/
«*.
o/ TE^
.M414
l^ll'I'liiiiiiiiiill
3
TOaO ODbDlSEM
ALFRED
P.
T
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
Funding Strategy
Technology Programs
Government
in
Jong-Tsong Chiang
WP
January 1990
3129-90-BPS
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
AiVCii.
?;
Government
Funding Strategy
Technology Programs
in
Jong-Tsong Chiang
WP
January 1990
1.
The author
is
grateful
the
to
International
3129-90-BPS
Institute
Systems Analysis (IIASA) and several organizations
their
financial
This paper
is
in
Applied
Europe for
support and other assistance in doing the field
research concerning this topic in a
2.
for
to appear in
Change (forthcoming,
number of European
countries.
Technological Forecasting and Social
1990).
A^^O
\
K?^^^
Government
Funding
Strategy
Technology
in
Programs
Abstract
R&D
Industrial
in
a
market economy
funding
therefore public
sector,
government
to
guide private
is
R&D
is
a very
mainly implemented
countries,
This paper investigates
activities.
To reduce
1.
incentive in
and reaches
opportunistic
a
in
number of
some preliminary conclusions:
behavior and ingrain intrinsic
both competition and cost sharing principles should
firms,
be used concurrently in underwriting firms'
R&D
projects.
Competition principles can be applied across many candidate
2.
projects
private
important tool of
the experience of funding national programs
industrialized
in
around the same time or a series of one-of-a-kind projects
over longer time horizon.
The major
3.
that there
specific
is
In practice,
50-50
determine.
5.
is
the decision
is
competition" due to few qualified candidates in
the appropriate cost sharing level
used as a rule of thumb
in
many
is
may
difficult
to
countries to
making and circumvent "bounded
Full cost endorsement
for projects
firms.
"real
of competition principles
technological fields or in some, especially small, countries.
4.
simplify
no
threat to application
rationality."
be another "quantum" alternative
urged by government but not
felt
to
be very relevant by
Introduction
The 1980s witnesses
technology development programs
national
One
Japan's strategy of
industrial collaborative
international
in
this
R&D.
bodies, public
endeavor because
in
these programs warrants
1970s and
emulate
to
is
encourage
to
funding becomes the most important tool
a market
special
make
support of government in
R&D
economy
an
industrial
R&D
is
Therefore the funding strategy
Nevertheless,
attention.
it
is
accurate estimate of the financial
activities
because of different
categorization of budget, indirect support by
other subsidies, etc.
as
For most countries and even
to
normally very difficult
simply
hereafter
enhancing industrial
at
Project in the late
mainly implemented by private firms.
in
to
and international
of these programs' main features
VLSI
its
(referred
programs) aiming
or international
competitiveness.
of national
proliferation
a
means of
In this research, the focus is only
tax
credits
and
on the
underlying rationale and strategy, rather than the absolute level, of
government direct funding
to
industrial
R&D
projects
in
national
programs.
Principles
in
Among
Government
others,
national program.
Funding
government usually has
First
it
to
do three things
it
a
should avoid spreading resources too thinly
and instead concentrate them on some priority technology
Second,
in
fields.
should identify high caliber teams to undertake the task.
Third,
strategy
has to help attain these goals.
To encourage
industry
to
pursue innovation in
government can provide funds
directions,
high commitment to
is
Government funding
should ensure good implementation.
it
some
projects
may
to
share
some prescribed
R&D
cost.
But too
be very costly and risky.
usually done at the expense of other alternatives which
may
This
also
have good potential, thus reducing the number of solution routes
Too much subsidy from
pursued and even chance of success.'
government may also entice firms
needs from industry and industry
To
propose ideas and execute
Moreover, government may overlook signals and
missions carelessly.
opinion
to
may
bother to reflect their
not
industry has no part in the funding.
if
teams, government can
better
select
process based on competition in one
way
adopt a screening
or another
among
candidates.
This strategy hopefully can also help reduce conscious or unconscious
opportunism. 2
competition
But
it
also has
some
may make opportunism more
behavior more difficult to afford. ^
may
not exist
if
there are
technological fields.
situation
may
projects,
likely
Another
is
that too
much
and responsible
that
few qualified candidates
the
is
"real
in
competition"
some
"moral hazard" due to "small number"
arise."*
To ensure
the progress.
Then
One
limitations.
responsible
But most
implementation,
R&D
activities,
government can monitor
except physical demonstration
are difficult to evaluate objectively.
concerned contracts are rather incomplete and
Furthermore, most
full
of uncertainty
R&D.
because of the nature of
be unobservable or not easy to detect.
reality
cannot do much
To compensate
commitment of
that,
the
more
their
the
do good job
own
stake.
In
principle,
the higher the
In this
own
indicated above,
spill-over effects
the appropriability
agree with each other.
more "serious"
resources, the
way, firms have
"intrinsic"
incentive
However, the appropriate cost
still
government would be willing
or externalities.
to
remain
to
For firms, the
firms'
(and
EC
the
But both sides may not
of the projects.
And
be
more cost
share
They would commit more resources
opposite rationale applies.
higi.er
sake.
own
between government and firms
sharing formulae
decided.
as
has good reason to hypothesize
It
firms invest their
for their
pitfalls
funding contingent on the firms'
its
and "honest" they will be.
to
other words, government in
In
firms are not strongly committed to the job.
if
for the potential
government can make
may
Therefore opportunistic behavior
actual
financial expenditure is not
easy to strictly monitor.
In
is
many
national
a necessary
becomes a
for collaboration
competitors, which
purpose makes
appropriate
Application
Government funding thus
condition for getting subsidy.
bait
it
may
more
funding
of
especially
otherwise not occur
difficult
programs, collaboration
international)
at
least
in
between
at
all.
real
or
potential
This additional
theory to determine an
level.
Competition
Principle
and
Limitations
the real world, competition
In
proposals
is
based on the evaluation of
basically followed by most
West European countries
investigated in this research: the U.K., Sweden,
the Netherlands.
This
support of industrial
requires
R&D.
some threshold
small firms with
is
is
little
also Germany's
However,
effort.
Norway, Finland, and
long tradition of government
to prepare
a qualified proposal
This process in effect rules out
technical reservoir.
Once
a project
is
many
started,
it
quite difficult to stop except for very obvious reasons like the
termination
of firms. ^
However, some evidence shows
firms actually spent more
money
that
many
than they originally claimed
to,
because their projects were connected to their central business and
many new
As
research
predicted,
topics
for
were stimulated
some technological
after
areas,
some time of work.^
there
Examples include
qualified firms, and real competition does not exist.
semiconductor hardware projects
materials
programs
technology programs
in
in
in
Norway and
Finland.
most countries, conventional
Finland,
and forest-related
The main reasons
are as follows.
semiconductor hardware technology, entry threshold
presently there are only a small
other
more
traditional
few
are
number of firms
technology programs
in
is
very high
this
industry.
In
and
In
which need rather
concentrated and big investment, there are only a few large
established
is
little
firms
in
small countries.^ In some other cases where there
enthusiasm from industry, government even has
firms to participate in the national programs,
to
persuade
work with them on
proposal preparation, and arrange special support from public
R&D
institutes.
the principle of competition
In Japan,
way.
Government
intention
to
applied in a different
is
support oligopolistic
made
technology) firms to compete in the global market
small
number of
was not
really competitive.
projects
since the
So
winners."
"potential
IT (information
bet on a
it
selection of firms
the initial
But a series of consecutive national
1960s gave government a chance to better compare
and monitor participants' competence and commitment.
As
a
striking
example, when Oki failed to come out with a commercial product
the
New
Series Project in response to
International
the next
IBM 370
VLSI
Ministry of
series, the
Trade and Industry (MITI) decided
to
in
exclude
it
from
Therefore competition principle works over
Project.
time.
By
contrast, France,
a country
with strong tradition of
government guidance and direct involvement
development, overlooked
champion strategy"
in
this
many
principle
fields,
another one in semiconductors.
It
e.g.,
is
in
technology
and adopted
one firm
argued
that,
in
"single
computers and
among
others,
lack of competition pressure helps explain France's failure in
developing a viable semiconductor and computer industry.
Application
Rationality
of
Cost
Sharing
Principle
and
national
Bounded
the
As
some
to
government funding
level,
it
most governments, and even
cases,
not surprising that, except
is
EC
Commission, adopted
sharing policy in projects mainly executed by firms.
government financial backing
pilot projects;
is
In
Denmark,
the
about 40-45% including prototype
Sweden, Finland and the Netherlands, about
in
cost-
and
half;
in
the U.K., the original plan of varying percentage depending on the
nature of individual projects and of
to
50%
in
most
in
FRG,
across-the-board; in
EC
programs
(e.g.,
60% on
the average
a long tradition of less than half; and
ESPRIT, RACE, BRITE and EURAM), 50%.
Japan, the situation was more complex: approximately
FONTAC, 100%
50%
Information Processing System (PIPS),
Fifth Generation
in
The above evidence suggests
practice
to
So
level.
industry
therefore
is
New
in
Series,
But
in
in Pattern
40%
in
Computer.
that
it
quite difficult in real
is
determine project by project the appropriate cost-sharing
to
roughly
the
split
the cost evenly
between government and
"most convenient" way under normal conditions. ^
becomes a
the delicate issues
to
rule
of
thumb
in
many
capabilities,
ha\e
little
competitiveness, or embrace
government tends
to
countries,
It
and simplifies
be dealt with by "bounded rationality." ^^
However, when the tasks are extraordinarily
firms'
50%
Super High Performance Computer, 100%
in
VLSI, and 100%
was reduced
difficult
relative
to
the
immediate impact on the firms'
high
likelihood
endorse the whole cost.
of large externalities,
Japan's exceptional
experience in Super High Performance Computer, PIPS and Fifth
Generation Computer Programs as discussed
seems
support this
to
Rationale of Full
In Japan,
second alternative.
Funding
in
Japan
PIPS was an add-on project
1971 after the
in
programming, printing and data transmission
High Performance Computer
in
below
details
of the special weakness in handling Japanese language
recognition
began
more
in
1971
Super
previous
the
in
PIPS was highly technical and
Project.
without a true understanding of
implications or
its
complexity by the various MITI councils and advisory groups.
proved
to
be an extremely difficult
general development
level
Government sponsored
the
set
of tasks, considering the
of input-output devices
whole cost
was then reduced from ¥35
billion
was extended two more years from
to
It
in
project,
this
¥22
the
at
time.
budget
but the
and the execution
billion,
Upon
the planned eight years.
its
completion, PIPS did not meet any real commercial marketing
criterion.
standpoints.
The evaluation was mixed, depending on
One
failure but with
some
high remarks for
the later Fifth
actual
study said
its
MITI considered PIPS
technical successes.'
^
U.S.
different
as a
OTA
whole
gave
it
to
be a
relatively
long-term impact including laying groundwork for
Generation Computer Program. '^
outcomes, Japan's government found
it
Regardless of
its
very difficult to
persuade industry to pool funds for PIPS.
In the Fifth Generation
Computer Program,
the ultimate goal
develop a radically new kind of computer based on revolutionary
is
to
breakthroughs
it
in
computer architecture and
successful to a reasonable degree,
is
it
intelligence.
artificial
may
put Japan at the leading
edge of computer and information technology, a step further from
present
In fact, MITI's attempt in this
position.
of
its
creativity
deemed
as
to
covered by industry.
a natural extension
As
until
recently
are
budget ¥100 billion to
total
The Ministry of Finance
difference which
the
computer
However, private industry was
half of the planned
make up
its
also aims at
It
such vague and seemingly unrealizable goals.
also refused
is
and original innovation, which
Japanese strength.
commit
reluctant to
generation
program
long-term series of national initiatives.
stimulating
not
and the fourth
microelectronics
strong
If
was supposed
MITI ended up being
a result,
to
be
solely
responsible for the total funds ¥50 billion as promised. ^^
For the Super High Performance Computer Project, the rationale
for
government 100% support
available.
in
not clear according to the information
But there are some clues.
1962 was widely perceived as a
Fujitsu,
not
is
Oki and
run.i'*
Meanwhile,
powerful 360
project in
NEC
series.
1966
might be due
to
this
predecessor
failure.
The
FONTAC
parts
launched
developed by
did not connect properly, and the machine could
IBM
in
1964 introduced
its
much more
This serious situation triggered this national
to quickly
membership increased
Its
to
respond to IBM's new threat, and
include
all
six
its
major manufacturers.
urgent condition that
MITI decided
to
underwrite the Super High Performance Computer Project,
It
fully
Remarks
Concluding
programs, government assumes a direct
national
In
developmental (as opposed to regulatory)
industry
asymmetry
innovation
intrusion
than
programs. ^^
of vested
constituencies,
with
taken
this
international bodies like
arm's length.
In
real
imposed by "bounded
the experience
in
seems advisable
more
^
to correct
little
in
many
in
"market failure," but
EC Commission
practice,
it
to
in
support industrial
R&D
and threat of "opportunism."
shows
countries
the sense that
it
that
strategy
this
at
intrinsic
Though
may become
financing designs in the future.
Notes
10
a
But
funding strategy
R&D
helps guide industrial
sense in the subsidized firms.
rather simple funding
and even
however, there are many limitations,
rationality"
many
countries
of national importance and ingrains
delicate
government deep
consideration, 6
into
challenge, the competition and cost sharing
widely adopted
are
typified by the
failure,"
"white elephants."^
also create
responsibility
many government-led
groups like politicians, bureaucrats and
interest
also
is
To cope
this
general
This information
"government
if the
involvement may not only do
principles
government.
an important cause of failure in
is
technology
direction
in
has better knowledge about the commercial prospects of a
technological
may
But
role.
incentive
far
in
the
and
from perfect,
starting
point for
^
A
comes from
better selection
a wider variety
is
advocated
in
Nelson and Winter (1982).
2
Using competition
opportunism
to reduce
is
one of the main
arguments by Williamson (1975).
3
This
4
Williamson (1975).
5
This
is
is
Dutch experience expressed
November
1989.
6
This
confirmed
in
December 1989.
'
This
is
is
pp.
"
in
in
May
EC
Hague
programs
in
in
Brussels
1989.
Anchordoguy (1988),
p.
221 and Nelson (1984),
45-47.
This rationale
EC
is
confirmed
Commission,
etc.
in
1989.
10
refers
"Bounded
limits of
human
formulating
rationality"
actors.
As
the Nordic countries,
in several
November and December
to
OTA
interviews in April,
the cognitive
May,
and computational
and solving complex problems, processing information,
(1957).
Bloom
the Netherlands,
a result, individuals face limits in
and anticipating the consequences of
12
interview in
interviews concerning
April and
See, for example,
the U.K.,
11
in an
(1988).
based on interviews with program leaders or coordinators in
Nordic countries
S
made by Keck
a different interpretation
(1984), pp. 64-70, 76-80.
(1983), p. 417.
11
their
own
decisions.
See Simon
13
The
Fifth Generation
Computer Program has been widely
Succinct analysis can be found in
discussed.
Levy and Samuels (1989),
pp.
66-68;
Bloom
(1984), pp. 71-72;
Anchordoguy (1989), pp. 188-
189.
14
Levy and Samuels (1989),
15
Keck
16
For "government failure" see Wolf (1979).
17
"White elephants" refer
p.
64.
(1988).
to projects
which
fail
the initial
expectation of a practical value greater than cost, or more precisely,
opportunity
cost.
12
Bibliography
Anchordoguy, Marie (1988), Computers
Cambridge,
Bloom,
MA:
Inc.: Japan's
Challenge
IBM,
to
Harvard University Press (forthcoming).
MITI as a Policy Instrument
Justin L. (1984), Japan's
in the
Development of Information Technology, Cambridge, MA: Harvard
University Center for Information Policy Research.
Keck, Otto (1988), "A Theory of White Elephants: Asymmetric
Information in Government Support for Technology," Research
Policy, Vol. 17, pp. 187-201.
Levy, Jonah D. and Samuels Richard
Innovation:
Japan,"
Paper
J.
(1989), "Institutions and
Research Collaboration as Technology Strategy
MIT MIT-Japan
in
Science and Technology Program Working
89-02.
Nelson, Richard R. (1984), Hight-Technology Policies:
A Five-Nation
Comparison, Washington, D.C.: American Enterprise
for
Institute
Public Policy Research.
Nelson, Richard R. and Winter, Sydney G. (1982),
Theory of Economic Change, Cambridge,
Simon, Herbert A. (1957), Administrative
York,
OTA
An Evolutionary
MA: Belknap
Press.
Behavior, 2nd edition.
New
NY: MacMillan.
(U.S. Congress Office of Technology Assessment) (1983),
International Competitiveness in Electronics, Washington, D.C.: U.S.
Government Printing
Office.
Williamson, Oliver E. (1975), Markets and Hierarchies: Analysis and
Antitrust
Implications,
New
York,
NY:
Free Press.
Wolf,
C.jr.
(1979),
"A Theory of Nonmarket
and Economics, Vol.
22, pp.
107-139.
Failure,"
Journal of
Law
\
Date Due
^ ^
(,
Lib-26-67