PCAST’s Report on Ensuring American Leadership in Advanced Manufacturing a Good Start, yet Misunderstands Industrial vs. Innovation Policy

Last month, the President’s Council of Advisors on Science and Technology (PCAST) submitted a Report to the President on Ensuring American Leadership in Advanced Manufacturing. In general, the report does a good job of explaining the true current state of U.S. manufacturing; articulating the implications of declining U.S. leadership in manufacturing on the country’s ability to produce high-paying jobs, to close our trade deficit, and to ensure U.S. national security; and identifying policy recommendations that can help spur a renaissance in advanced manufacturing in the United States.

However, while the report got most things right, it didn’t get the distinction between industrial policy and innovation policy right. For example, on page 15, the report correctly states that, “Many other nations are advancing their manufacturing enterprises through policies that include industrial policy—that is, direct investment in or subsidies to specific firms.” That’s correct—for the most part. Specifically, industrial policy occurs when countries intervene in markets to favor or to pick “national champion” winner companies, like France did in picking Groupe Bull, France’s state-sponsored computer giant, to compete directly against IBM or when the French government backed French search engine Quaero “as the next Google-killer.” Japan and Korea practiced industrial policy after WWII when specific companies or networks of companies (the chaebol in Korea or the zaibatsu in Japan) were selected as national champions to lead certain industries such as shipbuilding, concrete, automobiles, or electronics in those countries. China’s industrial policy selects state-owned enterprises (SOEs) to dominate key industries, like the SOEs CSR or CNR in high-speed rail. In the United States, Congress’s creation of the Synthetic Fuels Corporation in 1980, or frankly the U.S. government’s action in 2009 to bail out General Motors and Chrysler—an intervention in the economy to assist two very specific firms—represented industrial policy.

But when, in the very next two sentences on page 15, the PCAST report says, “We do not believe that the Federal Government should play the role of a venture capitalist, making large bets on particular firms and industries. Rather, the best industries, firms, and products should thrive based upon their ability to compete in the marketplace,” this discussion gets it half right/half wrong. Certainly, we shouldn’t be investing billions to make GM (or Ford or Chrysler) America’s alternative fuel vehicles champion; nor should the government create or pick a particular firm to be the Nanotechnology Corporation of America. But the government should be making strategic investments in key broad technologies—and industries. Moreover, frankly, if PCAST does not believe the “Federal Government should play the role of venture capitalist,” then tomorrow the Administration should shut down ARPA-E, ARPA-ED, the CIA-backed In-Q-Tel program, the Technology Innovation Program (TIP) at the National Institute of Standards and Technology  (NIST), and the SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) programs because these entities are in fact making investments in both research and technology development—though to secure a public (or social) rate of return, as opposed to a private rate of return, which is what private sector “venture capitalists” do.

For example, ARPA-E has invested hundreds of millions on creative, “out-of-the-box” transformational  research in the energy sector. SBIR awards $2 billion annually to small, innovative, high-tech businesses (and that indeed represents the government investing in the R&D, innovation, and new product development activities of specific companies). In-Q-Tel, a private strategic investment firm (though whose seed funding came directly from the CIA), has invested in more than 165 companies that support the missions of the Central Intelligence Agency and the broader U.S. Intelligence Community. NASA has invested more than $500 million in companies developing commercial space transportation services. TIP supports, promotes, and accelerates innovation in the United States through high-risk, high-reward research in “industries” such as advanced robotics, energy, and healthcare. Yet these are all appropriate forms of government investment in companies and industries to promote R&D and innovation.

Moreover, it’s difficult to reconcile PCAST’s argument on page 15 with its discussion of policies the United States needs to implement to restore U.S. advanced battery leadership, from page 4. To wit: “With respect to batteries, the United States has also lost its lead in manufacturing. The recent Recovery Act provided $2.4 billion for advanced battery and electric drive component manufacturing, demonstrations, and infrastructure development, which should allow advanced batteries and components for plug-in and hybrid vehicles to be manufactured in the United States rather than be imported.” But why is this necessary? If we take PCAST’s earlier sentence on its face—“Rather, the best industries, firms, and products should thrive based upon their ability to compete in the marketplace”—then global markets have spoken, U.S. firms and industries have lost in advanced battery manufacturing, that’s the way it is and is going to be, and there should be no need for any government investment or program to get the U.S. back in the game in advanced batteries.

To be sure, of course, what the United States needs is strategic investment by government in the first place in the technologies and industries of the future, many of which the PCAST report thoughtfully identifies—such as nano-scale carbon materials, next-generation optoelectronics, flexible electronics, nano-technology enabled medical diagnostic devices and therapeutics, and indeed advanced batteries. (Such strategic investments would keep the United States out of the unenviable position of having to implement catch-up policies, as in advanced battery manufacturing.) But to return to how the PCAST report gets industrial policy wrong, it would be industrial policy if the U.S. government picked a particular national battery champion—Duracell, for example—or a particular technology that government planners think is the best—lithium-ion, for example. Rather, it’s innovation policy if government seeks to support private sector efforts to solve key problems, like batteries and electric charge storage. This means supporting a wide range of firms, including startups, and technologies (such as lithium-ion, lithium-air, zinc-air, all electron, metal-molten salt, and magnesium-ion, etc.), recognizing that while it needs to support the private sector in its efforts to spur battery innovation, neither it nor the private sector can adequately predict which firms and technologies will ultimately win. In short, industrial policy entails a government picking specific firms or technologies, whereas innovation policy refers to governments making strategic investments in and supporting key broad technologies and/or industries, as the figure below called “The Innovation Policy Continuum” illustrates.

Now, the PCAST report is correct that nations’ innovation policies must get the “framework conditions” right. These supportive framework conditions include a competitive tax environment, a strong educational system producing high-skill talent, robust physical and digital infrastructures, dynamic labor and capital markets, and open immigration policies (among others). But to be effective, U.S. innovation policy simply can’t stop there, as much as the Washington Consensus might want to. Effective innovation policy must also include a focus on supporting key broad technologies and industries and promoting the transfer of those technologies to the private sector for commercialization. For example, Germany’s Fraunhofer Institutes are public-private partnerships (PPPs), funded jointly by Germany’s federal government, Länder (states), and private enterprise, that perform industrially relevant, applied research with the specific intent of transforming emerging technologies into commercializable products.  Of course, as the PCAST report notes, a great example of the United States having done this itself is SEMATECH, a PPP designed to preserve the competitiveness of the U.S. semiconductor industry in the 1980s by co-funding advanced precompetitive research on the technology needed for the next generation of semiconductor chips. The United States needs twenty such SEMATECH-like PPPs focused on advanced industries and technologies such as nanotechnology, microelectronics, photonics, adaptronics, microelectronics, wireless, ICT, ag-bioscience, optics, clean energy, advanced machining, advanced materials, etc.

Ultimately, we must be unabashed that governments—including the United States’—play a vital and appropriate role in making investments in strategic and emerging advanced technologies and sectors and helping transfer that technology to the private marketplace with the explicit intent and purpose of driving U.S. economic growth. To do so is not the derided so-called industrial policy, but in fact is a component of effective innovation policy. If the United States is to win in the intense race for global innovation advantage, it has to move beyond only supporting factor conditions to supporting key technologies and industries. But do not worry; that’s not “industrial policy.”