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petitors. In 1983the U.S., with 1.9% of GNP for nondefenseR&D, trailed both Japan (2.6%) and West Gennany (2.5%) (National Science Foundation, 1985, appendix tables 1-2, 1-4). Studies by a U.S. Labor Department economist have indicated that Gennany overtook the United States in 1977asthe leader in high- technology exports, and that Japanis likely to do the same (Samuelson, 1980,p.

1283). The need to depend on innovations from other countries-thus

giving their

products a leg up-seems to have increased. In the 1950s, accordingto ananaly- sis by the Stanford ResearchInstitute, 82 percentof the major inventions brought to market were developed in the United States, but by the late 1960s,55 percent

originated here. This decline contributed to America's low productivity growth compared to that of most other industrial nations (cited in Newsweek,June 4,

1979,p. 58). Aside from drawing a smaller slice of the GNP pie until the early 1980s, American R&D is believed to have suffered from disincentives due to excessive

regulation. Businessesare said to have had to allocate considerable resourcesto compliance with these regulations, such as checking the toxicity of chemicals and their carcinogenic effects. Funds and skilled personnel have beendiverted from developing new products and from applied researchto meeting mandated standards. This is sometimes referred to as "defensive research." A vice- president of General Electric stated in 1979 that about 12 percentofG.E.'s $1.3 billion R&D budget was absorbed by defense research(cited in Newsweek,June

4, 1979, p. 62). Many of theseexpenditures seemhighly justified from a human and social viewpoint (just assome seemexcessive), but atthe sametime, given a smaller R&D sector, defense work has further reduced the resources available for innovation. Moreover, for some finns, especially small ones, the high costof

defense research has made worthwhile, or has driven contributing to foreign R&D

it (and thus innovation) them to carry it out sectors.

appear economically not in other countries, thus

Besides regulation, another source of disincentives, especially until 1978, has beenthe tax system. Because modem R&D requires rapidly increasing sophisti- cation in facilities, R&D facilities become obsolete more rapidly than do plant and equipment used directly in production. Thus a relatively large investment of

high-risk capital is necessary.

Although this necessity affects even large manufacturing finns, it is much more significant for small, high-technology businesses,and for individual inno- vators who are trying to raise the money to develop and market their inventions. A 1976 study found that between 1953 and 1973, smaller businesses(those with fewer than a thousand employees) accounted for almost half the nation's innova- tions (National Science Foundation, 1977, appendix table 4-18). The National Science Foundation estimated that, during the sameperiod, thesefinns produced more than three times as many innovations per researchand development dollar as did larger finns (National Science Foundation, 1977, Table 4-31). However,

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