Economic Report of the President 1994 - The American Presidency ...

isky "pathbreaking" technologies that pay off in the creation ofnew industries (or the transformation of existing industries), andlower risk "infratechnologies" that can enhance the productive performanceof a broad spectrum of firms and industries but that receivelow levels of investment because of barriers to appropriabilityand implementation. For example, the development of refrigeratedsteamships at the end of the nineteenth century increased theavailability of perishable agricultural products throughout theworld. Most of this benefit ultimately accrued to farmers and consumersrather than to the inventors of refrigerated steamships.Similarly, the principle of interchangeable parts in manufacturing,originally developed for the production of firearms, soon was adoptedfor use in the fabrication of clocks, hardware, sewing machines,and other manufactured products.The appropriability problem is not limited to basic research, butfrequently extends to so-called precommercial technology developmentand eventual commercial applications. Indeed, technologicalprogress is full of feedbacks where developments downstream alterthe course of behavior upstream, as well as the degree of ultimatemarket success. A sharp distinction between basic research andprecommercial development activities is difficult to draw. Investmentsthat are necessary to the utilization and adoption of researchresults—investments in information gathering, work forcetraining, or the integration of new production equipment into automatedsystems—can also create spillover benefits that the investingfirm cannot perfectly appropriate. In addition, new manufacturingprocesses that lower cost or improve quality may not be patentable,and new ideas embodied in computer software can often beimitated rapidly without violating the originators intellectual propertyrights. In all of these cases, public actions can offset the effectsof underinvestment by the private sector that is caused by limitationson appropriability.Avoiding "Government Failure"The goal of technology policy is not to substitute the government'sjudgment for that of private industry in deciding which potential"winners" to back. Rather, the point is to correct a genuineand significant market failure—underinvestment in basic researchand in precommercial R&D resulting from the divergence betweenprivate and social returns to those activities. A complementary goalis to design the technology investments that the government itselfmakes in public goods—national security, public health, education,a clean environment, an efficient transportation system—in waysthat maximize the potential external benefits for the Nation's commercialtechnology base. In both cases, technology policy enhancesthe Nation's economic and social welfare.191