NIST Technology Report: Government Programs Can Fix Market Failures

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Publication date: 
4 December 1995
Number: 
169

"One point is certain: the multiplicity of market failures and the
variance of their intensity within technology-based industries
demands multiple policy responses from the government of an
industrialized nation."  -- NIST Planning Report 95-3

In an attempt to quell partisan disagreements over federal
technology policy, the Clinton Administration has produced a
plethora of reports demonstrating the need for a government role in
technology investment.  In October, a senior economist at NIST put
out a planning report entitled, "Technology and Economic Growth:
Implications for Federal Policy."  The 76-page study contains a
disclaimer that it "should not be construed as a statement of U.S.
Department of Commerce Policy."

Summarizing a number of macro- and microeconomic studies over the
past several decades, the document concludes that "technology is
the single most important determining factor of long-term economic
growth."  However, it contends that the market has "imperfections"
or "failures" that can result in underinvestment in important
technologies.

Decisions on investing in a technology are made by a company based
on rates of return to the innovator, the study says.  These
calculations do not take into account the spillover benefits, or
returns to the entire industry and consumers.  While critics of
government intervention want to leave decisions to the marketplace,
the report claims that market failures force down the estimated
rates of return to an innovator, leading to private-sector
underinvestment in a technology that could benefit society as a
whole. 

The report cites a number of causes of market failure, including
cost of capital, high technical risk, time to market, scope of
potential markets, technology-market mismatch, industry structural
barriers, and high transaction costs.  Many of these failures, it
says, "occur because several elements of the typical industrial
technology have the characteristics of infrastructure"-- elements
that are jointly used by competing firms.  Infrastructure
technologies include generic technologies as well as
"infratechnologies," tools such as engineering data, measurement
and test methods, production techniques, and interfaces that permit
efficient combinations of components.  According to the report,
"because of the typically high technical risk and the long time
before commercialization...,underinvestment by industry in generic
technology research is common. Similarly, capturability and
economies of scale problems lead to underinvestment in
infratechnologies." 

Opponents of government technology programs claim that the R&D tax
credit and capital gains tax incentives will solve the
underinvestment problem.  The NIST paper argues, however, that tax
incentives are only "good at increasing the type of R&D that
industry is already doing, but not so effective at restructuring
the composition of R&D.  Realizing this, most industrialized
nations use several types of policy mechanisms, only one of which
is tax-based."  To target other types of market failure, the report
recommends programs like NIST's Advanced Technology Program and the
infratechnology work performed at NIST's intramural laboratories.
Please contact Gregory Tassey at NIST (301-975-2663;
gtassey [at] nist.gov) for a copy of the report.

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