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NIST GCR
02-834 Technological progress is the key to offering future populations the potential for improved standards of living. Technical change enables firms to combine inputs in a novel manner to produce existing products more cheaply and to develop new products to meet consumer needs. Economists and other social scientists are in broad agreement that technological change is the most important contributor to economic growth in the modern era. Based on Robert Solow's and Moses Abramovitz's ground-breaking work more than 40 years ago, economists have estimated that more than half of the United States' long-run growth is attributable to technological change (Solow, 1957 ; Abramovitz, 1956 ). Whenever an individual or a firm makes a technological advancement that improves the performance or quality of a product or reduces the cost of making it, the overall level of social well-being in the economy is increased. Likewise, when a new product or service is developed, society benefits as long as some consumers are willing to pay more than the costs of producing the product or service. Established principles of public economics argue that the private level of investment in such innovations will be optimal in the absence of market failures or externalities; that is, if the innovator is able to fully realize the benefits generated by the technology improvements through profits. In most cases, however, a portion of these benefits "spills over" to consumers or to other economic agents (Mansfield et al., 1977 ; Scherer, 1999 ), because the innovating firm typically cannot extract all of the surplus created. If there is sufficient rivalry among producers, for example, prices may be driven down to the point that the innovating firm cannot retain any surplus and thus is unable to recover its investments in research, development, or purchase of long-lived assets. In other cases, benefits may accrue to competitors and firms in related or unrelated fields, in the form of knowledge or network spillovers. The risk that innovators may not recover their investment lies behind our nation's patent and copyright protection systems. The promise of a limited monopoly offers firms and individuals assurance that they will be able to retain some of the surplus from their creations. If this intellectual property protection is sufficient to induce firms and individuals to pursue all socially beneficial innovations, private levels of investment will be optimal. Even if some improvements are not made because of the existence of spillovers, the losses from these marginal innovations may not be large enough to justify an extensive government role in research supporting product and process development. The situation for R&D aimed at producing or improving private goods and services is quite different from the creation of scientific and technological knowledge, the goal of most basic and applied research. In the latter cases, it becomes difficult or impossible for innovators to achieve the major portion of the benefit from their inventions. Standard public economics tells us that private markets will yield a suboptimal level of basic and applied research, leading to a lower than desirable level of technical progress. To correct for this potential market failure, a large number of government organizations provide funding for research activities. These entities, including such giants as the National Science Foundation (NSF), the National Institutes of Health (NIH), and the Defense Advanced Research Projects Agency (DARPA), fund in-house research activities, university research programs, corporate projects, and joint ventures. Government support for technology infrastructure and standards development is provided by the National Institute of Standards and Technology (NIST) and related organizations. NIST's Advanced Technology Program (ATP) was created in 1990 to promote the development of high-risk and high pay-off technologies where market failures or externalities are likely to lead to underinvestment by private firms. ATP provides funds, on a cost-sharing basis, for precommercial research and development of enabling technologies that support new products and process improvements where substantial spillovers are expected and where technical and investment recovery risks are both high. For example, ATP can provide funding for small firms that may not have access to other sources of capital due to lenders' risk evaluation processes. Banks and venture capital firms, which are primarily concerned with the private return on their investment rather than improvements in social welfare, often are unwilling or unable to properly evaluate the risks and potential returns involved. Return to Table of Contents. Since its inception, ATP's Economic Assessment Office (EAO) has taken an active role in supporting evaluation of ATP-funded projects. To date, more than a dozen external assessments have been completed and shared with the public. These studies have measured the impact of the ATP on U.S. firms, industrial sectors, and the overall economy. The studies that ATP has conducted and funded include:
Case studies are an important part of ATP's economic analysis strategy. They provide an in-depth view of how ATP-funded technologies lead to economic benefits for the awardees, other companies, and consumers. They also provide qualitative details about how ATP funding affects the investment decisions of companies and the success of the projects. Ideally, case studies apply state-of-the-art methodologies that provide credible quantitative estimates of the economic performance of ATP's investments in these technologies. The economic methodologies and tools used by the external assessors have varied widely in these case studies, depending on the types of activities funded, outcomes of the public investment involved, and EAO's evaluation needs. For example, for projects yielding process improvements that raise finished product quality at a somewhat higher unit cost, a macroeconomic analysis would capture the net social benefits. Such an approach was used in two studies in the automotive sector (CONSAD, 1997 ; Ehlen, 1999 ). Mansfield et al. (1977) pioneered methods that evaluate the effects of new products and/or processes in reducing downstream production costs. Price-index concepts for measuring the value of performance improvements have been applied in a recent study of digital data storage technologies (Austin and Macauley, 2000 ). Return to Table of Contents. In the current assessment, Research Triangle Institute (RTI) was asked to evaluate the benefits from a number of new ATP-funded component-based software projects, most of which resulted in the creation of new software products. Because these products have a wide variety of potential uses and customers, data collection for a price-index analysis would have been difficult or impossible to accomplish. However, RTI's skills in primary data collection and case study methods allowed us to estimate consumer and producer surplus directly from data provided by the ATP-funded companies. Although this type of economic benefit estimation is theoretically straightforward, this is the first ATP evaluation in which it has been used. In completing this assessment, RTI refined and improved a case study methodology developed during a previous project conducted for ATP, "A Framework for Estimating the National Economic Benefits of ATP Funding of Medical Technologies" (Martin et al., 1998 ). That study demonstrated how ATP funding could increase the societal benefits of a technology by:
Figure 1‑1 demonstrates how these aspects of ATP investment lead to social return on the public's investment. For this project, we augmented the factors listed above by examining ATP's impact on the development of new high-risk ideas for component-based software technologies, its influence on the formation of firms and joint ventures, and its impact on the commercial success of these technologies. Figure
1-1. Elements Determining Social Return on Public Investment
and Social Return on Investment
Return to Table of Contents.
Section 2 of this report provides a technical description of component-based software, profiles the relevant portions of the software industry, and outlines ATP's component-based software development (CBSD) initiative. Of the 24 projects initially accepted for funding by ATP, 17 had successfully completed their period of ATP funding in time to be included in this analysis. In the first phase of our assessment, these 17 projects were studied qualitatively to identify common themes and key ATP impact areas. Based on the characteristics of the funded firms, RTI selected eight for detailed case studies. The selection criteria appear as Appendix A in this report. In Section 3, we present a detailed description of a firm's R&D decision-making process, including the separate phases of idea generation, technology and product development, and commercialization. Next, we examine potential externalities and market failures in the component-based software context, along with actions that ATP could take to eliminate or mitigate the adverse economic impacts. The section concludes with a qualitative discussion of our findings on ATP's impacts from analyzing the 17 funded and completed projects. Section 4 contains an economic model based on natural monopoly markets, building on the qualitative results from the first phase of the project. We then discuss how this model was operationalized as a means to estimate the economic benefits from the ATP focused program, and describe the valuation metrics employed. Section 5 presents the quantitative analysis of the eight projects selected for the in-depth case studies. The economic model developed in the previous section was used to estimate benefits from these projects, all of which were technically successful and most of which have been commercialized. With the expenditure data provided to us by ATP, we calculate the net present value (NPV), internal rate-of-return (IRR), and benefit-to-cost (B/C) ratio for each of the studied projects. Detailed write-ups of the eight case studies are included in Appendix B. Return to Table of Contents or go to next Chapter. Date created: December
3, 2002 |
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