Science, Technology, and Economic Growth - An Overview

Mariko Silver
Office of University Initiatives
Arizona State University

January 2003

Introduction

Technology accounts for over 50 percent of long-term growth in the United States. It is the single most important determinant of long-term economic growth. Science provides the basis for technological advance. Together, science and technology drive productivity growth and the emergence of new industries. Public science and the institutions that engage in publicly funded research provide the foundation and seedbed for innovation. Thus, these institutions directly and indirectly serve as engines for economic growth.

The primary investment in scientific research in the United States occurs at the federal level. However, state and local policies are critical for determining where that research will be undertaken and, therefore, where the opportunities will exist for private companies to invest in technology and where new industries, firms and jobs will be created.

Science And Technology As Drivers For Economic Growth

Economic studies have clearly shown that technology is the single most important determinant of long-term economic growth.

Economic growth as a key determinant of the success of cities, regions and nations:

“Compounded over generations, a 1 or 2 percent reduction in the overall [economic] growth rate could be the difference between the standard of living merely doubling or surging five-fold over a hundred-year period. For countries with similar standards of living today, small differences in the rate of growth could lead to very different economic outcomes in the future. For example, Argentina and the United States had roughly similar levels of economic performance during the 1860s, but the United States managed to launch itself on a high-growth path while Argentina became mired in low growth which reinforced itself over time.”

Economic growth is driven by long-run investment in three basic categories of economic assets: human capital (labor), physical capital (plant and equipment), intellectual capital (technology). Technology is in a particularly strategic position among economic assets, as improvements in the productive capacity of capital and labor skills are often driven by advances in technology. The distribution of our investment among these three asset categories determines the levels of long-term domestic productivity growth, competitive trade positions and economic growth.

Since Adam Smith, economists have recognized the importance of science and technology for increased productivity and long-term economic growth. Technological change can enable the economies of cities, regions and nations to surge forward with dramatically increased rates of productivity growth, and build long-term economic success, whereas without technological change the per capita growth rate of an economy will inexorably tend toward zero. Throughout the history of the United States and other industrialized nations, macroeconomic studies have shown that scientific and technological change accounts for at least half of long-term growth—many economists argue that, when we measure scientific and technical change properly, the figure is as high as 75 percent.

While no single economic asset, including technology, can by itself drive economic progress, investments in the research and development in science and technology (R&D) produce greater returns than almost any other use of capital.

The Public - Private Investment Interface

Econometric studies have shown that a strong correlation exists between public and private investment [in science]. Specifically, public investment leverages private investment and makes it more efficient, thereby increasing the economy's growth rates of productivity and output.

Technology based economic growth relies on our knowledge of the sciences and engineering. Our ability to produce the incredible advances of the 20th century, the transistor, the laser, the microchip, for example, is dependent on our understanding of the basic sciences of the material world, and much of this understanding is based on publicly funded scientific research.

Publicly funded science and technology research provides the foundation for private sector achievements that drive economic growth by building the scientific base for advances in industry and by generating commercial success in the form of spinoff companies and technologies.

United States President George W. Bush has committed to promoting public investment as a tool to leverage private investment in scientific research and technology development. Economists hold that it is not in the direct interest of individual companies to privately fund basic science because they cannot capture all of the returns on their investment. A lack of government support, therefore, reduces the availability of a major source of opportunity for private investment, reducing promising targets for capital and thus stifling economic growth.

The President has requested the largest federal R&D budget in history, $112 billion for FY03 alone. President Bush has also proposed broadening and making permanent the research and experimentation tax credit, noting the importance of encouraging innovation and affirming the importance of publicly funded science. Examples of the public-private investment interface include major public investment in the National Institutes of Health (NIH), which has seen its budget double in the last 5 years to nearly $27 Billion for FY02 alone, and through which the United States has both created a science and technology base in biotechnology and leveraged substantial private investment in product and process applications. In two decades, an industry has been created which is now beginning to turn out products with enormous potential benefits for the pharmaceutical, agricultural and chemical industries, as well as for quality healthcare, improvements in life expectancies, and in quality of life.

In the United States a great majority of the scientific innovations that drive industry progress are generated by universities, and stories of commercial success and economic growth born at the university-market interface abound. In biotechnology, for example, genetic engineering as a commercial venture began in 1976 when Robert Swanson, a venture capitalist, invested $200,000 in the formation of Genentech based on the scientific innovations of Herbert Boyer, a professor at the University of California San Francisco Medical Center.

The historically proven success of this university-industry interface was dramatically enhanced in the United States with the passage by Congress of the Bayh-Dole act in 1980. The Bayh-Dole act enabled universities to bring the results of federally funded research to market—the act achieved this by transferring ownership of the inventions born of that research to universities from the federal funding agencies. Bayh-Dole turned public funding of science into an investment to be leveraged by private entrepreneurs and investors.

Since the passage of Bayh-Dole, American universities have spun off more than 2,200 firms to commercialize innovations born of research, created 260,000 jobs in the process and now contribute $40 billion annually to the American economy. In the opinion of The Economist, “More than anything, this single policy measure helped to reverse America's precipitous slide into industrial irrelevance.”

The Importance of Knowledge Infrastructure

In addition to producing spinoff companies and related opportunities for the private sector to reap direct financial returns, public investment also leverages private investment in more subtle but equally important ways.

Current and past investment by the United States in knowledge infrastructure enable U.S.-based companies to obtain science and engineering data much faster than in other parts of the global economy. Given ever shorter product life cycles, this timing factor can be critical.

When a scientist in a corporate R&D lab working on a new advanced component for an aerospace or automotive application, or on the development of a new drug therapy, needs data on the phase changes of the ceramic material at different temperatures and pressures, or on emerging techniques in synthetic chemistry, that data often comes from a government laboratory or university engaged in federally funded science research.

The private sector builds on publicly funded research, often with universities. According to one survey, approximately 10 percent of new products and processes depend on recent academic research. In some industries, the impact is even higher. For example, in 1990, universities were responsible for 18 percent of all U.S. patents dealing with genetic engineering and recombinant DNA, 16 percent of patents dealing with natural resins/peptides or proteins, and 12 percent of patents dealing with chemicals involving microbiology and molecular biology. Multiple and diverse lines of business, ranging from biotechnology, to semiconductors, software and aerospace, to plastics, paper, steel, and automobiles, rely heavily on science, and public science provides the knowledge infrastructure crucial to the success of much privately funded research, and to economic development.

Science, Technology and Regional Economic Growth: The Role of States

Research capacity building investment in science and technology is the most critical factor in deciding the economic fate of regional economies.

As noted above, the federal government, under President George W. Bush, is investing heavily in science. But, both the federal government and economists are clear that “by itself, federal science policy cannot guarantee a given region an economic payoff.” The federal government provides most of the primary incentives, but the structure and organization of the research system within the local economy heavily influences the successful utilization of the results of research.

When knowledge is produced, the benefits do not only accrue to the producer, they “spill over” to the local economy as technical knowledge accumulates in specialized local assets like labor pools and supplier networks. One study put it this way:

“When the U.S. personal computer assemblers go to Taiwan for design and development of notebook computers, when U.S. disc drive assemblers go to Singapore for processes and volume manufacturing, when IBM moves microsystem development out of the United States to Japan they are seeking access to such specialized and local know-how in components and microsystems design, processes, and manufacturing. Such domestic capabilities are the probable basis for product differentiation and new technology generation….in other words, without such domestic capabilities, an economy has no enduring potential to operate at the technological frontier, with all that this implies for maintaining national well-being...”

Firms, regions, and nations that establish an initial advantage and invest in locally embedded knowledge production will enjoy the benefits of technologically driven economic growth.
State involvement in the formation and execution of policy for science and technology is vital. States have the local knowledge, are attuned to the needs and structure of local and regional industry, and will reap the rewards of success in the form of local economic growth driven by new wealth and employment gains.

1998 data provide a snapshot of selected geographically mediated spillovers throughout the United States:

States have the power to create local conditions most conducive to new ideas and new inventions, which in turn inspire new companies, industries, jobs and growth. In order to build environments that encourage innovation, the Council on Competitiveness recommends that states can have the greatest positive impact by focusing much of their investment to:

• Build the physical, information, and talent infrastructures with regional governments and organizations playing the central role in cluster-specific strategies
• Encourage networking organizations that catalyze public-private dialogue and develop community-wide strategies
• Establish research and industrial parks and business incubators that encourage innovation-based competition

Conclusion

In October 2002, United States Federal Reserve Chairman Alan Greenspan argued that we live and work in a global environment “in which prospects for economic growth now depend importantly on a country's capacity to develop and apply new technologies.” “If we are to remain preeminent in transforming knowledge into economic value,” says Greenspan, “the U.S. system of higher education must remain the world's leader in generating scientific and technological breakthroughs and in preparing workers to meet the evolving demands for skilled labor.”

Technological innovations have contributed more than any other single factor in America’s economic history to long-term growth. A great many of these technological innovations have grown out of publicly funded research, much of which has been undertaken at America’s universities. In the last twenty years, legislative and fiscal conditions in the United States have enhanced the ability of universities to interface directly with the market, thus increasing substantially the opportunities for private capital to benefit from public investments in scientific research. Private companies, both established industrial giants and emerging entrepreneurial ventures, have built on America’s foundation of publicly funded science research, investing capital and capturing the innovations that drive our economy forward. These investments have created multiple new industries, thousands of firms, and hundreds of thousands of new jobs.

Technological innovations drive much of our economic growth at the national level, but it is local economic environments that enable this growth to occur. State and local policy makers are key in creating the environments that encourage innovation. Through targeted investment in the building blocks of knowledge infrastructure, states can draw private capital to invest in the building of regional strength in science and innovation and act as catalysts for regional, and national, economic growth.