exports accounted for about one-third of total sales,
although for some SAMA companies, exports may amount to 50 per cent or more
of total sales. Since over a third of our industries' total sales are related to
exports of U.S. products, it is obvious that a substantial number of the jobs of
more than one-quarter of a million U.S. workers employed by our industries are
directly dependent upon international trade, and the competitiveness of the
United States in world markets. It should also come as no surprise that those businesses which have expended funds on R&D in the past have been successful
in the international marketplace today.
Mr. Chairman, SAMA represents an industry which is fully dedicated to
research and development (R&D). The products of its members are the result
of a continuing commitment of substantial resources to R&D.
To illustrate more closely the relationship of R&D to members' over all
business operations, SAMA conducted a survey of its membership in 1979. The
results of the survey are striking but not surprising. As had been expected,
SAMA's high-technology member companies consider research and development
to be the life-blood of their business.
While for manufacturing industries in general, capital expenditures con
stitute the major company investments, this is not necessarily the case for high
technology companies. According to the survey, SAMA members on the average,
spend one-and-one-half times as much on R&D as they do on new plants and
equipment. Some companies' expenditures are seven and eight times greater.
In terms of after-tax profits, SAMA members spend an average of about
87 per cent on R&D.
Of the total amount devoted to research and development by those
- an average in excess of $5.7 million per company annually
per cent is devoted to applied product development and 14 percent to research.
The survey results are clear: SAMA companies are clearly R&D oriented
and R&D dependent.
I am pleased to have the opportunity to appear before you today to
comment upon the effect that the R&D credit of Section 44F of the Internal
Revenue Code has had upon our industry and my company, and to convey to vou
SAMA's support for S. 738, a bill introduced by Senator Danforth which would
eliminate the sunset of the R&D tax credit.
NEED FOR A PERMANENT R&D TAX CREDIT
Shortly after the R&D credit was enacted into law as part of the Economic
Recovery Tax Act of 1981 (ERTA), SAMA conducted a survey of its membership
to find out if the R&D credit would achieve its stated objective to increase R&D
expenditures. Results of this survey showed that ERTA would cause 86 per cent of responding SAMA companies to increase their R&D activites, with over one
half of the companies expecting an increase in 1982 beyond what they had
originally planned to spend for R&D. We are now following up on this survey, ,
in cooperation with the other associations represented here today, to confirm the
findings of this early survey.
A recent McGraw-Hill report, "Annual Summary of R&D Expenditures for
1982," supports SAMA's own findings. It shows that high-tech electronics firms
increased R&D expenditures in 1982 between 16.1 and 23.2 per cent over 1981.
The survey report also indicates that these same companies intend to increase their R&D expenditures in 1985 between 29.6 and 46.3 per cent over those for
These survey results were certainly borne out in the case of the Foxboro
Company. Our 1982 R&D expenditures were approximately $43.7 million (7.3%
of sales), which was about 15% more than would have been spent without the
We plan to spend more in 1983 also. In these difficult economic
times, with incoming order rates down, shipments down, and profits down, there
is very strong pressure to cut costs of all types, including R&D expenditures,
never mind increasing them.
Thus, certainly in the case of the Foxboro
Company, the existence of the R&D credit is having the desired effect.
The importance of this increased R&D activity should not be minimized.
My company's short term financial results were clearly affected.
announced first quarter profits were only 4 cents per share, compared with 80
cents a year ago. Not all of the decline was due to increased R&D expenditures
of course, but the results could have been improved if R&D spending levels were
In my view, it is necessary to maintain, and even increase the levels of
R&D spending in my company and in our country if we are to continue to meet
foreign competition. New products and new developments do not materialize
over night. Competitive high technology products are a result of an evolutionary
process which requires the efforts of significant numbers of talented technical
people. The effort required appears to me to have increased geometrically rather than on a straight line. Thus, my firm (and our industry) is faced with an ever increasing need for still greater resources to devote to R&D. The R&D
credit is helping to meet that need, and we strongly support legislative efforts,
such as S. 738, which will make the credit available to us on a permanent basis.
Until World War II, the university was a significant source of the new
scientific knowledge and innovative ideas for industry. This is no longer true.
In the last thirty years, the Feder al government's funding of research at
universities has mushroomed bringing government direction and control of work
performed by university scientists.
Academic researchers are increasingly
oriented toward the needs of government. Political considerations are important
in "selling" projects to government policy makers, and interest in economic
applications has declined.
Academic R&D focuses on basic work. Nearly 70 percent of all university
research is basic research. Federal, state and local government funds account
for 75 percent of the funding while institutional funds and non-profit institutions
supply an additional 21 percent.
Private industry is responsible for only 4
per cent of the support for basic research.
In fact, one of the most significant changes in the entire process of
industrial innovation has been the gradual shift of university research efforts
away from industrial needs. The conventional wisdom, over the period of time,