Federal R&D and the Development of U.S. IT

1. Federal R&D and the Development of U.S. IT David C. Mowery Haas School of Business U.C. Berkeley & NBER

2. Overview • Three “new industries” emerged during 1945-1980 in information technology: • Semiconductors. • Computer hardware. • Computer software. • Federal R&D spending was essential to the creation of these industries, but…. • The effects of Federal R&D investment were influenced by other policies, notably procurement, antitrust, and IP policy.

3. Semiconductors (1) • Wartime military R&D in electronics & radar technologies supported work on semiconductor materials. • Transistor was developed within Bell Labs R&D program on long-distance transmission. • Bell Labs team “raced” Purdue University researchers in discovering the transistor, but industry subsequently assumed leadership in technology development. • 1956-57: Stanford Prof. James Gibbons was seconded to Shockley Semiconductor to learn semiconductor fabrication technologies. • Federal antitrust suit against AT&T influenced corporate decision to disseminate technology and knowhow about transistor. • AT&T sponsored seminars in 1951 & 1952 on transistor product and process technologies. • 1956 settlement of U.S. v. AT&T mandated low-cost licensing of its large patent portfolio by AT&T. • With AT&T at center, patent cross-licensing was common.

4. Semiconductors (2) • Early military R&D focused mainly on production engineering. • By late 1950s, objectives had broadened, and federal funding accounted for almost 25% of industry R&D investment • DoD R&D in “molecular electronics” supported established firms, produced limited results. • In 1959, “new firms” received 22% of federal R&D contracts, yet accounted for 63% of industry sales. • “Prize” of DoD procurement contracts led Texas Instruments, 1st producer of silicon junction transistor, to develop the integrated circuit in 1958. • Procurement policy influenced industry development. • DoD awarded procurement contracts to new, vertically specialized “merchant” producers, influencing evolution of industry structure. • DoD orders enabled entrants to exploit learning, reduce costs, and penetrate civilian markets. • “Second-sourcing” procurement requirements accelerated interfirm technology flows.

5. Semiconductors (3) • Summary: • Defense-related R&D funding important, but procurement also influenced innovation and growth of commercial applications. • Antitrust policy and procurement policy reduced entry barriers & supported substantial interfirm flows of technological knowledge, knowhow. • Exclusionary effects of IPRs were limited by US v. AT&T consent decree, cross-licensing of patents. • Potential dominance by AT&T in commercial development of the technology was forestalled at an early point in the industry’s development. • DoD influence declined as nonmilitary sales expanded • VHSIC program of 1980s & 1990s had limited influence on trajectory of industry’s technology development.

6. Computer hardware (1) • Computers originated in WWII military demand for ballistics computations, cryptography. • Universities were important sources of early technological developments in computers (e.g., magnetic memory). • MIT’s Lincoln Labs managed SAGE strategic air defense project in early 1950s for which IBM supplied computer hardware. • Federal spending (largely defense-related) supported 59% of computer-related R&D of major U.S. computer firms during 1949-59. • By early 1980s, federal funds accounted for roughly 15% of industry-wide R&D performance. • DoD & NSF funded purchase of hardware for US universities that aided development of computer science departments in late 1950s, 1960s. • Federal agencies funded 75% of math/computer science research performed in universities during 1970s and 1980s. • PhD-granting CS depts grew from 6 in 1965 to 148 by 1995.

7. Computer hardware (2) • Early DoD-funded R&D programs were relatively open to civilian researchers. • Summer 1946 seminar for industry at UPenn’s Moore School on “Theory and Techniques for Design of Electronic Digital Computers,” sponsored by military research agencies. • Military procurement and R&D programs enlisted participation of new as well as established firms. • Federal procurement policy for much of the 1960s discouraged purchases of nonmilitary equipment from IBM, contrasting with European “national champion” policies. • 1956 settlement of federal antitrust suit against IBM mandated licensing of computer-related patents, further reducing entry barriers. • Federal share of overall industry sales declined after 1950s, but federal sales remained significant in high-end computers (40% in 1972, 13% in 1980).

8. Computer hardware (3) • Summary of federal policy: • As in semiconductors, federal antitrust policy encouraged interfirm competition, entry of new firms, interfirm flows of knowledge. • Federal R&D spending was motivated largely by national security needs, but military programs were relatively accessible to civilian researchers and firms • R&D funding supported creation of a large, university-based research infrastructure that combined research and training. • Procurement supported entry and discriminated against dominant domestic supplier (IBM) in nondefense applications through the 1960s, the antithesis of European “national champion” policy.

9. Computer software (1) • Although federal R&D investment and procurement were less significant, the US computer software industry emerged from foundations laid by federal policy in computer hardware: • SW production for SAGE during 1950s was managed by RAND (later, the Systems Development Corp.), and served as a “trade school” for SW developers. • DoD HW procurement influenced development of some “standard” SW languages, e.g., COBOL in late 1950s. • Federal antitrust and procurement policies influenced growth of independent SW industry in late 1960s. • DC-based federal computer services firms began to develop SW. • IBM “unbundling” of SW & HW pricing under antitrust pressure in 1968 facilitated entry by independent SW developers.

10. Computer software (2) • IBM 650 and 360 mainframe computers formed platforms for SW user-developers and independent developers. • In the PC era, rapid adoption created a large domestic installed base and market for “shrinkwrap” SW that spurred user-driven innovation and “co-invention.” • Federal funding of academic computer science provided people & ideas for SW industry. • IPRs remained relatively weak/uncertain until the 1980s, prior to Diamond v. Diehr. • Failure of “Ada” SW development program of the 1980s illustrates declining DoD influence on SW industry, contrasting with COBOL in 1950s.

11. Conclusions (1) • Structure of US public R&D programs in IT was nearly as important as their scale: • Competition among research performers and would-be commercializers. • Pluralism and competition among sources of R&D support. • Reliance by federal agencies on extramural R&D performers rather than public laboratories. • Federal policy extended beyond support for R&D. • Policies encouraging adoption, entry, interfirm technology flows enhanced impact of R&D funding on competition, innovation. • Federal R&D investments supported growth of infrastructure for training scientists & engineers in IT-related fields.

12. Conclusions (2) • Defense-related procurement in semiconductors, computers complemented R&D spending and affected the development of industry structure. • Contracts with new firms aided entry. • Large gov’t “buys” of new products acted like “prizes.” • During the early period of IT industry’s development (circa 1950-80), relatively weak IPRs were associated with considerable new-firm entry. • Roles of industry & universities in innovation contrast among these 3 sectors and change over time. • DoD influence was critical in the early development of IT, but declined in all 3 sectors with growth of nonmilitary sources of demand and R&D funding.

13. Is energy different? • IT history highlights importance of demand-side policy for adoption & industry development. • In some energy technologies, larger installed base may accelerate technical progress through user innovation. • Energy demand-side policy has been erratic. • Absence of consistent demand-side policy exacerbated by wide swings in fossil-fuel prices. • Public R&D funding has tended to track price swings, exacerbating instability. • In IT, early-stage gov’t (military) demand focused on performance more than price. • Energy technologies often have to meet a more complex set of performance criteria, and compete with mature technologies in many applications.