NIST Technology Report: Government Programs Can Fix Market Failures

“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@nist.gov ) for a copy of the report.