E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Innovations during the 20th century have led to dramatic changes in howfirms compete in the American economy. In some cases, new technology hasgiven birth to new markets, where startup companies compete on equalterms on a fresh and level playing field. In others, it has opened a door forentrepreneurs to enter older industries and challenge the established incumbents.As these forms of competition have spread and flourished, consumershave benefited in numerous ways, from expanded service, greater variety, andfalling prices. These gains come not just from the new entrants but also fromthe old incumbent firms, forced to respond to the economic challengesposed by their rivals.Today, new technologies are transforming the economy. No one can yetpredict all the changes to come, but it seems clear that the informationeconomy is changing the way companies compete and the nature of work.In addition to changing the competitive playing field, technology isincreasingly redefining the role of the firm. Some firms are expanding to takeon new roles and integrate new activities into their enterprise, some arefinding it efficient to outsource some of their activities to specialists outsidethe firm, and some are restructuring through mergers and acquisitions. Twoindustries where these trends are strikingly evident are telecommunicationsand information technology; this chapter will look at both these industries,in which many firms, old as well as new, are exploring the economicopportunities made possible by innovations in computers, communicationstechnology, and the Internet.Although technological innovation brings constant and ultimatelybeneficial change to the economy, it also requires a constant reevaluation ofgovernment policies to determine how best to shape the forces of change topromote the public interest. As technology becomes increasingly vital to ourknowledge-based economy, a crucial task of government is to design anappropriate technology policy to maintain the flow of new ideas, products,and methods that sustains long-run growth.One element of technology policy is government’s role in creating but alsolimiting the property rights of innovators. Without the intellectual propertyrights provided by patents and copyrights, for example, the reward to innovationin many fields would fall, as imitators quickly develop similar products.Yet strong property rights for innovation can also create barriers to entryand competition, hampering not only the mere imitators but also the trueinnovators seeking to build on the existing knowledge base. This problembecomes particularly acute as knowledge-based industries, such as softwareand information technology, grow in economic importance.A second element of technology policy in today’s economy is supportingthe research and development (R&D) necessary to innovation. Although theprivate sector in recent years has increased its R&D expenditure, some of the98 | Economic Report of the President