Download IN ECONOMIC CASE FOR BASIC RESEARCH

IN ECONOMIC CASE FOR BASIC RESEARCH
Eugene Wong
from: Nature, 16.5.1996, Vol. 381
___________________________________________________________________
Contrary to the anecdotal evidence of the 1980s, basic research does confer a
preferential economic advantage on countries that fund it. That is why the United
States is likely to dominate vital markets well into the next century.
___________________________________________________________________
1. Everywhere in the industrial West there are pressures to reduce public funding for basic
research in favour of more applied work. In part, the pressures are due to a change in the
public perception of the benefits of basic research. But even those who understand the value
of basic research often question whether it confers any special economic advantage on the
country that funds it.
2. Whenever the issue is debated, Japan is cited as an example of a country that has
benefited from basic research without funding very much of it. Instead, Japan has
emphasized product development and high-quality manufacturing. In so doing, it had
captured, by the late 1980s, one after another of the science-based markets: television sets,
video recorders, liquid- crystal displays and dynamic random access memories (DRAM) -- all
technologies invented and commercialized by the United States. The loss of the DRAM
market was particularly disturbing. Because this part of the semiconductor market requires
the most sophisticated manufacturing technology, it was widely predicted that the loss of the
DRAM market would lead to the atrophy of the entire US semiconductor industry. The
perceived loss of competitiveness by precisely those countries that have done the most to
fund basic research has undermined its public support.
Japan’s example has been success- fully followed by other economies of the Asia
Pacific region. Singapore has attained the status of a developed country in one generation,
and its economy is growing three times faster than that of the United States. It has achieved
this without funding much -- if any -- basic research. Hong Kong, another tiger economy of the
region, is starting to build an infrastructure for research. After several years of rapid
development, its total research spending amounts to 0.03 per cent of gross domestic product
(GDP), less than a tenth of the percentage spent by the United States. In Asia it is often said
that “research is a luxury that only rich countries can afford”.
3.
4. The science and technology policy of the United States in the past 50 years was shaped
largely by the experience of the Second World War, in which science had a
decisive role. The tenets of the policy are set forth in the 1945 report by Vannevar Bush,
Science -- The Endless Frontier.
First, science must be called upon to serve some of the most critical of national needs.
Second, public funding for research
is a vital government function. Third, the benefits of science should be allowed
to diffuse through natural market mechanisms.
5. The policy formulated by Bush was implemented with remarkable success in the ensuing
years. Federal funding of research and development expanded vastly, and with it a research
establishment of extraordinary productivity and creativity. From health care to defence, the
unique role of science in serving national needs is unquestioned. The contribution of science
to the post-war economy of the United States, indeed the world, is particularly important. For
example, microelectronics, an entirely post-war industry that has depended on science for
every step of its development, now touches the daily lives of most people in the world.
6. With Japan and the Asia-Pacific region as apparent counter-examples, two specific
aspects of the Bush model have come under question: its emphasis on basic research and its
reliance on diffusion as the primary way of capturing the benefits of science. Some call for a
more proactive government policy that would give greater weight to applied work and make a
more deliberate effort to select areas of research for their commercial promise.
7. Although it is premature to assess fully the validity of these challenges to the Bush model,
there are recent indications that the evidence on which they are based is not what it seems.
8. Science deals with knowledge, whereas technology is the means by which knowledge is
applied. The distinction between these concepts is both significant and clear. But the
distinction between basic and applied research, or between applied research and
development, is less clear. Basic research is here defined as activities that lead to
fundamental understanding and discoveries, whether motivated by applications or by mere
curiosity.
9. The forces of a free market are an excellent allocator of investment funds. What then is the
justification for government investment in research and development (R&D) that will ultimately
lead to commercial products? Why not simply reduce taxes and let industry make the
investment in R&D? A persuasive answer lies in appropriability of returns.
10. Some activities in R&D produce large social returns: that is, returns that benefit society at
large but provide little or no preferential gains to those who make the investment. That being
the case, there is inadequate incentive for private companies to make such investments.
Basic research is a case in point. In the aggregate, basic research has provided enormous
economic returns, but these returns are social, not private. For example, the discovery of
quantum mechanics, among other things, was responsible for the eventual development of
the entire modern electronics industry. But even with the benefit of hindsight, quantum
mechanics, would not have been a good private investment.
11. Given its large returns and lack of appropriability, justification of the public role in funding
basic research is seldom questioned. What is questioned, however, is whether it confers a
preferential economic advantage on the country that funds it. If the benefit of research are not
appropriable for companies, why should they be appropriable for countries.
12. Japan is the model of an advanced industrial country that has specialized in acquiring
and using the results of basic research rather than doing it. Japan’s total investment in R&D
as a percentage of GDP (2.9 per cent as against 2.7 per cent in the United States) leads the
world. The private sector share of the investment is truly impressive ( 81 per cent of total
versus 53 per cent for the United States).
Indeed, with a substantially smaller GDP, the Japanese private sector investment in R&D
exceeds that of the United States in absolute terms. When one adjusts for the much larger
portion of R&D spending devoted to defence in the United States, the difference is even more
striking. But very little of Japan’s R&D, public or private is basic research.
13. Japan invests more not only in R&D, but also in total. The investment rate as a
percentage of GDP is nearly twice as high in Japan as in the United States and the gap is not
closing. Over the decade 1980-90, nonresidential capital investment in Japan rose from 15
per cent of gross national product a year to 19 per cent, while in the United States it declined
from 13 percent to 10 per cent. More input should yield more output. Indeed, the increase
should accelerate.
14. Input is made up of labor and capital. Because changes in the labor component are
small, Japan, with twice the capital investment rate, should have more than twice the rate of
economic growth. But that is not the case. The high rate of growth in Japan in earlier years
has slowed dramatically. Even after it recovers from its current recession, the sustainable rate
of growth in Japan is estimated to be no more than 3 per cent of GDP a year, whereas the
comparable estimate for the United States is 2.5 per cent. So despite its greater R&D
investment, Japan’s economy is considerably less, not more, efficient. If acquisition of
research results is a superior technology policy, economic data do not show it.
15. The comparison with Japan also applies to other countries of the Pacific Rim. Singapore,
for example, has three times the growth, but only by investing four or five times as much. In
looking for areas where the United States and Japan have large differences, one has to
consider their university and research infrastructures. Universities and basic research in the
United States have been major beneficiaries of its post-war science policy. By any reasonable
measure, they have reached heights never previously scaled. Their superiority over their
counterparts in Japan cannot be questioned. It is a reasonable hypothesis that this superiority
has contributed in important ways to the efficiency of the US economy.
16. The United States is not the only country to have benefited from a commitment to
research and higher education. Europe continues to reap the rewards for its support of basic
research and universities over the past century or more. It is no accident that two of the
industries most dependent on research, chemical and pharmaceutical, continue to flourish in
Europe. The smaller communities in Asia, such as Hong Kong and Singapore, should
consider the case of Switzerland. It has managed to retain a healthy share of manufacturing
in its economic mix, despite some of the highest wages in the world and without government
intervention. Its success is due in no small part to its outstanding universities and its
unwavering commitment to high-quality research.
17. Although the evidence on the role of the universities and importance of basic research is
not conclusive (economic evidence rarely is), there is no evidence at all to support the
alternative hypothesis that reducing public support for universities or de-emphasizing basic
research would be a wise policy.
18. As the economist Paul Krugman observes, the real miracle of Asia is the ability of the
countries in the region to produce sufficient savings to finance capital investments at 20, 30,
even 40 per cent or more of GDP while improving their standards of living. In savings and
investment at least, these are no paper tigers.
19. Meanwhile, the industrial nations of the West are straining to invest even 10 per cent of
GDP. The culprit in almost every case is medical costs, which in the United States now
represent nearly 15 per cent of GDP, and are rising. By contrast, the total funding for basic
research, both public and private, is less than half a per cent of GDP (one year’s increase in
medical costs) and threatened with reduction. Health care is almost pure consumption with a
powerful political base. Basic research is almost pure investment with a constituency largely
of the unborn. Who speaks for them?
20. The anecdotal evidence of the 1980s need updating. The US semiconductor industry did
not waste away, and while policy pundits were mourning the loss of the consumer electronics
market, US researchers were creating revolutionary markets as diverse as biotechnology,
multi-media, computer software and digital communications. None of these would have
existed without federally supported research, and none would have existed without the direct
participation of some of those who did the research. (Herein lies the secret of appropriability.)
As a result, US industry is now in a position to dominate these vital areas of the economy well
into the next century. In this regard, Wall Street is a better forecaster than Main Street and
Pennsylvania Avenue.
21. One major barrier to entry into new markets is the requirement to see the future with
clarity. It has been said that to foretell the future, one has to invent it. To be able to invent the
future is the dividend that basic research pays.
TEXT B
QUESTIONS - AN ECONOMIC CASE FOR BASIC RESEARCH
1.
The MAIN purpose of the writer of this text is
a. to show the benefits of re-investment of economic returns in
humanitarian causes
b. to compare the economic benefits of basic research done in
different
countries
c. to point out that the economic returns of research have recently
been
on the decline
d. to claim that investment in basic research is bound to bring
substantial economic returns
2.
12
pts
a. Japan and the Asia-Pacific region are given as “counter-examples”
to which policy?
________________________________________________________
b. Which economic situation in Japan has led the writer to call it “a
counter- example”?
14
pts
_______________________________________________________
3.
Answer this question according to the information given in paragraphs
8,9,
and 10.
What is the main point of the questions being asked in paragraph 8?
a. to ask whether investment in research should be made by the
public
sector or the private sector
b. to ask why investment in R & D has been profitable in the United
States so far
c. to investigate which social benefits will result from private
investment
in R & D
d. to question whether all areas of research should be given the same
government incentives
12
pts
SUBTOTAL
4. a. According to the text, why should investments with large social
returns be made by countries, rather than companies?
________________________________________________________
b.
We can understand from paragraph 9 that the development of the
modern electronics industry brought about returns which were
___________________ but _______________________
14
pts
5. According to the ideas in this text, what would be the writer’s advice to
economic policy makers in Japan? (Answer in no more than one
sentence.)
___________________________________________________________
12
___________________________________________________________ pts
6. According to the text, what are the 2 hypotheses related to funding for
basic research at universities? (Complete the sentences.)
Hypothesis 1: Investment in basic research at universities
________________________________________________________
Hypotheses 2: Investment in basic research at universities
________________________________________________________
12
pts
7. According to the text, in what areas of basic research is the U.S. currently
“inventing” the future? (Give 2 examples)
__________________________
_________________________
12
pts
SUBTOTAL
8.
Concerning the Bush policy, the writer would probably agree
that
a. 50 years after its establishment, it no longer answers U.S.
needs.
b. the U.S. would gain by continuing to act according to its
basic
doctrine.
c. it was a useful policy for the U.S., but not for the rest of the
world
d. some new evidence has challenged people’s belief in its
past success
12
pts
TOTAL
Last Update:April 20, 2004