Assessing the Changing U.S. IT R&D Ecosystem

The U.S. National Academy of Sciences was established by President Abraham Lincoln in 1863 to provide unbiased assessment of scientific and technology policy issues facing the U.S. government (http://www.nas.edu). In 2006, the Academy’s Computer Science and Telecommunication Board, under the sponsorship of the U.S. National Science Foundation, established a committee of experts in the fields of IT research (Randy Katz, Ed Lazowska, Raj Reddy), venture investment (Eric Benhamou, David Nagel, Arati Prabhakar), economics of innovation and globalization (Andrew Hargadon, Martin Kenney, Steven Klepper), and labor and workforce issues (Stephen Barley, Lucy Sanders) to assess the effects of changes in the U.S. IT R&D ecosystem (http://sites.nationalacademies.org/CSTB/index.htm). The committee took as its charter to examine the period from 1995 to the present, a time of rapid expansion and contraction of the field in response to the Internet boom, a precipitous stock-market collapse, increased competition through globalization of the industry, and an economy-disrupting terrorist attack and subsequent aftershocks to the economy, the full implications of which have yet to be understood.

While the committee’s study focused on global developments and their implications, particularly for the U.S., the report, which was issued in February 2009, is of interest to researchers and policymakers in all of the world’s IT-intensive economies, as the globalization of the industry accelerates with the rise of India and China as major centers.

Here, we summarize the report’s observations, findings, and recommendations (http://www.nap.edu/catalog.php?record_id=12174), covering several main themes:

• IT’s central role in the developed world;
• The committee’s assessments of the IT R&D ecosystem, with inevitable U.S.-centric view, calling for increased and balanced investment in IT research by the U.S. government, with supporting investment in education and outreach to develop a high-skills/information-technology-aware work force, a commitment to reduce the “friction” the IT industry faces in the U.S. economy (such as in its highly litigious intellectual property system and regulatory regimes whose compliance unduly burdens small companies significantly more than larger ones) and expanded commitment to develop a leading-edge U.S. IT infrastructure; and
• The American Recovery and Reinvestment Act of 2009 and the actions taken by the Obama administration directly relevant to the recommendations of the committee.

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IT Impact

Advances in IT and its applications represent a signal success for U.S. scientific, engineering, business, and government over the past 50 years. IT has transformed, and continues to transform, all aspects of people’s lives in the developed world, with increasing effects on the developing world, including in commerce, education, employment, health care, manufacturing, government, national security, communications, entertainment, science, and engineering. IT also drives the overall economy, both directly (the IT sector itself) and indirectly (other sectors powered by advances in IT).

To appreciate the magnitude and breadth of these effects, imagine spending a day in the developed world without IT. It would be a day without the Internet and all it enables: no diagnostic medical imaging; automobiles without electronic ignition, antilock brakes, and electronic stability control; no digital media (wireless telephones, high-definition televisions, MP3 audio, DVD video, computer animation, and videogames); aircraft unable to fly and travelers unable to navigate with benefit of the global positioning system; weather forecasters with no models; banks and merchants unable to transfer funds electronically; factory automation unable to function; and the U.S. military without technological supremacy. It would be, for most people, a “day the Earth stood still.”

IT and its effect on the economy continue to grow in size and importance. According to estimates of the U.S. government’s Bureau of Economic Analysis (http://www.bea.gov/), for 2006 the IT-intensive “information-communications technology producing” industries accounted for about 4% of the U.S. economy but contributed over 14% of real gross domestic product (GDP) growth. As a point of reference, U.S. federal funding in fiscal year 2008 for computer science research was around $3 billion, less than 0.025% of GDP. This substantial contribution to the economy reflects only a portion of the overall long-term benefits from IT research investment. It is in all governments’ interest for these benefits to continue to grow and accrue.

Figure 1 is the “tire-tracks” diagram used to describe a large number of IT-industry sectors that have grown into billion-dollar industries through a combination of university and industrial research. Creation of these sectors has been achieved, not just from the government investment in foundational research, but from a vibrant venture community able and willing to provide the risk capital to fund the commercialization of new ideas from which such industrial sectors are able to grow.

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Assessing the Ecosystem

The U.S. IT R&D ecosystem was the envy of the world in 1995; Figure 2 outlines its essential elements: university and industrial research enterprises; emerging start-up companies and more mature technology companies; the industry that finances innovative firms; and the regulatory environment and legal frameworks. From the perspective of IT, the U.S. enjoyed a strong industrial base, the ability to create and leverage new technological advances, and an extraordinary system for creating world-class technology companies.

The period from 1995 to the present has been a turbulent one for the U.S. and the world, as characterized by:

• Irrational exuberance for IT stocks and the NASDAQ bust (2000);
• Y2K and the development of the Indian software industry;
• Aftereffects of the terror attacks of September 11, 2001;
• Financial scandals and bankruptcies (2001);
• Surviving after the bubble burst (2001–2004);
• Recovery (2005–2007); and
• Global economic financial crisis (2008).

These shocks took their toll, and in the view of the committee, government actions are necessary to sustain the U.S. IT R&D ecosystem. The U.S. government should:

• Strengthen the effectiveness of government-funded IT research;
• Remain the strongest generator of and magnet for technical talent;
• Reduce the friction that harms the effectiveness of the U.S. IT R&D ecosystem while maintaining other important political and economic objectives; and
• Ensure that the U.S. has an infrastructure for communications, computing, applications, and services that enables U.S. IT users and innovators to lead the world.

Potential high-value societal benefits of continued investment in IT include:

• Safer, robotics-enhanced automobiles;
• A more scalable, manageable, secure, robust Internet;
• Personalized and collaborative educational tools for tutoring and just-in-time learning;
• Personalized health monitoring;
• Augmented cognition to help people cope with information overload; and
• IT-driven advances in all fields of science and engineering.

Much has been learned from decades of experience about what constitutes an environment that fosters successful research and its transition to commercial formation. The following insights are extracted from a 2003 Academy report from the National Research Council called Innovation in Information Technology (The National Academies Press, Washington, D.C., 2003 http://www.nap.edu/openbook.php?isbn=0309089808):

On the results of research:

• U.S. international leadership in IT (vital to the country) springs from a deep tradition of research;
• The unanticipated results of research are often as important as the anticipated results; and
• The interaction of research ideas multiplies their effect; for example, concurrent research programs targeting integrated circuit design, computer graphics, networking, and workstation-based computing strongly reinforce and amplify one another.

On research as a partnership:

• The success of the IT research enterprise reflects a complex partnership among government, industry, and universities;
• The federal government has had and will continue to have an essential role in sponsoring fundamental research in IT (largely university-based) because it does what industry cannot do. Industrial and governmental investment in research reflects different motivations, resulting in differences in style, focus, and time horizon;
• Companies have little incentive to invest significant amounts in activities whose benefits spread quickly to their rivals. Fundamental research often falls into this category. By contrast, the vast majority of corporate R&D addresses product-and-process development; and
• Government funding for research has leveraged the effective decision making of visionary program managers and program-office directors from the research community, empowering them to take risks in designing programs and selecting grantees. Government sponsorship of research, especially in universities, also helps develop the IT talent used by industry, universities, and other parts of the economy.

On the economic payoff of research:

• Past returns on federal investment in IT research have been extraordinary for both U.S. society and the U.S. economy. The transformative effects of IT grow as innovations build on one another and as user know-how compounds. Priming that pump for tomorrow is today’s challenge; and
• When companies create products using the ideas and work force that result from federally sponsored research, they repay the nation in jobs, tax revenue, productivity increases, and world leadership.

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Inevitable Globalization of IT

Another significant trend, analyzed in detail in the report, is how the IT industry has become more globalized, especially with the dramatic rise of the economies of India and China, fueled in no small part by their development of vibrant IT industries. Moreover, India and China represent fast-growing markets for IT products, with both likely to grow their IT industries into economic powerhouses for the world, reflecting both deliberate government policies and the existence of strong, vibrant private-sector firms, both domestic and foreign. Ireland, Israel, Japan, Korea, and Taiwan, as well as some Scandinavian countries, have also developed strong niches within the increasingly globalized industry. Today, a product conceptualized and marketed in the U.S. might be designed to specifications in Taiwan, and batteries or hard drives obtained from Japan might become parts in a product assembled in China. High-value software and integrated circuits at the heart of a product might be designed and developed in the U.S., fabricated in Taiwan, and incorporated into a product assembled from components supplied from around the world.

Unfortunately, during a period of rapid globalization, U.S. national policies have not sufficiently buttressed the ecosystem or generated side effects that have reduced its effectiveness. This is particularly true of such areas as IT education, U.S. government IT research funding, and the regulations that affect the corporate overhead and competitiveness of innovative IT companies. As a result, the U.S. position in IT leadership today has eroded compared to that of prior decades, and IT leadership may pass to other nations within a generation unless the U.S. recommits itself to providing the resources needed to fuel U.S. IT innovation, removing important roadblocks that reduce the ecosystem’s effectiveness in generating innovation and the fruits of innovation, and becoming a lead innovator and user of IT.

In 2009, the ecosystem also faced new challenges from a global economic crisis that continues to unfold. There has been a marked reduction in the availability of venture capital following losses in pension funds and endowments, as well as in initial public offerings by technology companies and a decline in mergers and acquisitions. There is also a steep decline in consumer confidence, suggesting that a consumer-driven recovery is unlikely in the near term. Significant layoffs and hiring cutbacks in IT firms and across the global economy seem all but certain to adversely affect the IT R&D ecosystem, undermining the partial recovery seen over the past few years. The magnitude, duration, and enduring effects on the ecosystem of the downturn are not yet clear.

Globalization is a broad and sweeping phenomenon that cannot be contained. If embraced rather than resisted, the committee concluded that it presents more opportunity than threat to the U.S. national IT R&D ecosystem. To thrive in this landscape, the U.S. should play to its strengths, notably its continued leadership in conceptualizing idea-intensive new concepts, products, and services the rest of the world desires and where the greatest increments of value-added are captured.

Toward this end, it is necessary for the U.S. to have the best-funded and most-creative research institutions; develop and attract the best technical and entrepreneurial talent among its own people, as well as those from around the world; make its economy the world’s most attractive for forming new ventures and nurturing small, innovative firms; and create an environment that ensures deployment of the most advanced technology infrastructures, applications, and services in the U.S. itself for the benefit of the nation’s people, institutions, and firms.

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Findings and Recommendations

Here, we describe the report’s findings and recommendations in the context of the four objectives for government action described earlier:

Objective 1. Strengthen the effectiveness of federally funded IT research. University research is focused largely on basic research, while industrial research concentrates on applied R&D, meaning that much of the feedstock for long-term innovation is to be found in the nation’s universities. As a result, support for university education and research is essential to generating the stream of innovations that nourish the rest of the ecosystem. Measures to enhance the productivity of university research funding, as well as that of other R&D funding, would increase the payoff from these investments.

Although the advances in IT over the past 50 years have been breathtaking, the field remains in its relative infancy, and continuing advances over the coming decades can be expected but only as long as the IT R&D ecosystem’s capacity to sustain innovation is preserved and enhanced.

Current decisions about how the U.S. should make investments—both civilian and military—in basic IT research do not seem to reflect the full effect of IT on society and the economy. The government’s own data indicates the U.S. lags behind Europe and Japan in civilian funding for IT R&D. Meanwhile, the European Union and China have aggressive plans for strengthening their global positions in IT through substantial and increasing IT R&D investment.

Regaining a leading position requires aggressive action, including ambitious targets for increased R&D investment. It is appropriate and necessary for the U.S. to correspondingly adjust its own IT R&D spending level, just as individual businesses, following best practices, track their global competitors’ business models to avoid falling behind in global market share. Increased federal investment in IT research would reflect the importance of IT to the nation’s society and economy as a whole and would allow the U.S. to build and sustain the already large positive effect of IT on its economy. The desirability of increased federal investment in IT R&D was also recognized in a 2007 report by the National Academies, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future (http://www.nap.edu/catalog.php?record_id=11463), and, to some extent, by provisions in the subsequently passed the America Competes Act of 2007 (http://thomas.loc.gov/cgi-bin/bdquery/z?d110:SN00761:@@@D&summ2=m&). Moreover, in its August 2007 report, the President’s Council of Advisors on Science and Technology (PCAST, http://www.ostp.gov/pdf/nitrd_review.pdf) found an imbalance in the current federal R&D portfolio in that more long-term, large-scale, multidisciplinary R&D is needed. PCAST concluded that current interagency coordination processes for networking and IT R&D are inadequate for meeting anticipated national needs and for maintaining U.S. leadership in an era of global competitiveness.

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Imagine spending a day in the developed world without IT.

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A strategic reassessment of U.S. R&D priorities is needed, an analysis meriting the attention of first-tier scientists and engineers from academia, industry, and government. A strong focus on IT is important due to the special role of IT within science and engineering.

Toward this end, a means of delivering to the highest levels of the U.S. government the best possible advice on the transformational power of IT would help ensure that the nation invests at appropriate levels in IT research and this investment is made as efficiently and as effectively as possible, in part through improved coordination of federal R&D investments. This advice could be provided in a number of ways, including augmentation of the current presidential science-and-technology advisory structure, establishment of a high-level IT adviser to the President of the U.S., or reestablishment of an IT-specific presidential advisory committee (such as the President’s Information Technology Advisory Committee, which operated 1997–2005).

Finding. A robust program of U.S. government-sponsored R&D in IT is vital to the nation.

Finding. The level of U.S. government investment in fundamental research in IT continues to be inadequate.

Recommendation. As the U.S. government increases its investment in long-term basic research in the physical sciences, engineering, mathematics, and information sciences, it should carefully assess the level of investment in IT R&D, mindful of economic return, societal effect, enablement of discovery across science and engineering, and other benefits of additional effort in IT and should ensure that appropriate advisory mechanisms are in place to guide investment within the IT R&D portfolio.

Objective 2. Remain the strongest generator of and magnet for technical talent. There is cause for concern that an undersized, insufficiently prepared work force for the IT industry will accelerate migration of higher-value activities out of the U.S. While the committee did not address the entire array of technology-sector wage-and-job-security issues, it is clear that without a work force that is knowledgeable with respect to technology and that has sufficient numbers of highly trained workers, the U.S. will find it difficult to retain the most innovation-driven parts of its own IT industry. Despite demand for such workers, the number of students specifying their intention to major in computing and information sciences has dropped significantly since 2003. The problem of declining enrollment in the computing disciplines (compared to projected demand) is compounded by the very low participation of underrepresented groups in IT.

The U.S. should rebuild its national IT educational pipeline, encouraging all qualified students, regardless of race, gender, or ethnicity, to enter the discipline. Without sustained, amplified intervention, the U.S. is unlikely to have an educational pipeline capable of yielding a revived and diverse IT work force over the next 10 years. To achieve the needed revitalization, the U.S. should pursue a multipronged approach: improve technology education at all levels from kindergarten through grade 12; broaden participation in IT careers by women, people with disabilities, and all minorities, particularly African-Americans, Hispanics, and Native Americans; and retain foreign students who have received advanced degrees in IT. Immigrants have been especially significant in high-technology entrepreneurship; for at least 25% of the U.S. engineering and technology companies started between 1995 and 2005, mostly in software, innovation, and manufacturing-related services, at least one key founder was born outside the U.S.

Finding. Rebuilding the computing-education pipeline at all levels requires overcoming numerous obstacles, in turn portending significant challenges for the development of future U.S. IT work-force talent.

Finding. Participation in IT of women, people with disabilities, and all minorities is especially low and declining. This low level of participation will affect the ability of the U.S. to meet its work-force needs and place it at a competitive disadvantage by not allowing it to capitalize on the innovative thinking of half its population.

Recommendation. To build such a skilled work force it needs to retain high-value IT industries, the U.S. should invest more in education and outreach initiatives to nurture and increase its IT talent pool.

Finding. Although some IT professional jobs will be offshored, at the time the committee completed its report in 2008, it found there were more IT jobs in the U.S. than at any time during the dotcom boom, even in the face of corporate offshoring trends. While this may no longer be true in the wake of the global recession, anecdotal evidence indicates strong demand for new graduates in computer science programs nationally.

Recommendation. The U.S. should increase the availability and facilitate the issuance of work and residency visas to foreign students who graduate with advanced IT degrees from U.S. educational institutions.

Objective 3. Reduce friction that harms the effectiveness of the U.S. IT R&D ecosystem. Such factors as intellectual property litigation and corporate governance regulations have become sources of increased friction in the conduct of business in the U.S. and can have the effect of making other countries more attractive places to establish the small, innovative companies that are essential components of the ecosystem. These issues are not simple; for example, in terms of corporate governance, the dampening effects of increased regulation must be weighed against the benefits of restoring and maintaining public confidence in equity markets. But to keep the U.S. attractive for new venture formation and to sustain the nation’s unrivaled ability to transform innovative new concepts into category-defining products and services the world desires, the potential effects on the IT R&D ecosystem should be weighed in considering new measures or reforms in such areas as corporate governance and intellectual property litigation.

Finding. Fewer young, innovative IT companies are gaining access to U.S. public equity markets.

Recommendation. Congress and federal agencies (such as the Securities and Exchange Commission http://www.sec.gov/ and the Patent and Trademark Office http://www.uspto.gov/) should consider the effect of both current and proposed policies and regulations on the IT ecosystem, especially on young, innovative IT businesses, and consider measures to mitigate them where appropriate.

Objective 4. Ensure that the U.S. has the infrastructure that enables U.S. IT users and innovators to lead the world. The U.S. has long enjoyed the position of being the largest market for IT; global demographics and relative growth rates suggest this advantage is unlikely to endure. Fortunately, although a healthy domestic IT market is an important element of a healthy domestic ecosystem, market size is not the only factor in leadership. The environment fostered by leading-edge users of technology (including those who can leverage research, innovate, and create additional value) creates the context for IT’s next wave and its effective application. In such an environment, all sectors of society (including consumers, businesses, and governments) exploit and make the best use of advanced IT. But there are indications that the U.S. has indeed lost its leadership in the use of IT.

In particular, the U.S. broadband infrastructure is not as advanced or as widely deployed as that in many other countries. Should this situation persist, the U.S. will no longer be the nation in which the most innovative, most advanced technology and highest value-added products and services are conceptualized and developed.

Moreover, in addition to broadly fostering research and commercial innovation, government-sponsored R&D can help meet particular government demands. Though the government is no longer a lead IT user across the board, it continues to play an appropriate leadership role where federal-agency requirements are particular to their missions and commercial analogs are scarce or nonexistent.

Finding. The most dynamic IT sector is likely to be in the country with the most demanding IT customers and consumers.

Finding. In terms of nationwide availability, use, and speed of broadband, the U.S. (a former leader in the technology) has been losing ground compared with other nations.

Recommendation. The U.S. should establish an ambitious target for regaining and holding a decisive lead in the broad deployment of affordable gigabit-broadband services. Federal and state regulators should explore models and approaches that reduce regulatory and jurisdictional bottlenecks and increase incentives for investment in these services.

Recommendation. Government (federal, state, local) should foster commercial innovation and itself make strategic investments in IT R&D and deployment so the U.S. retains a global lead position in areas where it has particular mission requirements.

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American Recovery and Reinvestment Act of 2009

The recent global financial crisis has had a major effect on the U.S. IT industry, which appeared to be recovering following the shocks of the early part of the decade; 2008 was the first year in almost two decades when there were no IT initial public offerings on U.S. stock exchanges. Even high-flying Internet companies like Google have sustained layoffs, though modest. The effect is not limited to the U.S.; the slowdown is evident throughout the globalized IT industry.

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The U.S. should play to its strengths, notably its continued leadership in conceptualizing idea-intensive new concepts, products, and services the rest of the world desires.

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The American Recovery and Reinvestment Act of 2009 (http://www.irs.gov/newsroom/article/0,id=204335,00.html) provides significant funding for infrastructure and research investment as part of the U.S. government’s recent economic stimulus package. The Act provides $2.5 billion for distance learning, telemedicine, and broadband infrastructure for rural communities. An additional $4.7 billion is available for broadband infrastructure projects, including for expanding public access to computers, such as through community colleges and public libraries. And an additional $4.5 billion is available to upgrade the electric grid for enhanced electricity delivery and energy reliability, and will likely make extensive use of IT in the process. The Department of Energy recently established the Advanced Research Projects Agency-Energy (http://arpa-e.energy.gov/), with initial funding of $400 million; initial science and technology research awards were announced in February 2009. Another $2 billion is available to coordinate deployment of advanced health IT. Finally, the National Science Foundation’s annual budget is being enhanced by $2.5 billion, essentially increasing its annual budget by 50%. This provides a much-needed increment in foundational research funding in IT. While this is intended as a one-time increase in funding, we are optimistic that the Obama administration’s and Congress’s commitment to science and technology will continue.

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Acknowledgments

We thank the entire membership and staff of the Committee on Assessing the Impacts of Changes in the Information Technology Research and Development Ecosystem for their contributions to this report.

Members: Eric Benhamou (Co-Chair), Randy H. Katz (Co-Chair), Stephen R. Barley, Andrew B. Hargadon, Martin Kenney, Steven Klepper, Edward D. Lazowska, Lenny Mendoca, David C. Nagel, Arati Prabhakar, Raj Reddy, and Lucinda Sanders.

Staff: Jon Eisenberg, Joan D. Winston, Kristen Batch, and Morgan R. Motto.

 Further Reading

Each of the following National Academies reports is available online and includes extensive bibliographies for further investigation of the issues discussed here.

Assessing the Impacts of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment. National Academies Press, Washington, D.C., 2009; http://www.nap.edu/catalog.php?record_id=12174

Computing the Future: A Broader Agenda for Computer Science and Engineering. National Academies Press, Washington, D.C., 1992; http://www.nap.edu/catalog.php?record_id=1982

Funding a Revolution: Government Support for Computing Research. National Academies Press, Washington, D.C., 1999; http://www.nap.edu/catalog.php?record_id=6323

Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. National Academies Press, Washington, D.C., 2008; http://www.nap.edu/catalog.php?record_id=11463

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